Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 169975               March 18, 2010
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO, Petitioners,
vs.
EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL INTERNATIONAL BANK), Respondent.
DECISION
CARPIO, J.:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this Petition for Review 1 assailing the Court of
Appeals’ (CA) Decision2 dated 30 June 2005 in CA-G.R. CV No. 63966 as well as the Resolution 3 dated 5 October 2005 denying the
Motion for Reconsideration. In the assailed decision, the CA modified the 12 April 1999 Decision 4 of the Regional Trial Court of
Makati City, Branch 59 (RTC) by ordering Equitable PCI Bank 5 (respondent) to pay petitioners ₱1,516,015.07 with interest at the legal
rate of 12% per annum starting 6 May 1994 until the amount is fully paid.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical works on airconditioning system. On 24
November 1989, Pan Pacific, through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of mechanical works
(Contract) with respondent for ₱20,688,800. Pan Pacific and respondent also agreed on nine change orders for ₱2,622,610.30. Thus,
the total consideration for the whole project was ₱23,311,410.30. 6 The Contract stipulated, among others, that Pan Pacific shall be
entitled to a price adjustment in case of increase in labor costs and prices of materials under paragraphs 70.1 7 and 70.28 of the
"General Conditions for the Construction of PCIB Tower II Extension" (the escalation clause). 9
Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site, the PCIB Tower II extension building in
Makati City. The project was completed in June 1992. Respondent accepted the project on 9 July 1992. 10
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with the escalation clause, Pan Pacific claimed a
price adjustment of ₱5,165,945.52. Respondent’s appointed project engineer, TCGI Engineers, asked for a reduction in the price
adjustment. To show goodwill, Pan Pacific reduced the price adjustment to ₱4,858,548.67. 11
On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment should be pegged at ₱3,730,957.07. TCGI
Engineers based their evaluation of the price adjustment on the following factors:
1. Labor Indices of the Department of Labor and Employment.
2. Price Index of the National Statistics Office.
PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.
Shipping Documents submitted by PPSCI.
Sub-clause 70.1 of the General Conditions of the Contract Documents. 12
Pan Pacific contended that with this recommendation, respondent was already estopped from disclaiming liability of at least
₱3,730,957.07 in accordance with the escalation clause. 13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific’s operational capital was becoming inadequate for
the project. However, respondent withheld the payment of the price adjustment under the escalation clause despite Pan Pacific’s
repeated demands.14 Instead, respondent offered Pan Pacific a loan of ₱1.8 million. Against its will and on the strength of
respondent’s promise that the price adjustment would be released soon, Pan Pacific, through Del Rosario, was constrained to
execute a promissory note in the amount of ₱1.8 million as a requirement for the loan. Pan Pacific also posted a surety bond. The
₱1.8 million was released directly to laborers and suppliers and not a single centavo was given to Pan Pacific. 15
Pan Pacific made several demands for payment on the price adjustment but respondent merely kept on promising to release the
same. Meanwhile, the ₱1.8 million loan matured and respondent demanded payment plus interest and penalty. Pan Pacific refused
to pay the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released the price adjustment on time.
Pan Pacific alleged that the promissory note did not express the true agreement of the parties. Pan Pacific maintained that the ₱1.8
million was to be considered as an advance payment on the price adjustment. Therefore, there was really no consideration for the
promissory note; hence, it is null and void from the beginning. 16
Respondent stood firm that it would not release any amount of the price adjustment to Pan Pacific but it would offset the price
adjustment with Pan Pacific’s outstanding balance of ₱3,226,186.01, representing the loan, interests, penalties and collection
charges.17
Pan Pacific refused the offsetting but agreed to receive the reduced amount of ₱3,730,957.07 as recommended by the TCGI
Engineers for the purpose of extrajudicial settlement, less ₱1.8 million and ₱414,942 as advance payments. 18
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the promissory note, sum of money, and
damages against the respondent with the RTC of Makati City, Branch 59. On 12 April 1999, the RTC rendered its decision, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendant as follows:
1. Declaring the promissory note (Exhibit "B") null and void;
 Ordering the defendant to pay the plaintiffs the following amounts:
a. ₱1,389,111.10 representing unpaid balance of the adjustment price, with interest thereon at the legal rate of
twelve (12%) percent per annum starting May 6, 1994, the date when the complaint was filed, until the amount is
fully paid;
₱100,000.00 representing moral damages;
₱50,000.00 representing exemplary damages; and
₱50,000.00 as and for attorney’s fees.
2. Dismissing defendant’s counterclaim, for lack of merit; and
With costs against the defendant.
SO ORDERED.19
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May 1999, respondent appealed the entire RTC
Decision for being contrary to law and evidence. In sum, the appeals of the parties with the CA are as follows:
1. With respect to the petitioners, whether the RTC erred in deducting the amount of ₱126,903.97 from the balance of the
adjusted price and in awarding only 12% annual interest on the amount due, instead of the bank loan rate of 18%
compounded annually beginning September 1992.
2. With respect to respondent, whether the RTC erred in declaring the promissory note void and in awarding moral and
exemplary damages and attorney’s fees in favor of petitioners and in dismissing its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the principal amount due to petitioners. The CA
removed the deduction of ₱126,903.97 because it represented the final payment on the basic contract price. Hence, the CA ordered
respondent to pay ₱1,516,015.07 to petitioners, with interest at the legal rate of 12% per annum starting 6 May 1994. 20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a reconsideration of the CA’s Decision imposing the
legal rate of 12%. Petitioners claimed that the interest rate applicable should be the 18% bank lending rate. Respondent likewise
filed a Motion for Reconsideration of the CA’s decision. In a Resolution dated 5 October 2005, the CA denied both motions.
Aggrieved by the CA’s Decision, petitioners elevated the case before this Court.
The Issue
Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the unpaid balance of the price adjustment,
erred in fixing the interest rate at 12% instead of the 18% bank lending rate.
Ruling of the Court
We grant the petition.
This Court notes that respondent did not appeal the decision of the CA. Hence, there is no longer any issue as to the principal
amount of the unpaid balance on the price adjustment, which the CA correctly computed at ₱1,516,015.07. The only remaining issue
is the interest rate applicable for respondent’s delay in the payment of the balance of the price adjustment.
The CA denied petitioners’ claim for the application of the bank lending rate of 18% compounded annually reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that the contract provides for an interest at the current bank
lending rate in case of delay in payment by the Owner, and the promissory note charged an interest of 18%, the said proviso does
not authorize plaintiffs to unilaterally raise the interest rate without the other party’s consent. Unlike their request for price
adjustment on the basic contract price, plaintiffs never informed nor sought the approval of defendant for the imposition of 18%
interest on the adjusted price. To unilaterally increase the interest rate of the adjusted price would be violative of the principle of
mutuality of contracts. Thus, the Court maintains the legal rate of twelve percent per annum starting from the date of judicial
demand. Although the contract provides for the period when the recommendation of the TCGI Engineers as to the price adjustment
would be binding on the parties, it was established, however, that part of the adjusted price demanded by plaintiffs was already
disbursed as early as 28 February 1992 by defendant bank to their suppliers and laborers for their account. 21
In this appeal, petitioners allege that the contract between the parties consists of two parts, the Agreement 22 and the General
Conditions,23 both of which provide for interest at the bank lending rate on any unpaid amount due under the contract. Petitioners
further claim that there is nothing in the contract which requires the consent of the respondent to be given in order that petitioners
can charge the bank lending rate.24 Specifically, petitioners invoke Section 2.5 of the Agreement and Section 60.10 of the General
Conditions as follows:
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge interest thereon at the current bank lending rates, without prejudice to
OWNER’S recourse to any other remedy available under existing law. 25
General Conditions
60.10 Time for payment
The amount due to the Contractor under any interim certificate issued by the Engineer pursuant to this Clause, or to any term of the
Contract, shall, subject to clause 47, be paid by the Owner to the Contractor within 28 days after such interim certificate has been
delivered to the Owner, or, in the case of the Final Certificate referred to in Sub-Clause 60.8, within 56 days, after such Final
Certificate has been delivered to the Owner. In the event of the failure of the Owner to make payment within the times stated, the
Owner shall pay to the Contractor interest at the rate based on banking loan rates prevailing at the time of the signing of the
contract upon all sums unpaid from the date by which the same should have been paid. The provisions of this Sub-Clause are
without prejudice to the Contractor’s entitlement under Clause 69. 26 (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank lending rate of interest from the time an amount is determined
to be due thereto, which respondent should have paid. Therefore, as petitioners have already proven their entitlement to the price
adjustment, it necessarily follows that the bank lending interest rate of 18% shall be applied. 27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the General Conditions, it is stipulated that any
additional cost shall be determined by the Engineer and shall be added to the contract price after due consultation with the Owner,
herein respondent. Hence, there being no prior consultation with the respondent regarding the additional cost to the basic contract
price, it naturally follows that respondent was never consulted or informed of the imposition of 18% interest rate compounded
annually on the adjusted price.28
A perusal of the assailed decision shows that the CA made a distinction between the consent given by the owner of the project for
the liability for the price adjustments, and the consent for the imposition of the bank lending rate. Thus, while the CA held that
petitioners consulted respondent for price adjustment on the basic contract price, petitioners, nonetheless, are not entitled to the
imposition of 18% interest on the adjusted price, as petitioners never informed or sought the approval of respondent for such
imposition.29
We disagree.
It is settled that the agreement or the contract between the parties is the formal expression of the parties’ rights, duties, and
obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written agreement. 30
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labor and/or materials
or any other matters affecting the cost of the execution of the Works as may be determined.
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for the Contract there occur in the country in which the
Works are being or are to be executed changes to any National or State Statute, Ordinance, Decree or other Law or any regulation or
bye-law (sic) of any local or other duly constituted authority, or the introduction of any such State Statute, Ordinance, Decree, Law,
regulation or bye-law (sic) which causes additional or reduced cost to the contractor, other than under Sub-Clause 70.1, in the
execution of the Contract, such additional or reduced cost shall, after due consultation with the Owner and Contractor, be
determined by the Engineer and shall be added to or deducted from the Contract Price and the Engineer shall notify the Contractor
accordingly, with a copy to the Owner.31
In this case, the CA already settled that petitioners consulted respondent on the imposition of the price adjustment, and held
respondent liable for the balance of ₱1,516,015.07. Respondent did not appeal from the decision of the CA; hence, respondent is
estopped from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give its consent to the imposition of interest
before petitioners can hold respondent liable for interest at the current bank lending rate. This is erroneous. A review of Section 2.6
of the Agreement and Section 60.10 of the General Conditions shows that the consent of the respondent is not needed for the
imposition of interest at the current bank lending rate, which occurs upon any delay in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its
stipulations governs. In these cases, courts have no authority to alter a contract by construction or to make a new contract for the
parties. The Court’s duty is confined to the interpretation of the contract which the parties have made for themselves without
regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not
contain. It is only when the contract is vague and ambiguous that courts are permitted to resort to construction of its terms and
determine the intention of the parties. 32
The escalation clause must be read in conjunction with Section 2.5 of the Agreement and Section 60.10 of the General Conditions
which pertain to the time of payment. Once the parties agree on the price adjustment after due consultation in compliance with the
provisions of the escalation clause, the agreement is in effect an amendment to the original contract, and gives rise to the liability of
respondent to pay the adjusted costs. Under Section 60.10 of the General Conditions, the respondent shall pay such liability to the
petitioner within 28 days from issuance of the interim certificate. Upon respondent’s failure to pay within the time provided (28
days), then it shall be liable to pay the stipulated interest.1avvphi1
This is the logical interpretation of the agreement of the parties on the imposition of interest. To provide a contrary interpretation,
as one requiring a separate consent for the imposition of the stipulated interest, would render the intentions of the parties
nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. Therefore, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for
the payment of monetary interest.33
We agree with petitioners’ interpretation that in case of default, the consent of the respondent is not needed in order to impose
interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay in discharging an obligation consisting of
the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. In the
absence of a stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal to the regular
monetary interest becomes due and payable. Finally, if no regular interest had been agreed upon by the contracting parties, then
the damages payable will consist of payment of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per
annum.34 It is only when the parties to a contract have failed to fix the rate of interest or when such amount is unwarranted that the
Court will apply the 12% interest per annum on a loan or forbearance of money. 35
The written agreement entered into between petitioners and respondent provides for an interest at the current bank lending rate in
case of delay in payment and the promissory note charged an interest of 18%.
To prove petitioners’ entitlement to the 18% bank lending rate of interest, petitioners presented the promissory note 36 prepared by
respondent bank itself. This promissory note, although declared void by the lower courts because it did not express the real
intention of the parties, is substantial proof that the bank lending rate at the time of default was 18% per annum. Absent any
evidence of fraud, undue influence or any vice of consent exercised by petitioners against the respondent, the interest rate agreed
upon is binding on them.37
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 63966.
We ORDER respondent to pay petitioners ₱1,516,015.07 with interest at the bank lending rate of 18% per annum starting 6 May
1994 until the amount is fully paid.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 160545               March 9, 2010
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON, Petitioners,
vs.
ARTHUR F. MENCHAVEZ, Respondent.
DECISION
BRION, J.:
We resolve in this Decision the petition for review on certiorari 1 filed by petitioners Prisma Construction & Development Corporation
(PRISMA) and Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside the Decision 2 dated May
5, 2003 and the Resolution3 dated October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in CA-G.R. CV No.
69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-
4552 that held the petitioners liable for payment of ₱3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified
the interest rate from 4% per month to 12% per annum, computed from the filing of the complaint to full payment. The assailed CA
Resolution denied the petitioners’ Motion for Reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained a ₱1,000,000.00 4 loan from the
respondent, with a monthly interest of ₱40,000.00 payable for six months, or a total obligation of ₱1,240,000.00 to be paid within
six (6) months,5 under the following schedule of payments:

January 8, 1994 …………………. ₱40,000.00

February 8, 1994 ………………... ₱40,000.00
March 8, 1994 …………………... ₱40,000.00
April 8, 1994 ……………………. ₱40,000.00
May 8, 1994 …………………….. ₱40,000.00
June 8, 1994 ………………… ₱1,040,000.006
Total ₱1,240,000.00

To secure the payment of the loan, Pantaleon issued a promissory note 7 that states:
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000),
Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-month loan payable according to the following schedule:

January 8, 1994 …………………. ₱40,000.00

February 8, 1994 ………………... ₱40,000.00
March 8, 1994 …………………... ₱40,000.00
April 8, 1994 ……………………. ₱40,000.00
May 8, 1994 …………………….. ₱40,000.00
June 8, 1994 ………………… ₱1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged. 8

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the promissory note in his personal
capacity,9 and as duly authorized by the Board of Directors of PRISMA. 10 The petitioners failed to completely pay the loan within the
stipulated six (6)-month period.
From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the respondent:
 September 8, 1994 ……………… ₱320,000.00
October 8, 1995…………………. ₱600,000.00
November 8, 1995……………. ₱158,772.00
January 4, 1997 …………………. ₱30,000.0011

As of January 4, 1997, the petitioners had already paid a total of ₱1,108,772.00. However, the respondent found that the petitioners
still had an outstanding balance of ₱1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly interest. 12 Thus, on August
28, 1997, the respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly interest,
₱30,000.00 in attorney’s fees, ₱1,000.00 per court appearance and costs of suit. 13
In their Answer dated October 6, 1998, the petitioners admitted the loan of ₱1,240,000.00, but denied the stipulation on the 4%
monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he made himself
personally liable and that he made representations that the loan would be repaid within six (6) months. 14
THE RTC RULING
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for ₱1,000,000.00 in favor of the
petitioners for a loan that would earn an interest of 4% or ₱40,000.00 per month, or a total of ₱240,000.00 for a 6-month period. It
noted that the petitioners made several payments amounting to ₱1,228,772.00, but they were still indebted to the respondent for
₱3,526,117.00 as of February 11,15 1999 after considering the 4% monthly interest. The RTC observed that PRISMA was a one-man
corporation of Pantaleon and used this circumstance to justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the
petitioners to jointly and severally pay the respondent the amount of ₱3,526,117.00 plus 4% per month interest from February 11,
1999 until fully paid.16
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court, insisting that there was no
express stipulation on the 4% monthly interest.
THE CA RULING
The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly interest principally based on the
board resolution that authorized Pantaleon to transact a loan with an approved interest of not more than 4% per month. The
appellate court, however, noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to
12% per annum. The CA affirmed the RTC’s finding that PRISMA was a mere instrumentality of Pantaleon that justified the piercing
of the veil of corporate fiction. Thus, the CA modified the RTC Decision by imposing a 12% per annum interest, computed from the
filing of the complaint until finality of judgment, and thereafter, 12% from finality until fully paid. 17
After the CA's denial18 of their motion for reconsideration,19 the petitioners filed the present petition for review on certiorari under
Rule 45 of the Rules of Court.
THE PETITION
The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the parties agreed to a 4% monthly
interest because the board resolution was not an evidence of a loan or forbearance of money, but merely an authorization for
Pantaleon to perform certain acts, including the power to enter into a contract of loan. The expressed mandate of Article 1956 of
the Civil Code is that interest due should be stipulated in writing, and no such stipulation exists. Even assuming that the loan is
subject to 4% monthly interest, the interest covers the six (6)-month period only and cannot be interpreted to apply beyond it. The
petitioners also point out the glaring inconsistency in the CA Decision, which reduced the interest from 4% per month or 48% per
annum to 12% per annum, but failed to consider that the amount of ₱3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.
THE CASE FOR THE RESPONDENT
The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest because the board resolution is
attached to, and an integral part of, the promissory note based on which the petitioners obtained the loan. The respondent further
contends that the petitioners are estopped from assailing the 4% monthly interest, since they agreed to pay the 4% monthly interest
on the principal amount under the promissory note and the board resolution.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest apply
to the 6-month payment period only or until full payment of the loan?
OUR RULING
We find the petition meritorious.
Interest due should be stipulated in writing; otherwise, 12% per annum
Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good
faith.20 When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning
of its stipulations governs.21 In such cases, courts have no authority to alter the contract by construction or to make a new contract
for the parties; a court's duty is confined to the interpretation of the contract the parties made for themselves without regard to its
wisdom or folly, as the court cannot supply material stipulations or read into the contract words the contract does not contain. 22 It is
only when the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine
the parties’ intent.
In the present case, the respondent issued a check for ₱1,000,000.00. 23 In turn, Pantaleon, in his personal capacity and as authorized
by the Board, executed the promissory note quoted above. Thus, the ₱1,000,000.00 loan shall be payable within six (6) months, or
from January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest of ₱40,000.00 per month, for a total
obligation of ₱1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month,
but no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it has been expressly stipulated in writing."
Under this provision, the payment of interest in loans or forbearance of money is allowed only if: (1) there was an express stipulation
for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of interest at a stipulated rate. Thus, we held in Tan v. Valdehueza24 and Ching v.
Nicdao25 that collection of interest without any stipulation in writing is prohibited by law.1avvphi1
Applying this provision, we find that the interest of ₱40,000.00 per month corresponds only to the six (6)-month period of the loan,
or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan
should be at the legal interest rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:26
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code." (Emphasis
supplied)
We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,27 Sulit v. Court of Appeals,28 Crismina Garments, Inc. v.
Court of Appeals, 29 Eastern Assurance and Surety Corporation v. Court of Appeals, 30 Sps. Catungal v. Hao, 31 Yong v. Tiu,32 and Sps.
Barrera v. Sps. Lorenzo.33 Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding that the parties agreed
to a 4% interest, compounded by the application of this interest beyond the promissory note’s six (6)-month period. The facts show
that the parties agreed to the payment of a specific sum of money of ₱40,000.00 per month for six months, not to a 4% rate of
interest payable within a six (6)-month period.
Medel v. Court of Appeals not applicable
The CA misapplied Medel v. Court of Appeals34 in finding that a 4% interest per month was unconscionable.
In Medel, the debtors in a ₱500,000.00 loan were required to pay an interest of 5.5% per month, a service charge of 2% per annum,
and a penalty charge of 1% per month, plus attorney’s fee equivalent to 25% of the amount due, until the loan is fully paid. Taken in
conjunction with the stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous,
unconscionable, exorbitant and hence, contrary to morals, thereby rendering the stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v. Salazar 35 of 6% per month or 72% per
annum interest on a ₱60,000.00 loan; in Ruiz v. Court of Appeals, 36 of 3% per month or 36% per annum interest on a ₱3,000,000.00
loan; in Imperial v. Jaucian,37 of 16% per month or 192% per annum interest on a ₱320,000.00 loan; in Arrofo v. Quiño,38 of 7%
interest per month or 84% per annum interest on a ₱15,000.00 loan; in Bulos, Jr. v. Yasuma,39 of 4% per month or 48% per annum
interest on a ₱2,500,000.00 loan; and in Chua v. Timan,40 of 7% and 5% per month for loans totalling ₱964,000.00. We note that in
all these cases, the terms of the loans were open-ended; the stipulated interest rates were applied for an indefinite period.
Medel finds no application in the present case where no other stipulation exists for the payment of any extra amount except
a specific sum of ₱40,000.00 per month on the principal of a loan payable within six months. Additionally, no issue on the
excessiveness of the stipulated amount of ₱40,000.00 per month was ever put in issue by the petitioners; 41 they only assailed the
application of a 4% interest rate, since it was not agreed upon.
It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they
have agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are
not contrary to law, morals, public order or public policy. 42 The payment of the specific sum of money of ₱40,000.00 per month was
voluntarily agreed upon by the petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation
showing that petitioners were victims of fraud when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of ₱1,000,000.00 shall earn ₱40,000.00 per month for a period of six (6) months, or
from December 8, 1993 to June 8, 1994, for a total principal and interest amount of ₱1,240,000.00. Thereafter, interest at the rate of
12% per annum shall apply. The amounts already paid by the petitioners during the pendency of the suit, amounting to
₱1,228,772.00 as of February 12, 1999,43 should be deducted from the total amount due, computed as indicated above. We remand
the case to the trial court for the actual computation of the total amount due.
Doctrine of Estoppel not applicable
The respondent submits that the petitioners are estopped from disputing the 4% monthly interest beyond the six-month stipulated
period, since they agreed to pay this interest on the principal amount under the promissory note and the board resolution.
We disagree with the respondent’s contention.
We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as established by the record, negate
its application. Under the promissory note,44 what the petitioners agreed to was the payment of a specific sum of ₱40,000.00 per
month for six months – not a 4% rate of interest per month for six (6) months – on a loan whose principal is ₱1,000,000.00, for the
total amount of ₱1,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring them from raising their present
defenses against a 4% per month interest after the six-month period of the agreement. The board resolution, 45 on the other hand,
simply authorizes Pantaleon to contract for a loan with a monthly interest of not more than 4%. This resolution merely embodies the
extent of Pantaleon’s authority to contract and does not create any right or obligation except as between Pantaleon and the board.
Again, no cause exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded
We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct
corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used
in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.46 In the absence of malice, bad faith, or a specific provision of law making a corporate officer
liable, such corporate officer cannot be made personally liable for corporate liabilities. 47
In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or unlawful act on the part of
PRISMA to justify piercing its corporate veil. While Pantaleon denied personal liability in his Answer, he made himself accountable in
the promissory note "in his personal capacity and as authorized by the Board Resolution" of PRISMA.48 With this statement of
personal liability and in the absence of any representation on the part of PRISMA that the obligation is all its own because of its
separate corporate identity, we see no occasion to consider piercing the corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May 5, 2003 of the Court of Appeals
in CA-G.R. CV No. 69627. The petitioners’ loan of ₱1,000,000.00 shall bear interest of ₱40,000.00 per month for six (6) months from
December 8, 1993 as indicated in the promissory note. Any portion of this loan, unpaid as of the end of the six-month payment
period, shall thereafter bear interest at 12% per annum. The total amount due and unpaid, including accrued interests, shall bear
interest at 12% per annum from the finality of this Decision. Let this case be REMANDED to the Regional Trial Court, Branch 73,
Antipolo City for the proper computation of the amount due as herein directed, with due regard to the payments the petitioners
have already remitted. Costs against the respondent.
SO ORDERED.
ARTURO D. BRION
Associate Justice
Acting Chairperson
WE CONCUR:
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
 
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a
solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment
of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent
(6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the
controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages
sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the
value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS
EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant
Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to
plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port
Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the
consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents
was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling
P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed
and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee
against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-
86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
Defendants filed their respective answers, traversing the material allegations of the complaint contending that: As
for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the
custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the
shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although
subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record);
Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the
shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised
extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition
shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of defendants (in
whose respective custody, if determinable);
 3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-
Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two
drums were shipped in good order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C).
But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service,
Inc., it excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were sustained while
in the respective and/or successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the
Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the
latter notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15,
South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in
damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report
further states that when defendant Allied Brokerage withdrew the shipment from defendant
arrastre operator's custody on January 7, 1982, one drum was found opened without seal, cello
bag partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was
found with adulterated/faked contents. It is obvious, therefore, that these losses/damages
occurred before the shipment reached the consignee while under the successive custodies of
defendants. Under Art. 1737 of the New Civil Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods remains in full force and effect even if the goods
are temporarily unloaded and stored in transit in the warehouse of the carrier at the place of
destination, until the consignee has been advised and has had reasonable opportunity to remove
or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-
Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum
was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1,
1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser,
while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to
Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant
Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there
is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the
appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS
BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM
THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM
THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a
fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are
surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or
until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon
vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive
in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an
express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87;
Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is
not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this
case.
The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the
consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have
explained, in holding the carrier and the arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and
the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince
Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its
custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in
good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always
and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The
instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the
presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the
appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the
sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this
case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the
value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely
ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon.
The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay
appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December
1962 until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this
Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such
interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for judicial
demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated
claims or damages, except when the demand can be established with reasonable certainty." And as was held by
this Court in Rivera vs. Perez,4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not
known until definitely ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de
P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of
Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the
defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the
following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B
Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the
insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a
result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of
June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00
with costs against defendants and third party plaintiffs. (Emphasis supplied.)
 On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in
adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's decision became final,
the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution
which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review
on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus —
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution
No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money,
goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest,
shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text)
—
should have, instead, been applied. This Court6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money,
goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or
forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the
ambit of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for
injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods
or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the
New Civil Code which reads —
Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six
percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28 July 1986. The case was for damages
occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and
compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid.
Relying on the Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6% interest per annum but sustained
the time computation thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages arising from the collapse of a
building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of
the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals
sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental
circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon
the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception to attorney's fees) occasioned by the loss of the building (including interest charges
and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the
total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per
cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per
annum imposed on the total amount of the monetary award was in contravention of law." The Court 10 ruled out the
applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is
applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any
money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol,
Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no
interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the
judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the
filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not
applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court11 was a petition for review
on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and
exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April
1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as
exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09
November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for
moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the
appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand
(P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose from a breach of employment
contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without,
however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is
affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton
Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date
of the filing of the complaint until fully paid (Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of
judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn
interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of
the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a
breach of employment contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was
filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas,14 decided on 08 May
1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the
trial court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code,
the Court15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of
certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the
interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid
on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for
damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint judgment
of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings
from loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two groups
according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first group" would
consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v. Manila Port
Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v. Intermediate Appellate
Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank
Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank
Circular imposing the 12% interest per annum applies only to loans or forbearance16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs
when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the
performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6%
interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum,17 depending on
whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand.
Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the
time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo, explaining that "if
the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after
proof,' then, interest 'should be from the date of the decision.'" American Express International v. IAC, introduced a different time
frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons
case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the
rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may
not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the
contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.20
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded.22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court24 at the rate of 6% per annum.25 No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where
the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to
be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such
amount upon finality of this decision until the payment thereof.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
 
G.R. No. 105410 July 25, 1994
PILIPINAS BANK, petitioner,
vs.
HON. COURT OF APPEALS AND FLORENCIO REYES, respondents.
Gella Reyes Danguilan & Associates for petitioner.
Santos V. Pampolina, Jr. for private respondent.

PUNO, J.:
This is a petition for review of the Decision of the respondent court 1 in CA-G.R. CV No. 29524 dated May 13, 1992 which ordered
petitioner to pay the private respondent the sum of P50,000.00 as moral damages, P25,000.00 as attorney's fees and cost of suit.
The facts as found both by the trial court 2 and the respondent court are:
As payments for the purchased shoe materials and rubber shoes, Florencio Reyes issued postdated checks to
Winner Industrial Corporation for P20,927.00 and Vicente Tui, for P11,419.50, with due dates on October 10 and
12, 1979, respectively.
To cover the face value of the checks, plaintiff, on October 10, 1979, requested PCIB Money Shop's manager Mike
Potenciano to effect the withdrawal of P32,000.00 from his savings account therein and have it deposited with his
current account with Pilipinas Bank (then Filman Bank), Biñan Branch. Roberto Santos was requested to make the
deposit.
In depositing in the name of FLORENCIO REYES, he inquired from the teller the current account number of
Florencio Reyes to complete the deposit slip he was accomplishing. He was informed that it was "815" and so this
was the same current account number he placed on the deposit slip below the depositor's name FLORENCIO
REYES.
Nothing that the account number coincided with the name Florencio, Efren Alagasi, then Current Account
Bookkeeper of Pilipinas Bank, thought it was for Florencio Amador who owned the listed account number. He,
thus, posted the deposted in the latter's account not noticing that the depositor's surname in the deposit slip was
REYES.
On October 11, 1979, the October 10, check in favor of Winner Industrial Corporation was presented for payment.
Since the ledger of Florencio Reyes indicated that his account had only a balance of P4,078.43, it was dishonored
and the payee was advised to try it for next clearing.
On October 15, 1979, the October 10, 1979 check was redeposited but was again dishonored. Likewise, the
October 12, 1979 check in favor of Vicente Tui when presented for payment on that same date met the same fate
but was advised to try the next clearing. Two days after the October 10 check was again dishonored, the payee
returned the same to Florencio Reyes and demanded a cash payment of its face value which he did if only to save
his name. The October 12, 1979 check was redeposited on October 18, 1979, but again dishonored for the reason
that the check was drawn against insufficient fund.
Furious over the incident, he immediately proceeded to the bank and urged an immediate verification of his
account.
Upon verification, the bank noticed the error. The P32,000.00 deposit posted in the account of Florencio Amador
was immediately transferred to the account of Reyes upon being cleared by Florencio Amador that he did not
effect a deposit in the amount of P32,000.00. The transfer having been effected, the bank then honored the
October 12, 1979, check (Exh. "C").
On the basis of these facts, the trial court ordered petitioner to pay to the private respondent: (1) P200,000.00 as compensatory
damages; (2) P100,000.00 as moral damages; (3) P25,000.00 as attorney's fees, and (4) the costs of suit. On appeal to the
respondent court, the judgment was modified as aforestated.
In this petition for review, petitioner argues:
I. Respondent Court of Appeals erred on a matter of law, in not applying the first sentence of Article 2179, New
Civil Code, in view of its own finding that respondent Reyes' own representative committed the mistake in writing
down the correct account number;
II. Respondent Court of Appeals erred, on a matter of law, in holding that respondent Reyes has the right to
recover moral damages and in awarding the amount of P50,000.00, when there is no legal nor factual basis for it;
III. The Honorable Court of Appeals erred, on a matter of law, in holding petitioner liable for attorney's fees in the
amount of P20,000.00, when there is no legal nor factual basis for it.
We find no merit in the petition.
First. For Article 21793 of the Civil Code to apply, it must be established that private respondent's own negligence was the immediate
and proximate cause of his injury. The concept of proximate cause is well defined in our corpus of jurisprudence as "any cause
which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the result complained of and
without which would not have occurred and from which it ought to have been forseen or reasonably anticipated by a person of
ordinary case that the injury complained of or some similar injury, would result therefrom as a natural and probable
consequence."4 In the case at bench, the proximate cause of the injury is the negligence of petitioner's employee in erroneously
posting the cash deposit of private respondent in the name of another depositor who had a similar first name. As held by the trial
court:
xxx xxx xxx
Applying the test, the bank employee is, on that basis, deemed to have failed to exercise the degree of care
required in the performance of his duties. As earlier stated, the bank employee posted the cash deposit in the
account of Florencio Amador from his assumption that the name Florencio appearing on the ledger without,
however, going through the full name, is the same Florencio stated in the deposit slip. He should have continuously
gone beyond mere assumption, which was proven to be erroneous, and proceeded with clear certainty,
considering the amount involved and the repercussions it would create on the totality of the person notable of
which is the credit standing of the person involved should a mistake happen. The checks issued by the plaintiff in
the course of his business were dishonored by the bank because the ledger of Florencio Reyes indicated a balance
insufficient to cover the face value of checks.
Second. In light of this negligence, the liability of petitioner for moral damages cannot be impugned. So we held in Bank of the
Philippine Islands vs. IAC, et al.5
The bank is not expected to be infallible but, as correctly observed by respondent Appellate Court, in this instance,
it must bear the blame for not discovering the mistake of its teller despite the established procedure requiring the
papers and bank books to pass through a battery of bank personnel whose duty it is to check and countercheck
them for possible errors. Apparently, the officials and employees tasked to do that did not perform their duties
with due care, as may be gathered from the testimony of the bank's lone witness, Antonio Enciso, who casually
declared that "the approving officer does not have to see the account numbers and all those things. Those are very
petty things for the approving manager to look into" (p. 78, Record on Appeal). Unfortunately, it was a "petty
thing," like the incorrect account number that the bank teller wrote on the initial deposit slip for the newly-opened
joint current account of the Canlas spouses, that sparked this half-a-million-peso damage suit against the bank.
While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused serious
anxiety, embarrassment and humiliation to the private respondents for which they are entitled to recover
reasonable moral damages (American Express International, Inc. IAC, 167 SCRA 209). The award of reasonable
attorney's fees is proper for the private respondent's were compelled to litigate to protect their interest (Art. 2208,
Civil Code). However, the absence of malice and bad faith renders the award of exemplary damages improper
(Globe Mackay Cable and Radio Corp. vs. Court of Appeals, 176 SCRA 778).
IN VIEW WHEREOF, the petition is denied there being no reversible error in the Decision of the respondent court. Cost against
petitioner.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 170452             August 13, 2008
SALVADOR CHUA and VIOLETA CHUA, petitioners,
vs.
RODRIGO TIMAN, MA. LYNN TIMAN and LYDIA TIMAN, respondents.
DECISION
QUISUMBING, J.:
Before us is a petition for review on certiorari assailing the Decision 1 and Resolution2 dated March 9, 2005 and November 24, 2005,
respectively, of the Court of Appeals in CA-G.R. CV No. 82865, which had affirmed the Decision 3 dated May 14, 2004 of the Regional
Trial Court (RTC) of Quezon City, Branch 86, in Civil Case No. Q-00-41276. The Court of Appeals reduced the stipulated original
interest rates of 7% and 5% per month to only 1% per month or 12% per annum and ordered petitioners to refund the excess
interest payments by respondents.
The pertinent facts are as follows:
In February and March 1999, petitioners Salvador and Violeta Chua granted respondents Rodrigo, Ma. Lynn and Lydia Timan the
following loans: a) P100,000; b) P200,000; c) P150,000; d) P107,000; e) P200,000; and f) P107,000. These loans were evidenced by
promissory notes with interest of 7% per month, which was later reduced to 5% per month. Rodrigo and Ma. Lynn issued five (5)
postdated checks to secure the loans, except for the P150,000 loan which was secured by a postdated check issued by Lydia.
Respondents paid the loans initially at 7% interest rate per month until September 1999 and then at 5% interest rate per month
from October to December 1999. Sometime in March 2000, respondents offered to pay the principal amount of the loans through a
Philippine National Bank manager’s check worth P764,000, but petitioners refused to accept the same insisting that the principal
amount of the loans totalled P864,000.
On May 3, 2000, respondents deposited P864,000 with the Clerk of Court of the RTC of Quezon City. Later, they filed a case for
consignation and damages. Petitioners moved to dismiss the case, but the RTC denied the motion, as well as the subsequent motion
for reconsideration.
By virtue of an order of Partial Judgment 4 dated October 16, 2002, the Clerk of Court of the RTC of Quezon City released the amount
of P864,000 to petitioners.
Trial on the validity of the stipulated interests on the subject loans, as well as on the issue of damages, then proceeded.
On May 14, 2004, the RTC rendered a decision in favor of respondents. It ruled that the original stipulated interest rates of 7% and
5% per month were excessive. It further ordered petitioners to refund to respondents all interest payments in excess of the legal
rate of 1% per month or 12% per annum. However, the RTC denied petitioners’ claim for damages.
On appeal, the Court of Appeals affirmed the trial court’s decision. The Court of Appeals declared illegal the stipulated interest rates
of 7% and 5% per month for being excessive, iniquitous, unconscionable and exorbitant. Accordingly, the Court of Appeals reduced
the stipulated interest rates of 7% and 5% per month (equivalent to 84% and 60% per annum, respectively) to a fair and reasonable
rate of 1% per month or 12% per annum. The Court of Appeals also ordered petitioners to refund to respondents all interest
payments in excess of 12% per annum. Petitioners sought reconsideration, but it was denied.
Hence, this petition raising the lone issue of:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR – OR ACTED NOT IN ACCORD
WITH THE LAW AND JURISPRUDENCE – WHEN IT AFFIRMED THE JUDGMENT OF THE REGIONAL TRIAL COURT ORDERING
THE RETURN OF THE EXCESS INTEREST TO RESPONDENTS. 5
Essentially, the main issue is: (1) Did the Court of Appeals err in ruling that the original stipulated interest rates of 7% and 5%,
equivalent to 84% and 60% per annum, are unconscionable, and in ordering petitioners to refund to respondents all payments of
interest in excess of 12% per annum?
Petitioners aver that the stipulated interest of 5% monthly and higher cannot be considered unconscionable because these rates are
not usurious by virtue of Central Bank (C.B.) Circular No. 905-82 6 which had expressly removed the interest ceilings prescribed by the
Usury Law. Petitioners add that respondents were in pari delicto since they agreed on the stipulated interest rates of 7% and 5% per
month. They further aver they honestly believed that the interest rates they imposed on respondents’ loans were not usurious.
Respondents, invoking Medel v. Court of Appeals,7 counter that the stipulated interest rates of 7% and 5% per month are iniquitous,
unconscionable and exorbitant, thus, they are entitled to the return of the excessive interest paid. They also contend that petitioners
cannot raise the defense of in pari delicto for the first time on appeal. They further contend that the defense of good faith is a
factual issue which cannot be raised by petitioners in a petition for review under Rule 45 of the Rules of Civil Procedure.
The petition is patently devoid of merit.
The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or
12% per annum.8 We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% 9 per
month and higher10 are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals,
if not against the law.11 While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured loans, regardless of maturity, 12 nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets.13
Petitioners cannot also raise the defenses of in pari delicto and good faith. The defense of in pari delicto was not raised in the RTC,
hence, such an issue cannot be raised for the first time on appeal. Petitioners must have seasonably raised it in the proceedings
before the lower court, because questions raised on appeal are confined only within the issues framed by the parties. 14 The defense
of good faith must also fail because such an issue is a question of fact 15 which may not be properly raised in a petition for review
under Rule 45 of the Rules of Civil Procedure which allows only questions of law. 16
As well set forth in Medel:17
We agree … that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous,
unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court has consistently held
that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Law and that the Usury Law is now "legally inexistent."
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, the Court held that CB Circular No. 905
"did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity." Indeed, we have held
that "a Central Bank Circular can not repeal a law. Only a law can repeal another law." In the recent case of Florendo vs.
Court of Appeals, the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered
ineffective." "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower
may agree upon."
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory
note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not against the law. The
stipulation is void.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution dated March 9, 2005 and November 24,
2005, respectively, of the Court of Appeals in CA-G.R. CV No. 82865 are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
FIRST DIVISION
G.R. No. 154129. July 8, 2005
TERESITA DIO, Petitioners,
vs.
SPOUSES VIRGILIO and LUZ ROCES JAPOR and MARTA1 JAPOR, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision,2 dated February 22, 2002, of the Court of Appeals, in the consolidated cases CA-G.R. CV No.
51521 and CA-G.R. SP No. 40457. The decretal portion read:
WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the decision of the trial court is AFFIRMED with MODIFICATION.
Judgment is rendered as follows:
1. Declaring the Real Estate Mortgage to be valid;
2. Fixing the interest at 12% per annum and an additional 1% penalty charge per month such that plaintiffs-appellants’ contractual
obligation under the deed of real estate mortgage would amount to ₱1,252,674.00;
3. Directing defendant-appellee Dio to give the surplus of ₱2,247,326.00 to plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary injunction previously issued by the trial court.
No pronouncement as to costs.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and academic.
SO ORDERED.3
Equally assailed in this petition is the Resolution,4 dated July 2, 2002, of the appellate court, denying Teresita Dio’s Motion for
Partial Reconsideration of March 19, 2002 and the Spouses Japor and Marta Japor’s Motion for Reconsideration dated March 20,
2002.
The antecedent facts are as follows:
Herein respondents Spouses Virgilio Japor and Luz Roces Japor were the owners of an 845.5 square-meter residential lot including its
improvements, situated in Barangay Ibabang Mayao, Lucena City, as shown by Transfer Certificate of Title (TCT) No. T-39514.
Adjacent to the Japor’s lot is another lot owned by respondent Marta Japor, which consisted of 325.5 square meters and titled under
TCT No. T-15018.
On August 23, 1982, the respondents obtained a loan of ₱90,000 from the Quezon Development Bank (QDB), and as security
therefor, they mortgaged the lots covered by TCT Nos. T-39514 and T-15018 to QDB, as evidenced by a Deed of Real Estate
Mortgage duly executed by and between the respondents and QDB.
On December 6, 1983, respondents and QDB amended the Deed of Real Estate Mortgage increasing respondents’ loan to ₱128,000.
The respondents failed to pay their aforesaid loans. However, before the bank could foreclose on the mortgage, respondents, thru
their broker, one Lucia G. Orian, offered to mortgage their properties to petitioner Teresita Dio. Petitioner prepared a Deed of Real
Estate Mortgage, whereby respondents mortgaged anew the two properties already mortgaged with QDB to secure the timely
payment of a ₱350,000 loan that respondents had from petitioner Dio. The Deed of Real Estate Mortgage, though dated January
1989, was actually executed on February 13, 1989 and notarized on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the petitioner interest at the rate of five percent (5%) a month, within a
period of two months or until April 14, 1989. In the event of default, an additional interest equivalent to five percent (5%) of the
amount then due, for every month of delay, would be charged on them.
The respondents failed to settle their obligation to petitioner on April 14, 1989, the agreed deadline for settlement.
On August 27, 1991, petitioner made written demands upon the respondents to pay their debt.
Despite repeated demands, respondents did not pay, hence petitioner applied for extrajudicial foreclosure of the mortgage. The
auction of the unredeemed properties was set for February 26, 1992.
Meanwhile, on February 24, 1992, respondents filed an action for Fixing of Contractual Obligation with Prayer for Preliminary
Mandatory Injunction/Restraining Order, docketed as Civil Case No. 92-26, with the Regional Trial Court (RTC) of Lucena City.
Respondents prayed that "judgment be rendered fixing the contractual obligations of plaintiffs with the defendant Dio plus legal or
allowable interests thereon."5
The trial court issued an Order enjoining the auction sale of the aforementioned mortgaged properties.
On June 15, 1992, the Japors filed a Motion to Admit Amended Complaint with an attached copy of their Amended
Complaint praying that the Deed of Real Estate Mortgage dated February 13, 1989 be declared null and void, but reiterating the plea
that the trial court fix the contractual obligations of the Japors with Dio. The trial court denied the motion.
On September 27, 1994, respondents filed with the appellate court, a petition for certiorari, docketed as CA-G.R. SP No. 35315,
praying that the Court of Appeals direct the trial court to admit their Amended Complaint. The appellate court denied said petition. 6
On December 11, 1995, the trial court handed down the following judgment:
WHEREFORE, in view of the foregoing considerations, judgment is rendered:
1. Dismissing the complaint for failure of the plaintiffs to substantiate their affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. "A" to "A-13"/Exhs. "3" to "3-D") to be valid and binding as between the parties, more
particularly the plaintiffs Virgilio Japor, Luz Japor and Marta Japor or the latter’s substituted heir or heirs, as the case may be;
3. Dissolving the writ of preliminary injunction previously issued by this Court; and
4. To pay the cost of this suit.
SO ORDERED.7
On January 17, 1996, respondents filed their notice of appeal. On April 26, 1996, they also filed a Petition for Temporary Restraining
Order And/Or Mandatory Injunction in Aid of Appellate Jurisdiction with the Court of Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction purchased the properties for ₱3,500,000.
On May 9, 1996, the Court of Appeals denied respondents’ application for a temporary restraining order. 8
On October 9, 1996, the appellate court consolidated CA-G.R. CV No. 51521 and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the decision of the trial court with respect to the validity of the Deed of Real
Estate Mortgage, but modified the interest and penalty rates for being unconscionable and exorbitant.
Before us, petitioner assigns the following errors allegedly committed by the appellate court:
I
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY WAS NOT RAISED BEFORE THE TRIAL COURT NOR ASSIGNED AS
AN ERROR IN RESPONDENTS’ APPEAL.
II
THE STIPULATED INTEREST AND PENALTY ARE NOT "EXCESSIVE, INIQUITOUS, UNCONSCIONABLE, EXORBITANT AND CONTRARY TO
MORAL[S]".
III
PAYMENT OF THE "SURPLUS" OF ₱2,247,326.00 TO RESPONDENTS WOULD RESULT IN THEIR UNJUST ENRICHMENT.
IV
RESPONDENTS’ APPEAL SHOULD HAVE BEEN DISMISSED DUE TO FORUM SHOPPING. 9
Simply stated, the issue is: Did the Court of Appeals err when it held that the stipulations on interest and penalty in the Deed of Real
Estate Mortgage is contrary to morals, if not illegal? Corollarily, were respondents entitled to any "surplus" on the auction sale price?
On the main issue, petitioner contends that The Usury Law 10 has been rendered ineffective by Central Bank Circular No. 905, series
of 1982 and accordingly, usury has become legally non-existent in this jurisdiction, thus, interest rates may accordingly be pegged at
such levels or rates as the lender and the borrower may agree upon. Petitioner avers she has not violated any law considering she is
not engaged in the business of money-lending. Moreover, she claims she has suffered inconveniences and incurred expenses for
some 13 years now as a result of respondents’ failure to pay her. Petitioner further points out that the 5% interest rate was
proposed by the respondents and have only themselves to blame if the interests and penalties ballooned to its present amount due
to their willful delay and default in payment. The appellate court thus erred, petitioner now insists, in applying Sps. Almeda v. Court
of Appeals11 and Medel v. Court of Appeals12 to reduce the interest rate to 12% per annum and the penalty to 1% per month.
Respondents admit they owe petitioner ₱350,000 and do not question any lawful interest on their loan but they maintain that the
Deed of Real Estate Mortgage is null and void since it did not state the true intent of the parties, which limited the 5% interest rate
to only two (2) months from the date of the loan and which did not provide for penalties and other charges in the event of default or
delay. Respondents vehemently contend that they never consented to the said stipulations and hence, should not be bound by
them.
On the first issue, we are constrained to rule against the petitioner’s contentions.
Central Bank Circular No. 905, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both
secured and unsecured loans, regardless of maturity. However, nothing in said Circular grants lenders carte blanche authority to
impose interest rates which would result in the enslavement of their borrowers or to the hemorrhaging of their assets. 13 While a
stipulated rate of interest may not technically and necessarily be usurious under Circular No. 905, usury now being legally non-
existent in our jurisdiction,14 nonetheless, said rate may be equitably reduced should the same be found to be iniquitous,
unconscionable, and exorbitant, and hence, contrary to morals (contra bonos mores), if not against the law.15 What is iniquitous,
unconscionable, and exorbitant shall depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per month for every month
of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month
or 66% per annum is void for being iniquitous or unconscionable.16 We have likewise ruled that an interest rate of 6% per month or
72% per annum is outrageous and inordinate.17 Conformably to these precedent cases, a combined interest and penalty rate at 10%
per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court
when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally
impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents who proposed the 5% interest rate per month for two (2) months. Having
agreed to said rate, the parties are now estopped from claiming otherwise. For the succeeding period after the two months,
however, the Court of Appeals correctly reduced the interest rate to 12% per annum and the penalty rate to 1% per month, in
accordance with Article 222718 of the Civil Code.
But were respondents entitled to the "surplus" of ₱2,247,326 19 as a result of the "overpricing" in the auction?
We note that the "surplus" was the result of the computation by the Court of Appeals of respondents’ outstanding liability based on
a reduced interest rate of 12% per annum and the reduced penalty rate of 1% per month. The court a quo then proceeded to apply
our ruling in Sulit v. Court of Appeals,20 to the effect that in case of surplus in the purchase price, the mortgagee is liable for such
surplus as actually comes into his hands, but where he sells on credit instead of cash, he must still account for the proceeds as if the
price were paid in cash, for such surplus stands in the place of the land itself with respect to liens thereon or vested rights therein
particularly those of the mortgagor or his assigns.
In the instant case, however, there is no "surplus" to speak of. In adjusting the interest and penalty rates to equitable and
conscionable levels, what the Court did was merely to reflect the true price of the land in the foreclosure sale. The amount of the
petitioner’s bid merely represented the true amount of the mortgage debt. No surplus in the purchase price was thus created to
which the respondents as the mortgagors have a vested right.
WHEREFORE, the Decision dated February 22, 2002, of the Court of Appeals in the consolidated cases CA-G.R. CV No. 51521 and CA-
G.R. SP No. 40457 is hereby AFFIRMED with MODIFICATION. The interest rate for the subject loan owing to QDB, or whoever is now
the party mortgagee, is hereby fixed at five percent (5%) for the first two (2) months following the date of execution of the Deed of
Real Estate Mortgage, and twelve percent (12%) for the succeeding period. The penalty rate thereafter shall be fixed at one percent
(1%) per month. Petitioner Teresita Dio is declared free of any obligation to return to the respondents, the Spouses Virgilio Japor and
Luz Roces Japor and Marta Japor, any surplus in the foreclosure sale price. There being no surplus, after the court below had applied
our ruling in Sulit,21 respondents could not legally claim any overprice from the petitioner, much less the amount of ₱2,247,326.00.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 189871               August 13, 2013
DARIO NACAR, PETITIONER,
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision 1 dated September 23, 2008 of the Court of Appeals (CA) in CA-G.R. SP
No. 98591, and the Resolution2 dated October 9, 2009 denying petitioner’s motion for reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National Labor Relations
Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner and found that he was dismissed from
employment without a valid or just cause. Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement in
the amount of ₱158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that complainant was dismissed
from employment for a just or valid cause. All the more, it is clear from the records that complainant was never afforded due
process before he was terminated. As such, we are perforce constrained to grant complainant’s prayer for the payments of
separation pay in lieu of reinstatement to his former position, considering the strained relationship between the parties, and his
apparent reluctance to be reinstated, computed only up to promulgation of this decision as follows:

SEPARATION PAY
Date Hired = August 1990
Rate = ₱198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos. = ₱62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20
TOTAL = ₱95.933.76

xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive dismissal and are
therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and 56/100
(₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and 36/100
(₱95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution 5 dated February 29, 2000. Accordingly,
the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for reconsideration, but it was denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA issued a Resolution
dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise denied in a Resolution dated May 8,
2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible error on the part of
the CA, this Court denied the petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27, 2002. 9 The case was,
thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently scheduled, but respondents failed to
appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed from the date of
his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on May 27, 2002. 11 Upon recomputation,
the Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of ₱471,320.31. 12
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter ordering the Sheriff to collect from respondents the
total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing, among other things, that since the
Labor Arbiter awarded separation pay of ₱62,986.56 and limited backwages of ₱95,933.36, no more recomputation is required to be
made of the said awards. They claimed that after the decision becomes final and executory, the same cannot be altered or amended
anymore.14 On January 13, 2003, the Labor Arbiter issued an Order 15 denying the motion. Thus, an Alias Writ of Execution 16 was
issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution 17 granting the appeal in favor of the
respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and executory. Consequently,
another pre-execution conference was held, but respondents failed to appear on time. Meanwhile, petitioner moved that an Alias
Writ of Execution be issued to enforce the earlier recomputed judgment award in the sum of ₱471,320.31. 18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where the judgment
award of petitioner was reassessed to be in the total amount of only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as determined by the
Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was due to petitioner in
the amount of ₱147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include the appropriate
interests.19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only up to the amount of ₱11,459.73. The Labor
Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced considering that it was the one that became final
and executory. However, the Labor Arbiter reasoned that since the decision states that the separation pay and backwages are
computed only up to the promulgation of the said decision, it is the amount of ₱158,919.92 that should be executed. Thus, since
petitioner already received ₱147,560.19, he is only entitled to the balance of ₱11,459.73.
Petitioner then appealed before the NLRC, 21 which appeal was denied by the NLRC in its Resolution 22 dated September 27, 2006.
Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution 23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA opined that since petitioner no longer appealed
the October 15, 1998 Decision of the Labor Arbiter, which already became final and executory, a belated correction thereof is no
longer allowed. The CA stated that there is nothing left to be done except to enforce the said judgment. Consequently, it can no
longer be modified in any respect, except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF DISCRETION AND
DECIDED CONTRARY TO LAW IN UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY
10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR
ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME DECISION. 26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiter’s decision, the same
is not final until reinstatement is made or until finality of the decision, in case of an award of separation pay. Petitioner maintains
that considering that the October 15, 1998 decision of the Labor Arbiter did not become final and executory until the April 17, 2002
Resolution of the Supreme Court in G.R. No. 151332 was entered in the Book of Entries on May 27, 2002, the reckoning point for the
computation of the backwages and separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was
rendered on October 15, 1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of the
decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner by the October
15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said awards. Respondents insist that since
the decision clearly stated that the separation pay and backwages are "computed only up to [the] promulgation of this decision,"
and considering that petitioner no longer appealed the decision, petitioner is only entitled to the award as computed by the Labor
Arbiter in the total amount of ₱158,919.92. Respondents added that it was only during the execution proceedings that the petitioner
questioned the award, long after the decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would substantially vary the decision
of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth Division), 27 wherein the
issue submitted to the Court for resolution was the propriety of the computation of the awards made, and whether this violated the
principle of immutability of judgment. Like in the present case, it was a distinct feature of the judgment of the Labor Arbiter in the
above-cited case that the decision already provided for the computation of the payable separation pay and backwages due and did
not further order the computation of the monetary awards up to the time of the finality of the judgment. Also in Session Delights,
the dismissed employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's original computation of
the awards made, pegged as of the time the decision was rendered and confirmed with modification by a final CA decision, is legally
proper. The question is posed, given that the petitioner did not immediately pay the awards stated in the original labor arbiter's
decision; it delayed payment because it continued with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original labor arbiter framed
his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is the finding of
the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages, attorney's fees, and legal
interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made shows that it was time-
bound as can be seen from the figures used in the computation. This part, being merely a computation of what the first part of the
decision established and declared, can, by its nature, be re-computed. This is the part, too, that the petitioner now posits should no
longer be re-computed because the computation is already in the labor arbiter's decision that the CA had affirmed. The public and
private respondents, on the other hand, posit that a re-computation is necessary because the relief in an illegal dismissal decision
goes all the way up to reinstatement if reinstatement is to be made, or up to the finality of the decision, if separation pay is to be
given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made a computation of
the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure which requires that a computation
be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall embody in any such
decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we noted above, this
implication is apparent from the terms of the computation itself, and no question would have arisen had the parties terminated the
case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as well as on all the
consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn, affirmed the labor arbiter's decision.
By law, the NLRC decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed Rule 65 petition for
certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment of 13th month pay and indemnity,
lapsed to finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor arbiter's decision,
the implementing labor arbiter ordered the award re-computed; he apparently read the figures originally ordered to be paid to be
the computation due had the case been terminated and implemented at the labor arbiter's level. Thus, the labor arbiter re-
computed the award to include the separation pay and the backwages due up to the finality of the CA decision that fully terminated
the case on the merits. Unfortunately, the labor arbiter's approved computation went beyond the finality of the CA decision (July 29,
2003) and included as well the payment for awards the final CA decision had deleted - specifically, the proportionate 13th month
pay and the indemnity awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the labor arbiter's
original decision in accordance with its basic component parts as we discussed above. To reiterate, the first part contains the finding
of illegality and its monetary consequences; the second part is the computation of the awards or monetary consequences of the
illegal dismissal, computed as of the time of the labor arbiter's original decision. 28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the petitioner, no
essential change is made by a recomputation as this step is a necessary consequence that flows from the nature of the illegality of
dismissal declared by the Labor Arbiter in that decision. 29 A recomputation (or an original computation, if no previous computation
has been made) is a part of the law – specifically, Article 279 of the Labor Code and the established jurisprudence on this provision –
that is read into the decision. By the nature of an illegal dismissal case, the reliefs continue to add up until full satisfaction, as
expressed under Article 279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon execution of the
decision does not constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling stands;
only the computation of monetary consequences of this dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is the risk that it ran
when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides for the consequences of illegal
dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation of when separation pay in lieu of reinstatement
is allowed. When that happens, the finality of the illegal dismissal decision becomes the reckoning point instead of the
reinstatement that the law decrees. In allowing separation pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be computed up to that point. 31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of Appeals, 32 the Court laid
down the guidelines regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013,
approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series of 2013,
effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in
the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 36 of the Manual of Regulations for Banks and Sections 4305Q.1, 37 4305S.338 and
4303P.139 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of
legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve
percent (12%) per annum - as reflected in the case of Eastern Shipping Lines 40 and Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%)
per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral Monetary
Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce Circulars when it ruled that
"the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or rates for different
types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said judgments shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.1awp++i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines 42 are accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.1âwphi1
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R. SP No. 98591, and the
Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002, when the
Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to June 30,
2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded and due to petitioner
in accordance with this Decision.
SO ORDERED.
 THIRD DIVISION
G.R. No. 212689, August 11, 2014
ECE REALTY AND DEVELOPMENT, INC., Petitioner, v. HAYDYN HERNANDEZ,, Respondent.
RESOLUTION
REYES, J.:
This is a Petition for Review on Certiorari1 from the Decision2 dated November 4, 2013 of the Court of Appeals (CA) in CA-G.R. SP No.
120738, which affirmed with modification the Decision 3 dated January 10, 2011 of the Office of the President (OP) in O.P. Case
Number 09-D-152, entitled, “The Housing and Land Use Regulatory Board and Haydyn Hernandez v. ECE Realty and Development
Corporation.” The fallo of the appellate court’s decision reads:chanRoblesvirtualLawlibrary
We AFFIRM the assailed Decision of the Office of the President in O.P. Case Number 09-D-152, with MODIFICATION: We DIRECT
petitioner ECE REALTY AND DEVELOPMENT INC., to pay respondent Haydyn Hernandez, the amount of [?]452,551.65 (representing
the total amount respondent Hernandez paid petitioner ECE), plus 6% interest per annum starting 07 September 2006, and 12%
interest per annum from the time the judgment becomes final and executor[y], until fully paid.

IT IS SO ORDERED.4chanrobleslaw

On September 7, 2006, Haydyn Hernandez (respondent) filed a Complaint for specific performance, with damages, against Emir
Realty and Development Corporation (EMIR) and ECE Realty and Development Incorporated (ECE) before the Housing and Land Use
Regulatory Board Expanded National Capital Region Field Office (HLURB-Regional Office). The respondent alleged that ECE and EMIR,
engaged in condominium development and marketing, respectively, sold to him a 30-square meter condominium unit in the
“Harrison Mansion” described as Unit 808, Building B, Phase 1 (Unit 808).  On July 22, 1997 the respondent paid the reservation fee
of P35,000.00, and on August 2, 1997 he paid P104,063.65 to complete the downpayment. 5  In the parties’ Contract to Sell6 dated
November 5, 1997, EMIR and ECE promised that Unit 808 would be ready for occupancy by December 31, 1999.

EMIR and ECE failed to deliver Unit 808 to the respondent on December 31, 1999, by which date he had already paid a total of
P452,551.65.  Moreover, the respondent discovered that Unit 808 contained only 26 sq m, not 30 sq m as contracted, thus, he asked
for a corresponding reduction in the price by P120,000.00, based on the price per sq m of P30,000.00.  Instead, EMIR and ECE
demanded that he settle all his amortizations in arrears with interest.  Sometime in 2005, the respondent learned that EMIR and ECE
had sold Unit 808 to a third party.7cralawred

The respondent in his complaint in the HLURB asked that EMIR and ECE be ordered to accept his payment of the balance of the price
of Unit 808, less P120,000.00, without interest; and to pay him moral damages of P500,000.00, actual damages of P100,000.00,
exemplary damages of P100,000.00, and attorney’s fees of P50,000.00 plus P2,000.00 per appearance fee.  If Unit 808 is no longer
available, the respondent asked that EMIR and ECE reimburse him the amount of P452,551.65 he paid, plus legal interest. 8cralawred

In their Answer with Counterclaim, EMIR and ECE sought to dismiss the complaint for lack of cause of action, and to drop EMIR as
defendant because it has no contractual relations with the respondent. 9  They alleged  that the respondent unjustifiably refused to
accept the turn-over of Unit 808, that he was duly given a Grace Period Notice 10 that he was in arrears in his monthly amortizations,
but the respondent let the said period lapse without settling his past-due amortizations.  Thus, ECE was compelled to cancel his
contract to sell, invoking Republic Act No. 6552 (An Act to provide protection to buyers of Real Estate on Installment Payments). 
EMIR and ECE also sought exemplary damages, attorney’s fees, and litigation expenses.

On May 12, 2008, the HLURB-Regional Office ordered EMIR and ECE to reimburse the respondent the amount of P452,551.65, plus
legal interest, from the filing of the complaint, and to pay the respondent P50,000.00 as moral damages, P50,000.00 as attorney’s
fees, and P50,000.00 as exemplary damages.11cralawred

EMIR and ECE appealed to the HLURB Board of Commissioners, which in its Decision 12 dated January 23, 2009 upheld the HLURB-
Regional Office but dropped EMIR as defendant.

ECE appealed to the OP, but the OP in its Decision 13 dated January 10, 2011 dismissed ECE’s appeal.  On July 5, 2011, the OP denied
ECE’s motion for reconsideration.

On petition for review to the CA, ECE argued that the OP erred in affirming the rescission of the parties’ contract to sell and the
order to refund the respondent’s payments with legal interest from filing of the complaint, along with the award of moral and
exemplary damages and attorney’s fees to the respondent.  ECE pointed out that the respondent did not ask for rescission and
refund on account of the delay in the delivery of Unit 808, but only for a reduction in the price.  It further argued that interest may
be imposed only from finality of judgment.  Insisting that it was not in bad faith, ECE sought the deletion of the award for damages
and attorney’s fees, saying also that they are excessive.

In upholding the OP, the CA cited Section 23 of Presidential Decree (P.D.) No.  957 (Regulating the Sale of Subdivision Lots and
Condominiums, Providing for Penalties for Violations Thereof), which reads:chanRoblesvirtualLawlibrary
Sec. 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision or condominium project for the lot or
unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or
developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or condominium
project according to the approved plans and within the time limit for complying with the same. Such buyer may, at his option, be
reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest thereon at the
legal rate.

The CA found that the respondent duly notified ECE that he was suspending his subsequent amortizations because of the delayed
delivery of Unit 808.  The CA then ruled that under P.D. No. 957, when the owner of the subdivision or condominium fails to develop
the same according to the plan within the period agreed, the buyer, after notifying the owner, may desist from paying the balance,
and may demand the reimbursement of all that he has paid.  ECE failed to deliver Unit 808 on or before December 31, 1999, even as
the said unit measured only 26 sq m, not 30 sq m as agreed.  As also found by the CA, by ECE’s own evidence Unit 808 was ready for
inspection only on June 28, 2002, or two and a half years after the agreed date of delivery.  But the CA deleted the award of moral
and exemplary damages, finding that ECE did not act in bad faith, while sustaining the award of P50,000.00 as attorney’s fees
pursuant to Article 2208 (2) of the Civil Code, since ECE’s act or omission compelled the respondent to litigate.

On the imposition of six percent (6%) interest, the appellate court cites Eastern Shipping Lines, Inc. v. Court of Appeals14 and in Fil-
Estate Properties, Inc. v. Spouses Go,15 the amount to be refunded being neither a loan nor a forbearance of money, goods or credit.

On petition to this Court, the petitioner ECE reiterated all the arguments it proffered before the CA.
Our Ruling

We resolve to affirm the CA decision with modification, by reducing the interest imposable after finality from twelve percent (12%)
to six percent (6%).

Article 2209 of the New Civil Code provides that “If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per annum.”  There is no doubt that ECE incurred in delay in
delivering the subject condominium unit, for which reason the trial court was justified in awarding interest to the respondent from
the filing of his complaint.  There being no stipulation as to interest, under Article 2209 the imposable rate is six percent (6%) by way
of damages, following the guidelines laid down in the landmark case of Eastern Shipping Lines v. Court of Appeals:16cralawred
II.  With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in writing.  Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded.  In the absence of stipulation, the rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum.  No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable certainty.  Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially
(Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained).  The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit. 17

As further clarified in Sunga-Chan, et al. v. Court of Appeals, et al.:18cralawred

In Reformina v. Judge Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular No. 416
shall be adjudged only in cases involving the loan or forbearance of money.  And for transactions involving payment of indemnities in
the concept of damages arising from default in the performance of obligations in general and/or for money judgment not involving a
loan or forbearance of money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6%
interest. Art. 2209 pertinently provides:chanRoblesvirtualLawlibrary
Art. 2209.  If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent per annum.

The term “forbearance,” within the context of usury law, has been described as a contractual obligation of a lender or creditor to
refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due and payable.

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as follows: The 12%
per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, as well as to
judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code
applies “when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in
the performance of obligations in general,” with the application of both rates reckoned “from the time the complaint was filed until
the [adjudged] amount is fully paid.” In either instance, the reckoning period for the commencement of the running of the legal
interest shall be subject to the condition “that the courts are vested with discretion, depending on the equities of each case, on the
award of interest.”19 (Emphasis ours)

Thus, from the finality of the judgment awarding a sum of money until it is satisfied, the award shall be considered a forbearance of
credit, regardless of whether the award in fact pertained to one. 20  Pursuant to Central Bank Circular No. 416 issued on July 29, 1974,
in the absence of written stipulation the interest rate to be imposed in judgments involving a forbearance of credit was twelve
percent (12%) per annum, up from six percent (6%) under Article 2209 of the Civil Code.  This was reiterated in Central Bank Circular
No. 905, which suspended the effectivity of the Usury Law beginning on January 1, 1983.

But since July 1, 2013, the rate of twelve percent (12%) per annum from finality of the judgment until satisfaction has been brought
back to six percent (6%).  Section 1 of Resolution No. 796 of the Monetary Board of the Bangko Sentral ng Pilipinas dated May 16,
2013 provides: “The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in
the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum.”  Thus, the rate of interest to be
imposed from finality of judgments is now back at six percent (6%), the rate provided in Article 2209 of the Civil Code.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No. 120738 is AFFIRMED with MODIFICATION.  Petitioner ECE
Realty and Development, Inc. is hereby ordered to pay respondent Haydyn Hernandez the amount of P452,551.65 representing the
total amount he paid to petitioner ECE Realty and Development Incorporated, plus six percent (6%) interest per annum from
September 7, 2006 until finality hereof by way of actual and compensatory damages.  From finality until full satisfaction, the total
amount due now compounded with interest due from September 7, 2006 up to finality, shall likewise earn interest at six percent
(6%) per annum until fully paid.

SO ORDERED.
 SECOND DIVISION
G.R. No. 116285            October 19, 2001
ANTONIO TAN, petitioner,
vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
Before us is a petition for review of the Decision 1 dated August 31, 1993 and Resolution2 dated July 13, 1994 of the Court of Appeals
affirming the Decision3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila, Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount of Two Million Pesos
(P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00) from respondent Cultural Center of the
Philippines (CCP, for brevity) evidenced by two (2) promissory notes with maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few partial payments he had the loans restructured by respondent CCP, and petitioner
accordingly executed a promissory note (Exhibit "A") on August 31, 1979 in the amount of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan
failed to pay any installment on the said restructured loan of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-
One Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment falling due on December 31, 1980. In a letter dated January
26, 1982, petitioner requested and proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent
(20%) of the principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on the
principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20, 1983, petitioner again sent a
letter to respondent CCP requesting for a moratorium on his loan obligation until the following year allegedly due to a substantial
deduction in the volume of his business and on account of the peso devaluation. No favorable response was made to said letters.
Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten
(10) days from receipt of said letter, of the petitioner’s restructured loan which as of April 30, 1984 amounted to Six Million Eighty-
Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money, docketed as Civil Case
No. 84-26363, against the petitioner after the latter failed to settle his said restructured loan obligation. The petitioner interposed
the defense that he merely accommodated a friend, Wilson Lucmen, who allegedly asked for his help to obtain a loan from
respondent CCP. Petitioner claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the trial
court, the petitioner filed a Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a
down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every beginning of the year to
cover installment payments for one year, and every year thereafter until the balance is fully paid. However, respondent CCP did not
agree to the petitioner’s proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering defendant to pay plaintiff,
the amount of P7,996,314.67, representing defendant’s outstanding account as of August 28, 1986, with the corresponding
stipulated interest and charges thereof, until fully paid, plus attorney’s fees in an amount equivalent to 25% of said
outstanding account, plus P50,000.00, as exemplary damages, plus costs.
Defendant’s counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the petitioner’s contention that
the loan was merely for the accommodation of Wilson Lucmen for the reason that the defense propounded was not credible in
itself. Second, assuming, arguendo, that the petitioner did not personally benefit from the said loan, he should have filed a third
party complaint against Wilson Lucmen, the alleged accommodated party but he did not. Third, for three (3) times the petitioner
offered to settle his loan obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under the
promissory note (Exh. "A") which he must comply with in good faith pursuant to Article 1159 of the New Civil Code. Fifth, petitioner
is estopped from denying his liability or loan obligation to the private respondent.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest, surcharges, attorney’s
fees and exemplary damages against the petitioner. In his appeal, the petitioner asked for the reduction of the penalties and charges
on his loan obligation. He abandoned his alleged defense in the trial court that he merely accommodated his friend, Wilson Lucmen,
in obtaining the loan, and instead admitted the validity of the same. On August 31, 1993, the appellate court rendered a decision,
the dispositive portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
 We are unable to accept appellant’s (petitioner’s) claim for modification on the basis of alleged partial or irregular
performance, there being none. Appellant’s offer or tender of payment cannot be deemed as a partial or irregular
performance of the contract, not a single centavo appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the award for exemplary damages and reducing the
amount of awarded attorney’s fees to five percent (5%), by ratiocinating as follows:
Given the circumstances of the case, plus the fact that plaintiff was represented by a government lawyer, We believe the
award of 25% as attorney’s fees and P500,000.00 as exemplary damages is out of proportion to the actual damage caused
by the non-performance of the contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioner’s motion for reconsideration of the said decision.
Hence, this petition anchored on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE DECISION OF THE TRIAL COURT
WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR THE PERIOD OF TIME THAT
PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON
AUDIT AND THE OFFICE OF THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEY’S FEES AND IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note marked Exhibit "A".
The first question to be resolved in the case at bar is whether there are contractual and legal bases for the imposition of the penalty,
interest on the penalty and attorney’s fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s fees and in not
reducing the penalties considering that the petitioner, contrary to the appellate court’s findings, has allegedly made partial
payments on the loan. And if penalty is to be awarded, the petitioner is asking for the non-imposition of interest on the surcharges
inasmuch as the compounding of interest on surcharges is not provided in the promissory note marked Exhibit "A". The petitioner
takes exception to the computation of the private respondent whereby the interest, surcharge and the principal were added
together and that on the total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of
interest on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of interest on
surcharges.
We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in
case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and penalties in case of
default on the part of the petitioner in the payment of the subject restructured loan. The pertinent 6 portion of the promissory note
(Exhibit "A") imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in Manila,
the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx           xxx           xxx
With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT
(3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We
jointly and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total
amount due until paid, payable and computed monthly. Default of payment of this note or any portion thereof when due
shall render all other installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE
PHILIPPINES immediately due and demandable. (Underscoring supplied)
xxx           xxx           xxx
The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on
the note and is allowed under Article 1956 of the New Civil Code. 7 On the other hand, the stipulated two percent (2%) per month
penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,8 this Court has
ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this
kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each
other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to state that such a
stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2209 of the New Civil Code which provides that:
 If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner.
There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The
penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be resolved is whether
interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code,
which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new
interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law
only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no
law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already explained, penalty
clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is
sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The fifth paragraph
of the said promissory note provides that: "Any interest which may be due if not paid shall be added to the total amount when due
and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law." 10 Therefore, any penalty
interest not paid, when due, shall earn the legal interest of twelve percent (12%) per annum, 11 in the absence of express stipulation
on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point." In the instant case, interest likewise began to run on the penalty
interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling
that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly on the case
of National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the imposition of interest on the
damages from the filing of the complaint is unjust where the litigation was prolonged for twenty-five (25) years through no fault of
the defendant. However, the ruling in the said National Power Corporation (NPC) case is not applicable to the case at bar inasmuch
as our ruling on the issue of interest in that NPC case was based on equitable considerations and on the fact that the said case lasted
for twenty-five (25) years "through no fault of the defendant." In the case at bar, however, equity cannot be considered inasmuch as
there is a contractual stipulation in the promissory note whereby the petitioner expressly agreed to the compounding of interest in
case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the compounding of interest has the force
of law between the parties and does not appear to be inequitable or unjust, the said written stipulation should be respected.
The private respondent’s Statement of Account (marked Exhibits "C" to "C-2") 13 shows the following breakdown of the petitioner’s
indebtedness as of August 28, 1986:

Principal P2,838,454.68
Interest P 576,167.89
Surcharge P4,581,692.10
P7,996,314.67

The said statement of account also shows that the above amounts stated therein are net of the partial payments amounting to a
total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and Forty-Three Centavos (P452,561.43) which were made
during the period from May 13, 1983 to September 30, 1983. 14 The petitioner now seeks the reduction of the penalty due to the said
partial payments. The principal amount of the promissory note (Exhibit "A") was Three Million Four Hundred Eleven Thousand Four
Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was restructured on August 31, 1979. As of
August 28, 1986, the principal amount of the said restructured loan has been reduced to Two Million Eight Hundred Thirty-Eight
Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos (P2,838,454.68). Thus, petitioner contends that reduction of the
penalty is justifiable pursuant to Article 1229 of the New Civil Code which provides that: "The judge shall equitably reduce the
penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable." Petitioner insists that the penalty
should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor Company v. Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid
balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a
reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can
indeed be justified under the said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be
unconscionable inasmuch as the same appeared to have been compounded monthly.
Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge per
month on the total amount due, compounded monthly, for twenty-one (21) years since his default in 1980, we find it fair and
equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28,
1986, the date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the offers of the petitioner to
enter into a compromise for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said offers
at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his financial problems.
However, we are not unmindful of the respondent’s long overdue deprivation of the use of its money collectible from the petitioner.
The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the running of the interest
during that period when the respondent allegedly failed to assist the petitioner in applying for relief from liability. In this connection,
the petitioner referred to the private respondent’s letter 16 dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx           xxx           xxx
With reference to your appeal for condonation of interest and surcharge, we wish to inform you that the center will assist
you in applying for relief of liability through the Commission on Audit and Office of the President xxx.
While your application is being processed and awaiting approval, the center will be accepting your proposed payment
scheme with the downpayment of P160,000.00 and monthly remittances of P60,000.00 xxx.
xxx           xxx           xxx
The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended because the obligation to
pay such interest and surcharge has become conditional, that is dependent on a future and uncertain event which consists of
whether the petitioner’s request for condonation of interest and surcharge would be recommended by the Commission on Audit
and the Office of the President to the House of Representatives for approval as required under Section 36 of Presidential Decree No.
1445. Since the condition has not happened allegedly due to the private respondent’s reneging on its promise, his liability to pay the
interest and surcharge on the loan has not arisen. This is the petitioner’s contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the private respondent’s promise to
assist the petitioners in applying for relief therefrom through the Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner is not part of the
formally offered documentary evidence of either party in the trial court. That letter cannot be considered evidence pursuant to Rule
132, Section 34 of the Rules of Court which provides that: "The court shall consider no evidence which has not been formally offered
xxx." Besides, the said letter does not contain any categorical agreement on the part of respondent CCP that the payment of the
interest and surcharge on the loan is deemed suspended while his appeal for condonation of the interest and surcharge was being
processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform the Commission on
Audit and the Office of the President of his application for condonation of interest and surcharge. It was incumbent upon the
petitioner to bring his administrative appeal for condonation of interest and penalty charges to the attention of the said government
offices.
On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial court’s award of twenty-five
percent (25%) attorney’s fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in that the penalty charge of
two percent (2%) per month on the total amount due, compounded monthly, is hereby reduced to a straight twelve percent (12%)
per annum starting from August 28, 1986. With costs against the petitioner.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 173227               January 20, 2009
SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the Decision, 2 dated 16
December 2005, and Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the
Decision,4 dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of money against petitioner Sebastian Siga-an before the
Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a
businesswoman engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio,
Taguig City, while petitioner was a military officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the amount of
₱540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioner’s proposal. The loan
agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan. 6
On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner as partial payment of the loan. On 31 October 1993,
she issued another check in the amount of ₱200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner
told her that since she paid a total amount of ₱700,000.00 for the ₱540,000.00 worth of loan, the excess amount of ₱160,000.00
would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay additional
interest. Petitioner threatened to block or disapprove her transactions with the PNO if she would not comply with his demand. As all
her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner
might block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash
and checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it was not
necessary as there was mutual trust and confidence between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to ₱1,200,000.00. 7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of agreement to
that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was no agreement
between her and petitioner regarding payment of interest. Since she paid petitioner a total amount of ₱1,200,000.00 for the
₱540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she sent a demand
letter to petitioner asking for the return of the excess amount of ₱660,000.00. Petitioner, despite receipt of the demand letter,
ignored her claim for reimbursement. 8
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) ₱660,000.00 plus legal interest from the
time of demand; (2) ₱300,000.00 as moral damages; (3) ₱50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of
₱660,000.00 as attorney’s fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992, respondent
approached and asked him if he could grant her a loan, as she needed money to finance her business venture with the PNO. At first,
he was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However, since
respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in full. 11
Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous loan in full, he
agreed to grant her another loan. Later, respondent requested him to restructure the payment of the loan because she could not
give full payment on the due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of the
payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would
acknowledge her obligation to him, inclusive of interest, and that she would issue several postdated checks to guarantee the
payment of her obligation. Upon his approval of respondent’s request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an amount of ₱1,240,000.00, inclusive of
interest, from petitioner and that she would pay said amount in March 1995. Respondent also issued to him six postdated checks
amounting to ₱1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he presented the six checks for
encashment but only one check was honored. He demanded that respondent settle her obligation, but the latter failed to do so.
Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were
assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC). 12
Petitioner insisted that there was no overpayment because respondent admitted in the latter’s promissory note that her monetary
obligation as of 12 September 1994 amounted to ₱1,240,000.00 inclusive of interests. He argued that respondent was already
estopped from complaining that she should not have paid any interest, because she was given several times to settle her obligation
but failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the loan was given interest-
free. Based on the foregoing averments, he asked the RTC to dismiss respondent’s complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her loan obligation to
petitioner and that the latter should refund the excess amount to the former. It ratiocinated that respondent’s obligation was only
to pay the loaned amount of ₱540,000.00, and that the alleged interests due should not be included in the computation of
respondent’s total monetary debt because there was no agreement between them regarding payment of interest. It concluded that
since respondent made an excess payment to petitioner in the amount of ₱660,000.00 through mistake, petitioner should return the
said amount to respondent pursuant to the principle of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings experienced by
respondent. Further, petitioner should pay exemplary damages by way of example or correction for the public good, plus attorney’s
fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and jurisprudence on the matter, judgment is
hereby rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal interest of 12% per annum computed from 3
March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of ₱660,000.00 as attorney’s fees; and
(5) Ordering defendant to pay the costs of suit. 14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision affirming in
toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed decision [is] AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate court’s decision but this was denied. 16 Hence, petitioner lodged the
instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary interest. Interest
may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory interest. 18 The right to
interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is
demanded.19
Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is allowed only
if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that collection
of interest without any stipulation therefor in writing is prohibited by law. 21
It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there convincing proof
of written agreement between the two regarding the payment of interest. Respondent testified that although she accepted
petitioner’s offer of loan amounting to ₱540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest
on the loan.22
Petitioner presented a handwritten promissory note dated 12 September 1994 23 wherein respondent purportedly admitted owing
petitioner "capital and interest." Respondent, however, explained that it was petitioner who made a promissory note and she was
told to copy it in her own handwriting; that all her transactions with the PNO were subject to the approval of petitioner as
comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that
being unaware of the law on interest and fearing that petitioner would make good of his threats if she would not obey his
instruction to copy the promissory note, she copied the promissory note in her own handwriting; and that such was the same
promissory note presented by petitioner as alleged proof of their written agreement on interest. 24 Petitioner did not rebut the
foregoing testimony. It is evident that respondent did not really consent to the payment of interest for the loan and that she was
merely tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an
express stipulation of interest or written agreement of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed on the payment of
7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in her testimony in the Batas
Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by respondent, the RTC and the Court of
Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the agreement on interest was not reduced
in writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to the application of such
provision should be made when the borrower admits that a specific rate of interest was agreed upon as in the present case; and that
it would be unfair to allow respondent to pay only the loan when the latter very well knew and even admitted in the Batas Pambansa
Blg. 22 cases that there was an agreed 7% rate of interest on the loan. 25
We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner and respondent
agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that although petitioner and respondent
entered into a valid oral contract of loan amounting to ₱540,000.00, they, nonetheless, never intended the payment of interest
thereon.26 While the Court of Appeals mentioned in its Decision that it concurred in the RTC’s ruling that petitioner and respondent
agreed on a certain rate of interest as regards the loan, we consider this as merely an inadvertence because, as earlier elucidated,
both the RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that
factual findings of the trial court deserve great weight and respect especially when affirmed by the appellate court. 27 We found no
compelling reason to disturb the ruling of both courts.
Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed on the payment of
interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that after paying the total
amount of loan, petitioner ordered her to pay interest. 28 Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed, monetary
interest is due only if there was an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written, regarding
payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money, and the
debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of
interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of contractual
obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the two instances apply
only to compensatory interest and not to monetary interest. 29 The case at bar involves petitioner’s claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that respondent defaulted
in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written agreement as regards
payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the instant case. Thus, he
cannot be compelled to return the alleged excess amount paid by respondent as interest. 30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract
whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person
who has no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to
the ancient principle that no one shall enrich himself unjustly at the expense of another. 31 The principle of solutio indebiti applies
where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who
received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. 32 We have
held that the principle of solutio indebiti applies in case of erroneous payment of undue interest. 33
It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such payment because
there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as
regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to ₱540,000.00 from petitioner. 34 Respondent issued two checks with a
total worth of ₱700,000.00 in favor of petitioner as payment of the loan. 35 These checks were subsequently encashed by
petitioner.36 Obviously, there was an excess of ₱160,000.00 in the payment for the loan. Petitioner claims that the excess of
₱160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent also paid
cash in the total amount of ₱175,000.00 to petitioner as interest. 37 Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit 38 in the Batas Pambansa Blg.
22 cases that respondent paid him a total amount of ₱175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the
Rules of Evidence provides that the declaration of a party as to a relevant fact may be given in evidence against him. Aside from the
amounts of ₱160,000.00 and ₱175,000.00 paid as interest, no other proof of additional payment as interest was presented by
respondent. Since we have previously found that petitioner is not entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to respondent the excess amount of ₱160,000.00 and ₱175,000.00 or
the total amount of ₱335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of Appeals
should be reduced from ₱660,000.00 to ₱335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against respondent. In the said cases,
the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless,
respondent’s conviction therein does not affect our ruling in the instant case. The two checks, subject matter of this case, totaling
₱700,000.00 which respondent claimed as payment of the ₱540,000.00 worth of loan, were not among the five checks found to be
dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an overpayment of the loan by
reason of the interest which the latter paid to petitioner. 39
Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury.
Respondent testified that she experienced sleepless nights and wounded feelings when petitioner refused to return the amount paid
as interest despite her repeated demands. Hence, the award of moral damages is justified. However, its corresponding amount of
₱300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil
Code instructs that assessment of damages is left to the discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not be palpably excessive as to indicate that it was the result
of prejudice or corruption on the part of the trial court. 40 To our mind, the amount of ₱150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be imposed if the
defendant acted in an oppressive manner. Petitioner acted oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not pay interest. This forced respondent to pay interest despite lack
of agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of ₱50,000.00 imposed as exemplary
damages by the RTC and the Court is fitting so as to deter petitioner and other lenders from committing similar and other serious
wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the factual, legal or equitable justification for
awarding the same.42 In the case under consideration, the RTC stated in its Decision that the award of attorney’s fees equivalent to
25% of the amount paid as interest by respondent to petitioner is reasonable and moderate considering the extent of work rendered
by respondent’s lawyer in the instant case and the fact that it dragged on for several years. 43 Further, respondent testified that she
agreed to compensate her lawyer handling the instant case such amount. 44 The award, therefore, of attorney’s fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to respondent computed
from 3 March 1998 until its full payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that when an obligation, not constituting a loan or forbearance of
money is breached, an interest on the amount of damages awarded may be imposed at the rate of 6% per annum. We further
declared that when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality until its satisfaction, this interim period
being deemed equivalent to a forbearance of credit.
In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not from a loan or forbearance of
money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on the damages awarded
and on the attorney’s fees, to be computed from the time of the extra-judicial demand on 3 March 1998, 46 up to the finality of this
Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is hereby AFFIRMED with the
following MODIFICATIONS: (1) the amount of ₱660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY
FIVE THOUSAND PESOS (₱335,000.00); (2) the amount of ₱300,000.00 imposed as moral damages is reduced to ONE HUNDRED
FIFTY THOUSAND PESOS (₱150,000.00); (3) an interest of 6% per annum is imposed on the ₱335,000.00, on the damages awarded
and on the attorney’s fees to be computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up to its satisfaction. Costs against
petitioner.
SO ORDERED.