LOAN

Sun Life of Canada (Philippines), Inc. v. Sandra Tan Kit and The Estate of the Deceased
Norberto Tan Kit

There are two kinds of interest – monetary and compensatory.

"Monetary interest refers to the compensation set by the parties for the use or forbearance of
money.” No such interest shall be due unless it has been expressly stipulated in writing. "On the
other hand, compensatory interest refers to the penalty or indemnity for damages imposed by
law or by the courts.” The interest mentioned in Articles 22091 and 22122 of the Civil Code
applies to compensatory interest.

Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary
interest because aside from the fact that there is no use or forbearance of money involved in
this case, the subject interest was not one which was agreed upon by the parties in writing.
This being the case and judging from the tenor of the CA, to wit:

Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93

representing the [premium] paid by the insured with interest at the rate of 12% per annum from
time of death of the insured until fully paid.

there can be no other conclusion than that the interest imposed by the appellate court is in the
nature of compensatory interest.

The CA incorrectly imposed compensatory interest on the premium refund reckoned from the
time of death of the insured until fully paid.

As a form of damages, compensatory interest is due only if the obligor is proven to have failed
to comply with his obligation.

In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was
rescinding the policy due to concealment, petitioner tendered the refund of premium by
attaching to the said notice a check representing the amount of refund. However, respondents
refused to accept the same since they were seeking for the release of the proceeds of the
policy. Because of this discord, petitioner led for judicial rescission of the contract. Petitioner,
after receiving an adverse judgment from the RTC, appealed to the CA. And as may be
recalled, the appellate court found Norberto guilty of concealment and thus upheld the
rescission of the insurance contract and consequently decreed the obligation of petitioner to
return to respondents the premium paid by Norberto. Moreover, we nd that petitioner did not
incur delay or unjusti ably deny the claim.

Based on the foregoing, we nd that petitioner properly complied with its obligation under the
law and contract. Hence, it should not be made liable to pay compensatory interest.

1 Article 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.
2 Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded although
the obligation may be silent upon this point.

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 Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse
the premium paid within 15 days from date of nality of this Decision. If petitioner fails to pay
within the said period, then the amount shall be deemed equivalent to a forbearance of credit.
In such a case, the rate of interest shall be 6% per annum.

Danilo David v. BPI

Under Article 1253 of the New Civil Code, "if the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have been covered.” But
this is not what the trial courts did. For they applied all the payments exclusively to the
principal amount, unmindful of the interests. As a result, the interest simply started from
January 2007 onward. Consequently, since the application of payments by the MeTC, RTC,
and Court of Appeals, was erroneous, the end result was also erroneous.

We now turn to petitioner's own computation. He posits that since he already paid a total
amount of P211,100.00 out of his starting obligation of P223,000.00, then his total unpaid
obligation is only P11,900.00. This computation is likewise wrong. First, he erroneously used as
reference point P223,000.00 instead of P223,749.48; second, he totally omitted to include
interests.

So what is the correct computation? The last row shows the unpaid obligation of petitioner as
of August 12, 2008, i.e., P90,392.12, representing the principal amount, and P8,135.28,
representing the total accrued interests as of August 2008. The total is P98,527.40.

The transactions here occurred between 2007 and 2008, hence, the twelve percent (12%)
interest per annum under Eastern Shipping Lines, Inc. v. Court of Appeals applies from the
time petitioner failed to fully pay his obligation until August 2008. The unpaid obligation of
P98,527.40, continued to earn one percent (1%) interest per month or twelve percent (12%)
interest per annum from September 2008 until June 30, 2013 pursuant to Eastern Shipping
Lines, and six percent (6%) interest per annum from July 1, 2013 until nality of this Decision in
accordance with Nacar v. Gallery Frames. Thereafter, the total amount due shall earn six
percent (6%) interest per annum from nality of this Decision until full payment similarly in
accordance with Nacar and Article 2212 of the New Civil Code.3

Lastly, in accordance with Article 2208 of the Civil Code,4 the MeTC, RTC, and the Court of
Appeals all correctly awarded the bank with ten percent (10%) of the total monetary award as

3Interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point.
4 Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2)
When the defendant's act or omission has compelled the plainti to litigate with third persons
or to incur expenses to protect his interest; (3) In criminal cases of malicious prosecution
against the plainti ; (4) In case of a clearly unfounded civil action or proceeding against the
plainti ; (5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plainti s plainly valid, just and demandable claim; (6) In actions for legal support; (7) In actions
for the recovery of wages of household helpers, laborers and skilled workers; (8) In actions for
indemnity under workmen's compensation and employer's liability laws; (9) In a separate civil
action to recover civil liability arising from a crime; (10) When at least double judicial costs are
awarded; (11) In any other case where the court deems it just and equitable that attorney's fees
and expenses of litigation should be recovered.

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attorney's fees because it was compelled to engage the services of a lawyer to protect its
interest.

First Fil-Sin Lending Corporation v. Gloria Padilla

Perusal of the promissory notes and the disclosure statements pertinent to the July 22, 1997
and September 7, 1997 loan obligations of respondent clearly and unambiguously provide for
interest rates of 4.5% per annum and 5% per annum, respectively. Nowhere was it stated that
the interest rates shall be applied on a monthly basis.

Thus, when the terms of the agreement are clear and explicit that they do not justify an attempt
to read into it any alleged intention of the parties, the terms are to be understood literally just
as they appear on the face of the contract. It is only in instances when the language of a
contract is ambiguous or obscure that courts ought to apply certain established rules of
construction in order to ascertain the supposed intent of the parties. However, these rules will
not be used to make a new contract for the parties or to rewrite the old one, even if the
contract is inequitable or harsh. They are applied by the court merely to resolve doubts and
ambiguities within the framework of the agreement.

The lower court and the CA mistook the Loan Transactions Summary for the Disclosure
Statement. The former was prepared exclusively by petitioner and merely summarizes the
payments made by respondent and the income earned by petitioner. There was no mention of
any interest rates and having been prepared exclusively by petitioner, the same is self serving.
On the contrary, the Disclosure Statements were signed by both parties and categorically
stated that interest rates were to be imposed annually, not monthly.

As such, since the terms and conditions contained in the promissory notes and disclosure
statements are clear and unambiguous, the same must be given full force and e ect. The
expressed intention of the parties as laid down on the loan documents controls.

Also, reformation cannot be resorted to as the documents have not been assailed on the
ground of mutual mistake. When a party sues on a written contract and no attempt is made to
show any vice therein, he cannot be allowed to lay claim for more than what its clear
stipulations accord. His omission cannot be arbitrarily supplied by the courts by what their own
notions of justice or equity may dictate.

Notably, petitioner even admitted that it was solely responsible for the preparation of the loan
documents, and that it failed to correct the pro forma note "p.a." to "per month”. Since the
mistake is exclusively attributed to petitioner, the same should be charged against it. This
unilateral mistake cannot be taken against respondent who merely a xed her signature on the
pro forma loan agreements. As between two parties to a written agreement, the party who
gave rise to the mistake or error in the provisions of the same is estopped from asserting a
contrary intention to that contained therein. The checks issued by respondent do not clearly
and convincingly prove that the real intent of the parties is to apply the interest rates on a
monthly basis. Absent any proof of vice of consent, the promissory notes and disclosure
statements remain the best evidence to ascertain the real intent of the parties.

The same promissory note provides that "x x x any and all remaining amount due on the
principal upon maturity hereof shall earn interest at the rate of _____ from date of maturity until
fully paid." The CA thus properly imposed the legal interest of 12% per annum from the time
the loans matured until the same has been fully paid on February 2, 1999. As decreed in
Eastern Shipping Lines, Inc. v. Court of Appeals, "in the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default.”

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As regards the penalty charges, we agree with the CA in ruling that the 1% penalty per day of
delay is highly unconscionable. Applying Article 1229 of the Civil Code, courts shall equitably
reduce the penalty when the principal obligation has been partly or irregularly complied with, or
if it is iniquitous or unconscionable.

With regard to the attorney’s fees, the CA correctly deleted the award in favor of petitioner
since the trial court’s decision does not reveal any explicit basis for such an award. Attorney’s
fees are not automatically awarded to every winning litigant. It must be shown that any of the
instances enumerated under Art. 22085 of the Civil Code exists to justify the award thereof.14
Not one of such instances exists here. Besides, by ling the complaint, respondent was merely
asserting her rights which, after due deliberations, proved to be lawful, proper and valid.

PNB v. AIC Construction Corporation and Sps. Rodolfo and Ma. Aurora Bacani

The Court of Appeals correctly applied the legal rate of interest to the loan.

Article 1308 of the Civil Code states: "The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.”

The principle of mutuality of contracts is premised on the condition that there must be an
essential equality between the parties so that obligations arising from contracts may have the
force of law between them. If a condition in the contract depends solely on the will of one of
the contracting parties, it is void.

This principle applies to interest rates. Monetary interest is always agreed upon by the parties
and they are free to stipulate on the rates that will apply to their loans. However, if there is no
true parity between the parties, courts may equitably reduce iniquitous or unconscionable
interest charges. In Vitug v. Abuda:

Parties are free to stipulate interest rates in their loan contracts in view of the
suspension of the implementation of the Usury Law ceiling on interest e ective January
1, 1983.

5In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant’s act or omission has compelled the plainti to litigate with third
persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plainti ;
(4) In case of a clearly unfounded civil action or proceeding against the plainti ;
(5) When the defendant acted in gross and evident bad faith in refusing to satisfy the plainti ’s
plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
(8) In actions for indemnity under workmen’s compensation and employer’s liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorney’s fees and
expenses of litigation should be recovered.

In all cases, the attorney’s fees and expenses of litigation must be reasonable.

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 The freedom to stipulate interest rates is granted under the assumption that we have a
perfectly competitive market for loans where a borrower has many options from whom
to borrow. It assumes that parties are on equal footing during bargaining and that
neither of the parties has a relatively greater bargaining power to command a higher or
lower interest rate. It assumes that the parties are equally in control of the interest rate
and equally have options to accept or deny the other party's proposals. In other words,
the freedom is granted based on the premise that parties arrive at interest rates that
they are willing but are not compelled to take either by force of another person or by
force of circumstances.

However, the premise is not always true. There are imperfections in the loan market.
One party may have more bargaining power than the other. A borrower may be in need
of funds more than a lender is in need of lending them. In that case, the lender has
more commanding power to set the price of borrowing than the borrower has the
freedom to negotiate for a lower interest rate.

Hence, there are instances when the state must step in to correct market imperfections
resulting from unequal bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public morals,
safety, and welfare.
...
In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor
unconscionable. Iniquitous or unconscionable interest rates are illegal and, therefore,
void for being against public morals. The lifting of the ceiling on interest rates may not
be read as "grant[ing] lenders carte blanche [authority] to raise interest rates to levels
which will either enslave their borrowers or lead to a hemorrhaging of their assets.”

Voluntariness of stipulations on interest rates is not su cient to make the interest rates
valid. In Castro v. Tan:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly

and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant
spoliation and an iniquitous deprivation of property, repulsive to the common sense of
man. It has no support in law, in principles of justice, or in the human conscience nor is
there any reason whatsoever which may justify such imposition as righteous and as one
that may be sustained within the sphere of public or private morals.

Thus, even if the parties voluntarily agree to an interest rate, courts are given the
discretionary power to equitably reduce it if it is later found to be iniquitous or
unconscionable. Courts approximate what the prevailing market rate would have been
under the circumstances had the parties had equal bargaining power. (Citations omitted)

In this case, the interest provision on the parties' agreement states:

2.03 Interest on Availments. (a) the Borrowers agree to pay on each Availment from the
date of each Availment, up to but not including the date of full payment thereof at the
rate per annum which is determined by the Bank to be the Bank's prime rate plus
applicable spread in e ect as of the date of the relevant availment. (Emphasis supplied)

This Court has already found this stipulation invalid in Spouses Silos:

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 On the other hand, the August 1991 Amendment to Credit Agreement contains the
following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full payment
thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in e ect as of the date of each Availment.

and under this Amendment to Credit Agreement, petitioners again executed and signed
the following promissory notes in blank, for the respondent to later on enter the
corresponding interest rates, which it did, as follows:
...
These stipulations must be once more invalidated, as was done in previous cases. The
common denominator in these cases is the lack of agreement of the parties to the
imposed interest rates. For this case, this lack of consent by the petitioners has been
made obvious by the fact that they signed the promissory notes in blank for the
respondent to ll. We nd credible the testimony of Lydia in this respect. Respondent
failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted
that interest rates were xed solely by its Treasury Department in Manila, which were
then simply communicated to all PNB branches for implementation. If this were the
case, then this would explain why petitioners had to sign the promissory notes in blank,
since the imposable interest rates have yet to be determined and xed by respondent's
Treasury Department in Manila.

Moreover, in Aspa's enumeration of the factors that determine the interest rates PNB
xes — such as cost of money, foreign currency values, bank administrative costs,
pro tability, and considerations which a ect the banking industry — it can be seen that
considerations which a ect PNB's borrowers are ignored. A borrower's current nancial
state, his feedback or opinions, the nature and purpose of his borrowings, the e ect of
foreign currency values or uctuations on his business or borrowing, etc. — these are
not factors which in uence the xing of interest rates to be imposed on him. Clearly,
respondent's method of xing interest rates based on one-sided, indeterminate, and
subjective criteria such as pro tability, cost of money, bank costs, etc. is arbitrary for
there is no xed standard or margin above or below these considerations.
...
To repeat what has been said in the above-cited cases, any modi cation in the contract,
such as the interest rates, must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modi cation, especially when
it a ects an important aspect of the agreement. In the case of loan agreements, the rate
of interest is a principal condition, if not the most important component. Thus, any
modi cation thereof must be mutually agreed upon; otherwise, it has no binding e ect.
What is even more glaring in the present case is that, the stipulations in question no
longer provide that the parties shall agree upon the interest rate to be xed; instead,
they are worded in such a way that the borrower shall agree to whatever interest rate
respondent xes.
...
Accordingly, petitioners are correct in arguing that estoppel should not apply to them,
for "estoppel cannot be predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is prohibited by law or is against
public policy." It appears that by its acts, respondent violated the Truth in Lending Act,
or Republic Act No. 3765, which was enacted "to protect ... citizens from a lack of
awareness of the true cost of credit to the user by using a full disclosure of such cost

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 with a view of preventing the uninformed use of credit to the detriment of the national
economy." The law "gives a detailed enumeration of the speci c information required to
be disclosed, among which are the interest and other charges incident to the extension
of credit." (Emphases supplied, citations omitted)

The facts of this case are similar to the facts in Spouses Silos. The interest rates are yet to be
determined through a subjective and one-sided criterion. These rates are no longer subject to
the approval of respondents. The parties did not agree on the interest rate. Rather, the interest
rate was imposed by petitioner, and respondents were left with no choice but to agree to it.
This arrangement violates Republic Act No. 3765 or the Truth in Lending Act, which requires
creditors to fully disclose to the debtor all amounts incidental to the extension of the credit,
including interests, discounts or fees, to protect debtors from a lack of awareness of the true
cost of credit.

It also cannot be argued that respondents are bound by the interest rates. Spouses Silos also
discussed the inequality between the parties in loan and credit arrangements:

The fact that petitioners later received several statements of account detailing its
outstanding obligations does not cure respondent's breach. To repeat, the belated
discovery of the true cost of credit does not reverse the ill e ects of an already
consummated business decision. Neither may the statements be considered proposals
sent to secure the petitioners' conformity; they were sent after the imposition and
application of the interest rate, and not before. And even if it were to be presumed that
these are proposals or o ers, there was no acceptance by petitioners. "No one
receiving a proposal to modify a loan contract, especially regarding interest, is obliged
to answer the proposal.”

Loan and credit arrangements may be made enticing by, or "sweetened" with, o ers of
low initial interest rates, but actually accompanied by provisions written in ne print that
allow lenders to later on increase or decrease interest rates unilaterally, without the
consent of the borrower, and depending on complex and subjective factors. Because
they have been lured into these contracts by initially low interest rates, borrowers get
caught and stuck in the web of subsequent steep rates and penalties, surcharges and
the like. Being ordinary individuals or entities, they naturally dread legal complications
and cannot a ord court litigation; they succumb to whatever charges the lenders
impose. At the very least, borrowers should be charged rightly; but then again this is not
possible in a one-sided credit system where the temptation to abuse is strong and the
willingness to rectify is made weak by the eternal desire for pro t.
...
Besides, that petitioners are given the right to question the interest rates imposed is,
under the circumstances, irrelevant; we have a situation where the petitioners do not
stand on equal footing with the respondent. It is doubtful that any borrower who nds
himself in petitioners' position would dare question respondent's power to arbitrarily
modify interest rates at any time. In the second place, on what basis could any
borrower question such power, when the criteria or standards — which are really one-
sided, arbitrary and subjective — for the exercise of such power are precisely lost on
him? (Emphasis in the original, citations omitted)

In this case, this Court notes that petitioner did not contest respondents' allegations as to the
breakdown of the amounts due to it: (i) that respondents' obligation of P65 million when the
loan matured was composed of their actual loan availment of P40 million and P25 million for
interest charges; (ii) that at around May 2000, without any additional availments, the amount
due became P92 million; (iii) that by April 30, 2001, respondents' obligation increased to more

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than P140 million; (iv) that when the amount due became P162,553,680.50 and after petitioner
foreclosed the mortgaged properties, it still wanted to collect de ciency judgment in the
amount of P157 million. This Court also notes that respondents have already argued against
the loss of their family home.

In a concurring and dissenting opinion in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales,
Inc. it was discussed how interest should be consistent with the demands of social justice:

As a matter of principle, money itself should not beget money. Money is only generally a
store of value. It "has value because people are willing to accept it in exchange for
goods and services and in payment for debts.”

Allowing money to produce more money — for instance, lending money at excessive
interest rates as a way of increasing money — lays the foundation for a growing wealth
disparity, since loans are usually extended by those who are richer (with capital) to
those who are poorer (without capital). This does not serve the demands of social
justice; that is, "the humanization of laws and the equalization of social and economic
forces by the State so that justice in its rational and objectively secular conception may
at least be approximated.”

Money should be put to productive use so that the owner, the society, and the less
privileged may all share in the bene ts to be derived from it. Passive income "adds no
new good or service into the market that would be of use to real persons. Instead, it has
the tendency to alter the price of real goods and services to the detriment of those who
manufacture, labor, and consume products." The practice of making money out of
money skews the economy in favor of speculation and provides a disincentive for real
economies. (Citations omitted)

Interest and penalties cannot be charged to unjustly enrich a person at the expense of another.
Thus, the Court of Appeals correctly applied the legal rate of interest in the credit agreement.

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