CREDIT TRANSACTIONS AY 2013-2014, First Semester Marion P.

Allam Professor

Case Digest on Simple Loan or Mutuum

Naguiat vs. Queano GR No. 118375 Issue: Whether or not there is a perfected contract of loan? Held: An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but he commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. The lender did not remit and the borrower did not receive the proceeds of the loan. That being the case, it follows that the mortgage which is suppose to secure the loan is null and void. A mortgage contract being a mere accessory contract, its validity depends on the validity of the loan secured by it. Cadleron vs. People GR No. 158495 Facts: Elizabeth Eusebio-Calderon (Calderon for brevity), was charged with Estafa in three separate informations. First was against Amelia Casanova, which she issued checks in exchange of the cash received to Amelia of about P130,900.00, but Closed Account. Second was against Teresita Eusebio, which she issued checks in exchange of the cash received to Amelia of about P1 72,250.00, but Closed Account. And lastly, was against Manolito Eusebio, which she issued checks in exchange of the cash received to Amelia of about P60,000.00, but Closed Accounts. The three are Calderons Aunt and cousins respectively. Issue: Held: The CA found that the Calderon did not employ trickery or deceit in obtaining money from the complainants, instead, it is concluded that the money obtained was undoubtedly loans for which the petitioner paid interest. The checks issued by Calderon as payment for the principal loan constitute evidence of her civil liability which was deemed instituted with the criminal action. The civil liability of Calderon includes only the principal amount of the loan. With respect to the interest checks she issued, the same are void. There was no written proof of the payable interest except the verbal agreement that the loan shall earn 5% interest per month. Under Art. 1956 of Civil Code, an agreement as to payment of interest must be in writing, otherwise it cannot be valid. Consequently, no interest is due and the interest checks she issued should be eliminated from the computation of her civil liability. However, while there can be no stipulated interest, there can be legal interest pursuant to Art. 2209 of the Civil Code. It is elementary that in the absence of a stipulations to interest, the loan due will now earn interest at the legal rate of 12% per annum. Alcaraz vs. Court of Appeals GR No. 152202

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Facts: Equitable issued credit card to Alcaraz. Alcaraz through the use of the said credit card secured cash advances and purchased goods and services on credit with Equitables affiliated merchant establishments. Thus, Alcaraz accumulated unpaid credit with Equitable and despite the receipt of several demand letters, failed to pay his outstanding obligations. Equitable sought the payment of the accumulated outstanding balance including interest of 2.5% per month as well as monthly late penalty/surcharge of 1.5% for the peso account and, and 1.5 monthly interest and 1% late penalty/surcharge per month for the dollar account until full payment thereof as provided in the Terms and Conditions Governing the Issuance and Use of Equitable Visa Card. Alcaraz contended that he was an honorary member, as such he is not required to submit any application or sign any document prior to the issuance of the card and he was entitled to pay on an installment basis without any interest. Issue: Held: Equitable failed to prove that the terms and conditions on the usage including the applicability of the interest is binding to Alcaraz. It is, however, undeniable that Alcaraz accumulated unpaid obligations both in peso and dollar accounts through the use of the credit card issued to him by Equitable. Therefore, Alcaraz is liable for the payment thereof. Since the provisions of the Terms and Conditions are inapplicable to Alcaraz, the legal interest on obligations consisting of loan or forbearance of money shall apply. Almeda vs. Court of Appeals GR No. 113412 Facts: PNB granted spouses Almeda several loan/credit accommodations tataling to P18M payable in 6 years at an interest rate of 21% per annum. To secure the loan, spouses Almeda executed a Real Estate Mortgage Contract covering a parcel of land together with the building erected thereon (The Marvin Plaza). A credit agreement embodying the terms and conditions of the loan was executed between the parties. On 1984, PNB raised the interest rate to 28%, allegedly pursuant to Section III-c (1). Spouses Almeda protested but o no avail. Issue: Held: The binding effect of any agreement between parties to a contract is premised on two settled principle: 1) that any obligation arising from contract has the force of law between the parties; and 2) that there must be mutuality between the parties based on their essential quality . Any contract which appears to be heavily weighed in favor of one of the parties so as to lead an unconscionable result id void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. It is plainly obvious, therefore, from the undisputed facts of the case that PNB unilaterally altered the terms of its contract with spouses Almeda by increasing the interest rates on the loan without prior assent of the latter. Spouses Almeda never agreed in writing to pay the increased interest rates demanded by PNB. Garcia vs. Thio GR No. 154878 Facts: Thio received from Gracia crossed checks payable to order of Santiago. Garcia alleged that Thio borrowed from her money with interests thereon at the rates of 3% and 4% per month respectively. Thio paid the stipulated monthly interest for both loans on their maturity dates but failed to pay the principal amounts despite repeated demands. Cases on #2 of Syllabus | Simple Loan or Mutuum| Digests by Muji Jaafar | Page 2 of 9

Thio denied that she contracted the two loans with petitioner and countered that it was Santiago to whom Garcia lent money. Thio claimed that she wa merely asked by Garcia to give the crossed checks to Santiago. Issue: Held: A loan is a real contract, not consensual, and as such is perfected upon the delivery of the object of the contract. This is evident in Art. 1934 of the Civil Code: An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. Upon the delivery of the object of the contract of loan (in this case the money received by the debtor when the checks were encashed) the debtor acquires ownership or such money or loan proceeds and is bound to pay the creditor an equal amount. Thio is, however, not liable for the 3% and 4% monthly interest for the loans respectively. There was no written proof of the interest payable except for the verbal agreement that the loans would earn 3% and 4% interest per month. Art. 1956 of the Civil Code provides that no interest shall be due unless it has been stipulated in writing. Be that is may, while there can be no stipulated interest, there can be legal interest pursuant to Art. 2209 of the Civil Code. First Fil-Sin Lending vs. Padillo June 12, 2005 Facts: Padillo obtained two loans from First Fil-SinLending. For the first loan (P500,000.00),, PAdillo made 13 monthly interst payments before she settled the loan. For the second loan (P500,000.00), Padillo made 11 monthly interest payment before she paid the loan. In sum, Padillo paid P792,500.00 for the first loan and P775,000.00 for the second loan. Padillo filed an action for sum of money against Fil-Sin alleging that she only agreed to pay interest at the rates of 4.5% and 5% per annum, respectively, and not 4.5% and 5% per month, Padillo sought to recover the amounts she alledgely paid in excess of her actual obligations. Issue: Held: the provision as to the annual interest rate is clear and requires no room for interpretation. 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 as they appear on the face of the contract. Notably, Fil-Sin even admitted thatit was solely responsible for the preparation of he loan documents, and that it failed to correct the pro forma note p.a. to per month . Since the mistake is exclusively attributed to the petitioner, the same should be charged against it. This unilateral mistake cannot be taken against Padillo who merely affixed 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 form asserting a contrary intention to that contained therein. Commonwealth Insurance Corporation vs. RCBC January 29, 2004 Facts: RCBC granted two export loan lines, one, for P2,500,000.00 to Jigs Manufacturing and, the other, for P1,000,000.00 to Elba Industries. JIGS and ELBA which are sister corporations both drew from their Cases on #2 of Syllabus | Simple Loan or Mutuum| Digests by Muji Jaafar | Page 3 of 9

respective credit lines, the former in the amount of P2,499,992.00 and the latter for P998,033.37 plusP478,985.05 from the case-to-case basis and trust receipts. These loans were evidenced by promissory notes and secured by surety bonds executed by CIC. Specifically, the surety bonds issued by CIC in favor of appellant RCBC to secure the obligations of JIGS totaled P2,894,128.00, while that securing ELBAs obligation was P1,570,000.00. Hence, the total face value of the surety bonds issued by CIC wasP4,464,128.00. JIGS and ELBA defaulted in the payment of their respective loans. RCBC made a written demand on CIC to pay JIGs account to the full extent of the suretyship. A similar demand was made on for CIC to pay ELBAs account to the full extent of the suretyship. In response to those demands, CIC made several payments from in the total amount of P2,000,000.00. There having been a substantial balance unpaid, RCBC made a final demand for payment upon CIC but the latter ignored it. Thus, appellant RCBC filed the Complaint for a Sum of Money against CIC. Issue: Whether or not CIC should be held liable to pay legal interest over and above its principal obligation under the surety bonds issued by it Held: We have sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection. CICs liability under the suretyship contract is different from its liability under the law. There is no question that as a surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds. However, it is clear from the above-cited jurisprudence that petitioners liability for the payment of interest is not by reason of the suretyship agreement itself but because of the delay in the payment of its obligation under the said agreement. CIC admits having incurred in delay. Nonetheless, it insists that mere delay does not warrant the payment of interest. Citing Section 244 of the Insurance Code, petitioner submits that under the said provision of law, interest shall accrue only when the delay or refusal to pay is unreasonable; that the delay in the payment of its obligation is not unreasonable because such delay was brought about by negotiations being made with RCBC for the amicable settlement of the case. CICs contention that what prevented it from paying its obligation to RCBC is the fact that the latter insisted on imposing interest and penalties over and above the principal sum it seeks to recover is not plausible. The issue of CICs payment of interest is a matter that is totally different from its obligation to pay the principal amount covered by the surety bonds it issued. Petitioner offered no valid excuse for not paying the balance of its principal obligation when demanded by RCBC. Its failure to pay is, therefore, unreasonable. Thus, we find no error in the appellate courts ruling that petitioner is liable to pay interest. Medel vs. Court of Appeals 299 SCRA 481 Facts: Medel obtained several loans from Gonzales totalling P500,000. These were evidenced by several promissory notes agreeing to an interest rate of 5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per month.. On maturity, Medel failed to pay their indebtedness. Hence, Gonzales filed with the RTC of Bulacan a complaint for collection of the full amount of the loan. RTC declared that the promissory notes were genuine, however, it ruled that although the Usury Law had been repealed, the interest charged by Gonzales on the loans was unconscionable. Hence, RTC applied the legal rate of interest for loan of money, goods or credit of 12% per annum. CA reversed the ruling of the RTC holding that the Usury Law had become legally inexistent. Hence, this petition for review on certiorari.

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Issue: Whether or not the interest rate stipulated upon was valid. Held: NO. SC held that the stipulated rate of interest at 5.5% per month on the P500,000 loan was excessive. However, it could not consider the rate usurious because CB Circular No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and that said law is now legally inexistent. CB Circular 905 did not repeal nor in any way amend the Usury Law but simply suspended the latters effectivity. A CB Circular cannot repeal a law. Only a law can repeal another law. By virtue of this circular, the Usury Law has been rendered ineffective. Interest can no be charged as lender and borrower may agree upon. Nevertheless, SC held that the interest of 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note was unconscionable, and hence, contrary to morals, if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. SC ordered that the interest of 12% per annum and additional 1% a month penalty charge as liquidated damages reasonable. Pascual vs. Ramos GR No. 144712 Facts: Petitioners executed a Deed of Absolute Sale with Right to Repurchase with respondent, in consideration of Php 150,000. The petitioners did not exercise their right to repurchase the property within the stipulated one-year period; hence, respondent prayed that the title over the parcels of land be consolidated in his favor. Petitioners aver that what was really executed between them and the respondent is a real estate mortgage and that there was no agreement limiting the period within which to exercise the right to repurchase and that they have even overpaid respondent. Respondent offered in evidence a document denominated as Sinumpaang Salaysay which had a provision of an interest of 7% per month on the principal loan of Php 150,000. RTC ruled that the transaction was actually a loan and the payment was secured by a mortgage of the property, and that the petitioners had made payments which resulted in overpayment as the interest was at 7% per annum. Respondent filed an MR alleging that the interest stipulated in the Sinumpaang Salaysay was 7% per month. The RTC ruled in favor of the respondent acknowledging that the correct interest rate stipulated was 7% per month. However, the RTC declared that the 7% per month interest is too burdensome and onerous and so the court unilaterally reduced the interest rate from 7% per month to 5% per month. Petitioners filed an MR alleging that either 5% or 7% per month is exorbitant, unconscionable, unreasonable, usurious and inequitable. Issue: Whether or not the interest of 5% month is exorbitant, unconscionable, unreasonable, usurious and inequitable. Held: NO. It is a basic principle in civil law that parties are bound by the stipulations in the contracts voluntarily entered into by them. Parties are free to stipulate terms and conditions which they deem convenient provided they are not contrary to law, morals, good customs, public order, or public policy. The interest rate of 7% per month was voluntarily agreed upon by RAMOS and the PASCUALs. 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 RAMOS. Neither is there a showing that in their contractual relations with RAMOS, the PASCUALs were at a disadvantage on account of their moral dependence, ignorance, mental weakness, tender age or other handicap, which would entitle them to the vigilant protection of the courts as mandated by Article 24 of the Civil Code. With the suspension of the Usury Law and the removal of interest ceiling, the parties are free to stipulate the interest to be imposed on loans. Absent any evidence of fraud, undue influence, or any vice of consent exercised by RAMOS on the PASCUALs, the interest agreed upon is binding upon them. This Court is not in a position to impose upon parties contractual stipulations different from what they have agreed upon. Cases on #2 of Syllabus | Simple Loan or Mutuum| Digests by Muji Jaafar | Page 5 of 9

Imperial vs. Jaucian GR No. 149004 Facts: Alex A. Jaucian filed a case for collection of money against Restituta Imperial. The complaint alleges, that Restituta obtained from Alex six (6) separate loans for which the former executed in favor of the latter six (6) separate promissory notes and issued several checks as guarantee for payment. When the said loans became overdue and unpaid, especially when the Restitutas checks were dishonored, Alex made repeated oral and written demands for payment. The loans were covered by six (6) separate promissory notes executed by Restituta. The face value of each promissory notes is bigger than the amount released to Restituta because said face value already included the interest, which is 16% per month, from date of note to date of maturity. The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a check matures the defendant would exchange it with cash. Although, admittedly, defendant made several payments, the same were not enough and she always defaulted whenever her loans matured. On the other hand, Restituta claims that she was extended loans by the Alex on several occasions, i.e., from November 13, 1987 to January 13, 1988, in the total sum of P320,000.00 at the rate of sixteen percent (16%) per month. The notes matured every four (4) months with unearned interest compounding every four (4) months if the loan was not fully paid. Issue: Whether or not the charging of interest of twenty-eight (28%) per centum per annum without any writing is illegal? Held: The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per annum; and the stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum. Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed the rate of 12 percent per annum only. The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the rate of 16 percent per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. In Medel v. CA, the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered contrary to morals, if not against the law. Such stipulation is void. Since the stipulation on the interest rate is void, it is as if there were no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand. We find no justification to reverse or modify the rate imposed by the two lower courts. Spouses Zacarias and Bacolor vs. Banco Filipino Savings Bank GR No. 148491 Facts: On February 11, 1982, spouses Zacarias and Catherine Bacolor, obtained a loan of P244,000.00 from Banco Filipino Savings and Mortgage Bank, Dagupan City Branch. They executed a promissory note providing that the amount shall be payable within a period of ten (10) years with a monthly amortization of P5,380.00 beginning March 11, 1982 and every 11th day of the month thereafter; that the interest rate shall be twenty-four percent (24%) per annum, with a penalty of three percent (3%) on any unpaid monthly amortization; that there shall be a service charge of three percent (3%) per annum on the loan; and that in case respondent bank seeks the assistance of counsel to enforce the collection of the Cases on #2 of Syllabus | Simple Loan or Mutuum| Digests by Muji Jaafar | Page 6 of 9

loan, Zacarias and Bacolor shall be liable for ten percent (10%) of the amount due as attorneys fees and fifteen percent (15%) of the amount due as liquidated damages. As security for the loan, Zacarias and Bacolor mortgaged with respondent bank their parcel of land. From March 11, 1982 to July 10, 1991, Zacarias and Bacolor paid respondent bank P412, 199.36. Thereafter, they failed to pay the remaining balance of the loan. On August 7, 1992, Zacarias and Bacolor received from respondent bank a statement of account stating that their indebtedness as of July 31, 1992 amounts to P840,845.61. In its letter dated January 13, 1993, respondent bank informed Zacarias and Bacolor that should they fail to pay their loan within fifteen (15) days from notice, appropriate action shall be taken against them. Due to the of Zacarias and Bacolor to settle their obligation, respondent instituted, on March 5, 1993, an action for extra-judicial foreclosure of mortgage. Prior thereto, or on February 1, 1993, Zacarias and Bacolor filed a complaint for violation of the Usury Law against respondent. On August 25, 1994, the RTC rendered its decision dismissing petitioners complaint. Issue: Whether or not the interest rate is considered excessive and unconscionable. Held: It is stated in Article 1956 of the Civil Code that no interest shall be due unless it has been expressly stipulated in writing. Here the parties agreed in writing on February 11, 1982 that the rate of interest on the petitioners loan shall be 24% per annum. At the time the parties entered into the loan transaction the applicable law was Section 2 of Act 2655 of the Usury Law as amended by P.D. No. 166, which provides that the rate of interest for the forbearance of money when secured by a mortgage upon real estate, should not be more than 6% per annum or the maximum rate prescribed by the Monetary Board of the Central Bank of the Philippines in force at the time the loan was granted. Thus, the interest rate on a loan forbearance of any money, goods, or credits with a maturity of more than 730 days shall not be subject to any ceiling. Therefore, the 24% rate agreed upon does not violate the Usury Law. A contract is the law between the parties and they are bound by its stipulations. Verily, petitioners cannot now renege their obligation to comply with what is incumbent upon them under the loan agreement. During the closure of respondent bank, it could still function as a bonding institution, hence, could continue collecting interests from petitioners. Thus, petition is denied and the challenged Decision and Resolution of the Court of Appeals Affirmed. Dio vs. Jardines GR No. 145871 Facts: Leonides C. Dio filed a Petition for Consolidation of Ownership. She alleged that Lina Jardines executed in her favor a Deed of Sale with Pacto de Retro over a parcel of land with improvements thereon, the consideration for which amounted to P165,000.00; it was stipulated in the deed that the period for redemption would expire in six months; such period expired but neither Jardines nor any of her legal representatives were able to redeem or repurchase the subject property; as a consequence, absolute ownership over the property has been consolidated in favor of Dio. Jardines countered in her Answer tha the Deed of Sale with Pacto de Retro did not embody the real intention of the parties; the transaction actually entered into by the parties was one of simple loan and the Deed of Sale with Pacto de Retro was executed just as a security for the loan; the amount borrowed by Jardines during the first week of January 1987 was only P50,000.00 with monthly interest of 9% to be paid within a period of six months, but since said amount was insufficient to buy construction materials for the house she was then building, she again borrowed an additional amount of P30,000.00; it was never the intention of respondent to sell her property to petitioner; the value of respondents residential house alone is over a million pesos and if the value of the lot is added, it would be around one and a half million pesos; it is unthinkable that Jardines would sell her property worth one and a half million pesos for only P165,000.00; Jardines has even paid a total of P55,000.00 out of the amount borrowed and she is willing to settle the unpaid amount, but Dio insisted on appropriating the property of respondent which she put up as collateral for the loan; Jardines has been the one paying for the realty taxes on the subject property; and due to the malicious suit filed by Dio, Jardines suffered moral damages.

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On September 14, 1993, Dio filed an Amended Complaint adding allegations that she suffered actual and moral damages. Thus, she prayed that she be declared the absolute owner of the property and/or that respondent be ordered to pay her P165,000.00 plus the agreed monthly interest of 10%; moral and exemplary damages, attorneys fees and expenses of litigation. Issue: Whether or not the interest to be paid under the agreement is 10% or 9% or whether or not this amount of interest shall be reduced equitably pursuant to law? Held: Both parties admit that they came to an agreement whereby respondent shall pay petitioner interest, at 9% (according to respondent) or 10% (according to petitioner) per month, if she is unable to pay the principal amount ofP165,000.00 on July 29, 1987. It is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest. In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-cited cases, this stipulation is similarly invalid. Applying the afore-cited rulings to the instant case, the inescapable conclusion is that the agreed interest rate of 9% per month or 108% per annum, as claimed by respondent; or 10% per month or 120% per annum, as claimed by petitioner, is clearly excessive, iniquitous, unconscionable and exorbitant. Although respondent admitted that she agreed to the interest rate of 9%, which she believed was exorbitant, she explained that she was constrained to do so as she was badly in need of money at that time. As declared in the Medel case and Imperial vs. Jaucian,20 "[i]niquitous and unconscionable stipulations on interest rates, penalties and attorneys fees are contrary to morals." Thus, in the present case, the rate of interest being charged on the principal loan of P165,000.00, be it 9% or 10% per month, is void. The CA correctly reduced the exorbitant rate to "legal interest." Eastern Shipping Lines v. CA GR No. 97412 Facts: 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. The shipment was insured under plaintiff's Marine Insurance Policy. Upon arrival of the shipment in Manila, 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 Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal. On January 8 and 14, 1982, 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. 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.

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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. Facts: Petitioner-defendant was consigned to deliver a cargo. Upon embarkment, the cargo was found to be damaged while on transit. Private respondent-plaintiff, Mercantile Insurance, paid the consignee the amount of damage based on a marine insurance policy. Mercantile consequently sued the petitioner for recovery of damages it paid to the consignee. The court a quo decided in favor of the plaintiff and further stressing the amount paid by the insurance company to the consignee be paid and with the present legal interest of 12% per annum commencing on the date of filing of the complaint, until fully paid. The petitioner now contests the ruling particularly on the issue of interest. Issue: When should the reckoning period be for the computation of the payment of legal interest on an award for loss or damage? What is the applicable rate of interest? Held: The Court laid down the following rules of thumb for guidance in cases like that of the above:

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. 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.

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