B. The Usury Law and CB Circular Nos.

416 and 905 BSP

Circular No. 799
PHILIPPINE NATIONAL BANK petitioner , vs, THE HON.
COURT OF APEALS and AMBROSIOPADILLA, respondents
GR# 88880. April 30, 1991.
GRIRO-AQUINO, J
FACTS:
Private respondent (PR) Ambrosio Padilla, applied for and was
granted a credit line of 321.8million, by petitioner PNB. This was
for a term of 2 years at 18% interest per annum and was
secured by real estate mortgage and 2 promissory notes
executed in favor of Petitioner by PR. The credit agreement and
the promissory notes, in effect, provide that PR agrees to be
bound by increases to the interest rate stipulated, provided it is
within the limits provided for by law. Conflict in this case
arose when Petitioner unilaterally increased the interest rate
from 18% to: (1) 32%[July 1984]; (2) 41% [October 1984];
and (3) 48% [November 1984], or 3 times within the span of a
single year. This was done despite the numerous letters of
request made by PR that the interest rate be increased only to
21% or 24%.PR filed a complaint against Petitioner with the
RTC. The latter dismissed the case for lack of merit. Appeal by
PR to CA resulted in his favor. Hence the petition for certiorari
under Rule 45 of ROC filed by PNB with SC.
ISSUE:
Despite the removal of the Usury Law ceiling on interest, may
the bank validly increase the stipulated interest rate on loans
contracted with third persons as often as necessary and against
the protest of such persons.
HELD:
NO
RATIO:
Although under Sec. 2 of PD 116, the Monetary Board
is authorized to prescribe the maximum rate of interest for
loans and to change such rates whenever warranted by
prevailing economic and social conditions, by express provision,
it may not do so oftener than once every 12 months. If the

Monetary Board cannot, much less can PNB, effect increases on

the interest rates more than once a year. Based on the credit
agreement and promissory notes executed between the parties,
although PR did agree to increase on the interest rates allowed
by law, no law was passed warranting Petitioner to effect
increase on the interest rates on the existing loan of PR for
the months of July to November of 1984.Neither there being
any document executed and delivered by PR to effect such
increase. For escalation clauses to be valid and warrant the
increase of the interest rates on loans, there must be:(1)
increase was made by law or by the Monetary Board; (2)
stipulation must include a clause for the reduction of the
stipulated interest rate in the event that the maximum interest
is lowered by law or by the Monetary board. In this case, PNB
merely relied on its own Board Resolutions, which are not laws
nor resolutions of the Monetary Board. Despite the suspension
of the Usury Law, imposing a ceiling on interest rates, this does
not authorize banks to unilaterally and successively increase
interest rates in violation of Sec. 2 PD 116.Increases unilaterally
effected by PNB was in violation of the Mutuality of Contracts
under Art. 1308. This provides that the validity and compliance
of the parties to the contract cannot be left to the will of one
of the contracting parties. Increases made are therefore void.
Increase on the stipulated interest rates made by PNB also
contravenes Art. 1956. It provides that, no interest shall be
due unless it has been expressly stipulated in writing. PR never
agreed in writing to pay interest imposed by PNB in excess of
24% per annum. Interest rate imposed by PNB, as correctly
found by CA, is indubitably excessive.

Tio Khe Chio v. CA

GR No. 76101-02 September 30, 1991
Facts: Petitioner shipped bags of imported fishmeals and
insured the same with respondent insurance company Eastern
Assurance & Surety Corp (EASCO). During transit, the bags
were found out to be damaged thus rendering the fishmeals
useless. Petitioner filed a claim before the EASCO which denied
the same, prompting the former to sue the latter at CFI Cebu
who ordered EASCO to pay the petitioner's claim for insurance

with damages. Upon execution, respondent filed a petition for

certiorari with the CA who set aside the lower court's decision
arguing that the latter has erred in fixing the legal interest on
12% per annum rather than the mandated 6%.
Issue: What should the legal interest be for damages arising
from loss of property?
Held: The applicable law is Article 2209 of the Civil Code which
reads 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 interest agreed upon, and in the absence of
stipulation, the legal interest which is 6% per annum.
The adjusted rate mentioned in the Circular No. 416, from
which the CFI based its decision, refers only to loans or
forbearances of money, goods or credits and court judgments
thereon but not to court judgments for damages arising from
injury to persons and loss of property which does not involve a
loan.

PILIPINAS BANK, vs.THE HONORABLE COURT OF APPEALS, and

LILIA R. ECHAUSG.R. No. 97873 August 12, 1993J. Quiason
Facts:
Echaus filed a complaint against Pilipinas Bank and its
president, Constantino Bautista, for collection of a sum of
money. Echuas alleged that Greatland realty conveyed to
Pilipinas Bank by virtue of a contract of Dacion en Pago parcels
of land for a consideration of P7,776,335.69; that Greatland
assigned P2,300,000.00 out of the total consideration of the
Dacion en Pago, in her favor; and that despite demand Pilipinas
Bank refused to give her amount. The RTC and the CA, when
appealed, ruled in favor of Echaus and ordered Pilipinas Bank to
pay her the P2, 300,000.00 with legal interest and other
monetary awards amounting to P5,517.707.00 but pending
appeal Echaus filed a motion for execution which was granted
by the court. Although the CA ruled in favor of Echaus it
decreased the award of damages and ordered Pilipinas Bank to pay a total
of P2,655,000.00, excess of P1,898,623.67.

Contention of the petitioner:

The interest rate due on the mount of P2, 300, 000.00 should be 6% and
the excess amount paid must be refunded to it with interest of 6% per
annum.
Contention of the respondent:
The interest rate due on the amount of P2,300.000.00 should be 12%
per annum and the amount to be refunded to Pilipinas bank at 6% per
annum.
Ruling:
In favour of petitioner. As to the amount to be paid to Echaus: P.D. No.
116, the Monetary Board of Central Bank issued Central Bank Circular No.
416, which provides: By virtue of the authority granted to it under
Section 1 of Act 2655, as amended, otherwise known as the
"Usury Law" the 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%) per cent per annum.
Note that Circular No. 416, fixing the rate of interest at 12% per
annum, deals with (1) loans; (2) forbearance of any money,
goods or credit; and (3) judgments. Judgments spoken of and
referred to in Circular No. 416 are "judgments in litigation
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."The amount
to be paid was a portion of the P7,776,335.69 which petitioner
was obligated to pay Greatland as consideration for the sale
of several parcels of land by Greatland to petitioner. The amount
of P2,300,000.00 was assigned by Greatland in favor of private
respondent. The said obligation therefore arose from a contract
of purchase and sale and not from a contract of loan or
mutuum. Hence, what is applicable is the rate of 6% per annum
as provided in Article 2209 of the Civil Code of the Philippines
and not the rate of 12% per annum as provided in Circular No.
416.As to the amount to be refunded to Pilipinas Bank: Private
respondent was paid in advance the amount of P5,517,707.00 by
petitioner to the order for the execution pending appeal of the
judgment of the trial court. On appeal, the Court of Appeals

reduced the total damages toP3,619,083.33, leaving a balance of

P1,898,623.67 to be refunded by private respondent to petitioner. In an
execution pending appeal, funds are advanced by the losing party to the
prevailing party with the implied obligation of the latter to repay former, in
case the appellate court cancels or reduces the monetary award. In the
case before us, the excess amount ordered to refunded by private
respondent falls within the ruling in Viloria and Buiser that Circular
No. 416 applies to cases where money is transferred from one
person to another and the obligation to return the same or a portion
thereof is subsequently adjudged.

injunction Upon the posting of a counter bond by the PNB, the

trial court dissolved the supplemental writ of preliminary
injunction. PNB set a new date for the foreclosure saleof Marvin
Plaza which was March 12, 1990. Prior to the scheduled date,
however, petitioners tendered to respondent bank the amount
of P40,142,518.00,consisting of the principal (P18,000,000.00)
and accrued interest calculated at the originally stipulated rate
of 21%. The PNB refused to accept the payment.

Almeda v. CA
April 17, 1996; Kapunan, J.

Case History:
RTC issued a writ of preliminary injunction enjoining the
foreclosure sale of Marvin Plaza
CA - set aside the assailed orders and upheld PNBsright to
foreclose the mortgaged property

FACTS:
PNB granted to the spouses Almeda several loan/credit
accommodations totaling P18 M in a period of six yearsat an
interest rate of 21%per annum. To secure the loan, the spouses
Almeda executed a Real Estate Mortgage Contract covering a
3,500 square meter parcel of land, together with the building
erected thereon(the Marvin Plaza).On the contract, it was
stipulated that the Bank reservest he right to increase the
interest rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the
future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by
law or by the Monetary Board. In either case, the adjustment
in the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease of the maximum
interest rate.
Petitioners made partial payments on the loan totaling.
P7,735,004.66. On March 31, 1984, PNB raised the interest rate
to 28%. It was thereupon increased from an initial 21% to a
high of 68% between March of 1984 to September, 1986.
Petitioner protested the increase in interest rates. Before the
loan was to mature in March, 1988, the spouses filed a petition
for injunction and TRO with the RTC. The RTC issued a writ of
preliminary injunction and supplemental preliminary writ of

Petitioners formally consigned the amount of P40,142,518.00

with the Regional Trial Court

ISSUE:
WON PNB was authorized to raise its interest rates to as high as
68%, pursuant to the credit agreement's escalation clause, and
in relation to Central Bank Circular No. 905
RATIO:
The binding effect of any agreement between partiest o a
contract is premised on two settled principles: (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 equality. Any contract which
appears to be heavily weighed in favor of one of the parties so
as to lead to an unconscionable result is 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.
PNB unilaterally altered the terms of its contract with
petitioners by increasing the interest rates n the loan without
the prior assent of the latter. In fact, the manner of agreement
is itself explicitly stipulated by the Civil Code when it provides,
in Article 1956 that "No interest shall be due unless it has been
expressly stipulated in writing." What has been "stipulated in
writing "from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were

bound merely to pay 21%interest, subject to a possible

escalation or de-escalation, when 1) the circumstances warrant
such escalation or de-escalation; 2) within thelimits allowed by
law; and 3) upon agreement.

could be validly invoked by respondent only after settlement of

thequestion involving the interest rate on the loan, and only
after the spouses refused to meet their obligations following
such determination.

C.B. Circular No. 905 did not authorize the bank, or any
lending institution for that matter, to progressively increase
interest rates. Nothing in the said circular could possibly be read
as granting respondent bank Carte blanche authority to raise
interest rates to levels which would either enslave its borrowers
or lead to a hemorrhaging of their assets. The credit agreement
specifically requires that the increase be "within the limits
allowed by law".

Furthermore, petitioners made a valid consignation of what

they, in good faith and incompliance with the letter of the Credit
Agreement, honestly believed to be the real amount of their
remaining obligations with the respondent bank. The latter
could not therefore claim that there was no honest-to-goodness
attempt on the part of the spouse to settle their obligations.

The escalation clause of the credit agreement requires that the

same be made "within the limits allowed by law," obviously
referring specifically to legislative enactments not administrative
circulars.
Note that the phrase "limits imposed by law, "refers only to the
escalation clause. However, the same agreement allows
reduction on the basis of law or the Monetary Board. Had the
parties intended the word "law" to refer to both legislative
enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction
between "law or the Monetary Board Circulars" in referring to
mutually agreed upon reductions in interest rates.
ISSUE:
WON PNB is granted the authority to foreclose theMarvin Plaza
under the mandatory foreclosure provisions of P.D. 385
PNBs argument:
Invoking the Law on Mandatory Foreclosure (Act 3135), the PNB
countered by ordering the extrajudicial foreclosure of
petitioner's mortgaged properties and scheduled an auction sale
for March 14,1989.
RATIO: Because of the dispute regarding the interest rate
increases, an issue which was never settled on merit in the
courts below, the exact amount of petitioner's obligations could
not be determined. Thus, the foreclosure provisions of P.D. 385

Disposition:
Reversed. Case remanded for further proceedings.

CARPO vs. Eleanor CHUA & Elma DY NG, GR. Nos. 150773
& 153599, September 30, 2005
FACTS: Herein petitioner spouses David Carpo and Rechilda
Carpo contracted a loan from Eleanor Chua and Elma Dy Ng for
a certain sum of money (175K) payable within six (6) months
with an interest rate of six percent (6%) per month secured by
a mortgaged of the spouses Carpo of their residential house and
lot located in San Francisco, Cam Sur. Petitioners failed to pay
the loan upon demand.
Consequently, the real estate mortgage was extrajudicially
foreclosed, mortgaged property sold at a public auction, and the
house and lot was awarded to respondents, who were the only
bidders. Unable to exercise their right of redemption by
petitioners, a certificate of sale was issued in the name of
respondents. However, petitioners continued to occupy the said
house and lot, thus respondents file a petition for writ of
possession which was granted by the Trial Court. Petitioners
filed a complaint for annulment of real estate mortgage and the
consequent foreclosure proceedings claiming that the rate of
interest stipulated in the principal loan agreement is clearly null
and void for being excessive, iniquitous, unconscionable and
exorbitant. Consequently, they also argue that the nullity of the
agreed interest rate affects the validity of the real estate
mortgage.

ISSUE: Whether or not the agreed rate of interest of 6% per

month or 72% per annum is so excessive, iniquitous,
unconscionable and exorbitant that it should have been declared
null and void.
HELD: In a long line of cases, the Supreme Court has
invalidated similar stipulations on interest rates for being
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
by jurisprudence, this stipulation is similarly invalid.
The RTC had likewise concluded that petitioners were barred by
laches from assailing the validity of the real estate mortgage.
We wholeheartedly agree. If indeed petitioners unwillingly gave
their consent to the agreement, they should have raised this
issue as early as in the foreclosure proceedings. It was only
when the writ of possession was issued did petitioners challenge

the stipulations in the loan contract in their action for

annulment of mortgage.
Clearly then, with the absence of undue influence, petitioners
have no cause of action. Even assuming undue influence
vitiated their consent to the loan contract, their action would
already be barred by prescription when they filed it.
One final note. The issue on the validity of the stipulated
interest rates, regrettably for petitioners, was not raised at the
earliest possible opportunity. It should be pointed out though
that since an excessive stipulated interest rate may be void for
being contrary to public policy, an action to annul said interest
rate does not prescribe. Such indeed is the remedy; it is not the
action for annulment of the ancillary real estate mortgage.
Despite the nullity of the stipulated interest rate, the principal
loan obligation subsists, and along with it the mortgage that
serves as collateral security for it.
WHEREFORE, in view of all the foregoing, the petitions are
DENIED. Costs against petitioners