INTEGRATED REALTY CORP.

, VS PNB 174 S 295

Fact: Sometime in 1967, Raul Santos made two time deposits with Overseas Bank
of Manila (OBM) amounting to 700,000. The corresponding certificates of time
deposit were issued in favor of Santos and thereafter used as security for a loan by
Integrated Realty Corp., through its President Santos, to Phil. National Bank (PNB)
amounting to 700,000. A Deed of Assignment was thereafter executed by Santos in
favor of PNB and a Deed of Conformity of Assignment was also executed by OBM.
After the due dates of the time deposit certificates, OBM did not pay PNB
hence the latter demanded payment from IRC and Santos. IRC and Santos, informed
PNB that the loan obligation was deemed paid with the irrevocable assignment of
the time deposit certificates. Thus PNB filed an action for collection of money
against IRC and Santos. IRC and Santos then filed a cross-claim against OBM. OBM
admitted its failure to pay due to its distressed financial situation. After trial, the
trial court ruled in favor of PNB and ordered IRC and Santos to pay PNB the loan
obligation plus interest.
OBM on the other hand, would pay IRC and Santos whatever amounts the
latter would pay to PNB. On appeal, the appellate court modified the decision of the
trial court by deleting the portion of the judgment ordering OBM to pay IRC and
Santos whatever amounts they will pay to PNB plus interests.
IRC and Santos now claim that OBM should reimburse them for whatever
amounts they may be adjudged to pay PNB by way of compensation for damages
incurred plus interest.
ISSUE: Whether or not the claim of IRC and Santos will prosper.
RULING: The Court held in the affirmative. The 2 time deposits matured on 11
January 1968 and 6 February 1968, respectively. However, OBM was not allowed
and suspended to operate only on 31 July 1968 and resolved on 2 August 1968.
There was a yet no obstacle to the faithful compliance by OBM of its liabilities. For
having incurred in delay in the performance of its obligation, OBM should be held for
damages. OBM contends that it had agreed to pay interest only up to the dates of
maturity of the CTD and that Santos is not entitled to interest after maturity dates
had expired.
While it is true that under Article 1956 of the CC, no interest shall be due
unless it has been expressly stipulated in writing, this applies only to interest for the
use of money. It does not comprehend interest paid as damages. OBM is being
required to pay such interest, not as interest income stipulated in the CTD, but as
damages for failure and delay in the payment of its obligations which thereby
compelled IRC and Santos to resort to the courts.

The applicable rule is that legal interest, in the nature of damages for noncompliance with an obligation to pay a sum of money, is recoverable from the date
judicial or extra-judicial demand is made, Which latter mode of demand was made
by PNB, after the maturity of the certificates of time deposit, on March 1, 1968.The
measure of such damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon in the certificates of deposit Which is six and
one half percent (6-1/2%). Such interest due or accrued shall further earn legal
interest from the time of judicial demand.
State Investment House, Inc. v. CAGR No. 90676 June 19, 1991
Facts: Private respondents Spouses Rafael & Refugia Aquino pledged certain shares
of stock to petitioner to secure a loan. Prior to the execution of such pledge,
respondents, agreed with the petitioner for the latter's purchase of
receivables from Spouses Jose and Marcelina Aquino. Respondent spouses paid their
loan partly from their own money and from the proceeds of a new loan secured
by the same pledge. Upon maturity of the new loan, petitioner
demanded payment. Respondents expressed willingness to pay requesting that
upon payment the shares of stocks pledged be released. Petitioner denied the
request on the ground that the loan extended to Jose & Marcelina had remained.
Respondent sued the petitioner. The trial judge ruled in their favor.
During execution, the petitioner refused to accept payment demanding that
interests be paid.
Issue: Are the respondents liable for payment of interest even without mora? If they
are liable, on what rate should the interests be?
Held: On the first issue, yes. The respondents may not be in default in view of their
expressed willingness to pay the same upon demand and the refusal of the
petitioner to accept. However, their tender of payment should have been properly
consigned with the court. On the second issue, since respondent spouses were held
not to have been in delay, they were properly liable only for the principal of the loan
and the stipulated regular or monetary interest of 17% per annum. They were not
liable for penalty or compensatory interest, fixed by the promissory note in Account
No. IF-82-0904-AA at two percent (2%) per month or twenty-four(24%) per
annum. It must be stressed that the appropriate measure for damages in case of
delay in discharging an obligation consisting of the payment of a sum or money, is
the payment of penalty interest at the rate agreed upon; and in the absence of a
stipulation of a particular rate of penalty interest, then the payment of additional
interest at a rate equal to the regular monetary interest; and if no regular interest
had been agreed upon, then payment of legal interest or six percent (6%)per
annum, or in the case of loans or forbearances of money, 12 %per annum as
provided for in Central Bank Circular No. 416.State Investment House vs. CA(198
SCRA 390) 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 the penalty interest at the rate agreed upon; and in the absence of a
stipulation of a particular rate of penalty interest, then the payment of additional
interest at a rate equal to the
regular
monetary interest, and
if no regular
interest had been agreed upon, then payment of legal interest.

Ligutan vs. CA G.R#138677

Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the
amount of P120,000.00 from respondent Security Bank and Trust Company.
Petitioners executed a promissory note binding themselves, jointly and severally,
with an interest of 15.189% per annum upon maturity and to pay a penalty of 5%
every month on the outstanding principal and interest in case of default and also a
10% attorneys fees if the matter were indorsed to a lawyer for collection.
The obligation matured, the petitioners were not able to settle the obligation;
the bank gave an extension, still the same happened. Since the petitioners still
defaulted, the former filed a complaint for recovery of the due amount.
Issue: Whether the interest and penalty charge imposed by private respondent bank
on petitioners loan are manifestly exorbitant, iniquitous and unconscionable?
Ruling:
The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof on the existence and on the measure of damages
caused by the breach. Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene
neither law nor morals, good customs, public order or public policy, a stipulated
penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly or irregularly complied
with. The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such factors as, but
not necessarily confined to, the type, extent and purpose of the penalty, the nature
of the obligation, the mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties, and the like, the application of
which, by and large, is addressed to the sound discretion of the court. The CA
exercised good judgment in reducing the stipulated penalty interest from 5% to 3%

a month. It was also been held that the 15.189% per annum stipulated interest and
the 10% attorneys is reasonable and not excessive. The interest prescribed in loan
financing arrangements is a fundamental part of the banking business and the core
of a bank's existence.

Sebastian Siga-an, petitioner, vs. Alicia Villanueva, respondent.

Facts:
Respondent filed a complaint for sum of money against petitioner.
Respondent claimed that petitioner approached her inside the PNO and offered to loan
her the amount of P540,000.00 of which the loan agreement was not reduced in writing
and there was no stipulation as to the payment of interest for the loan. Respondent
issued a check worth P500,000.00 to petitioner as partial payment of the loan. She
then issued another check in the amount of P200,000.00 to petitioner as payment of the
remaining balance of the loan of which the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as interest,
petitioner pestered her to pay additional interest and threatened to block or disapprove
her transactions with the PNO if she would not comply with his demand. Thus, she paid
additional amounts in cash and checks as interests for the loan. She asked petitioner
for receipt for the payments but was told 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 P1,200,000.00.
The RTC rendered a Decision 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 respondents obligation was only to pay the loaned
amount of P540,000.00, and that the alleged interests due should not be included in the
computation of respondents 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 P660,000.00 through mistake,
petitioner should return the said amount to respondent pursuant to the principle
of solutio indebiti. Also, 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 attorneys
fees
and
costs
of
suit.
Issue: (1) Whether or not interest was due to petitioner; and (2) whether the principle of
solutio
indebiti
applies
to
the
case
at
bar.
Ruling: (1) No. Compensatory interest is not chargeable in the instant case because it
was not duly proven that respondent defaulted in paying the loan and no interest was
due on the loan because there was no written agreement as regards payment of
interest. 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. 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.
(2) Petitioner cannot be compelled to return the alleged excess amount paid by
respondent as interest. 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. 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. We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue interest.
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 so as to deter petitioner and other lenders from
committing similar and other serious wrongdoings

Eastern Shipping vs CA
GR No. 97412, 12 July 1994
234 SCRA 78
FACTS
Two fiber drums were shipped owned by Eastern Shipping from Japan. The shipment as insured
with a marine policy. Upon arrival in Manila unto the custody of metro Port Service, which excepted to one
drum, said to be in bad order and which damage was unknown the Mercantile Insurance Company. Allied
Brokerage Corporation received the shipment from Metro, one drum opened and without seal. Allied
delivered the shipment to the consignees warehouse. The latter excepted to one drum which contained
spillages while the rest of the contents was adulterated/fake. As consequence of the loss, the insurance
company paid the consignee, so that it became subrogated to all the rights of action of consignee against
the defendants Eastern Shipping, Metro Port and Allied Brokerage. The insurance company filed before
the trial court. The trial court ruled in favor of plaintiff an ordered defendants to pay the former with
present legal interest of 12% per annum from the date of the filing of the complaint. On appeal by
defendants, the appellate court denied the same and affirmed in toto the decision of the trial court.
ISSUE
(1) Whether the applicable rate of legal interest is 12% or 6%.
(2) Whether the payment of legal interest on the award for loss or damage is to be computed from the time
the complaint is filed from the date the decision appealed from is rendered.
HELD
(1)
The Court held that the legal interest is 6% computed from the decision of the court a quo.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damaes awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty.

When the judgment of the court awarding a sum of money becomes final and executor, the
rate of legal interest shall be 12% per annum from such finality until satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of money.
The interest due shall be 12% PA to be computed fro default, J or EJD.
(2)
From the date the judgment is made. Where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or EJ but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shll begin to
run only from the date of judgment of the court is made.

(3) The Court held that it should be computed from the decision rendered by the court a quo.

Nacar v. Gallery Frames, 703 scra 439

Facts: Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey,
Jr. Nacar alleged that he was dismissed without cause by Gallery Frames on January 24,
1997. On October 15, 1998, the Labor Arbiter (LA) found Gallery Frames guilty of illegal
dismissal hence the Arbiter awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme Court
affirmed the decision of the Labor Arbiter and the decision became final on May 27, 2002.
After the finality of the SC decision, Nacar filed a motion before the LA for recomputation as
he alleged that his backwages should be computed from the time of his illegal dismissal
(January 24, 1997) until the finality of the SC decision (May 27, 2002) with interest. The LA
denied the motion as he ruled that the reckoning point of the computation should only be
from the time Nacar was illegally dismissed (January 24, 1997) until the decision of the LA
(October 15, 1998). The LA reasoned that the said date should be the reckoning point
because Nacar did not appeal hence as to him, that decision became final and executory.
ISSUE: Whether or not the Labor Arbiter is correct.
HELD: No. There are two parts of a decision when it comes to illegal dismissal cases
(referring to cases where the dismissed employee wins, or loses but wins on appeal). The
first part is the ruling that the employee was illegally dismissed. This is immediately final

even if the employer appeals but will be reversed if employer wins on appeal. The second
part is the ruling on the award of backwages and/or separation pay. For backwages, it will
be computed from the date of illegal dismissal until the date of the decision of the Labor
Arbiter. But if the employer appeals, then the end date shall be extended until the day when
the appellate courts decision shall become final. Hence, as a consequence, the liability of
the employer, if he loses on appeal, will increase this is just but a risk that the employer
cannot avoid when it continued to seek recourses against the Labor Arbiters decision. This
is also in accordance with Article 279 of the Labor Code.
Anent the issue of award of interest in the form of actual or compensatory damages, the
Supreme Court ruled that the old case of Eastern Shipping Lines vs CA is already modified
by the promulgation of the Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796
which lowered the legal rate of interest from 12% to 6%. Specifically, the rules on interest
are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay upon extra-judicial demand or upon
judicial demand whichever is appropriate and subject to the provisions of Article 1169 of the
Civil Code)
b.2. rate of interest shall be 6% per annum
2.

Non-Monetary Obligations (such as the case at bar)

a. If already liquidated, rate of interest shall be 6% per annum, demandable from date of
judicial or extra-judicial
demand (Art. 1169, Civil Code)
b. If unliquidated, no interest

Except: When later on established with certainty. Interest shall still be 6% per annum
demandable from the date of judgment because such on such date, it is already deemed
that the amount of damages is already ascertained.
3. Compounded Interest
This is applicable to both monetary and non-monetary obligations
6% per annum computed against award of damages (interest) granted by the court. To be
computed from the date when the courts decision becomes final and executory until the
award is fully satisfied by the losing party.
4. The 6% per annum rate of legal interest shall be applied prospectively:
Final and executory judgments awarding damages prior to July 1, 2013 shall apply the
12% rate;
Final and executory judgments awarding damages on or after July 1, 2013 shall apply the
12% rate for unpaid obligations until June 30, 2013; unpaid obligations with respect to said
judgments on or after July 1, 2013 shall still incur the 6%

PHILIPPINE NATIONAL
AMBROSIOPADILLA,.

BANK

vs,

THE

HON.

COURT

OF

"PEALS

and

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, 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. CAGR No. 76101-02 September 30, 1991
Facts: Petitioner shipped bags of imported fish meals 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 fish meals
useless. Petitioner filed a claim before the EASCO which denied the same,

prompting the former to sue the latterat 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.
Tio Khe Chio vs. Court of Appeals(202 SCRA 119)Circular No. 416 of the Central
Bank which took effecton July 29, 1974 pursuant to Presidential Decree No. 116
(Usury Law)raised the legal rate of interest from six (6%) percent to twelve
(12%)percent. The adjusted rate mentioned in the circular refers only toloans 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. In the caseof Philippine Rabbit Bus Lines, Inc. vs.
Cruz, G.R. No. 71017, July 28, 1986, 143 SCRA 158, the Court declared thatthe legal
rate of interest is six (6%) percent per annum and not twelve(12%) percent, where a
judgment award is based on an action fordamages for personal injury, not use or
forbearance of money, goodsor credit. In the same vein, the Court held in GSIS vs.
Court of AppealsG.R. No. 52478, October30, 1986, 145 SCRA 311, that the rates
underthe Usury Law(amended by P. D. 116) are applicable only to interest by way of
compensation for the use or forbearance of money; interest byway of damages is
governed by Article 2209 of the Civil Code.

Almeda v. CAApril 17, 1996; Kapunan, J.

FACTS:PNB granted to the spouses Almeda several loan/credit accommodations
totaling P18 M in a period of six years at 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 reserves
the 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 orby 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 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 sale of 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 of21%. The PNB refused to accept the payment. Petitioners
formally consigned the amount ofP40,142,518.00 with the Regional Trial Court
Case.
History: RTC issued a writ of preliminary injunction enjoining the foreclosure sale of
Marvin Plaza CA - set aside the assailed orders and upheld PNBs right to foreclose
the mortgaged property 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. 905RATIO:The binding effect of
any agreement between parties to 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 ofthe parties, is likewise, invalid. PNB unilaterally altered the terms
of its contract with petitioners by increasing the interest rates on 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 the limits allowed
by law; and 3) upon agreement. 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 carteblanche authority to raise interest rates to levels which
would either enslave its borrowers or lead to a hemorrhaging of their assets.

1. BANCO FILIPINO VS NAVARROFACTS: Florante del Valle (the BORROWER)

obtained a loan secured by a real estate mortgage from petitioner BANCOFILIPINO
in the sum of P41,300.00, payable and to be amortized within 15 years at 12% per
cent interestannually Stamped on the promissory note evidencing the loan is an
Escalation Clause stating that:o Banco Filipino to correspondingly increase the
interest rate stipulated the contract without advance noticeto borrowe in the event
law should be enacted increasing the lawful rates of interest that may be chargedon
this particular kind of loano Escalation Clause is based upon Central Bank CIRCULAR
No. 494 which provided: maximum rate of interest shall be nineteen percent
(19%) per annum loans or renewals thereof shall continue to be governed by the
Usury Law Monetary Board is hereby authorized to prescribe the maximum rate or
rates of interest for theloan or renewal thereof or the forbearance of any money,
goods or credits, and to change suchrate or rates whenever warranted by prevailing
economic and social conditions: Provided, thatsuch changes shall not be made
oftener than once every twelve months On September 24, 1976, Ms. Mercedes C.
Paderes of the Central Bank wrote a letter to del valle:o seeking clarification and
their official stand on Banco Filipino's recent decision to raise interest rates onlots
bought on installment from 12% to 17% per annum.o That Monetary Board, in its
Resolution No. 1155 dated June 11, 1976, adopted the following guidelines togovern
interest rate adjustments by banks and non-banks performing quasi-banking
functions on loansalready existing as of January 3, 1976o increase in the rate of
interest can be effective only as of January 2, 1976 or on a later date del Valle
contended that CIRCULAR No. 494 is not the law contemplated in the
Escalation Clause of thepromissory note, thus he filed suit against BANCO
FILIPINO for "Declaratory Relief" with respondent Court,praying that the Escalation
Clause be declared null and void and that BANCO FILIPINO be ordered to desist
fromenforcing the increased rate of interest on the BORROWER's real estate loan.
On the other hand BANCO FILIPINO maintained that the Escalation
Clause signed by the BORROWERauthorized it to increase the interest rate
once a law was passed increasing the rate of interest and that itsauthority to
increase was provided for by CIRCULAR No. 494
Trial court ruled in favor of del valle, thus it nullified the Escalation Clause and
ordered BANCO FILIPINO to desistfrom enforcing the increased rate of interest on
the BORROWER's loan.

Trial courts reason: P.D. No. 116 does not expressly grant the Central Bank
authority to maximize interest rateswith retroactive effect and that
BANCO
FILIPINO cannot legally impose a higher rate of interest before theexpiration
of the 15-year period in which the loan is to be paid other than the 12% per annum
in force at the timeof the execution of the loan. Banco Filipino filed petition for
review on certiorari (since a question of law is involved) SC impleaded the Central
Bank and required it to submit its Comment, and encouraged homeowners
similarlysituated as the BORROWER to intervene in the proceedings The Court
made it explicit that intervention was allowed only for the purpose of "joining in the
discussion of thelegal issue involved in this proceedings, to wit, the validity of the
so-called "escalation clause," or its applicabilityto existing contracts of loan."
Central Banks comment: the issuance of its Circulars is a valid exercise of its
authority to scribe maximum ratesof interest and that, based on general principles
of contract, the Escalation Clause is a valid provision in the loanagreement provided
that "(1) the increased rate imposed or charged by petitioner does not exceed the
ceiling fixed by law or the MonetaryBoard; (2) the increase is made effective not
earlier than the effectivity of the law or regulation authorizing such anincrease; and
(3) the remaining maturities of the loans are more than 730 days as of the
effectivity of the law orregulation authorizing such an increase. However, with
respect to loan agreements entered into on or after March 17, 1980, such
agreement, in order to bevalid, must also include a de-escalation clause as required
by Presidential Decree No. 1684."ISSUE: The substantial question in this case is not
really whether the escalation clause is a valid or void stipulation.There should be no
question that the clause is valid.WHETHER BANCO FILIPINO CAN INCREASE THE
INTEREST RATE ON
THE LOAN FROM 12% TO 17% PERANNUM UNDER THE
ESCALATION CLAUSE.RULING SC held Banco Filipino may not increase the interest
rate It is clear from the stipulation between the parties that the interest rate may
be increased "in the event a lawshould be enacted increasing the lawful rate of
interest that may be charged on this particular kind ofloan." - The Escalation
Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No.
494, although it has the effect of law, is not a law. "Although a circular duly issued is
notstrictly a statute or a law, it has, however, the force and effect of law." "An
administrative regulation adoptedpursuant to law has the force and effect of law."
"That administrative rules and regulations have the force of lawcan no longer be
questioned The distinction between a law and an administrative regulation is
recognized in the Monetary Board guidelines.According to the guidelines, for a
loan's interest to be subject to the increases provided in CIRCULAR No. 494,there
must be an Escalation Clause allowing the increase "in the event that any law or
Central Bank regulation ispromulgated increasing the maximum interest rate for
loans." The guidelines thus presuppose that a CentralBank regulation is not within
the term "any law." It is now clear that from March 17, 1980, escalation clauses to
be valid should specifically provide:

(1) that there can be an increase in interest if increased by law or by the

Monetary Board; and(2) in order for such stipulation to be valid, it must
include a provision for reduction of the stipulated interest "in theevent that
the applicable maximum rate of interest is reduced by law or by the Monetary
Board." While P.D. No. 1684 is not to be given retroactive effect, the
absence of a de-escalation clause in the EscalationClause in question
provides another reason why it should not be given effect because of its onesidedness infavor of the lender. The Escalation Clause specifically
stipulated that the increase in interest rate was to be "on this particular kind
ofloan, " meaning one secured by registered real estate mortgage COURT
RULES THAT WHILE AN ESCALATION CLAUSE LIKE THE ONE IN QUESTION CAN
ORDINARILYBE HELD VALID, NEVERTHELESS, PETITIONER BANCO FILIPINO
CANNOT RELY THEREON TO RAISETHE INTEREST ON THE BORROWER'S LOAN
FROM 12% TO 17% PER ANNUM BECAUSE CIRCULAR NO.494 OF THE
MONETARY BOARD WAS NOT THE "LAW" CONTEMPLATED BY THE PARTIES,
NOR SHOULDSAID CIRCULAR BE HELD AS APPLICABLE TO LOANS SECURED
BY REGISTERED REAL ESTATE INTHE ABSENCE OF ANY SUCH SPECIFIC
INDICATION AND IN CONTRAVENTION OF THE POLICY BEHINDTHE USURY
LAW Courts Judgment: Banco Filipino to desist from enforcing the
increased rate of interest on petitioner's loan.

Sps. Juico v. China Banking Corp

DOCTRINE :
The escalation clause is void if it grants respondent the power to impose an
increased rate of interest without a written notice to petitioners and their written
consent.
These points must be considered by creditors and debtors in the drafting of valid
escalation clauses. Firstly, as a matter of equity and consistent with P.O. No. 1684,
the escalation clause must be paired with a de-escalation clause.
Secondly, so as not to violate the principle of mutuality, the escalation must be
pegged to the prevailing market rates, and not merely make a generalized
reference to "any increase or decrease in the interest rate" in the event a law or a
Central Bank regulation is passed. Thirdly, consistent with the nature of contracts,
the proposed modification must be the result of an agreement between the parties.
In this way, our credit system would be facilitated by firm loan provisions that not
only aid fiscal stability, but also avoid numerous disputes and litigations between
creditors and debtors.

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China
Banking Corporation (respondent) as evidenced by two Promissory Notes both dated
October 6, 1998 and numbered 507-001051-34 and 507-001052-0, 5 for the sums
of !!6,216,000 and P4, 139,000, respectively.
The loan was secured by a Real Estate Mortgage (REM) over petitioners property
located at 49 Greensville St., White Plains, Quezon City respondent demanded the
full payment of the outstanding balance with accrued monthly interests.
As of February 23, 2001, the amount due on the two promissory notes totaled
P19,201,776. On the same day, the mortgaged property was sold at public auction,
with respondent China bank as highest bidder for the amount of P10,300,000
petitioners received a demand letter dated May 2, 2001 from respondent for the
payment of P8,901,776.63, the amount of deficiency after applying the proceeds of
the foreclosure sale.
Respondent prayed that judgment be rendered ordering the petitioners to pay
jointly and severally: (1)P8,901,776.63 representing the amount of deficiency, plus
interests at the legal rate, from February 23, 2001 until fully paid; (2) an additional
amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as
penalty; (3) an amount equivalent to 10% of the foregoing amounts as attorneys
fees; and (4) expenses of litigation and costs of suit.
Ms. Annabelle Cokai Yu, its Senior Loans Assistant stated that as of now the
outstanding balance of petitioners was P15,190,961.48. Yu reiterated that the
interest rate changes every month based on the prevailing market rate. she notified
petitioners of the prevailing rate by calling them monthly .It was increased
unilaterally

RTC: ordered Spouses to pay bank 9M plus the interest which amounted to 15M. CA
AFFIRMED
PETITIONER: They insist that the increase in interest rates were unilaterally imposed
by the bank and thus violate the principle of mutuality of contracts.
Issue: whether the increase in interest rates is void for violating the mutuality of
contracts.
HELD:Yes
RATIO: Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. Article 1956 of the Civil Code

likewise ordains that "no interest shall be due unless it has been expressly
stipulated in writing."
The binding effect of any agreement between parties to a contract is premised on
xxx (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
Escalation clauses refer to stipulations allowing an increase in the interest rate
agreed upon by the contracting parties. This Court has long recognized that there is
nothing inherently wrong with escalation clauses
Nevertheless, an escalation clause "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of
the right to assent to an important modification in the agreement" is void. A
stipulation of such nature violates the principle of mutuality of contracts. In a case,
SC said that petitioners assent to the modifications in the interest rates cannot be
implied from their lack of response to the memos sent by respondent
It is now settled that an escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of interest without the
express conformity of the debtor. Such unbridled right given to creditors to adjust
the interest independently and upwardly would completely take away from the
debtors the right to assent to an important modification in their agreement and
would also negate the element of mutuality in their contracts.

More recently in Solidbank Corporation v. Permanent Homes, Incorporated ,

we upheld as valid an escalation clause which required a written notice to and
conformity by the borrower to the increased interest rate

In Polotan, Sr. v. CA ,On petitioners contention that the interest rate was unilaterally
imposed and based on the standards and rate formulated solely by respondent
credit card company, we held: Cardholder hereby authorizes Security Diners to

correspondingly increase the rate of such interest in the event of changes in

prevailing market rates x x x" is an escalation clause. However, it cannot be said to
be dependent solely on the will of private respondent as it is also dependent on the
prevailing market rates. Thus, it was valid because it wasnt solely potestative as it
was based on the market rates(something outside the control of respondent)
Here, the interest rates would vary as determined by prevailing market rates.
Evidently, the parties intended the interest on petitioners loan, including any
upward or downward adjustment, to be determined by the prevailing market rates
and not dictated by respondents policy.
HOWEVER, SC hold that the escalation clause here is still void because it grants
respondent the power to impose an increased rate of interest without a written
notice to petitioners and their written consent.
Respondents monthly telephone calls to petitioners advising them of the prevailing
interest rates would not suffice. A detailed billing statement based on the new
imposed interest with corresponding computation of the total debt should have
been provided by the respondent to enable petitioners to make an informed
decision.
An appropriate form must also be signed by the petitioners to indicate their
conformity to the new rates Compliance with these requisites is essential to
preserve the mutuality of contracts. For indeed, one-sided impositions do not have
the force of law between the parties, because such impositions are not based on the
parties essential equality
y. In the absence of consent on the part of the petitioners to the modifications in the
interest rates, the adjusted rates cannot bind them. Hence, we consider as invalid
the interest rates in excess of 15%, the rate charged for the first year.
Based on the August 29, 2000 demand letter of China Bank, petitioners total
principal obligation under the two promissory notes which they failed to settle is
P10,355,000. However, due to China Banks unilateral increases in the interest rates
from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5%
per annum for the period November 4, 1999 to February 23, 2001, petitioners
balance ballooned to P19,201,776.63. Note that the original amount of principal
loan almost doubled in only 16 months. The Court also finds the penalty charges
imposed excessive and arbitrary, hence the same is hereby reduced to 1% per
month or 12% per annum.
Hermojina Estores vs. Spouses Arturo and Laura Supangan G.R. No. 175139
Facts

: 1.In Oct. 1993, Hermojina Estores and Spouses Supangan entered into a
Conditional Deed of Sale where Estores offered to sell, and Spouses offered to buy a
parcel of land in Cavite for P4.7M.
2.After almost 7 years and despite the payment of P3.5M by the Spouses, Estores
still failed to comply with her obligation to handle the peaceful transfer of ownership
as stated in 5 provisions in the contract.
3.In a letter in 2000, Spouses demanded the return of the amount within 15 days
from receipt
4. In reply, Estores promised to return the same within 120 days
5. Spouses agreed but imposed an interest of 12% annually
6. Estores still failed despite demands
7. Spouses filed a complaint with the RTC against Estores and Roberto Arias
(allegedly acted as Estores agent)
8. In Answer, Estores said they were willing to pay the principal amount but without
the interest as it was not agreed upon
a.That since the Conditional Deed of Sale provided only for the return of the
downpayment in case of breach, they cant be liable for legal interest as well
9. RTC ruled saying that the Spouses are entitled to the interest but only at 6% per
annum and also entitled to attys fees
10. On appeal, CA said that the issue to resolve is a. whether it is proper to impose
interest for an obligation that does not involve a loan or forbearance of money in
the absence of stipulation of the parties
11. CA affirmed RTC a. That interest should start on date of formal demand by
Spouses to return the money not when contract was executed as stated by the RTC
b. That Arias not be solidarily liable as he acted as agent only and did not expressly
bind himself or exceeded his authority
12. Estores contends: a. Not bound to pay interest because the deed only provided
for the return of the downpayment in case of failure to comply with her obligations
b.That atty fees not proper because both RTC and CA sustained her contention that
12% interest was uncalled for so it showed that Spouses did not win
13. Spouses contend:

a. It is only fair that interest be imposed because Estores failed to return the
amount upon demand and used the money for her benefit
b. Estores failed to relocate the house outside the perimeter of the subject lot and
complete the necessary documents
c. As to the fees, they claim that they were forced to litigate when Estores unjustly
held the amount

Issue: Is theimposition of interest and attorneys fees is proper? YES Interest based
on Art 2209 of CC (6%) or under Central Bank Circular 416 (12%)? 12%
Held: Interest may be imposed even in the absence of stipulation in the contract.
Article 2210 of the Civil Code expressly provides that [i]nterest may, in the
discretion of the court, be allowed upon damages awarded for breach of contract.
Estores failed on her obligations despite demand.
O She admitted that the conditions were not fulfilled and was willing to return the
full amount of P3.5M but has not done so

O She is now in default

The interest at the rate of 12% is applicable in the instant case.
Gen Rule: the applicable interest rate shall be computed in accordance with the
stipulation of the parties
Exc: if no stipulation, applicable rate of interest shall be 12% per annum
O When obligation arises out of a loan or forbearance of money, goods or credits

In other cases, it shall be 6%

In this case, no stipulation was made

Contract involved in this case is not a loan but a Conditional Deed of Sale.
O No question that the obligations were not met and the return of money not made
Even if transaction was a Conditional Deed of Sale, the stipulation governing the
return of the money can be considered as a forbearance of money which requires
12% interest
In Crismina Garments, Inc. v. Court of Appeals, Forbearance--contractual obligation
of lender or creditor to refrain during a given period of time, from requiring the
borrower or debtor to repay a loan or debt then due and payable.
O In such case, forbearance of money, goods or credits will have no distinct
definition from a loan.
O however, the phrase forbearance of money, goods or credits is meant to have a
separate meaning from a loan, otherwise there would have been no need to add
that phrase as a loan is already sufficiently defined in the Civil Code
O Forbearance of money, goods or credits should therefore refer to arrangements
other than loan agreements, where a person acquiesces to the temporary use of his
money, goods or credits pending happening of certain events or fulfillment of
certain conditions.
Estores unwarranted withholding of the money amounts to forbearance of money
which can be considered as an involuntary loan so rate is 12% starting in Sept. 2000
The award of attorneys fees is warranted. no doubt that the Spouses were forced
to litigate to protect their interest,
i.e ., to recover their money. The amount of P50,000.00 more appropriate

S.C. Megaworld v. Engr. Parada G.R. No. 183804, Sept. 11, 2013
Facts: S.C. Megaworld Construction and Development Corporation (SC Megaworld)
bought electrical lighting materials from Genlite Industries, a sole proprietorship
owned by Engr Luis Parada for its Read-Rite project in Canlubang, Laguna.
SC Megaworld was unable to pay for the above purchase on due date, but blamed
it on its failure to collect under its sub-contract with the EnviroKleen.
Engr. Parada then filed a suit in the RTC to collect from the petitioner the said
balance, plus damages, costs and expenses.
SC Megaworld in its answer denied liability, claiming that it was released from its
indebtedness to Engr. Parada by reason of the novation of their contract, which took
place when the latter accepted the partial payment of EnviroKleen in its behalf, and
thereby acquiesced to the substitution of
EnviroKleen as the new debtor in the petitioners place.

RTC rendered judgment in favor Engr. Parado.

On appeal to the CA, SC Megaworld maintained that the trial court erred in ruling
that no novation of the contract took place and for the first time, it further argued
that the trial court should have dismissed the complaint for failure of Engr. Parado to
implead Genlite Industries as a proper party in interest, as provided in Sec 2 of
Rule 3 of the 1997 Rules of Civil Procedure.
In Sec 1(g) of Rule 16, it is also provided that the defendant may move to dismiss
the suit on the ground that it was not brought in the name of or against the real
party in interest, with the effect that the complaint is then deemed to state no
cause of action.
CA dismissed the appeal noting that at no stage in the proceedings did SC
Megaworld raise the question of whether the suit was brought in the name of the
real party in interest. Litigants cannot raise an issue for the first time on appeal as
this would contravene the basic rules of fair play and justice. Moreover, Engr. Parada
is the sole proprietor of Genlite Industries, and therefore the real party-plaintiff.
CA concurred with the RTC. On motion for reconsideration, the SC Megaworld raised
for the first time the issue of the validity of the verification and certification of nonforum shopping attached to the complaint. CA denied the said motion for lack of
merit.

Issues:

First Metro vs Este del Sol

GR No. 141811, 15 November 2001

369 SCRA 99
FACTS
FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal. Under
the agreement, the interest was 16% pa based on the diminishing balance. In case of default, an
acceleration clause was provided and the amount due is subject to 20% one-time penalty on the amount
due and such amount shall bear interest at the highest rate permitted by law. respondent executed a
REM, individual continuing suretyship and an underwriting agreement whereby FMIC shall underwrite the
public offering of one P120,000 common shares of respondents capital stock for one-time underwriting
fee of P200,000. For failure to pay its obligation, FMIC caused the foreclosure of the REM. At the public
auction, FIC was the highest bidder. Petitioner filed to collect for alleged deficiency balance against
respondents since it failed to collect from the sureties, plus interest at 21% pa. the trial court ruled in favor
of FMIC. Respondents appealed before the CA which held that the fees provided for in the Underwriting
and Consultacy Agreements were mere subterfuges to camouflage the excessively usurious interest
charged. The CA ordered FMIC to reimburse petitioner representing what is ue to petitioner and what is
due to respondent.
ISSUE
Whether or not the interests are lawful
HELD
No. an apparently lawful loan is usurious when it is intended that additional compensation for the
loan be disguised by an ostensibly unrelated contract for the payment by the borrower for the lenders
services which re of little value or which are not in fact to be rendered. Article 1957 clearly provides:
contracts and stipulations, under any cloak or device whatever, intended to circumvent the law agaistn
usury shall be void. The borrower may recover in accordance with the laws on usury.

CARPO vs. CHUA & DY NG, GR. Nos. 150773 & 153599, September 30, 2005FACTS:

Herein petitioner spouses David Carpo and Rechilda Carpo contracted a loan
fromEleanor Chua and Elma Dy Ng for a certain sum of money payable within six (6)
months with aninterest rate of six percent (6%) per month secured by a mortgaged
of the spouses Carpo of their residential house and lot. Petitioners failed to pay the
loan upon demand. Consequently, the realestate mortgage was extrajudicially
foreclosed, mortgaged property sold at a public auction, andthe house and lot was
awarded to respondents, who were the only bidders. Unable to exercisetheir 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
respondentsfile a petition for writ of possession which was granted by the Trial
Court. Petitioners filed acomplaint for annulment of real estate mortgage and the
consequent foreclosure proceedingsclaiming that the rate of interest stipulated in
the principal loan agreement is clearly null and voidfor being excessive, iniquitous,
unconscionable and exorbitant. Consequently, they also arguethat 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
soexcessive, iniquitous, unconscionable and exorbitant that it should have been
declared null andvoid.
HELD:
In a long line of cases, the Supreme Court has invalidated similar stipulations on
interestrates 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 establishsuch stipulations, clauses, terms and
conditions as they may deem convenient, provided they arenot 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.