Credtrans Commodatum and Mutuum

Credit Transactions
Course Outline
SY 2015-2016
Fiscal Blair Dura
Based on Atty. Stephanie V. Gomez-Someras outline
The concept of credit

A. Credit, Debt, Security
1987 Philippine Constitution Article III, Section 20.
No person shall be imprisoned for debt or non-payment of a poll tax.
B. Credit and Credit Transaction defined

Credit transactions include all transactions involving the purchase or
loan of goods, services, or money in the present with a promise to pay or
deliver in the future.
Two types of credit transactions/contracts of security

1. Secured transactions or contracts of real security supported by a
collateral or an encumbrance of property
2. Unsecured transactions or contracts of personal security fulfillment
by the debtor is supported only by a promise to pay or the personal
commitment of another.
Truth in Lending Act, Section 3, par. 2:
"Credit" means any loan, mortgage, deed of trust, advance, or discount;
any conditional sales contract; any contract to sell, or sale or contract of
sale of property or services, either for present or future delivery, under
which part or all of the price is payable subsequent to the making of such
sale or contract; any rental-purchase contract; any contract or arrangement
for the hire, bailment, or leasing of property; any option, demand, lien,
pledge, or other claim against, or for the delivery of, property or money;
any purchase, or other acquisition of, or any credit upon the security of,
any obligation of claim arising out of any of the foregoing; and any
transaction or series of transactions having a similar purpose or effect.
Case: People vs. Concepcion, GR L-19190, November 29, 1922
Held: The "credit" of an individual means his ability to borrow money by
virtue of the confidence or trust reposed by a lender that he will pay what
he may promise. The concession of a "credit" necessarily involves the
granting of "loans" up to the limit of the amount fixed in the "credit.
(citations omitted)
C. Commercial Credit Transactions
Code of Commerce, Article 1
The following are merchants for the purposes of this Code:
1. Those who, having legal capacity to trade, devote themselves thereto
customarily.
2. Commercial or industrial associations which are formed in accordance
with this code.
Articles 4 to 9 and 11 fix the persons who may trade; 13 and 14 those
who cannot trade; and 15, the conditions under which foreigners may do
so.
Commercial transactions, be they executed by merchants or not, whether
they are specified in this Code or not, shall be governed by the provisions
contained in the same; in the absence of which, by the commercial customs
generally observed in each place; and in the absence of both, by those of
the common law.
Commercial transactions shall be considered those embraced in this Code

and any others of a similar character.
The legal presumption of a customary engagement in commerce exists from
the time the person who desires to trade gives notice through circulars,
newspapers, handbills, posters exhibited to the public, or in any other
manner whatsoever, of an establishment, the purpose of which is to
conduct any commercial transaction.
Part 1. LOAN
The concept of loan
A. General Concepts
Civil Code, Article 1933
By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a
certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while
in simple loan, ownership passes to the borrower.
B. Obligation to deliver
An accepted promise to deliver something by way of commodatum or
simple loan is binding upon parties, but the commodatum or simple loan
itself shall not be perfected until the delivery of the object of the contract.
Case: Garcia vs. Thio GR 154878, March 6, 2007
(copied from
http://lextheorica.blogspot.com/2012/02/garcia-vs-thio-credit-digest.html)
Facts: Respondent Thio received from petitioner Garcia two crossed

checks which amount to US$100,000 and US$500,000, respectively,
payable to the order of Marilou Santiago. According to petitioner,
respondent failed to pay the principal amounts of the loans when they
fell due and so she filed a complaint for sum of money and damages with
the RTC. Respondent denied that she contracted the two loans and
countered that it was Marilou Santiago to whom petitioner lent the
money. She claimed she was merely asked by petitioner to give the
checks to Santiago. She issued the checks for P76,000 and P20,000 not
as payment of interest but to accommodate petitioners request that
respondent use her own checks instead of Santiagos.
Issue: Was there a contract of loan between the parties?
Held: Yes, there was. A loan is a real contract, not consensual, and as
such is perfected only upon the delivery of the object of the contract.
Upon delivery of the contract of loan (in this case the money was received
by the debtor when the checks were encashed), the debtor acquires
ownership of such money or loan proceeds and is bound to pay the
creditor an equal amount. It is undisputed that the checks were delivered
to respondent.
Issue 2: Who borrowed money from petitioner, the respondent or Marilou
Santiago?
Held: The checks were crossed and payable not to the order of the
respondent but to the order of a certain Marilou Santiago. Delivery is the
act by which the res or substance is thereof placed within the actual or
constructive possession or control of another. Although respondent did
not physically receive the proceeds of the checks, these instruments were
placed in her control and possession under an arrangement whereby she
actually re-lent the amount to Santiago.
C. Kinds of loan
1. Object of a loan

commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in
which case the contract is simply called a loan or mutuum. xxx
Movable property is either consumable or non-consumable. To the first
class belong those movables which cannot be used in a manner
appropriate to their nature without their being consumed; to the second
class belong all the others.
2. Consideration of a loan
Xxx
3. Obligation to return or pay

which case the contract is simply called a loan or mutuum. xxx
Civil Code, Article 1232 1233
Article 1232. Payment means not only the delivery of money but also
the performance, in any other manner, of an obligation.
Article 1233. A debt shall not be understood to have been paid unless
the thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be.
D. Contract to Loan
An accepted promise to deliver something by way of commodatum or
simple loan is binding upon parties, but the commodatum or simple loan
itself shall not be perfected until the delivery of the object of the contract.
Case 1: Saura Import and Export Co. Inc. vs. DBP GR L-24968, April
27, 1972 (copied from http://antslegal.blogspot.com/2011/12/digestscredit-transactions.html)
Facts: Saura Inc. applied to the Rehabilitation Finance Corp (before its
conversion to DBP) for a loan of 500k secured by a first mortgage of the
factory building to finance for the construction of a jute mill factory and
purchase of factory implements. RFC accepted and approved the loan
application subject to some conditions which Saura admitted it could not
comply with. Without having received the amount being loaned, and
sensing that it could not at anyway obtain the full amount of loan, Saura
Inc. then asked for cancellation of the mortgage which RFC also
approved. Nine years after the cancellation of the mortgage, Saura sued
RFC for damages for its non-fulfillment of obligations arguing that there
was indeed a perfected consensual contract between them.
Issue: Was there a perfected consensual contract? Was there a real
contract of loan which would warrant recovery of damages arising out of
breach of such contract?
Held: On the first issue, yes, there was indeed a perfected consensual
contract, as recognized in Article 1934 of the Civil Code. There was
undoubtedly offer and acceptance in this case: the application of Saura,
Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered.
But this fact alone falls short of resolving the second issue and the basic
claim that the defendant failed to fulfill its obligation and the plaintiff is
therefore entitled to recover damages. The action thus taken by both
partiesSaura's request for cancellation and RFC's subsequent approval
of such cancellationwas in the nature of mutual desistance what
Manresa terms "mutuo disenso" which is a mode of extinguishing

obligations. It is a concept derived from the principle that since mutual
agreement can create a contract, mutual disagreement by the parties can
cause its extinguishment. In view of such extinguishment, said perfected
consensual contract to deliver did not constitute a real contract of loan.
Case 2: BPI Investment vs. CA, ALS Management and Development
GR 133632, February 15, 2002
ISSUE: Whether or not a contract of loan is a consensual contract.
HELD: A loan contract is not a consensual contract but a real contract. It
is perfected only upon delivery of the object of the contract. A contract of
loan involves a reciprocal obligation, wherein the obligation or promise of
each party is the consideration for that of the other; it is a basic principle
in reciprocal obligations that neither party incurs in delay, if the other
does not comply or is not ready to comply is a proper manner with what
is incumbent upon him.
Case 3: Pantaleon vs. American Express International Inc. GR
174269, August 25, 2010
Important doctrines:
1. Nature of credit card transactions
Every credit card transaction involves three contracts, namely: (a)
the sales contract between the credit card holder and the merchant or
the business establishment which accepted the credit card; (b)
the loan agreement between the credit card issuer and the credit card
holder; and lastly, (c) the promise to pay between the credit card
issuer and the merchant or business establishment.
2. Credit card issuer-cardholder relationship
the relationship between the credit card issuer and the credit card
holder as a contractual one that is governed by the terms and
conditions found in the card membership agreement.[21] This contract
provides the rights and liabilities of a credit card company to its
cardholders and vice versa.
3. The contractual relationship from the creditor-debtor relationship

which only arises after the credit card issuer has approved the
cardholders purchase request involves the actual credit on loan
agreement
involving three
contracts,
namely:
the sales
contract between the credit card holder and the merchant or the
business establishment which accepted the credit card; the loan
agreement between the credit card issuer and the credit card holder;
and the promise to pay between the credit card issuer and the
merchant or business establishment.
4. The use of a credit card to pay for a purchase is only an offer to the
credit card company to enter a loan agreement with the credit card
holder. Before the credit card issuer accepts this offer, no obligation
relating to the loan agreement exists between them.
Commodatum
A. General Concepts
B. Object of commodatum

Consumable goods may be the subject of commodatum if the purpose of
the contract is not the consumption of the object, as when it is merely for
exhibition.
Movable or immovable property may be the object of commodatum.
Case: Producers Bank vs. CA GR 115324, February 19, 2003

Held: If consumable goods are loaned only for purposes of exhibition, or
when the intention of the parties is to lend consumable goods and to
have the very same goods returned at the end of the period agreed upon,
the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded
primordial consideration in determining the actual character of a
contract. In case of doubt, the contemporaneous and subsequent acts of
the parties shall be considered in such determination.
C. Consideration in commodatum
xxx
The bailee in commodatum acquires the used of the thing loaned but not its
fruits; if any compensation is to be paid by him who acquires the use, the
contract ceases to be a commodatum.
Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third
person. However, the members of the bailee's household may make use of
the thing loaned, unless there is a stipulation to the contrary, or unless the
nature of the thing forbids such use.
D. Parties to a commodatum
1. Ownership by bailor
The bailor in commodatum need not be the owner of the thing loaned.
xxx In commodatum the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.
2. Use by bailee
The bailee in commodatum acquires the used of the thing loaned but
not its fruits; if any compensation is to be paid by him who acquires the
use, the contract ceases to be a commodatum.
Civil Code, Article 1939, par. 2
Commodatum is purely personal in character. Consequently:
xxx
(2) The bailee can neither lend nor lease the object of the contract to a
third person. However, the members of the bailee's household may
make use of the thing loaned, unless there is a stipulation to the
contrary, or unless the nature of the thing forbids such use.
3. Solidary liability of bailees

When there are two or more bailees to whom a thing is loaned in the
same contract, they are liable solidarily.
E. Liability for expenses and damages
1. Ordinary expenses
which case the contract is simply called a loan or mutuum.
In commodatum the bailor retains the ownership of the thing loaned,
while in simple loan, ownership passes to the borrower.
The bailee in commodatum acquires the used of the thing loaned but
not its fruits; if any compensation is to be paid by him who acquires the
use, the contract ceases to be a commodatum.

The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned.
The bailee does not answer for the deterioration of the thing loaned due
only to the use thereof and without his fault.
Case: Pajuyo vs. CA GR 146364, June 3, 2004
Held: In a contract of commodatum, one of the parties delivers to

another something not consumable so that the latter may use the
same for a certain time and return it. An essential feature of
commodatum is that it is gratuitous. Another feature of commodatum
is that the use of the thing belonging to another is for a certain
period. Thus, the bailor cannot demand the return of the thing loaned
until after expiration of the period stipulated, or after accomplishment
of the use for which the commodatum is constituted. If the bailor
should have urgent need of the thing, he may demand its return for
temporary use. If the use of the thing is merely tolerated by the bailor,
he can demand the return of the thing at will, in which case the
contractual relation is called a precarium. Under the Civil Code,
precarium is a kind of commodatum. The Kasunduan reveals that the
accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay
rent, it obligated him to maintain the property in good condition. The
imposition of this obligation makes the Kasunduan a contract
different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has
treated relationship based on tolerance as one that is akin to a
landlord-tenant relationship where the withdrawal of permission
would result in the termination of the lease. The tenants withholding
of the property would then be unlawful.
2. Extraordinary expenses
The bailor shall refund the extraordinary expenses during the contract
for the preservation of the thing loaned, provided the bailee brings the
same to the knowledge of the bailor before incurring them, except when
they are so urgent that the reply to the notification cannot be awaited
without danger.
If the extraordinary expenses arise on the occasion of the actual use of
the thing by the bailee, even though he acted without fault, they shall
be borne equally by both the bailor and the bailee, unless there is a
stipulation to the contrary.
3. Other expenses
If, for the purpose of making use of a thing, the bailee incurs expenses
other than those referred to in Article 1941 and Article 1949, he is not
entitled to reimbursement.
4. Abandonment by bailor
The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee.
F. Liability for loss

The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it
has been loaned;
(2) If he keeps it longer than the period stipulated, or after the

accomplishment of the use for which the commodatum has been
constituted;
(3) If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exemption the bailee from responsibility in
case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is not a member of
his household;
(5) If, being able to save either the thing borrowed or his own thing, he
chose to save the latter.
Case: Republic vs. Bagtas GR L-17474, October 25, 1962
(copied from
https://thelawiscool.wordpress.com/2014/02/20/republic-v-bagtas/ )
Facts: Bagtas borrowed three bulls from the Bureau of Animal Industry
for one year for breeding purposes subject to payment of breeding fee of
10% of book value of the bull. Upon expiration, Bagtas asked for renewal.
The renewal was granted only to one bull. Bagtas offered to buy the bulls
at its book value less depreciation but the Bureau refused. The Bureau
said that Bagtas should either return or buy it at book value. Bagtas
proved that he already returned two of the bulls, and the other bull died
during a Huk raid, hence, obligation already extinguished. He claims
that the contract is a commodatum hence, loss through fortuitous event
should be borne by the owner.
Issue: WON Bagtas is liable for the death of the bull.
Held: Yes. Commodatum is essentially gratuitous. However, in this case,
there is a 10% charge. If this is considered compensation, then the case
at bar is a lease. Lessee is liable as possessor in bad faith because the
period already lapsed.
Even if this is a commodatum, Bagtas is still liable because the
fortuitous event happened when he held the bull and the period
stipulated already expired and he is liable because the thing loaned was
delivered with appraisal of value and there was no contrary stipulation

regarding his liability in case there is a fortuitous event
G. Obligation to return
1. General concepts
The bailor cannot demand the return of the thing loaned till after the
expiration of the period stipulated, or after the accomplishment of the
use for which the commodatum has been constituted. However, if in the
meantime, he should have urgent need of the thing, he may demand its
return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is
suspended while the thing is in the possession of the bailor.
The bailor may demand the thing at will, and the contractual relation is
called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the thing
loaned should be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner.

The bailor may demand the immediate return of the thing if the bailee
commits any act of ingratitude specified in Article 765.
Case: Quintos & Ansaldo vs. Beck GR L-46240, November 3, 1939
Held: The contract entered into between the parties is one
of commadatum, because under it the plaintiff gratuitously granted
the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to
return the furniture to the plaintiff, upon the latters demand. The
obligation voluntarily assumed by the defendant to return the
furniture upon the plaintiff's demand, means that he should return
all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely placed
them at the disposal of the plaintiff, retaining for his benefit the three
gas heaters and the four electric lamps. The provisions of article 1169
of the Civil Code cited by counsel for the parties are not squarely
applicable. The trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with her obligation to get
the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the
furniture to the plaintiff, upon the latter's demand, the Court could
not legally compel her to bear the expenses occasioned by the deposit
of the furniture at the defendant's behest. The latter, as bailee, was
not entitled to place the furniture on deposit; nor was the plaintiff
under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric
lamps.
As to the value of the furniture, we do not believe that the plaintiff is
entitled to the payment thereof by the defendant in case of his
inability to return some of the furniture because under paragraph 6 of
the stipulation of facts, the defendant has neither agreed to nor
admitted the correctness of the said value. Should the defendant fail
to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may
desire to present.
2. Right of retention of bailee
The bailee cannot retain the thing loaned on the ground that the bailor
owes him something, even though it may be by reason of expenses.
However, the bailee has a right of retention for damages mentioned in

Article 1951.
The bailor who, knowing the flaws of the thing loaned, does not advise
the bailee of the same, shall be liable to the latter for the damages
which he may suffer by reason thereof.
Simple Loan
A. General concepts
Civil Code, Article 1933.
that the same amount of the same kind and quality shall be paid, in which

Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
B. Object of simple loan
xxx money or other consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum. xxx

A person who receives a loan of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality.
A contract whereby one person transfers the ownership of non-fungible
things to another with the obligation on the part of the latter to give things
of the same kind, quantity, and quality shall be considered a barter.
Act No. 2137, The Warehouse Receipts Law, Section 58
Fungible goods means goods of which any unit is, from its nature by
mercantile custom, treated as the equivalent of any other unit.
Case 1: People vs. Puig & Porras GR 173654-765, August 28, 2008
Doctrines:
1. Depositors who place their money with the bank are considered
creditors of the bank. The bank acquires ownership of the money
deposited by its clients, making the money taken by respondents as
belonging to the bank.
2. The relationship between banks and depositors has been held to be
that of creditor and debtor. (See Articles 1953 and 1980 of the New
Civil Code)
3. The Bank acquires ownership of the money deposited by its clients;
and the employees of the Bank, who are entrusted with the
possession of money of the Bank due to the confidence reposed in
them, occupy positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting the crime of
Qualified Theft.
Case 2: BPI Family Bank vs. Franco GR 123498, November 23, 2007
Held: As there is a debtor-creditor relationship between a bank and its
depositor, BPI-FB ultimately acquired ownership of Francos deposits,
but such ownership is coupled with a corresponding obligation to pay
him an equal amount on demand. Although BPI-FB owns the deposits in
Francos accounts, it cannot prevent him from demanding payment of
BPI-FBs obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account. Thus, when
Franco issued checks drawn against his current account, he had every
right as creditor to expect that those checks would be honored by BPI-FB
as debtor.
C. Obligation to pay
The obligation of a person who borrows money shall be governed by the
provisions of Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes
another thing of the same kind, quantity and quality, even if it should
change in value. In case it is impossible to deliver the same kind, its value
at the time of the perfection of the loan shall be paid.

The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which
is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be
held in the abeyance.
In case an extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there
is an agreement to the contrary.
D. Interest
1. Conventional interest
a. General Concepts
xxx Simple loan may be gratuitous or with a stipulation to pay
interest. xxx
No interest shall be due unless it has been expressly stipulated in
writing.
The 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.
If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
In the determination of the interest, if it is payable in kind, its value

shall be appraised at the current price of the products or goods at
the time and place of payment.
If the borrower pays interest when there has been no stipulation
therefor, the provisions of this Code concerning solutio indebiti, or
natural obligations, shall be applied, as the case may be.
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.
Obligations are civil or natural. Civil obligations give a right of action
to compel their performance. Natural obligations, not being based on
positive law but on equity and natural law, do not grant a right of
action to enforce their performance, but after voluntary fulfillment by
the obligor, they authorize the retention of what has been delivered
or rendered by reason thereof. Some natural obligations are set forth
in the following articles.
b. Monetary interest
Case 1: Frias vs. San Diego-Sison GR 155223, April 3, 2007
Held: The payment of regular interest constitutes the price or cost
of the use of money and thus, until the principal sum due is
returned to the creditor, regular interest continues to accrue since
the debtor continues to use such principal amount. It has been
held that for a debtor to continue in possession of the principal of
the loan and to continue to use the same after maturity of the loan
without payment of the monetary interest, would constitute unjust
enrichment on the part of the debtor at the expense of the creditor.
Case 2: Siga-an vs. Villanueva GR 173227, January 20, 2009

(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html)
Interests:
a)
Monetary interest is a compensation fixed by the parties for
the use or forbearance of money.
b)
Compensatory interest - imposed by law or by courts as
penalty or indemnity for damages.
The right to interest arises only by virtue of a contract or by virtue
of damages for delay or failure to pay the principal loan on which
interest is demanded.
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.
I. Hence, 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.
Monetary interest is due only when these requirements are
present.
II. However, there are instances in which an interest may be
imposed even in the absence of express stipulation, verbal or
written, regarding payment of interest. Article 2209 of the Civil
Code states that if the obligation consists in the payment of a sum
of money, and the debtor incurs delay, a legal interest of 12% (now
6%) per annum may be imposed as indemnity for damages if no
stipulation on the payment of interest was agreed upon.
(Compensatory interest)
This interest may be imposed only as a penalty or damages for

breach of contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. This applies
only to compensatory interest and not to monetary interest.
Solutio Indebiti
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 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. We have held that the principle
of solutio indebiti applies in case of erroneous payment of undue
interest.
HELD: It was duly established that respondent paid interest to
petitioner. Respondent was under no duty to make such payment
because there was no express stipulation in writing to that effect.
There was no binding relation between petitioner and respondent
as regards the payment of interest. The payment was clearly a
mistake. Since petitioner received something when there was no
right to demand it, he has an obligation to return it.
c. Interest rate
Usury Law, Section 1
The rate of interest for the loan or forbearance of any money goods,
or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be six per centum
per annum or such rate as may be prescribed by the Monetary
Board of the Central Bank of the Philippines for that purpose in
accordance with the authority hereby granted.
d. Escalation clauses
The contract must bind both contracting parties; its validity or

compliance cannot be left to the will of one of them.
All covenants and stipulations contained in conveyances, mortgages,
bonds, bills, notes, and other contracts or evidences of debts, and all
deposits of goods or other things, whereupon or whereby there shall
be stipulated, charged, demanded, reserved, secured, taken, or
received, directly or indirectly, a higher rate or greater sum or value
for the loan or renewal or forbearance of money, goods, or credits
than is hereinbefore allowed, shall be void: Provided, however, That
no merely clerical error in the computation of interest, made without
intent to evade any of the provisions of this Act, shall render a
contract void: Provided, further, That parties to a loan agreement, the
proceeds of which may be availed of partially or fully at some future
time, may stipulate that the rate of interest agreed upon at the time
the loan agreement is entered into, which rate shall not exceed the
maximum allowed by law, shall prevail notwithstanding subsequent
changes in the maximum rates that may be made by the Monetary
Board: And Provided, finally, That nothing herein contained shall be
construed to prevent the purchase by an innocent purchaser of a
negotiable mercantile paper, usurious or otherwise, for valuable
consideration before maturity, when there has been no intention on
the part of said purchaser to evade the provisions of this Act and
said purchase was not a part of the original usurious transaction. In
any case, however, the maker of said note shall have the right to
recover from said original holder the whole interest paid by him
thereon and, in case of litigation, also the costs and such attorney's
fees as may be allowed by the court.
Usury Law, Section 7-a
Parties to an agreement pertaining to a loan or forbearance of
money, goods or credits may stipulate that the rate of interest agreed
upon may be increased in the event that the applicable maximum
rate of interest is increased by law or by the Monetary
Board: Provided, That such stipulation shall be valid only if there is

also a stipulation in the agreement that the rate of interest agreed
upon shall be reduced in the event that the applicable maximum rate
of interest is reduced by law or by the Monetary
Board: Provided, further, That the adjustment in the rate of interest
agreed upon shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.
Case 1: Spouses Juico vs. China Bank GR 187678, April 10,
2013
(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-
doctrines.html )
RULES on Escalation Clauses:

a) Escalation clauses are not void per se.
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 which are valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value of
money in long term contracts. Hence, such stipulations are not
void per se.
b) Escalation clauses violating the principle of mutuality of
contracts are void.
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. Thus,
this Court has previously nullified the unilateral determination
and imposition by creditor banks of increases in the rate of interest
provided in loan contracts.
Banco Filipino Savings & Mortgage Bank v. Navarro: While
escalation clauses in general are considered valid, we ruled that
Banco Filipino may not increase the interest on respondent
borrowers loan, pursuant to Circular No. 494 issued by the

Monetary Board, because said circular is not a law although it has
the force and effect of law and the escalation clause has no deescalation clause.
De-escalation Clause: provision for reduction of the stipulated
interest "in the event that the applicable maximum rate of interest
is reduced by law or by the Monetary Board."
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. While a ceiling on interest rates under the Usury Law
was already lifted under Central Bank Circular No. 905, nothing
therein "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."
Escalation clause in this case: I/We hereby authorize the CHINA
BANKING CORPORATION to increase or decrease as the case may
be, the interest rate/service charge presently stipulated in this
note without any advance notice to me/us in the event a law or
Central Bank regulation is passed or promulgated by the Central
Bank of the Philippines or appropriate government entities,
increasing or decreasing such interest rate or service charge.
RULING: At no time did petitioners protest the new rates imposed
on their loan even when their property was foreclosed by
respondent. This notwithstanding, we hold that the escalation
clause 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, onesided impositions do not have the force of law between the parties,
because such impositions are not based on the parties essential
equality.
Effect: Modifications in the rate of interest for loans pursuant to an
escalation clause must be the result of an agreement between the
parties. Unless such important change in the contract terms is
mutually agreed upon, it has no binding effect. In the absence of
consent on the part of the petitioners to the modifications in the
interest rates, the adjusted rates cannot bind them.
NOTE: The lender and the borrower should agree on the imposed
rate, and such imposed rate should be in writing. Escalation
clauses are not basically wrong or legally objectionable as long as
they are not solely potestative but based on reasonable and valid
grounds.
Case 2: Spouses Silos vs. PNB GR 181045, July 2, 2014

Held: P.D. No. 1684 and C.B. Circular No. 905 no more than allow
contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank,
the said law and circular did not authorize either party to
unilaterally raise the interest rate without the others consent.
It is basic that there can be no contract in the true sense in the

absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done
under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it
can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner banks posturing that the
escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents loan. That
would completely take away from private respondents the right to
assent to an important modification in their agreement, and would
negate the element of mutuality in contracts.
Citing the case of Spouses Almeda v. Court of Appeals:
It is plainly obvious, therefore, from the undisputed facts of the
case that respondent bank 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.
e. Interest on interest
Without prejudice to the provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the contracting parties may
by stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest.
Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
2. Compensatory interest
a. General concepts
Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order
that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive for
the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.

If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum.

In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
Interest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract.

Interest cannot be recovered upon unliquidated claims or damages,
except when the demand can be established with reasonably
certainty.
Liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of breach thereof.
Liquidated damages, whether intended as an indemnity or a

penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
Case: Ligutan vs. CA GR 138677, February 12, 2002
(copied from
http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )
Held: The essence or rationale for the payment of interest, quite

often referred to as cost of money, is not exactly the same as that of
a surcharge or a penalty. A penalty stipulation is not necessarily
preclusive of interest, if there is an agreement to that effect, the
two being distinct concepts which may separately be
demanded. What may justify a court in not allowing the creditor to
impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally justify
the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part
of the banking business and the core of a bank's existence.
b. Interest rate
If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum.

Case 1: Eastern Shipping Lines vs. CA GR 97412, July 12,

1994
(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-casedoctrines.html )
Rules on Interest:
Interest upon an obligation which calls for the payment of
money, absent a stipulation, is the legal rate. Such interest
normally is allowable from the date of demand, judicial or
extrajudicial. The trial court opted for judicial demand as the
starting point.
But then upon the provisions of Article 2213 of the Civil
Code, interest "cannot be recovered upon unliquidated
claims or damages, except when the demand can be
established with reasonable certainty. Here, interest should
be counted from the date of the decision (when the amount
of damages are ascertained).
Art. 2209, CC. If the obligation consists in the payment of
a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the
contrary, shall be the payment of interest agreed upon, and
in the absence of stipulation, the legal interest which is six
percent per annum.
Rules of thumb (on the award of interests):
*NOTE: The legal rate of 12% has been amended to 6%. See
Circular No. 799 (amending Circular No. 905) effective July 1,
2013, and the case of NACAR V. GALLERY FRAMES AND/OR
BORDEY (2013). Therefore, there is no need to distinguish now
the obligations breached as the legal interest applicable is 6%.
1) 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.
2) 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:
a) Obligation breached: consists in the payment of a sum of
money, i.e., a loan or forbearance of money
Interest Due:
i) that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded.
ii) 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. (amended to 6%)
b) Obligation breached: not constituting a loan or forbearance of
money,
Interest due: 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.
o 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)
o 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.
c) 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. (amended to 6%)
Case 2: Estores vs. Spouses Supangan GR 175139, April 18,
2012.
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. In this case, there is no question
that petitioner is legally obligated to return the P3.5 million
because of her failure to fulfill the obligation under the Conditional
Deed of Sale, despite demand. Petitioner enjoyed the use of the
money from the time it was given to her until now. Thus, she is
already in default of her obligation from the date of demand.
Forbearance is defined as a 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. This definition describes a loan where a debtor is given a
period within which to pay a loan or debt. In such case,
forbearance of money, goods or credits will have no distinct
definition from a loan. We believe however, that 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.
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.
In this case, the respondent-spouses parted with their money even
before the conditions were fulfilled. They have therefore allowed or
granted forbearance to the seller (petitioner) to use their money
pending fulfillment of the conditions. They were deprived of the
use of their money for the period pending fulfillment of the
conditions and when those conditions were breached, they are
entitled not only to the return of the principal amount paid, but
also to compensation for the use of their money. And the
compensation for the use of their money, absent any stipulation,
should be the same rate of legal interest applicable to a loan since
the use or deprivation of funds is similar to a loan.
Case 3: Nacar vs. Gallery Frames GR 189871, August 13, 2013

(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )
*Amending the Eastern Shipping Doctrine

*Important: because this case discusses the amendment of the
legal interest in loan and forbearance of money, credits or goods
from 12% to 6% effective July 1, 2013.
Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796, approved the amendment of Section 2 of
Circular No. 905, Series of 1982 and, accordingly, issued Circular
No. 799, Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:
Section 1. The rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.
Thus, from the foregoing, in the absence of an express stipulation
as to the rate of interest that would govern the parties, the rate of
legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be 12%

per annum but will now be 6% per annum effective July 1, 2013.
It should be noted, nonetheless, that the new rate could only be
applied prospectively and not retroactively. Consequently, the 12%
per annum legal interest shall apply only until June 30, 2013.
Come July 1, 2013 the new rate of 6% per annum shall be the
prevailing rate of interest when applicable.
To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No. 799, as
follows:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.
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:
New guidelines in the award of interest:
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 6% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
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 be6% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of
credit.
Application in this case: The interest of 12% per annum of the total
monetary awards, computed from May 27, 2002 to June 30, 2013
and 6% per annum from July 1, 2013 until their full satisfaction,
is awarded.
c. Interest on interest
Civil Code, Article 2212.
Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
3. Finance charges
Truth in Lending Act, Section 4
Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with
rules and regulations prescribed by the Board, the following
information:
(1) the cash price or delivered price of the property or service to be

acquired;
(2) the amounts, if any, to be credited as down payment and/or tradein;
(3) the difference between the amounts set forth under clauses (1) and
(2);
(4) the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which are not
incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.
Truth in Lending Act, Section 6
(a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the
amount of P100 or in an amount equal to twice the finance charged
required by such creditor in connection with such transaction,
whichever is the greater, except that such liability shall not exceed
P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence
of the violation, in any court of competent jurisdiction. In any action
under this subsection in which any person is entitled to a recovery, the
creditor shall be liable for reasonable attorney's fees and court costs as
determined by the court.
(b) Except as specified in subsection (a) of this section, nothing
contained in this Act or any regulation contained in this Act or any
regulation thereunder shall affect the validity or enforceability of any

contract or transactions.
(c) Any person who willfully violates any provision of this Act or any
regulation issued thereunder shall be fined by not less than P1,00 or
more than P5,000 or imprisonment for not less than 6 months, nor more
than one year or both.
(d) No punishment or penalty provided by this Act shall apply to the
Philippine Government or any agency or any political subdivision
thereof.
(e) A final judgment hereafter rendered in any criminal proceeding
under this Act to the effect that a defendant has willfully violated this
Act shall be prima facie evidence against such defendant in an action or
proceeding brought by any other party against such defendant under
this Act as to all matters respecting which said judgment would be an
estoppel as between the parties thereto.
Case: United Coconut Planters Bank vs. Spouses Beluso GR
159912, August 17, 2007
Held: Rationale of Truth in Lending Act, Section 6 (a): to protect the

public from hidden or undisclosed charges on their loan obligations,
requiring a full disclosure thereof by the lender.
Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of
the transaction. Rationale: to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the experience
that banks are able to conceal such true cost by hidden charges,
uncertainty of interest rates, deduction of interests from the loaned
amount, and the like. The law thereby seeks to protect debtors by
permitting them to fully appreciate the true cost of their loan, to
enable them to give full consent to the contract, and to properly
evaluate their options in arriving at business decisions.
The promissory notes, the copies of which were presented to the

spouses Beluso after execution, are not sufficient notification from
UCPB. As earlier discussed, the interest rate provision therein does
not sufficiently indicate with particularity the interest rate to be
applied to the loan covered by said promissory notes.
4. Usury
a. General concepts
Usurious transactions shall be governed by special laws.
Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The
borrower may recover in accordance with the laws on usury.
Usurious contracts shall be governed by the Usury Law and other
special laws, so far as they are not inconsistent with this Code.
Usury Law
Section 1
Section 1-a
The Monetary Board is hereby authorized to prescribe the maximum
rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate
or rates whenever warranted by prevailing economic and social
conditions.
In the exercise of the authority herein granted, the Monetary Board

may prescribe higher maximum rates for loans of low priority, such
as consumer loans or renewals thereof as well as such loans made
by pawnshops finance companies and other similar credit
institutions although the rates prescribed for these institutions need
not necessarily be uniform. The Monetary Board is also authorized
to prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries.
Section 4-a
The Monetary Board may eliminate, exempt from, or suspend the
effectivity of, interest rate ceilings on certain types of loans or
renewals thereof or forbearances of money, goods, or credit,
whenever warranted by prevailing economic and social conditions.
Section 4-b
In the exercise of its authority to fix the maximum rate or rates of
interest under this Act, the Monetary Board shall be guided by the
following:
1. The existing economic conditions in the country and the general
requirements of the national economy;
2. The supply of and demand for credit;
3. The rate of increase in the price levels; and
4. Such other relevant criteria as the Monetary Board may adopt.
Section 5
In computing the interest on any obligation, promissory note or other
instrument or contract, compound interest shall not be reckoned,
except by agreement: Provided, That whenever compound interest is
agreed upon, the effective rate of interest charged by the creditor
shall not exceed the equivalent of the maximum rate prescribed by
the Monetary Board, or, in default thereof, whenever the debt is
judicially claimed, in which last case it shall draw six per centum
per annum interest or such rate as may be prescribed by the
Monetary Board. No person or corporation shall require interest to be

paid in advance for a period of more than one year: Provided,
however, That whenever interest is paid in advance, the effective
rate of interest charged by the creditor shall not exceed the
equivalent of the maximum rate prescribed by the Monetary Board.
Section 9-a
The Monetary Board shall promulgate such rules and regulations as
may be necessary to implement effectively the provisions of this Act.
Central Bank Circular No. 905, Series of 1982, Section 1
The rate of interest, including commissions, premiums, fees and
other charges, on a loan or forbearance of any money, goods, or
credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or
juridical, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
Case: Advocates for Truth in Lending Inc. and Olaguer vs.
Bangko Sentral Monetary Board GR 192986, January 15, 2013
(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )
Relevant Laws:
Act No. 2655, or the Usury Law of 1916.
R.A. No. 265 - created the Central Bank (CB) of the Philippines on
June 15, 1948, empowered the CB-MB to, among others, set the
maximum interest rates which banks may charge for all types of
loans and other credit operations, within limits prescribed by the
Usury Law.
P.D. No. 1684 Amended the Usury Law was amended on March
17, 1980, giving the CB-MB authority to prescribe different
maximum rates of interest which may be imposed for a loan or
renewal thereof or the forbearance of any money, goods or credits,
provided that the changes are effected gradually and announced in
advance.
CB Circular No. 905, Series of 1982 issued by the CB-MB,
effective on January 1, 1983. Section 1 of the Circular, under its
General Provisions, removed the ceilings on interest rates on loans

or forbearance of any money, goods or credits.
RA 7653 established BSP to replace CB. Repealed RA 265.
CB Circular No. 905 did not repeal nor in anyway amend the
Usury Law but simply suspended the latters effectivity. By virtue
of CB Circular No. 905, the Usury Law has been rendered
ineffective and legally non-existent in our jurisdiction. Interest can
now be charged as lender and borrower may agree upon.
Effect of PD 1684 and CB 905 suspending the effectivity of the
Usury Law:
1) Lifted interest ceiling.
2) Upheld the parties freedom of contract to agree freely on the
rate of interest.
The BSP-MB has authority to enforce CB Circular No. 905
Under Section 1-a of the Usury Law, as amended, the BSP-MB may
prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans,
as well as such loans made by pawnshops, finance companies and
similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries.
The lifting of the ceilings for interest rates does not authorize
stipulations charging excessive, unconscionable, and iniquitous
interest
It is settled that nothing in CB Circular No. 905 grants lenders a
carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their
assets. Stipulations authorizing iniquitous or unconscionable
interests have been invariably struck down for being (void) contrary
to morals, if not against the law.
Nonetheless, the nullity of the stipulation of usurious interest does
not affect the lenders right to recover the principal of a loan, nor
affect the other terms thereof. Thus, in a usurious loan with

mortgage, the right to foreclose the mortgage subsists, and this
right can be exercised by the creditor upon failure by the debtor to
pay the debt due. The debt due is considered as without the
stipulated excessive interest, and a legal interest of 12% (now
6%) per annum will be added in place of the excessive interest
formerly imposed.
b. Usurious acts
Usury Law
Section 2
No person or corporation shall directly or indirectly take or receive in
money or other property, real or personal, or choses in action, a
higher rate of interest or greater sum or value, including
commissions, premiums, fines and penalties, for the loan or renewal
thereof or forbearance of money, goods, or credits, where such loan
or renewal or forbearance is secured in whole or in part by a
mortgage upon real estate the title to which is duly registered, or by
any document conveying such real estate or an interest therein, than
twelve per centum per annum or the maximum rate prescribed by
the Monetary Board and in force at the time the loan or renewal
thereof or forbearance is granted: Provided, That the rate of interest
under this section or the maximum rate of interest that may be
prescribed by the Monetary Board under this section may likewise
apply to loans secured by other types of security as may be
specified by the Monetary Board.
Section 3
No person or corporation shall directly or indirectly demand, take,
receive or agree to charge in money or other property, real or
personal, a higher rate or greater sum or value for the loan or
forbearance of money, goods, or credits where such loan or
forbearance is not secured as provided in Section two hereof, than
fourteen per centum per annum or the maximum rate or rates
prescribed by the Monetary Board and in force at the time the loan
or forbearance is granted.
Section 4
No pawnbroker or pawnbroker's agent shall directly or indirectly
stipulate, charge, demand, take or receive any higher rate or greater
sum or value for any loan or forbearance than two and one-half per
centum per month when the sum lent is less than one hundred
pesos; two per centum per month when the sum lent is one hundred
pesos or more, but not exceeding five hundred pesos; and fourteen
per centum per annum when it is more than the amount last
mentioned; or the maximum rate or rates prescribed by the Monetary
Board and in force at the time the loan or forbearance is granted. A
pawnbroker or pawnbroker's agent shall be considered such, for the
benefits of this Act, only if he be duly licensed and has an
establishment open to the public.
It shall be unlawful for a pawnbroker or pawnbroker's agent to
divide the pawn offered by a person into two or more fractions in
order to collect greater interest than the permitted by this section.
It shall also be unlawful for a pawnbroker or pawnbroker's agent to
require the pawner to pay an additional charge as insurance
premium for the safekeeping and conservation of the article pawned.
c. Remedies
Interest paid in excess of the interest allowed by the usury laws may
be recovered by the debtor, with interest thereon from the date of the
payment.
Usury Law
Section 6
Any person or corporation who, for any such loan or renewal thereof
or forbearance, shall have paid or delivered a higher rate or greater
sum or value than is hereinbefore allowed to be taken or received,
may recover the whole interest, commissions, premiums penalties
and surcharges paid or delivered with costs and attorneys' fees in
such sum as may be allowed by the court in an action against the
person or corporation who took or received them if such action is
brought within two years after such payment or delivery: Provided,

however, That the creditor shall not be obliged to return the interest,
commissions and premiums for a period of not more than one year
collected by him in advance when the debtor shall have paid the
obligation before it is due, provided such interest, and commissions
and premiums do not exceed the rates fixed in this Act.
Section 7
All covenants and stipulations contained in conveyances, mortgages,
bonds, bills, notes, and other contracts or evidences of debts, and all
deposits of goods or other things, whereupon or whereby there shall
be stipulated, charged, demanded, reserved, secured, taken, or
received, directly or indirectly, a higher rate or greater sum or value
for the loan or renewal or forbearance of money, goods, or credits
than is hereinbefore allowed, shall be void: Provided, however, That
no merely clerical error in the computation of interest, made without
intent to evade any of the provisions of this Act, shall render a
contract void: Provided, further, That parties to a loan agreement, the
proceeds of which may be availed of partially or fully at some future
time, may stipulate that the rate of interest agreed upon at the time
the loan agreement is entered into, which rate shall not exceed the
maximum allowed by law, shall prevail notwithstanding subsequent
changes in the maximum rates that may be made by the Monetary
Board: And Provided, finally, That nothing herein contained shall be
construed to prevent the purchase by an innocent purchaser of a
negotiable mercantile paper, usurious or otherwise, for valuable
consideration before maturity, when there has been no intention on
the part of said purchaser to evade the provisions of this Act and
said purchase was not a part of the original usurious transaction. In
any case, however, the maker of said note shall have the right to
recover from said original holder the whole interest paid by him
thereon and, in case of litigation, also the costs and such attorney's
fees as may be allowed by the court.
Section 8
All loans under which payment is to be made in agricultural
products or seed or in any other kind of commodities shall also be
null and void unless they provide that such products or seed or other
commodities shall 6e appraised at the time when the obligation falls
due at the current local market price: Provided, That unless

otherwise stated in a document written in a language or dialect
intelligible to the debtor and subscribed in the presence of not less
than two witnesses, any contract advancing money to be repaid
later in agricultural products or seed or any other kind of
commodities shall be understood to be a loan, and any person or
corporation having paid otherwise shall be entitled in case action is
brought within two years after such payment or delivery to recover
all the products or seed delivered as interest, or the value thereof,
together with the costs and attorney's fees in such sum as may be
allowed by the court. Nothing contained in this section shall be
construed to prevent the lender from taking interest for the money
lent, provided such interest be not in excess of the rates herein fixed.
Section 9
The person or corporation sued shall file its answer in writing under
oath to any complaint brought or filed against said person or
corporation before a competent court to recover the money or other
personal or real property, seeds or agricultural products, charged or
received in violation of the provisions of this Act. The lack of taking
an oath to an answer to a complaint will mean the admission of the
facts contained in the latter.
Section 10
Without prejudice to the proper civil action violation of this Act and
the implementing rules and regulations promulgated by the
Monetary Board shall be subject to criminal prosecution and the
guilty person shall, upon conviction, be sentenced to a fine of not
less than fifty pesos nor more than five hundred pesos, or to
imprisonment for not less than thirty days nor more than one year,
or both, in the discretion of the court, and to return the entire sum
received as interest from the party aggrieved, and in the case of nonpayment, to suffer subsidiary imprisonment at the rate of one day
for every two pesos: Provided, That in case of corporations,
associations, societies, or companies the manager, administrator or
gerent or the person who has charge of the management or
administration of the business shall be criminally responsible for
any violation of this Act.
1. Remedy of debtor
2. Remedy of creditor
Case: Carpo vs. Chua & Dy Ng GR 150773, September 30,
2005
Held:
The invalidation of the interest rate is congruent with the
rule that a usurious loan transaction is not a complete
nullity but defective only with respect to the agreed
interest. Art. 1420, CC allows the severance of the illegal
terms of a divisible contract, thereby allowing the legal
ones to be enforced.
In simple loan with stipulation of usurious interest, the
prestation of the debtor to pay the principal debt, which
is the cause of the contract (Article 1350, Civil Code) is
not illegal. The illegality lies only as to the prestation to
pay the stipulated interest; hence, being separable, the
latter only should be deemed void, since it is the only one
that is illegal.
An ancillary mortgage contract is not rendered void by the
invalid stipulation on interest rate. Since the principal
obligation still stands and remains valid and the mortgage
contract derives its validity from the validity of the
principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary
mortgage contract.
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.

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Credtrans Commodatum and Mutuum

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Credit Transactions

The concept of credit

B. Credit and Credit Transaction defined

Two types of credit transactions/contracts of security

Commercial transactions shall be considered those embraced in this Code

Case: Garcia vs. Thio GR 154878, March 6, 2007

Facts: Respondent Thio received from petitioner Garcia two crossed

By the contract of loan, one of the parties delivers to another, either

3. Obligation to return or pay

Manresa terms "mutuo disenso" which is a mode of extinguishing

3. The contractual relationship from the creditor-debtor relationship

Civil Code, Article 1936

Case: Producers Bank vs. CA GR 115324, February 19, 2003

Civil Code, Article 1945

Civil Code, Article 1941

Held: In a contract of commodatum, one of the parties delivers to

Civil Code, Article 1942

(2) If he keeps it longer than the period stipulated, or after the

delivered with appraisal of value and there was no contrary stipulation

Civil Code, Article 1948

However, the bailee has a right of retention for damages mentioned in

Civil Code, Article 1980

Civil Code, Article 1953

Civil Code, Article 1249

In the determination of the interest, if it is payable in kind, its value

Case 2: Siga-an vs. Villanueva GR 173227, January 20, 2009

This interest may be imposed only as a penalty or damages for

The contract must bind both contracting parties; its validity or

Board: Provided, That such stipulation shall be valid only if there is

(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-

RULES on Escalation Clauses:

borrowers loan, pursuant to Circular No. 494 issued by the

interest rates would not suffice. A detailed billing statement based

Case 2: Spouses Silos vs. PNB GR 181045, July 2, 2014

It is basic that there can be no contract in the true sense in the

Civil Code, Article 2209

Civil Code, Article 1226

Civil Code, Article 2213

Liquidated damages, whether intended as an indemnity or a

Held: The essence or rationale for the payment of interest, quite

Usury Law, Section 1

Case 1: Eastern Shipping Lines vs. CA GR 97412, July 12,

2) With regard particularly to an award of interest in the concept

c) When the judgment of the court awarding a sum of money

pending happening of certain events or fulfillment of certain

Case 3: Nacar vs. Gallery Frames GR 189871, August 13, 2013

*Amending the Eastern Shipping Doctrine

credits and the rate allowed in judgments shall no longer be 12%

the demand is established with reasonable certainty, the interest

(1) the cash price or delivered price of the property or service to be

regulation thereunder shall affect the validity or enforceability of any

Held: Rationale of Truth in Lending Act, Section 6 (a): to protect the

The promissory notes, the copies of which were presented to the

In the exercise of the authority herein granted, the Monetary Board

Monetary Board. No person or corporation shall require interest to be

General Provisions, removed the ceilings on interest rates on loans

affect the other terms thereof. Thus, in a usurious loan with

brought within two years after such payment or delivery: Provided,

due at the current local market price: Provided, That unless

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