Credit Transactions Mutuum and Usury Law Case Digest
II-Sanchez Roman
CRISMINA GARMENTS, INC. VS. CA
Petitioner contracted the services of the respondent, to sew for the
petitioner of 20,762 pieces of assorted girls denims to the amount of
P76,410.00. At first, the respondent was told that the sewing of some of
the pants was defective. She offered to take delivery of the defective
pants. However, she was later told by [petitioner]'s representative that
the goods were already good. She was told to just return for her check
of P76,410.00.
However, the petitioner failed to pay her the aforesaid amount. This
prompted her to hire the services of counsel who, on November 12,
1979, wrote a letter to the petitioner demanding payment of the
aforesaid amount within ten days from receipt thereof. On February 7,
1990, the petitioner's vice-president-comptroller, wrote a letter to
respondent's counsel, averring, inter alia, that the pairs of jeans sewn by
her, numbering 6,164 pairs, were defective and that she was liable to the
petitioner for the amount of P49,925.51 which was the value of the
damaged pairs of denim pants and demanded refund of the aforesaid
amount.
ISSUE:
Whether or not it is proper to impose interest at the rate of twelve
percent (12%) per annum for an obligation that does not involve a loan
or forbearance of money in the absence of stipulation of the parties.
HELD:
The Supreme Court found petitioners contention tenable. The Court
had previously ruled that the interest rate under CB Circular No. 416
applies to (1) loans; (2) forbearance of money, goods or credits; or (3) a
judgment involving a loan or forbearance of money, goods or credits.
Cases beyond the scope of said circular are governed by Article 2209 of
the Civil Code, which considers interest a form of indemnity for the
delay in the performance of an obligation.
Applying the said doctrine in the case at bar, the Court ruled that since
the amount due in the present case arose from a contract for a piece of
work, not from a loan or forbearance of money, the legal rate of six
percent (6%) interest per annum should be applied. Private respondents
contention that the twelve percent (12%) interest per annum should be
imposed because the obligation arose from a forbearance of money
was found by the Court erroneous because a forbearance in the context
of the Usury Law is 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. Using the said
standard in case at bar, the Court concluded that the obligation was
obviously not a forbearance of money, goods or credits.
PNB VS. IBARROLA
As payments for the purchase of medicines, the Province of Isabela
issued several checks drawn against its accounts with petitioner
Philippine National Bank (PNB) in favor of the seller, private respondent
Ibarrola. Ibarrola failed to receive the full payment, thus she filed an
action for a sum of money and damages against the Province of Isabela
and PNB among others.
RTC ruled in her favor ordering that she be paid with interest thereon at
the legal rate from the date of the filing of the complaint until the entire
amount is fully paid. CA and SC affirmed. However, the three courts did
not specify whether the legal rate of interest referred to in the judgment
is 6% or 12%.
ISSUE:
Whether in an action for damages, the legal rate of interest is 6% as
provided by Article 2209of the New Civil Code or 12% as provided by CB
Circular 416 series of 1974
HELD:
The case at bench does not involve a loan. When an obligation arises
from a contract of purchase and sale and not from a contract of loan or
mutuum, the applicable rate is 6% per annum as provided in Article
2209 of the NCC and not the rate of 12% per annum as provided in (CB)
Cir. No. 416.
The rate of 12% interest referred to in Cir. 416 applies only to: Loan or
forbearance of money, or to cases where money is transferred from one
person to another and the obligation to return the same or a portion
thereof is adjudged. Any other monetary judgment which does not 1
involve or which has nothing to do with loans or forbearance of any
money, goods or credit does not fall within its coverage for such
imposition is not within the ambit of the authority granted to the Central
Bank.
Therefore, the proper rate of interest referred to in the judgment under
execution is only 6%. However, once the judgment becomes final and
executory, the "interim period from the finality of judgment awarding a
monetary claim and until payment thereof, is deemed to be equivalent
to a forbearance of credit. Thus, the rate of 12% p.a. should be imposed,
and to be computed from the time the judgment became final and
executory until fully satisfied.
MEDELvs. CA
Facts:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter
Servando and Leticia) obtained a loan from Veronica R. Gonzales
(hereafter Veronica), who was engaged in the money lending business
under the name "Gonzales Credit Enterprises", in the amount of
P50,000.00, payable in two months. Veronica gave only the amount of
P47,000.00, to the borrowers, as she retained P3,000.00, as advance
interest for one month at 6% per month. Servando and Leticia executed
a promissory note for P50,000.00, to evidence the loan, payable on
January 7, 1986.
On November 19, 1985, Servando and Liticia obtained from Veronica
another loan in the amount of P90,000.00, payable in two months, at 6%
interest per month. They executed a promissory note to evidence the
loan, maturing on Janaury 19, 1986. They received only P84,000.00, out
of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still
another loan in the amout of P300,000.00, maturing in one month,
secured by a real estate mortgage over a property belonging to Leticia
Makalintal Yaptinchay, who issued a special power of attorney in favor
of Leticia Medel, authorizing her to execute the mortgage. Servando and
Leticia executed a promissory note in favor of Veronica to pay the sum
of P300,000.00, after a month, or on July 11, 1986. However, only the
sum of P275.000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan
on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr.
Rafael Medel, consolidated all their previous unpaid loans totaling
P440,000.00, and sought from Veronica another loan in the amount of
P60,000.00, bringing their indebtedness to a total of P500,000.00,
payable on August 23, 1986.
On maturity of the loan, the borrowers failed to pay the indebtedness of
P500,000.00, plus interests and penalties, evidenced by the above-
quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband
Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan,
Branch 16, at Malolos, Bulacan, a complaint for collection of the full
amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990,
defendant Servando alleged that he did not obtain any loan from the
plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who
borrowed from the plaintiffs the sum of P500,000.00, and actually
received the amount and benefited therefrom; that the loan was
secured by a real estate mortgage executed in favor of the plaintiffs,
and that he (Servando Franco) signed the promissory note only as a
witness.
In their separate answer filed on April 10, 1990, defendants Leticia and
Rafael Medel alleged that the loan was the transaction of Leticia
 Credit Transactions Mutuum and Usury Law Case Digest
II-Sanchez Roman
Yaptinchay, who executed a mortgage in favor of the plaintiffs over a 2) April 21, 1994 100,000.00 monthly
parcel of real estate situated in San Juan, Batangas; that the interest 3) October 2, 1995 30,000.00 interest
rate is excessive at 5.5% per month with additional service charge of 2%
per annum, and penalty charge of 1% per month; that the stipulation for
4) October 9, 1995 30,000.00 2
with 7% monthly
attorney's fees of 25% of the amount due is unconscionable, illegal and 5) May 22, 1997 100,000.00
interest
excessive, and that substantial payments made were applied to interest,
penalties and other charges. TOTAL AMOUNT OF
P 290,000.00
LOAN
RTC: the lower court declared that the due execution and genuineness
of the four promissory notes had been duly proved, and ruled that From August 15, 1993 up to December 31, 1997, Jocelyn had been
although the Usury Law had been repealed, the interest charged by the religiously paying Marilou the stipulated monthly interest by issuing
plaintiffs on the loans was unconscionable and "revolting to the checks and depositing sums of money in the bank account of the latter.
conscience". Hence, the trial court applied "the provision of the New However, the total principal amount of P290,000.00 remained unpaid.
[Civil] Code" that the "legal rate of interest for loan or forbearance of Thus, in April 1998, Marilou visited Jocelyn in her office at CAP in Cebu
money, goods or credit is 12% per annum." City and asked Jocelyn and the other employees who were likewise
indebted to her to acknowledge their debts. A document entitled
In their appeal, plaintiffs-appellants (Gonzales Credit Corp.) argued that "Acknowledgment of Debt" for the amount of P290,000.00 was signed
the promissory note, which consolidated all the unpaid loans of the by Jocelyn with two of her subordinates as witnesses.
defendants, is the law that governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing the rate of interest for The said amount represents the principal consolidated amount of the
loans or forbearance of money, goods or credit at 12% per annum, aforementioned previous debts due on December 25, 1998. Also on said
applies only in the absence of a stipulation on interest rate, but not occasion, Jocelyn issued five checks to Marilou representing renewal
when the parties agreed thereon. payment of her five previous loans.

CA: sustained the plaintiffs-appellants' contention. It ruled that "the Check No. 0010761 dated . . . . . . . . P 30,000.00
Usury Law having become 'legally inexistent' with the promulgation by September 2, 1998
the Central Bank in 1982 of Circular No. 905, the lender and borrower Check No. 0010762 dated . . . . . . . . 30,000.00
could agree on any interest that may be charged on the loan". The Court September 9, 1998
of Appeals further held that "the imposition of 'an additional amount Check No. 0010763 dated . . . . . . . . 30,000.00
equivalent to 1% per month of the amount due and demandable as September 15, 1998
penalty charges in the form of liquidated damages until fully paid' was Check No. 0010764 dated . . . . . . . . 100,000.00
allowed by law". September 22, 1998
Check No. 0010765 dated . . . . . . . . 100,000.00
ISSUE:
September 25, 1998
W/N the stipulated rate of 5.5% per month on the 500,000 loan is valid
and binding? TOTAL P 290,000.00

HELD:
NO. We agree with petitioners (Medel) that the stipulated rate of interest
at 5.5% per month on the P500,000.00 loan is excessive, iniquitous,
unconscionable and exorbitant. However, we cannot consider the rate
"usurious" because this Court has consistently held that Circular No.
905 of the Central Bank, adopted on December 22, 1982, has expressly
removed the interest ceilings prescribed by the Usury Law and that the
Usury Law is now "legally inexistent".
In June 1998, Jocelyn asked Marilou for the recall of Check No.
0010761 in the amount of P30,000.00 and replaced the same with six
checks.
After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn
ordered the stop payment on the remaining checks and on October 27,
1998, filed with the RTC of Cebu City a complaint6 against Marilou for
Declaration of Nullity and Payment, Annulment, Sum of Money,
Injunction and Damages.

In Security Bank and Trust Company vs. Regional Trial Court of Makati,
Branch 61 the Court held that CB Circular No. 905 "did not repeal nor in
anyway amend the Usury Law but simply suspended the latter's
effectivity." Indeed, we have held that "a Central Bank Circular cannot
repeal a law. Only a law can repeal another law." In the recent case of
Florendo vs. Court of Appeals, the Court reiterated the ruling that "by
virtue of CB Circular 905, the Usury Law has been rendered ineffective".
"Usury has been legally non-existent in our jurisdiction. Interest can
now be charged as lender and borrower may agree upon."
Nevertheless, we find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to morals ("contra bonos mores"),
if not against the law. The stipulation is void. The courts shall reduce
equitably liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable.
Consequently, the Court of Appeals erred in upholding the stipulation of
the parties. Rather, we agree with the trial court that, under the
circumstances, interest at 12% per annum, and an additional 1% a
month penalty charge as liquidated damages may be more reasonable.
TOLEDOS CONTENTION: Jocelyn averred that Marilou forced,
threatened and intimidated her into signing the "Acknowledgment of
Debt" and at the same time forced her to issue the seven postdated
checks. She claimed that Marilou even threatened to sue her for
violation of Batas Pambansa (BP) Blg. 22 or the Bouncing Checks Law if
she will not sign the said document and draw the above-mentioned
checks. Jocelyn further claimed that the application of her total
payment of P528,550.00 to interest alone is illegal, unfounded, unjust,
oppressive and contrary to law because there was no written
agreement to pay interest.
HYDENS CONTENTION: Marilou filed an Answer with Special
Affirmative Defenses and Counterclaim alleging that Jocelyn voluntarily
obtained the said loans knowing fully well that the interest rate was at
6% to 7% per month. In fact, a 6% to 7% advance interest was already
deducted from the loan amount given to Jocelyn.
RTC: The court a quo did not find any showing that Jocelyn was forced,
threatened, or intimidated in signing the document referred to as
"Acknowledgment of Debt" and in issuing the postdated checks.
CA: AFFIRMED the decision of the RTC.

On petition before the Supreme Court:

TOLEDO vs.HYDEN TOLEDOS CONTENTION: Jocelyn posits that the CA erred when it held
FACTS: that the imposition of interest at the rates of 6% to 7% per month is not
Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice- contrary to law, not unconscionable and not contrary to morals. She
President of the College Assurance Plan (CAP) Phils., Inc., obtained likewise contends that the CA erred in ruling that the "Acknowledgment
several loans from respondent Marilou M. Hyden (Marilou). The of Debt" is valid and binding. According to Jocelyn, even assuming that
transactions are briefly summarized below: the execution of said document was not attended with force, threat and
intimidation, the same must nevertheless be declared null and void for
1) August 15, 1993 P 30,000.00 with 6% being contrary to law and public policy. This is borne out by the fact that
 Credit Transactions Mutuum and Usury Law Case Digest
the payments in the total amount of P778,000.00 was applied to
interest payment alone. This only proves that the transaction was
iniquitous, excessive, oppressive and unconscionable.
HYDENS CONTENTION: On the other hand, Marilou would like this
Court to consider the fact that the document referred to as
"Acknowledgment of Debt" was executed in the safe surroundings of
the office of Jocelyn and it was witnessed by two of her staff. If at all
there had been coercion, then Jocelyn could have easily prevented her
staff from affixing their signatures to said document. In fact, petitioner
had admitted that she was the one who went to the tables of her staff
to let them sign the said document.
ISSUE:
W/N the imposition of interest at the rate of 6% to 7% is contrary to law,
morals, good customs, public order or public policy.
HELD:
NO. The 6% to 7% interest per month paid by Jocelyn is not excessive
under the circumstances of this case.
In view of Central Bank Circular No. 905 s. 1982, which suspended the
Usury Law ceiling on interest effective January 1, 1983, parties to a loan
agreement have wide latitude to stipulate interest rates. Nevertheless,
such stipulated interest rates may be declared as illegal if the same is
unconscionable.
There is certainly nothing in said circular which grants lenders carte
blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets. In
fact, in Medel v. Court of Appeals, we annulled a stipulated 5.5% per
month or 66% per annum interest with additional service charge of 2%
per annum and penalty charge of 1% per month on a P500,000.00 loan
for being excessive, iniquitous, unconscionable and exorbitant.
In this case, however, we cannot consider the disputed 6% to 7%
monthly interest rate to be iniquitous or unconscionable vis--vis the
principle laid down in Medel. Noteworthy is the fact that in Medel, the
defendant-spouses were never able to pay their indebtedness from
the very beginning and when their obligations ballooned into a
staggering sum, the creditors filed a collection case against them. In
this case, there was no urgency of the need for money on the part of
Jocelyn, the debtor, which compelled her to enter into said loan
transactions. She used the money from the loans to make advance
payments for prospective clients of educational plans offered by her
employer.
In this way, her sales production would increase, thereby entitling her to
50% rebate on her sales. This is the reason why she did not mind the 6%
to 7% monthly interest. Notably too, a business transaction of this
nature between Jocelyn and Marilou continued for more than five
years. Jocelyn religiously paid the agreed amount of interest until she
ordered for stop payment on some of the checks issued to Marilou. The
checks were in fact sufficiently funded when she ordered the stop
payment and then filed a case questioning the imposition of a 6% to 7%
interest rate for being allegedly iniquitous or unconscionable and,
hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew
fully well that the same carried with it an interest rate of 6% to 7% per
month, yet she did not complain. In fact, when she availed of said
loans, an advance interest of 6% to 7% was already deducted from the
loan amount, yet she never uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing an
interest rate of 6% to 7% per month and paying for the same, Jocelyn
cannot now go to court to have the said interest rate annulled on the
ground that it is excessive, iniquitous, unconscionable, exorbitant, and
absolutely revolting to the conscience of man.
"This is so because among the maxims of equity are (1) he who seeks
equity must do equity, and (2) he who comes into equity must come
with clean hands. The latter is a frequently stated maxim which is also
expressed in the principle that he who has done inequity shall not have
equity. It signifies that a litigant may be denied relief by a court of equity
on the ground that his conduct has been inequitable, unfair and
dishonest, or fraudulent, or deceitful as to the controversy in issue."
We are convinced that Jocelyn did not come to court for equitable relief
with equity or with clean hands. It is patently clear from the above
II-Sanchez Roman
summary of the facts that the conduct of Jocelyn can by no means be
characterized as nobly fair, just, and reasonable. This Court likewise
notes certain acts of Jocelyn before filing the case with the RTC. In
September 1998, she requested Marilou not to deposit her checks as 3
she can cover the checks only the following month. On the next month,
Jocelyn again requested for another extension of one month.
It turned out that she was only sweet-talking Marilou into believing that
she had no money at that time. But as testified by Serapio Romarate, an
employee of the Bank of Commerce where Jocelyn is one of their
clients, there was an available balance of P276,203.03 in the latters
account and yet she ordered for the stop payments of the seven checks
which can actually be covered by the available funds in said account.
She then caught Marilou by surprise when she surreptitiously filed a
case for declaration of nullity of the document and for damages.
ESTORES v. SPOUSES SUPUNGAN
Facts:
Hermojina Estores and spouses Arturo and Laura Supangan entered into a
Conditional Deed of Sale whereby Estores offered to sell, and spouses Supungan
offered to buy, a parcel of land located at Naic, Cavite for the sum of P4.7
million. The parties likewise stipulated, among others, to wit:
1. Vendor will secure approved clearance from DAR requirements.
4. Vendee shall be informed as to the status of DAR clearance within 10 days
upon signing of the documents.
6. Regarding the house located within the perimeter of the subject lot owned
by spouses Magbago, said house shall be moved outside the perimeter
of this subject property to the 300 sq. m. area allocated for it.
7. If and after the vendor has completed all necessary documents for
registration of the title and the vendee fails to complete payment as per
agreement, a forfeiture fee of 25% or downpayment, shall be
applied. However, if the vendor fails to complete necessary documents
within thirty days without any sufficient reason, or without informing
the vendee of its status, vendee has the right to demand return of full
amount of down payment.
After almost seven years from the time of the execution of the
contract and notwithstanding payment of P3.5 million on the part of respondent-
spouses, Estores still failed to comply with her obligations provided the
contract. Hence, respondent-spouses demanded the return of the amount
of P3.5 million within 15 days from receipt of the letter. In reply, petitioner
acknowledged receipt of the P3.5 million and promised to return the same within
120 days. Respondent-spouses were amenable to the proposal provided an
interest of 12% compounded annually shall be imposed on the P3.5 million.
When petitioner still failed to return the amount despite demand, respondent-
spouses were constrained to file a Complaint for sum of money before the RTC
against Estores as well as Arias who allegedly acted as her agent. In their
complaint, respondent-spouses prayed that petitioner and Arias be ordered to:
1. Pay the principal amount of P3,500,000.00 plus interest of 12%
compounded annually starting October 1, 1993 or an estimated amount
of P8,558,591.65;
2. Pay the following items of damages: Moral, Actual, Exemplary,
Attorneys fee, Cost of suit.
In their Answer with Counterclaim, petitioner and Arias averred that
they are willing to return the principal amount of P3.5 million but without any
interest as the same was not agreed upon. They reiterated that the only
remaining issue between the parties is the imposition of interest. They argued
that since the Conditional Deed of Sale provided only for the return of the
downpayment in case of breach, they cannot be held liable to pay legal interest
as well.
In its Pre-Trial Order, the RTC noted that the parties agreed that the
principal amount of 3.5 million pesos should be returned to the respondent-
spouses by the petitioner and the issue remaining is whether respondent-
spouses are entitled to legal interest thereon, damages and attorneys fees.
Ruling of the Regional Trial Court
The RTC rendered its Decision finding respondent-spouses entitled to interest
but only at the rate of 6% per annum and not 12% as prayed by them. It also
found respondent-spouses entitled to attorneys fees as they were compelled to
litigate to protect their interest.
 Credit Transactions Mutuum and Usury Law Case Digest
Ruling of the Court of Appeals
The CA noted that the only issue submitted for its resolution is 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.
On May 12, 2006, the CA rendered the assailed Decision affirming the
ruling of the RTC finding the imposition of 6% interest proper. However, the same
shall start to run only from September 27, 2000 when respondent-spouses
formally demanded the return of their money and not from October 1993 when
the contract was executed as held by the RTC.
ISSUE:
WON the imposition of interest is proper.
RULING:
NO. The petition lacks merit.
Petitioners Arguments: Petitioner insists that she is not bound to pay interest on
the P3.5 million because the Conditional Deed of Sale only provided for the return
of the downpayment in case of failure to comply with her obligations.
Respondent-spouses Arguments: Respondent-spouses aver that it is only fair
that interest be imposed on the amount they paid considering that petitioner
failed to return the amount upon demand and had been using the P3.5 million for
her benefit. Moreover, it is undisputed that petitioner failed to perform her
obligations to relocate the house outside the perimeter of the subject property
and to complete the necessary documents.
Interest may be imposed even in the absence of stipulation in the contract.
We sustain the ruling of both the RTC and the CA that it is proper to
impose interest notwithstanding the absence of stipulation in the contract. Article
2210 of the Civil Code expressly provides that interest 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. She has in fact admitted that the conditions were not fulfilled
and that she was willing to return the full amount of P3.5 million but has not
actually done so. 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, i.e., on September 27, 2000.
The interest at the rate of 12% is applicable in the instant case.
Anent the interest rate, the general rule is that the applicable rate of
interest shall be computed in accordance with the stipulation of the parties.
Absent any stipulation, the applicable rate of interest shall be 12% per annum
when the obligation arises out of a loan or a forbearance of money, goods or
credits. In other cases, it shall be six percent (6%). In this case, the parties did not
stipulate as to the applicable rate of interest. The only question remaining
therefore is whether the 6% as provided under Article 2209 of the Civil Code, or
12% under Central Bank Circular No. 416, is due.
The contract involved in this case is admittedly not a loan but a
Conditional Deed of Sale. However, the contract provides that the seller
(petitioner) must return the payment made by the buyer (respondent-spouses) if
the conditions are not fulfilled. There is no question that they have in fact, not
been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand
by the buyer (respondent-spouses), the seller (petitioner) has failed to return the
money and should be considered in default from the time that demand was
made on September 27, 2000.
Even if the transaction involved a Conditional Deed of Sale, can the
stipulation governing the return of the money be considered as a forbearance of
money which required payment of interest at the rate of 12%? We believe so.
In Crismina Garments, Inc. v. Court of Appeals, forbearance was
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
II-Sanchez Roman
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 4
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.
Petitioners unwarranted withholding of the money which rightfully
pertains to respondent-spouses amounts to forbearance of money which can
be considered as an involuntary loan. Thus, the applicable rate of interest is
12% per annum. In Eastern Shipping Lines, Inc. v. Court of Appeals, cited
in Crismina Garments, Inc. v. Court of Appeals, the Court suggested the following
guidelines:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can be
held liable for damages. The provisions under Title XVIII on Damages of
the Civil Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of
a sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.
Since the date of demand which is September 27, 2000 was
satisfactorily established during trial, then the interest rate of 12% should be
reckoned from said date of demand until the principal amount and the interest
thereon is fully satisfied.
PAN PACIFIC vs. EQUITABLE PCI BANK
FACTS:
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in
contracting mechanical works on airconditioning system. Pan Pacific,
through its President, Ricardo F. Del Rosario, entered into a contract of
mechanical works with respondent for P20,688,800. Pan Pacific and
respondent also agreed on nine change orders for P2,622,610.30. Thus,
the total consideration for the whole project was P23,311,410.30. The
Contract stipulated, among others, that Pan Pacific shall be entitled to a
price adjustment in case of increase in labor costs and prices of
materials (the escalation clause).
 Credit Transactions Mutuum and Usury Law Case Digest
Pursuant to the contract, Pan Pacific commenced the mechanical
works in the project site, the PCIB Tower II extension building
in Makati City. The project was completed in June 1992. Respondent
accepted the project on 9 July 1992.
In 1990, labor costs and prices of materials escalated. In accordance
with the escalation clause, Pan Pacific claimed a price adjustment
of P5,165,945.52. Respondents appointed project engineer, TCGI
Engineers, asked for a reduction in the price adjustment. To show
goodwill, Pan Pacific reduced the price adjustment to P4,858,548.67.
On 28 April 1992, TCGI Engineers recommended to respondent that the
price adjustment should be pegged at P3,730,957.07. TCGI Engineers
based their evaluation of the price adjustment on the following factors:
(1) Labor Indices of the Department of Labor and Employment.
(2) PRICE INDEX OF THE NATIONAL STATISTICS OFFICE.
Pan Pacific contended that with this recommendation, respondent was
already estopped from disclaiming liability of at least P3,730,957.07 in
accordance with the escalation clause.
Due to the extraordinary increases in the costs of labor and materials,
Pan Pacifics operational capital was becoming inadequate for the
project. However, respondent withheld the payment of the price
adjustment under the escalation clause despite Pan Pacifics repeated
demands. Instead, respondent offered Pan Pacific a loan of P1.8 million.
Against its will and on the strength of respondents promise that the
price adjustment would be released soon, Pan Pacific, through Del
Rosario, was constrained to execute a promissory note in the amount
of P1.8 million as a requirement for the loan. Pan Pacific also posted a
surety bond. The P1.8 million was released directly to laborers and
suppliers and not a single centavo was given to Pan Pacific.
Pan Pacific made several demands for payment on the price
adjustment but respondent merely kept on promising to release the
same. Meanwhile, the P1.8 million loan matured and respondent
demanded payment plus interest and penalty. Pan Pacific refused to
pay the loan. Pan Pacific insisted that it would not have incurred the
loan if respondent released the price adjustment on time. Pan Pacific
alleged that the promissory note did not express the true agreement of
the parties. Pan Pacific maintained that the P1.8 million was to be
considered as an advance payment on the price adjustment. Therefore,
there was really no consideration for the promissory note; hence, it is
null and void from the beginning.
Respondent stood firm that it would not release any amount of the price
adjustment to Pan Pacific but it would offset the price adjustment with
Pan Pacifics outstanding balance of P3,226,186.01, representing the
loan, interests, penalties and collection charges.
Pan Pacific refused the offsetting but agreed to receive the reduced
amount of P3,730,957.07 as recommended by the TCGI Engineers for
the purpose of extrajudicial settlement, less P1.8 million and P414,942
as advance payments.
On 6 May 1994, petitioners filed a complaint for declaration of
nullity/annulment of the promissory note, sum of money, and damages
against the respondent with the RTC. On 12 April 1999, the RTC
rendered its decision declaring the promissory note null and void;
ordering the defendant to pay the plaintiffs the following amounts:
a) P1,389,111.10 representing unpaid balance of the adjustment
price, with interest thereon at the legal rate of twelve (12%)
percent per annum starting may 6, 1994, the date when the
complaint was filed, until the amount is fully paid.
The CA modified the RTC decision, with respect to the principal amount
due to petitioners. The CA removed the deduction
of P126,903.97 because it represented the final payment on the basic
contract price. Hence, the CA ordered respondent to
pay P1,516,015.07 to petitioners, with interest at the legal rate of 12%
per annum starting 6 May 1994.
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration
seeking a reconsideration of the CAs Decision imposing the legal rate of
12%. Petitioners claimed that the interest rate applicable should be
the 18% bank lending rate.
ISSUE:
II-Sanchez Roman
WON the CA, in awarding the unpaid balance of the price adjustment,
erred in fixing the interest rate at 12% instead of the 18% bank lending
rate. YES
5
HELD:
We grant the petition.
This Court notes that respondent did not appeal the decision of the CA.
Hence, there is no longer any issue as to the principal amount of the
unpaid balance on the price adjustment, which the CA correctly
computed at P1,516,015.07. The only remaining issue is the interest
rate applicable for respondents delay in the payment of the balance of
the price adjustment.
The CA denied petitioners claim for the application of the bank lending
rate of 18% compounded annually reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that
the contract provides for an interest at the current bank lending rate
in case of delay in payment by the Owner, and the promissory note
charged an interest of 18%, the said proviso does not authorize
plaintiffs to unilaterally raise the interest rate without the other
partys consent. Unlike their request for price adjustment on the
basic contract price, plaintiffs never informed nor sought the
approval of defendant for the imposition of 18% interest on the
adjusted price.
In this appeal, petitioners allege that the contract between the parties
consists of two parts, the Agreement and the General Conditions, both
of which provide for interest at the bank lending rate on any unpaid
amount due under the contract. Petitioners further claim that there is
nothing in the contract which requires the consent of the respondent to
be given in order that petitioners can charge the bank lending rate.
Specifically, petitioners invoke Section 2.5 of the Agreement and
Section 60.10 of the General Conditions as follows:
Agreement
2.5 IF ANY PAYMENT IS DELAYED, THE CONTRACTOR MAY
CHARGE INTEREST THEREON AT THE CURRENT BANK
LENDING RATES, WITHOUT PREJUDICE TO OWNERS
RECOURSE TO ANY OTHER REMEDY AVAILABLE UNDER
EXISTING LAW.
Petitioners thus submit that it is automatically entitled to the bank
lending rate of interest from the time an amount is determined to be
due thereto, which respondent should have paid. Therefore, as
petitioners have already proven their entitlement to the price
adjustment, it necessarily follows that the bank lending interest rate of
18% shall be applied.
On the other hand, respondent insists that under the provisions of 70.1
and 70.2 of the General Conditions, it is stipulated that any additional
cost shall be determined by the Engineer and shall be added to the
contract price after due consultation with the Owner, herein respondent.
Hence, there being no prior consultation with the respondent regarding
the additional cost to the basic contract price, it naturally follows that
respondent was never consulted or informed of the imposition of 18%
interest rate compounded annually on the adjusted price.
While the CA held that petitioners consulted respondent for price
adjustment on the basic contract price, petitioners, nonetheless, are not
entitled to the imposition of 18% interest on the adjusted price, as
petitioners never informed or sought the approval of respondent for
such imposition.
We disagree.
It is settled that the agreement or the contract between the parties is
the formal expression of the parties rights, duties, and obligations. It
is the best evidence of the intention of the parties. Thus, when the terms
of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the
parties and their successors in interest, no evidence of such terms other
than the contents of the written agreement.
In this case, the CA already settled that petitioners consulted
respondent on the imposition of the price adjustment, and held
respondent liable for the balance of P1,516,015.07. Respondent did not
 Credit Transactions Mutuum and Usury Law Case Digest
II-Sanchez Roman
appeal from the decision of the CA; hence, respondent is estopped from 18% per annum. Absent any evidence of fraud, undue influence or any
contesting such fact. vice of consent exercised by petitioners against the respondent, the
interest rate agreed upon is binding on them.
However, the CA went beyond the intent of the parties by requiring 6
respondent to give its consent to the imposition of interest before
petitioners can hold respondent liable for interest at the current bank
lending rate. This is erroneous. A review of Section 2.6 of the Agreement PRISMA CONSTRUCTION and DEVELOPMENT
and Section 60.10 of the General Conditions shows that the consent of
the respondent is not needed for the imposition of interest at the
CORPORATION and ROGELIO S. PANTALEON vs.
current bank lending rate, which occurs upon any delay in payment. ARTHUR F. MENCHAVEZ
FACTS:
When the terms of a contract are clear and leave no doubt as to the
Pantaleon, the President and Chairman of the Board of PRISMA,
intention of the contracting parties, the literal meaning of its
obtained a P1,000,000.00 loan from the Arthur Menchavez, with a
stipulations governs. In these cases, courts have no authority to alter a
monthly interest of P40,000.00 payable for six months, or a total
contract by construction or to make a new contract for the parties. The
obligation of P1,240,000.00 to be paid within six (6) months. To secure
Courts duty is confined to the interpretation of the contract which the
the payment of the loan, Pantaleon issued a promissory note and six (6)
parties have made for themselves without regard to its wisdom or folly
postdated checks corresponding to the schedule of payments. Later on,
as the court cannot supply material stipulations or read into the
Prisma and Pantaleon failed to completely pay the loan within the
contract words which it does not contain. It is only when the contract is
stipulated six (6)-month period.
vague and ambiguous that courts are permitted to resort to
construction of its terms and determine the intention of the parties.
Prisma and Pantaleon had already paid a total of P1,108,772.00.
However, Menchavez found that the petitioners still had an outstanding
The escalation clause must be read in conjunction with Section 2.5 of
balance of P1,364,151.00 as of January 4, 1997, to which it applied a 4%
the Agreement and Section 60.10 of the General Conditions which
monthly interest.
pertain to the time of payment. Once the parties agree on the price
adjustment after due consultation in compliance with the provisions of
Menchavez filed a complaint for sum of money with the RTC to enforce
the escalation clause, the agreement is in effect an amendment to the
the unpaid balance, plus 4% monthly interest plus damages. Petitioners
original contract, and gives rise to the liability of respondent to pay the
admitted the loan of P1,240,000.00, but denied the stipulation on the 4%
adjusted costs. Under Section 60.10 of the General Conditions, the
monthly interest, arguing that the interest was not provided in the
respondent shall pay such liability to the petitioner within 28 days from
promissory note.
issuance of the interim certificate. Upon respondents failure to pay
within the time provided (28 days), then it shall be liable to pay the
RTC ordered the petitioners to jointly and severally pay the amount of
stipulated interest.
P3,526,117.00 plus 4% per month interest from February 11, 1999 until
fully paid. It noted that the Prisma made several payments amounting
This is the logical interpretation of the agreement of the parties on the
to P1,228,772.00, but they were still indebted to the for P3,526,117.00 as
imposition of interest. To provide a contrary interpretation, as one
of February 11, 1999 after considering the 4% monthly interest.
requiring a separate consent for the imposition of the stipulated
interest, would render the intentions of the parties nugatory.
The CA modified the RTC Decision by imposing a 12% per annum
interest, computed from the filing of the complaint until finality of
Article 1956 of the Civil Code, which refers to monetary interest,
judgment, and thereafter, 12% from finality until fully paid. It found that
specifically mandates that no interest shall be due unless it has been
the parties agreed to a 4% monthly interest. However, it noted that the
expressly stipulated in writing. Therefore, payment of monetary
interest of 4% per month, or 48% per annum, was unreasonable and
interest is allowed only if:
should be reduced to 12% per annum.
(1) there was an express stipulation for the payment of interest;
and
ISSUE:
(2) the agreement for the payment of interest was reduced in
Whether the 4% monthly interest on the loan should be applied.
writing. The concurrence of the two conditions is required for
the payment of monetary interest.
ARGUMENT: Prisma submits that based on Article 1956 of the Civil
Code, interest due should be stipulated in writing. In which case, no
We agree with petitioners interpretation that in case of default, the
such stipulation exists in the case at bar. Even assuming that the loan is
consent of the respondent is not needed in order to impose interest at
subject to 4% monthly interest, the interest covers the six (6)-month
the current bank lending rate.
period only and cannot be interpreted to apply beyond it.
Applicable Interest Rate
Menchavez counters that petitioners are estopped from assailing the
Under Article 2209 of the Civil Code, the appropriate measure for
4% monthly interest, since they agreed to pay the 4% monthly interest
damages in case of delay in discharging an obligation consisting of the
on the principal amount under the promissory note.
payment of a sum of money is the payment of penalty interest at the
rate agreed upon in the contract of the parties. In the absence of a
HELD:
stipulation of a particular rate of penalty interest, payment of additional
No. Interest due should be stipulated in writing; otherwise, 12% per
interest at a rate equal to the regular monetary interest becomes due
annum
and payable. Finally, if no regular interest had been agreed upon by the
contracting parties, then the damages payable will consist of payment
Obligations arising from contracts have the force of law between the
of legal interest which is 6%, or in the case of loans or forbearances of
contracting parties and should be complied with in good faith. In the
money, 12% per annum. It is only when the parties to a contract have
present case, a check was issued for P1,000,000.00 payable within 6
failed to fix the rate of interest or when such amount is unwarranted
months with an interest of P40,000.00 per month. We note that this
that the Court will apply the 12% interest per annum on a loan or
agreed sum can be computed at 4% interest per month, but no such
forbearance of money.
rate of interest was stipulated in the promissory note; rather a fixed sum
equivalent to this rate was agreed upon.
The written agreement entered into between petitioners and
respondent provides for an interest at the current bank lending rate in
Article 1956 of the Civil Code specifically mandates that no interest
case of delay in payment and the promissory note charged an interest
shall be due unless it has been expressly stipulated in writing. Under
of 18%.
this provision, the payment of interest in loans or forbearance of money
is allowed only if:
To prove petitioners entitlement to the 18% bank lending rate of interest,
(1) there was an express stipulation for the payment of interest;
petitioners presented the promissory note prepared by respondent bank
and
itself. This promissory note, although declared void by the lower
(2) the agreement for the payment of interest was reduced in
courts because it did not express the real intention of the parties, is
writing.
substantial proof that the bank lending rate at the time of default was
 Credit Transactions Mutuum and Usury Law Case Digest
The concurrence of the two conditions is required for the payment of
interest at a stipulated rate. Thus, collection of interest without any
stipulation in writing is prohibited by law.
Applying this provision, we find that the interest of P40,000.00 per
month corresponds only to the 6 month period of the loan, or from
January 8, 1994 to June 8, 1994, as agreed upon by the parties in the
promissory note. Thereafter, the interest on the loan should be at the
legal interest rate of 12% per annum, consistent with our ruling in
Eastern Shipping Lines, Inc. v. Court of Appeals:
When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
The facts show that the parties agreed to the payment of a specific sum
of money of P40,000.00 per month for six months, not to a 4% rate of
interest payable within a six (6)-month period.
As to the P40,000 payments per month. It is not unconscionable. No
other stipulation exists for the payment of any extra amount except a
specific sum of P40,000.00 per month on the principal of a loan payable
within six months. Additionally, no issue on the excessiveness of the
stipulated amount of P40,000.00 per month was ever put in issue by the
petitioners; they only assailed the application of a 4% interest rate, since
it was not agreed upon.
The 12% interest rate applies. Therefore, as agreed by the parties, the
loan of P1,000,000.00 shall earn P40,000.00 per month for a period of
six (6) months, or from December 8, 1993 to June 8, 1994, for a total
principal and interest amount of P1,240,000.00. Thereafter, interest at
the rate of 12% per annum shall apply.
As to the Doctrine of Estoppel. It is not applicable. What Prisma agreed
to was the payment of a specific sum of P40,000.00 per month for six
months not a 4% rate of interest per month for 6 months.
WHEREFORE, we hereby REVERSE and SET ASIDE the Decision of the
CA. The petitioners loan of P1,000,000.00 shall bear interest of
P40,000.00 per month for six (6) months from December 8, 1993 as
indicated in the promissory note. Any portion of this loan, unpaid as of
the end of the six-month payment period, shall thereafter bear interest
at 12% per annum. The total amount due and unpaid, including accrued
interests, shall bear interest at 12% per annum from the finality of this
Decision..
PILIPINAS BANK vs. CA and LILIA R. ECHAUS
FACTS:
Lilia Echaus filed a complaint against Pilipinas Bank and its president,
Constantino Bautista, for collection of a sum of money. The complaint
alleged:
1. that Pilipinas and Greatland Realty Corporation (Greatland)
executed a "Dacion en Pago," wherein Greatland conveyed to
Pilipinas several parcels of land in consideration of the sum
of P7,776,335.69;
2. that Greatland assigned P2,300,000.00 out of the total
consideration of the Dacion en Pago, in favor of Lilia Echaus;
and
3. that notwithstanding her demand for payment, Pilipinas in
bad faith, refused and failed to pay the said amount assigned
to her.
RTC ruled in favor of Echaus and ordered Pilipinas and its co-defendant,
jointly and severally, to pay P2,300,000.00 the total amount assigned by
Greatland in her favor out of the P2,300,000.00 liability of defendant
Pilipinas to Greatland plus legal interest from the dates of assignments
until fully paid plus damages.
II-Sanchez Roman
While the case was elevated on appeal, Echaus file for a Motion for
Immediate Execution Pending Appeal which was granted by the trial
court.
7
The CA modified the by limiting the execution pending appeal against
petitioner to P5,517.707.00 and deferring the execution of the award for
damages to await the final judgment of the main case. Pilipinas
complied with the writ of execution pending appeal by issuing two
manager's checks in the total amount of P5,517,707.00.
Later on, the CA rendered a decision, which modified the judgment of
the trial court ordering Pilipinas Bank to pay the sum of 2,300,000,00
Pesos, representing the total amount assigned by Greatland to her, with
interest at the legal rate starting July 24, 1981, date when demand
was first made plus damages.
Pilipinas filed a motion in the trial court praying for the refund to her the
excess payment of P1,898,623.67 with interests at 6%. It must be
recalled that while Echaus was able to collect P5,517,707.00 from
Pilipinas pursuant to the writ of advance execution, the final judgment in
the main case awarded to Echaus damages in the total amount of only
P2,655,000.00 (P2,300,000.00 representing the amount assigned by
Greatland to private respondent, P100,000.00 as moral damages;
P25,000.00 as exemplary damages and attorney's fees equivalent to
10% of the P2,300,000.00), together "with interest on the amount of
P2,300,000.00 at the legal rate starting July 24, 1981, date when
demand was first made.
The trial court, while ordering the refund to petitioner of the excess
payment, fixed the interest rate due on the amount of P2,300.000.00 at
12% per annum as proposed by private respondent, instead of 6% per
annum as proposed by petitioner.
Echaus filed a Motion for Clarification with the Court of Appeals
regarding the legal interest rate to be applied. The CA clarified that the
legal rate of interest on the principal award of P2,300,000.00 should be
12% per annum in accordance with Circular No. 416 dated July 29,
1974 of the Central Bank.
ISSUE:
WON the legal interest rate on the amount of P2,300,000.00 adjudged to
be paid by Pilipinas to Echaus is 12% per annum.
ARGUMENT: Echaus opposed the motion of Pilipinas with respect to
the rate of interest to be charged on the amount of P2,300,000.00.
According to Echaus, the legal interest on the principal amount of
P2,300,000.00 due her should be 12% per annum pursuant to CB
Circular No. 416 and not 6% per annum as computed by petitioner.
Pilipinas argues that the applicable law is Article 2209 of the Civil Code,
not the Central Bank Circular No. 416. Said Article 2209 provides for a
six per cent interest rate per annum.
HELD:
No. It is not a loan or forbearance of money but a contract of sale. 6%
applies.
The said amount was a portion of the P7,776,335.69 which petitioner
was obligated to pay Greatland as consideration for the sale of several
parcels of land by Greatland to Pilipinas. The amount of P2,300,000.00
was assigned by Greatland in favor of Echaus. The said obligation
therefore arose from a contract of purchase and sale and not from a
contract of loan or mutuum. Hence, what is applicable is the rate of 6%
per annum as provided in Article 2209 of the Civil Code of the
Philippines and not the rate of 12% per annum as provided in Circular
No. 416.
PD No. 116 authorized the Monetary Board 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 amended the Usury
Law (Act No. 2655) for that purpose.
As amended, the Usury Law now provides:
Sec. 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
 Credit Transactions Mutuum and Usury Law Case Digest
prescribed by the Monetary Board of the Central Bank of the
Philippines for that purpose in accordance with the authority
hereby granted.xxx
Acting on the authority vested on it by the Usury Law, as amended by
P.D. No. 116, the Monetary Board of Central Bank issued Central Bank
Circular No. 416, which provides:
By virtue of the authority granted to it under Section 1 of Act
2655, as amended, otherwise known as the "Usury Law" the
Monetary Board in its Resolution No. 1622 dated July 29,
1974, has prescribed that the rate of interest for the loan, or
forbearance of any money, goods, or credits and the rate
allowed in judgments, in the absence of express contract as
to such rate of interest, shall be twelve (12%) per cent per
annum. This Circular shall take effect immediately. (italics
supplied)
Note that Circular No. 416, fixing the rate of interest at 12% per annum,
deals with (1) loans; (2) forbearance of any money, goods or credit; and
(3) judgments.
Reformina vs Tomol and Philippines Virginia Tobacco Administration
v. Tensuan [1990], emphasized that the "judgments" contemplated in
Circular No. 417 "are judgments involving said loans or forbearance
only and not in judgments in litigation that have nothing to do with
loans"
ISSUE:
WON the refund to which Pilipinas is entitled should earn interest at the
rate of 12% per annum.
ARGUMENT: Pilipinas contends that, consistent with its thesis that
Circular No. 416 applies only to judgments involving the payment of
loans or forbearance of money, goods and credit, the CA should have
ordered Echaus to pay interest at the rate of 12%.
HELD: Yes.
Echaus was paid in advance the amount of P5,517,707.00 to the order
for the execution pending appeal of the judgment of the trial court. On
appeal, the CA reduced the total damages to P3,619,083.33, leaving a
balance of P1,898,623.67 to be refunded to Pilipinas. In an execution
pending appeal, funds are advanced by the losing party to the prevailing
party with the implied obligation of the latter to repay former, in case the
appellate court cancels or reduces the monetary award.
In the case before us, the excess amount ordered to refunded by
Echaus falls within the Circular No. 416 which applies to cases where
money is transferred from one person to another and the obligation to
return the same or a portion thereof is subsequently adjudged. Hence,
12% should be used as the legal interest rate.
WHEREFORE, the petition is GRANTED. The Resolution of the CA
appealed from is MODIFIED in that (1) the amount of P2,300,000.00
adjudged to be paid by Pilipnas shall earn interest of 6% per annum and
(2) the amount of P1,898,623.67 to be refunded by Ecahus shall earn
interest of 12% per annum. Costs against private respondent. SO
ORDERED.
SOLIDBANK VS PERMANENT HOMES
Facts:
PERMANENT HOMES is a real estate development company. To
finance its housing project known as the Buena Vida Townhomes, it
applied and was subsequently granted by SOLIDBANK with an Omnibus
Line credit facility in the total amount of SIXTY MILLION PESOS.
Of the entire loan, FIFTY NINE MILLION as time loan for a term of up to
three hundred sixty (360) days, with interest thereon at prevailing
market rates, and subject to monthly repricing. The remaining ONE
MILLION was available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged
three (3) townhouse units within the Buena Vida project in Paraaque.
II-Sanchez Roman
Of the 60 million available to PERMANENT HOMES, it availed of a total
of 41.5 million pesos, covered by three (3) promissory notes.
All 3 promissory notes contain the following provisions, thus: 8
xxx
5. We/I irrevocably authorize Solidbank to increase or decrease at
any time the interest rate agreed in this Note or Loan on the basis
of, among others, prevailing rates in the local or international
capital markets. For this purpose, We/I authorize Solidbank to
debit any deposit or placement account with Solidbank belonging
to any one of us. The adjustment of the interest rate shall be
effective from the date indicated in the written notice sent to us by
the bank, or if no date is indicated, from the time the notice was
sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall
prepay all amounts due under this Note or Loan within thirty (30)
days from the receipt by anyone of us of the written
notice. Otherwise, We/I shall be deemed to have given our consent
to the interest rate adjustment.
Contrary, however, to the specific provisions as afore-quoted, there was
a standing agreement by the parties that any increase or decrease in
interest rates shall be subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on March 20, 1997,
in the amount of 19.6 MILLION, from the initial interest rate
of 14.25% per annum (p.a.), the same fluctuated to which on January
16, 1988was pegged at 30% p.a.
For the second loan availment in the amount of 18 million, the rate was
initially pegged at 15.75% p.a. on June 24, 1997. It fluctuated, same, to
which on January 22, 1998 to February 20, 1998 the rate was at 30%
p.a.
For the third loan availment on July 15, 1997, in the amount of 3.9
million, the interest rate was initially pegged at 35% p.a. It fluctuated,
same, to which it settled at 29% p.a. for the month of February.
PERMANENT HOMES contention:
That contrary to their earlier agreement that any interest rate
changes will be subject to mutual agreement of the parties,
SOLIDBANK unilaterally and arbitrarily accelerated the
interest rates without any declared basis of such increases,
of which PERMANENT HOMES had not agreed to, or at the
very least, been informed of.
That PERMANENT HOMES was not able to protest such
arbitrary increases at the time they were imposed by
SOLIDBANK, for fear that SOLIDBANK might cut off the credit
facility; SOLIDBANK knew that it was relying substantially on
the credit facility the latter extended to it.
PERMANENT now seeks to, among others, annul the increases in
interest rates on the loans it obtained from SOLIDBANK, on the ground
that it was violative of the principle of MUTUALITY OF THE PARTIES
(Art 1409 of NCC), and to fix the interest rates at the applicable interest
rate.
In addition, [Permanent] prays for the payment of compensatory, moral
and exemplary damages.
SOLIDBANKS contention:
That it was authorized to, upon due notice, periodically adjust
the interest rates on PERMANENT HOMES loan availments
during the monthly interest repricing dates, depending on the
changes in prevailing interest rates in the local and
international capital markets.
SOLIDBANK insists that PERMANENT HOMES should not be
allowed to renege on its contractual obligations, as it freely
and voluntarily bound itself to the provisions of the Omnibus
Credit Line and the promissory notes.
PERMANENT HOMES witnesses also claims that sent their billings late
that there there were instances where PERMANENT HOMES received
no billing at all.
 Credit Transactions Mutuum and Usury Law Case Digest
RTC ruled in favor of Solidbank; CA reversed/
Issue:
WON the increases in the interest rates on [Permanents] loans are void
for having been unilaterally imposed without basis. NO.
Ruling:
The Usury Law had been rendered legally ineffective by Resolution No.
224 dated 3 December 1982 of the Monetary Board of the Central Bank,
and later by Central Bank Circular No. 905 which took effect on 1
January 1983. These circulars removed the ceiling on interest rates for
secured and unsecured loans regardless of maturity. The effect of
these circulars is to allow the parties to agree on any interest that may
be charged on a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take into
account.[9] Although interest rates are no longer subject to a ceiling, the
lender still does not have an unbridled license to impose increased
interest rates. The lender and the borrower should agree on the
imposed rate, and such imposed rate should be in writing.
The stipulations on interest rate repricing are valid because:
1. the parties mutually agreed on said stipulations;
2. repricing takes effect only upon Solidbanks written notice to
Permanent of the new interest rate; and
3. Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate.//
The phrases irrevocably authorize, at any time and adjustment of the
interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time
the notice was sent, emphasize that Permanent should receive a
written notice from Solidbank as a condition for the adjustment of the
interest rates.
In order that obligations arising from contracts may have the force of
law between the parties, there must be a mutuality between the parties
based on their essential equality.[10]A contract containing a condition
which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties is void.
There was no showing that either Solidbank or Permanent coerced
each other to enter into the loan agreements. The terms of the Omnibus
Line Agreement and the promissory notes were mutually and freely
agreed upon by the parties.
Moreover, Solidbanks range of lending rates were consistent with
prevailing rates in the local or international capital markets.
The interest rate repricing happened at the height of the Asian financial
crises in late 1997, when banks clamped down on lendings because of
higher credit risks across industries, particularly the real estate industry.
Re: late billings
Solidbank admitted that it did not promptly send Permanent written
repriced rates, but rather verbally advised Permanents officers over
the phone at the start of the period. It only advised Permanent on the
repriced interest rate applicable for the 30-day interest period only after
the period had begun. Here, the SC ruled that the computation of the
interest due from Permanent should be adjusted to take effect only
upon Permanents receipt of the written notice from Solidbank (not
when it was verbally advised).
CHUA vs. TIMAN
Facts:
In February and March 1999, petitioners Salvador and Violeta Chua
granted respondents Rodrigo, Ma. Lynn and Lydia Timan the following
loans:
a. P100,000;
b. P200,000;
c. P150,000;
d. P107,000;
e. P200,000; and
f. P107,000.
II-Sanchez Roman
These loans were evidenced by promissory notes with interest of 7%
per month, which was later reduced to 5% per month.
Respondents paid the loans initially at 7% interest rate per month until 9
September 1999 and then at 5% interest rate per month from October to
December 1999. Sometime in March 2000, respondents offered to pay
the principal amount of the loans through a Philippine National Bank
managers check worth P764,000, but petitioners refused to accept the
same insisting that the principal amount of the loans totalled P864,000.
On May 3, 2000, respondents deposited P864,000 with the Clerk of
Court of the RTC of Quezon City. Later, they filed a case for
consignation and damages. Laater on, the Clerk of Court of the RTC of
Quezon City released the amount of P864,000 to petitioners.
Trial on the validity of the stipulated interests on the subject loans, as
well as on the issue of damages, then proceeded.
The RTC rendered a decision in favor of respondents. It ruled that the
original stipulated interest rates of 7% and 5% per month were
excessive. It further ordered petitioners to refund to respondents all
interest payments in excess of the legal rate of 1% per month or 12%
per annum.
On appeal, the Court of Appeals affirmed the trial courts decision. The
Court of Appeals declared illegal the stipulated interest rates of 7% and
5% per month for being excessive, iniquitous, unconscionable and
exorbitant. Accordingly, the Court of Appeals reduced the stipulated
interest rates of 7% and 5% per month (equivalent to 84% and 60% per
annum, respectively) to a fair and reasonable rate of 1% per month or
12% per annum. The Court of Appeals also ordered petitioners to refund
to respondents all interest payments in excess of 12% per annum.
Petitioners sought reconsideration, but it was denied.
The Petitioners Allegations:
Petitioners aver that the stipulated interest of 5% monthly and higher
cannot be considered unconscionable because these rates are not
usurious by virtue of Central Bank (C.B.) Circular No. 905-826 which had
expressly removed the interest ceilings prescribed by the Usury Law.
Petitioners add that respondents were in pari delicto since they agreed
on the stipulated interest rates of 7% and 5% per month. (The SC did not
rule on the issue of in pari delicto because it was not raised in the RTC,
cannot be raised for the first time on appeal.)
Issue:
WON the original stipulated interest rates of 7% and 5%, equivalent to
84% and 60% per annum, are unconscionable. YES.
Ruling:
The stipulated interest rates of 7% and 5% per month imposed on
respondents loans must be equitably reduced to 1% per month or 12%
per annum.8 We need not unsettle the principle we had affirmed in a
plethora of cases that stipulated interest rates of 3% per month and
higher are excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against the law.
While C.B. Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said circular
could possibly be read as granting carte blanche authority to lenders
to raise interest rates to levels which would either enslave their
borrowers or lead to a hemorrhaging of their assets.
As well set forth in Medel:17
We agree that the stipulated rate of interest at 5.5% per
month on the P500,000.00 loan is excessive, iniquitous,
unconscionable and exorbitant. However, we can not
consider the rate "usurious" because this Court has
consistently held that Circular No. 905 of the Central Bank,
adopted on December 22, 1982, has expressly removed the
interest ceilings prescribed by the Usury Law and that the
Usury Law is now "legally inexistent."
In Security Bank and Trust Company vs. Regional Trial Court
of Makati, Branch 61, the Court held that CB Circular No. 905
"did not repeal nor in any way amend the Usury Law but
simply suspended the latters effectivity." Indeed, we have
held that "a Central Bank Circular can not repeal a law. Only a
law can repeal another law." In the recent case of Florendo
 Credit Transactions Mutuum and Usury Law Case Digest
vs. Court of Appeals, the Court reiterated the ruling that "by
virtue of CB Circular 905, the Usury Law has been rendered
ineffective." "Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and
borrower may agree upon."
Nevertheless, we find the interest at 5.5% per month, or 66%
per annum, stipulated upon by the parties in the promissory
note iniquitous or unconscionable, and, hence, contrary to
morals ("contra bonos mores"), if not against the law. The
stipulation is void.
II-Sanchez Roman
In the case at bar, the interest and penalty rates in the Deed are
excessive, hence legally impermissible and should therefore be
reduced.
10
Second issue. Nevertheless, even if the agreed interest rate is deemed
excessive, the respondents are now estopped from claiming otherwise
because evidence shows that it was respondents who proposed the 5%
interest rate per month for two months. However, for the succeeding
period after the two months, the interest rate should be reduced to 12%
per annum and the penalty rate to 1% per month, in accordance with
Article 2227 of the CC.

Third issue. There is no "surplus" to speak of. In adjusting the interest

and penalty rates to equitable and conscionable levels, what the Court
DIO vs. JAPOR did was merely to reflect the true price of the land in the foreclosure
FACTS:
sale. No surplus in the purchase price was thus created to which the
Respondents spouses Japor obtained a loan amounting to P128k from
respondents as the mortgagors have a vested right.
the Quezon Development Bank (QDB) as evidenced by a duly executed
Deed of Real Estate Mortgage. The spouses failed to pay their loan
In conclusion, the interest rate for the subject loan owing to QDB, or
obligations. However, before the foreclosure of the property, the whoever is now the party mortgagee, is hereby fixed at 5% for the first
spouses Japor offered to mortgage their properties to petitioner two months following the date of execution of the Deed of Real Estate
Teresita Dio after obtaining from her a loan worth P350k. A new Deed of Mortgage, and 12% for the succeeding period. The penalty rate is fixed
Real Estate Mortgage was executed in favor of petitioner Dio. at 1% per month. Petitioner Dio is free of any obligation to return to the
respondents Spouses Japor any surplus in the foreclosure sale price.
Under the terms of the deed, the respondents agreed to pay petitioner a
5% interest rate per month for a period of two months with an additional
5% penalty rate for every month in case of default or delay.

However, despite repeated demands, respondents failed to pay causing

petitioner to foreclose the mortgage.

The respondents filed a petition for the fixing of their contractual

obligation. They alleged that the Deed of Real Estate Mortgage was null
and void since it did not state the true intent of the parties, which limited
the 5% interest rate to only two months from the date of the loan and
which did not provide for penalties and other charges in the event of
default or delay. Respondents vehemently contend that they never
consented to the said stipulations and hence, should not be bound by
them.

Petitioner countered that the upon the suspension of the Usury Law,
interest rates may accordingly be pegged at such levels or rates as the
lender and the borrower may agree upon. Petitioner further points out
that the 5% interest rate was proposed by the respondents and have
only themselves to blame if the interests and penalties ballooned to its
present amount due to their willful delay and default in payment.

The CA fixed the respondents liability at 12% per annum and an

additional 1% penalty charge per month.

ISSUES:
(1) W/N the 5% interest rate is iniquitous, unconscionable, and
exorbitant. YES
(2) W/N the 5% interest rate for two months should be applied.
YES
(3) W/N the spouses Japor are entitled to the surplus. NO

RULING:
First issue. Central Bank Circular No. 905 effectively removed the
ceiling on interest rates for both secured and unsecured loans,
regardless of maturity. However, it does not grant lenders carte blanche
authority to impose interest rates which would result in the
enslavement of their borrowers or to the hemorrhaging of their assets.

While a stipulated rate of interest may not technically and necessarily

be usurious under Circular, the rate may be equitably reduced should
the court find it to be iniquitous, unconscionable, and exorbitant, and
hence, contrary to morals (contra bonos mores), if not against the law.
What is iniquitous, unconscionable, and exorbitant shall depend upon
the factual circumstances of each case.