G.R. No. 82082 March 25, 1988
including
INSULAR BANK OF ASIA AND AMERICA,plaintiff-appellant,
vs.
SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-
appellees.
GUTIERREZ, JR., J.:
This is an appeal by the Insular Bank of Asia and America (IBAA) from the
judgment of the Regional Trial Court of Leyte in Civil Case No. 6932 for
collection of a sum of money with preliminary attachment. The appeal was
originally brought to the Court of Appeals but was certified to us by that
tribunal because it raises only a question of law.
The facts are not disputed.
On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo
Salazar obtained a loan from the plaintiff-appellant in the amount of Forty
Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before
December 12, 1980. This loan transaction was evidenced by a promissory
note where the defendants-appellees bound themselves jointly and severally
to pay the amount with interest at 19% per annum and with the express
authority to increase without notice the rate of interest up to the maximum
allowed by law and subject further to penalty charges or liquidated damages
upon default equivalent to 2% per month on any amount due and unpaid. In
the event the account was referred to an attorney for collection, the
defendants-appellees were also bound to pay 25% of any amount due as
attorney's fees plus expenses of litigation and costs.
In accordance with the agreement, the plaintiff-appellant increased the rate
of interest to 21% pursuant to Central Bank Circular No. 705 dated
December 1, 1979.
The promissory note matured but the defendants-appellees failed to pay their
account. It was only after several demands that the defendants-appellees
were able to make partial payment. As of November 25, 1983, they were
able to pay a total of P68,676.75 which payments were applied to partially
satisfy the penalty and interest charges.
On September 12, 1984, the plaintiff-appellant filed a complaint with the
Regional Trial Court alleging that the defendants-appellees were indebted to
IBAA in the amount of P87,647.19 as of September 15, 1984.
interest at 21% per annum penalty charges, and attorney's fees.
At the pre-trial on October 31, 1984, the parties and their counsels appeared.
The defendant-spouses admitted the execution of the promissory note in
consideration of P48,050.00. The trial court then rendered a summary
judgment the dispositive portion of which reads:
WHEREFORE, judgment is hereby ordered in favor of the
plaintiff ordering the defendant spouses Ricardo Salazar and
Epifania Salazar to pay Insular Bank of Asia and America
(IBAA) the sum of Eleven Thousand Two Hundred Fifty
Three Pesos and Twenty Five Centavos ( P11,253.25 ), with
interest thereon at the rate of 19% per annum from the filing
of the complaint on September 12, 1984 until fully paid. The
defendants are further ordered to pay the plaintiff-attorney's
fees in the amount of one Thousand Pesos ( P1,000.00 )
and to pay the costs. (p. 4, Plaintiff- Appellant's Brief).
Plaintiff-appellant now raises the following assigned errors:
I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-
APPELLANT PENALTY CHARGES OR LIQUIDATED DAMAGES IN THE
AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID;
II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE
LOAN AT 21 % PER ANNUM.
III THE LOWER COURT ERRED IN THE COMPUTATION OF THE
AMOUNT OF OBLIGATION DUE FROM DEFENDANTS-APPELLEES
APPELLEES IN FAVOR OF PLAINTIFF-APPELLANT
III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-
APPELLANT ATTORNEY'S FEES EQUIVALENT TO 25% OF THE
AMOUNT DUE AND EXPENSES OF LITIGATION; and
IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-
APELLEES TO JOINTLY AND SEVERALLY PAY THE OBLIGATION. (pp. 4-
5, Plaintiff-Appellant's Brief)
The Escalation Clause provided in the promissory note reads:
The interest herein charged shall be subject to in , without
notice, depending on whatever policy IBAA may in the future
 adopt conformable to law, especially to compensate for any
in Central Bank interests or rediscounting rates.
Finding strength in the argument that the promissory note is the contract
between the parties and, under the law, obligations arising from contracts
have the force of law between the parties, the plaintiff-appellant increased
the interest rate to 21% per annum effective December 1, 1979 pursuant to
Central Bank Circular No. 705.
In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R.
No. L-46591, July 28,1987), the interest rate may not be increased by the
plaintiff-appellant in the instant case. It is the nile that escalation clauses are
valid stipulations in commercial contracts to maintain fiscal stability and to
retain the value of money in long term contracts. However, the enforceability
of such stipulations are subject to certain conditions.
In the Banco Filipino case, the borrower questioned the additional interest
charges on the loan of P41,300.00 she obtained when the interest rates were
increased from 12% to 17% per Central Bank Circular No. 494, issued on
January 2, 1976. In a letter written by the Central Bank to the borrower, some
clarifications were made. Pertinent portions of the letter read:
In this connection, please be advised that the Monetary
Board, in its Resolution No. 1155 dated June 11, 1976
adopted the following guidelines to govern interest rate
adjustments by banks and non-banks performing quasi-
banking functions on loans already existing as of January 3,
1976, in the light of Central Rank Circulars Nos. 492-498:
1 Only banks and non-bank financial intermediaries
performing quasi-banking functions may interest rates on I
already existing as of January 2,1976, provided that:
a. The pertinent loan contracts/documents
contain escalation clauses expressly
authorizing lending bank or non-bank
performing quasi-banking functions to
increase the rate of interest stipulated in the
contract, in the event that any law or Central
Bank regulation is promulgated increasing
the maximum interest rate for loans; and
b. Said loans were directly granted by them
and the remaining maturities thereof were
more than 730 days as of January 2, 1976,
and
2. The increase in the rate of interest can be effective only
as of January 2, 1976 or on a later date. (Emphasis
supplied)
Moreover, in its comment and supplemental comment submit, ted upon
orders of this Court, the Central Bank took the position that the issuance of
its circulars is a valid exercise of its authority to prescribe maximum rates of
interest and based on the general principles of contract, the Escalation
Clause is a valid provision in the loan agreement provided that- 41) the
increased rate imposed or charged by petitioner does not exceed the ceiling
fixed by law or the Monetary Board; (2) the increase is made effective not
earlier than the effectivity of the law or regulation authorizing such an
increase and (3) the remaining maturities of the loans are more than 730
days as of the effectivity of the law or regulation authorizing such an
increase. (Emphasis supplied)
In the case at bar, the loan was obtained on November 21, 1978 and was
payable on or before November 12, 1980. Central Bank Circular No. 705,
authorizing the increase from 19% to 21% was issued on December 1, 1979.
Obviously, as of this date, December 1, 1979, the remaining maturity of the
loan was less than 730 days. Hence, the plaintiff-appellant's second
assignment of error is without merit.
With respect to the penalty clause, we have upheld the validity of such
agreements in several cases. As the Court stated in the case of Government
Service Insurance System v. Court of appeals (145 SCRA 311, 321):
In the Bachrach case (supra) the Supreme Court ruled that
the Civil Code permits the agreement upon a penalty apart
from the interest. Should there be such an agreement, the
penalty does not include the interest, and as such the two
are different and distinct things which may be demanded
separately. Reiterating the same principle in the later case of
Equitable Banking Corp. (supra), where this Court held that
the stipulation about payment of such additional rate
partakes of the nature of a penalty clause, winch is
sanctioned by law.
In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293,
297), the Court explained:
xxx xxx xxx
 ... We have not overlooked the 14% interest that appellant records as to the fluctuation of actual interest rates from 1984 and, therefore,
has been sentenced to pay. This may appear to be usurious, we order interest at the legal rate of 12% per annum on the unpaid amount.
but it is not so. The rate stipulated was 9%, subject,
however, to an additional rate of 5%, in the event of default. WHEREFORE, the decision of the lower court is MODIFIED. The
The stipulation about payment of such additional rate defendants-appellants Ricardo Salazar and Epifania Salazar are ordered to
partakes of the nature of a penalty clause, which is pay Insular Bank of Asia and America (IBAA) the sum of THIRTY-EIGHT
sanctioned by law, (Art. 1226, Civil Code of the Philippines), THOUSAND NINE HUNDRED PESOS and EIGHTEEN CENTAVOS
although, the penalty may also be reduced by the courts if it (P38,915.18 ) with interest thereon at the rate of Twelve Percent (12%) per
is iniquitous or unconscionable. (Art 1229, Civil Code of the annum from the filing of the complaint until fully paid.
Philippines). ...
SO ORDERED.
Admittedly, the defendants-appellees in the instant case failed to pay the
loan on the due date. However, with earnest efforts, they tried to pay the loan Fernan (Chairman), Feliciano and Cortes JJ., concur.
little by little so that as of November 25, 1983, a total of P68,676.75 had been
paid. The plaintiff-appellant, on the other hand, merely applied this amount to
satisfy the penalty and interest charges which it additionally imposed. We do
not find any evidence of bad faith on the part of the defendants-appellees in
their failure to pay the loan on time. Efforts were indeed made to make good
their promise. We note the trial court's observation that the plaintiff-appellant
did not even state in the complaint that the defendants-appellees had made
partial payments, making it appear that the spouses Salazars refused to pay
the loan. In their answer with counterclaim, the defendants-appellees alleged
that the bank neglected to credit said payments in the defendant's account
folio and subjected it as it did to the additional charges. Furthermore, we
agree with the trial court that the bank has already profited considerably from
the loan. In a span of about six (6) years, the bank was enriched by P
26,626.75 (p. 17, Records). The penalty charges of 2% a month are,
therefore, out of proportion to the damage incurred by the bank. In
accordance with Article 1229 of the Civil Code, the Court is constrained to
reduce the penalty for being highly iniquitous

With respect to the attorney's fees, the court is likewise empowered to

reduce the same if they are unreasonable or unconscionable notwithstanding
the express contract for attorney's fees. The award of one thousand (
P1,000.00 ) pesos by the trial court appears to be enough.

The promissory note signed by the defendants-appellants states that the loan
of P42,050.00 shall bear interest at the rate of 19% per annum. This would
yield interest of P7,989.50 per annum or a total of P 46,339.10 from
November 22, 1978 to September 12, 1984, the date of filing the complaint.
Penalty interest of 1% a month or 12% per annum is reasonable so that from
December 12, 1980 up to September 12, 1984, penalty charges should be
P19,202.83. Considering that the defendants-appellees have paid the
amount of P68,676.75, they, therefore, owed the bank the amount of
P38,915.18 when the complaint was filed. There is no indication in the
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY,
INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.
VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for
damage sustained on a shipment of goods can be a solidary, or joint and
several, liability of the common carrier, the arrastre operator and the customs
broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the
date the decision appealed from is rendered; and (c) whether the applicable
rate of interest, referred to above, is twelve percent (12%) or six percent
(6%).
The findings of the court a quo, adopted by the Court of Appeals, on the
antecedent and undisputed facts that have led to the controversy are
hereunder reproduced:
This is an action against defendants shipping company,
arrastre operator and broker-forwarder for damages
sustained by a shipment while in defendants' custody, filed
by the insurer-subrogee who paid the consignee the value of
such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were
shipped from Yokohama, Japan for delivery vessel "SS
EASTERN COMET" owned by defendant Eastern Shipping
Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under
plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on December 12,
1981, it was discharged unto the custody of defendant Metro
Port Service, Inc. The latter excepted to one drum, said to be
in bad order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation
received the shipment from defendant Metro Port Service,
Inc., one drum opened and without seal (per "Request for
Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage
Corporation made deliveries of the shipment to the
consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents was
adulterated/fake (per "Bad Order Waybill" No. 10649, Exh.
E).
Plaintiff contended that due to the losses/damage sustained
by said drum, the consignee suffered losses totaling
P19,032.95, due to the fault and negligence of defendants.
Claims were presented against defendants who failed and
refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was
compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became
subrogated to all the rights of action of said consignee
against defendants (per "Form of Subrogation", "Release"
and Philbanking check, Exhs. M, N, and O). (pp. 85-
86, Rollo.)
There were, to be sure, other factual issues that confronted both courts.
Here, the appellate court said:
Defendants filed their respective answers, traversing the
material allegations of the complaint contending that: As for
defendant Eastern Shipping it alleged that the shipment was
discharged in good order from the vessel unto the custody of
Metro Port Service so that any damage/losses incurred after
the shipment was incurred after the shipment was turned
over to the latter, is no longer its liability (p. 17, Record);
Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was already
in bad order (p. 11, Record); Allied Brokerage alleged that
plaintiff has no cause of action against it, not having
negligent or at fault for the shipment was already in damage
and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and
diligence in the handling/delivery of the cargo to consignee
in the same condition shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained
losses/damages;
2. Whether or not these losses/damages
were sustained while in the custody of
defendants (in whose respective custody, if
determinable);
3. Whether or not defendant(s) should be
held liable for the losses/damages (see
plaintiff's pre-Trial Brief, Records, p. 34;
Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).
As to the first issue, there can be no doubt
that the shipment sustained
losses/damages. The two drums were
shipped in good order and condition, as
clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate
any damages drum that was shipped (Exhs.
B and C). But when on December 12, 1981
the shipment was delivered to defendant
Metro Port Service, Inc., it excepted to one
drum in bad order.
Correspondingly, as to the second issue, it
follows that the losses/damages were
sustained while in the respective and/or
successive custody and possession of
defendants carrier (Eastern), arrastre
operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the
Marine Cargo Survey Report (Exh. G), with
its "Additional Survey Notes", are
considered. In the latter notes, it is stated
that when the shipment was "landed on
vessel" to dock of Pier # 15, South Harbor,
Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in
damaged condition, covered by the vessel's
Agent's Bad Order Tally Sheet No. 86427."
The report further states that when
defendant Allied Brokerage withdrew the
shipment from defendant arrastre operator's
custody on January 7, 1982, one drum was
found opened without seal, cello bag partly
torn but contents intact. Net unrecovered
spillages was
15 kgs. The report went on to state that
when the drums reached the consignee, one
drum was found with adulterated/faked
contents. It is obvious, therefore, that these
losses/damages occurred before the
shipment reached the consignee while
under the successive custodies of
defendants. Under Art. 1737 of the New Civil
Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of
goods remains in full force and effect even if
the goods are temporarily unloaded and
stored in transit in the warehouse of the
carrier at the place of destination, until the
consignee has been advised and has had
reasonable opportunity to remove or dispose
of the goods (Art. 1738, NCC). Defendant
Eastern Shipping's own exhibit, the "Turn-
Over Survey of Bad Order Cargoes" (Exhs.
3-Eastern) states that on December 12,
1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED,
judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the
present legal interest of 12% per
annum from October 1, 1982, the date of
filing of this complaints, until fully paid (the
liability of defendant Eastern Shipping, Inc.
 shall not exceed US$500 per case or the
CIF value of the loss, whichever is lesser,
while the liability of defendant Metro Port
Service, Inc. shall be to the extent of the
actual invoice value of each package, crate
box or container in no case to exceed
P5,000.00 each, pursuant to Section 6.01 of
the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the
counterclaims and
crossclaim of
defendant/cross-claimant
Allied Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find
that the conclusion drawn therefrom is correct. As there is
sufficient evidence that the shipment sustained damage
while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the
amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes
error and grave abuse of discretion on the part of the appellate court when
I. IT HELD PETITIONER CARRIER JOINTLY AND
SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR
AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED
DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE
CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER
ANNUM INSTEAD OF FROM THE DATE OF THE
DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY
UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by
petitioner carrier are not all that novel. Indeed, we do have a fairly good
number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment
of goods lasts from the time the articles are surrendered to or unconditionally
placed in the possession of, and received by, the carrier for transportation
until delivered to, or until the lapse of a reasonable time for their acceptance
by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon
vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52
Phil. 863). When the goods shipped either are lost or arrive in damaged
condition, a presumption arises against the carrier of its failure to observe
that diligence, and there need not be an express finding of negligence to hold
it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of
Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA
365). There are, of course, exceptional cases when such presumption of fault
is not observed but these cases, enumerated in Article 1734 1 of the Civil
Code, are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the
obligation of properly delivering the goods to the consignee has, too, been
passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port
Services (182 SCRA 455), we have explained, in holding the carrier and the
arrastre operator liable in solidum,thus:
The legal relationship between the consignee and the
arrastre operator is akin to that of a depositor and
warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA
5 [1967]. The relationship between the consignee and the
common carrier is similar to that of the consignee and the
arrastre operator (Northern Motors, Inc. v. Prince Line, et al.,
107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE
to take good care of the goods that are in its custody and to
 deliver them in good condition to the consignee, such
responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with
the obligation to deliver the goods in good condition to the
consignee.
We do not, of course, imply by the above pronouncement that the arrastre
operator and the customs broker are themselves always and necessarily
liable solidarily with the carrier, or vice-versa, nor that attendant facts in a
given case may not vary the rule. The instant petition has been brought
solely by Eastern Shipping Lines, which, being the carrier and not having
been able to rebut the presumption of fault, is, in any event, to be held liable
in this particular case. A factual finding of both the court a quo and the
appellate court, we take note, is that "there is sufficient evidence that the
shipment sustained damage while in the successive possession of
appellants" (the herein petitioner among them). Accordingly, the liability
imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that
deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money
arising out of short deliveries and pilferage of goods. In this case, appellee
Malayan Insurance (the plaintiff in the lower court) averred in its complaint
that the total amount of its claim for the value of the undelivered goods
amounted to P3,947.20. This demand, however, was neither established in
its totality nor definitely ascertained. In the stipulation of facts later entered
into by the parties, in lieu of proof, the amount of P1,447.51 was agreed
upon. The trial court rendered judgment ordering the appellants (defendants)
Manila Port Service and Manila Railroad Company to pay appellee Malayan
Insurance the sum of P1,447.51 with legal interest thereon from the date the
complaint was filed on 28 December 1962 until full payment thereof. The
appellants then assailed,inter alia, the award of legal interest. In sustaining
the appellants, this Court ruled:
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." And as was held by
this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if
the suit were for damages, "unliquidated and not known until
definitely ascertained, assessed and determined by the
courts after proof (Montilla c. Corporacion de P.P. Agustinos,
25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the
decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for
"Recovery of Damages for Injury to Person and Loss of Property." After trial,
the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and third party defendants and against the
defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and
Michael, Incorporated to pay jointly and severally the
following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina
the sum of P131,084.00 which is the value of the boat F B
Pacita III together with its accessories, fishing gear and
equipment minus P80,000.00 which is the value of the
insurance recovered and the amount of P10,000.00 a month
as the estimated monthly loss suffered by them as a result of
the fire of May 6, 1969 up to the time they are actually paid
or already the total sum of P370,000.00 as of June 4, 1972
with legal interest from the filing of the complaint until
paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis
supplied.)
On appeal to the Court of Appeals, the latter modified the amount of
damages awarded but sustained the trial court in adjudging legal
interest from the filing of the complaint until fully paid. When the
appellate court's decision became final, the case was remanded to
the lower court for execution, and this was when the trial court issued
its assailed resolution which applied the 6% interest per
 annum prescribed in Article 2209 of the Civil Code. In their petition
for review on certiorari, the petitioners contended that Central Bank
Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act
2655, as amended, 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%) percent per annum. This Circular shall take effect
immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in
litigations involving loans or forbearance of any money,
goods or credits. Any other kind of monetary judgment which
has nothing to do with, nor involving loans or forbearance of
any money, goods or credits does not fall within the
coverage of the said law for it is not within the ambit of the
authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be
executed is one rendered in an Action for Damages for injury
to persons and loss of property and does not involve any
loan, much less forbearances of any money, goods or
credits. As correctly argued by the private respondents, the
law applicable to the said case is Article 2209 of the New
Civil Code which reads
Art. 2209. 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.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc.,
v. Cruz, 7 promulgated on 28 July 1986. The case was for damages
occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory
damages in the amount of P72,500.00 with legal interest thereon from the
filing of the complaint until fully paid. Relying on the Reformina
v. Tomol case, this Court 8 modified the interest award from 12% to 6%
interest per annum but sustained the time computation thereof, i.e., from the
filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the
recovery of damages arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the
petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal
rate from November 29, 1968, the date of the filing of the complaint until full
payment . . . ." Save from the modification of the amount granted by the
lower court, the Court of Appeals sustained the trial court's decision. When
taken to this Court for review, the case, on 03 October 1986, was decided,
thus:
WHEREFORE, the decision appealed from is hereby
MODIFIED and considering the special and environmental
circumstances of this case, we deem it reasonable to render
a decision imposing, as We do hereby impose, upon the
defendant and the third-party defendants (with the exception
of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of
FIVE MILLION (P5,000,000.00) Pesos to cover all damages
(with the exception to attorney's fees) occasioned by the loss
of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total
sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest
per annum shall be imposed upon aforementioned amounts
from finality until paid. Solidary costs against the defendant
and third-party defendants (Except Roman Ozaeta).
(Emphasis supplied)
A motion for reconsideration was filed by United Construction,
contending that "the interest of twelve (12%) per cent per
annum imposed on the total amount of the monetary award was in
contravention of law." The Court 10 ruled out the applicability of the
Reformina and Philippine Rabbit Bus Lines cases and, in its
resolution of 15 April 1988, it explained:
 There should be no dispute that the imposition of 12%
interest pursuant to Central Bank Circular No. 416 . . . is
applicable only in the following: (1) loans; (2) forbearance of
any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to
judgments involving loans or forbearance of any money,
goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz,
143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139
SCRA 260 [1985]). It is true that in the instant case, there is
neither a loan or a forbearance, but then no interest is
actually imposed provided the sums referred to in the
judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will cause
the imposition of the interest.
It will be noted that in the cases already adverted to, the rate
of interest is imposed on the total sum, from the filing of the
complaint until paid; in other words, as part of the judgment
for damages. Clearly, they are not applicable to the instant
case. (Emphasis supplied.)
The subsequent case of American Express International, Inc.,
vs. Intermediate Appellate Court 11 was a petition for review on certiorari from
the decision, dated 27 February 1985, of the then Intermediate Appellate
Court reducing the amount of moral and exemplary damages awarded by the
trial court, to P240,000.00 and P100,000.00, respectively, and its resolution,
dated 29 April 1985, restoring the amount of damages awarded by the trial
court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary
damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court,
while recognizing the right of the private respondent to recover damages,
held the award, however, for moral damages by the trial court, later
sustained by the IAC, to be inconceivably large. The Court 12 thus set aside
the decision of the appellate court and rendered a new one, "ordering the
petitioner to pay private respondent the sum of One Hundred Thousand
(P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision
until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo
v. Ruiz 13 which arose from a breach of employment contract. For having
been illegally dismissed, the petitioner was awarded by the trial court moral
and exemplary damages without, however, providing any legal interest
thereon. When the decision was appealed to the Court of Appeals, the latter
held:
WHEREFORE, except as modified hereinabove the decision
of the CFI of Negros Oriental dated October 31, 1972 is
affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton
Munn, are ordered to pay, jointly and severally, the amounts
stated in the dispositive portion of the decision, including the
sum of P1,400.00 in concept of compensatory damages,
with interest at the legal rate from the date of the filing of the
complaint until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were
thereupon transmitted to the trial court, and an entry of judgment was
made. The writ of execution issued by the trial court directed that
only compensatory damages should earn interest at 6% per
annum from the date of the filing of the complaint. Ascribing grave
abuse of discretion on the part of the trial judge, a petition
for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the
payment of interest "at the legal rate"from the time of the
filing of the complaint. . . Said circular [Central Bank Circular
No. 416] does not apply to actions based on a breach of
employment contract like the case at bar. (Emphasis
supplied)
The Court reiterated that the 6% interest per annum on the damages
should be computed from the time the complaint was filed until the
amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National
Power Corporation vs. Angas, 14decided on 08 May 1992, involved the
expropriation of certain parcels of land. After conducting a hearing on the
complaints for eminent domain, the trial court ordered the petitioner to pay
the private respondents certain sums of money as just compensation for their
lands so expropriated "with legal interest thereon . . . until fully paid." Again,
in applying the 6% legal interest per annum under the Civil Code, the
Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or
forbearance of money, goods or credits but expropriation of
certain parcels of land for a public purpose, the payment of
which is without stipulation regarding interest, and the
interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid
on the amount of just compensation for the properties
 expropriated is manifestly in the form of indemnity for
damages for the delay in the payment thereof. Therefore,
since the kind of interest involved in the joint judgment of the
lower court sought to be enforced in this case is interest by
way of damages, and not by way of earnings from loans, etc.
Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The
cases can perhaps be classified into two groups according to the similarity of
the issues involved and the corresponding rulings rendered by the court. The
"first group" would consist of the cases of Reformina v. Tomol (1985),
Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group"
would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil
and Sons v. Court of Appeals (1988), and American Express International
v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the
6% (under the Civil Code) or 12% (under the Central Bank Circular)
interest per annum. It is easily discernible in these cases that there has been
a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance 16 of money, goods
or credits, as well as to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest under the Civil Code
governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time
frame in the computation of the 6% interest per annum has been applied, i.e.,
from the time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of
the 6% or 12% interest per annum, 17depending on whether or not the
amount involved is a loan or forbearance, on the one hand, or one of
indemnity for damage, on the other hand. Unlike, however, the "first group"
which remained consistent in holding that the running of the legal interest
should be from the time of the filing of the complaint until fully paid, the
"second group" varied on the commencement of the running of the legal
interest.
Malayan held that the amount awarded should bear legal interest from the
date of the decision of the court a quo,explaining that "if the suit were for
damages, 'unliquidated and not known until definitely ascertained, assessed
and determined by the courts after proof,' then, interest 'should be from the
date of the decision.'" American Express International v. IAC, introduced a
different time frame for reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until paid." The Nakpil and Sons
case ruled that 12% interest per annum should be imposed from the finality
of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances
may have called for different applications, guided by the rule that the courts
are vested with discretion, depending on the equities of each case, on the
award of interest. Nonetheless, it may not be unwise, by way of clarification
and reconciliation, to suggest the following rules of thumb for future
guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-
contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held
liable for damages. 19 The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages. 20
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. 21 Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. 22 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 23 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 24 at the rate of 6% per annum. 25 No interest,
however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable
certainty. 26 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.

WHEREFORE, the petition is partly GRANTED. The appealed decision is

AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest,
in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality
of this decision until the payment thereof.

SO ORDERED.
G.R. No. 181045 July 2, 2014
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal
condition, if not the most important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation granting a party the option
to prepay the loan if said party is not agreeable to the arbitrary interest rates
imposed. Premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw
from the agreement if it discovers that what the other party has been doing
all along is improper or illegal.
This Petition for Review on Certiorari1 questions the May 8, 2007
Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which
affirmed with modifications the February 28, 2003 Decision3 and the June 4,
2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in
Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for
about two decades of operating a department store and buying and selling of
ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a
banking corporation organized and existing under Philippine laws.
To secure a one-year revolving credit line of P150,000.00 obtained from
PNB, petitioners constituted in August 1987 a Real Estate Mortgage5 over a
370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title
No. (TCT) T-14250. In July 1988,the credit line was increased to P1.8 million
and the mortgage was correspondingly increased to P1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was
executed to cover the same credit line, which was increased to P2.5 million,
and additional security was given in the form of a 134-square meter lot
covered by TCT T-16208. In addition, petitioners issued eight Promissory
Notes8 and signed a Credit Agreement.9This July 1989 Credit Agreement
contained a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5%
per annum. Interest shall be payable in advance every one hundred twenty
days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the
Loan depending on whatever policy the Bank may adopt in the future,
including without limitation, the shifting from the floating interest rate system
to the fixed interest rate system, or vice versa. Where the Bank has imposed
on the Loan interest at a rate per annum, which is equal to the Banks spread
over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time depending on whatever
policy it may adopt in the future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation
granting PNB the right to increase or reduce interest rates "within the limits
allowed by law or by the Monetary Board."11
The Real Estate Mortgage agreement provided the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB may
adopt in the future."12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 19.5%;
2. 2nd Promissory Note dated November 22, 1989 23%;
3. 3rd Promissory Note dated March 21, 1990 22%;
4. 4th Promissory Note dated July 19, 1990 24%;
5. 5th Promissory Note dated December 17, 1990 28%;
6. 6th Promissory Note dated February 14, 1991 32%;
7. 7th Promissory Note dated March 1, 1991 30%; and
8. 8th Promissory Note dated July 11, 1991 24%.13
In August 1991, an Amendment to Credit Agreement14 was executed by the
parties, with the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date
of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each
Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of
PNB the following 18 Promissory Notes, which petitioners settled except
the last (the note covering the principal) at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 26%;
2. 10th Promissory Note dated March 19, 1992 25%;
3. 11th Promissory Note dated July 11, 1992 23%;
4. 12th Promissory Note dated November 10, 1992 21%;
5. 13th Promissory Note dated March 15, 1993 21%;
6. 14th Promissory Note dated July 12, 1993 17.5%;
7. 15th Promissory Note dated November 17, 1993 21%;
8. 16th Promissory Note dated March 28, 1994 21%;
9. 17th Promissory Note dated July 13, 1994 21%;
10. 18th Promissory Note dated November 16, 1994 16%;
11. 19th Promissory Note dated April 10, 1995 21%;
12. 20th Promissory Note dated July 19, 1995 18.5%;
13. 21st Promissory Note dated December 18, 1995 18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;
15. 23rd Promissory Note dated July 22, 1996 18.5%;
16. 24th Promissory Note dated November 25, 1996 18%;
17. 25th Promissory Note dated May 30, 1997 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997
25%.16
The 9th up to the 17th promissory notes provide for the payment of interest
at the "rate the Bank may at any time without notice, raise within the limits
allowed by law x x x."17
On the other hand, the 18th up to the 26th promissory notes including PN
9707237, which is the 26th promissory note carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated
may be increased or decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes in interest rate
prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Banks overall cost of funds. I/We hereby agree that in
the event I/we are not agreeable to the interest rate fixed for any Interest
Period, I/we shall have the option top repay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting
Date.18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners
made good on the promissory notes, religiously paying the interests without
objection or fail. But in 1997, petitioners faltered when the interest rates
soared due to the Asian financial crisis. Petitioners sole outstanding
promissory note for P2.5 million PN 9707237 executed in July 1997 and
due 120 days later or on October 28, 1997 became past due, and despite
repeated demands, petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per
annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment
thereon, when due, shall constitute default and in such cases or in case of
garnishment, receivership or bankruptcy or suit of any kind filed against
me/us by the Bank, the outstanding principal of this note, at the option of the
Bank and without prior notice of demand, shall immediately become due and
payable and shall be subject to a penalty charge of twenty four percent
(24%) per annum based on the defaulted principal amount. x x x19 (Emphasis
supplied)
PNB prepared a Statement of Account20 as of October 12, 1998, detailing the
amount due and demandable from petitioners in the total amount
of P3,620,541.60, broken down as follows:

Principal P 2,500,000.00
Interest 538,874.94
Penalties 581,666.66
Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB
foreclosed on the mortgage, and on January 14, 1999, TCTs T-14250 and T-
16208 were sold to it at auction for the amount of P4,324,172.96.21 The
sheriffs certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No.
5975, seeking annulment of the foreclosure sale and an accounting of the
PNB credit. Petitioners theorized that after the first promissory note where
they agreed to pay 19.5% interest, the succeeding stipulations for the
payment of interest in their loan agreements with PNB which allegedly left
to the latter the sole will to determine the interest rate became null and
void. Petitioners added that because the interest rates were fixed by
respondent without their prior consent or agreement, these rates are void,
and as a result, petitioners should only be made liable for interest at the legal
rate of 12%. They claimed further that they overpaid interests on the credit,
and concluded that due to this overpayment of steep interest charges, their
debt should now be deemed paid, and the foreclosure and sale of TCTs T-
14250 and T-16208 became unnecessary and wrongful. As for the imposed
penalty of P581,666.66, petitioners alleged that since the Real Estate
Mortgage and the Supplement thereto did not include penalties as part of the
secured amount, the same should be excluded from the foreclosure amount
or bid price, even if such penalties are provided for in the final Promissory
Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment
of P848,285.00 made during the period August 21, 1991 to March 5,
1998,resulting from respondents imposition of the alleged illegal and steep
interest rates. They also prayed to be awarded P200,000.00 by way of
attorneys fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates;
that petitioners agreed that without prior notice, PNB may modify interest
rates depending on future policy adopted by it; and that the imposition of
penalties was agreed upon in the Credit Agreement. It added that the
imposition of penalties is supported by the all-inclusive clause in the Real
Estate Mortgage agreement which provides that the mortgage shall stand as
security for any and all other obligations of whatever kind and nature owing
to respondent, which thus includes penalties imposed upon default or non-
payment of the principal and interest on due date.
On pre-trial, the parties mutually agreed to the following material facts,
among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total
amount of P3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000
demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement,
the Amendment to Credit Agreement, Real Estate Mortgage and the
Supplement thereto were all prepared by respondent PNB and were
presented to her and her husband Eduardo only for signature; that she was
told by PNB that the latter alone would determine the interest rate; that as to
the Amendment to Credit Agreement, she was told that PNB would fill up the
interest rate portion thereof; that at the time the parties executed the said
Credit Agreement, she was not informed about the applicable spread that
PNB would impose on her account; that the interest rate portion of all
Promissory Notes she and Eduardo issued were always left in blank when
they executed them, with respondents mere assurance that it would be the
one to enter or indicate thereon the prevailing interest rate at the time of
availment; and that they agreed to such arrangement. She further testified
that the two Real Estate Mortgage agreements she signed did not stipulate
the payment of penalties; that she and Eduardo consulted with a lawyer, and
were told that PNBs actions were improper, and so on March 20, 2000, they
wrote to the latter seeking a recomputation of their outstanding obligation;
and when PNB did not oblige, they instituted Civil Case No. 5975.27
On cross-examination, Lydia testified that she has been in business for 20
years; that she also borrowed from other individuals and another bank; that it
was only with banks that she was asked to sign loan documents with no
indicated interest rate; that she did not bother to read the terms of the loan
documents which she signed; and that she received several PNB statements
of account detailing their outstanding obligations, but she did not complain;
that she assumed instead that what was written therein is correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the
sole witness for respondent, stated on cross-examination that as a practice,
the determination of the prime rates of interest was the responsibility solely of
PNBs Treasury Department which is based in Manila; that these prime rates
were simply communicated to all PNB branches for implementation; that
there are a multitude of considerations which determine the interest rate,
such as the cost of money, foreign currency values, PNBs spread, bank
administrative costs, profitability, and the practice in the banking industry;
that in every repricing of each loan availment, the borrower has the right to
question the rates, but that this was not done by the petitioners; and that
anything that is not found in the Promissory Note may be supplemented by
the Credit Agreement.29
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil
Case No. 5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its
spread over the floating interest rate at any time depending on
whatever policy it may adopt in the future, it likewise allows for the
decrease at any time of the same. Thus, such stipulation authorizing
both the increase and decrease of interest rates as may be
applicable is valid,31 as was held in Consolidated Bank and Trust
Corporation (SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need
not be fixed and instead be made dependent on prevailing rates
upon which to peg such variable interest rates;33
3. The Promissory Note, as the principal contract evidencing
petitioners loan, prevails over the Credit Agreement and the Real
Estate Mortgage.
As such, the rate of interest, penalties and attorneys fees stipulated
in the Promissory Note prevail over those mentioned in the Credit
Agreement and the Real Estate Mortgage agreements;34
4. Roughly, PNBs computation of the total amount of petitioners
obligation is correct;35
5. Because the loan was admittedly due and demandable, the
foreclosure was regularly made;36
6. By the admission of petitioners during pre-trial, all payments made
to PNB were properly applied to the principal, interest and
penalties.37
The dispositive portion of the trial courts Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
respondent and against the petitioners by DISMISSING the latters petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the
trial court granted only a modification in the award of attorneys fees,
reducing the same from 10% to 1%. Thus, PNB was ordered to refund to
petitioner the excess in attorneys fees in the amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the
interest rate charged by the respondent as well as the extra-judicial
foreclosure proceedings and the Certificate of Sale. However, respondent is
directed to refund to the petitioner the amount of P356,589.90 representing
the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with
the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY
GRANTED. The modified Decision of the Regional Trial Court per Order
dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first
30-day interest period for PN. No. 9707237 should be 12% per
annum;
2. [T]hat the attorneys fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the
excess in the bid price of P377,505.99 which is the difference
between the total amount due [PNB] and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the
trial court which reduced its award of attorneys fees. It simply raised the
issue in its appellees brief in the CA, and included a prayer for the reversal
of said Order.
In effect, the CA limited petitioners appeal to the following issues:
1) Whether x x x the interest rates on petitioners outstanding
obligation were unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate
mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial,
the latter dutifully paid a total ofP3,027,324.60 in interest for the period
August 7, 1991 to August 6, 1997, over and above the P2.5 million principal
obligation. And this is exclusive of payments for insurance premiums,
documentary stamp taxes, and penalty. All the while, petitioners did not
complain nor object to the imposition of interest; they in fact paid the same
religiously and without fail for seven years. The appellate court ruled that
petitioners are thus estopped from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14,
1997, PNB wrongly applied an interest rate of 25.72% instead of the agreed
25%; thus it overcharged petitioners, and the latter paid, an excess
ofP736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real
Estate Mortgage agreements contemplated the inclusion of the PN 9707237-
stipulated 24% penalty in the amount to be secured by the mortgaged
property, thus
For and in consideration of certain loans, overdrafts and other credit
accommodations obtained from the MORTGAGEE and to secure the
payment of the same and those others that the MORTGAGEE may extend to
the MORTGAGOR, including interest and expenses, and other obligations
owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect,
principal or secondary, as appearing in the accounts, books and records of
the MORTGAGEE, the MORTGAGOR does hereby transfer and convey by
way of mortgage unto the MORTGAGEE x x x43 (Emphasis supplied)
The CA believes that the 24% penalty is covered by the phrase "and other
obligations owing by the mortgagor to the mortgagee" and should thus be
added to the amount secured by the mortgages.44
The CA then proceeded to declare valid the foreclosure and sale of
properties covered by TCTs T-14250 and T-16208, which came as a
necessary result of petitioners failure to pay the outstanding obligation upon
demand.45The CA saw fit to increase the trial courts award of 1% to 10%,
finding the latter rate to be reasonable and citing the Real Estate Mortgage
agreement which authorized the collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus,
which is the difference between PNBs bid price of P4,324,172.96 and
petitioners total computed obligation as of January 14, 1999, or the date of
the auction sale, in the amount of P3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER
COURT ERRED IN NOT NULLIFYING THE INTEREST
RATE PROVISION IN THE CREDIT AGREEMENT DATED
JULY 24, 1989 X X X AND IN THE AMENDMENT TO
CREDIT AGREEMENT DATEDAUGUST 21, 1991 X X X
WHICH LEFT TO THE SOLE UNILATERAL
DETERMINATION OF THE RESPONDENT PNB THE
ORIGINAL FIXING OF INTEREST RATE AND ITS
INCREASE, WHICH AGREEMENT IS CONTRARY TO
LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS
ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF
APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND
CONTRARY TO PUBLIC POLICY AND PUBLIC INTEREST,
AND IN APPLYING THE PRINCIPLE OF ESTOPPEL
ARISING FROM THE ALLEGED DELAYED COMPLAINT
OF PETITIONER[S], AND [THEIR] PAYMENT OF THE
INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND
THE LOWER COURT ERRED IN NOT DECLARING THAT
PNB IS NOT AT ALL ENTITLED TO ANY INTEREST
 EXCEPT THE LEGAL RATE FROM DATE OF DEMAND,
AND IN NOT APPLYING THE EXCESS OVER THE LEGAL
RATE OF THE ADMITTED PAYMENTS MADE BY
PETITIONER[S] FROM 1991-1998 IN THE ADMITTED
TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT OF
THE PRINCIPAL OFP2,500,000.[00] LEAVING AN
OVERPAYMENT OFP984,287.00 REFUNDABLE BY
RESPONDENT TO PETITIONER[S] WITH INTEREST OF
12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN
HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE
MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE MORTGAGE
AS A SECURED AMOUNT AND THEREFORE THE AMOUNT OF
PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE]
FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE
LOWER COURT, WHICH REDUCED THE ATTORNEYS FEES OF 10% OF
THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL
FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEYS
FEES.48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and
the Amendment to Credit Agreement should be declared null and void, for
they relegated to PNB the sole power to fix interest rates based on arbitrary
criteria or factors such as bank policy, profitability, cost of money, foreign
currency values, and bank administrative costs; spaces for interest rates in
the two Credit Agreements and the promissory notes were left blank for PNB
to unilaterally fill, and their consent or agreement to the interest rates
imposed thereafter was not obtained; the interest rate, which consists of the
prime rate plus the bank spread, is determined not by agreement of the
parties but by PNBs Treasury Department in Manila. Petitioners conclude
that by this method of fixing the interest rates, the principle of mutuality of
contracts is violated, and public policy as well as Circular 905 49 of the then
Central Bank had been breached.
Petitioners question the CAs application of the principle of estoppel, saying
that no estoppel can proceed from an illegal act. Though they failed to timely
question the imposition of the alleged illegal interest rates and continued to
pay the loan on the basis of these rates, they cannot be deemed to have
acquiesced, and hence could recover what they erroneously paid. 50
Petitioners argue that if the interest rates were nullified, then their obligation
to PNB is deemed extinguished as of July 1997; moreover, it would appear
that they even made an over payment to the bank in the amount
ofP984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements
did not include nor specify, as part of the secured amount, the penalty of
24% authorized in PN 9707237, such amount of P581,666.66 could not be
made answerable by or collected from the mortgages covering TCTs T-
14250 and T-16208. Claiming support from Philippine Bank of
Communications [PBCom] v. Court of Appeals,51 petitioners insist that the
phrase "and other obligations owing by the mortgagor to the mortgagee"52 in
the mortgage agreements cannot embrace theP581,666.66 penalty,
because, as held in the PBCom case, "[a] penalty charge does not belong to
the species of obligations enumerated in the mortgage, hence, the said
contract cannot be understood to secure the penalty";53while the mortgages
are the accessory contracts, what items are secured may only be determined
from the provisions of the mortgage contracts, and not from the Credit
Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees
should be maintained, given that in foreclosures, a lawyers work consists
merely in the preparation and filing of the petition, and involves minimal
study.54 To allow the imposition of a staggering P396,211.00 for such work
would be contrary to equity. Petitioners state that the purpose of attorneys
fees in cases of this nature "is not to give respondent a larger compensation
for the loan than the law already allows, but to protect it against any future
loss or damage by being compelled to retain counsel x x x to institute judicial
proceedings for the collection of its credit."55 And because the instant case
involves a simple extrajudicial foreclosure, attorneys fees may be equitably
tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest rates were
unilaterally fixed by it, taking relief in the CA pronouncement that petitioners
are deemed estopped by their failure to question the imposed rates and their
continued payment thereof without opposition. It adds that because the
Credit Agreement and promissory notes contained both an escalation clause
and a de-escalation clause, it may not be said that the bank violated the
principle of mutuality. Besides, the increase or decrease in interest rates
have been mutually agreed upon by the parties, as shown by petitioners
continuous payment without protest. Respondent adds that the alleged
unilateral imposition of interest rates is not a proper subject for review by the
Court because the issue was never raised in the lower court.
As for petitioners claim that interest rates imposed by it are null and void for
the reasons that 1) the Credit Agreements and the promissory notes were
signed in blank; 2) interest rates were at short periods; 3) no interest rates
could be charged where no agreement on interest rates was made in writing;
4) PNB fixed interest rates on the basis of arbitrary policies and standards
left to its choosing; and 5) interest rates based on prime rate plus applicable
spread are indeterminate and arbitrary PNB counters:
a. That Credit Agreements and promissory notes were signed by
petitioner[s] in blank Respondent claims that this issue was never
raised in the lower court. Besides, documentary evidence prevails
over testimonial evidence; Lydia Silos testimony in this regard is
self-serving, unsupported and uncorroborated, and for being the lone
evidence on this issue. The fact remains that these documents are in
proper form, presumed regular, and endure, against arbitrary claims
by Silos who is an experienced business person that she signed
questionable loan documents whose provisions for interest rates
were left blank, and yet she continued to pay the interests without
protest for a number of years.56
b. That interest rates were at short periods Respondent argues that
the law which governs and prohibits changes in interest rates made
more than once every twelve months has been removed57 with the
issuance of Presidential Decree No. 858.58
c. That no interest rates could be charged where no agreement on
interest rates was made in writing in violation of Article 1956 of the
Civil Code, which provides that no interest shall be due unless it has
been expressly stipulated in writing Respondent insists that the
stipulated 25% per annum as embodied in PN 9707237 should be
imposed during the interim, or the period after the loan became due
and while it remains unpaid, and not the legal interest of 12% as
claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary policies and
standards left to its choosing According to respondent, interest
rates were fixed taking into consideration increases or decreases as
provided by law or by the Monetary Board, the banks overall costs of
funds, and upon agreement of the parties.60
e. That interest rates based on prime rate plus applicable spread are
indeterminate and arbitrary On this score, respondent submits
there are various factors that influence interest rates, from political
events to economic developments, etc.; the cost of money,
profitability and foreign currency transactions may not be
discounted.61
On the issue of penalties, respondent reiterates the trial courts finding that
during pre-trial, petitioners admitted that the Statement of Account as of
October 12, 1998 which detailed and included penalty charges as part of
the total outstanding obligation owing to the bank was correct. Respondent
justifies the imposition and collection of a penalty as a normal banking
practice, and the standard rate per annum for all commercial banks, at the
time, was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that
matter is to ensure the performance of the obligation and substitute for
damages and the payment of interest in the event of non-compliance.62 And
the promissory note being the principal agreement as opposed to the
mortgage, which is a mere accessory should prevail. This being the case,
its inclusion as part of the secured amount in the mortgage agreements is
valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners
of pre-empting consolidation of its ownership over TCTs T-14250 and T-
16208; that petitioners filed Civil Case No. 5975 ostensibly to question the
foreclosure and sale of properties covered by TCTs T-14250 and T-16208 in
a desperate move to retain ownership over these properties, because they
failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No.
181046,63 where the propriety of the CAs ruling on the following issues is
squarely raised:
1. That the interest rate to be applied after the expiration of the first
30-day interest period for PN 9707237 should be 12% per annum;
and
2. That PNB should reimburse petitioners the excess in the bid price
of P377,505.99 which is the difference between the total amount due
to PNB and the amount of its bid price.
 Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function of the Court to
re-examine or re-evaluate evidence adduced by the parties in the
proceedings below. The rule admits of certain well-recognized exceptions,
though, as when the lower courts findings are not supported by the evidence
on record or are based on a misapprehension of facts, or when certain
relevant and undisputed facts were manifestly overlooked that, if properly
considered, would justify a different conclusion. This case falls within such
exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the
Courts First Division denying respondents petition in G.R. No. 181046, due
to late filing, failure to attach the required affidavit of service of the petition on
the trial court and the petitioners, and submission of a defective verification
and certification of non-forum shopping. On June 25, 2008, the Court issued
another Resolution denying with finality respondents motion for
reconsideration of the March 5, 2008 Resolution. And on August 15, 2008,
entry of judgment was made. This thus settles the issues, as above-stated,
covering a) the interest rate or 12% per annum that applies upon
expiration of the first 30 days interest period provided under PN 9707237,
and b)the CAs decree that PNB should reimburse petitioner the excess in
the bid price of P377,505.09.
It appears that respondents practice, more than once proscribed by the
Court, has been carried over once more to the petitioners. In a number of
decided cases, the Court struck down provisions in credit documents issued
by PNB to, or required of, its borrowers which allow the bank to increase or
decrease interest rates "within the limits allowed by law at any time
depending on whatever policy it may adopt in the future." Thus, in Philippine
National Bank v. Court of Appeals,64 such stipulation and similar ones were
declared in violation of Article 130865 of the Civil Code. In a second case,
Philippine National Bank v. Court of Appeals,66 the very same stipulations
found in the credit agreement and the promissory notes prepared and issued
by the respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future; Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest,
at any time without notice, beyond the stipulated rate of 12% but only "within
the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the
obligation secured by this mortgage as well as the interest on the amount
which may have been advanced by the MORTGAGEE, in accordance with
the provision hereof, shall be subject during the life of this contract to such an
increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner bank relied on
the escalation clause contained in their credit agreement which provides, as
follows:
The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future and provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684
which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after
Section 7, to read as follows:
Sec. 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 bylaw 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.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary
Board to prescribe the maximum rates of interest for loans and certain
forbearances. Pursuant to such authority, the Monetary Board issued Central
Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other
Financial Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges.
The rate of interest, including commissions, premiums, fees and other
charges, on any loan, or forbearance of any money, goods or credits,
regardless of maturity and whether secured or unsecured, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended.
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. In
Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545
(1991) we held
x x x The unilateral action of the PNB in increasing the interest rate on the
private respondents loan violated the mutuality of contracts ordained in
Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void . . . . Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will
during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker
partys (the debtor) participation being reduced to the alternative "to take it or
leave it" . . . . Such a contract is a veritable trap for the weaker party whom
the courts of justice must protect against abuse and imposition.67 (Emphases
supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court
invalidated the very same provisions in the respondents prepared Credit
Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising from
contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract
which appears to be heavily weighed in favor of one of the parties so as to
lead to an unconscionable result is void. Any stipulation regarding the validity
or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.
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.
Indeed, the interest rate which appears to have been agreed upon by the
parties to the contract in this case was the 21% rate stipulated in the interest
provision. Any doubt about this is in fact readily resolved by a careful reading
of the credit agreement because the same plainly uses the phrase "interest
rate agreed upon," in reference to the original 21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates
demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68%
is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire
principal (P7,735,004.66) which was applied to interest alone. By the time the
spouses tendered the amount of P40,142,518.00 in settlement of their
obligations; respondent bank was demanding P58,377,487.00 over and
above those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as
they are not solely potestative but based on reasonable and valid grounds.
Here, as clearly demonstrated above, not only [are] the increases of the
interest rates on the basis of the escalation clause patently unreasonable
and unconscionable, but also there are no valid and reasonable standards
upon which the increases are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement
and in the law requiring the parties to agree to changes in the interest rate in
writing, we hold that the unilateral and progressive increases imposed by
respondent PNB were null and void. Their effect was to increase the total
obligation on an eighteen million peso loan to an amount way over three
times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to
spur business cannot be disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the
above doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise
to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in
San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY
(P15,000.00), Philippine Currency, together with interest thereon at the rate
of 12% per annum until paid, which interest rate the Bank may at any time
without notice, raise within the limits allowed by law, and I/we also agree to
pay jointly and severally ____% per annum penalty charge, by way of
liquidated damages should this note be unpaid or is not renewed on due
dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made
subject to the condition that any and/or all extensions hereof that will leave
any portion of the amount still unpaid after 730 days shall automatically
convert the outstanding balance into a medium or long-term obligation as the
case may be and give the Bank the right to charge the interest rates
prescribed under its policies from the date the account was originally
granted.
To secure payment of the loan the parties executed a real estate mortgage
contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject
during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
xxxx
To begin with, PNBs argument rests on a misapprehension of the import of
the appellate courts ruling. The Court of Appeals nullified the interest rate
increases not because the promissory note did not comply with P.D. No.
1684 by providing for a de-escalation, but because the absence of such
provision made the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings &
Mortgage Bank v. Navarro that although P.D. No. 1684 is not to be
retroactively applied to loans granted before its effectivity, there must
nevertheless be a de-escalation clause to mitigate the one-sidedness of the
escalation clause. Indeed because of concern for the unequal status of
borrowers vis--vis the banks, our cases after Banco Filipino have fashioned
the rule that any increase in the rate of interest made pursuant to an
escalation clause must be the result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes
authorized PNB to increase the stipulated interest per annum" within the
limits allowed by law at any time depending on whatever policy [PNB] may
adopt in the future; Provided, that the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board." The real estate mortgage
likewise provided:
The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
Pursuant to these clauses, PNB successively increased the interest from
18% to 32%, then to 41% and then to 48%. This Court declared the
increases unilaterally imposed by [PNB] to be in violation of the principle of
mutuality as embodied in Art.1308 of the Civil Code, which provides that
"[t]he contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the
PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do
not bargain on equal footing, the weaker partys (the debtor) participation
being reduced to the alternative "to take it or leave it" (Qua vs. Law Union &
Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and
imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals.
The credit agreement in that case provided:
The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so
that what was originally 12% per annum became, after only two years, 42%.
In declaring the increases invalid, we held:
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.
Only recently we invalidated another round of interest increases decreed by
PNB pursuant to a similar agreement it had with other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular
905, nothing in the said circular could possibly be read as granting
respondent bank carte blanche authority to raise interest rates to levels
which would either enslave its borrowers or lead to a hemorrhaging of their
assets.
In this case no attempt was made by PNB to secure the conformity of private
respondents to the successive increases in the interest rate. Private
respondents assent to the increases can not be implied from their lack of
response to the letters sent by PNB, informing them of the increases. For as
stated in one case, no one receiving a proposal to change a contract is
obliged to answer the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders
Construction, Inc. v. Philippine National Bank,72 thus
Courts have the authority to strike down or to modify provisions in promissory
notes that grant the lenders unrestrained power to increase interest rates,
penalties and other charges at the latters sole discretion and without giving
prior notice to and securing the consent of the borrowers. This unilateral
authority is anathema to the mutuality of contracts and enable lenders to take
undue advantage of borrowers. Although the Usury Law has been effectively
repealed, courts may still reduce iniquitous or unconscionable rates charged
for the use of money. Furthermore, excessive interests, penalties and other
charges not revealed in disclosure statements issued by banks, even if
stipulated in the promissory notes, cannot be given effect under the Truth in
Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses
Rocamora,74 the above pronouncements were reiterated to debunk PNBs
repeated reliance on its invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez
and the 1996 case of PNB v. CA and Spouses Basco. Taking no heed of
these rulings, the escalation clause PNB used in the present case to justify
the increased interest rates is no different from the escalation clause assailed
in the 1996 PNB case; in both, the interest rates were increased from the
agreed 12% per annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNBs argument that the spouses
Rocamoras failure to contest the increased interest rates that were
purportedly reflected in the statements of account and the demand letters
sent by the bank amounted to their implied acceptance of the increase
should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the
increased interest rates prompted the lower courts to declare excessive and
illegal the interest rates imposed. Togo around this lower court finding, PNB
alleges that the P206,297.47 deficiency claim was computed using only the
original 12% per annum interest rate. We find this unlikely. Our examination
of PNBs own ledgers, included in the records of the case, clearly indicates
that PNB imposed interest rates higher than the agreed 12% per annum rate.
This confirmatory finding, albeit based solely on ledgers found in the records,
reinforces the application in this case of the rule that findings of the RTC,
when affirmed by the CA, are binding upon this Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar
provisions found in respondents credit agreements and promissory notes.
Thus, the July 1989 Credit Agreement executed by petitioners and
respondent contained the following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5%
[per annum]. Interest shall be payable in advance every one hundred twenty
days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the
Loan depending on whatever policy the Bank may adopt in the future,
including without limitation, the shifting from the floating interest rate system
to the fixed interest rate system, or vice versa. Where the Bank has imposed
on the Loan interest at a rate per annum which is equal to the Banks spread
over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time depending on whatever
policy it may adopt in the future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB the
right to increase or reduce interest rates "within the limits allowed by law or
the Monetary Board"77 and the Real Estate Mortgage agreement included the
same right to increase or reduce interest rates "at any time depending on
whatever policy PNB may adopt in the future."78
On the basis of the Credit Agreement, petitioners issued promissory notes
which they signed in blank, and respondent later on entered their
corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 19.5%;
2nd Promissory Note dated November 22, 1989 23%;
3rd Promissory Note dated March 21, 1990 22%;
4th Promissory Note dated July 19, 1990 24%;
5th Promissory Note dated December 17, 1990 28%;
6th Promissory Note dated February 14, 1991 32%;
7th Promissory Note dated March 1, 1991 30%; and
8th Promissory Note dated July 11, 1991 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement
contains the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date
of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each
Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed
and signed the following promissory notes in blank, for the respondent to
later on enter the corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 26%;
10th Promissory Note dated March 19, 1992 25%;
11th Promissory Note dated July 11, 1992 23%;
12th Promissory Note dated November 10, 1992 21%;
13th Promissory Note dated March 15, 1993 21%;
14th Promissory Note dated July 12, 1993 17.5%;
15th Promissory Note dated November 17, 1993 21%;
16th Promissory Note dated March 28, 1994 21%;
17th Promissory Note dated July 13, 1994 21%;
18th Promissory Note dated November 16, 1994 16%;
19th Promissory Note dated April 10, 1995 21%;
20th Promissory Note dated July 19, 1995 18.5%;
21st Promissory Note dated December 18, 1995 18.75%;
22nd Promissory Note dated April 22, 1996 18.5%;
23rd Promissory Note dated July 22, 1996 18.5%;
24th Promissory Note dated November 25, 1996 18%;
25th Promissory Note dated May 30, 1997 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest
at the "rate the Bank may at any time without notice, raise within the limits
allowed by law x x x."82 On the other hand, the 18th up to the 26th
promissory notes which includes PN 9707237 carried the following
provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated
may be increased or decreased for the subsequent Interest Periods, with
prior notice to the Borrower in the event of changes in interest rate
prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Banks overall cost of funds. I/We hereby agree that in
the event I/we are not agreeable to the interest rate fixed for any Interest
Period, I/we shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting
Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous
cases. The common denominator in these cases is the lack of agreement of
the parties to the imposed interest rates. For this case, this lack of consent
by the petitioners has been made obvious by the fact that they signed the
promissory notes in blank for the respondent to fill. We find credible the
testimony of Lydia in this respect. Respondent failed to discredit her; in fact,
its witness PNB Kalibo Branch Manager Aspa admitted that interest rates
were fixed solely by its Treasury Department in Manila, which were then
simply communicated to all PNB branches for implementation. If this were
the case, then this would explain why petitioners had to sign the promissory
notes in blank, since the imposable interest rates have yet to be determined
and fixed by respondents Treasury Department in Manila.
Moreover, in Aspas enumeration of the factors that determine the interest
rates PNB fixes such as cost of money, foreign currency values, bank
administrative costs, profitability, and considerations which affect the banking
industry it can be seen that considerations which affect PNBs borrowers
are ignored. A borrowers current financial state, his feedback or opinions,
the nature and purpose of his borrowings, the effect of foreign currency
values or fluctuations on his business or borrowing, etc. these are not
factors which influence the fixing of interest rates to be imposed on him.
Clearly, respondents method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money,
bank costs, etc. is arbitrary for there is no fixed standard or margin above or
below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review
does not render the imposition by UCPB of interest rates on the obligations
of the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or
decreased by the LENDER considering among others the prevailing financial
and monetary conditions; or the rate of interest and charges which other
banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was
given [to] UCPB alone as the lender. Moreover, UCPB may apply the
considerations enumerated in this provision as it wishes. As worded in the
above provision, UCPB may give as much weight as it desires to each of the
following considerations: (1) the prevailing financial and monetary
condition;(2) the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or(3)
the resulting profitability to the LENDER (UCPB) after due consideration of all
dealings with the BORROWER (the spouses Beluso). Again, as in the case
of the interest rate provision, there is no fixed margin above or below these
considerations.
In view of the foregoing, the Separability Clause cannot save either of the
two options of UCPB as to the interest to be imposed, as both options violate
the principle of mutuality of contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any modification in
the contract, such as the interest rates, must be made with the consent of the
contracting parties.1wphi1 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 agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in
question no longer provide that the parties shall agree upon the interest rate
to be fixed; -instead, they are worded in such a way that the borrower shall
agree to whatever interest rate respondent fixes. In credit agreements
covered by the above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future: Provided, that, the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease in maximum interest rate.85 (Emphasis
supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the
Loan depending on whatever policy the Bank may adopt in the future,
including without limitation, the shifting from the floating interest rate system
to the fixed interest rate system, or vice versa. Where the Bank has imposed
on the Loan interest at a rate per annum, which is equal to the Banks spread
over the current floating interest rate, the Borrower hereby agrees that the
Bank may, without need of notice to the Borrower, increase or decrease its
spread over the floating interest rate at any time depending on whatever
policy it may adopt in the future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on
each Availment from date of each Availment up to but not including the date
of full payment thereof at the rate per annum which is determined by the
Bank to be prime rate plus applicable spread in effect as of the date of each
Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or
agreement by the borrower is now completely lacking, which makes
respondents unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not apply
to them, for "[e]stoppel cannot be predicated on an illegal act. As between
the parties to a contract, validity cannot be given to it by estoppel if it is
prohibited by law or is against public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or
Republic Act No. 3765, which was enacted "to protect x x x citizens from a
lack of awareness of the true cost of credit to the user by using a full
disclosure of such cost with a view of preventing the uninformed use of credit
to the detriment of the national economy."89 The law "gives a detailed
enumeration of the specific information required to be disclosed, among
which are the interest and other charges incident to the extension of
credit."90 Section 4 thereof provides that a disclosure statement must be
furnished prior to the consummation of the transaction, thus:
SEC. 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
trade-in;
(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.
Under Section 4(6), "finance charge" represents the amount to be paid by the
debtor incident to the extension of credit such as interest or discounts,
collection fees, credit investigation fees, attorneys fees, and other service
charges. The total finance charge represents the difference between (1) the
aggregate consideration (down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory
notes in blank, and then unilaterally filling them up later on, respondent
violated the Truth in Lending Act, and was remiss in its disclosure
obligations. In one case, which the Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies
of the subject promissory notes after their execution, then they were duly
notified of the terms thereof, in substantial compliance with the Truth in
Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly
provides that the disclosure statement must be furnished prior to the
consummation of the transaction:
SEC. 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
trade-in;
(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.
The rationale of this provision is 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. Upholding UCPBs claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true
cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.
In addition, 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.92(Emphases supplied)
However, the one-year period within which an action for violation of the Truth
in Lending Act may be filed evidently prescribed long ago, or sometime in
2001, one year after petitioners received the March 2000 demand letter
which contained the illegal charges.
The fact that petitioners later received several statements of account
detailing its outstanding obligations does not cure respondents breach. To
repeat, the belated discovery of the true cost of credit does not reverse the ill
effects of an already consummated business decision. 93
Neither may the statements be considered proposals sent to secure the
petitioners conformity; they were sent after the imposition and application of
the interest rate, and not before. And even if it were to be presumed that
these are proposals or offers, there was no acceptance by petitioners. "No
one receiving a proposal to modify a loan contract, especially regarding
interest, is obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened"
with, offers of low initial interest rates, but actually accompanied by
provisions written in fine print that allow lenders to later on increase or
decrease interest rates unilaterally, without the consent of the borrower, and
depending on complex and subjective factors. Because they have been lured
into these contracts by initially low interest rates, borrowers get caught and
stuck in the web of subsequent steep rates and penalties, surcharges and
the like. Being ordinary individuals or entities, they naturally dread legal
complications and cannot afford court litigation; they succumb to whatever
charges the lenders impose. At the very least, borrowers should be charged
rightly; but then again this is not possible in a one-sided credit system where
the temptation to abuse is strong and the willingness to rectify is made weak
by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondents
argument that in every repricing of petitioners loan availment, they are given
the right to question the interest rates imposed. The import of respondents
line of reasoning cannot be other than that if one out of every hundred
borrowers questions respondents practice of unilaterally fixing interest rates,
then only the loan arrangement with that lone complaining borrower will enjoy
the benefit of review or re-negotiation; as to the 99 others, the questionable
practice will continue unchecked, and respondent will continue to reap the
profits from such unscrupulous practice. The Court can no more condone a
view so perverse. This is exactly what the Court meant in the immediately
preceding cited case when it said that "the belated discovery of the true cost
of credit does not reverse the ill effects of an already consummated business
decision;"95 as to the 99 borrowers who did not or could not complain, the
illegal act shall have become a fait accompli to their detriment, they have
already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates
imposed is, under the circumstances, irrelevant; we have a situation where
the petitioners do not stand on equal footing with the respondent. It is
doubtful that any borrower who finds himself in petitioners position would
dare question respondents power to arbitrarily modify interest rates at any
time. In the second place, on what basis could any borrower question such
power, when the criteria or standards which are really one-sided, arbitrary
and subjective for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in
the 18th up to the 26th promissory notes, petitioners are granted the option
to prepay the loan or credit facility without penalty within 10 calendar days
from the Interest Setting Date if they are not agreeable to the interest rate
fixed. It has been shown that the promissory notes are executed and signed
in blank, meaning that by the time petitioners learn of the interest rate, they
are already bound to pay it because they have already pre-signed the note
where the rate is subsequently entered.
Besides, premium may not be placed upon a stipulation in a contract which
grants one party the right to choose whether to continue with or withdraw
from the agreement if it discovers that what the other party has been doing
all along is improper or illegal.
Thus said, respondents arguments relative to the credit documents that
documentary evidence prevails over testimonial evidence; that the credit
documents are in proper form, presumed regular, and endure, against
arbitrary claims by petitioners, experienced business persons that they are,
they signed questionable loan documents whose provisions for interest rates
were left blank, and yet they continued to pay the interests without protest for
a number of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is
annulled, the principal amount of the loan is subject to the original or
stipulated rate of interest, and upon maturity, the amount due shall be subject
to legal interest at the rate of 12% per annum. This is the uniform ruling
adopted in previous cases, including those cited here.96 The interests paid by
petitioners should be applied first to the payment of the stipulated or legal
and unpaid interest, as the case may be, and later, to the capital or
principal.97 Respondent should then refund the excess amount of interest
that it has illegally imposed upon petitioners; "[t]he amount to be refunded
refers to that paid by petitioners when they had no obligation to do
so."98 Thus, the parties original agreement stipulated the payment of 19.5%
interest; however, this rate was intended to apply only to the first promissory
note which expired on November 21, 1989 and was paid by petitioners; it
was not intended to apply to the whole duration of the loan. Subsequent
higher interest rates have been declared illegal; but because only the rates
are found to be improper, the obligation to pay interest subsists, the same to
be fixed at the legal rate of 12% per annum. However, the 12% interest shall
apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of
interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery
Frames99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any
installment thereon, when due, shall constitute default, and a penalty charge
of 24% per annum based on the defaulted principal amount shall be
imposed. Petitioners claim that this penalty should be excluded from the
foreclosure amount or bid price because the Real Estate Mortgage and the
Supplement thereto did not specifically include it as part of the secured
amount. Respondent justifies its inclusion in the secured amount, saying that
the purpose of the penalty or a penal clause is to ensure the performance of
the obligation and substitute for damages and the payment of interest in the
event of non-compliance.100 Respondent adds that the imposition and
collection of a penalty is a normal banking practice, and the standard rate per
annum for all commercial banks, at the time, was 24%. Its inclusion as part of
the secured amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be included as
part of the secured amount. Having found the credit agreements and
promissory notes to be tainted, we must accord the same treatment to the
mortgages. After all, "[a] mortgage and a note secured by it are deemed
parts of one transaction and are construed together."101 Being so tainted and
having the attributes of a contract of adhesion as the principal credit
documents, we must construe the mortgage contracts strictly, and against
the party who drafted it. An examination of the mortgage agreements reveals
that nowhere is it stated that penalties are to be included in the secured
amount. Construing this silence strictly against the respondent, the Court can
only conclude that the parties did not intend to include the penalty allowed
under PN 9707237 as part of the secured amount. Given its resources,
respondent could have if it truly wanted to conveniently prepared and
executed an amended mortgage agreement with the petitioners, thereby
including penalties in the amount to be secured by the encumbered
properties. Yet it did not.
With regard to attorneys fees, it was plain error for the CA to have passed
upon the issue since it was not raised by the petitioners in their appeal; it was
the respondent that improperly brought it up in its appellees brief, when it
should have interposed an appeal, since the trial courts Decision on this
issue is adverse to it. It is an elementary principle in the subject of appeals
that an appellee who does not himself appeal cannot obtain from the
appellate court any affirmative relief other than those granted in the decision
of the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal
be permitted to make counter assignments of error in ordinary actions, when
the purpose is merely to defend himself against an appeal in which errors are
alleged to have been committed by the trial court both in the appreciation of
facts and in the interpretation of the law, in order to sustain the judgment in
his favor but not when his purpose is to seek modification or reversal of the
judgment, in which case it is necessary for him to have excepted to and
appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorneys fees, the
CA possessed no authority to pass upon it at the instance of respondent. The
ruling of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties to the
respondent as creditor and to the petitioners who are entitled to a refund as a
consequence of overpayment considering that they paid more by way of
interest charges than the 12% per annum 103 herein allowed the case
should be remanded to the lower court for proper accounting and
computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed
proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th
promissory notes) shall carry an interest rate of only 12% per
annum.104 Thus, interest payment made in excess of 12% on the 2nd
promissory note shall immediately be applied to the principal, and
the principal shall be accordingly reduced. The reduced principal
shall then be subjected to the 12%105 interest on the 3rd promissory
note, and the excess over 12% interest payment on the 3rd
promissory note shall again be applied to the principal, which shall
again be reduced accordingly. The reduced principal shall then be
subjected to the 12% interest on the 4th promissory note, and the
excess over12% interest payment on the 4th promissory note shall
again be applied to the principal, which shall again be reduced
accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be
able to conclude if petitioners a) still have an OUTSTANDING
BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND
ABOVE THEIR TOTAL OBLIGATION (principal and interest);
4. Such outstanding balance/obligation, if there be any, shall then be
subjected to a 12% per annum interest from October 28, 1997 until
January 14, 1999, which is the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24%
per annum penalty from August 14, 1997 until January 14, 1999. But
from this total penalty, the petitioners previous payment of penalties
in the amount of P202,000.00made on January 27, 1998106 shall be
DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.),
and the final and executory award of 1% attorneys fees shall be
ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1%
attorneys fees (6.) shall be DEDUCTED from the bid price
of P4,324,172.96. The penalties (5.) are not included because they
are not included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the
outstanding balance (3.), interest (4.), and 1% attorneys fees (6.)]
shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-
14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.),
it turns out that petitioners made an OVERPAYMENT, the interest
(4.), penalties (5.), and the award of 1% attorneys fees (6.) shall be
DEDUCTED from the overpayment. There is no outstanding
balance/obligation precisely because petitioners have paid beyond
the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.),
penalties (5.), and award of 1% attorneys fees (6.), the excess shall
be RETURNED to the petitioners, with legal interest, under the
principle of solutio indebiti;107
12. Likewise, if the overpayment exceeds the total amount of interest
(4.) and award of 1% attorneys fees (6.), the trial court shall
INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1%
attorneys fees (6.) exceed petitioners overpayment, then the excess
shall be DEDUCTED from the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the
interest (4.) and 1% attorneys fees (6.)] shall be DELIVERED TO
THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-
14250 and T-16208. The outstanding penalties, if any, shall be
collected by other means.
From the above, it will be seen that if, after proper accounting, it
turns out that the petitioners made payments exceeding what they
actually owe by way of principal, interest, and attorneys fees, then
the mortgaged properties need not answer for any outstanding
secured amount, because there is not any; quite the contrary,
respondent must refund the excess to petitioners.1wphi1 In such
case, the extrajudicial foreclosure and sale of the properties shall be
declared null and void for obvious lack of basis, the case being one
of solutio indebiti instead. If, on the other hand, it turns out that
petitioners overpayments in interests do not exceed their total
obligation, then the respondent may consolidate its ownership over
the properties, since the period for redemption has expired. Its only
obligation will be to return the difference between its bid price
(P4,324,172.96) and petitioners total obligation outstanding except
penalties after applying the latters overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8,
2007 Decision of the Court of Appeals in CA-G.R. CV No. 79650 is
ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th
Promissory Notes are DECLARED NULL AND VOID, and such
notes shall instead be subject to interest at the rate of twelve percent
(12%) per annum up to June 30, 2013, and starting July 1, 2013, six
percent (6%) per annum until full satisfaction;
 2. The penalty charge imposed in Promissory Note No. 9707237
shall be EXCLUDED from the amounts secured by the real estate
mortgages;

3. The trial courts award of one per cent (1%) attorneys fees is
REINSTATED;

4. The case is ordered REMANDED to the Regional Trial Court,

Branch 6 of Kalibo, Aklan for the computation of overpayments made
by petitioners spouses Eduardo and Lydia Silos to respondent
Philippine National Bank, taking into consideration the foregoing
dispositions, and applying the procedure hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination

as to the validity of the extrajudicial foreclosure and sale, declaring
the same null and void in case of overpayment and ordering the
release and return of Transfer Certificates of Title Nos. T-14250 and
TCT T-16208 to petitioners, or ordering the delivery to the petitioners
of the difference between the bid price and the total remaining
obligation of petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is

ENJOINED from consolidating title to Transfer Certificates of Title
Nos. T-14250 and T-16208 until all the steps in the procedure above
set forth have been taken and applied;

7. The reimbursement of the excess in the bid price of P377,505.99,

which respondent Philippine National Bank is ordered to reimburse
petitioners, should be HELD IN ABEYANCE until the true amount
owing to or owed by the parties as against each other is determined;

8. Considering that this case has been pending for such a long time
and that further proceedings, albeit uncomplicated, are required, the
trial court is ORDERED to proceed with dispatch.

SO ORDERED.
 [G.R. No. 88880. April 30, 1991.]
PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF
APPEALS and AMBROSIO PADILLA, Respondents.
The Chief Legal Counsel for Petitioner.
Ambrosio Padilla, Mempin & Reyes Law Offices for Private Respondent.
DECISION
GRIO-AQUINO, J.:
The Philippine National Bank (PNB) has appealed by certiorari from the
decision promulgated on June 27, 1989 by the Court of Appeals in CA-G.R.
CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-appellant versus
PHILIPPINE NATIONAL BANK, defendant-appellee," reversing the decision
of the trial court which had dismissed the private respondents complaint "to
annul interest increases." (p. 32, Rollo.) The Court of Appeals rendered
judgment:jgc:chanrobles.com.ph
". . . declaring the questioned increases of interest as unreasonable,
excessive and arbitrary and ordering the defendant-appellee [PNB] to refund
to the plaintiff-appellant the amount of interest collected from July, 1984 in
excess of twenty-four percent (24%) per annum. Costs against the
defendant-appellee." (pp 14-15, Rollo.)
In July 1982, the private respondent applied for, and was granted by
petitioner PNB, a credit line of 321.8 million, secured by a real estate
mortgage, for a term of two (2) years, with 18% interest per annum. Private
respondent executed in favor of the PNB a Credit Agreement, two (2)
promissory notes in the amount of P900,000.00 each, and a Real Estate
Mortgage Contract.
The Credit Agreement provided that
"9.06 Other Conditions. The Borrowers hereby agree to be bound by the
rules and regulations of the Central Bank and the current and general
policies of the Bank and those which the Bank may adopt in the future, which
may have relation to or in any way affect the Line, which rules, regulations
and policies are incorporated herein by reference as if set forth herein in full.
Promptly upon receipt of a written request from the Bank, the Borrowers shall
execute and deliver such documents and instruments, in form and substance
satisfactory to the Bank, in order to effectuate or otherwise comply with such
rules, regulations and policies." (p. 85, Rollo.)
The Promissory Notes, in turn, uniformly authorized the PNB to increase the
stipulated 18% interest per annum "within the limits allowed by law at any
time depending on whatever policy it [PNB] may adopt in the future;
Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced
by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis ours.)
The Real Estate Mortgage Contract likewise provided
that:jgc:chanrobles.com.ph
"(k) INCREASE OF INTEREST RATE
"The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors." (p. 86, Rollo;Emphasis supplied.)
Four (4) months advance interest and incidental expenses/charges were
deducted from the loan, the net proceeds of which were released to the
private respondent by crediting or transferring the amount to his current
account with the bank.chanrobles.com : virtual law library
On June 20, 1984, PNB informed the private respondent that (1) his credit
line of P1.8 million "will expire on July 4, 1984," (2)" [i]f renewal of the line for
another year is intended, please submit soonest possible your request," and
(3) the "present policy of the Bank requires at least 30% reduction of
principal before your line can be renewed." (pp. 86-87, Rollo.) Complying,
private respondent on June 25, 1984, paid PNB P540,000 00 (30% of P1.8
million) and requested that "the balance of P1,260,000.00 be renewed for
another period of two (2) years under the same arrangement" and that "the
increase of the interest rate of my mortgage loan be from 18% to 21%" (p.
87, Rollo.).
On July 4, 1984, private respondent paid PNB P360,000.00.
On July 18, 1984, private respondent reiterated in writing his request that
"the increase in the rate of interest from 18% be fixed at 21% of 24%. (p. 87,
Rollo.)
On July 26, 1984, private respondent made an additional payment of
P100,000.
On August 10, 1984, PNB informed private respondent that "we can not give
due course to your request for preferential interest rate in view of the
following reasons: Existing Loan Policies of the bank requires 32% for loan of
more than one year; our present cost of funds has substantially increased."
(pp. 8788, Rollo.)
On August 17, 1984, private respondent further paid PNB P150,000.00.
In a letter dated August 24, 1984 to PNB, private respondent announced that
he would "continue making further payments, and instead of a loan of more
than one year, I shall pay the said loan before the lapse of one year or
before July 4, 1985. . . . I reiterate my request that the increase of my rate of
interest from 18% be fixed at 21% or 24%." (p. 88, Rollo.)
On September 12, 1984, private respondent paid PNB P160,000.00.
In letters dated September 12, 1984 and September 13, 1984, PNB informed
private respondent that "the interest rate on your outstanding line/loan is
hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%) effective
September 6, 1984;" and further explained "why we can not grant your
request for a lower rate of 21% or 24%." (pp. 88-89, Rollo.)
In a letter dated September 24, 1984 to PNB, private respondent registered
his protest against the increase of interest rate from 18% to 32% on July 4,
1984 and from 32% to 41% on September 6, 1984.
On October 15, 1984, private respondent reiterated his request that the
interest rate should not be increased from 18% to 32% and from 32% to
41%. He also attached (as payment) a check for
P140,000.00.chanrobles.com.ph : virtual law library
Like rubbing salt on the private respondents wound, the petitioner informed
private respondent on October 29, 1984, that "the interest rate on your
outstanding line/loan is hereby adjusted from 41% p.a. to 48% p.a. (42%
prime rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.)
In November 1984, private respondent paid PNB P50,000.00 thus reducing
his principal loan obligation to P300,000.00.
On December 18, 1984, private respondent filed in the Regional Trial Court
of Manila a complaint against PNB entitled, "AMBROSIO PADILLA v.
PHILIPPINE NATIONAL BANK" (Civil Case No. 84-28391), praying that
judgment be rendered:jgc:chanrobles.com.ph
"a. Declaring that the unilateral increase of interest rates from 18% to 32%,
then to 41% and again to 48% are illegal, not valid nor binding on plaintiff,
and that an adjustment of his interest rate from 18% to 24% is reasonable,
fair and just;
"b. The interest rate on the P900,000.00 released on September 27, 1982 be
counted from said date and not from July 4, 1984;
"c. The excess of interest payment collected by defendant bank by debiting
plaintiffs current account be refunded to plaintiff or credited to his current
account;
"d. Pending the determination of the merits of this case, a restraining order
and or a writ of preliminary injunction be issued (1) to restrain and or enjoin
defendant bank for [sic] collecting from plaintiff and/or debiting his current
account with illegal and excessive increases of interest rates; and (2) to
prevent defendant bank from declaring plaintiff in default for non-payment
and from instituting any foreclosure proceeding, extrajudicial or judicial, of the
valuable commercial property of plaintiff." (pp. 89-90, Rollo.)
In its answer to the complaint, PNB denied that the increases in interest rates
were illegal, unilateral excessive and arbitrary and recited the reasons
justifying said increases.
On March 31, 1985, the private respondent paid the P300,000 balance of his
obligation to PNBN (Exh. 5).
The trial court rendered judgment on April 14, 1986, dismissing the complaint
because the increases of interest were properly made.
The private respondent appealed to the Court of Appeals. On June 27, 1989,
the Court of Appeals reversed the trial court, hence, NBs recourse to this
Court by a petition for review under Rule 45 of the Rules of Court.
The assignments of error raised in PNBs petition for review can be resolved
into a single legal issue of whether the bank, within the term of the loan
which it granted to the private respondent, may unilaterally change or
increase the interest rate stipulated therein at will and as often as it pleased.
The answer to that question is no.
In the first place, although Section 2, PD. No. 116 of January 29, 1973,
authorizes the Monetary Board to prescribe the maximum rate or rates of
interest for loans or renewal thereof and to change such rate or rates
whenever warranted by prevailing economic and social conditions, it
expressly provides that "such changes shall not be made oftener than once
every twelve months."cralaw virtua1aw library
In this case, PNB, over the objection of the private respondent, and without
authority from the Monetary Board, within a period of only four (4) months,
increased the 18% interest rate on the private respondents loan obligation
three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c)
to 48% in November 1984. Those increases were null and void, for if the
Monetary Board itself was not authorized to make such changes oftener than
once a year, even less so may a bank which is subordinate to the
Board.chanrobles law library : red
Secondly, as pointed out by the Court of Appeals, while the private
respondent-debtor did agree in the Deed of Real Estate Mortgage (Exh. 5)
that the interest rate may be increased during the life of the contract "to such
increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe" (Exh. 5-e-1) or "within the limits allowed by
law" (Promissory Notes, Exs. 2, 3, and 4), no law was ever passed in July to
November 1984 increasing the interest rates on loans or renewals thereof to
32%, 41% and 48% (per annum), and no documents were executed and
delivered by the debtor to effectuate the increases. The Court of Appeals
observed.
". . . We focus Our attention first of all on the agreement between the parties
as embodied in the following instruments, to wit: (1) Exhibit 1 Credit
Agreement dated July 1, 1982; (2) Exhibit 2 Promissory Note dated July
5, 1982; (3) Exhibit (3) Promissory Note dated January 3, 1983; (4)
Exhibit 4 Promissory Note, dated December 13, 1983; and (5) Exhibit 5
Real Estate Mortgage contract dated July 1, 1982.
"Exhibit 1 states in its portion marked Exhibit 1-g-1:chanrob1es virtual 1aw
library
9 .06 Other Conditions. The Borrowers hereby agree to be bound by the
rules and regulations of the Central Bank and the current and general
policies of the Bank and those which the Bank may adopt in the future, which
may have relation to or in any way affect the Line, which rules, regulations
and policies are incorporated herein by reference as if set forth herein in full.
Promptly upon receipt of a written request from the Bank, the Borrowers shall
execute and deliver such documents and instruments, in form and substance
satisfactory to the Bank, in order to effectuate or otherwise comply with such
rules, regulations and policies.
"Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, "It is now clear that from March 17, 1980, escalation clauses to be valid
3-B, and 4-B uniformly authorize the defendant bank to increase the
stipulated interest rate of 18% per annum within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided,
that, the interest rate on this note shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or by the
Monetary Board.
"Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates:chanrob1es virtual
1aw library
(k) INCREASE OF INTEREST RATE
The rate of interest charged on the obligation secured by this mortgage as
well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provisions hereof, shall be subject
during the life of this contract to such an increase within the rate allowed by
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
"Clearly, then, the agreement between the parties authorized the defendant
bank to increase the interest rate beyond the original rate of 18% per annum
but within the limits allowed by law or within the rate allowed by law, it
being declared the obligation of the plaintiff as borrower to execute and
deliver the corresponding documents and instruments to effectuate the
increase." (pp. 11-12, Rollo.)
In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346
(1987), this Court disauthorized the bank from raising the interest rate on the
borrowers loan from 12% to 17% despite an escalation clause in the loan
agreement signed by the debtors authorizing Banco Filipino "to
correspondingly increase the interest rate stipulated in this contract without
advance notice to me/us in the event a law should be enacted increasing the
lawful rates of interest that may be charged on this particular kind of loan."
(Emphasis supplied.)chanrobles virtual lawlibrary
In the Banco Filipino case, the bank relied on Section 3 of CB Circular No.
494 dated July 1, 1976 (72 O.G. No. 3, p. 676-J) which provided that "the
maximum rate of interest, including commissions premiums, fees and other
charges on loans with a maturity of more than 730 days by banking institution
. . . shall be 19%."cralaw virtua1aw library
This Court disallowed the increase for the simple reason that said "Circular
No. 494, although it has the effect of law is not a law." Speaking through
Mme. Justice Ameurfina M. Herrera, this Court held:jgc:chanrobles.com.ph
should specifically provide: (1) that there can be an increase in interest if
increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the
stipulated interest in the event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board." p. 111, Rollo.).
In the present case, the PNB relied on its own Board Resolution No. 681
(Exh. 10), PNB Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-
129-84 (Exh. 15), but those resolution and circulars are neither laws nor
resolutions of the Monetary Board.
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling
on interest rates
". . . increases in interest rates are not subject to any ceiling prescribed by
the Usury Law."cralaw virtua1aw library
but it did not authorize the PNB, or any bank for that matter, to unilaterally
and successively increase the agreed interest rates from 18% to 48% within
a span of four (4) months, in violation of PD. 116 which limits such changes
to "once every twelve months."cralaw virtua1aw library
be due unless it has been expressly stipulated in writing."cralaw virtua1aw
library
The debtor herein never agreed in writing to pay the interest increases fixed
by the PNB beyond 24% per annum, hence, he is not bound to pay a higher
rate than that.
That an increase in the interest rate from 18% to 48% within a period of four
(4) months is excessive, as found by the Court of Appeals, is indisputable.
WHEREFORE, finding no reversible error in the decision of the Court of
Appeals in CA-G.R. CV No. 09791, the Court resolved to deny the petition for
review for lack of merit, with costs against the petitioner.
SO ORDERED.

Besides violating PD. 116, the unilateral action of the PNB in increasing the
interest rate on the private respondents loan, violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:jgc:chanrobles.com.ph

"ART. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them."cralaw virtua1aw library

In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement between the
PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do
not bargain on equal footing, the weaker partys (the debtor) participation
being reduced to the alternative "to take it or leave it" (Qua v. Law Union &
Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and
imposition.

PNBS successive increases of the interest rate on the private respondents

loan, over the latters protest, were arbitrary as they violated an express
provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may
be amended only by an instrument in writing signed by the party to be bound
as burdened by such amendment." The increases imposed by PNB also
contravene Art. 1956 of the Civil Code which provides that "no interest shall
 [G.R. No. 113926. October 23, 1996]
SECURITY BANK AND TRUST COMPANY, petitioner, vs. REGIONAL
TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL
EUSEBIO and LEILA VENTURA, respondents.
DECISION
HERMOSISIMA, JR., J.:
Questions of law which are the first impression are sought to be resolved
in this case: Should the rate of interest on a loan or forbearance of money,
goods or credits, as stipulated in a contract, far in excess of the ceiling
prescribed under or pursuant to the Usury Law, prevail over Section 2 of
Central Bank Circular No. 905 which prescribes that the rate of interest thereof
shall continue to be 12% per annum? Do the Courts have the discretion to
arbitrarily override stipulated interest rates of promissory notes and stipulated
interest rates of promissory notes and thereby impose a 12% interest on the
loans, in the absence of evidence justifying the impositions of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the
decision of Honorable Judge Fernando V. Gorospe of the Regional Trial Court
of Makati, Branch 61, datedMarch 30, 1993, which found private respondent
Eusebio liable to petitioner for a sum of money. Interest was lowered by the
court a quo from 23% per annum as agreed upon by the parties to 12% per
annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed
Promissory Note No. TL/74/178/83 in favor of petitioner Security Bank and
Trust Co. (SBTC) in the total amount of One Hundred Thousand Pesos
(P100,000.00) payable in six monthly installments with a stipulated interest of
23% per annum up to the fifth installments.[1]
On July 28, 1983, respondent Eusebio again executed Promissory note
No TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to
pay the sum of One Hundred Thousand Pesos (P100.000.00) in six (6)
monthly installments plus 23% interest per annum.[2]
Finally, another Promissory Note No. TL74/1491/83 was executed
on August 31, 1983 in the amount of Sixty Five Thousand Pesos
(P65,000.00). Respondent agreed to pay this note in six (6) monthly
installments plus interest at the rate of 23% per annum.[3]
On all the abovementioned notes, private respondents Leila Ventura had
signed as co-maker.[4]
Upon maturity which fell on the different dates below, the principal
balance remaining on the notes stood at:
1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the aforestated
balance payable, a collectible case was filed in court by petitioner
SBTC.[5] On March 30, 1993, the court a quo rendered a judgment in favor of
petitioner SBTC, the dispositive portion which reads:
WHEREFORE, premises above-considered, and plaintiffs claim having been duly
proven, judgment is hereby rendered in favor of plaintiff and as against defendant
Eusebio who is hereby ordered to:
1. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27 September
1983, until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August
1983, until fully paid;
3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August
1983, until fully paid;
4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as
and by way of attorneys fees; and to
5. Pay the cost of this suit.
SO ORDERED.[6]
On August 6, 1993, a motion for partial reconsideration was filed by
petitioner SBTC contending that:
(1) the interest rate agreed upon by the parties during the signing of
the promissory notes was 23% per annum;
(2) the interests awarded should be compounded quarterly from due
date as provided in three (3) promissory notes;
 (3) defendant Leila Ventura should likewise be held liable to pay the
balance on the promissory notes since she has signed as co-maker and
as such, is liable jointly and severally with defendant Eusebio without a
need for demand upon her.[7]
Consequently, an Order was issued by the court a quo denying the
motion to grant the rates of interest beyond 12% per annum; and holding
defendant Leila Ventura jointly and severally liable with co-defendant Eusebio.
Hence, this petition.
The sole issue to be settled in this petition is whether or not the 23% rate
of interest per annum agreed upon by petitioner bank and respondents is
allowable and not against the Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed
rate of interest as stipulated on the three (3) promissory notes is 23% per
annum.[8] The applicable provision of law is the Central Bank Circular No. 905
which took effect on December 22, 1982, particularly Sections 1 and 2 which
state:[9]
Sec. 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 judicial, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.
Sec. 2. 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 continue to be twelve per cent (12%) per annum.
CB Circular 905 was issued by the Central Banks Monetary Board
pursuant to P.D. 1684 empowering them to prescribe the maximum rates of
interest for loans and certain forbearances, to wit:
SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as
follows:
SEC. 1-a The Monetary Board is hereby authorized to prescribed 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: Provided, That changes in such rates or rates may be
effected gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted, the Monetary Board may prescribed
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 prescribed
different maximum rate or rates for different types of borrowings, including deposits
and deposit substitutes, or loans of financial intermediaries.[10]
This court has ruled in the case of Philippine National Bank v. Court of
Appeals[11] that:
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.
All the promissory notes were signed in 1983 and, therefore, were already
covered by CB Circular No. 905. Contrary to the claim of respondent court,
this circular did not repeal nor in anyway amend the Usury Law but simply
suspended the latters effectivity.
Basic is the rule of statutory construction that when the law is clear and
unambiguous, the court is left with no alternative but to apply the same
according to its clear language. As we have held in the case of Quijano v.
Development Bank of the Philippines:[12]
xxx We cannot see any room for interpretation or construction in the clear and
unambiguous language of the above-quoted provision of law. This Court had
steadfastly adhered to the doctrine that its first and fundamental duty is the
application of the law according to its express terms, interpretation being called for
only when such literal application is impossible. No process of interpretation or
construction need be resorted to where a provision of law peremptorily calls for
application. Where a requirement or condition is made in explicit and unambiguous
terms, no discretion is left to the judiciary. It must see to it that its mandate is
obeyed.
The rate of interest was agreed upon by the parties freely. Significantly,
respondent did not question that rate. It is not for respondent court a quo to
change the stipulations in the contract where it is not illegal. Furthermore,
Article 1306 of the New Civil code provides that 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. We find no valid reason for the respondent
court a quo to impose a 12% rate of interest on the principal balance owing to
petitioner by respondent in the presence of a valid stipulation. In a loan or
forbearance of money, the interest due should be that stipulated in writing, and
in the absence thereof, the rate shall be 12% per annum.[13] Hence, only in the
absence of a stipulation can the court impose the 12% rate of interest.
The promissory notes were signed by both parties voluntarily. Therefore,
stipulations therein are binding between them. Respondent Eusebio, likewise,
did not question any of the stipulations therein. In fact, in the Comment file by
respondent Eusebio to this court, he chose not to question the decision and
instead expressed his desire to negotiate with the petitioner bank for terms
within which to settle his obligation.[14]
IN VIEW OF THE FOREGOING, the decision of the respondent court a
quo, is hereby AFFIRMED with the MODIFICATION that the rate of interest
that should be imposed be 23% per annum.
SO ORDERED.
 SECOND DIVISION
SPOUSES DAVID B. CARPO G.R. Nos. 150773 & six (6) months with an interest rate of six percent (6%) per month. To secure
and RECHILDA S. CARPO, 153599 the payment of the loan, petitioners mortgaged their residential house and lot
Petitioners,
Present: situated at San Francisco, Magarao, Camarines Sur, which lot is covered by
Transfer Certificate of Title (TCT) No. 23180. Petitioners failed to pay the loan
- versus - PUNO, J.,
Chairman, upon demand. Consequently, the real estate mortgage was extrajudicially
AUSTRIA-MARTINEZ, foreclosed and the mortgaged property sold at a public auction on 8 July 1996.
CALLEJO, SR.,
ELEANOR CHUA and TINGA, and The house and lot was awarded to respondents, who were the only bidders,
ELMA DY NG, CHICO-NAZARIO, JJ.
for the amount of Three Hundred Sixty-Seven Thousand Four Hundred Fifty-
Respondents.
Promulgated: Seven Pesos and Eighty Centavos (P367,457.80).
September 30, 2005

x-------------------------------------------------------------------x Upon failure of petitioners to exercise their right of redemption, a

certificate of sale was issued on 5 September 1997 by Sheriff Rolando A.

DECISION Borja. TCT No. 23180 was cancelled and in its stead, TCT No. 29338 was
issued in the name of respondents.
TINGA, J.:

Despite the issuance of the TCT, petitioners continued to occupy the

Before this Court are two consolidated petitions for review. The first,
docketed as G.R. No. 150773, assails the Decision[1] of the Regional Trial
Court (RTC), Branch 26 of Naga City dated 26 October 2001 in Civil Case No.
99-4376. RTC Judge Filemon B. Montenegro dismissed the complaint[2] for
annulment of real estate mortgage and consequent foreclosure proceedings
filed by the spouses David B. Carpo and Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of
Appeals Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court
of Appeals Third Division annulled and set aside the orders of Judge Corazon
A. Tordilla to suspend the sheriffs enforcement of the writ of possession.
said house and lot, prompting respondents to file a petition for writ of
possession with the RTC docketed as Special Proceedings (SP) No. 98-1665.
On 23 March 1999, RTC Judge Ernesto A. Miguel issued an Order[4]for the
issuance of a writ of possession.
On 23 July 1999, petitioners filed a complaint for annulment of real
estate mortgage and the consequent foreclosure proceedings, docketed as
Civil Case No. 99-4376 of the RTC. Petitioners consigned the amount of Two
Hundred Fifty-Seven Thousand One Hundred Ninety-Seven Pesos and
Twenty-Six Centavos (P257,197.26) with the RTC.

The cases stemmed from a loan contracted by petitioners. On 18 July 1995, Meanwhile, in SP No. 98-1665, a temporary restraining order was
they borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount issued upon motion on 3 August 1999, enjoining the enforcement of the writ of
of One Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within possession. In an Order[5] dated 6 January 2000, the RTC suspended the
enforcement of the writ of possession pending the final disposition of Civil
Case No. 99-4376. Against this Order, respondents filed a petition for certiorari
and mandamus before the Court of Appeals, docketed as CA-G.R. SP No.
57297.
During the pendency of the case before the Court of Appeals, RTC
Judge Filemon B. Montenegro dismissed the complaint in Civil Case No. 99-
4376 on the ground that it was filed out of time and barred by laches. The RTC
proceeded from the premise that the complaint was one for annulment of a
voidable contract and thus barred by the four-year prescriptive period. Hence,
the first petition for review now under consideration was filed with this Court,
assailing the dismissal of the complaint.
The second petition for review was filed with the Court after the Court
of Appeals on 30 April 2002 annulled and set aside the RTC orders in SP No.
98-1665 on the ground that it was the ministerial duty of the lower court to
issue the writ of possession when title over the mortgaged property had been
consolidated in the mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel
v. Court of Appeals[6] the rate of interest stipulated in the principal loan
agreement is clearly null and void. Consequently, they also argue that the
nullity of the agreed interest rate affects the validity of the real estate mortgage.
Notably, while petitioners were silent in their petition on the issues of
prescription and laches on which the RTC grounded the dismissal of the
complaint, they belatedly raised the matters in their Memorandum.
Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not
commit any grave abuse of discretion when it issued the orders dated 3 August
1999 and 6 January 2000, and that these orders could not have been the
proper subjects of a petition for certiorari and mandamus. More accurately, the
justiciable issues before us are whether the Court of Appeals could properly
entertain the petition for certiorari from the timeliness aspect, and whether the
appellate court correctly concluded that the writ of possession could no longer
be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month
or 72% per annum is so excessive, iniquitous, unconscionable and exorbitant
that it should have been declared null and void. Instead of dismissing their
complaint, they aver that the lower court should have declared them liable to
respondents for the original amount of the loan plus 12% interest per annum
and 1% monthly penalty charge as liquidated damages,[7] in view of the ruling
in Medel v. Court of Appeals.[8]
In Medel, the Court found that the interest stipulated at 5.5% per
month or 66% per annum was so iniquitous or unconscionable as to render
the stipulation void.
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 Court shall reduce equitably
liquidated damages, whether intended as an indemnity or a
penalty if they are iniquitous or unconscionable.[9]
 In a long line of cases, this Court has invalidated similar stipulations
on interest rates for being excessive, iniquitous, unconscionable and
exorbitant. In Solangon v. Salazar,[10] we annulled the stipulation of 6% per
month or 72% per annum interest on a P60,000.00 loan. In Imperial v.
Jaucian,[11] we reduced the interest rate from 16% to 1.167% per month or
14% per annum. In Ruiz v. Court of Appeals,[12] we equitably reduced the
agreed 3% per month or 36% per annum interest to 1% per month or 12% per
annum interest. The 10% and 8% interest rates per month on a P1,000,000.00
loan were reduced to 12% per annum in Cuaton v. Salud.[13] Recently, this
Court, in Arrofo v. Quino,[14] reduced the 7% interest per month on
a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases.
From that perspective, it is apparent that the stipulated interest in the subject
loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the
freedom of contract principle embodied in Article 1306 of the Civil Code,
contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. In the ordinary
course, the codal provision may be invoked to annul the excessive stipulated
interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72%
per annum. By the standards set in the above-cited cases, this stipulation is
similarly invalid. However, the RTC refused to apply the principle cited and
employed in Medel on the ground that Medel did not pertain to the annulment
of a real estate mortgage,[15] as it was a case for annulment of the loan contract
itself. The question thus sensibly arises whether the invalidity of the stipulation
on interest carries with it the invalidity of the principal obligation.
The question is crucial to the present petition even if the subject
thereof is not the annulment of the loan contract but that of the mortgage
contract. The consideration of the mortgage contract is the same as that of the
principal contract from which it receives life, and without which it cannot exist
as an independent contract. Being a mere accessory contract, the validity of
the mortgage contract would depend on the validity of the loan secured by it.[16]
Notably in Medel, the Court did not invalidate the entire loan obligation despite
the inequitability of the stipulated interest, but instead reduced the rate of
interest to the more reasonable rate of 12% per annum. The same remedial
approach to the wrongful interest rates involved was employed or affirmed by
the Court in Solangon, Imperial, Ruiz, Cuaton, and Arrofo.
The Courts ultimate affirmation in the cases cited of the validity of the principal
loan obligation side by side with the invalidation of the interest rates thereupon
is congruent with the rule that a usurious loan transaction is not a complete
nullity but defective only with respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that
a usurious loan is wholly null and void both as to the loan and as to the usurious
interest.[17] However, this Court adopted the contrary rule,
as comprehensively discussed in Briones v. Cammayo:[18]
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court
likewise declared that, in any event, the debtor in a usurious
contract of loan should pay the creditor the amount which he justly
owes him, citing in support of this ruling its previous decisions in
Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and
Delgado vs. Duque Valgona, 44 Phil. 739.
 ....
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil.
249, We also held that the standing jurisprudence of this Court on
the question under consideration was clearly to the effect that the
Usury Law, by its letter and spirit, did not deprive the lender of his
right to recover from the borrower the money actually loaned to
and enjoyed by the latter. This Court went further to say that the
Usury Law did not provide for the forfeiture of the capital in favor
of the debtor in usurious contracts, and that while the forfeiture
might appear to be convenient as a drastic measure to eradicate
the evil of usury, the legal question involved should not be
resolved on the basis of convenience.
Other cases upholding the same principle are Palileo vs.
Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31,
1964, 10 SCRA 199, 200-202. In the latter We expressly held that
when a contract is found to be tainted with usury "the only right of
the respondent (creditor) . . . was merely to collect the amount of
the loan, plus interest due thereon."
The view has been expressed, however, that the ruling
thus consistently adhered to should now be abandoned because
Article 1957 of the new Civil Code a subsequent law provides that
contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury, shall be void, and
that in such cases "the borrower may recover in accordance with
the laws on usury." From this the conclusion is drawn that the
whole contract is void and that, therefore, the creditor has no right
to recover not even his capital.
The meaning and scope of our ruling in the cases
mentioned heretofore is clearly stated, and the view referred to in
the preceding paragraph is adequately answered, in Angel Jose,
etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On
the question of whether a creditor in a usurious contract may or
may not recover the principal of the loan, and, in the affirmative,
whether or not he may also recover interest thereon at the legal
rate, We said the following:
....
Appealing directly to Us, defendants raise
two questions of law: (1) In a loan with usurious
interest, may the creditor recover the principal of
the loan? (2) Should attorney's fees be awarded
in plaintiff's favor?"
Great reliance is made by appellants on
Art. 1411 of the New Civil Code . . . .
Since, according to the appellants, a usurious
loan is void due to illegality of cause or object, the
rule of pari delicto expressed in Article
1411, supra, applies, so that neither party can
bring action against each other. Said rule,
however, appellants add, is modified as to the
borrower, by express provision of the law (Art.
1413, New Civil Code), allowing the borrower to
recover interest paid in excess of the interest
allowed by the Usury Law. As to the lender, no
exception is made to the rule; hence, he cannot
recover on the contract. So they continue the New
Civil Code provisions must be upheld as against
the Usury Law, under which a loan with usurious
interest is not totally void, because of Article 1961
of the New Civil Code, that: "Usurious contracts
shall be governed by the Usury Law and other
special laws, so far as they are not inconsistent
with this Code."
We do not agree with such reasoning.
Article 1411 of the New Civil Code is not new; it is
the same as Article 1305 of the Old Civil Code.
Therefore, said provision is no warrant for
departing from previous interpretation that, as
provided in the Usury Law (Act No. 2655, as
amended), a loan with usurious interest is not
totally void only as to the interest.
. . . [a]ppellants fail to consider that a
contract of loan with usurious interest
consists of principal and accessory
stipulations; the principal one is to pay the
debt; the accessory stipulation is to pay
interest thereon.
And said two stipulations are divisible
in the sense that the former can still stand
without the latter. Article 1273, Civil Code,
attests to this: "The renunciation of the
 principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall and the offending interest rate merely corrected. Hence, it is clear and settled
leave the former in force." that the principal loan obligation still stands and remains valid. By the same

The question therefore to resolve is token, since the mortgage contract derives its vitality from the validity of the
whether the illegal terms as to payment of principal obligation, the invalid stipulation on interest rate is similarly
interest likewise renders a nullity the legal
terms as to payments of the principal debt. insufficient to render void the ancillary mortgage contract.
Article 1420 of the New Civil Code provides in
this regard: "In case of a divisible contract, if
the illegal terms can be separated from the It should be noted that had the Court declared the loan and mortgage
legal ones, the latter may be enforced."
agreements void for being contrary to public policy, no prescriptive period
In simple loan with stipulation of could have run.[20] Such benefit is obviously not available to petitioners.
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 Yet the RTC pronounced that the complaint was barred by the four-
illegal. The illegality lies only as to the
prestation to pay the stipulated interest; year prescriptive period provided in Article 1391 of the Civil Code, which
hence, being separable, the latter only should governs voidable contracts. This conclusion was derived from the allegation in
be deemed void, since it is the only one that is
illegal. the complaint that the consent of petitioners was vitiated through undue
influence. While the RTC correctly acknowledged the rule of prescription for
....
voidable contracts, it erred in applying the rule in this case. We are hard put to
The principal debt remaining without
stipulation for payment of interest can thus be conclude in this case that there was any undue influence in the first place.
recovered by judicial action. And in case of such
demand, and the debtor incurs in delay, the debt
earns interest from the date of the demand (in this There is ultimately no showing that petitioners consent to the loan
case from the filing of the complaint). Such and mortgage agreements was vitiated by undue influence. The financial
interest is not due to stipulation, for there was
none, the same being void. Rather, it is due to the condition of petitioners may have motivated them to contract with
general provision of law that in obligations to pay
respondents, but undue influence cannot be attributed to respondents simply
money, where the debtor incurs in delay, he has
to pay interest by way of damages (Art. 2209, Civil because they had lent money. Article 1391, in relation to Article 1390 of the
Code). The court a quo therefore, did not err in
ordering defendants to pay the principal debt with Civil Code, grants the aggrieved party the right to obtain the annulment of
interest thereon at the legal rate, from the date of contract on account of factors which vitiate consent. Article 1337 defines the
filing of the complaint."[19]
concept of undue influence, as follows:

The Courts wholehearted affirmation of the rule that the principal obligation
subsists despite the nullity of the stipulated interest is evinced by its
subsequent rulings, cited above, in all of which the main obligation was upheld
There is undue influence when a person takes
improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential,
 family, spiritual and other relations between the parties or the
fact that the person alleged to have been unduly influenced contract, their action would already be barred by prescription when they filed
was suffering from mental weakness, or was ignorant or in it. Moreover, petitioners had clearly slept on their rights as they failed to timely
financial distress.
assail the validity of the mortgage agreement. The denial of the petition in G.R.
No. 150773 is warranted.
While petitioners were allegedly financially distressed, it must be proven that
there is deprivation of their free agency. In other words, for undue influence to
We now resolve the petition in G.R. No. 153599.
be present, the influence exerted must have so overpowered or subjugated
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6
the mind of a contracting party as to destroy his free agency, making him
January 2000 could no longer be questioned in a special civil action for
express the will of another rather than his own.[21] The alleged lingering
certiorari and mandamus as the reglementary period for such action had
financial woes of petitioners per se cannot be equated with the presence of
already elapsed.
undue influence.

It must be noted that the Order dated 3 August 1999 suspending the
The RTC had likewise concluded that petitioners were barred by
enforcement of the writ of possession had a period of effectivity of only twenty
laches from assailing the validity of the real estate mortgage. We
(20) days from 3 August 1999, or until 23 August 1999. Thus, upon the
wholeheartedly agree. If indeed petitioners unwillingly gave their consent to
expiration of the twenty (20)-day period, the said Order becamefunctus officio.
the agreement, they should have raised this issue as early as in the foreclosure
Thus, there is really no sense in assailing the validity of this Order, mooted as
proceedings. It was only when the writ of possession was issued did petitioners
it was. For the same reason, the validity of the order need not have been
challenge the stipulations in the loan contract in their action for annulment of
assailed by respondents in their special civil action before the Court of
mortgage. Evidently, petitioners slept on their rights. The Court of Appeals
Appeals.
succinctly made the following observations:
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
In all these proceedings starting from the foreclosure,
followed by the issuance of a provisional certificate of sale; injunction whose period of efficacy is indefinite. It may be properly assailed by
then the definite certificate of sale; then the issuance of TCT way of the special civil action for certiorari, as it is interlocutory in nature.
No. 29338 in favor of the defendants and finally the petition for
the issuance of the writ of possession in favor of the As a rule, the special civil action for certiorari under Rule 65 must be filed not
defendants, there is no showing that plaintiffs questioned the later than sixty (60) days from notice of the judgment or order. [23]Petitioners
validity of these proceedings. It was only after the issuance of
the writ of possession in favor of the defendants, that plaintiffs argue that the 3 August 1999 Order could no longer be assailed by
allegedly tendered to the defendants the amount
respondents in a special civil action for certiorari before the Court of Appeals,
of P260,000.00 which the defendants refused. In all these
proceedings, why did plaintiffs sleep on their rights?[22] as the petition was filed beyond sixty (60) days following respondents receipt
Clearly then, with the absence of undue influence, petitioners have no cause of the Order. Considering that the 3 August 1999 Orderhad become functus
of action. Even assuming undue influence vitiated their consent to the loan officio in the first place, this argument deserves scant consideration.
Petitioners further claim that the 6 January 2000 Order could not have likewise
Thus, we also affirm the Court of Appeals ruling to set aside the RTC
been the subject of a special civil action for certiorari, as it is according to them
orders enjoining the enforcement of the writ of possession.[27] The purchaser
a final order, as opposed to an interlocutory order. That the 6 January
in a foreclosure sale is entitled as a matter of right to a writ of possession,
2000 Order is interlocutory in nature should be beyond doubt. An order is
regardless of whether or not there is a pending suit for annulment of the
interlocutory if its effects would only be provisional in character and would still
mortgage or the foreclosure proceedings. An injunction to prohibit the issuance
leave substantial proceedings to be further had by the issuing court in order to
or enforcement of the writ is entirely out of place.[28]
put the controversy to rest.[24] The injunctive relief granted by the order is
definitely final, but merely provisional, its effectivity hinging on the ultimate
One final note. The issue on the validity of the stipulated interest rates,
outcome of the then pending action for annulment of real estate mortgage.
regrettably for petitioners, was not raised at the earliest possible opportunity.
Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or
It should be pointed out though that since an excessive stipulated interest rate
a disputed issue leaving nothing else to be done by the court in respect thereto,
may be void for being contrary to public policy, an action to annul said interest
as is characteristic of a final order.
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
Since the 6 January 2000 Order is not a final order, but rather interlocutory in
stipulated interest rate, the principal loan obligation subsists, and along with it
nature, we cannot agree with petitioners who insist that it may be assailed only
the mortgage that serves as collateral security for it.
through an appeal perfected within fifteen (15) days from receipt thereof by
respondents. It is axiomatic that an interlocutory order cannot be challenged
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs
by an appeal,
against petitioners.

SO ORDERED.
but is susceptible to review only through the special civil action of
certiorari.[25] The sixty (60)-day reglementary period for special civil actions
under Rule 65 applies, and respondents petition was filed with the Court of
Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the
petition for certiorari and mandamus. As pointed out by respondents, the
remedy of mandamus lies to compel the performance of a ministerial duty. The
issuance of a writ of possession to a purchaser in an extrajudicial foreclosure
is merely a ministerial function.[26]