Legal Interest, rules of application

Interest as a form of damages

When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of recoverable damages.

In such case, interest in the concept of actual and compensatory damages may be awarded. The rate of
interest applicable, as well as the accrual thereof, will depend on the nature of the obligation breached.

[see Eastern Shipping Lines, Inc, vs Court of Appeals, G.R. No. 97412, July 12, 1994]

I. Obligation -Payment of Sum of Money

Interest stipulated in writing

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.

Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.

[Eastern Shipping Lines, Inc, vs Court of Appeals, G.R. No. 97412, July 12, 1994](underscoring
supplied)

If there is no stipulated interest, the legal rate of interest applies

It is proper to impose interest notwithstanding the absence of stipulation in the contract. Article 2210 of
the Civil Code expressly provides that interest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract.

Current Rate of Legal interest - 6%

Monetary Board Circular No. 799 states that, effective July 1, 2013, the legal "rate of interest for the
loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of
an express contract as to such rate of interest, shall be 6 percent per annum.

The twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1,
2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when
applicable....With regard to those judgments that have become final and executory prior to July 1, 2013,
said judgments shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein. [Nacar vs Gallery Frames, G.R. No. 189871, August 13, 2013]

Previous to the issuance, the effective rate of legal interest for money or credit transactions and
judgments relating to the same was 12%.
| Page 1 of 3
Previous rate of legal interest - 12 %

In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

This was based on Central Bank Circular No. 416--

"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."

The Central Bank Circular imposing the 12% interest per annum applies not only to loans or forbearance
of money, goods or credits, but also to judgments involving such loan or forbearance of money, goods or
credits.

[Eastern Shipping Lines, Inc, vs Court of Appeals, G.R. No. 97412, July 12, 1994](emphasis and
underscoring supplied)

Meaning of Forbearance

In Estores vs Supangan, the Supreme Court explained the meaning of "forbearance":

"In Crismina Garments, Inc. v. Court of Appeals, forbearance was defined as a contractual
obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or
debtor to repay a loan or debt then due and payable. This definition describes a loan where a debtor is
given a period within which to pay a loan or debt. In such case, forbearance of money, goods or credits
will have no distinct definition from a loan. We believe however, that the phrase forbearance of money,
goods or credits is meant to have a separate meaning from a loan, otherwise there would have been no
need to add that phrase as a loan is already sufficiently defined in the Civil Code. Forbearance of money,
goods or credits should therefore refer to arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or credits pending happening of certain events or
fulfillment of certain conditions."

Thus, in cases where the transaction involved is a Conditional Deed of Sale, the stipulation governing
the return of the money in case of breach of the contract shall be considered as a forbearance of
money-- thus, the 12% legal interest applies.

[see Estores vs Supangan, G.R. No. 175139, April 8, 2012 citing Crismina Garments, Inc. v. Court
of Appeals, G.R. No. 128721, March 9, 1999](underscoring supplied)

II. Obligation other than Payment of Money

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.
| Page 2 of 3
Commencement of running of interest

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 of the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained).

Base for computation of Interest

The actual base for the computation of legal interest shall, in any case, be on the amount finally
adjudged.

[Spouses Golez vs Spouses Navarro, G.R. No. 192532, January 30, 2013; Eastern Shipping Lines,
Inc, vs Court of Appeals, G.R. No. 97412, July 12, 1994]

III. Finality of Judgment Awarding a Sum of Money

When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, 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.

[see Eastern Shipping Lines, Inc, vs Court of Appeals, G.R. No. 97412, July 12, 1994; Keng Hua
Paper Products Co., Inc. v. Court of Appeals, G.R. No. 116863, February 12, 1998]

The rule applies regardless if the obligation from which the court judgment was based is an obligation for
payment of a sum of money (i.e. loan) or otherwise (i.e. contract for piece of work).

12% p.a. rate only applies to judgments rendered before July 1, 2013

The twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1,
2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when
applicable....With regard to those judgments that have become final and executory prior to July 1, 2013,
said judgments shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein. [Nacar vs Gallery Frames, G.R. No. 189871, August 13, 2013; See M.B. Circular No.
799]

| Page 3 of 3