Note no. 3
799 (June 21, 2013)
January 29
Sample Problems:
1. Loan of seedling for planting- Mutuum
2. Loan of cellphone- Commodatum
3. Transfer of ownership over a Note 8 in exchange of
Iphone X- Barter
- Non-fungible. Specific thing must be given or
the specific substitute.
Note: If the specie of seedling borrowed is extinct, apply
Art. 1950 which refers to the value at perfection of the
contract.
Interest:
Art. 1959- There must be consent to the imposition of
interest. It shall be expressed stipulation.
Art.1956- The agreement to pay interest shall be reduced
in writing.
Note: In the document, if interest rate is provided, it
shall be due and demandable, otherwise, it shall still be
due and demandable but the rate shall be the legal
interest provided by law which is 6% per annum.
If interest is payable in kind, it shall be stipulated and
value shall be the appraised value at time of payment.
Kinds of Interest:
1. Simple Interest- interest only on the principal
2. Compound principal- covered by Art. 1959 and Art.
2212 of the NCC
- interest on unpaid interest and added on the principal
which shall earn interest, then later on be subject to
interest.
- allowed under the Civil Code
-example: “The borrower shall pay compound interest on
the unpaid balance of 2% per month”
Purpose: An interest is imposed for the purpose of
making money or profits. Opportunity cost. It’s not a
security.
Compound interest is to compel prompt payment and to
not to prolong the loan.
Where can there be compound interest:
1. Stipulated in writing.
2. If there is a judicial demand (Art. 2212). If there is
already a decision from the court.
According to purpose:
Those for monetary or regular interest rate or
compensable.
Monetary interest- Interest rate imposed is from the use
of the money.
Compensatory- from damages. In the form of penalty
when there is a penal clause for breach of contract. Need
not be in writing or not be stipulated for it to be
enforceable.
BSP CIRCULAR NO.
In the absence of a contract expressly providing for a
different rate, the rate of interest for the loan or
forbearance of any money, goods or credits and the rate
allowed in judgments has been reduced from twelve
percent (12%) to six percent (6%) per annum
BAR: There was no stipulation of interest in the contract,
there was failure to pay by the borrower. The SC imposed
an interest rate of 6%, the legal interest. Compensatory.
Payment of interest when there is no stipulation.
Mistake:
a. Yes- solutio indebiti, required to return.
b. No- natural obligation, right to return. (Out of the
kindness)
Why does this matter: Cause of Action.
Sample defense: It would depend on whether there was
mistake. There was no mistake, it’s a natural obligation,
and the lender is entitled to the sum of money. No right
to collect it.
Escalation and De-escalation clauses.
Escalation Clause
- Stipulation in a contract of loan, allowing the
increase of interest rate without the parties
having to execute another contract.
- SC, it is valid and is not contrary to public policy.
Conditions:
1. There must be a de-escalation clause.
De-escalation clause- if there are certain
conditions are met, there should be a decrease of
interest rate.
- Stipulation that authorizes a reduction in the
interest rates corresponding to downward
changes made by law or by the monetary board.
2. The interest rate must be mutually agreed upon,
otherwise void.
3. The adjustment in the rate of interest rate agreed
upon shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.
Why is there a need for escalation?
- To protect interest of both parties.
“.. which interest rate may be increased at any time,
without notice..”
- It should be agreed upon, must be stipulated.
- “which may be increased by 2% higher than the
maximum rate”
USURY
Art. 1957
Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury
shall be void. The borrower may recover in accordance
with the laws on usury.

Usury Law
- Empowered the monetary board of the Central
Bank to fix the maximum rate for a loan or
forbearance.
- Prohibits the imposition of a hiugher interest
rate greater than that imposed by the monetary
board.
- Suspended by the virtue of Central Bank Circular
no. 905, parties are now free to stipulate on the
interest rate.
- But no when, it will enslave the borrower or will
lead to a hemorrhaging of their assets, or would
cause so much indebtedness.
- The imposition of an unconscionable rate or
interest on a money even if knowingly and
voluntarily assumed, is immoral and unjust
(SC).
- Voluntariness does not make the stipulation an
unconscionable interest, even if you agreed to it.
BSP Circular no. 799
In the absence of a contract expressly providing for a
different rate, the rate of interest for the loan or
forbearance of any money, goods or credits and the rate
allowed in judgments has been reduced from twelve
percent (12%) to six percent (6%) per annum.
Consequences of unconscionable interest rate:
1. The nullity of the stipulation only affects the interest,
the loan is valid.
2. Stipulations are divisible, either to pay the loan or to
pay the interest.
*To declare both void, it is unjust enrichment. The court
is empowered to reduce the interest rate if a rate was
stipulated but usurious.
Financing Company Act
RA 5980, as amended by RA 8556
Purpose:
To regulate and promote the activities of financing and
leasing companies.
To strengthen the critical role in providing credit and
services to small and medium enterprises and to curtail
acts and practices.
Financing companies
Companies other than the bank and investment houses,
savings and loan associations, insurance and other
financial institutions.
Corporations primarily organized for the purpose of
extending credit facilities to consumers.
Examples:
- Direct lending
- Discounting
- Factoring commercial papers or account
receivables
- Buying and selling contracts such as leases and
chattel mortgages and other evidence of
indebtedness.
- Financial Leasing of movables and immovable.
Discounting
Receivables of financing whereby evidence of
indebtedness of a third party, like installment contracts
are purchased by, or assigned to a financing company in
an amount or for a consideration less than the face value.
Using the receivables from a third party purchasing it at
a discount such as purchasing promissory notes from an
establishment, then the makers will now be paying to the
financing company.
As compared to factoring, these are open accounts.
There are no proof of indebtedness.
Factoring
Open accounts which are not evidenced by a written
promise to pay supported by documents like invoices of
manufacturers and suppliers are assigned to a financing
company in an amount or for a consideration less than
the outstanding balance of the open accounts.
Finance leasing
A mode of extending credit through a non-cancellable
lease where the lessor buys the equipment and the leasee
pays a fixed amount of at least 70% of the purchase price
for a period of two years. The lease will have a right to
hold and use the lease properly.
There is no obligation or option on the part of the leasee
to purchase the lease properly.
Requirement:
- A stock corporation, 40% of the voting stocks
should be owned by Filipinos and that there is a
reciprocity requirement.
- Foreigners from other countries with a
reciprocity agreement are all allowed to be
stockholders.
- Paid-up capital of not less than Php. 10M if in
Metro Manila, Php. 5M in other cities and Php.
2.5M in municipalities.
- No person, association or corporation may
engage in the business of a financing activities or
hold itself to be financing company or to call
yourself a financing, leasing or a finance and
investment.
- They must call themselves as financing, leasing
or financing..
Limitation:
- Accounts which have been factored or
discounted shall be only be sold to banks and
not to other individuals or another financing
entity.