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1. Spouses Barrera vs.

Spouses Lorenzo


(Compensatory, Penalty or Indemnity Interest)

Monetary interest is a compensation fixed by the parties for the use or forbearance of money.


Compensatory interest - imposed by law or by courts as penalty or indemnity for damages.

The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the
principal loan on which interest is demanded.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest shall be
due unless it has been expressly stipulated in writing.
I. Hence, payment of monetary interest is allowed only if:
1) there was an express stipulation for the payment of interest; and
2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have
held that collection of interest without any stipulation therefor in writing is prohibited by law.
Monetary interest is due only when these requirements are present.
II. However, there are instances in which an interest may be imposed even in the absence of express stipulation,
verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation
consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% (now 6%) per
annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon.
(Compensatory interest)
This interest may be imposed only as a penalty or damages for breach of contractual obligations. It cannot
be charged as a compensation for the use or forbearance of money. This applies only to compensatory interest
and not to monetary interest.
Solutio Indebiti
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation
therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied.
Article 2154 provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. We have held that the principle of solutio
indebiti applies in case of erroneous payment of undue interest.
HELD: It was duly established that respondent paid interest to petitioner. Respondent was under no duty to
make such payment because there was no express stipulation in writing to that effect. There was no binding

relation between petitioner and respondent as regards the payment of interest. The payment was clearly a
mistake. Since petitioner received something when there was no right to demand it, he has an obligation to
return it.


(Conventional Interest; Escalation Clause)
(Include Concurring Opinion)
Bank: that the interest rate changes every month based on the prevailing market rate and notified
petitioners of the prevailing rate by calling them thru a telephone monthly before their account becomes past
due. When asked if there was any written authority from petitioners for respondent to increase the interest rate
unilaterally, respondent answered that petitioners signed a promissory note indicating that they agreed to pay
interest at the prevailing rate.
China Bank unilaterally increased the interest rates from 15% to as high as 24.50%.
RULES on Escalation Clauses:

Escalation clauses are not void per se.

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the
contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses
which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money
in long term contracts. Hence, such stipulations are not void per se.

Escalation clauses violating the principle of mutuality of contracts are void.

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important modification
in the agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts. Thus, this
Court has previously nullified the unilateral determination and imposition by creditor banks of increases in the
rate of interest provided in loan contracts.

Banco Filipino Savings & Mortgage Bank v. Navarro: While escalation clauses in general are considered

valid, we ruled that Banco Filipino may not increase the interest on respondent borrowers loan, pursuant to
Circular No. 494 issued by the Monetary Board, because said circular is not a law although it has the force and
effect of law and the escalation clause has no de-escalation clause.

De-escalation Clause: provision for reduction of the stipulated interest "in the event that the applicable

maximum rate of interest is reduced by law or by the Monetary Board."

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an
increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right
given to creditors to adjust the interest independently and upwardly would completely take away from the
debtors the right to assent to an important modification in their agreement and would also negate the element of
mutuality in their contracts.34 While a ceiling on interest rates under the Usury Law was already lifted under

Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets."
Ecalation clause in this case: I/We hereby authorize the CHINA BANKING CORPORATION to increase or
decrease as the case may be, the interest rate/service charge presently stipulated in this note without any
advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the Central
Bank of the Philippines or appropriate government entities, increasing or decreasing such interest rate or service
RULING: At no time did petitioners protest the new rates imposed on their loan even when their property was
foreclosed by respondent. This notwithstanding, we hold that the escalation clause is still VOID because it
grants respondent the power to impose an increased rate of interest without a written notice to petitioners and
their written consent. Respondents monthly telephone calls to petitioners advising them of the prevailing
interest rates would not suffice. A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the respondent to enable petitioners
to make an informed decision. An appropriate form must also be signed by the petitioners to indicate their
conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts.
For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are
not based on the parties essential equality.
Effect: Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an
agreement between the parties. Unless such important change in the contract terms is mutually agreed upon, it
has no binding effect. In the absence of consent on the part of the petitioners to the modifications in the interest
rates, the adjusted rates cannot bind them.
NOTE: The lender and the borrower should agree on the imposed rate, and such imposed rate should be in
writing. Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds.
Concurring Opinion:
Points to consider in drafting a valid escalation clause: (DAP)

Firstly, as a matter of equity and consistent with P.O. No. 1684, the escalation clause must be paired with

a de-escalation clause.

Secondly, so as not to violate the principle of mutuality, the escalation must be pegged to theprevailing

market rates, and not merely make a generalized reference to "any increase or decrease in the interest rate" in
the event a law or a Central Bank regulation is passed.

Thirdly, consistent with the nature of contracts, the proposed modification must be the result of

anagreement between the parties.


(Compensatory, Penalty or Indemnity Interest)
Rules on Interest:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is thelegal rate.
Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for
judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable certainty. Here,
interest should be counted from the date of the decision (when the amount of damages are ascertained).
Art. 2209, CC. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest
agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum.
Rules of thumb (on the award of interests):
*NOTE: The legal rate of 12% has been amended to 6%. See Circular No. 799 (amending Circular No. 905)
effective July 1, 2013, and the case of NACAR V. GALLERY FRAMES AND/OR BORDEY (2013). Therefore,
there is no need to distinguish now the obligations breached as the legal interest applicable is 6%.

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.

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:

Obligation breached: consists in the payment of a sum of money, i.e., a loan or forbearance of money

Interest Due:

that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal

interest from the time it is judicially demanded.


In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from

default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code. (amended to 6%)

Obligation breached: not constituting a loan or forbearance of money,

Interest due: may be imposed at the discretion of the court at the rate of 6% per annum.

No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand

can be established with reasonable certainty.


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)

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.


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

interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit. (amended to 6%)

6. SPS.


[G.R. No. 197861. June 5, 2013. 697 SCRA 555]

Unconscionable interest rates The SC has ruled in the following cases that the interest is unconscionable:
3% and 3.81% per month on a P10 Million loan (Toring vs. Sps. Ganzon-Olan, 2008); 66% per annum or 5.5% per
month on a P500 thousand loan (Medel vs. Court of Appeals,1998) and; 7% and 5% or 84% and 60% per annum
(Chua vs. Timan, 2008). The Court has also ruled affirmed in a plethora of cases that stipulated interest rates
of 3% per month and higher are excessive, unconscionable and exorbitant.
Conscionable interest rates In this case 23% per annum or 2% per month as agreed upon by petitioner and
respondent bank is NOT unconscionable. It is much lower than the above mentioned unconscionable interest
rates and there is no similarity of factual milieu.
[Decided 2013] In 1984, Petitioner Florentino Mallari obtained a loan from respondent Prudential
Bank in the amount of P300,000.00. It was subject to an interest rate of 21% per annum and, in
case of default, a penalty of 12% per annum of the total amount due and attorneys fees
equivalent of 15% of the total amount due. This was secured by a Deed of Assignment (DOA) over
petitioner's time deposit account. In 1989, Spouses Florentino and Aurea Mallari obtained another
loan from respondent for P1.7 million, stipulating interest of 23% per annum with the same
penalties in case of default. This was secured by Real Estate Mortgage (REM).
Petitioners defaulted. When computed in 1992, the total debt was P571,218.54 and P2,991,294.82
for the first and second loans respectively.
Respondent tried to extrajudicially foreclose the mortgage. Petitioners on the other hand tried to
nullify the mortgage claiming that the Bank imposed onerous terms and conditions and that the
bank was unilaterally increasing its charges and interest over and above those stipulated. The
Bank claimed that the basis for its computation was all written in the Promissory Notes.
The RTC ruled in favor of respondent bank. CA affirmed.
ISSUE: Whether or not an interest rate of 23% per annum and 12% per annum penalty is

No. The Court has also ruled affirmed in a plethora of cases that stipulated interest rates of 3% per
month and higher are excessive, unconscionable and exorbitant. thus, the 23% per annum interest
rate imposed on petitioners loan in this case can by no means be considered excessive or
unconscionable. And neither is the 12% per annum penalty charge unconscionable as the counrt
found in DBP vs. Family Foods (2009) and Ruiz vs. Court of Appeals (2003).

INC.G.R. No. 182963 June 3, 2013 697 SCRA
On February 15, 2001, petitioners spouses Deo Agner and Maricon Agner executed a Promissory
Note with Chattel Mortgage in favor of Citimotors, Inc. The contract provides, among others,
that: for receiving the amount of Php834,768.00, petitioners shall pay Php17,391.00 every 15th
day of each succeeding month until fully paid; the loan is secured by a 2001 Mitsubishi
Adventure Super Sport. On the same day, Citimotors, Inc. assigned all its rights, title and
interests in the Promissory Note with Chattel Mortgage to ABN AMRO Savings Bank, Inc.
(ABN AMRO), which, on May 31, 2002, likewise assigned the same to respondent BPI Family
Savings Bank, Inc.
For failure to pay four successive installments, respondent, through counsel, sent to petitioners a
demand letter dated August 29, 2002, declaring the entire obligation as due and demandable and
requiring to pay Php576,664.04, or surrender the mortgaged vehicle immediately upon receiving
the letter. As the demand was left unheeded, respondent filed on October 4, 2002 an action for
Replevin and Damages before the Manila Regional Trial Court (RTC).
A writ of replevin was issued. Despite this, the subject vehicle was not seized. The Manila RTC

ruled for the respondent. Petitioners appealed the decision to the Court of Appeals (CA), but the
CA affirmed the lower court's decision and, subsequently, denied the motion for reconsideration;
hence, this petition.
Whether demand is necessary prior to the filing of application for the writ of replevin.
Whether respondent's remedy of resorting to both actions of replevin and collection of sum of
money is contrary to the provision of Article 1484 of the Civil Code and the Elisco Tool
Manufacturing Corporation v. Court of Appeals 10 ruling.
Records bear that both verbal and written demands were in fact made by respondent prior to the
institution of the case against petitioners. Even assuming, for argument's sake, that no demand
letter was sent by respondent, there is really no need for it because petitioners legally waived the
necessity of notice or demand in the Promissory Note with Chattel Mortgage, which they
voluntarily and knowingly signed in favor of respondent's predecessor-in-interest.
Further, the Court even ruled in Navarro v. Escobido that prior demand is not a condition
precedent to an action for a writ of replevin, since there is nothing in Section 2, Rule 60 of the
Rules of Court that requires the applicant to make a demand on the possessor of the property
before an action for a writ of replevin could be filed.
Also, there is no violation of Article 1484 of the Civil Code and the Court's decision in Elisco

Tool Manufacturing Corporation v. Court of Appeals.

The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars
the exercise of the others. This limitation applies to contracts purporting to be leases of personal
property with option to buy by virtue of Art. 1485.
Compared with Elisco, the vehicle subject matter of this case was never recovered and delivered
to respondent despite the issuance of a writ of replevin. As there was no seizure that transpired, it
cannot be said that petitioners were deprived of the use and enjoyment of the mortgaged vehicle
or that respondent pursued, commenced or concluded its actual foreclosure. The trial court,
therefore, rightfully granted the alternative prayer for sum of money, which is equivalent to the
remedy of "[e]xact[ing] fulfillment of the obligation." Certainly, there is no double recovery or
unjust enrichment to speak of.
8.Andal vs. PNB


Oate opened and maintained seven trust accounts with Land Bank. Each trust account was covered by
an Investment Management Account (IMA) with Full Discretion and has a corresponding passbook
where deposits and withdrawals were recorded.
In a letter dated October 8, 1981, Land Bank demanded from Oate the return of P4 million it claimed

to have been inadvertently deposited to Trust Account No. 01-125 as his additional funds but actually
represents the total amount of the checks issued to Land Bank by its corporate borrowers as payment
for their pre-terminated loans. Oate refused hence the issue of miscrediting remained unsettled.
Then on June 21, 1991, Land Bank unilaterally applied the outstanding balance in all of Oates trust
accounts against his resulting indebtedness by reason of the miscrediting of funds. Although it
exhausted the funds in all of Oates trust accounts, Land Bank was able to debit the amount of
P1,528,583.48 only.
To recoup the remaining balance of Oates indebtedness, Land Bank filed a Complain for Sum of
Money seeking to recover the amount of P8,222,687.89 plus interest at the legal rate of 12% per annum
computed from May 15, 1992 until fully paid.
Oate asserted that the setoff was without legal and factual bases. He specifically denied any
knowledge or involvement in the transaction between Land Bank and its clients Philippine Virginia
Tobacco Administration (PVTA) and Philippine Virginia Tobacco Board (PVTB). He also denied that
he made fraudulent misrepresentation to induce the bank to deposit to his Trust Account No. 01-125 as
his additional capital the payments allegedly tendered by the banks corporate borrowers. He
maintained that all the funds in his accounts came from legitimate sources and that he was totally
unaware of and had nothing to do with the alleged miscrediting.
By way of compulsory counterclaim, Oate pointed out that per Balance Sheets as of June 30, 1982 the
funds in his trust accounts already totaled P35,555,464.78. And as of January 1993, the accumulated

balance of his accounts reached P229,222,160.25 and $3,472,683.94.

Hence, even if the amount of P8,222,687.89 as of May 15, 1992 is deducted from the outstanding
balance of his trust accounts as of January 1993, the bank still owes him P220,999,472.36 on top of his
dollar deposits amounting to $3,472,683.94.
Oate prayed that a judgment be issued dismissing the Complaint and ordering Land Bank to pay him.
In a report submitted by the Board investigating the case, it was found out that balance of each trust
account may not be accurate considering that it was not given ample opportunity to collate and sort out
the documents related to each trust account and that there may have been double take up of accounts
since the documents previously reviewed may have been considered again in subsequent reports.
In his Comment, Oate asserted that the undocumented withdrawals mentioned in the consolidated
report should not be considered as cash outflows. Rather, they should be treated as unauthorized
transactions and the amounts subject thereof must be credited back to his accounts. Oate reiterated
that Land Bank should be held liable for the undocumented withdrawals and drawings.
On May 31, 2006, the RTC rendered a Decision dismissing Land Banks Complaint for its failure to
establish that the amount of P4,086,888.89 allegedly miscredited to Oates Trust Account No. 01125 actually came from the investments of PVTA and PVTB. Hence, the RTC ordered Land Bank to
restore the total amount of P1,471,416.52 which the bank unilaterally debited from Oates five trust
accounts with legal rate of interest of 12% per annum, compounded yearly, effective on 21 June 1991
until fully paid. The RTC also ruled that Oate is deemed to have approved the entries in the
statements of account that were sent to him as he never interposed any objection thereto within the

period given him to do so. Consequently, the CA denied Land Banks appeal and granted that of Oate.
The CA affirmed the RTCs ruling that Land Bank failed to establish the source of the funds it claimed
to have been erroneously credited to Oates account.
Land Bank filed a Motion for Reconsideration dated May 27, 2010, however, the CA denied its motion.
Hence, Land Bank filed the instant Petition for Review on Certiorari.
Whether or not the award of interest to Oate at the rate of twelve percent (12%) per annum,
compounded yearly from june 21, 1991 until fully paid, is violative of article 1959 of the civil code.
Supreme Court denied the petition. From the very start the issues involved in this case are factual the
very reason why the RTC created a Board of Commissioners to assist it in examining the records
pertaining to Oates accounts and determine the respective cash inflows and outflows in said accounts.
Land Banks argument that the lower courts erred in imposing 12% per annum rate of interest is devoid
of merit. The unilateral offsetting of funds without legal justification and the undocumented
withdrawals are tantamount to forbearance of money. Land Bank is estopped from assailing the award
of 12% per annum rate of interest. In its Complaint, Land Bank arrived at P8,222,687.89 as the
outstanding indebtedness of Oate by using the same 12% per annum rate of interest. It was only after
the lower courts rendered unfavorable decisions that Land Bank started to insist that the applicable rate
of interest is 6% per annum. The compounding of interest, on the other hand, was based on the
provision of the IMAs granting Land Bank to hold, invest and reinvest the Fund and keep the same

invested, in your sole discretion, without distinction between principal and income. As for the
commencement date, it was suggested that 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). In
accordance to that, the Court ruled that the debited amount of P1,471,416.52, shall earn interest
beginning May 31, 2006 or the day the RTC rendered its Decision granting said amount to Oate. As
to the undocumented withdrawals of P60,663,488.11 and US$3,210,222.85, the legal rate of interest
should start to run the day the CA promulgated its Decision on December 18, 2009.
During the pendency of this case, however, the Monetary Board issued Resolution No. 796 dated May
16, 2013, stating that in the absence of express stipulation between the parties, the rate of interest in
loan or forbearance of any money, goods or credits and the rate allowed in judgments shall be 6% per
annum. Said Resolution is embodied in Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013,
which took effect on July 1, 2013. Hence, the 12% annual interest mentioned above shall apply only
up to June 30, 2013. Thereafter, or starting July 1, 2013, the applicable rate of interest for both the
debited amount and undocumented withdrawals shall be 6% per annum, compounded annually, until
fully paid.

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