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G.R. No.

194201 November 27, 2013

SPOUSES BAYANI H. ANDAL AND GRACIA G. ANDAL, Petitioners,


vs.
PHILIPPINE NATIONAL BANK REGISTER OF DEEDS OF BATANGAS CITY JOSE C.
CORALES, Respondents.

DECISION

PEREZ, J.:

Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking
to partially set aside the Decision,2 dated 30 March 2010, and the Resolution,3 dated 13 October
2010, of the Court of Appeals (CA) in CA-G.R. CV No. 91250. The challenged Decision dismissed
the appeal of herein respondent Philippine National Bank (respondent bank) and affirmed the
decision of the Regional Trial Court (RTC), Branch 84, Batangas City with the modification that the
interest rate to be applied by respondent bank on the principal loan obligation of petitioners Spouses
Bayani H. Andal and Gracia G. Andal (petitioners spouses) shall be 12% per annum, to be
computed from default.

As found by the CA, the facts of this case are as follows:

x x x on September 7, 1995, [petitioners-spouses] obtained a loan from [respondent bank] in the


amount ofP21,805,000.00, for which they executed twelve (12) promissory notes x x x [undertaking]
to pay [respondent bank] the principal loan with varying interest rates of 17.5% to 27% per interest
period. It was agreed upon by the parties that the rate of interest may be increased or decreased for
the subsequent interest periods, with prior notice to [petitioners-spouses], in the event of changes in
interest rates prescribed by law or the Monetary Board x x x, or in the banks overall cost of funds.

To secure the payment of the said loan, [petitioners-spouses] executed in favor of [respondent bank]
a real estate mortgage using as collateral five (5) parcels of land including all improvements therein,
all situated in Batangas City and covered by Transfer Certificate of Title (TCT) Nos. T-641, T-32037,
T-16730, T-31193 and RT 363 (3351) of the Registry of Deeds of Batangas City, in the name of
[petitioners-spouses].

Subsequently, [respondent bank] advised [petitioners-spouses] to pay their loan obligation,


otherwise the former will declare the latters loan due and demandable. On July 17, 2001,
[petitioners-spouses] paid P14,800,000.00 to [respondent bank] to avoid foreclosure of the
properties subject of the real estate mortgage. Accordingly, [respondent bank] executed a release of
real estate mortgage over the parcels of land covered by TCT Nos. T-31193 and RT-363 (3351).
However, despite payment x x x, [respondent bank] proceeded to foreclose the real estate
mortgage, particularly with respect to the three (3) parcels of land covered by TCT Nos. T-641, T-
32037 and T-16730 x x x.

x x x [A] public auction sale of the properties proceeded, with the [respondent bank] emerging as the
highest and winning bidder. Accordingly, on August 30, 2002, a certificate of sale of the properties
involved was issued. [Respondent bank] consolidated its ownership over the said properties and
TCT Nos. T-52889, T-52890, and T-52891 were issued in lieu of the cancelled TCT[s] x x x. This
prompted [petitioners-spouses] to file x x x a complaint for annulment of mortgage, sheriffs
certificate of sale, declaration of nullity of the increased interest rates and penalty charges plus
damages, with the RTC of Batangas City.
In their amended complaint, [petitioners-spouses] alleged that they tried to religiously pay their loan
obligation to [respondent bank], but the exorbitant rate of interest unilaterally determined and
imposed by the latter prevented the former from paying their obligation. [Petitioners-spouses] also
alleged that they signed the promissory notes in blank, relying on the representation of [respondent
bank] that they were merely proforma [sic] bank requirements. Further, [petitioners-spouses] alleged
that the unilateral increase of interest rates and exorbitant penalty charges are akin to unjust
enrichment at their expense, giving [respondent bank] no right to foreclose their mortgaged
properties. x x x.

xxxx

On August 27, 2004 [respondent bank] filed its answer, denying the allegations in the complaint. x x
x [respondent bank] alleged that: the penalty charges imposed on the loan was expressly stipulated
under the credit agreements and in the promissory notes; although [petitioners-spouses] paid to
[respondent bank]P14,800,000.00 on July 10, 2001, the former was still indebted to the latter in the
amount of P33,960,633.87; assuming arguendo that the imposition was improper, the foreclosure of
the mortgaged properties is in order since [respondent banks] bid in the amount of P28,965,100.00
was based on the aggregate appraised rates of the foreclosed properties. x x x4

After trial, the RTC rendered judgment5 in favor of petitioners-spouses and against respondent bank,
ordering that:

1. The rate of interest should be reduced as it is hereby reduced to 6% in accordance with Article
2209 of the Civil Code effective the next 30, 31 and 180 days respectively from the date of the
twelve (12) promissory notes x x x covered by the real estate x x x mortgages, to be applied on a
declining balance of the principal after the partial payments of P14,800,00.00 (paid July 17, 2001)
and P2,000,000.006 (payments of P300,000.00 on October 1, 1999, P1,800,000.00 as [of] December
1, 1999, P700,000.00 [on] January 31, 2000) per certification of [respondent bank] to be reckoned at
(sic) the dates the said payments were made, thus the corrected amounts of the liability for principal
balance and the said 6% charges per annum shall be the new basis for the [petitioners-spouses] to
make payments to the [respondent bank] x x x which shall automatically extinguish and release the
mortgage contracts and the outstanding liabilities of the [petitioners-spouses]; [respondent bank]
shall then surrender the new transfer certificates of title x x x in its name to the [c]ourt x x x,
[c]anceling the penalty charges.

xxxx

3. Declaring as illegal and void the foreclosure sales x x x, the Certificates of Sales and the
consolidation of titles of the subject real properties, including the cancellation of the new Transfer
Certificates of Title x x x in the name of the [respondent] bank and reinstating Transfer Certificates of
Title Nos. T-641, T-32037 and T-16730 in the names of the [petitioners-spouses]; the latter acts to
be executed by the Register of Deeds of Batangas City.7

The foregoing disposition of the RTC was based on the following findings of fact:

As of this writing the [respondent] bank have (sic) not complied with the said orders as to the interest
rates it had been using on the loan of [petitioners-spouses] and the monthly computation of interest
vis a vis (sic) the total shown in the statement of account as of Aug 30, 2002. Such refusal amounts
to suppression of evidence thus tending to show that the interest used by the bank was unilaterally
increased without the written consent of the [petitioners-spouses]/borrower as required by law and
Central Bank Circular No. 1171. The latter circular provides that any increase of interest in a given
interest period will have to be expressly agreed to in writing by the borrower. The mortgaged
properties were subject of foreclosure and were sold on August 30, 2002 and the [respondent]
banks statement of account as of August 30, 2002 x x x shows unpaid interest up to July 17, 2001
of P12,695,718.99 without specifying the rate of interest for each interest period of thirty days.
Another statement of account of [respondent bank] x x x as [of] the date of foreclosure on August 30,
2002 shows account balance ofP20,505,916.51 with a bid price of P28,965,100.00 and showing an
interest of P16,163,281.65. Again, there are no details of the interest used for each interest period
from the time these loans were incurred up to the date of foreclosure. These statements of account
together with the stated interest and expenses after foreclosure were furnished by the [respondent]
bank during the court hearings. The central legal question is that there is no agreement in writing
from the [petitioners-spouses]/borrowers for the interest rate for each interest period neither from the
data coming from the Central Bank or the cost of money which is understood to mean the interest
cost of the bank deposits form the public. Such imposition of the increased interest without the
consent of the borrower is null and void pursuant to Article 1956 of the Civil Code and as held in the
pronouncement of the Supreme Court in several cases and C.B. Circular No. 1191 that the interest
rate for each re-pricing period under the floating rate of interest is subject to mutual agreement in
writing. Art. 1956 states that no interest is due unless it has been expressly stipulated and agreed to
in writing.

Any stipulation where the fixing of interest rate is the sole prerogative of the creditor/mortgagee,
belongs to the class of potestative condition which is null and void under Art. 1308 of the New Civil
Code. The fulfillment of a condition cannot be left to the sole will of [one of] the contracting parties.

xxxx

In the instant case, if the interest is declared null and void, the foreclosure sale for a higher amount
than what is legally due is likewise null and void because under the Civil Code, a mortgage may be
foreclosed only to enforce the fulfillment of the obligation for whose security it was constituted (Art.
2126, Civil Code).

xxxx

Following the declaration of nullity of the stipulation on floating rate of interest since no interest may
be collected based on the stipulation that is null and void and legally inexistent and unenforceable. x
x x. Since the interest imposed is illegal and void only the rate of 6% interest per month shall be
imposed as liquidated damages under Art. 2209 of the Civil Code.

It is worth mentioning that these forms used by the bank are pre- printed forms and therefore
contracts of adhesion and x x x any dispute or doubt concerning them shall be resolved in favor of
the x x x borrower. This (sic) circumstances tend to support the contention of the [petitioners-
spouses] that they were made to sign the real estate mortgages/promissory notes in blank with
respect to the interest rates.

xxxx

[Respondent bank has] no right to foreclose [petitioners-spouses] property and any foreclosure
thereof is illegal, unreasonable and void, since [petitioners-spouses] are not and cannot be
considered in default for their inability to pay the arbitrarily, illegally, and unconscionably adjusted
interest rates and penalty charges unilaterally made and imposed by [respondent] bank.

The [petitioners-spouses] submitted to the court certified copies of the weighted average of Selected
Domestic Interest Rates of the local banks obtained from the Bangko Sentral ng Pilipinas Statistical
Center and it shows a declining balance of interest rates x x x.
xxxx

There is no showing by the [respondent bank] that any of the foregoing rate was ever used to
increase or decrease the interest rates charged upon the [petitioners-spouses] mortgage loan for
the 30 day re- pricing period subsequent to the first 30 days from [the] dates of the promissory notes.
These documents submitted being certified public documents are entitled to being taken cognizance
of by the court as an aid to its decision making. x x x.8

Respondent bank appealed the above judgment of the trial court to the CA. Its main contention is
that the lower court erred in ordering the re-computation of petitioners-spouses loans and applying
the interest rate of 6% per annum. According to respondent bank, the stipulation on the interest rates
of 17.5% to 27%, subject to periodic adjustments, was voluntarily agreed upon by the parties; hence,
it was not left to the sole will of respondent bank. Thus, the lower court erred in reducing the interest
rate to 6% and in setting aside the penalty charges, as such is contrary to the principle of the
obligatory force of contracts under Articles 1315 and 1159 of the Civil Code.9

The CA disposed of the issue in the following manner:

We partly agree with [respondent banks] contention.

Settled is the rule that the contracting parties are free to enter into stipulations, clauses, terms and
conditions as they may deem convenient, as long as these are not contrary to law, morals, good
customs, public order or public policy. Pursuant to Article 1159 of the Civil Code, these obligations
arising from such contracts have the force of law between the parties and should be complied with in
good faith. x x x.

xxxx

In the case at bar, [respondent bank] and [petitioners-spouses] expressly stipulated in the
promissory notes the rate of interest to be applied to the loan obtained by the latter from the former,
x x x.

xxxx

[Respondent bank] insists that [petitioner-spouses] agreed to the interest rates stated in the
promissory notes since the latter voluntarily signed the same. However, we find more credible and
believable the version of [petitioners-spouses] that they were made to sign the said promissory notes
in blank with respect to the rate of interest and penalty charges, and subsequently, [respondent]
bank filled in the blanks, imposing high interest rate beyond which they were made to understand at
the time of the signing of the promissory notes.

xxxx

The signing by [petitioners-spouses] of the promissory notes in blank enabled [respondent] bank to
impose interest rates on the loan obligation without prior notice to [petitioners-spouses]. The
unilateral determination and imposition of interest rates by [respondent] bank without [petitioners-
spouses] assent is obviously violative of the principle of mutuality of contracts ordained in Article
1308 of the Civil Code x x x.

xxxx
[Respondent banks] act converted the loan agreement into a contract of adhesion where the parties
do not bargain on equal footing, the weaker partys participation, herein [petitioners-spouses], being
reduced to the alternative to take it or leave it. [Respondent] bank tried to sidestep this issue by
averring that [petitioners-spouses], as businessmen, were on equal footing with [respondent bank]
as far as the subject loan agreements are concerned. That may be true insofar as entering into the
original loan agreements and mortgage contracts are concerned. However, that does not hold true
when it comes to the unilateral determination and imposition of the escalated interest rates imposed
by [respondent] bank.

xxxx

The Court further notes that in the case at bar, [respondent] bank imposed different rates in the
twelve (12) promissory notes: interest rate of 18% in five (5) promissory notes; 17.5% in two (2)
promissory notes; 23% in one (1) promissory note; and 27% in three (3) promissory notes.
Obviously, the interest rates are excessive and arbitrary. Thus, the foregoing interest rates imposed
on [petitioners-spouses] loan obligation without their knowledge and consent should be disregarded,
not only for being iniquitous and exorbitant, but also for being violative of the principle of mutuality of
contracts.

However, we do not agree with the trial court in fixing the rate of interest of 6%. It is well-settled that
when an obligation is breached and consists in the payment of a sum of money, i.e., loan or
forbearance of money, the interest due shall be that which may have been stipulated in writing. In
the absence of stipulation, the rate of interest shall be 12% interest per annum to be computed from
default, i.e., from judicial or extra-judicial demand and subject to the provisions of Article 1169 of the
Civil Code. Since the interest rates printed in the promissory notes are void for the reasons above-
stated, the rate of interest to be applied to the loan should be 12% per annum only.10

The CA, consequently, dismissed respondent banks appeal and affirmed the decision of the trial
court with the modification that the rate of interest shall be 12% per annum instead of 6%.
Respondent bank filed a Motion for Reconsideration of the CA decision. Petitioners-spouses, on the
other hand, filed a comment praying for the denial of respondent banks motion for reconsideration.
They also filed an "Urgent Manifestation"11 calling the attention of the CA to its respective decisions
in the cases of Spouses Enrique and Epifania Mercado v. China Banking Corporation, et. al. (CA-GR
CV No. 75303)12 and Spouses Bonifacio Caraig and Ligaya Caraig v. The Ex-Officio Sheriff of RTC,
Batangas City, et. al. (CA-G.R. CV No. 76029).13

According to petitioners-spouses, in Spouses Mercado v. China Banking, the Special Seventh


Division of the CA held that where the interest rate is potestative, the entire interest is null and void
and no interest is due.

On the other hand, in the case of Spouses Caraig v. The Ex-Officio Sheriff of RTC, Batangas City,
the then Ninth Division of the CA ruled that under the doctrine of operative facts, no interest is due
after the auction sale because the loan is paid in kind by the auction sale, and interest shall
commence to run again upon finality of the judgment declaring the auction sale null and void.14

The CA denied respondent banks Motion for Reconsideration for lack of merit. It likewise found no
merit in petitioners-spouses contention that no interest is due on their principal loan obligation from
the time of foreclosure until finality of the judgment annulling the foreclosure sale. According to the
CA:

x x x Notably, this Court disregarded the stipulated rate[s] of interest on the subject promissory notes
after finding that the same are iniquitous and exorbitant, and for being violative of the principle of
mutuality of contracts. Nevertheless, in Equitable PCI Bank v. Ng Sheung Ngor, the Supreme Court
ruled that because the escalation clause was annulled, the principal amount of the loan was subject
to the original or stipulated interest rate of interest, and that upon maturity, the amount due was
subject to legal interest at the rate of 12% per annum. In this case, while we similarly annulled the
escalation clause contained in the promissory notes, this Court opted not to impose the original rates
of interest stipulated therein for being excessive, the same being 17.5% to 27% per interest period.

Relevantly, the High Court held in Asian Cathay Finance and Leasing Corporation v. Spouses
Cesario Gravador and Norma De Vera, et. al. that stipulations authorizing the imposition of iniquitous
or unconscionable interest are contrary to morals, if not against the law. x x x. The nullity of the
stipulation on the usurious interest does not, however, affect the lenders right to recover the
principal of the loan. The debt due is to be considered without the stipulation of the excessive
interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly
imposed.

Following the foregoing rulings of the Supreme Court, it is clear that the imposition by this Court of a
12% rate of interest per annum on the principal loan obligation of [petitioners-spouses], computed
from the time of default, is proper as it is consistent with prevailing jurisprudence.

While the decisions of the Special Seventh Division and the Ninth Division of this Court in CA-G.R.
CV No. 75303 and in CA-G.R. No. 76029 are final and executory, the same merely have persuasive
effect but do not outweigh the decisions of the Supreme Court which we are duty-bound to follow,
conformably with the principle of stare decisis.

The doctrine of stare decisis enjoins adherence to judicial precedents. It requires courts in a country
1w phi 1

to follow the rule established in a decision of the Supreme Court thereof. That decision becomes a
judicial precedent to be followed in subsequent cases by all courts in the land. The doctrine of stare
decisis is based on the principle that once a question of law has been examined and decided, it
should be deemed settled and closed to further argument.15 (Emphasis supplied.)

Petitioners-spouses are now before us, reiterating their position that no interest should be imposed
on their loan, following the respective pronouncements of the CA in the Caraig and Mercado Cases.
Petitioners-spouses insist that "if the application of the doctrine of operative facts is upheld, as
applied in Caraig vs. Alday, x x x, interest in the instant case would be computed only from the
finality of judgment declaring the foreclosure sale null and void. If Mercado vs. China Banking
Corporation x x x, applying by analogy the rule on void usurious interest to void potestative interest
rate, is further sustained, no interest is due when the potestative interest rate stipulation is declared
null and void, as in the instant case.16

Our Ruling

We dismiss the appeal.

We cannot subscribe to the contention of petitioners-spouses that no interest should be due on the
loan they obtained from respondent bank, or that, at the very least, interest should be computed only
from the finality of the judgment declaring the foreclosure sale null and void, on account of the
exorbitant rate of interest imposed on their loan.

It is clear from the contract of loan between petitioners-spouses and respondent bank that
petitioners-spouses, as borrowers, agreed to the payment of interest on their loan obligation. That
the rate of interest was subsequently declared illegal and unconscionable does not entitle
petitioners-spouses to stop payment of interest. It should be emphasized that only the rate of
1wphi 1
interest was declared void. The stipulation requiring petitioners-spouses to pay interest on their loan
remains valid and binding. They are, therefore, liable to pay interest from the time they defaulted in
payment until their loan is fully paid.

It is worth mentioning that both the RTC and the CA are one in saying that "[petitioners-spouses]
cannot be considered in default for their inability to pay the arbitrary, illegal and unconscionable
interest rates and penalty charges unilaterally imposed by [respondent] bank."17 This is precisely the
reason why the foreclosure proceedings involving petitioners-spouses properties were invalidated.
As pointed out by the CA, "since the interest rates are null and void, [respondent] bank has no right
to foreclose [petitioners-spouses] properties and any foreclosure thereof is illegal. x x x. Since there
was no default yet, it is premature for [respondent] bank to foreclose the properties subject of the
real estate mortgage contract."18

Thus, for the purpose of computing the amount of liability of petitioners-spouses, they are
considered in default from the date the Resolution of the Court in G.R. No. 194164 (Philippine
National Bank v. Spouses Bayani H. Andal and Gracia G. Andal) which is the appeal interposed by
respondent bank to the Supreme Court from the judgment of the CA became final and executory.
Based on the records of G.R. No. 194164, the Court denied herein respondent banks appeal in a
Resolution dated 10 January 2011. The Resolution became final and executory on 20 May 2011.19

In addition, pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of the
Bangko Sentral ng Pilipinas on 21 June 2013, and in accordance with the ruling of the Supreme
Court in the recent case of Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr.,20 effective 1 July
2013, 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 an express contract as to such rate of interest, shall be six
percent (6%) per annum. Accordingly, the rate of interest of 12% per annum on petitioners-spouses
obligation shall apply from 20 May 2011 the date of default until 30 June 2013 only. From 1 July
2013 until fully paid, the legal rate of 6% per annum shall be applied to petitioners-spouses unpaid
obligation.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Judgment of the Court of Appeals
in CA-G.R. CV No. 91250 is AFFIRMED with the MODIFICATION that the 12% interest per annum
shall be applied from the date of default until 30 June 2013 only, after which date and until fully paid,
the outstanding obligation of petitioners-spouses shall earn interest at 6% per annum. Let the
records of this case be remanded to the trial court for the proper computation of the amount of
liability of petitioners Spouses Bayani H. Andal and Gracia G. Andal, in accordance with the
pronouncements of the Court herein and with due regard to the payments previously made by
petitioners-spouses.

SO ORDERED.

JOSE PORTUGAL PEREZ


Associate Justice
G.R. No. 208984, September 16, 2015

WT CONSTRUCTION, INC., Petitioner, v. THE PROVINCE OF CEBU, Respondent.

G.R. No. 209245

PROVINCE OF CEBU, Petitioner, v. WT CONSTRUCTION, INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

Before this Court are consolidated petitions for review on certiorari1 assailing the Decision2 dated December
19, 2012 and the Resolution3 dated August 8, 2013 of the Court of Appeals (CA) in CA-G.R. CEB-CV No.
03791, which affirmed the Order4 dated September 22, 2009 of the Regional Trial Court of Cebu City,
Branch 6 (RTC) in Civil Case No. CEB-34012 finding the Province of Cebu liable to pay WT Construction, Inc.
(WTCI) the amount of P257,413,911.73, but reduced the legal interest rate imposable thereon from 12% to
6% per annum.

The Facts

Sometime in 2005, the Province of Cebu was chosen by former President Gloria Macapagal-Arroyo to host
the 12th Association of Southeast Asian Nations (ASEAN) Summit scheduled on December 10, 2006. To cater
to the event, it decided to construct the Cebu International Convention Center (CICC or the project) at the
New Mandaue Reclamation Area, Mandaue City, Cebu, which would serve as venue for the ASEAN Summit.5

Accordingly, the Province of Cebu conducted a public bidding for the project and, on February 22, 2006,
WTCI emerged as the winning bidder for the construction of Phase I thereof which consists of the
substructure of CICC. On July 26, 2006, after completing Phase I and receiving payment therefor, WTCI
again won the bidding for Phase II of the project involving the adjacent works on CICC.6

As Phase II neared completion, the Province of Cebu caused WTCI to perform additional works on the
project which included site development, and additional structural, architectural, electric, and plumbing
works (additional works). Cognizant of the need to complete the project in time for the ASEAN Summit, and
with the repeated assurances that it would be promptly paid, WTCI agreed to perform the additional works
notwithstanding the lack of public bidding.7

In November 2006, weeks before the scheduled ASEAN Summit, WTCI completed the project, including the
additional works and, accordingly, demanded payment therefor.8 In a letter9 dated February 8, 2007, WTCI
billed the Province of Cebu the amount of P175,951,478.69 corresponding to the added cost for the site
development and extended structural and architectural works. In a separate letter dated February 12,
2007,10 WTCI billed the Province of Cebu the amount of P85,266,407.97 representing the cost for the
additional electrical and plumbing works. The Province of Cebu, however, refused to pay,11 thereby
prompting WTCI to send a Final Billing12 dated February 21, 2007 where it demanded payment of the
aggregate sum of P261,217,886.66.

In the letters dated March 20, 200713 and September 11, 2007,14 WTCI again reiterated its demand for
payment but the Province of Cebu still refused to pay. Thus, on January 22, 2008, WTCI filed a
complaint15 for collection of sum of money before the RTC which was docketed as Civil Case No. CEB-34012.

For its defense, the Province of Cebu admitted the existence of the additional works but maintained that
there was no contract between it and WTCI therefor. It also claimed that the additional works did not
undergo public bidding as required by Republic Act No. (RA) 9184,16 otherwise known as the "Government
Procurement Reform Act."17 Upon joint verification by the parties, the value of the additional works was
pegged at P263,263,261.41.18

The RTC Ruling

In a Judgment19 dated May 20, 2009, the RTC ruled in favor of WTCI and ordered the Province of Cebu to
pay the following amounts: (a) P263,263,261.41 representing the cost of the additional works, with legal
interest at the rate of 12% per annum computed from the filing of the complaint on January 22, 2008 until
fully paid; (b) P50,000.00 as attorney's fees; and (c) costs of suit.20 The RTC found that there was a
perfected oral contract between the parties for the additional works on CICC, and that WTCI must be duly
compensated therefor under the doctrine of quantum meruit; otherwise, the Province of Cebu would be
unjustly enriched.21

The Province of Cebu sought a reconsideration22 of the foregoing and argued that its valuation of the
additional works was only P257,413,911.73.23 Further, it maintained that it was not liable to pay interests as
WTCI performed the additional works at its own risk, given that there was no public bidding.24

WTCI, on the other hand, neither filed an appeal nor a motion for reconsideration of the May 20, 2009
Judgment of the RTC.

In an Order25 dated September 22, 2009, the RTC granted in part the motion for reconsideration and
reduced the amount of actual damages from P263,263,261.41 to P257,413,911.73, in accordance with the
cost standards for the year 2006 provided by the Commission on Audit (COA), the National Statistics Office
(NSO), the Department of Trade and Industry (DTI), and the Province of Cebu itself. On all other points,
including the award of 12% legal interest from the filing of the complaint, as well as the award of attorney's
fees and costs of suit, the RTC sustained its earlier ruling.26

Dissatisfied, the Province of Cebu appealed27 to the CA.

The CA Ruling

In a Decision28 dated December 19, 2012, the CA affirmed the RTC's Order dated September 22, 2009 but
reduced the interest rate to 6% per annum.29 It remarked that the issue of whether or not a contract existed
between the parties for the additional works has been rendered immaterial in view of the admission by the
Province of Cebu that it was liable for the amount of P257,413,911.73, and that it had paid the same to
WTCI; hence, only the award of interest, attorney's fees, and costs of suit are at issue.30 In this regard, the
CA pointed out that the reduction of the interest rate from 12% to 6% per annum is warranted given that
the liability of the Province of Cebu did not arise from a loan or forbearance of money but from the
nonpayment of services rendered by WTCI.31 Anent the award of attorney's fees and costs of suit, the CA
affirmed the same after finding that the Province of Cebu acted maliciously and in bad faith when it refused
to pay the value of the additional works.32

On January 24, 2013, the Province of Cebu moved for reconsideration33 which was, however, denied by the
CA in a Resolution34 dated August 8, 2013.

WTCI, on the other hand, did not seek for a reconsideration of the CA's December 19, 2012 Decision but
filed, on November 13, 2013, a petition for review on certiorari35 before this Court, docketed as G.R. No.
208984. In said petition, WTCI maintained that the obligation is one for forbearance of money since its
performance of the additional works was a mere financial accommodation to the Province of Cebu, thereby
warranting the imposition of legal interest at the rate of 12% per annum, as originally decreed by the
RTC.36 It further claimed that the interest should be computed from the date of extrajudicial demand, i.e.,
from the date of receipt of the Province of Cebu of its February 8 and 12, 2007 billing letters.37

On November 13, 2013, the Province of Cebu filed its own petition for review on certiorari38 before this
Court, docketed as G.R. No. 209245. It contended that there was no perfected contract between the parties
and that even if there was, the same is void for lack of public bidding as required under RA 9184.39 While it
admitted paying P257,413,911.73 to WTCI, the Province of Cebu averred that it did so only under the
principle of quantum meruit,40 adding too that it could not be held liable for interest, attorney's fees, and
costs of suit because there was no valid contract and that, at any rate, even if it wanted to pay WTCI
sooner, it could not do so owing to the lack of documentation.41

In a Resolution42 dated December 4, 2013, the Court consolidated the present petitions.

The Issues Before the Court

The issues for the resolution of the Court are: (a) whether or not the liability of the Province of Cebu is in
the nature of a loan or forbearance of money; and (b) whether or not the interest due should be computed
from the date of the filing of the complaint or from the time extrajudicial demand was made.
The Court's Ruling

At the outset, it must be pointed out that a determination of whether or not there wras a perfected oral
contract between the Province of Cebu and WTCI is a question of fact which is beyond the scope of the
Court's power in a petition for review on certiorari, subject to certain exceptions which do not obtain in this
case. It is a settled rule that questions of law may be brought before this Court on petition for review
on certiorari under Rule 45 of the Rules of Court. This Court is not a trier of facts and factual findings of the
RTC, when affirmed by the CA, as in this case, are entitled to great weight and respect by this Court and are
deemed final and conclusive when supported by the evidence on record.43 Accordingly, the Court affirms the
liability of the Province of Cebu to WTCI in the amount of P257,413,911.73 which corresponds to the value
of the additional works.

The Court now proceeds to determine the nature of the liability of the Province of Cebu to WTCI.

There is no question that the present case does not involve an obligation arising from a loan; what is at
issue is whether the liability of the Province of Cebu involves a forbearance of money, based on WTCI's
claim that it merely advanced the cost of the additional works. In Sunga-Chan v. CA,44 the Court
characterized a transaction involving forbearance of money as follows:
The term "forbearance," within the context of usury law, has been described as a contractual obligation of a
lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay
the loan or debt then due and payable.45
In Estores v. Supangan,46 the Court explained that forbearance of money, goods, or credit refers to
arrangements other than loan agreements where a person acquiesces to the temporary use of his money,
goods or credits pending the happening of certain events or fulfilment of certain conditions such that if these
conditions are breached, the said person is entitled not only to the return of the principal amount given, but
also to compensation for the use of his money equivalent to the legal interest since the use or deprivation of
funds is akin to a loan.47

Applying the foregoing standards to the case at hand, the Court finds that the liability of the Province of
Cebu to WTCI is not in the nature of a forbearance of money as it does not involve an acquiescence to the
temporary use of WTCI's money, goods or credits. Rather, this case involves WTCI's performance of a
particular service, i.e., the performance of additional works on CICC, consisting of site development,
additional structural, architectural, plumbing, and electrical works thereon.

Verily, the Court has repeatedly recognized that liabilities arising from construction contracts do not partake
of loans or forbearance of money but are in the nature of contracts of service. In Federal Builders, Inc. v.
Foundation Specialists, Inc.,48 the Court ruled that the liability arising from the non-payment for the
construction works, specifically the construction of a diaphragm wall, capping beam, and guide walls of the
Trafalgar Plaza in Makati City, do not partake of a loan or forbearance of money but is more in the nature of
a contract of service.49 The Court, therefore, sustains the CA's ruling that the rate of legal interest imposable
on the liability of the Province of Cebu to WTCI is 6% per annum, in accordance with the guidelines laid
down in Eastern Shipping Lines, Inc. v. Court of Appeals50(Eastern Shipping Lines, Inc.), viz.:
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:
chanRoble svirtual Lawli bra ry

1. When the obligation is breached, and it consists in the payment of a sum of money,i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on


the amount of damages awarded may be imposed at thediscretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the judgment
of the court is made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.51 (Emphases supplied)
The foregoing guidelines have been updated in Nacar v. Gallery Frames52 (Nacar), pursuant to Bangko
Sentral ng Pilipinas (BSP) Circular No. 799, series of 2013, which reduced the rate of legal interest for loans
or transactions involving forbearance of money, goods, or credit from 12% to 6% per
annum.53Nevertheless, the rate of legal interest for obligations not constituting loans or forbearance such as
the one subject of this case remains unchanged at 6% per annum.

Coming now to the issue of whether the RTC and the CA erred in computing the interest due WTCI from the
time of the filing of the complaint, the Court finds merit in WTCI's argument that the same should be
reckoned from the time WTCI made the extrajudicial demand for the payment of the principal, i.e., upon
receipt of the Province of Cebu of WTCI's February 8, 2007 and February 12, 2007 letters demanding
payment for the additional structural and architectural works, and additional electrical and plumbing works,
respectively. The Court observes, however, that WTCI neither appealed from nor sought a
reconsideration of the May 20, 2009 Judgment of the RTC which awarded interest to it computed from the
time of the filing of the complaint on January 22, 2008. Accordingly, the RTC's determination of the
interest's reckoning point had already become final as against WTCI since it was not one of the assigned
errors considered on appeal. It is settled that a decision becomes final as against a party who does not
appeal the same.54 Consequently, the present petition of WTCI questioning the RTC's determination on the
reckoning point of the legal interest awarded can no longer be given due course. The Court is, therefore,
constrained to uphold the rulings of the RTC and the CA that the legal interest shall be computed from the
time of the filing of the complaint.

Lastly, the Court agrees with the CA that the legal interest rate of 6% shall be imposed from the finality of
the herein judgment until satisfaction thereof. This is in view of the principle that in the interim, the
obligation assumes the nature of a forbearance of credit which, pursuant to Eastern Shipping Lines, Inc. as
modified by Nacar, is subject to legal interest at the rate of 6% per annum.

WHEREFORE, the petitions are DENIED. The Decision dated December 19, 2012 and the Resolution dated
August 8, 2013 of the Court of Appeals in CA-G.R. CEB-CV No. 03791 are hereby AFFIRMED.

SO ORDERED. chanroblesvi rtua llawli bra ry


G.R. No. 107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner,


vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO
FERNANDEZ, respondents.

Vidad, Corpus & Associates for petitioner.

Remedios Jayme-Fernandez for privaate respondents.

PUNO, J.:

Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of
Appeals 1 in CA G.R. CV No. 27195, the dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is
entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per
annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness
and to accordingly take the appropriate charges from plaintiffs-appellants' (private
respondents') payment of P81,000.00 made on December 26, 1985. Any balance on
the indebtedness should, likewise, be charged interest at the rate of 12%per annum.

SO ORDERED.

The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:

On April 7, 1982, (private respondents) as owners of a NACIDA-registered


enterprise, obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF)
from the Philippine National Bank (PNB) in the amount of Fifty Thousand
(P50,000.00) Pesos, as evidenced by a Credit Agreement. Under the Promissory
Note covering the loan, the loan was to be amortized over a period of three (3) years
to end on March 29, 1985, at twelve (12%) percent interest annually.

To secure the loan, (private respondents) executed a Real Estate Mortgage over a
1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug,
Toledo City, which was appraised by the PNB at P1,062.52 and given a loan value of
P531.26 by the Bank. In addition, (private respondents) executed a Chattel Mortgage
over a thermo plastic-forming machine, which had an appraisal value of P8,800 and
a loan value of P4,400.00.

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 MORTGAGE, 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.

On February 17, 1983, (private respondents) were granted an additional NACIDA


loan of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private
respondents) executed another Promissory Note, which was to mature on April 1,
1985. Other than the date of maturity, the second promissory note contained the
same terms and stipulations as the previous note. The parties likewise executed a
new Credit Agreement, changing the amount of the loan from P50,000.00 to
P100,000.00, but otherwise preserving the stipulations contained in the original
agreement.

As additional security for the loan, (private respondents) constituted another real
estate mortgage over 2 parcels of registered land, with a combined area of 311
square meters, located at Guadalupe, Cebu City. The land, upon which several
buildings are standing, was appraised by the PNB to have a value of P40,000.00 and
a loan value of P28,000.00.

In a letter dated August 1, 1984, the PNB informed (private respondents) "that the
interest rate of your CIGLF loan account with us is now 25% per annum plus a
penalty of 6% per annum on past dues." The PNB further increased this interest rate
to 30% on October 15, 1984; and to 42% on October 25, 1984.

The records show that as of December 1985, (private respondents) had an


outstanding principal account of P81,000.00 of which P18,523.14 was credited to the
principal, P57,488.89 to the interest, and the rest to penalty and other charges. Thus,
as of said date, the unpaid principal obligation of (private respondent) amounted to
P62,830.32.

Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12%
interest and to condone the present interest and penalties due; but to no
avail. 2 (Citations omitted.)

On December 15, 1987, private respondents filed a suit for specific performance against petitioner
PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional
Trial Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court to order:
1. The PNB and NACIDA to issue in (private respondents') favor, a release of
mortgage;

2. The PNB to pay pecuniary consequential damages for the destruction of (private
respondents') enterprise;

3. The PNB to pay moral and exemplary damages as well as the costs of suit; and

4. Granting (private respondents') such other relief as may be found just and
equitable in the premises. 4

On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No.
CEB-5610. On October 15, 1992, the Court of Appeals reversed the dismissal with respect to
petitioner bank, and disallowed the increases in interest rates.

Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled
(1) that the increase in interest rates are unauthorized; (2) that the Credit Agreement and the
Promissory Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular
No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the
increase of rate interest made by petitioner." 5

The petition is bereft of merit.

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 by law 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 Bank's 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 other's
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. 6

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 bank's posturing that the escalation clause at bench gives it
unbridled right tounilaterally 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

. . . The unilateral action of the PNB in increasing the interest rate on the private
respondent's 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 or 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 party's (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.
(Citation omitted.)

Private respondents are not also estopped from assailing the unilateral increases in interest rate
made by petitioner bank. No one receiving a proposal to change a contract to which he is a party, is
obliged to answer the proposal, and his silence per se cannot be construed as an acceptance. 7 In
the case at bench, the circumstances do not show that private respondents implicitly agreed to the
proposed increases in interest rate which by any standard were too sudden and too stiff.

IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of
Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.

SO ORDERED.
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.

HERMOSISIMA, JR. J.:p

Questions of law which are of 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 imposition 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, dated March 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 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 installment. 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 promissory notes, private respondent 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
collection 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 plaintiff's 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 P16,655.00, 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 attorney's fees; and to

5. Pay the costs 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 the three (3) promissory notes;

(3) defendants 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-defendants 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 Bank's Monetary Board pursuant to P.D. 1684
empowering them to prescribe the maximum rates of interest for loans and certain forbearances, to
wit:

Sec. 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 prescribe the maximum rate 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 rate or rates may be effected
gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted, the Monetary Board may prescribe
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

The 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 latter's 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

. . . 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 is 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 filed 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.
G.R. No. 192986 January 15, 2013

ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,


vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR
ARMANDO M. TETANGCO, JR., and its incumbent members: JUANITA D. AMATONG,
ALFREDO C. ANTONIO, PETER FA VILA, NELLY F. VILLAFUERTE, IGNACIO R. BUNYE and
CESAR V. PURISIMA, Respondents.

DECISION

REYES, J.:

Petitioners, claiming that they are raising issues of transcendental importance to the public, filed
directly with this Court this Petition for Certiorari under Rule 65 of the 1997 Rules of Court, seeking
to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), replacing the Central
Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no authority to
continue enforcing Central Bank Circular No. 905,1 issued by the CB-MB in 1982, which "suspended"
Act No. 2655, or the Usury Law of 1916.

Factual Antecedents

Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation
organized to engage in pro bono concerns and activities relating to money lending issues. It was
incorporated on July 9, 2010,2 and a month later, it filed this petition, joined by its founder and
president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.

R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, empowered
the CB-MB to, among others, set the maximum interest rates which banks may charge for all types
of loans and other credit operations, within limits prescribed by the Usury Law. Section 109 of R.A.
No. 265 reads:

Sec. 109. Interest Rates, Commissions and Charges. The Monetary Board may fix the maximum
rates of interest which banks may pay on deposits and on other obligations.

The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of
interest which banks may charge for different types of loans and for any other credit operations, or
may fix the maximum differences which may exist between the interest or rediscount rates of the
Central Bank and the rates which the banks may charge their customers if the respective credit
documents are not to lose their eligibility for rediscount or advances in the Central Bank.

Any modifications in the maximum interest rates permitted for the borrowing or lending operations of
the banks shall apply only to future operations and not to those made prior to the date on which the
modification becomes effective.

In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board
may also fix the maximum rates that banks may pay to or collect from their customers in the form of
commissions, discounts, charges, fees or payments of any sort. (Underlining ours)

On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the
CB-MB authority to prescribe different maximum rates of interest which may be imposed for a loan
or renewal thereof or the forbearance of any money, goods or credits, provided that the changes are
effected gradually and announced in advance. Thus, Section 1-a of Act No. 2655 now reads:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to
change such rate or rates whenever warranted by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually on scheduled dates
announced in advance.

In the exercise of the authority herein granted the Monetary Board may prescribe 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 prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries. (Underlining and emphasis
ours)

In its Resolution No. 2224 dated December 3, 1982,3 the CB-MB issued CB Circular No. 905, Series
of 1982, effective on January 1, 1983. Section 1 of the Circular, under its General Provisions,
removed the ceilings on interest rates on loans or forbearance of any money, goods or credits, to
wit:

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 juridical, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. (Underscoring
and emphasis ours)

The Circular then went on to amend Books I to IV of the CBs "Manual of Regulations for Banks and
Other Financial Intermediaries" (Manual of Regulations) by removing the applicable ceilings on
specific interest rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I,
Subsections 1303, 1349, 1388.1 of the Manual of Regulations, by removing the ceilings for interest
and other charges, commissions, premiums, and fees applicable to commercial banks; Sections 12
and 17 removed the interest ceilings for thrift banks (Book II, Subsections 2303, 2349); Sections 19
and 21 removed the ceilings applicable to rural banks (Book III, Subsection 3152.3-c); and, Sections
26, 28, 30 and 32 removed the ceilings for non-bank financial intermediaries (Book IV, Subsections
4303Q.1 to 4303Q.9, 4303N.1, 4303P).4

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko
Sentral ng Pilipinas (BSP) to replace the CB. The repealing clause thereof, Section 135, reads:

Sec. 135. Repealing Clause. Except as may be provided for in Sections 46 and 132 of this Act,
Republic Act No. 265, as amended, the provisions of any other law, special charters, rule or
regulation issued pursuant to said Republic Act No. 265, as amended, or parts thereof, which may
be inconsistent with the provisions of this Act are hereby repealed. Presidential Decree No. 1792 is
likewise repealed.

Petition for Certiorari

To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ of
certiorari, petitioners contend that the transcendental importance of their Petition can readily be seen
in the issues raised therein, to wit:
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or
constitutional authority to prescribe the maximum rates of interest for all kinds of credit
transactions and forbearance of money, goods or credit beyond the limits prescribed in the
Usury Law;

b) If so, whether the CB-MB exceeded its authority when it issued CB Circular No. 905,
which removed all interest ceilings and thus suspended Act No. 2655 as regards usurious
interest rates;

c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No.
905.5

Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th
Congress, which held its sessions from 1995 to 1998, calling for investigations by the Senate
Committee on Banks and Financial Institutions into alleged unconscionable commercial rates of
interest imposed by these entities. Senate Bill (SB) Nos. 376 and 1860,7 filed by Senator Vicente C.
Sotto III and the late Senator Blas F. Ople, respectively, sought to amend Act No. 2655 by fixing the
rates of interest on loans and forbearance of credit; Philippine Senate Resolution (SR) No.
1053,8 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and
Franklin M. Drilon, respectively, urged the aforesaid Senate Committee to investigate ways to curb
the high commercial interest rates then obtaining in the country; Senator Ernesto Maceda filed SB
No. 1151 to prohibit the collection of more than two months of advance interest on any loan of
money; and Senator Raul Roco filed SR No. 114411 seeking an investigation into an alleged cartel of
commercial banks, called "Club 1821", reportedly behind the regime of high interest rates. The
petitioners also attached news clippings12 showing that in February 1998 the banks prime lending
rates, or interests on loans to their best borrowers, ranged from 26% to 31%.

Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-
MB was authorized only to prescribe or set the maximum rates of interest for a loan or renewal
thereof or for the forbearance of any money, goods or credits, and to change such rates whenever
warranted by prevailing economic and social conditions, the changes to be effected gradually and on
scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend the limits of
interest on all credit transactions, when it issued CB Circular No. 905. They further insist that under
Section 109 of R.A. No. 265, the authority of the CB-MB was clearly only to fix the banks maximum
rates of interest, but always within the limits prescribed by the Usury Law.

Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit of
any prior public hearing, is void because it violated Article 5 of the New Civil Code, which provides
that "Acts executed against the provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes their validity."

They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day
Treasury bills (T-bills),13 then known as "Jobo" bills14 shot up to 40% per annum, as a result. The
banks immediately followed suit and re-priced their loans to rates which were even higher than those
of the "Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also unconstitutional in light of
Section 1 of the Bill of Rights, which commands that "no person shall be deprived of life, liberty or
property without due process of law, nor shall any person be denied the equal protection of the
laws."

Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of
R.A. No. 265, and therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the
BSP-MB has been stripped of the power either to prescribe the maximum rates of interest which
banks may charge for different kinds of loans and credit transactions, or to suspend Act No. 2655
and continue enforcing CB Circular No. 905.

Ruling

The petition must fail.

A. The Petition is procedurally infirm.

The decision on whether or not to accept a petition for certiorari, as well as to grant due course
thereto, is addressed to the sound discretion of the court.15 A petition for certiorari being an
extraordinary remedy, the party seeking to avail of the same must strictly observe the procedural
rules laid down by law, and non-observance thereof may not be brushed aside as mere
technicality.16

As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising
judicial or quasi-judicial functions.17 Judicial functions are exercised by a body or officer clothed with
authority to determine what the law is and what the legal rights of the parties are with respect to the
matter in controversy. Quasi-judicial function is a term that applies to the action or discretion of
public administrative officers or bodies given the authority to investigate facts or ascertain the
existence of facts, hold hearings, and draw conclusions from them as a basis for their official action
using discretion of a judicial nature.18

The CB-MB (now BSP-MB) was created to perform executive functions with respect to the
establishment, operation or liquidation of banking and credit institutions, and branches and agencies
thereof.19 It does not perform judicial or quasi-judicial functions. Certainly, the issuance of CB
Circular No. 905 was done in the exercise of an executive function. Certiorari will not lie in the instant
case.20

B. Petitioners have no locus standi to file the Petition

Locus standi is defined as "a right of appearance in a court of justice on a given question." In private
suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that "every action must be
prosecuted or defended in the name of the real party in interest," who is "the party who stands to be
benefited or injured by the judgment in the suit or the party entitled to the avails of the suit."
Succinctly put, a partys standing is based on his own right to the relief sought.21

Even in public interest cases such as this petition, the Court has generally adopted the "direct injury"
test that the person who impugns the validity of a statute must have "a personal and substantial
interest in the case such that he has sustained, or will sustain direct injury as a result."22 Thus, while
petitioners assert a public right to assail CB Circular No. 905 as an illegal executive action, it is
nonetheless required of them to make out a sufficient interest in the vindication of the public order
and the securing of relief. It is significant that in this petition, the petitioners do not allege that they
sustained any personal injury from the issuance of CB Circular No. 905.

Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular
No. 905. In Kilosbayan, Inc. v. Morato,23 involving the on-line lottery contract of the PCSO, there was
no allegation that public funds were being misspent, which according to the Court would have made
the action a public one, "and justify relaxation of the requirement that an action must be prosecuted
in the name of the real party-in-interest." The Court held, moreover, that the status of Kilosbayan as
a peoples organization did not give it the requisite personality to question the validity of the contract.
Thus:
Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not
detract from the high regard for petitioners as civic leaders to say that their interest falls short of that
required to maintain an action under the Rule 3, Sec. 2.24

C. The Petition raises no issues of transcendental importance.

In the 1993 case of Joya v. Presidential Commission on Good Government,25 it was held that no
question involving the constitutionality or validity of a law or governmental act may be heard and
decided by the court unless there is compliance with the legal requisites for judicial inquiry, namely:
(a) that the question must be raised by the proper party; (b) that there must be an actual case or
controversy; (c) that the question must be raised at the earliest possible opportunity; and (d) that the
decision on the constitutional or legal question must be necessary to the determination of the case
itself.

In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before
taxpayers, voters, concerned citizens, and legislators can be accorded a standing to sue, viz:

(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax
measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of the election law in
question;

(4) for concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early; and

(5) for legislators, there must be a claim that the official action complained of infringes upon
their prerogatives as legislators.

While the Court may have shown in recent decisions a certain toughening in its attitude concerning
the question of legal standing, it has nonetheless always made an exception where the
transcendental importance of the issues has been established, notwithstanding the petitioners
failure to show a direct injury.27 In CREBA v. ERC,28the Court set out the following instructive guides
as determinants on whether a matter is of transcendental importance, namely: (1) the character of
the funds or other assets involved in the case; (2) the presence of a clear case of disregard of a
constitutional or statutory prohibition by the public respondent agency or instrumentality of the
government; and (3) the lack of any other party with a more direct and specific interest in the
questions being raised. Further, the Court stated in Anak Mindanao Party-List Group v. The
Executive Secretary29 that the rule on standing will not be waived where these determinants are not
established.

In the instant case, there is no allegation of misuse of public funds in the implementation of CB
Circular No. 905. Neither were borrowers who were actually affected by the suspension of the Usury
Law joined in this petition. Absent any showing of transcendental importance, the petition must fail.

More importantly, the Court notes that the instant petition adverted to the regime of high interest
rates which obtained at least 15 years ago, when the banks prime lending rates ranged from 26% to
31%,30 or even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In contrast,
according to the BSP, in the first two (2) months of 2012 the bank lending rates averaged 5.91%,
which implies that the banks prime lending rates were lower; moreover, deposit interests on savings
and long-term deposits have also gone very low, averaging 1.75% and 1.62%, respectively.31

Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%. In the 1w phi 1

auctions held on November 12, 2012, the rates of 3-month, 6-month and 1-year T-bills have dropped
to 0.150%, 0.450% and 0.680%, respectively.32 According to Manila Bulletin, this very low interest
regime has been attributed to "high liquidity and strong investor demand amid positive economic
indicators of the country."33

While the Court acknowledges that cases of transcendental importance demand that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure,34 the delay of at least
15 years in the filing of the instant petition has actually rendered moot and academic the issues it
now raises.

For its part, BSP-MB maintains that the petitioners allegations of constitutional and statutory
violations of CB Circular No. 905 are really mere challenges made by petitioners concerning the
wisdom of the Circular. It explains that it was in view of the global economic downturn in the early
1980s that the executive department through the CB-MB had to formulate policies to achieve
economic recovery, and among these policies was the establishment of a market-oriented interest
rate structure which would require the removal of the government-imposed interest rate ceilings.35

D. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No.
905.

The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been
recognized and upheld in many cases. As the Court explained in the landmark case of Medel v.
CA,36 citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law
but simply suspended the latters effectivity;"37 that "a CB Circular cannot repeal a law, [for] only a
law can repeal another law;"38 that "by virtue of CB Circular No. 905, the Usury Law has been
rendered ineffective;"39 and "Usury has been legally non-existent in our jurisdiction. Interest can now
be charged as lender and borrower may agree upon."40

In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.41 cited in DBP v. Perez,42 we
also belied the contention that the CB was engaged in self-legislation. Thus:

Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply
suspended the latters effectivity. The illegality of usury is wholly the creature of legislation. A Central
Bank Circular cannot repeal a law. Only a law can repeal another law. x x x.43

In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to
unilaterally increase the rate of interest to 25% per annum, plus a penalty of 6% per annum on past
dues, then to 30% on October 15, 1984, and to 42% on October 25, 1984. The Supreme Court
invalidated the rate increases made by the PNB and upheld the 12% interest imposed by the CA, in
this wise:

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. x x x.45

Thus, according to the Court, by lifting the interest ceiling, CB Circular No. 905 merely upheld the
parties freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the New
Civil Code, under which the 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.

E. The BSP-MB has authority to enforce CB Circular No. 905.

Section 1 of CB Circular No. 905 provides that "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 juridical, shall not be subject to any ceiling prescribed under or pursuant
to the Usury Law, as amended." It does not purport to suspend the Usury Law only as it applies to
banks, but to all lenders.

Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSP-
MB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which
expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a
provision similar to Section 109 of R.A. No. 265.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low priority such as consumer loans, as well as such
loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the
BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries.

Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653,
merely supplemented it as it concerns loans by banks and other financial institutions. Had R.A. No.
7653 been intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal
terms.

Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed
to be passed with deliberation and full knowledge of all laws existing pertaining to the subject.46 An
implied repeal is predicated upon the condition that a substantial conflict or repugnancy is found
between the new and prior laws. Thus, in the absence of an express repeal, a subsequent law
cannot be construed as repealing a prior law unless an irreconcilable inconsistency and repugnancy
exists in the terms of the new and old laws.47 We find no such conflict between the provisions of Act
2655 and R.A. No. 7653.

F. The lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest.

It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.48 As held in Castro v. Tan:49

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may
justify such imposition as righteous and as one that may be sustained within the sphere of public or
private morals.50
Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for
being contrary to morals, if not against the law.51 Indeed, under Article 1409 of the Civil Code, these
contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor may the right
to set up their illegality as a defense be waived.

Nonetheless, the nullity of the stipulation of usurious interest does not affect the lenders right to
recover the principal of a loan, nor affect the other terms thereof.52 Thus, in a usurious loan with
mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the
creditor upon failure by the debtor to pay the debt due. The debt due is considered as without the
stipulated excessive interest, and a legal interest of 12% per annum will be added in place of the
excessive interest formerly imposed,53following the guidelines laid down in the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals,54 regarding the manner of computing legal interest:

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an


interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.55 (Citations omitted)

The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 56 as follows:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to
loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code
applies "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," with the application of both
rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid." In
either instance, the reckoning period for the commencement of the running of the legal interest shall
be subject to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest."57 (Citations omitted)
WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.

SO ORDERED.

G.R. No. 141811 November 15, 2001

FIRST METRO INVESTMENT CORPORATION, petitioner,


vs.
ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q.
SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES,
VICENTE M. DE VERA, JR., and FELIPE B. SESE, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals2 dated
November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision3 of the Regional Trial Court of
Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the Court of
Appeals found and declared that the fees provided for in the Underwriting and Consultancy
Agreements executed by and between petitioner First Metro Investment Corp. (FMIC) and
respondent Este del Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with the Loan
Agreement dated January 31, 1978 were mere subterfuges to camouflage the usurious interest
charged by petitioner FMIC.

The facts of the case are as follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of
Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance
the construction and development of the Este del Sol Mountain Reserve, a sports/resort complex
project located at Barrio Puray, Montalban, Rizal.4

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered
basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the
diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly
amortizations to commence at the beginning of the thirteenth month from the date of the first release
in accordance with the Schedule of Amortization.5 In case of default, an acceleration clause was,
among others, provided and the amount due was made subject to a twenty (20%) percent one-time
penalty on the amount due and such amount shall bear interest at the highest rate permitted by law
from the date of default until full payment thereof plus liquidated damages at the rate of two (2%)
percent per month compounded quarterly on the unpaid balance and accrued interests together with
all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid, plus
attorney's fees equivalent to twenty-five (25%) percent of the sum sought to be recovered, which in
no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were
hired.6

In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several
documents7 as security for payment, among them, (a) a Real Estate Mortgage dated January 31,
1978 over two (2) parcels of land being utilized as the site of its development project with an area of
approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square meters and
particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of Rizal, inclusive
of all improvements, as well as all the machineries, equipment, furnishings and furnitures existing
thereon; and (b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez,
Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores,
Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of
all the obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred
Thousand Pesos (P7,500,000.00) each.8

Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting
Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the
public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del
Sol's capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos (P200,000.00).
In addition to the underwriting fee, the Underwriting Agreement provided that for supervising the
public offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual
supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4)
consecutive years. The Underwriting Agreement also stipulated for the payment by respondent Este
del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred
Pesos (P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the
execution of and in accordance with the terms of the Underwriting Agreement, a Consultancy
Agreement was also executed on January 31, 1978 whereby respondent Este del Sol engaged the
services of petitioner FMIC for a fee as consultant to render general consultancy services.9

In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the
amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner
FMIC in connection with the public offering of the common shares of stock of respondent Este del
Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee for a
period of four (4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for
the year beginning February, 1978, in accordance to the Underwriting Agreement.10 The said
amounts of fees were deemed paid by respondent Este del Sol to petitioner FMIC which deducted
the same from the first release of the loan.

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a
revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million Six
Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos
(P12,679,630.98) per the petitioner's Statement of Account dated June 23, 1980,11 to wit:

STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE,


INC.
AS OF JUNE 23, 1980
PARTICULARS AMOUNT
Total amount due as of 11-22-78 per revised amortization
schedule dated 1-3-78 P7,999,631.42
Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-
22-79 (92 days) 327,096.04
Balance 8,326,727.46
One time penalty of 20% of the entire unpaid obligations
under Section 6.02 (ii) of Loan Agreement 1,665,345.49
Past due interest under Section 6.02 (iii) of loan Agreement: 1,481,879.93
@ 19% p.a. from 2-22-79 to 11-30-79 (281 days) 1,200,714.10
@ 21% p.a. from 11-30-79 to 6-23-80 (206 days)
Other charges publication of extra judicial foreclosure of
REM made on 5-23-80 & 6-6-80 4,964.00
Total Amount Due and Collectible as of June 23, 1980 P12,679,630.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on
June 23, 1980.12At the public auction, petitioner FMIC was the highest bidder of the mortgaged
properties for Nine Million Pesos (P9,000,000.00). The total amount of Three Million One Hundred
Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) was
deducted therefrom, that is, for the publication fee for the publication of the Sheriff's Notice of Sale,
Four Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the
foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees, Three
Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos
(P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three
Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and
penalty charges and partly against the principal, due as of June 23, 1980, thereby leaving a balance
of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-
Three Centavos (P6,863,297.73) on the principal amount of the loan as of June 23, 1980.13

Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol
by virtue of their continuing surety agreements, the payment of the alleged deficiency balance,
despite individual demands sent to each of them,14 petitioner instituted on November 11, 1980 the
instant collection suit15 against the respondents to collect the alleged deficiency balance of Six
Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three
Centavos (P6,863,297.73) plus interest thereon at twenty-one (21%) percent per annum from June
24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney's fees and costs.

In their Answer, the respondents sought the dismissal of the case and set up several special and
affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements
executed simultaneously with and as integral parts of the Loan Agreement and which provided for
the payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges resorted
to by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the usurious interest
being charged by petitioner FMIC.16

The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior
Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an Account
Manager of its Account Management Group, as well as documentary evidence. On the other hand,
co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja, former
Senior Manager and Assistant Vice-President of FMIC, testified for the respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion
of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants,


ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 plus
21% interest per annum, from June 24, 1980, until the entire amount is fully paid, plus the
amount equivalent to 25% of the total amount due, as attorney's fees, plus costs of suit.

Defendants' counterclaims are dismissed, for lack of merit.


Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court
of Appeals. On November 8, 1999, the appellate court reversed the challenged decision of the trial
court. The appellate court found and declared that the fees provided for in the Underwriting and
Consultancy Agreements were mere subterfuges to camouflage the excessively usurious interest
charged by the petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated
penalties, liquidated damages and attorney's fees were "excessive, iniquitous, unconscionable and
revolting to the conscience," and declared that in lieu thereof, the stipulated one time twenty (20%)
percent penalty on the amount due and ten (10%) percent of the amount due as attorney's fees
would be reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate
court dismissed the complaint as against the individual respondents sureties and ordered petitioner
FMIC to pay or reimburse respondent Este del Sol the amount of Nine Hundred Seventy-One
Thousand Pesos (P971,000.00) representing the difference between what is due to the petitioner
and what is due to respondent Este del Sol, based on the following computation:17

A: DUE TO THE [PETITIONER]


Principal of Loan P7,382,500.00
Add: 20% one-time
Penalty 1,476,500.00
Attorney's fees 900,000.00 P9,759,000.00
Less: Proceeds of foreclosure Sale 9,000,000.00
Deficiency P759,000.00
B. DUE TO [RESPONDENT ESTE DEL SOL]
Return of usurious interest in the form of:
Underwriting fee P 200,000.00
Supervision fee 200,000.00
Consultancy fee 1,330,000.00
Total amount due Este P1,730,000.00

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of
P971,000.00 or (P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate court's adverse decision. However, this was
denied in a Resolution18 dated February 9, 2000 of the appellate court.

Hence, the instant petition anchored on the following assigned errors:19

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN


ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT
WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS


SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN
AGREEMENT, AND INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE
CONTRACT.

b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE


SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE
PETITIONER.
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON
THE SERVICES PERFORMED BY PETITIONER.

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR
RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii]
THAT RESPONDENTS HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND
CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH


PARTY AFTER THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE
ASSAILED DECISION, EVEN GRANTING JUST FOR THE SAKE OF ARGUMENT THAT
THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE PROVISIONS OF
THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED
DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND
UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE" AND [ii] THE
UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS
SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST
CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE
INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the appellate court that the
Underwriting and Consultancy Agreements were executed to conceal a usurious loan. Inquiry upon
the veracity of the appellate court's factual findings and conclusion is not the function of this Court for
the Supreme Court is not a trier of facts. Only when the factual findings of the trial court and the
appellate court are opposed to each other does this Court exercise its discretion to re-examine the
factual findings of both courts and weigh which, after considering the record of the case, is more in
accord with law and justice.

After a careful and thorough review of the record including the evidence adduced, we find no reason
to depart from the findings of the appellate court.

First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905 which took
effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured
loans, regardless of maturity, should be applied retroactively to a contract executed on January 31,
1978, as in the case at bar, that is, while the Usury Law was in full force and effect. It is an
elementary rule of contracts that the laws, in force at the time the contract was made and entered
into, govern it.20 More significantly, Central Bank Circular No. 905 did not repeal nor in any way
amend the Usury Law but simply suspended the latter's effectivity.21 The illegality of usury is wholly
the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal
another law.22 Thus, retroactive application of a Central Bank Circular cannot, and should not, be
presumed.23

Second, when a contract between two (2) parties is evidenced by a written instrument, such
document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the
face of written contracts to determine the intention of the parties. However, this rule is not without
exception.24 The form of the contract is not conclusive for the law will not permit a usurious loan to
hide itself behind a legal form. Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury. If from a construction of the whole transaction it
becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should
and will permit no scheme, however ingenious, to becloud the crime of usury.25
In the instant case, several facts and circumstances taken altogether show that the Underwriting and
Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by
petitioner FMIC to conceal and collect excessively usurious interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the
same date of the Loan Agreement.26 Furthermore, under the Underwriting Agreement payment of the
supervision and consultancy fees was set for a period of four (4) years27 to coincide ultimately with
the term of the Loan Agreement.28 This fact means that all the said agreements which were executed
simultaneously were set to mature or shall remain effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an
underwriting agreement29 and specifically mentioned that such underwriting agreement is a condition
precedent30 for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and as
admitted by petitioner FMIC's employees,31 that such Underwriting Agreement is "part and parcel of
the Loan Agreement."32

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three
Hundred Thirty Thousand Pesos (P1,330,000.00)33 as consultancy fee despite the clear provision in
the Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy
fee shall be due upon signing of the said consultancy agreement.34

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand
Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00),
respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978,35 that is, on
the same occasion of the first partial release of the loan in the amount of Two Million Three Hundred
Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00).36 It is from this first partial release of
the loan that the said corresponding bills for Underwriting, Supervision and Constantly fees were
conducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of One
Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to
respondent Este del Sol.37

e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share
of stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to
comply with its obligation under the Underwriting Agreement.38 Besides, there was really no need for
an Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm to sell
its shares and all its shares have been sold through its marketing arm.39

f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement,40 aside from
the fact that there was no need for a Consultancy Agreement, since respondent Este del Sol's
officers appeared to be more competent to be consultants in the development of the projected
sports/resort complex.41

All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC
that the Loan, Underwriting and Consultancy Agreements are separate and independent
transactions. The Underwriting and Consultancy Agreements which were executed and delivered
contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner FMIC
as essential conditions for the grant of the loan. An apparently lawful loan is usurious when it is
intended that additional compensation for the loan be disguised by an ostensibly unrelated contract
providing for payment by the borrower for the lender's services which are of little value or which are
not in fact to be rendered, such as in the instant case.42 In this connection, Article 1957 of the New
Civil Code clearly provides that:
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.

In usurious loans, the entire obligation does not become void because of an agreement for usurious
interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious
interest is void, consequently, the debt is to be considered without stipulation as to the interest.43 The
reason for this rule was adequately explained in the case of Angel Jose Warehousing Co., Inc. v.
Chelda Enterprises44 where this Court held:

In simple loan with stipulation of 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 illegal. The
illegality lies only as to the prestation to pay the stipulated interest; hence, being separable,
the latter only should be deemed void, since it is the only one that is illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to receive
back the principal amount of the loan. With respect to the debtor, the amount paid as interest under
a usurious agreement is recoverable by him, since the payment is deemed to have been made
under restraint, rather than voluntarily.45

This Court agrees with the factual findings and conclusion of the appellate court, to wit:

We find the stipulated penalties, liquidated damages and attorney's fees, excessive,
iniquitous and unconscionable and revolting to the conscience as they hardly allow the
borrower any chance of survival in case of default. And true enough, ESTE folded up when
the appellee extrajudicially foreclosed on its (ESTE's) development project and literally
closed its offices as both the appellee and ESTE were at the time holding office in the same
building. Accordingly, we hold that 20% penalty on the amount due and 10% of the proceeds
of the foreclosure sale as attorney's fees would suffice to compensate the appellee,
especially so because there is no clear showing that the appellee hired the services of
counsel to effect the foreclosure, it engaged counsel only when it was seeking the recovery
of the alleged deficiency.

Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long as
such stipulation does not contravene any law, morals, or public order, it is binding upon the parties.
Nonetheless, courts are empowered to reduce the amount of attorney's fees if the same is
"iniquitous or unconscionable."46 Articles 1229 and 2227 of the New Civil Code provide that:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be


equitably reduced if they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred
Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated attorney's fees
equivalent to twenty-five (25%) percent of the alleged amount due, as of the date of the auction sale
on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with the
appellate court that a reduction of the attorney's fees to ten (10%) percent is appropriate and
reasonable under the facts and circumstances of this case.
Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in awarding an
amount allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief
was not expressly prayed for is of no moment for the reason that the relief was plainly warranted by
the allegations of the respondents as well as by the facts as found by the appellate court. A party is
entitled to as much relief as the facts may warrant 47

In view of all the foregoing, the Court is convinced that the appellate court committed no reversible
error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 131622 November 27, 1998

LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners,


vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR.
doing lending business under the trade name and style "GONZALES CREDIT
ENTERPRISES", respondents.

PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules
of Court, seeking to set aside the decision of the Court of Appeals, 1 and its resolution denying
reconsideration, 2 the dispositive portion of which decision reads as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants


are hereby-ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month
interest and 2% service charge per annum effective July 23, 1986, plus 1% per
month of the total amount due and demandable as penalty charges effective August
23, 1986, until the entire amount is fully paid.

The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.

SO ORDERED. 3

The Court required the respondents to comment on the petition, 4 which was filed on April 3,
1998, 5 and the petitioners to reply thereto, which was filed on May 29, 1998. 6 We now resolve to give
due course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are considered binding
and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of
P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to
evidence the loan, maturing on Janaury 19, 1986. They received only P84,000.00, out of the
proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amout of
P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging
to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor
of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the
sum of P275.000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all
their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23,
1986. They executed a promissory note, reading as follows:

Baliwag, Bulacan July 23, 1986

Maturity Date Augsut 23, 1986

P500,000.00

FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of
VERONICA R. GONZALES doing business in the business style of GONZALES
CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of
Baliwag, Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . .
(P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT
per month plus 2% service charge per annum from date hereof until fully paid
according to the amortization schedule contained herein. (Emphasis supplied)

Payment will be made in full at the maturity date.

Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable
and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%)
per month of the amount due and demandable as penalty charges in the form of
liquidated damages until fully paid; and the furthersum of TWENTY FIVE PER CENT
(25%) thereof in full, without deductions as Attorney's Fee whether actually incurred
or not, of the total amount due and demandable, exclusive of costs and judicial or
extra judicial expenses. (Emphasis supplied).

I, WE further agree that in the event the present rate of interest on loan is increased
by law or the Central Bank of the Philippines, the holder shall have the option to
apply and collect the increased interest charges without notice although the original
interest have already been collected wholly or partially unless the contrary is required
by law.

It is also a special condition of this contract that the parties herein agree that the
amount of peso-obligation under this agreement is based on the present value of the
peso, and if there be any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation herein contracted
shall be adjusted in accordance with the value of the peso then prevailing at the time
of the complete fulfillment of the obligation.

Demand and notice of dishonor waived. Holder may accept partial payments and
grant renewals of this note or extension of payments, reserving rights against each
and all indorsers and all parties to this note.

IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors
waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised
Rules of Court.

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests
and penalties, evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with
the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the
full amount of the loan including interests and other charges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged
that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel
who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and
benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the
plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that
the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs
over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at
5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per
month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal
and excessive, and that substantial payments made were applied to interest, penalties and other
charges.

After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been repealed,
the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the
conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate
of interest for loan or forbearance of money, goods or credit is 12% per annum." 7
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which
reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered, as follows:

1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally,
to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from
November 7, 1985 and 1% per month as penalty, until the entire amount is paid in
full.

2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly
and severally the amount of P84,000.00 with 12% interest per annum and 1% per
cent per month as penalty from November 19, 1985 until the whole amount is fully
paid;

3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of
P285,000.00 plus 12% interest per annum and 1% per month as penalty from July
11, 1986, until the whole amount is fully paid;

4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of
P50,000.00 as attorney's fees;

5. All counterclaims are hereby dismissed.

With costs against the defendants. 8

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular
No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods
or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not
when the parties agreed thereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law
having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and borrower could agree on any interest that may be charged on the loan". 9 The
Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of
the amount due and demandable as penalty charges in the form of liquidated damages until fully paid'
was allowed by
law". 10

Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the
Regional Trial Court, disposing as follows:

WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants


are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per
month interest and 2% service charge per annum effective July 23, 1986, plus 1%
per month of the total amount due and demandable as penalty charges effective
August 24, 1986, until the entire amount is fully paid.
The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.

SO ORDERED. 11

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By
resolution dated November 25, 1997, the Court of Appeals denied the motion. 12

Hence, defendants interposed the present recourse via petition for review on certiorari. 13

We find the petition meritorious.

Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question
presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum
of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury
Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December
22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684?

We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00
loan is excessive, iniquitous, unconscionable and exorbitant. 13 However, we can not consider the rate
"usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law 14 and that
the Usury Law is now "legally inexistent". 15

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 16 the Court held
that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the
latter's effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law
can repeal another law." 17 In the recent case of Florendo vs. Court of Appeals 18, the Court reiterated the
ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been
legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree
upon." 19

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. 20 The stipulation is void. 21 The courts shall reduce equitably
liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable. 22

Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we
agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional
1% a month penalty charge as liquidated damages may be more reasonable.

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial
Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same
parties.

No pronouncement as to costs in this instance.

SO ORDERED.
G.R. No. 149004 April 14, 2004

RESTITUTA M. IMPERIAL, petitioner,


vs.
ALEX A. JAUCIAN, respondent.

DECISION

PANGANIBAN, J.:

Iniquitous and unconscionable stipulations on interest rates, penalties and attorneys fees are
contrary to morals. Consequently, courts are granted authority to reduce them equitably. If
reasonably exercised, such authority shall not be disturbed by appellate courts.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19, 2000
Decision2 and the June 14, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 43635.
The decretal portion of the Decision is as follows:

"WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court, 5th
Judicial Region, Branch 21, Naga City, dated August 31, 1993, in Civil Case No. 89-1911 for
Sum of Money, is hereby AFFIRMED in toto."4

The assailed Resolution denied petitioners Motion for Reconsideration.

The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial Court
(RTC) of Naga City (Branch 21) and affirmed by the CA, reads as follows:

"Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No.
905, series of 1982 to be of no force and legal effect, it having been promulgated by the
Monetary Board of the Central Bank of the Philippines with grave abuse of discretion
amounting to excess of jurisdiction; declaring that the rate of interest, penalty, and charges
for attorneys fees agreed upon between the parties are unconscionable, iniquitous, and in
violation of Act No. 2655, otherwise known as the Usury Law, as amended; and ordering
Defendant to pay Plaintiff the amount of FOUR HUNDRED SEVENTY-EIGHT THOUSAND,
ONE HUNDRED NINETY-FOUR and 54/100 (P478,194.54) PESOS, Philippine currency,
with regular and compensatory interests thereon at the rate of twenty-eight (28%) per
centum per annum, computed from August 31, 1993 until full payment of the said amount,
and in addition, an amount equivalent to ten (10%) per centum of the total amount due and
payable, for attorneys fees, without pronouncement as to costs."5

The Facts

The CA summarized the facts of the case in this wise:

"The present controversy arose from a case for collection of money, filed by Alex A. Jaucian
against Restituta Imperial, on October 26, 1989. The complaint alleges, inter alia, that
defendant obtained from plaintiff six (6) separate loans for which the former executed in favor
of the latter six (6) separate promissory notes and issued several checks as guarantee for
payment. When the said loans became overdue and unpaid, especially when the defendants
checks were dishonored, plaintiff made repeated oral and written demands for payment.

"Specifically, the six (6) separate loans obtained by defendant from plaintiff on various dates
are as follows:

(a) November 13, 1987 P 50,000.00


(b) December 28, 1987 40,000.00

(c) January 6, 1988 30,000.00


(d) January 11, 1988 50,000.00

(e) January 12, 1988 50,000.00

(f) January 13, 1988 100,000.00

Total P320,000.00

"The loans were covered by six (6) separate promissory notes executed by defendant. The
face value of each promissory notes is bigger [than] the amount released to defendant
because said face value already include[d] the interest from date of note to date of maturity.
Said promissory notes, which indicate the interest of 16% per month, date of issue, due date,
the corresponding guarantee checks issued by defendant, penalties and attorneys fees, are
the following:

1. Exhibit D for loan of P40,000.00 on December 28, 1987, with face value
of P65,000.00;

2. Exhibit E for loan of P50,000.00 on January 11, 1988, with face value
of P82,000.00;

3. Exhibit F for loan of P50,000.00 on January 12, 1988, with face value
of P82,000.00;

4. Exhibit G for loan of P100,000.00 on January 13, 1988, with face value
of P164,000.00;

5. Exhibit H This particular promissory note covers the second renewal of the
original loan ofP50,000.00 on November 13, 1987, which was renewed for the first
time on March 16, 1988 after certain payments, and which was renewed finally for
the second time on January 4, 1988 also after certain payments, with a face value
of P56,240.00;

6. Exhibit I This particular promissory note covers the second renewal of the
original loan ofP30,000.00 on January 6, 1988, which was renewed for the first time
on June 4, 1988 after certain payments, and which was finally renewed for the
second time on August 6, 1988, also after certain payments, with [a] face value
of P12,760.00;
"The particulars about the postdated checks, i.e., number, amount, date, etc., are indicated
in each of the promissory notes. Thus, for Exhibit D, four (4) PB checks were issued; for
Exhibit E four (4) checks; for Exhibit F four (4) checks; for Exhibit G four (4) checks; for
Exhibit H one (1) check; for Exhibit I one (1) check;

"The arrangement between plaintiff and defendant regarding these guarantee checks was
that each time a check matures the defendant would exchange it with cash.

"Although, admittedly, defendant made several payments, the same were not enough and
she always defaulted whenever her loans mature[d]. As of August 16, 1991, the total unpaid
amount, including accrued interest, penalties and attorneys fees, [was] P2,807,784.20.

"On the other hand, defendant claims that she was extended loans by the plaintiff on several
occasions, i.e., from November 13, 1987 to January 13, 1988, in the total sum
of P320,000.00 at the rate of sixteen percent (16%) per month. The notes mature[d] every
four (4) months with unearned interest compounding every four (4) months if the loan [was]
not fully paid. The loan releases [were] as follows:

(a) November 13, 1987 P 50,000.00

(b) December 28, 1987 40,000.00


(c) January 6, 1988 30,000.00

(d) January 11, 1988 50,000.00

(e) January 12, 1988 50,000.00


(f) January 13, 1988 100,000.00

Total P320,000.00

"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including the
usurious interests of 16% per month, this is the reason why these were not included in the
complaint.

"Defendant alleges that all the above amounts were released respectively by checks drawn
by the plaintiff, and the latter must produce these checks as these were returned to him
being the drawer if only to serve the truth. The above amount are the real amount released
to the defendant but the plaintiff by masterful machinations made it appear that the total
amount released was P462,600.00. Because in his computation he made it appear that the
true amounts released was not the original amount, since it include[d] the unconscionable
interest for four months.

"Further, defendant claims that as of January 25, 1989, the total payments made by
defendants [were] as follows:

a. Paid releases on November 13, 1987


ofP50,000.00 and January 6, 1988
ofP30,000.00 these two items were not
included in the complaint affirming the fact that P 80,000.00
these were paid
b. Exhibit 26 Receipt 231,000.00

c. Exhibit 8-25 Receipt 65,300.00

d. Exhibit 27 Receipt 65,000.00

Total
P441,780.00
Less: 320,000.00

Excess Payment P121,780.00

"Defendant contends that from all perspectives the above excess payment of P121,780.00 is
more than the interest that could be legally charged, and in fact as of January 25, 1989, the
total releases have been fully paid.

"On 31 August 1993, the trial court rendered the assailed decision."6

Ruling of the Court of Appeals

On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the
constitutionality of Section 1, Central Bank Circular No. 905, Series of 1982. Nonetheless, the
appellate court affirmed the judgment of the trial court, holding that the latters clear and detailed
computation of petitioners outstanding obligation to respondent was convincing and satisfactory.

Hence, this Petition.7

The Issues

Petitioner raises the following arguments for our consideration:

"1. That the petitioner has fully paid her obligations even before filing of this case.

"2. That the charging of interest of twenty-eight (28%) per centum per annum without any
writing is illegal.

"3. That charging of excessive attorneys fees is hemorrhagic.

"4. Charging of excessive penalties per month is in the guise of hidden interest.

"5. The non-inclusion of the husband of the petitioner at the time the case was filed should
have dismissed this case."8

The Courts Ruling

The Petition has no merit.


First Issue:

Computation of Outstanding Obligation

Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges that
the two lower courts misappreciated the facts when they ruled that she still had an outstanding
balance of P208,430.

This issue involves a question of fact. Such question exists when a doubt or difference arises as to
the truth or the falsehood of alleged facts; and when there is need for a calibration of the evidence,
considering mainly the credibility of witnesses and the existence and the relevancy of specific
surrounding circumstances, their relation to each other and to the whole, and the probabilities of the
situation.9

It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by
certiorari under Rule 45 of the Rules of Court, as this remedy is generally confined to questions of
law.10 The jurisdiction of this Court over cases brought to it is limited to the review and rectification of
errors of law allegedly committed by the lower court. As a rule, the latters factual findings, when
adopted and affirmed by the CA, are final and conclusive and may not be reviewed on appeal.11

Generally, this Court is not required to analyze and weigh all over again the evidence already
considered in the proceedings below.12 In the present case, we find no compelling reason to overturn
the factual findings of the RTC -- that the total amount of the loans extended to petitioner
was P320,000, and that she paid a total of onlyP116,540 on twenty-nine dates. These findings are
supported by a preponderance of evidence. Moreover, the amount of the outstanding obligation has
been meticulously computed by the trial court and affirmed by the CA. Petitioner has not given us
sufficient reason why her cause falls under any of the exceptions to this rule on the finality of factual
findings.

Second Issue:

Rate of Interest

The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per
month or 14 percent per annum; and the stipulated penalty charge, from 5 percent to 1.167 percent
per month or 14 percent per annum.

Petitioner alleges that absent any written stipulation between the parties, the lower courts should
have imposed the rate of 12 percent per annum only.

The records show that there was a written agreement between the parties for the payment of interest
on the subject loans at the rate of 16 percent per month. As decreed by the lower courts, this rate
must be equitably reduced for being iniquitous, unconscionable and exorbitant. "While the Usury
Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular 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."13

In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent
per annum, unconscionable. In the present case, the rate is even more iniquitous and
unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or
unconscionable, it is considered "contrary to morals, if not against the law. [Such] stipulation is
void."15

Since the stipulation on the interest rate is void, it is as if there were no express contract
thereon.16 Hence, courts may reduce the interest rate as reason and equity demand. We find no
justification to reverse or modify the rate imposed by the two lower courts.

Third and Fourth Issue:

Penalties and Attorneys Fees

Article 1229 of the Civil Code states thus:

"The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or unconscionable."

In exercising this power to determine what is iniquitous and unconscionable, courts must consider
the circumstances of each case.17 What may be iniquitous and unconscionable in one may be totally
just and equitable in another. In the present case, iniquitous and unconscionable was the parties
stipulated penalty charge of 5 percent per month or 60 percent per annum, in addition to regular
interests and attorneys fees. Also, there was partial performance by petitioner when she
remitted P116,540 as partial payment of her principal obligation of P320,000. Under the
circumstances, the trial court was justified in reducing the stipulated penalty charge to the more
equitable rate of 14 percent per annum.

The Promissory Note carried a stipulation for attorneys fees of 25 percent of the principal amount
and accrued interests. Strictly speaking, this covenant on attorneys fees is different from that
mentioned in and regulated by the Rules of Court.18 "Rather, the attorneys fees here are in the
nature of liquidated damages and the stipulation therefor is aptly called a penal clause."19 So long as
the stipulation does not contravene the law, morals, public order or public policy, it is binding upon
the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to enforce the
judgment by execution.

Nevertheless, it appears that petitioners failure to comply fully with her obligation was not motivated
by ill will or malice. The twenty-nine partial payments she made were a manifestation of her good
faith. Again, Article 1229 of the Civil Code specifically empowers the judge to reduce the civil penalty
equitably, when the principal obligation has been partly or irregularly complied with. Upon this
premise, we hold that the RTCs reduction of attorneys fees -- from 25 percent to 10 percent of the
total amount due and payable -- is reasonable.

Fifth Issue:

Non-Inclusion of Petitioners Husband

Petitioner contends that the case against her should have been dismissed, because her husband
was not included in the proceedings before the RTC.

We are not persuaded. The husbands non-joinder does not warrant dismissal, as it is merely a
formal requirement that may be cured by amendment.20 Since petitioner alleges that her husband
has already passed away, such an amendment has thus become moot.
WHEREFORE, the Petition is DENIED. Costs against petitioner.

SO ORDERED.

ILEANA DR. MACALINAO, G.R. No. 175490


Petitioner,
Present:

- versus - YNARES-SANTIAGO, J.,


Chairperson,
CHICO-NAZARIO,
BANK OF THE VELASCO, JR.,
PHILIPPINEISLANDS, NACHURA, and
Respondent. PERALTA, JJ.

. Promulgated:
September 17, 2009
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules


of Court seeking to reverse and set aside the June 30, 2006 Decision [1] of the Court
of Appeals (CA) and its November 21, 2006 Resolution[2] denying petitioners
motion for reconsideration.
The Facts

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard,


one of the credit card facilities of respondent Bank of the Philippine Islands
(BPI).[3] Petitioner Macalinao made some purchases through the use of the said
credit card and defaulted in paying for said purchases. She subsequently received a
letter dated January 5, 2004 from respondent BPI, demanding payment of the
amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-
four centavos (PhP 141,518.34), as follows:

Statement Previous Purchases Penalty Finance Balance Due


Date Balance (Payments) Interest Charges
10/27/2002 94,843.70 559.72 3,061.99 98,456.41
11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02
12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28
1/27/2003 119,752.28 618.23 3,891.07 124,234.58
2/27/2003 124,234.58 990.93 4,037.62 129,263.13
3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90
4/27/2003 115,177.90 644.26 3,743.28 119,565.44
5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10
6/29/2003 113,540.10 8,362.50 323.57 3,607.32 118,833.49
(7,000.00)
7/27/2003 118,833.49 608.07 3,862.09 123,375.65
8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56
9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23
10/28/2003
11/28/2003
12/28/2003
1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78

Under the Terms and Conditions Governing the Issuance and Use of the BPI
Credit and BPI Mastercard, the charges or balance thereof remaining unpaid after
the payment due date indicated on the monthly Statement of Accounts shall bear
interest at the rate of 3% per month and an additional penalty fee equivalent to
another 3% per month. Particularly:
8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a
monthly Statement of Account (SOA) and the Cardholder agrees that all charges
made through the use of the CARD shall be paid by the Cardholder as stated in
the SOA on or before the last day for payment, which is twenty (20) days from
the date of the said SOA, and such payment due date may be changed to an earlier
date if the Cardholders account is considered overdue and/or with balances in
excess of the approved credit limit, or to such other date as may be deemed proper
by the CARD issuer with notice to the Cardholder on the same monthly SOA. If
the last day fall on a Saturday, Sunday or a holiday, the last day for the payment
automatically becomes the last working day prior to said payment date. However,
notwithstanding the absence or lack of proof of service of the SOA of the
Cardholder, the latter shall pay any and all charges made through the use of the
CARD within thirty (30) days from date or dates thereof. Failure of the
Cardholder to pay the charges made through the CARD within the payment
period as stated in the SOA or within thirty (30) days from actual date or dates of
purchase whichever occur earlier, shall render him in default without the necessity
of demand from BCC, which the Cardholder expressly waives. The charges or
balance thereof remaining unpaid after the payment due date indicated on
the monthly Statement of Accounts shall bear interest at the rate of 3% per
month for BPI Express Credit, BPI Gold Mastercard and an additional
penalty fee equivalent to another 3% of the amount due for every month or a
fraction of a months delay. PROVIDED that if there occurs any change on the
prevailing market rates, BCC shall have the option to adjust the rate of interest
and/or penalty fee due on the outstanding obligation with prior notice to the
cardholder. The Cardholder hereby authorizes BCC to correspondingly increase
the rate of such interest [in] the event of changes in the prevailing market rates,
and to charge additional service fees as may be deemed necessary in order to
maintain its service to the Cardholder. A CARD with outstanding balance unpaid
after thirty (30) days from original billing statement date shall automatically be
suspended, and those with accounts unpaid after ninety (90) days from said
original billing/statement date shall automatically be cancel (sic), without
prejudice to BCCs right to suspend or cancel any card anytime and for whatever
reason. In case of default in his obligation as provided herein, Cardholder shall
surrender his/her card to BCC and in addition to the interest and penalty charges
aforementioned , pay the following liquidated damages and/or fees (a) a collection
fee of 25% of the amount due if the account is referred to a collection agency or
attorney; (b) service fee for every dishonored check issued by the cardholder in
payment of his account without prejudice, however, to BCCs right of considering
Cardholders account, and (c) a final fee equivalent to 25% of the unpaid balance,
exclusive of litigation expenses and judicial cost, if the payment of the account is
enforced though court action. Venue of all civil suits to enforce this Agreement or
any other suit directly or indirectly arising from the relationship between the
parties as established herein, whether arising from crimes, negligence or breach
thereof, shall be in the process of courts of the City of Makati or in other courts at
the option of BCC.[4] (Emphasis supplied.)
For failure of petitioner Macalinao to settle her obligations, respondent BPI
filed with the Metropolitan Trial Court (MeTC) of Makati City a complaint for a
sum of money against her and her husband, Danilo SJ. Macalinao. This was raffled
to Branch 66 of the MeTC and was docketed as Civil Case No. 84462
entitled Bank of the Philippine Islands vs. Spouses Ileana Dr. Macalinao and
Danilo SJ. Macalinao.[5]

In said complaint, respondent BPI prayed for the payment of the amount of
one hundred fifty-four thousand six hundred eight pesos and seventy-eight
centavos (PhP 154,608.78) plus 3.25% finance charges and late payment charges
equivalent to 6% of the amount due from February 29, 2004 and an amount
equivalent to 25% of the total amount due as attorneys fees, and of the cost of
suit.[6]

After the summons and a copy of the complaint were served upon petitioner
Macalinao and her husband, they failed to file their Answer.[7] Thus, respondent
BPI moved that judgment be rendered in accordance with Section 6 of the Rule on
Summary Procedure.[8] This was granted in an Order dated June 16,
2004.[9] Thereafter, respondent BPI submitted its documentary evidence.[10]

In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent
BPI and ordered petitioner Macalinao and her husband to pay the amount of PhP
141,518.34 plus interest and penalty charges of 2% per month, to wit:

WHEREFORE, finding merit in the allegations of the complaint supported


by documentary evidence, judgment is hereby rendered in favor of the
plaintiff, Bank of the Philippine Islands and against defendant-spouses Ileana
DR Macalinao and Danilo SJ Macalinaoby ordering the latter to pay the former
jointly and severally the following:
1. The amount of PESOS: ONE HUNDRED FORTY ONE
THOUSAND FIVE HUNDRED EIGHTEEN AND 34/100
(P141,518.34) plus interest and penalty charges of 2% per month from
January 05, 2004 until fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of suit.

SO ORDERED.[11]

Only petitioner Macalinao and her husband appealed to the Regional Trial
Court (RTC) of Makati City, their recourse docketed as Civil Case No. 04-1153. In
its Decision dated October 14, 2004, the RTC affirmed in toto the decision of the
MeTC and held:

In any event, the sum of P141,518.34 adjudged by the trial court appeared
to be the result of a recomputation at the reduced rate of 2% per month. Note that
the total amount sought by the plaintiff-appellee was P154,608.75 exclusive of
finance charge of 3.25% per month and late payment charge of 6% per month.

WHEREFORE, the appealed decision is hereby affirmed in toto.

No pronouncement as to costs.

SO ORDERED.[12]

Unconvinced, petitioner Macalinao filed a petition for review with the CA,
which was docketed as CA-G.R. SP No. 92031. The CA affirmed with
modification the Decision of the RTC:

WHEREFORE, the appealed decision


is AFFIRMED but MODIFIED with respect to the total amount due
and interest rate. Accordingly, petitioners are jointly and severally
ordered to pay respondent Bank of the Philippine Islands the following:

1. The amount of One Hundred Twenty Six Thousand Seven


Hundred Six Pesos and Seventy Centavos plus interest and
penalty charges of 3% per month from January 5, 2004 until
fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of Suit.

SO ORDERED.[13]

Although sued jointly with her husband, petitioner Macalinao was the only
one who filed the petition before the CA since her husband already passed away on
October 18, 2005.[14]

In its assailed decision, the CA held that the amount of PhP 141,518.34 (the
amount sought to be satisfied in the demand letter of respondent BPI) is clearly not
the result of the re-computation at the reduced interest rate as previous higher
interest rates were already incorporated in the said amount. Thus, the said amount
should not be made as basis in computing the total obligation of petitioner
Macalinao. Further, the CA also emphasized that respondent BPI should not
compound the interest in the instant case absent a stipulation to that effect. The CA
also held, however, that the MeTC erred in modifying the amount of interest rate
from 3% monthly to only 2% considering that petitioner Macalinao freely availed
herself of the credit card facility offered by respondent BPI to the general public. It
explained that contracts of adhesion are not invalid per se and are not entirely
prohibited.

Petitioner Macalinaos motion for reconsideration was denied by the CA in


its Resolution dated November 21, 2006. Hence, petitioner Macalinao is now
before this Court with the following assigned errors:

I.

THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE


UPHELD SINCE THE STIPULATED RATE OF INTEREST WAS
UNCONSCIONABLE AND INIQUITOUS, AND THUS ILLEGAL.

II.
THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED
RATE OF INTEREST FROM 2% TO 3%, CONTRARY TO THE TENOR OF
ITS OWN DECISION.

III.

THE COURT A QUO, INSTEAD OF PROCEEDING WITH A


RECOMPUTATION, SHOULD HAVE DISMISSED THE CASE FOR
FAILURE OF RESPONDENT BPI TO PROVE THE CORRECT AMOUNT OF
PETITIONERS OBLIGATION, OR IN THE ALTERNATIVE, REMANDED
THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT
PROOF OF THE CORRECT AMOUNT THEREOF.

Our Ruling

The petition is partly meritorious.

The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum
Should Be Reduced to 2% Per Month or 24% Per Annum

In its Complaint, respondent BPI originally imposed the interest and penalty
charges at the rate of 9.25% per month or 111% per annum. This was declared as
unconscionable by the lower courts for being clearly excessive, and was thus
reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate
of interest and penalty charge and increased them to 3% per month or 36% per
annum based on the Terms and Conditions Governing the Issuance and Use of the
BPI Credit Card, which governs the transaction between petitioner Macalinao and
respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty
charge of 3% per month imposed by the CA is iniquitous as the same translates to
36% per annum or thrice the legal rate of interest.[15] On the other hand, respondent
BPI asserts that said interest rate and penalty charge are reasonable as the same are
based on the Terms and Conditions Governing the Issuance and Use of the BPI
Credit Card.[16]

We find for petitioner. We are of the opinion that the interest rate and
penalty charge of 3% per month should be equitably reduced to 2% per month or
24% per annum.

Indeed, in the Terms and Conditions Governing the Issuance and Use of the
BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it
should be noted that this is not the first time that this Court has considered the
interest rate of 36% per annum as excessive and unconscionable. We held in Chua
vs. Timan:[17]

The stipulated interest rates of 7% and 5% per month imposed on


respondents loans must be equitably reduced to 1% per month or
12% per annum. We need not unsettle the principle we had affirmed
in a plethora of cases that stipulated interest rates of 3% per month
and higher are excessive, iniquitous, unconscionable and exorbitant.
Such stipulations are void for being contrary to morals, if not
against the law. While C.B. Circular No. 905-82, which took effect on
January 1, 1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of maturity, nothing in the
said circular could possibly be read as granting carte blanche authority
to lenders to raise interest rates to levels which would either enslave their
borrowers or lead to a hemorrhaging of their assets. (Emphasis supplied.)

Since the stipulation on the interest rate is void, it is as if there was no


express contract thereon. Hence, courts may reduce the interest rate as reason and
equity demand.[18]

The same is true with respect to the penalty charge. Notably, under the
Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, it
was also stated therein that respondent BPI shall impose an additional penalty
charge of 3% per month. Pertinently, Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and unconscionable,
courts must consider the circumstances of each case since what may be iniquitous
and unconscionable in one may be totally just and equitable in another.[19]

In the instant case, the records would reveal that petitioner Macalinao made
partial payments to respondent BPI, as indicated in her Billing
Statements.[20] Further, the stipulated penalty charge of 3% per month or 36% per
annum, in addition to regular interests, is indeed iniquitous and unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the
interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge
fixed by the CA at 1.5% monthly to 1% monthly or a total of 2% per month or
24% per annum in line with the prevailing jurisprudence and in accordance with
Art. 1229 of the Civil Code.

There Is No Basis for the Dismissal of the Case,


Much Less a Remand of the Same for Further Reception of Evidence

Petitioner Macalinao claims that the basis of the re-computation of the CA,
that is, the amount of PhP 94,843.70 stated on the October 27, 2002 Statement of
Account, was not the amount of the principal obligation. Thus, this allegedly
necessitates a re-examination of the evidence presented by the parties. For this
reason, petitioner Macalinao further contends that the dismissal of the case or its
remand to the lower court would be a more appropriate disposition of the case.

Such contention is untenable. Based on the records, the summons and a copy
of the complaint were served upon petitioner Macalinao and her husband on May
4, 2004. Nevertheless, they failed to file their Answer despite such service. Thus,
respondent BPI moved that judgment be rendered accordingly.[21] Consequently, a
decision was rendered by the MeTC on the basis of the evidence submitted by
respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on
Summary Procedure, which states:

Sec. 6. Effect of failure to answer. Should the defendant fail to


answer the complaint within the period above provided, the
court, motu proprio, or on motion of the plaintiff, shall render
judgment as may be warranted by the facts alleged in the complaint
and limited to what is prayed for therein: Provided, however, that the
court may in its discretion reduce the amount of damages and attorneys
fees claimed for being excessive or otherwise unconscionable. This is
without prejudice to the applicability of Section 3(c), Rule 10 of the
Rules of Court, if there are two or more defendants. (As amended by the
1997 Rules of Civil Procedure; emphasis supplied.)

Considering the foregoing rule, respondent BPI should not be made to suffer
for petitioner Macalinaos failure to file an answer and concomitantly, to allow the
latter to submit additional evidence by dismissing or remanding the case for further
reception of evidence. Significantly, petitioner Macalinao herself admitted the
existence of her obligation to respondent BPI, albeit with reservation as to the
principal amount. Thus, a dismissal of the case would cause great injustice to
respondent BPI. Similarly, a remand of the case for further reception of evidence
would unduly prolong the proceedings of the instant case and render inutile the
proceedings conducted before the lower courts.

Significantly, the CA correctly used the beginning balance of PhP 94,843.70


as basis for the re-computation of the interest considering that this was the first
amount which appeared on the Statement of Account of petitioner Macalinao.
There is no other amount on which the re-computation could be based, as can be
gathered from the evidence on record. Furthermore, barring a showing that the
factual findings complained of are totally devoid of support in the record or that
they are so glaringly erroneous as to constitute serious abuse of discretion, such
findings must stand, for this Court is not expected or required to examine or
contrast the evidence submitted by the parties.[22]
In view of the ruling that only 1% monthly interest and 1% penalty charge
can be applied to the beginning balance of PhP 94,843.70, this Court finds the
following computation more appropriate:

Statement Previous Purchases Balance Interest Penalty Total


Date Balance (Payments) (1%) Charge Amount
(1%) Due for
the Month
10/27/2002 94,843.70 94,843.70 948.44 948.44 96,740.58
11/27/2002 94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58
12/31/2002 79,843.70 30,308.80 110,152.50 1,101.53 1,101.53 112,355.56
1/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
2/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
3/27/2003 110,152.50 (18,000.00) 92,152.50 921.53 921.53 93,995.56
4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56
5/27/2003 92,152.50 (10,000.00) 82,152.50 821.53 821.53 83,795.56
6/29/2003 82,152.50 8,362.50 83,515.00 835.15 835.15 85,185.30
(7,000.00)
7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
10/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
11/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
12/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30
TOTAL 83,515.00 14,397.26 14,397.26 112,309.52
WHEREFORE, the petition is PARTLY GRANTED. The CA Decision
dated June 30, 2006 in CA-G.R. SP No. 92031 is hereby MODIFIED with respect
to the total amount due, interest rate, and penalty charge. Accordingly, petitioner
Macalinao is ordered to pay respondent BPI the following:

(1) The amount of one hundred twelve thousand three hundred nine
pesos and fifty-two centavos (PhP 112,309.52) plus interest and penalty charges
of 2% per month from January 5, 2004 until fully paid;

(2) PhP 10,000 as and by way of attorneys fees; and

(3) Cost of suit.

SO ORDERED.

PRESBITERO J. VELASCO, JR.


Associate Justice

G.R. No. 200868 November 12, 2012

ANITA A. LEDDA, Petitioner,


vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

DECISION

CARPIO, J.:

The Case

This petition for rebiew1 assails the 15 July 2011 Decision2 and 9 February 2012 Resolution3 of the
Court of Appeals in CA-G.R. CV No. 93747. The Court of Appeals partially granted the appeal filed
by petitioner Anita A. Ledda (Ledda) and modified the 4 June 2009 Decision4 of the Regional Trial
Court, Makati City, Branch 61. The Court of Appeals denied the motion for reconsideration.

The Facts
This case arose from a collection suit filed by respondent Bank of the Philippine Islands (BPI)
against Ledda for the latters unpaid credit card obligation.

BPI, through its credit card system, extends credit accommodations to its clientele for the purchase
of goods and availment of various services from accredited merchants, as well as to secure cash
advances from authorized bank branches or through automated teller machines.

As one of BPIs valued clients, Ledda was issued a pre-approved BPI credit card under Customer
Account Number 020100-9-00-3041167. The BPI Credit Card Package, which included the Terms
and Conditions governing the use of the credit card, was delivered at Leddas residence on 1 July
2005. Thereafter, Ledda used the credit card for various purchases of goods and services and cash
advances.

Ledda defaulted in the payment of her credit card obligation, which BPI claimed in their complaint
amounted to P548,143.73 per Statement of Account dated 9 September 2007.5 Consequently, BPI
sent letters6 to Ledda demanding the payment of such amount, representing the principal obligation
with 3.25% finance charge and 6% late payment charge per month.

Despite BPIs repeated demands, Ledda failed to pay her credit card obligation constraining BPI to
file an action for collection of sum of money with the Regional Trial Court, Makati City, Branch 61.
The trial court declared Ledda in default for failing to file Answer within the prescribed period, despite
receipt of the complaint and summons. Upon Leddas motion for reconsideration, the trial court lifted
the default order and admitted Leddas Answer Ad Cautelam.

While she filed a Pre-Trial Brief, Ledda and her counsel failed to appear during the continuation of
the Pre-Trial. Hence, the trial court allowed BPI to present its evidence ex-parte.

In its Decision of 4 June 2009, the trial court ruled in favor of BPI, thus:

WHEREFORE, premises duly considered, the instant "Complaint" of herein plaintiff Bank of the
Philippine Islands (BPI) is hereby given DUE COURSE/GRANTED.

Accordingly, judgment is hereby rendered against herein defendant ANITA A. LEDDA and in favor of
the plaintiff.

Ensuably, the herein defendant ANITA A. LEDDA is hereby ordered to pay the herein plaintiff Bank
of the Philippine Islands (BPI) the following sums, to wit:

1. Five Hundred Forty-Eight Thousand One Hundred Forty-Three Pesos and Seventy-Three
Centavos (P548,143.73) as and for actual damages, with finance and late-payment charges at the
rate of three and one-fourth percent (3.25%) and six percent (6%) per month, respectively, to be
counted from 19 October 2007 until the amount is fully paid;

2. Attorneys fees equivalent to twenty-five percent (25%) of the total obligation due and
demandable, exclusive of appearance fee for every court hearing, and

3. Costs of suit.

SO ORDERED.7 (Emphasis in the original)

The Ruling of the Court of Appeals


The Court of Appeals rejected Leddas argument that the document containing the Terms and
Conditions governing the use of the BPI credit card is an actionable document contemplated in
Section 7, Rule 8 of the 1997 Rules of Civil Procedure. The Court of Appeals held that BPIs cause
of action is based on "Leddas availment of the banks credit facilities through the use of her
credit/plastic cards, coupled with her refusal to pay BPIs outstanding credit for the cost of the goods,
services and cash advances despite lawful demands."

Citing Macalinao v. Bank of the Philippine Islands,8 the Court of Appeals held that the interest rates
and penalty charges imposed by BPI for Leddas non-payment of her credit card obligation, totalling
9.25% per month or 111% per annum, are exorbitant and unconscionable. Accordingly, the Court of
Appeals reduced the monthly finance charge to 1% and the late payment charge to 1%, or a total of
2% per month or 24% per annum.

The Court of Appeals recomputed Leddas total credit card obligation by deducting P226,000.15,
representing interests and charges, from P548,143.73, leaving a difference of P322,138.58 as the
principal amount, on which the reduced interest rates should be imposed.

The Court of Appeals awarded BPI P10,000 attorneys fees, pursuant to the ruling in Macalinao.

The dispositive portion of the Court of Appeals Decision reads:

WHEREFORE, premises considered, the appeal is PARTLY GRANTED, and accordingly the herein
assailed June 4, 2009 Decision of the trial court is hereby MODIFIED, ordering defendant-appellant
Anita Ledda to pay plaintiff-appellee BPI the amount of Php322,138.58, with 1% monthly finance
charges from date of availment of the plaintiffs credit facilities, and penalty charge at 1% per month
of the amount due from the date the amount becomes due and payable, until full payment. The
award of attorneys fees is fixed at Php10,000.00.

SO ORDERED.9 (Emphasis in the original)

The Issues

Ledda raises the following issues:

1. Whether the Court of Appeals erred in holding that the document containing the Terms
and Conditions governing the issuance and use of the credit card is not an actionable
document contemplated in Section 7, Rule 8 of the 1997 Rules of Civil Procedure.

2. Whether the Court of Appeals erred in applying Macalinao v. Bank of the Philippine
Islands instead of Alcaraz v. Court of Appeals10 as regards the imposition of interest and
penalty charges on the credit card obligation.

3. Whether the Court of Appeals erred in awarding attorneys fees in favor of BPI.

The Ruling of the Court

The petition is partially meritorious.

I.
Whether the document containing the
Terms and Conditions is an actionable document.
Section 7, Rule 8 of the 1997 Rules of Civil Procedure provides:

SEC. 7. Action or defense based on document. Whenever an action or defense is based upon a
written instrument or document, the substance of such instrument or document shall be set forth in
the pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which
shall be deemed to be a part of the pleading, or said copy may with like effect be set forth in the
pleading.

Clearly, the above provision applies when the action is based on a written instrument or document.

In this case, the complaint is an action for collection of sum of money arising from Leddas default in
her credit card obligation with BPI. BPIs cause of action is primarily based on Leddas (1)
acceptance of the BPI credit card, (2) usage of the BPI credit card to purchase goods, avail services
and secure cash advances, and (3) non-payment of the amount due for such credit card
transactions, despite demands.11 In other words, BPIs cause of action is not based only on the
document containing the Terms and Conditions accompanying the issuance of the BPI credit card in
favor of Ledda. Therefore, the document containing the Terms and Conditions governing the use of
the BPI credit card is not an actionable document contemplated in Section 7, Rule 8 of the 1997
Rules of Civil Procedure. As such, it is not required by the Rules to be set forth in and attached to
the complaint.

At any rate, BPI has sufficiently established a cause of action against Ledda, who admits having
received the BPI credit card, subsequently used the credit card, and failed to pay her obligation
arising from the use of such credit card.12

II.
Whether Alcaraz v. Court of Appeals,
instead of Macalinao v. BPI, is applicable.

Ledda contends that the case of Alcaraz v. Court of Appeals,13 instead of Macalinao v. Bank of the
Philippine Islands14 which the Court of Appeals invoked, is applicable in the computation of the
interest rate on the unpaid credit card obligation. Ledda claims that similar to Alcaraz, she was a
"pre-screened" client who did not sign any credit card application form or terms and conditions prior
to the issuance of the credit card. Like Alcaraz, Ledda asserts that the provisions of the Terms and
Conditions, particularly on the interests, penalties and other charges for non-payment of any
outstanding obligation, are not binding on her as such Terms and Conditions were never shown to
her nor did she sign it.

We agree with Ledda. The ruling in Alcaraz v. Court of Appeals15 applies squarely to the present
case. In Alcaraz, petitioner there, as a pre-screened client of Equitable Credit Card Network, Inc., did
not submit or sign any application form or document before the issuance of the credit card. There is
no evidence that petitioner Alcaraz was shown a copy of the terms and conditions before or after the
issuance of the credit card in his name, much less that he has given his consent thereto.

In this case, BPI issued a pre-approved credit card to Ledda who, like Alcaraz, did not sign any
credit card application form prior to the issuance of the credit card. Like the credit card issuer in
Alcaraz, BPI, which has the burden to prove its affirmative allegations, failed to establish Leddas
agreement with the Terms and Conditions governing the use of the credit card. It must be noted that
BPI did not present as evidence the Terms and Conditions which Ledda allegedly received and
accepted.16 Clearly, BPI failed to prove Leddas conformity and acceptance of the stipulations
contained in the Terms and Conditions. Therefore, as the Court held in Alcaraz, the Terms and
Conditions do not bind petitioner (Ledda in this case) "without a clear showing that x x x petitioner
was aware of and consented to the provisions of such document."17

On the other hand, Macalinao v. Bank of the Philippine Islands,18 which the Court of Appeals cited,
involves a different set of facts. There, petitioner Macalinao did not challenge the existence of the
Terms and Conditions Governing the Issuance and Use of the BPI Credit Card and her consent to its
provisions, including the imposition of interests and other charges on her unpaid BPI credit card
obligation. Macalinao simply questioned the legality of the stipulated interest rate and penalty
charge, claiming that such charges are iniquitous. In fact, one of Macalinaos assigned errors before
this Court reads: "The reduction of interest rate, from 9.25% to 2%, should be upheld since the
stipulated rate of interest was unconscionable and iniquitous, and thus illegal."19 Therefore, there is
evidence that Macalinao was fully aware of the stipulations contained in the Terms and Conditions
Governing the Issuance and Use of the Credit Card, unlike in this case where there is no evidence
that Ledda was aware of or consented to the Terms and Conditions for the use of the credit card.

Since there is no dispute that Ledda received, accepted and used the BPI credit card issued to her
and that she defaulted in the payment of the total amount arising from the use of such credit card,
Ledda is liable to pay BPI P322,138.58 representing the principal amount of her unpaid credit card
obligation.20

Consistent with Alcaraz, Ledda must also pay interest on the total unpaid credit card amount at the
rate of 12% per annum since her credit card obligation consists of a loan or forbearance of
money.21 In Eastern Shipping Lines, Inc. v. Court of Appeals,22 the Court explained:

1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code.

We reject Leddas contention that, since there was no written agreement to pay a higher interest
rate, the interest rate should only be 6%. Ledda erroneously invokes Article 2209 of the Civil
Code.23 Article 2209 refers to indemnity for damages and not interest on loan or forbearance of
money, which is the case here. In Sunga-Chan v. Court of Appeals,24 the Court held:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to
loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code
applies "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," with the application of both
rates reckoned "from the time the complaint was filed until the adjudged amount is fully paid." In
either instance, the reckoning period for the commencement of the running of the legal interest shall
be subject to the condition "that the courts are vested with discretion, depending on the equities of
each case, on the award of interest. (Emphasis supplied)

In accordance with Eastern Shipping Lines, Inc., the 12% legal interest shall be reckoned from the
date BPI extrajudicially demanded from Ledda the payment of her overdue credit card obligation.
Thus, the 12% legal interest shall be computed from 2 October 2007, when Ledda, through her
niece Sally D. Gancea,25 received BPIs letter26 dated 26 September 2007 demanding the payment
of the alleged overdue amount of P548,143.73.
III.
Whether the award of attorneys fees is proper.

Ledda assails the award of attorneys fees in favor of BPI on the grounds of (1) erroneous reliance
by the Court of Appeals on the case of Macalinao and (2) failure by the trial court to state the
reasons for the award of attorneys fees.

Settled is the rule that the trial court must state the factual, legal or equitable justification for the
award of attorneys fees.27 The matter of attorneys fees cannot be stated only in the dispositive
portion of the decision.28The body of the courts decision must state the reasons for the award of
attorneys fees.29 In Frias v. San Diego-Sison,30 the Court held:

Article 2208 of the New Civil Code enumerates the instances where such may be awarded and, in all
cases, it must be reasonable, just and equitable if the same were to be granted. Attorneys fees as
part of damages are not meant to enrich the winning party at the expense of the losing litigant. They
are not awarded every time a party prevails in a suit because of the policy that no premium should
be placed on the right to litigate. The award of attorneys fees is the exception rather than the
general rule. As such, it is necessary for the trial court to make findings of facts and law that would
1wphi 1

bring the case within the exception and justify the grant of such award. The matter of attorneys fees
cannot be mentioned only in the dispositive portion of the decision. They must be clearly explained
and justified by the court in the body of its decision. On appeal, the CA is precluded from
supplementing the bases for awarding attorneys fees when the trial court failed to discuss in its
Decision the reasons for awarding the same. Consequently, the award of attorneys fees should be
deleted.1wphi1

In this case, the trial court failed to state in the body of its decision the factual or legal reasons for the
award of attorneys fees in favor of BPI. Therefore, the same must be deleted.

WHEREFORE, we GRANT the petition IN PART. Petitioner Anita A. Ledda is ORDERED to pay
respondent Bank of the Philippine Islands the amount of .P322, 138.58, representing her unpaid
credit card obligation, with interest thereon at the rate of 12% per annum to be computed from 2
October 2007, until full payment thereof. The award of attorney's fees is DELETED for lack of basis.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

SECOND DIVISION
SPOUSES DAVID B. CARPO G.R. Nos. 150773 &
and RECHILDA S. CARPO, 153599
Petitioners,
Present:

- versus - PUNO, J.,


Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
ELEANOR CHUA and TINGA, and
ELMA DY NG, CHICO-NAZARIO, JJ.
Respondents.
Promulgated:
September 30, 2005

x-------------------------------------------------------------------x

DECISION

TINGA, J.:

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.

The cases stemmed from a loan contracted by petitioners. On 18


July 1995, they borrowed from Eleanor Chua and Elma Dy Ng
(respondents) the amount of One Hundred Seventy-Five Thousand
Pesos (P175,000.00), payable within six (6) months with an interest
rate of six percent (6%) per month. To secure the payment of the
loan, petitioners mortgaged their residential house and lot 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 upon demand. Consequently, the real estate mortgage
was extrajudicially foreclosed and the mortgaged property sold at a
public auction on 8 July 1996. The house and lot was awarded to
respondents, who were the only bidders, for the amount of Three
Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos
and Eighty Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of


redemption, a certificate of sale was issued on 5 September 1997 by
Sheriff Rolando A. Borja. TCT No. 23180 was cancelled and in its
stead, TCT No. 29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to


occupy the 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.

Meanwhile, in SP No. 98-1665, a temporary restraining order


was issued upon motion on 3 August 1999, enjoining the
enforcement of the writ of 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 leave the former in
force."

The question therefore to resolve is


whether the illegal terms as to payment of
interest likewise renders a nullity the legal
terms as to payments of the principal debt.
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 legal
ones, the latter may be enforced."

In simple loan with stipulation of 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 illegal.
The illegality lies only as to the prestation to
pay the stipulated interest; hence, being
separable, the latter only should be deemed
void, since it is the only one that is illegal.

....

The principal debt remaining without


stipulation for payment of interest can thus be
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
case from the filing of the complaint). Such interest
is not due to stipulation, for there was none, the
same being void. Rather, it is due to the general
provision of law that in obligations to pay money,
where the debtor incurs in delay, he has to pay
interest by way of damages (Art. 2209, Civil Code).
The court a quo therefore, did not err in ordering
defendants to pay the principal debt with interest
thereon at the legal rate, from the date of filing of
the complaint."[19]

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 and the offending interest rate merely
corrected. Hence, it is clear and settled that the principal loan
obligation still stands and remains valid. By the same token, since
the mortgage contract derives its vitality from the validity of the
principal obligation, the invalid stipulation on interest rate is
similarly insufficient to render void the ancillary mortgage contract.

It should be noted that had the Court declared the loan and
mortgage agreements void for being contrary to public policy, no
prescriptive period could have run.[20] Such benefit is obviously not
available to petitioners.

Yet the RTC pronounced that the complaint was barred by the
four-year prescriptive period provided in Article 1391 of the Civil
Code, which governs voidable contracts. This conclusion was
derived from the allegation in 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 conclude in this case that there was any undue influence in the
first place.

There is ultimately no showing that petitioners consent to the


loan and mortgage agreements was vitiated by undue influence.
The financial condition of petitioners may have motivated them to
contract with respondents, but undue influence cannot be
attributed to respondents simply because they had lent money.
Article 1391, in relation to Article 1390 of the Civil Code, grants the
aggrieved party the right to obtain the annulment of contract on
account of factors which vitiate consent. Article 1337 defines the
concept of undue influence, as follows:
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 was suffering from mental weakness, or
was ignorant or in financial distress.

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 be present, the influence exerted must have
so overpowered or subjugated the mind of a contracting party as to
destroy his free agency, making him express the will of another
rather than his own.[21] The alleged lingering financial woes of
petitioners per se cannot be equated with the presence of undue
influence.

The RTC had likewise concluded that petitioners were barred


by laches from assailing the validity of the real estate mortgage. We
wholeheartedly agree. If indeed petitioners unwillingly gave their
consent to the agreement, they should have raised this issue as
early as in the foreclosure proceedings. It was only when the writ of
possession was issued did petitioners challenge the stipulations in
the loan contract in their action for annulment of mortgage.
Evidently, petitioners slept on their rights. The Court of Appeals
succinctly made the following observations:

In all these proceedings starting from the foreclosure,


followed by the issuance of a provisional certificate of sale;
then the definite certificate of sale; then the issuance of TCT
No. 29338 in favor of the defendants and finally the petition
for the issuance of the writ of possession in favor of the
defendants, there is no showing that plaintiffs questioned
the validity of these proceedings. It was only after the
issuance of the writ of possession in favor of the defendants,
that plaintiffs allegedly tendered to the defendants the
amount of P260,000.00 which the defendants refused. In all
these proceedings, why did plaintiffs sleep on their rights?[22]
Clearly then, with the absence of undue influence, petitioners have
no cause of action. Even assuming undue influence vitiated their
consent to the loan contract, their action would already be barred
by prescription when they filed it. Moreover, petitioners had clearly
slept on their rights as they failed to timely assail the validity of the
mortgage agreement. The denial of the petition in G.R. No. 150773
is warranted.

We now resolve the petition in G.R. No. 153599.


Petitioners claim that the assailed RTC orders dated 3 August 1999
and 6 January 2000 could no longer be questioned in a special civil
action for certiorari and mandamus as the reglementary period for
such action had already elapsed.

It must be noted that the Order dated 3 August 1999 suspending


the enforcement of the writ of possession had a period of effectivity
of only twenty (20) days from 3 August 1999, or until 23 August
1999. Thus, upon the expiration of the twenty (20)-day period, the
said Order became functus officio. Thus, there is really no sense in
assailing the validity of this Order, mooted as it was. For the same
reason, the validity of the order need not have been assailed by
respondents in their special civil action before the Court of Appeals.

On the other hand, the Order dated 6 January 2000 is in the nature
of a writ of injunction whose period of efficacy is indefinite. It may
be properly assailed by way of the special civil action for certiorari,
as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must
be filed not later than sixty (60) days from notice of the judgment or
order.[23] Petitioners argue that the 3 August 1999 Order could no
longer be assailed by respondents in a special civil action for
certiorari before the Court of Appeals, as the petition was filed
beyond sixty (60) days following respondents receipt of the Order.
Considering that the 3 August 1999 Order had become functus
officio in the first place, this argument deserves scant consideration.

Petitioners further claim that the 6 January 2000 Order could not
have likewise been the subject of a special civil action for certiorari,
as it is according to them a final order, as opposed to an
interlocutory order. That the 6 January 2000 Order is interlocutory
in nature should be beyond doubt. An order is interlocutory if its
effects would only be provisional in character and would still leave
substantial proceedings to be further had by the issuing court in
order to 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 outcome of the then pending action for
annulment of real estate mortgage. Indeed, an interlocutory order
hardly puts to a close, or disposes of, a case or a disputed issue
leaving nothing else to be done by the court in respect thereto, as is
characteristic of a final order.

Since the 6 January 2000 Order is not a final order, but rather
interlocutory in nature, we cannot agree with petitioners who insist
that it may be assailed only through an appeal perfected within
fifteen (15) days from receipt thereof by respondents. It is axiomatic
that an interlocutory order cannot be challenged by an appeal,
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]

Thus, we also affirm the Court of Appeals ruling to set aside


the RTC orders enjoining the enforcement of the writ of
possession.[27] The purchaser in a foreclosure sale is entitled as a
matter of right to a writ of possession, regardless of whether or not
there is a pending suit for annulment of the mortgage or the
foreclosure proceedings. An injunction to prohibit the issuance or
enforcement of the writ is entirely out of place.[28]

One final note. The issue on the validity of the stipulated


interest rates, regrettably for petitioners, was not raised at the
earliest possible opportunity. It should be pointed out though that
since an excessive stipulated interest rate may be void for being
contrary to public policy, an action to annul said interest 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 stipulated interest rate, the principal loan obligation subsists,
and along with it the mortgage that serves as collateral security for
it.

WHEREFORE, in view of all the foregoing, the petitions are


DENIED. Costs against petitioners.
SO ORDERED.

JOCELYN M. TOLEDO , G.R. No. 172139


Petitioner,

Present:

CORONA, C. J., Chairperson,


- versus - LEONARDO-DE CASTRO,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.

MARILOU M. HYDEN, Promulgated:


Respondent. December 8, 2010
x-------------------------------------------------------------------x

DECISION
DEL CASTILLO, J.:

It is true that the imposition of an unconscionable rate of interest on a money debt is


immoral and unjust and the court may come to the aid of the aggrieved party to that
contract. However, before doing so, courts have to consider the settled principle that
the law will not relieve a party from the effects of an unwise, foolish or disastrous
contract if such party had full awareness of what she was doing.

This Petition for Review on Certiorari[1] assails the Decision[2] dated August 24, 2005 of
the Court of Appeals (CA) in CA-G.R. CV No. 79805, which affirmed the Decision dated
March 10, 2003[3] of the Regional Trial Court (RTC),
Branch 22, Cebu City in CivilCase No. CEB-22867. Also assailed is the
Resolution dated March 8, 2006 denying the motion for reconsideration.

Factual Antecedents

Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the College
Assurance Plan (CAP) Phils., Inc., obtained several loans from respondent Marilou M.
Hyden (Marilou). The transactions are briefly summarized below:

1) August 15, 1993

P 30,000.00

2) April 21, 1994 100,000.00

3) October 2, 1995 30,000.00

4) October 9, 1995 30,000.00


5) May 22, 1997 100,000.00 with 7% monthly interest

TOTAL AMOUNT OF LOAN P 290,000.00[4]

From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously paying
Marilou the stipulated monthly interest by issuing checks and depositing sums of money
in the bank account of the latter. However, the total principal amount of P290,000.00
remained unpaid. Thus, in April 1998, Marilou visited Jocelyn in her office at CAP
in Cebu City and asked Jocelyn and the other employees who were likewise indebted to
her to acknowledge their debts. A document entitled Acknowledgment of Debt[5] for the
amount ofP290,000.00 was signed by Jocelyn with two of her subordinates as
witnesses. The said amount represents the principal consolidated amount of the
aforementioned previous debts due on December 25, 1998. Also on said occasion,
Jocelyn issued five checks to Marilou representing renewal payment of her five previous
loans, viz:

Check No. 0010761 dated September 2, 1998 ......... P 30,000.00

Check No. 0010762 dated September 9, 1998 ......... 30,000.00

Check No. 0010763 dated September 15, 1998 ......... 30,000.00

Check No. 0010764 dated September 22, 1998 ......... 100,000.00

Check No. 0010765 dated September 25, 1998 ......... 100,000.00

TOTAL P 290,000.00

In June 1998, Jocelyn asked Marilou for the recall of Check No. 0010761 in the
amount of P30,000.00 and replaced the same with six checks, in staggered amounts,
namely:

Check No. 0010494 dated July 2, 1998 ......... P 6,625.00

Check No. 0010495 dated August 2, 1998 ......... 6,300.00

Check No. 0010496 dated September 2, 1998 ......... 5,975.00

Check No. 0010497 dated October 2, 1998 ......... 6,500.00

Check No. 0010498 dated November 2, 1998 ......... 5,325.00

Check No. 0010499 dated December 2, 1998 ......... 5,000.00


TOTAL P 35,725.00

After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the stop
payment on the remaining checks and on October 27, 1998, filed with the RTC of Cebu
City a complaint[6] against Marilou for Declaration of Nullity and Payment, Annulment,
Sum of Money, Injunction and Damages.

Jocelyn averred that Marilou forced, threatened and intimidated her into signing the
Acknowledgment of Debt and at the same time forced her to issue the seven postdated
checks. She claimed that Marilou even threatened to sue her for violation of Batas
Pambansa (BP)Blg. 22 or the Bouncing Checks Law if she will not sign the said document
and draw the above-mentioned checks. Jocelyn further claimed that the application of
her total payment of P528,550.00 to interest alone is illegal, unfounded, unjust,
oppressive and contrary to law because there was no written agreement to pay
interest.

On November 23, 1998, Marilou filed an Answer[7] with Special Affirmative


Defenses and Counterclaim alleging that Jocelyn voluntarily obtained the said loans
knowing fully well that the interest rate was at 6% to 7% per month. In fact, a 6% to 7%
advance interest was already deducted from the loan amount given to Jocelyn.

Ruling of the Regional Trial Court

The court a quo did not find any showing that Jocelyn was forced, threatened, or
intimidated in signing the document referred to as Acknowledgment of Debt and in
issuing the postdated checks. Thus, in its March 10, 2003 Decision the trial court ruled in
favor of Marilou, viz:
WHEREFORE, premised on the foregoing, the Court hereby declares
the document Acknowledgment of Debt valid and binding. PLAINTIFF is
indebted to DEFENDANT [for] the amount of TWO HUNDRED NINETY
THOUSAND (P290,000.00) PESOS since December 25, 1998 less the amount
of EIGHTEEN THOUSAND NINE HUNDRED (P18,900.00) PESOS, equivalent to
the three checks made good (P6,625.00 dated 07-02-1998; P6,300.00 dated
08-02-1998; and P5,975.00 dated 09-02-1998).

Consequently, PLAINTIFF is hereby ordered to pay DEFENDANT the


amount of TWO HUNDRED SEVENTY ONE THOUSAND ONE HUNDRED
(P271,100.00) PESOS due on December 25, 1998 with a 12% interest per
annum or 1% interest per month until such time that the said amount shall
have been fully paid.

No pronouncement as to costs.

SO ORDERED.[8]

On March 26, 2003, Jocelyn filed an Earnest Motion for Reconsideration,[9] which was
denied by the trial court in its Order[10] dated April 29, 2003 stating that it finds no
sufficient reason to disturb its March 10, 2003 Decision.

Ruling of the Court of Appeals

On appeal, Jocelyn asserts that she had made payments in the total amount
of P778,000.00 for a principal amount of loan of only P290,000.00. What is appalling,
according to Jocelyn, was that such payments covered only the interest because of the
excessive, iniquitous, unconscionable and exorbitant imposition of the 6% to 7%
monthly interest.
On August 24, 2005, the CA issued its Decision which provides:

WHEREFORE, premises considered, the Decision dated March 10,


2003 and the Order dated April 29, 2003, of the Regional Trial Court,
7th Judicial Region, Branch 22, Cebu City, in Civil Case No. CEB-22867 are
hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.[11]

The Motion for Reconsideration[12] filed by Jocelyn was denied by the CA through its
Resolution[13] dated March 8, 2006.

Issues

Hence, this petition raising the following issues:

I.
Whether the CA gravely erred when it held that the imposition of interest at
the rate of six percent (6%) to seven percent (7%) is not contrary to law,
morals, good customs, public order or public policy.

II.
Whether the CA gravely erred when it failed to declare that the
Acknowledgment of Debt is an inexistent contract that is void from the very
beginning pursuant to Article 1409 of the New Civil Code.
Petitioners Arguments

Jocelyn posits that the CA erred when it held that the imposition of interest at the rates
of 6% to 7% per month is not contrary to law, not unconscionable and not contrary to
morals. She likewise contends that the CA erred in ruling that the Acknowledgment of
Debt is valid and binding. According to Jocelyn, even assuming that the execution of said
document was not attended with force, threat and intimidation, the same must
nevertheless be declared null and void for being contrary to law and public policy. This is
borne out by the fact that the payments in the total amount of P778,000.00 was applied
to interest payment alone. This only proves that the transaction was iniquitous,
excessive, oppressive and unconscionable.

Respondents Arguments

On the other hand, Marilou would like this Court to consider the fact that the
document referred to as Acknowledgment of Debt was executed in the safe
surroundings of the office of Jocelyn and it was witnessed by two of her staff. If at all
there had been coercion, then Jocelyn could have easily prevented her staff from
affixing their signatures to said document. In fact, petitioner had admitted that she was
the one who went to the tables of her staff to let them sign the said document.

Our Ruling

The petition is without merit.


The 6% to 7% interest per month paid by
Jocelyn is not excessive under the
circumstances of this case.

In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling
on interest effective January 1, 1983, parties to a loan agreement have wide latitude to
stipulate interest rates. Nevertheless, such stipulated interest rates may be declared as
illegal if the same is unconscionable.[14] There is certainly nothing in said circular which
grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets.[15] In fact, in Medel v.
Court of Appeals,[16] we annulled a stipulated 5.5% per month or 66% per annum
interest with additional service charge of 2% per annum and penalty charge of 1% per
month on a P500,000.00 loan for being excessive, iniquitous, unconscionable and
exorbitant.

In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate
to be iniquitous or unconscionable vis--vis the principle laid down in Medel. Noteworthy
is the fact that in Medel, the defendant-spouses were never able to pay their
indebtedness from the very beginning and when their obligations ballooned into a
staggering sum, the creditors filed a collection case against them. In this case, there was
no urgency of the need for money on the part of Jocelyn, the debtor, which compelled
her to enter into said loan transactions. She used the money from the loans to make
advance payments for prospective clients of educational plans offered by her
employer. In this way, her sales production would increase, thereby entitling her to 50%
rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly
interest. Notably too, a business transaction of this nature between Jocelyn and Marilou
continued for more than five years. Jocelyn religiously paid the agreed amount of
interest until she ordered for stop payment on some of the checks issued to
Marilou. The checks were in fact sufficiently funded when she ordered the stop
payment and then filed a case questioning the imposition of a 6% to 7% interest rate for
being allegedly iniquitous or unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that
the same carried with it an interest rate of 6% to 7% per month, yet she did not
complain. In fact, when she availed of said loans, an advance interest of 6% to 7% was
already deducted from the loan amount, yet she never uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate
of 6% to 7% per month and paying for the same, Jocelyn cannot now go to court to have
the said interest rate annulled on the ground that it is excessive, iniquitous,
unconscionable, exorbitant, and absolutely revolting to the conscience of man. This is so
because among the maxims of equity are (1) he who seeks equity must do equity, and
(2) he who comes into equity must come with clean hands. The latter is a frequently
stated maxim which is also expressed in the principle that he who has done inequity
shall not have equity. It signifies that a litigant may be denied relief by a court of equity
on the ground that his conduct has been inequitable, unfair and dishonest, or
fraudulent, or deceitful as to the controversy in issue. [17]

We are convinced that Jocelyn did not come to court for equitable relief with equity or
with clean hands. It is patently clear from the above summary of the facts that the
conduct of Jocelyn can by no means be characterized as nobly fair, just, and
reasonable. This Court likewise notes certain acts of Jocelyn before filing the case with
the RTC. In September 1998, she requested Marilou not to deposit her checks as she
can cover the checks only the following month. On the next month, Jocelyn again
requested for another extension of one month. It turned out that she was only sweet-
talking Marilou into believing that she had no money at that time. But as testified by
Serapio Romarate,[18] an employee of the Bank of Commerce where Jocelyn is one of
their clients, there was an available balance ofP276,203.03 in the latters account and yet
she ordered for the stop payments of the seven checks which can actually be covered
by the available funds in said account. She then caught Marilou by surprise when she
surreptitiously filed a case for declaration of nullity of the document and for damages.
The document Acknowledgment of Debt is
valid and binding.

Jocelyn seeks for the nullification of the document entitled Acknowledgment of Debt
and wants this Court to declare that she is no longer indebted to Marilou in the amount
of P290,000.00 as she had already paid a total amount of P778,000.00. She claims that
said document is an inexistent contract that is void from the very beginning as clearly
provided for by Article 1409[19] of the New Civil Code.

Jocelyn further claims that she signed the said document and issued the seven
postdated checks because Marilou threatened to sue her for violation of BP Blg. 22.

Jocelyn is misguided. Even if there was indeed such threat made by Marilou, the
same is not considered as threat that would vitiate consent. Article 1335 of the New
Civil Code is very specific on this matter. It provides:

Art. 1335. There is violence when in order to wrest consent, serious or


irresistible force is employed.

xxxx

A threat to enforce ones claim through competent authority, if the


claim is just or legal, does not vitiate consent. (Emphasis supplied.)

Clearly, we cannot grant Jocelyn the relief she seeks.


As can be seen from the records of the case, Jocelyn has failed to prove her claim that
she was made to sign the document Acknowledgment of Debt and draw the seven Bank
of Commerce checks through force, threat and intimidation. As earlier stressed, said
document was signed in the office of Jocelyn, a high ranking executive of CAP, and it
was Jocelyn herself who went to the table of her two subordinates to procure their
signatures as witnesses to the execution of said document. If indeed, she was forced to
sign said document, then Jocelyn should have immediately taken the proper legal
remedy. But she did not. Furthermore, it must be noted that after the execution of said
document, Jocelyn honored the first three checks before filing the complaint with the
RTC. If indeed she was forced she would never have made good on the first three
checks.

It is provided, as one of the conclusive presumptions under Rule 131, Section 2(a), of the
Rules of Court that, Whenever a party has, by his own declaration, act or omission,
intentionally and deliberately led another to believe a particular thing to be true, and to
act upon such belief, he cannot, in any litigation arising out of such declaration, act or
omission, be permitted to falsify it. This is known as the principle of estoppel.

The essential elements of estoppel are: (1) conduct amounting to false representation
or concealment of material facts or at least calculated to convey the impression that the
facts are otherwise than, and inconsistent with, those which the party subsequently
attempts to assert; (2) intent, or at least expectation, that this conduct shall be acted
upon by, or at least influence, the other party; and, (3) knowledge, actual or
constructive, of the real facts.[20]

Here, it is uncontested that Jocelyn had in fact signed the Acknowledgment of Debt in
April 1998 and two of her subordinates served as witnesses to its execution, knowing
fully well the nature of the contract she was entering into. Next, Jocelyn issued five
checks in favor of Marilou representing renewal payment of her loans amounting
to P290,000.00. In June 1998, she asked to recall Check No. 0010761 in the amount
of P30,000.00 and replaced the same with six checks, in staggered amounts. All these
are indicia that Jocelyn treated the Acknowledgment of Debt as a valid and binding
contract.
More significantly, Jocelyn already availed herself of the benefits of the
Acknowledgment of Debt, the validity of which she now impugns. As aptly found by the
RTC and the CA, Jocelyn was making a business out of the loaned amounts. She was
actually using the money to make advance payments for her prospective clients so that
her sales production would increase. Accordingly, she did not mind the 6% to 7% interest
per month as she was getting a 50% rebate on her sales.

Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the
Acknowledgment of Debt. [A] party to a contract cannot deny the validity thereof after
enjoying its benefits without outrage to ones sense of justice and fairness.[21] It is a long
established doctrine that the law does not relieve a party from the effects of an unwise,
foolish or disastrous contract, entered into with all the required formalities and with full
awareness of what she was doing. Courts have no power to relieve parties from
obligations voluntarily assumed, simply because their contracts turned out to be
disastrous or unwise investments.[22]

WHEREFORE, the instant petition for review on certiorari is DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 79805 dated August 24, 2005 affirming the Decision
dated March 10, 2003 of the Regional Trial Court, Branch 22, Cebu City, in Civil Case No.
CEB-22867 is AFFIRMED.

SO ORDERED.

G.R. No. 183360 September 8, 2014

ROLANDO C. DE LA PAZ,* Petitioner,


vs.
L & J DEVELOPMENT COMPANY, Respondent.

DECISION
DEL CASTILLO, J.:

"No interest shall be due unless it has been expressly stipulated in writing."1

This is a Petition for Review on Certiorari2 assailing the February 27, 2008 Decision3 of the Court of
Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the Decision4 dated April 19,
2007 of the Regional Trial Court (RTC), Branch 192, Marikina City in Civil Case No. 06-1145-MK.
The said RTC Decision affirmed in all respects the Decision5 dated June 30, 2006 of the Metropolitan
Trial Court (MeTC), Branch 75, Marikina City in Civil Case No. 05-7755, which ordered respondent L
& J Development Company (L&J) to pay petitioner Architect Rolando C. De La Paz (Rolando) its
principal obligation of P350,000.00, plus 12% interest per annumreckoned from the filing of the
Complaint until full payment of the obligation.

Likewise assailed is the CAs June 6, 2008 Resolution6 which denied Rolandos Motion for
Reconsideration.

Factual Antecedents

On December 27, 2000, Rolando lent P350,000.00 without any security to L&J, a property developer
with Atty. Esteban Salonga (Atty. Salonga) as its President and General Manager. The loan, with no
specified maturity date, carried a 6% monthly interest, i.e., P21,000.00. From December 2000 to
August 2003, L&J paid Rolando a total ofP576,000.007 representing interest charges.

As L&J failed to pay despite repeated demands, Rolando filed a Complaint8 for Collection of Sum of
Money with Damages against L&J and Atty. Salonga in his personal capacity before the MeTC,
docketed as Civil Case No. 05-7755. Rolando alleged, amongothers, that L&Js debtas of January
2005, inclusive of the monthly interest, stood at P772,000.00; that the 6% monthly interest was upon
Atty. Salongas suggestion; and, that the latter tricked him into parting with his money without the
loan transaction being reduced into writing.

In their Answer,9 L&J and Atty. Salonga denied Rolandos allegations. While they acknowledged the
loan as a corporate debt, they claimed that the failure to pay the same was due to a fortuitous event,
that is, the financial difficulties brought about by the economic crisis. They further argued that
Rolando cannot enforce the 6% monthly interest for being unconscionable and shocking to the
morals. Hence, the payments already made should be applied to the P350,000.00 principal loan.

During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former Senator, and the owner of L&J which
developed Brentwood Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When
Nilo told him that Atty. Salonga and L&J needed money to finish their projects, heagreed to lend
them money. He personally met withAtty. Salonga and their meeting was cordial.

He narrated that when L&J was in the process of borrowing the P350,000.00 from him, it was Arlene
San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and conditions
thereof.She said that the money was to finance L&Js housing project. Rolando claimed that it was
not he who demanded for the 6% monthly interest. It was L&J and Atty. Salonga, through Arlene,
who insisted on paying the said interest as they asserted that the loan was only a short-term one.

Ruling of the Metropolitan Trial Court


The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it
ratiocinated that since L&J agreed thereto and voluntarily paid the interest at suchrate from 2000 to
2003, it isalready estopped from impugning the same. Nonetheless, for reasons of equity, the
saidcourt reduced the interest rate to 12% per annumon the remaining principal obligation
of P350,000.00. With regard to Rolandos prayer for moral damages, the MeTC denied the same as
it found no malice or bad faith on the part ofL&J in not paying the obligation. It likewise relieved Atty.
Salonga of any liability as it found that he merely acted in his official capacity in obtaining the loan.
The MeTC disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch.
Rolando C. Dela Paz, and against the defendant, L & J Development Co., Inc., as follows:

a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Three
Hundred Fifty Thousand Pesos (P350,000.00) representing the principal obligation, plus
interest at the legal rate of 12% per annum to be computed from January 20, 2005, the date
of the filing of the complaint, until the whole obligation is fully paid;

b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five
Thousand Pesos (P5,000.00) as and for attorneys fees; and

c) to pay the costs of this suit.

SO ORDERED.11

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal memorandum12 that from December 2000 to
March 2003, it paid monthly interest of P21,000.00 based on the agreed-upon interest rate of
6%monthly and from April 2003 to August 2003, interest paymentsin various amounts.13 The total of
interest payments made amounts toP576,000.00 an amount which is even more than the principal
obligation of P350,000.00

L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12% per
annumlegal interest should have been applied from the time of the constitution of the obligation. At
12% per annum interest rate, it asserted that the amount of interestit ought to pay from December
2000 to March 2003 and from April 2003 to August 2003, only amounts to P105,000.00. If this
amount is deducted from the total interest paymentsalready made, which is P576,000.00, the
amount of P471,000.00 appears to have beenpaid over and above what is due. Applying the rule on
compensation, the principal loan of P350,000.00 should be set-off against the P471,000.00, resulting
in the complete payment of the principal loan.

Unconvinced, the RTC, inits April 19, 2007 Decision,14 affirmed the MeTC Decision, viz:
WHEREFORE, premises considered, the Decision appealed from is hereby AFFIRMED in all
respects, with costs against the appellant.

SO ORDERED.15

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its arguments and proposed computation as proffered
before the RTC.
In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The CA
stressed that the parties failedto stipulate in writing the imposition of interest on the loan. Hence, no
interest shall be due thereon pursuant to Article 1956 of the Civil Code.17 And even if payment of
interest has been stipulated in writing, the 6% monthly interest is still outrightly illegal and
unconscionable because it is contrary to morals, if not against the law. Being void, this cannot be
ratified and may be set up by the debtor as defense. For these reasons, Rolando cannot collect any
interest even if L&J offered to pay interest. Consequently, he has to return all the interest payments
of P576,000.00 to L&J.

Considering further that Rolando and L&J thereby became creditor and debtor of each other, the CA
applied the principle of legal compensation under Article 1279 of the Civil Code.18 Accordingly, it set
off the principal loan ofP350,000.00 against the P576,000.00 total interest payments made, leaving
an excess of P226,000.00, which the CA ordered Rolando to pay L&J plus interest. Thus:

WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.

CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the
petitioner the amount of P226,000.00,plus interest of 12% per annumfrom the finality of this decision.

Costs of suit to be paid by respondent Dela Paz.

SO ORDERED.19

In his Motion for Reconsideration,20 Rolando argued thatthe circumstances exempt both the
application of Article 1956 and of jurisprudence holding that a 6% monthly interest is
unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a lawyer, should have
taken it upon himself to have the loan and the stipulated rate of interest documented but, by way of
legal maneuver, Atty. Salonga, whom he fully trusted and relied upon, tricked him into believing that
the undocumented and uncollateralized loan was withinlegal bounds. Had Atty. Salonga told him that
the stipulated interest should be in writing, he would have readily assented. Furthermore, Rolando
insisted that the 6% monthly interest ratecould not be unconscionable as in the first place, the
interest was not imposed by the creditor but was in fact offered by the borrower, who also dictated all
the terms of the loan. He stressed that in cases where interest rates were declared unconscionable,
those meant to be protected by such declaration are helpless borrowers which is not the case here.

Still, the CA denied Rolandos motion in its Resolution21 of June 6, 2008.

Hence, this Petition.

The Parties Arguments

Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty.
Salonga took advantage of his legal knowledge to hoodwink him into believing that no document
was necessaryto reflect the interest rate. Moreover, the cases anent unconscionable interest rates
that the CA relied upon involve lenders who imposed the excessive rates,which are totally different
from the case at bench where it is the borrower who decided on the high interest rate. This case
does not fall under a scenariothat enslaves the borrower or that leads to the hemorrhaging of his
assets that the courts seek to prevent.

L&J, in controverting Rolandos arguments, contends that the interest rate is subject of negotiation
and is agreedupon by both parties, not by the borrower alone. Furthermore, jurisprudence has
nullified interestrates on loans of 3% per month and higher as these rates are contrary to moralsand
public interest. And while Rolando raises bad faithon Atty. Salongas part, L&J avers thatsuch issue
is a question of fact, a matter that cannot be raised under Rule 45.

Issue

The Courts determination of whether to uphold the judgment of the CA that the principal loan is
deemed paid isdependent on the validity of the monthly interest rate imposed. And in determining
such validity, the Court must necessarily delve into matters regarding a) the form of the agreement
of interest under the law and b) the alleged unconscionability of the interest rate. Our Ruling

The Petition is devoid of merit.

The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from
charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly stipulated
in writing. Jurisprudence on the matter also holds that for interest to be due and payable, two
conditions must concur: a) express stipulation for the payment of interest; and b) the agreement to
pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest is
due. The collection of interest without any stipulation in writing is prohibited by law.22

But Rolando asserts that his situation deserves an exception to the application of Article 1956. He
blames Atty. Salonga for the lack of a written document, claiming that said lawyer used his legal
knowledge to dupe him. Rolando thus imputes bad faith on the part of L&J and Atty. Salonga. The
Court, however, finds no deception on the partof L&J and Atty. Salonga. For one, despite the lack of
a document stipulating the payment of interest, L&J nevertheless devotedly paid interests on the
loan. It only stopped when it suffered from financial difficulties that prevented it from continuously
paying the 6% monthly rate. For another,regardless of Atty. Salongas profession, Rolando who is an
architect and an educated man himself could have been a more reasonably prudent person under
the circumstances. To top it all, he admitted that he had no prior communication with Atty. Salonga.
Despite Atty. Salonga being a complete stranger, he immediately trusted him and lent his
company P350,000.00, a significant amount. Moreover, as the creditor,he could have requested or
required that all the terms and conditions of the loan agreement, which include the payment of
interest, be put down in writing to ensure that he and L&J are on the same page. Rolando had a
choice of not acceding and to insist that their contract be put in written form as this will favor and
safeguard him as a lender. Unfortunately, he did not. It must be stressed that "[c]ourts cannot follow
one every step of his life and extricate him from bad bargains, protect him from unwise investments,
relieve him from one-sided contracts,or annul the effects of foolish acts. Courts cannotconstitute
themselves guardians of persons who are not legally incompetent."23

It may be raised that L&J is estopped from questioning the interest rate considering that it has been
paying Rolando interest at such ratefor more than two and a half years. In fact, in its pleadings
before the MeTCand the RTC, L&J merely prayed for the reduction of interest from 6% monthly to
1% monthly or 12% per annum. However, in Ching v. Nicdao,24 the daily payments of the debtor to
the lender were considered as payment of the principal amount of the loan because Article 1956 was
not complied with. This was notwithstanding the debtors admission that the payments made were
for the interests due. The Court categorically stated therein that "[e]stoppel cannot give validity to an
act that is prohibited by law or one thatis against public policy."
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan is
unconscionable, regardless of who between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in view of the suspension of the Usury
Law25 by Central Bank Circular No. 905 s. 1982.26 Even so, not all interest rates levied upon loans are
permitted by the courts as they have the power to equitably reduce unreasonable interest rates. In
Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction
Corporation,27 we said:

While the Court recognizes the right of the parties to enter into contracts and who are expectedto
comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are illegal if
they are unconscionable and the Court is allowed to temper interest rates when necessary. In
exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What may be iniquitous and unconscionable in onecase,
may be just in another. x x x28

Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per
month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are
void for being contrary to morals, if not against the law.29 The Court, however, stresses that these
rates shall be invalidated and shall be reduced only in cases where the terms of the loans are open-
ended, and where the interest rates are applied for an indefinite period. Hence, the imposition of a
specific sum of P40,000.00 a month for six months on aP1,000,000.00 loan is not considered
unconscionable.30

In the case at bench, there is no specified period as to the payment of the loan. Hence, levying 6%
monthly or 72% interest per annumis "definitely outrageous and inordinate."31 The situation that it
was the debtor who insisted on the interest rate will not exempt Rolando from a ruling that the rate is
void. As this Court cited in Asian Cathay Finance and Leasing Corporation v. Gravador,32 "[t]he
imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man."33 Indeed, "voluntariness does
notmake the stipulation on [an unconscionable] interest valid."34

As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article 1956. The CA thus
1wphi1

correctly adjudged that the excess interest payments made by L&J should be applied to its principal
loan. As computed by the CA, Rolando is bound to return the excess payment of P226,000.00 to
L&J following the principle of solutio indebiti.35

However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, 2013,36 the
interest imposed by the CA must be accordingly modified. The P226,000.00 which Rolando is
ordered to pay L&J shall earn an interest of 6% per annumfrom the finality of this Decision.

WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No.
100094 is hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is ordered to
pay respondent L&J Development Company the amount of ,P226,000.00, plus interest of 6o/o per
annum from the finality of this Decision until fully paid.

SO ORDERED.

MARIANO C. DEL CASTILLO


Associate Justice