DELA PAZ VS L&J DEVELOPMENT
ARGUMENTS:
Facts: On December 27, 2000, Rolando lent ₱350,000.00 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., ₱21,000.00.
From December 2000 to August 2003, L&J paid Rolando a total of
₱576,000.007 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, among others, 1. that
L&J’s debt as of January 2005, inclusive of the monthly interest, stood
at ₱772,000.00;
1. that the 6% monthly interest was upon Atty. Salonga’s suggestion;
and,
2. that the latter tricked him into parting with his money without the loan
transaction being reduced into writing.
In their Answer, L&J and Atty. Salonga denied Rolando’s 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 ₱350,000.00 principal loan.
METC - upheld the 6% monthly interest since L&J agreed and
voluntarily paid teh interest thus it was already estopped.
Nonetheless, for reasons of equity, the saidcourt reduced the interest
rate to 12% per annumon the remaining principal obligation of
₱350,000.00.
RTC
affirmed the MeTC Decision
CA
reversed and set aside the RTC Decision. The CA stressed that the
parties failed to 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 ₱576,000.00 to L&J.
Hence, a petition was brought before the supreme court.
Rolando argues that the 6%monthly interest rate should 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 Rolando’s 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. Salonga’s part, L&J
avers thatsuch issue is a question of fact, a matter that cannot be raised
under Rule 45.
ISSUE
Is interest due?
RULING: NO.
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.
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.
SC: 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.
Salonga’s 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 ₱350,000.00, 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."
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 IS DUE Rolando
pursuant to Article 1956. The CA thus 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
₱226,000.00 to L&J following the principle of solutio indebiti.35

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 However, pursuant to Central Bank Circular No. 799 s. 2013 which took
MeTCand the RTC, L&J merely prayed for the reduction of interest effect on July 1, 2013,36 the interest imposed by the CA must be accordingly
from 6% monthly to 1% monthly or 12% per annum. However, in Ching modified. The ₱226,000.00 which Rolando is ordered to pay L&J shall earn
v. Nicdao,24 the daily payments of the debtor to the lender were an interest of 6% per annumfrom the finality of this Decision.
considered as payment of the principal amount of the loan because
Article 1956 was not complied with. This was notwithstanding the
debtor’s 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, 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 ₱40,000.00 a month for six months on a
₱1,000,000.00 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
 DIO VS JAPOR vehemently contend that they never consented to the said stipulations and
hence, should not be bound by them.
FACTS: Spouses Virgilio Japor and Luz Roces Japor were the owners
of a residential lot including its improvements situated in Lucena City.

On August 23, 1982, the respondents obtained a loan of P90,000 from
the Quezon Development Bank (QDB), and as security therefor, they
mortgaged the said lots, as evidenced by a Deed of Real Estate
Mortgage. Subsequently, the parties amended the deed increasing
respondents’ loan to P128,000.
RULING: The stipulation as to the 5% interest for the two-month period was
sustained. However, the stipulation as to the 5% interest for every month of
delay after that (compound interest) was deemed unconscionable.
FULL TEXT RULING:
Central Bank Circular No. 905, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity.

The respondents failed to pay their aforesaid loans. However, before

the bank could foreclose on the mortgage, respondents offered to
mortgage their properties to petitioner Teresita Dio. Respondents However, nothing in said Circular grants lenders carte blanche authority to
mortgaged anew the two properties already mortgaged with QDB to impose interest rates which would result in the enslavement of their
secure the timely payment of a P350,000 loan that respondents had borrowers or to the hemorrhaging of their assets.
from petitioner Dio. Under the terms of the deed, respondents agreed
to pay the petitioner interest at the rate of five percent (5%) a month,
within a period of two months or until April 14, 1989. In the event of
While a stipulated rate of interest may not technically and necessarily be
default, an additional interest equivalent to five percent (5%) of the
usurious under Circular No. 905, usury now being legally non-existent in our
amount then due, for every month of delay, would be charged on them.
jurisdiction, nonetheless, said rate may be equitably reduced should the
However, the respondents failed to settle their obligation to petitioner
same be found to be iniquitous, unconscionable, and exorbitant, and hence,
on April 14, 1989, the agreed deadline for settlement. On August 27,
contrary to morals (contra bonos mores), if not against the law.
1991, petitioner made written demands upon the respondents to pay
their debt. Despite repeated demands, respondents did not pay, hence
petitioner applied for extrajudicial foreclosure of the mortgage.
What is iniquitous, unconscionable, and exorbitant shall depend upon the
factual circumstances of each case.
ISSUE: Won the stipulation of 5% interest within the 2 month period
and 5% interest for every month of delay after that is contrary to morals,
if not, illegal. IN THE INSTANT CASE, the Court of Appeals found that the 5% interest
rate per month and 5% penalty rate per month for every month of default or
delay is in reality interest rate at 120% per annum. This Court has held that a
stipulated interest rate of 5.5% per month or 66% per annum is void for being
CONTENTIONS:
iniquitous or unconscionable.
On the main issue, petitioner contends that The Usury Law10 has
been rendered ineffective by Central Bank Circular No. 905, series of
1982 and accordingly, usury has become legally non-existent in this We have likewise ruled that an interest rate of 6% per month or 72% per
jurisdiction, thus, interest rates may accordingly be pegged at such annum is outrageous and inordinate. Conformably to these precedent cases,
levels or rates as the lender and the borrower may agree upon. a combined interest and penalty rate at 10% per month or 120% per annum,
should be deemed iniquitous, unconscionable, and inordinate. Hence, we
sustain the appellate court when it found the interest and penalty rates in the
Petitioner avers she has not violated any law considering she is not Deed of Real Estate Mortgage in the present case excessive, hence legally
engaged in the business of money-lending. Moreover, she claims she impermissible.
has suffered inconveniences and incurred expenses for some 13 years
now as a result of respondents’ failure to pay her.
Reduction is legally called for now in rates of interest and penalty stated in
the mortgage contract.
Petitioner further points out that the 5% interest rate was proposed by
the respondents and have only themselves to blame if the interests
and penalties ballooned to its present amount due to their willful delay What then should the interest and penalty rates be?
and default in payment. The appellate court thus erred,
The evidence shows that it was indeed the respondents who proposed the 5%
petitioner now insists, in applying Sps. Almeda v. Court of Appeals and interest rate per month for two (2) months. Having agreed to said rate, the
Medel v. Court of Appeals12 to reduce the interest rate to 12% per parties are now estopped from claiming otherwise. For the succeeding
annum and the penalty to 1% per month. period after the two months, however, the Court of Appeals correctly
reduced the interest rate to 12% per annum and the penalty rate to 1% per
month, in accordance with Article 222718 of the Civil Code.
Respondents admit they owe petitioner ₱350,000 and do not question
any lawful interest on their loan but they maintain that the Deed of Real
Estate Mortgage is null and void since it did not state the true intent of But were respondents entitled to the "surplus" of ₱2,247,32619 as a result of
the parties, which limited the 5% interest rate to only two (2) months the "overpricing" in the auction?
from the date of the loan and which did not provide for penalties and
other charges in the event of default or delay. Respondents
We note that the "surplus" was the result of the computation by the
Court of Appeals of respondents’ outstanding liability based on a
reduced interest rate of 12% per annum and the reduced penalty rate
of 1% per month.

In the instant case, however, there is no "surplus" to speak of. In

adjusting the interest and penalty rates to equitable and conscionable
levels, what the Court did was merely to reflect the true price of the
land in the foreclosure sale. The amount of the petitioner’s bid merely
represented the true amount of the mortgage debt. No surplus in the
purchase price was thus created to which the respondents as the
mortgagors have a vested right.
 SOLIDBANK VS PERMANENT HOMES
FACTS
PERMANENT HOMES is a real estate development company, and
to finance its housing project known as the "Buena Vida
Townhomes" located within Merville Subdivision, Parañaque City, it
applied and was subsequently granted by SOLIDBANK with an
"Omnibus Line" credit facility in the total amount of SIXTY MILLION
PESOS. Of the entire loan, FIFTY NINE MILLION as [sic] time loan
for a term of up to three hundred sixty (360) days, with interest
thereon at prevailing market rates, and subject to monthly repricing.
The remaining ONE MILLION was available for domestic bills
purchase.
To secure the aforesaid loan, PERMANENT HOMES initially
mortgaged three (3) townhouse units within the Buena Vida project
in Parañaque. At the time, however, the instant complaint was filed
against SOLIDBANK, a total of thirty six (36) townhouse units were
mortgaged with said bank. Of the 60 million available to
PERMANENT HOMES, it availed of a total of 41.5 million pesos,
covered by three (3) promissory notes, which contain the following
provisions, thus:
"xxx 5.
We/I irrevocably authorize Solidbank to increase or decrease at any
time the interest rate agreed in this Note or Loan on the basis of,
among others, prevailing rates in the local or international capital
markets. For this purpose,
We/I authorize Solidbank to debit any deposit or placement account
with Solidbank belonging to any one of us. The adjustment of the
interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time
the notice was sent.
Should We/I disagree to the interest rate adjustment, We/I shall
prepay all amounts due under this Note or Loan within thirty (30)
days from the receipt by anyone of us of the written notice.
Otherwise, We/I shall be deemed to have given our consent to the
interest rate adjustment."
Contrary, however, to the specific provisions as afore-quoted, there
was a standing agreement by the parties that any increase or
decrease in interest rates shall be subject to the mutual agreement
of the parties. For the first loan availment of PERMANENT HOMES
on March 20, 1997, in the amount of 19.6 MILLION, from the initial
interest rate of 14.25% per annum (p.a.), the same was increased
15% p.a. effective May 19, 1997; it was again increased to 26% p.a.
effective July 18, 1997. It was thereafter reduced to 20% p.a.
effective August 18, 1997, and then increased to 24% p.a. effective
September 17, 1997. The rate was increased further to 30% p.a.
effective October 17, 1997, then decreased to 27% p.a. on
November 17, 1997, and again increased to 34% p.a. effective
December 17, 1997. The rate then decreased to 30% p.a. on
January 16, 1998.
For the second loan availment in the amount of 18 million, the rate
was initially pegged at 15.75% p.a. on June 24, 1997.
A month later, the rate increased to 23.5% p.a. It thereafter decreased to
20% p.a. effective August 24, 1997, but again increased to 22.5% p.a.
effective September 24, 1997. For the next month, the rate surged to 30%
p.a., and decreased to 27% p.a. for the month of November.
The rate again surged to 34% p.a. for the month of December, and was
decreased to 30% p.a. from January 22, 1998 to February 20, 1998.
For the third loan availment on July 15, 1997, in the amount of 3.9 million,
the interest rate was initially pegged at 35% p.a., but this was decreased
to 21% p.a. from August 14 until September 11, 1997.
The rate increased slightly to 23% p.a. on September 12, 1997, and
surged to 27% p.a. on October 13, 1997.
The rate went down slightly to 27% p.a. for the month of November, and
to 26% p.a. for the month of December. The rate, however, again surged
to 30% p.a. on January 12, 1998 before settling at 29% p.a. for the month
of February.
IT IS [PERMANENT’S] STAND that SOLIDBANK unilaterally and
arbitrarily accelerated the interest rates without any declared basis of
such increases, of which PERMANENT HOMES had not agreed to, or at
the very least, been informed of. This is contrary to their earlier agreement
that any interest rate changes will be subject to mutual agreement of the
parties. PERMANENT HOMES further admits that it was not able to
protest such arbitrary increases at the time they were imposed by
SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it
extended to PERMANENT HOMES. Permanent was then in the midst of
the construction of its project in Merville, Parañaque City, and
SOLIDBANK knew that it was relying substantially on the credit facility the
latter extended to it. [Permanent] thus filed a case before the trial court
seeking the following:
(1) the annulment of the increases in interest rates on the loans it
obtained from SOLIDBANK, on the ground that it was violative of the
principle of mutuality of agreement of the parties, as enunciated in Article
1409 of the New Civil Code,
(2) the fixing of the interest rates at the applicable interest rate, and
(3) for the trial court to order SOLIDBANK to make an accounting of the
payments it made, so as to determine the amount of refund PERMANENT
is entitled to, as well as to order SOLIDBANK to release the remaining
available balance of the loan it extended to PERMANENT.
ISSUE: Was the increase in rates proper?
RULING: The stipulations on interest rate repricing are valid. (see below)
The three promissory notes between Solidbank and Permanent all
contain the following provisions:
5. We/I irrevocably authorize Solidbank to increase or decrease at any
time the interest rate agreed in this Note or Loan on the basis of, among
others, prevailing rates in the local or international capital markets.
For this purpose, We/I authorize Solidbank to debit any deposit or
placement account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the date
indicated in the written notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall
prepay all amounts due under this Note or Loan within thirty (30)
days from the receipt by anyone of us of the written notice.
Otherwise, We/I shall be deemed to have given our consent to the
interest rate adjustment.
The stipulations on interest rate repricing are valid because (1) the
parties mutually agreed on said stipulations; (2) repricing takes
effect only upon Solidbank’s written notice to Permanent of the new
interest rate; and (3) Permanent has the option to prepay its loan if
Permanent and Solidbank do not agree on the new interest rate.
The phrases "irrevocably authorize," "at any time" and "adjustment
of the interest rate shall be effective from the date indicated in the
written notice sent to us by the bank, or if no date is indicated, from
the time the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for the
adjustment of the interest rates.
In order that obligations arising from contracts may have the force of
law between the parties, there must be a mutuality between the
parties based on their essential equality.
10 A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the
contracting parties is void.
11 There was no showing that either Solidbank or Permanent
coerced each other to enter into the loan agreements. The terms of
the Omnibus Line Agreement and the promissory notes were
mutually and freely agreed upon by the parties.
Moreover, Solidbank’s range of lending rates were consistent with
"prevailing rates in the local or international capital markets."
Solidbank’s lending rates, as reported to Bangko Sentral ng
Pilipinas and compared the lending rates with the interest rates
charged by Solidbank on Permanent’s loans, thus:
The repriced interest rates from 12 September to 21 November
1997 conformed to the range of Solidbank’s lending rates to other
borrowers. The 12 December 1997 to 12 February 1998 repriced
interest rates were not unconscionably out of line with the upper
range of lending rates to other borrowers.
The interest rate repricing happened at the height of the Asian
financial crises in late 1997, when banks clamped down on lendings
because of higher credit risks across industries, particularly the real
estate industry.
We also recognize that Solidbank admitted that it did not promptly send
Permanent written repriced rates, but rather verbally advised
Permanent’s officers over the phone at the start of the period. Solidbank
did not present any written memorandum to support its allegation that it
promptly advised Permanent of the change in interest rates.
SC rule that Solidbank’s computation of the interest due from Permanent
should be adjusted to take effect only upon Permanent’s receipt of the
written notice from Solidbank.
Discussion
Q: What did they agree upon as to the interest rates imposed as to
the loans? Can Solidbank increase the interest rates?
A: They agreed in their promissory notes that an increase or
decrease in the interest rates shall be mutually agreed by the
parties.
Q: Is that agreement considered valid?
A: Yes, the SC said it is valid. First, the parties mutually agreed on
the said stipulations. Second, the repricing only takes effect
uponSolidbank’s written notice to Permanent of the new interest
rate. Third, Permanent has the option to repay its loan, if they do not
agree on the new interest rate.
Q: Since the stipulation was valid, was it proper for Solidbank to
impose the increased rates to Permanent Homes? From what time?
From the time the interest rates were already increased? What was
the reason behind the increase of interest rates by Solidbank? This
was taken into consideration by the court. Why was there a need for
Solidbank to increase the rates? What happened?
A: As contained in the promissory notes, there was a provision
stating that they irrevocably authorize Solidbank to increase or
decrease at any time the interest rate agreed in the note, or in the
business thereof, or the prevailing rates in the local or international
capital markets.
Q: What was the factor that made Solidbank increase the interest
rate to be imposed on the loans of Permanent?
A: Because of the Asian financial crisis during that time.
Q: With that, they increased the rate. The SC the increase was
proper and it was not unconscionable because of the Asian financial
crisis. We are saying that the stipulation is valid. However, was it
already proper for Solidbank to impose the interest rate?
A: Permanent should first receive a written notice from Solidbank as
a condition for the adjustment of the interest. In this case, they did
not receive any notice.
Although as we have mentioned earlier, the Usury Law has already
been legally ineffective or suspended since January 1, 1983, and
that there is no more ceiling in interest rates, the lenders still do not
have unbridled license to impose increased interest rates.
Here, the stipulations on interest rate repricing are valid because (1) Usury is not applicable in:
the parties mutually agreed on said stipulations; (2) repricing takes
effect only upon Solidbank’s written notice to Permanent of the new 1.Rentals
interest rate; and (3) Permanent has the option to prepay its loan if
Permanent and Solidbank do not agree on the new interest rate. 2.Contracts of lease
The phrases "irrevocably authorize," "at any time" and "adjustment
3.Bona fide sale
of the interest rate shall be effective from the date indicated in the
written notice sent to us by the bank, or if no date is indicated, from 4.Increase in price of things sold as a result of a sale on credit
the time the notice was sent," emphasize that Permanent should
receive a written notice from Solidbank as a condition for the 5.True pacto de retro sale
adjustment of the interest rates.

Just take note of that in case the Usury Law is no longer

In relation to (1), take note that for parties to agree in any increase suspended.
in the interest rates, which is an escalation clause, there must also
be a provision that in case of lower interest rates due to the financial
markets, it should also be present in the contract. In other words,
there is an escalation clause and a de-escalation clause, which are
both present in the agreement between the parties.

Again, while the stipulation is considered valid, Solidbank’s

computation of the interest due from Permanent should be adjusted
to take effect only upon Permanent’s receipt of the written notice
from Solidbank. In this case, Solidbank did not present any written
memorandum to support its allegation that it promptly advised
Permanent of the change in interest rates.

The repricing in interest rates under the facts of this case were held
to be not unconscionably out of line with the upper range of lending
rates to other borrowers since it happened at theheight of the Asian
financial crisis in 1997. Here, the repricing of the interest rate was
not deemed unconscionable. Remember- factual circumstances of
the case.

Why do we still discuss the Usury Law? Because it was merely

suspended.

Elements for usury to exist:

1.There is a loan or forbearance of money, goods or credits; and

2.There is an agreement or understanding between the parties that

the loan shall or may be returned

For the interest to be considered usurious, there must be unlawful

intent on the part of the creditor to take more that the legal rate for
the use of money or its equivalent, and that the takingor agreeing to
take for the use of the loan of something in excess of what is
allowed by law.

Purpose of the Usury Law: For the protection ofborrowers from the
imposition of unscrupulous lenders who take undue advantage of
the necessities of others.

Nevertheless despite its suspension, the interest of borrowers is still

protected by the rulings of the SC as to what interest is considered
unconscionable or exorbitant.
 PAN PACIFIC VS EQUITABLE
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in
contracting mechanical works on airconditioning system.
On 24 November 1989, Pan Pacific, through its President, Ricardo
F. Del Rosario (Del Rosario), entered into a contract of mechanical
works (Contract) with respondent for ₱20,688,800. Pan Pacific and
respondent also agreed on nine change orders for ₱2,622,610.30.
Thus, the total consideration for the whole project was
₱23,311,410.30.6 The Contract stipulated, among others, that Pan
Pacific shall be entitled to a price adjustment in case of increase in
labor costs and prices of materials under paragraphs 70.17 and
70.28 of the "General Conditions for the Construction of PCIB
Tower II Extension" (the escalation clause)
Pursuant to the contract, Pan Pacific commenced the mechanical
works in the project site, the PCIB Tower II extension building in
Makati City. The project was completed in June 1992. Respondent
accepted the project on 9 July 1992.
In 1990, labor costs and prices of materials escalated. On 5 April
1991, in accordance with the escalation clause, Pan Pacific claimed
a price adjustment of ₱5,165,945.52.
Respondent’s appointed project engineer, TCGI Engineers, asked
for a reduction in the price adjustment. To show goodwill, Pan
Pacific reduced the price adjustment to ₱4,858,548.67.
On 28 April 1992, TCGI Engineers recommended to respondent
that the price adjustment should be pegged at ₱3,730,957.07. TCGI
Engineers based their evaluation of the price adjustment on the
following factors:
1. Labor Indices of the Department of Labor and Employment.
2. Price Index of the National Statistics Office.
PD 1594 and its Implementing Rules and Regulations as amended,
15 March 1991.
Pan Pacific contended that with this recommendation, respondent
was already estopped from disclaiming liability of at least
₱3,730,957.07 in accordance with the escalation clause.
Due to the extraordinary increases in the costs of labor and
materials, Pan Pacific’s operational capital was becoming
inadequate for the project. However, respondent withheld the
payment of the price adjustment under the escalation clause
despite Pan Pacific’s repeated demands.
Instead, respondent offered Pan Pacific a loan of ₱1.8 million.
Against its will and on the strength of respondent’s promise that the price
adjustment would be released soon, Pan Pacific, through Del Rosario,
was constrained to execute a promissory note in the amount of ₱1.8
million as a requirement for the loan.
Pan Pacific also posted a surety bond. The ₱1.8 million was released
directly to laborers and suppliers and not a single centavo was given to
Pan Pacific.
Pan Pacific made several demands for payment on the price adjustment
but respondent merely kept on promising to release the same.
Meanwhile, the ₱1.8 million loan matured and respondent demanded
payment plus interest and penalty. Pan Pacific refused to pay the loan.
Pan Pacific insisted that it would not have incurred the loan if respondent
released the price adjustment on time.
Pan Pacific alleged that the promissory note did not express the true
agreement of the parties. Pan Pacific maintained that the ₱1.8 million was
to be considered as an advance payment on the price adjustment.
Therefore, there was really no consideration for the promissory note;
hence, it is null and void from the beginning Respondent stood firm that it
would not release any amount of the price adjustment to Pan Pacific but it
would offset the price adjustment with Pan Pacific’s outstanding balance
of ₱3,226,186.01, representing the loan, interests, penalties and
collection charges.
Pan Pacific refused the offsetting but agreed to receive the reduced
amount of ₱3,730,957.07 as recommended by the TCGI Engineers for
the purpose of extrajudicial settlement, less ₱1.8 million and ₱414,942 as
advance payments.
On 6 May 1994, petitioners filed a complaint for declaration of
nullity/annulment of the promissory note, sum of money, and damages
against the respondent with the RTC.
Upon reaching the CA, it imposed a 12% legal interest in the amount, Pan
Pacific claims that the interest rate applicable should be the 18% bank
lending rate.
ISSUE: What interest should apply? - 18%
In this appeal, petitioners allege that the contract between the parties
consists of two parts, the Agreement and the General Conditions, both of
which provide for interest at the bank lending rate on any unpaid amount
due under the contract. Petitioners further claim that there is nothing in
the contract which requires the consent of the respondent to be given in
order that petitioners can charge the bank lending rate.
Specifically, petitioners invoke Section 2.5 of the Agreement and Section
60.10 of the General Conditions as follows:
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge
interest thereon at the current bank lending rates, without prejudice
to OWNER’S recourse to any other remedy available under existing
law.
General Conditions
60.10 Time for payment
The amount due to the Contractor under any interim certificate
issued by the Engineer pursuant to this Clause, or to any term of the
Contract, shall, subject to clause 47, be paid by the Owner to the
Contractor within 28 days after such interim certificate has been
delivered to the Owner, or, in the case of the Final Certificate
referred to in Sub-Clause 60.8, within 56 days, after such Final
Certificate has been delivered to the Owner.
In the event of the failure of the Owner to make payment within the
times stated, the Owner shall pay to the Contractor interest at the
rate based on banking loan rates prevailing at the time of the
signing of the contract upon all sums unpaid from the date by which
the same should have been paid.
The provisions of this Sub-Clause are without prejudice to the
Contractor’s entitlement under Clause 69. (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank
lending rate of interest from the time an amount is determined to be
due thereto, which respondent should have paid. Therefore, as
petitioners have already proven their entitlement to the price
adjustment, it necessarily follows that the bank lending interest rate
of 18% shall be applied.
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1 Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such
sums in respect of rise or fall in the cost of labor and/or materials or
any other matters affecting the cost of the execution of the Works as
may be determined.
70.2 Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of
tenders for the Contract there occur in the country in which the
Works are being or are to be executed changes to any National or
State Statute, Ordinance, Decree or other Law or any regulation or
bye-law (sic) of any local or other duly constituted authority, or the
introduction of any such State Statute, Ordinance, Decree, Law,
regulation or bye-law (sic) which causes additional or reduced cost
to the contractor, other than under Sub-Clause 70.1, in the
execution of the Contract, such additional or reduced cost shall,
after due consultation with the Owner and Contractor, be
determined by the Engineer and shall be added to or deducted from
the Contract Price and the Engineer shall notify the Contractor
accordingly, with a copy to the Owner.
The escalation clause must be read in conjunction with Section 2.5 of the
Agreement and Section 60.10 of the General Conditions which pertain to
the time of payment.
Once the parties agree on the price adjustment after due consultation in
compliance with the provisions of the escalation clause, the agreement is
in effect an amendment to the original
contract, and gives rise to the liability of respondent to pay the adjusted
costs.
Under Section 60.10 of the General Conditions, the respondent shall pay
such liability to the petitioner within 28 days from issuance of the interim
certificate. Upon respondent’s failure to pay within the time provided (28
days), then it shall be liable to pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the
imposition of interest. To provide a contrary interpretation, as one
requiring a separate consent for the imposition of the stipulated interest,
would render the intentions of the parties nugatory.
Article 1956 of the Civil Code, which refers to monetary interest,
specifically mandates that no interest shall be due unless it has been
expressly stipulated in writing. Therefore, payment of monetary interest is
allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of
monetary interest.
SC:
We agree with petitioners’ interpretation that in case of default, the
consent of the respondent is not needed in order to impose interest at the
current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for
damages in case of delay in discharging an obligation consisting of the
payment of a sum of money is the payment of penalty interest at the rate
agreed upon in the contract of the parties.
In the absence of a stipulation of a particular rate of penalty interest,
payment of additional interest at a rate equal to the regular monetary
interest becomes due and payable.
Finally, if no regular interest had been agreed upon by the contracting
parties, then the damages payable will consist of payment of legal interest
which is 6%, or in the case of loans or forbearances of money, 12% per
annum. It is only when the parties to a contract have failed to fix the rate
of interest or when such amount is unwarranted that the Court will apply
the 12% interest per annum on a loan or forbearance of money.
 stipulated in writing. Therefore, payment of the monetary interest is
allowed only if:
The written agreement entered into between petitioners and
respondent provides for an interest at the current bank lending rate
in case of delay in payment and the promissory note charged an
interest of 18%. 1.there was an express stipulation for the payment of interest; and

2.the agreement for the payment of interest was reduced in writing.

To prove petitioners’ entitlement to the 18% bank lending rate of
interest, petitioners presented the promissory note36 prepared by
respondent bank itself. This promissory note, although declared
void by the lower courts because it did not express the real intention
of the parties, is substantial proof that the bank lending rate at the
time of default was 18% per annum. Absent any evidence of fraud,
undue influence or any vice of consent exercised by petitioners
against the respondent, the interest rate agreed upon is binding on
them.
Q1: What is the proper interest rate that should be imposed?
A1: The interest rate that should be imposed is 18%.
Q2: Why?
The concurrence of the two conditions is required for the payment of
the monetary interest.
Also, under Article 2209 of the NCC, the appropriate measure for
the damages in the case of delay in discharging an obligation
consisting of the payment of a sum of money is the payment of the
penalty interest at the rate agreed upon in the contract of the
parties. In the absence of a stipulation of a particular rate of penalty
interest, payment of additional interest at a rate equal to the regular
monetary interest becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the
damages payable will consist of payment of legal interest, which is
6%, or in the case of loans or forbearance of money, 12% p.a. It is
only when the parties to a contract have failed to fix the rate of
interest or when such amount is unwarranted that the Court will
apply the 12% interest p.a. on a loan or forbearance of money.

A2: “Settled is the rule that the agreement or the contract between
the parties is the formal expression of the parties’ rights, duties, and
obligations. It is the best evidence of the intention of the parties.
Thus, when the terms of an agreement have been reduced in
writing it is considered as containing all the terms agreed upon and
there can be, between the parties and their succesors-in-interest,
no evidence of such terms other than the contents of the written
agreement.”
Another thing that you should consider is the difference
between monetary and compensatory interests.
1.Monetary Interest – compensation for the use of money;
2.Compensatory Interest – penalty or indemnity of payment for
damages.

Debtor in delay is liable to pay the legal interest as indemnity fro

Q3: Where was it stipulated?
A3: Under the General Conditions Section 60.10, which provides
that the CONTRACTOR may charge interest at the current bank
lending rates. The current bank lending rate is at 18% p.a.
damages even in the absence of stipulation of payment of interest.
Those obliged to deliver or to do something incur in delay from the
time the oblige judicially or extrajudicially demands from them the
fulfillment of the obligation. This is in relation to Article 1169.

Q4: But isn’t it that the PN was considered void for lack of
consideration?

A4: The written agreement provides that the interest be at the

current bank lending rate in case there is delay in payment. While it
is true that the PN was declared void as it did not express the real
intention of the parties, it was nevertheless considered as
substantial proof that the bank lending rate at that time of default is
18% p.a.

When the terms of the contract are clear and leave no doubt
as to the intention of the parties, the literal meaning of the
stipulation governs. Once, the parties agree on the price adjustment
after due consultation in compliance with the provisions of the
escalation clause, the agreement is in effect an amendment to the
original contract, and gives rise to the liability of the respondent to
pay the adjusted costs. Upon respondent’s failure to pay within the
time provided, then it shall be liable to pay the stipulated interests.
Therefore, the basis is the delay of EPCI such that its consent is not
anymore needed before it can become liable for the adjusted price.

Article 1956, which refers to the monetary interest, specifically

mandates that no interest shall be due unless it has been expressly
 NACAR VS GALLERY FRAMES judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board

(BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the
amendment of Section 234 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799,35 Series of 2013, effective July 1,
2013, the pertinent portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982:

ISSUE: How should the new legal interest apply? - Prospectively. Section 1. 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.
HELD:

To recapitulate and for future guidance, the guidelines laid down in

the case of Eastern Shipping Linesare accordingly modified to Section 2. In view of the above, Subsection X305.136 of the Manual of
embody BSP-MB Circular No. 799, as follows: Regulations for Banks and Sections 4305Q.1,37 4305S.338 and
4303P.139 of the Manual of Regulations for Non- Bank Financial
I. When an obligation, regardless of its source, i.e., law, contracts,
Institutions are hereby amended accordingly.
quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages. This Circular shall take effect on 1 July 2013.

II. With regard particularly to an award of interest in the concept of Thus, from the foregoing, in the absence of an express stipulation as to
actual and compensatory damages, the rate of interest, as well as the rate of interest that would govern the parties, the rate of legal interest
the accrual thereof, is imposed, as follows: for loans or forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be twelve percent (12%) per annum
- as reflected in the case of Eastern Shipping Lines and Subsection
X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1,
When the obligation is breached, and it consists in the payment of a
4305S. and 4303P.1 of the Manual of Regulations for Non-Bank Financial
sum of money, i.e., a loan or forbearance of money, the interest due
Institutions, before its amendment by BSP-MB Circular No. 799 - but will
should be that which may have been stipulated in writing.
now be six percent (6%) per annum effective July 1, 2013.
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 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the It should be noted, nonetheless, that the new rate could only be applied
provisions of Article 1169 of the Civil Code. prospectively and not retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only until June 30, 2013. Come
July 1, 2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.
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
Q1: When was the 12% interest rate imposed?

A1: The 12% interest was imposed on the award of backwages from
the finality of the decision on May 27, 2002.

Q2: Why 12%?

A2: It was 12 % first because they followed the ruling in Eastern

Shipping. The guideline in Eastern Shipping (3rd paragraph) states
that when the judgment of the court awarding a sum of money
becomes final and executory, the interest to be imposed is 12%.

Q3: So what is May 27, 2002?

A3: The date when the resolution/decision of the court became final
and executory.

Q4: After that, what is the penalty to be imposed?

A5: The penalty to be imposed is 6% until full payment.

Alright, what do we have here? This is actually emanating from a

case of dismissal with the NLRC wherein there was a judgment for
liability for Php 158,000 as backwages and separation pay. The
judgment became final and executory on May 27, 2002 and there
was a recomputation – from Php 158,000, it became Php 417,000
plus because of the interest rates. Backwages is computed from
time of illegal dismissal until final judgment. Separation pay is
computed from the time of employment until final judgment.

Interest rate of 12% per annum of the total monetary award from
May 27, 2002 (resolution became final and executory). Thereafter,
6% from July 1, 2013 until full satisfaction. Take note that Circular
No. 799 issued by the Bangko Sentral Monetary Board saying that
the legal interest is now 6% should be applied prospectively, not
retroactively. Consequently, the 12% interest shall run until June 30,
2013. (By the way, walay 31 and June) So from July 1, 2013, it is
6% per annum as the prevailing rate of interest.

Again, that is the relevance of why we still discuss cases applying

the rule in Eastern Shipping. We have to make a distinction for
interest rates made applicable prior to July 1, 2013.
 SPOUSES SALVADOR ABELLA VS SPOUSES ROMEO interest made after the perfection of the loan in 1999 but before the
ABELLA demand was made in 2002 were invalid.

FACTS:

In their Complaint, petitioners alleged that respondents obtained a ISSUE:

loan from them in the amount of P500,000.00.

Was there a loan?

The loan was evidenced by an acknowledgment receipt dated
March 22, 1999 and was payable within one (1) year. Petitioners
added that respondents were able to pay a total of P200,000.00—
P100,000.00 paid on two separate occasions—leaving an unpaid What interest should apply?
balance of P300,000.00.

RULING -
In their Answer (with counterclaim and motion to dismiss),
Respondents’ claims, as articulated in their testimonies before the trial
respondents alleged that the amount involved did not pertain to a
court, cannot prevail over the clear terms of the document attesting to the
loan they obtained from petitioners but was part of the capital for a
relation of the parties. "If the terms of a contract are clear and leave no
joint venture involving the lending of money.
doubt upon the intention of the contracting parties, the literal meaning of
its stipulations shall control."32

Specifically, respondents claimed that they were approached by

petitioners, who proposed that if respondents were to "undertake
Articles 1933 and 1953 of the Civil Code provide the guideposts that
the management of whatever money [petitioners] would give them,
determine if a contractual relation is one of simple loan or mutuum:
[petitioners] would get 2.5% a month with a 2.5% service fee to
[respondents]."

Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for
The 2.5% that each party would be receiving represented their
a certain time and return it, in which case the contract is called a
sharing of the 5% interest that the joint venture was supposedly
commodatum; or money or other consumable thing, upon the condition
going to charge against its debtors. Respondents further alleged
that the same amount of the same kind and quality shall be paid, in which
that the one year averred by petitioners was not a deadline for
case the contract is simply called a loan or mutuum.
payment but the term within which they were to return the money
placed by petitioners should the joint venture prove to be not
lucrative. Moreover, they claimed that the entire amount of
P500,000.00 was disposed of in accordance with their agreed terms Commodatum is essentially gratuitous.
and conditions and that petitioners terminated the joint venture,
prompting them to collect from the joint venture’s borrowers. They
were, however, able to collect only to the extent of P200,000.00;
hence, the P300,000.00 balance remained unpaid. Simple loan may be gratuitous or with a stipulation to pay interest.

RTC ruled in favor of petitioners. It noted that the terms of the In commodatum the bailor retains the ownership of the thing loaned, while
acknowledgment receipt executed by respondents clearly showed in simple loan, ownership passes to the borrower.
that: (a) respondents were indebted to the extent of P500,000.00; (b)
this indebtedness was to be paid within one (1) year; and (c) the
indebtedness was subject to interest. Thus, the trial court ....
concluded that respondents obtained a simple loan, although
they later invested its proceeds in a lending enterprise. The
Regional Trial Court adjudged respondents solidarily liable to
petitioners. Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.

CA ruled that while respondents had indeed entered into a simple

loan with petitioners, respondents were no longer liable to pay the
outstanding amount of P300,000.00. On March 22, 1999, respondents executed an acknowledgment receipt to
petitioners, which states:

As to the loan’s not having earned stipulated interest - at the time

respondents were making interest payments of 2.5% per month, Batan, Aklan
these interest payments were invalid for not being properly
stipulated by the parties.
March 22, 1999

As to the loan’s not having earned interest in the concept of actual

or compensatory damages, -the payments for the 2.5% monthly
This is to acknowledge receipt of the Amount of Five Hundred
Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable
within one (1) year from date hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.)
The text of the acknowledgment receipt is uncomplicated and
straightforward. It attests to: first, respondents’ receipt of the sum of
P500,000.00 from petitioner Alma Abella; second, respondents’ duty
to pay back this amount within one (1) year from March 22, 1999;
and third, respondents’ duty to pay interest. Consistent with what
typifies a simple loan, petitioners delivered to respondents with the
corresponding condition that respondents shall pay the same
amount to petitioners within one (1) year.
ON THE DUTY TO PAY CONVENTIONAL INTEREST
Article 1956 of the Civil Code spells out the basic rule that "[n]o
interest shall be due unless it has been expressly stipulated in
writing."
On the matter of interest, the text of the acknowledgment receipt is
simple, plain, and unequivocal. It attests to the contracting parties’
intent to subject to interest the loan extended by petitioners to
respondents. The controversy, however, stems from the
acknowledgment receipt’s failure to state the exact rate of interest.
Jurisprudence is clear about the applicable interest rate if a written
instrument fails to specify a rate. In Spouses Toring v. Spouses
Olan,35 this court clarified the effect of Article 1956 of the Civil Code
and noted that the legal rate of interest (then at 12%) is to apply: "In
a loan or forbearance of money, according to the Civil Code, the
interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum."
Spouses Toring cites and restates (practically verbatim) what this
court settled in Security Bank and Trust Company v. Regional Trial
Court of Makati, Branch 61: "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."
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of
Appeals, which, in turn, stated:
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.39 (Emphasis supplied)
The rule is not only definite; it is cast in mandatory language. From
Eastern Shipping to Security Bank to Spouses Toring, jurisprudence has
repeatedly used the word "shall," a term that has long been settled to
denote something imperative or operating to impose a duty. Thus, the rule
leaves no room for alternatives or otherwise does not allow for discretion.
It requires the application of the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames recognized that the
legal rate of interest has been reduced to 6% per annum:
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board
(BSP-MB), in its Resolution No. 796 dated May 16, 2013, approved the
amendment of Section 2 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, Series of 2013, effective July 1,
2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in the
absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982:
Section 1. 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.
Section 2. In view of the above, Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of
the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as
to the rate of interest that would govern the parties, the rate of legal
interest for loans or forbearance of any money, goods or credits and
the rate allowed in judgments shall no longer be twelve percent (12%)
per annum — as reflected in the case of Eastern Shipping Lines and
Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1,= 4305S.3 and 4303P.1 of the Manual of Regulations for Non-
Bank Financial Institutions, before its amendment by BSP-MB Circular No.
799 — but will now be six percent (6%) per annum effective July 1, 2013.
It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively.
Consequently, the twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when
applicable.42 (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series
of 2013 and Nacar retain the definite and mandatory framing of the rule
articulated in Eastern Shipping, Security Bank, and Spouses Toring.
Nacar even restates Eastern Shipping:

To recapitulate and for future guidance, the guidelines laid down in
the case of Eastern Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, 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 6% 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.43 (Emphasis supplied,
citations omitted)
Thus, it remains that where interest was stipulated in writing by the
debtor and creditor in a simple loan or mutuum, but no exact interest
rate was mentioned, the legal rate of interest shall apply. At present,
this is 6% per annum, subject to Nacar’s qualification on prospective
application.
Applying this, the loan obtained by respondents from petitioners is
deemed subjected to conventional interest at the rate of 12% per
annum, the legal rate of interest at the time the parties executed
their agreement. Moreover, should conventional interest still be due
as of July 1, 2013, the rate of 12% per annum shall persist as the
rate of conventional interest.
This is so because interest in this respect is used as a surrogate for
the parties’ intent, as expressed as of the time of the execution of
their contract. In this sense, the legal rate of interest is an affirmation
of the contracting parties’ intent; that is, by their contract’s silence on
a specific rate, the then prevailing legal rate of interest shall be the
cost of borrowing money. This rate, which by their contract the
parties have settled on, is deemed to persist regardless of shifts in
the legal rate of interest. Stated otherwise, the legal rate of interest,
when applied as conventional interest, shall always be the legal rate
at the time the agreement was executed and shall not be
susceptible to shifts in rate.
Petitioners, however, insist on conventional interest at the rate of
2.5% per month or 30% per annum. They argue that the
acknowledgment receipt fails to show the complete and accurate
intention of the contracting parties. They rely on Article 1371 of the
Civil Code, which provides that the contemporaneous and
subsequent acts of the contracting parties shall be considered
should there be a need to ascertain their intent.44 In addition, they
claim that this case falls under the exceptions to the Parol Evidence
Rule, as spelled out in Rule 130, Section 9 of the Revised Rules on
Evidence.45
It is a basic precept in legal interpretation and construction that a
rule or provision that treats a subject with specificity prevails over a
rule or provision that treats a subject in general terms.
The rule spelled out in Security Bank and Spouses Toring is anchored on
Article 1956 of the Civil Code and specifically governs simple loans or
mutuum.
Mutuum is a type of nominate contract that is specifically recognized by
the Civil Code and for which the Civil Code provides a specific set of
governing rules: Articles 1953 to 1961. In contrast, Article 1371 is among
the Civil Code provisions generally dealing with contracts. As this case
particularly involves a simple loan, the specific rule spelled out in Security
Bank and Spouses Toring finds preferential application as against Article
1371.
In sum, two (2) things must be established for parol evidence to be
admitted: first,
1. that the existence of any of the four (4) exceptions has been put in
issue in a party’s pleading or has not been objected to by the adverse
party; and
2. second, that the parol evidence sought to be presented serves to form
the basis of the conclusion proposed by the presenting party.
In the Petition they filed before this court, petitioners themselves
acknowledged that checks supposedly attesting to payment of monthly
interest at the rate of 2.5% were admitted by the trial court (and marked
as Exhibits "2," "3," "4," "5," "6," "7," and "8").49 What petitioners have an
issue with is not the admission of these pieces of evidence but how these
have not been appreciated in a manner consistent with the conclusions
they advance.
Even if it can be shown that the parties have agreed to monthly interest at
the rate of 2.5%, this is unconscionable. As emphasized in Castro v. Tan,
the willingness of the parties to enter into a relation involving an
unconscionable interest rate is inconsequential to the validity of the
stipulated rate:
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.
The imposition of an unconscionable interest rate is void ab initio for being
"contrary to morals, and the law."
In determining whether the rate of interest is unconscionable, the
mechanical application of pre-established floors would be wanting. The
lowest rates that have previously been considered unconscionable need
not be an impenetrable minimum. What is more crucial is a consideration
of the parties’ contexts. Moreover, interest rates must be appreciated in
light of the fundamental nature of interest as compensation to the creditor
for money lent to another, which he or she could otherwise have used for
his or her own purposes at the time it was lent. It is not the default vehicle
for predatory gain. As such, interest need only be reasonable. It ought not
be a supine mechanism for the creditor’s unjust enrichment at the
expense of another.
The legal rate of interest is the presumptive reasonable
compensation for borrowed money. While parties are free to deviate
from this, any deviation must be reasonable and fair. Any deviation
that is far-removed is suspect. Thus, in cases where stipulated
interest is more than twice the prevailing legal rate of interest, it is
for the creditor to prove that this rate is required by prevailing market
conditions. Here, petitioners have articulated no such justification.
In sum, Article 1956 of the Civil Code, read in light of established
jurisprudence, prevents the application of any interest rate other
than that specifically provided for by the parties in their loan
document or, in lieu of it, the legal rate. Here, as the contracting
parties failed to make a specific stipulation, the legal rate must apply.
Moreover, the rate that petitioners adverted to is unconscionable.
The conventional interest due on the principal amount loaned by
respondents from petitioners is held to be 12% per annum.
III
Apart from respondents’ liability for conventional interest at the rate
of 12% per annum, outstanding conventional interest—if any is due
from respondents—shall itself earn legal interest from the time
judicial demand was made by petitioners, i.e., on July 31, 2002,
when they filed their Complaint. This is consistent with Article 2212
of the Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this
point.
So, too, Nacar states that "the interest due shall itself earn legal
interest from the time it is judicially demanded."53
Consistent with Nacar, as well as with our ruling in Rivera v.
Spouses Chua,54 the interest due on conventional interest shall be
at the rate of 12% per annum from July 31, 2002 to June 30, 2013.
Thereafter, or starting July 1, 2013, this shall be at the rate of 6%
per annum.
IV
Proceeding from these premises, we find that RESPONDENTS
MADE AN OVERPAYMENT IN THE AMOUNT OF P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents paid a
total of P200,000.00, which was charged against the principal
amount of P500,000.00. The first payment of P100,000.00 was
made on June 30, 2001,55 while the second payment of
P100,000.00 was made on December 30, 2001.56
The Court of Appeals’ September 30, 2010 Decision stated that
respondents paid P6,000.00 in March 1999.57
The Pre-Trial Order dated December 2, 2002,58 stated that the parties
admitted that "from the time the principal sum of P500,000.00 was
borrowed from [petitioners], [respondents] ha[d] been religiously
paying"59 what was supposedly interest "at the rate of 2.5% per
month."60
From March 22, 1999 (after the loan was perfected) to June 22, 2001
(before respondents’ payment of P100,000.00 on June 30, 2001, which
was deducted from the principal amount of P500,000.00), the 2.5%
monthly "interest" was pegged to the principal amount of P500,000.00.
These monthly interests, thus, amounted to P12,500.00 per month.
Considering that the period from March 1999 to June 2001 spanned
twenty seven (27) months, respondents paid a total of P337,500.00.
From June 22, 2001 up to December 22, 2001 (before respondents’
payment of another P100,000.00 on December 30, 2001, which was
deducted from the remaining principal amount of P400,000.00), the 2.5%
monthly "interest" was pegged to the remaining principal amount of
P400,000.00. These monthly interests, thus, amounted to P10,000.00 per
month. Considering that this period spanned six (6) months, respondents
paid a total of P60,000.00.
From after December 22, 2001 up to June 2002 (when petitioners filed
their Complaint), the 2.5% monthly "interest" was pegged to the remaining
principal amount of P300,000.00. These monthly interests, thus,
amounted to P7,500.00 per month. Considering that this period spanned
six (6) months, respondents paid a total of P45,000.00.63
APPLYING THESE FACTS AND THE PROPERLY APPLICABLE
INTEREST RATE (FOR CONVENTIONAL INTEREST, 12% PER
ANNUM; for interest on conventional interest, 12% per annum from July
31, 2002 up to June 30, 2013 and 6% per annum henceforth), the
following conclusions may be drawn:
By the end of the first year following the perfection of the loan, or as of
March 21, 2000, P560,000.00 was due from respondents. This consisted
of the principal of P500,000.00 and conventional interest of P60,000.00.
Within this first year, respondents made twelve (12) monthly payments
totalling P150,000.00 (P12,500.00 each from April 1999 to March 2000).
This was in addition to their initial payment of P6,000.00 in March 1999.
Application of payments must be in accordance with Article 1253 of the
Civil Code, which reads:
Art. 1253. If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered.
Thus, the payments respondents made must first be reckoned as interest
payments. Thereafter, any excess payments shall be charged against the
principal. As respondents paid a total of P156,000.00 within the first year,
the conventional interest of P60,000.00 must be deemed fully paid and
the remaining amount that respondents paid (i.e., P96,000.00) is to be
charged against the principal. This yields a balance of P404,000.00. By
the end of the second year following the perfection of the loan, or as of
March 21, 2001, P452,480.00 was due from respondents. This
consisted of the outstanding principal of P404,000.00 and
conventional interest of P48,480.00.
Within this second year, respondents completed another round of
twelve (12) monthly payments totaling P150,000.00.
Consistent with Article 1253 of the Civil Code, as respondents paid
a total of P156,000.00 within the second year, the conventional
interest of P48,480.00 must be deemed fully paid and the remaining
amount that respondents paid (i.e., P101,520.00) is to be charged
against the principal. This yields a balance of P302,480.00.
By the end of the third year following the perfection of the loan, or as
of March 21, 2002, P338,777.60 was due from respondents. This
consists of the outstanding principal of P302,480.00 and
conventional interest of P36,297.60.
Within this third year, respondents paid a total of P320,000.00, as
follows:
(a) Between March 22, 2001 and June 30, 2001, respondents
completed three (3) monthly payments of P12,500.00 each, totaling
P37,500.00.
(b) On June 30, 2001, respondents paid P100,000.00, which was
charged as principal payment.
(c) Between June 30, 2001 and December 30, 2001, respondents
delivered monthly payments of P10,000.00 each. At this point, the
monthly payments no longer amounted to P12,500.00 each
because the supposed monthly interest payments were pegged to
the supposedly remaining principal of P400,000.00. Thus, during
this period, they paid a total of six (6) monthly payments totaling
P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which,
like the June 30, 2001 payment, was charged against the principal.
(e) From the end of December 2002 to the end of February 2002,
respondents delivered monthly payments of P7,500.00 each. At this
point, the supposed monthly interest payments were now pegged to
the supposedly remaining principal of P300,000.00. Thus, during
this period, they delivered three (3) monthly payments totaling
P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid
a total of P320,000.00 within the third year, the conventional interest
of P36,927.50 must be deemed fully paid and the remaining amount
that respondents paid (i.e., P283,702.40) is to be charged against
the principal. This yields a balance of P18,777.60.
By the end of the fourth year following the perfection of the loan, or as of
March 21, 2003, P21,203. would have been due from respondents. This
consists of: (a) the outstanding principal of P18,777.60, (b) conventional
interest of P2,253.31, and (c) interest due on conventional interest
starting from July 31, 2002, the date of judicial demand, in the amount of
P172.60. The last (i.e., interest on interest) must be pro-rated. There were
only 233 days from July 31, 2002 (the date of judicial demand) to March
21, 2003 (the end of the fourth year); this left 63.83% of the fourth year,
within which interest on interest might have accrued. Thus, the full annual
interest on interest of 12% per annum could not have been completed,
and only the proportional amount of 7.66% per annum may be properly
imposed for the remainder of the fourth year.
From the end of March 2002 to June 2002, respondents delivered three (3)
more monthly payments of P7,500.00 each. Thus, during this period, they
delivered three (3) monthly payments totalling P22,500.00.
At this rate, however, payment would have been completed by
respondents even before the end of the fourth year. Thus, for precision, it
is more appropriate to reckon the amounts due as against payments
made on a monthly, rather than an annual, basis.
By April 21, 2002, _18,965.38 (i.e., remaining principal of P18,777.60 plus
pro-rated monthly conventional interest at 1%, amounting to P187.78)
would have been due from respondents. Deducting the monthly payment
of P7,500.00 for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a balance of P11,465.38.
By May 21, 2002, _11,580.03 (i.e., remaining principal of P11,465.38 plus
pro-rated monthly conventional interest at 1%, amounting to P114.65)
would have been due from respondents. Deducting the monthly payment
of P7,500.00 for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus
pro-rated monthly conventional interest at 1%, amounting to P40.80)
would have been due from respondents. Deducting the monthly payment
of P7,500.00 for the preceding month in a manner consistent with Article
1253 of the Civil Code would yield a negative balance of P3,379.17.
Thus, by June 21, 2002, respondents had not only fully paid the principal
and all the conventional interest that had accrued on their loan. By this
date, they also overpaid P3,379.17. Moreover, while hypothetically,
interest on conventional interest would not have run from July 31, 2002,
no such interest accrued since there was no longer any conventional
interest due from respondents by then.
As respondents made an overpayment, the principle of solutio indebiti as
provided by Article 2154 of the Civil Code64 applies. Article 2154 reads:
Article 2154. If something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to return it
arises.
In Moreno-Lentfer v. Wolff,65 this court explained the application of
solutio indebiti:

The quasi-contract of solutio indebiti harks back to the ancient
principle that no one shall enrich himself unjustly at the expense of
another. It applies where (1) a payment is made when there exists
no binding relation between the payor, who has no duty to pay, and
the person who received the payment, and (2) the payment is made
through mistake, and not through liberality or some other cause.66
As respondents had already fully paid the principal and all
conventional interest that had accrued, they were no longer obliged
to make further payments.1awp++i1 Any further payment they made
was only because of a mistaken impression that they were still due.
Accordingly, petitioners are now bound by a quasi-contractual
obligation to return any and all excess payments delivered by
respondents.
Nacar provides that "[w]hen 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."67 This applies to obligations arising
from quasi-contracts such as solutio indebiti.
Further, Article 2159 of the Civil Code provides:
Art. 2159. Whoever in bad faith accepts an undue payment, shall
pay legal interest if a sum of money is involved, or shall be liable for
fruits received or which should have been received if the thing
produces fruits.
He shall furthermore be answerable for any loss or impairment of
the thing from any cause, and for damages to the person who
delivered the thing, until it is recovered.
Consistent however, with our finding that the excess payment made
by respondents were borne out of a mere mistake that it was due,
we find it in the better interest of equity to no longer hold petitioners
liable for interest arising from their quasi-contractual obligation.
Nevertheless, Nacar also provides:
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 6% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of
credit.68
Thus, interest at the rate of 6% per annum may be properly imposed
on the total judgment award. This shall be reckoned from the finality
of this Decision until its full satisfaction.
WHEREFORE, the assailed September 30, 2010 Decision and the
January 4, 2011 Resolution of the Court of Appeals Nineteenth
Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners
Spouses Salvador and Alma Abella are DIRECTED to jointly and
severally reimburse respondents Spouses Romeo and Annie Abella the
amount of P3,379.17, which respondents have overpaid.
A legal interest of 6% per annum shall likewise be imposed on the total
judgment award from the finality of this Decision until its full satisfaction.
ISLA VS ESTORGA
Facts:
On December 6, 2004, petitioners obtained a loan in the amount of
P100,000.00 from respondent, payable anytime from six (6) months to
one (1) year and subject to interest at the rate of ten percent (10%) per
month, payable on or before the end of each month.
As security, a real estate mortgage was constituted over a parcel of land
located in Pasay City, covered by Transfer Certificate of Title (TCT) No.
1326736 and registered under the name of Edilberto Isla (Edilberto), who
is married to Catalina (subject property).
When petitioners failed to pay the said loan, respondent sought
assistance from the barangay, and consequently, a Kasulatan ng Pautang
dated December 8, 2005 was executed.
Petitioners, however, failed to comply with its terms, prompting
respondent to send a demand letter dated November 16, 2006. Once
more, petitioners failed to comply with the demand, causing respondent to
file a Petition for Judicial Foreclosure against them before the RTC.
For their part,petitioners maintained that the subject mortgage was not a
real estate mortgage but a mere loan, and that the stipulated interest of
ten percent (10%) per month was exorbitant and grossly
unconscionable.12 They also insisted that since petitioners were not the
absolute owners of the subject property - as the same was allegedly
owned by Edilberto – they could not have validly constituted the subject
mortgage thereon.
RTC granted the Petition for Judicial Foreclosure. Further, the RTC
observed that while it is true that the present action pertains to a judicial
foreclosure, the underlying principle is that a real estate mortgage is but a
security and not a satisfaction of indebtedness. Thus, it is only proper to
render petitioners solidarily liable to pay respondent and/or foreclose the
subject mortgage should they fail to fulfill their obligation.16
Consequently, the RTC directed petitioners to pay respondent the not written in the contract; whereas
amounts of P100,000.00 with twelve percent (12%) interest per the parties' agreement on the payment
annum from December 2007 until fully paid and P20,000.00 as of interest on the principal loan
attorney's fees. obligation subsists.35 It is as if the
parties failed to specify the interest rate
to be imposed on the principal amount,
in which case the legal rate of interest
CA
prevailing at the time the agreement
Affirmed RTC decision but ordered petitioners to pay respondent the was entered into is applied by the
following sums: (a) P100,000.00 representing the principal of the Court. This is because, according to
loan obligation; (b) an amount equivalent to twelve percent (12%) of jurisprudence, the legal rate of
P100,000.00 computed per year from November 16, 2006 until full interest is the presumptive
payment, representing interest on the loan; (c) an amount reasonable compensation for
equivalent to six percent (6%) of the sums due in (a) and (b) per borrowed money
annum computed from the finality of the CA Decision until full
payment, representing legal interest;
IN THIS CASE, petitioners and respondent entered into a loan obligation
and clearly stipulated for the payment of monetary interest. However,
CA ruled that the RTC erred in imposing the interest rate of twelve the stipulated interest of ten percent (10%) per month was found to be
percent (12%) per annum from December 2007 until full payment. unconscionable, and thus, the courts a quo struck down the same and
pegged a new monetary interest of twelve percent (12%) per annum,
which was the prevailing legal rate of interest for loans and forbearances
of money at the time the loan was contracted on December 6, 2004.
ISSUE: Did the CA err in warding 12% interest on the principal
obligation until full payment?

Reiteration of SPS ABELLA CASE:

RULING: Jurisprudence is clear about the applicable interest rate if a written

Case law states that there are two (2) types of interest, namely,
monetary interest and compensatory interest.
instrument fails to specify a rate. In Spouses Toring v. Spouses
Olan [(589 Phil. 362 [2008])], this court clarified the effect of Article
1956 of the Civil Code and noted that the legal rate of interest (then
at 12%) is to apply: "In a loan or forbearance of money, according to
the Civil Code, the interest due should be that stipulated in writing,
and in the absence thereof, the rate shall be 12% per annum."

Spouses Toring cites and restates (practically verbatim) what this

Monetary Interest
Monetary interest is the
compensation fixed by the parties for
the use or forbearance of money.
Accordingly, the right to recover
interest arises only either by virtue of a
contract (monetary interest)
Anent monetary interest, the parties
are free to stipulate their preferred rate.
However, courts are allowed to
equitably temper interest rates that are
found to be excessive, iniquitous,
unconscionable, and/or exorbitant,
such as stipulated interest rates of
three percent (3%) per month or
higher.
court settled in Security Bank and Trust Company v. Regional Trial
Compensatory interest Court of Makati, Branch 61 [(331 Phil. 787 [1996])]: "In a loan or
forbearance of money, the interest due should be that stipulated in
On the other hand, writing, and in the absence thereof, the rate shall be 12% per
compensatory interest is that annum."
imposed by law or by the
courts as penalty or indemnity
for damages.
xxxx
or as damages for delay or
failure to pay the principal
loan on which the interest is The rule is not only definite; it is cast in mandatory language. From
demanded (compensatory Eastern Shipping [Lines, Inc. v. CA] [(G.R. No. 97412, July 12,
interest). 1994, 234 SCRA 78)] to Security Bank to Spouses Toring,
jurisprudence has repeatedly used the word "shall," a term that has
long been settled to denote something imperative or operating to
impose a duty. Thus, the rule leaves no room for alternatives or
otherwise does not allow for discretion. It requires the application of
the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames [(716 Phil. 267
[2013])] recognized that the legal rate of interest has been reduced
to 6% per annum[.]

xxxx

In such instances, it is well to clarify

that only the unconscionable
interest rate is nullified and deemed Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799,
Series of 2013 and Nacar retain the definite and mandatory framing annum from judicial demand, i.e., the date of the filing of the complaint on
of the rule articulated in Eastern Shipping, Security Bank, and July 24, 2007, to June 30, 2013, and thereafter, at the rate of six percent
Spouses Toring. Nacar even restates Eastern Shipping: (6%) per annum from July 1, 2013 until fully paid.

xxxx

Thus, it remains that where interest was stipulated in writing by the

debtor and creditor in a simple loan or mutuum, but no exact interest
rate was mentioned, the legal rate of interest shall apply. At present,
this is 6% per annum, subject to Nacar 's qualification on
prospective application.

Applying this, the loan obtained by respondents from petitioners is

deemed subjected to conventional interest at the rate of 12% per
annum, the legal rate of interest at the time the parties executed
their agreement. Moreover, should conventional interest still be due
as of July 1, 2013, the rate of 12% per annum shall persist as the
rate of conventional interest.

This is so because interest in this respect is used as a surrogate for

the parties' intent, as expressed as of the time of the execution of
their contract. In this sense, the legal rate of interest is an
affirmation of the contracting parties' intent; that is, by their
contract's silence on a specific rate, the then prevailing legal
rate of interest shall be the cost of borrowing money. This rate,
which by their contract the parties have settled on, is deemed
to persist regardless of shifts in the legal rate of interest.
Stated otherwise, the legal rate of interest, when applied as
conventional interest, shall always be the legal rate at the time
the agreement was executed and shall not be susceptible to
shifts in rate.

Following this pronouncement, the Court rules that the CA correctly

imposed a STRAIGHT MONETARY INTEREST RATE OF
TWELVE PERCENT (12%) PER ANNUM ON THE PRINCIPAL
LOAN OBLIGATION OF PETITIONERS TO RESPONDENT,
RECKONED FROM THE DATE OF EXTRAJUDICIAL DEMAND
UNTIL FINALITY OF THIS RULING. At this point, suffice it to say
that petitioner's reliance on ECE Realty is misplaced primarily
because unlike in this case, the amount due therein does not
partake of a loan obligation or forbearance of money.

In addition, not only the principal amount but also the monetary
interest due to respondent as discussed above shall itself earn
compensatory interest at the legal rate, pursuant to Article 2212 of
the Civil Code, which states that "[i]nterest due shall earn legal
interest from the time it is judicially demanded, although the
obligation may be silent upon this point."

To be sure, Article 2212 contemplates the presence of stipulated or

conventional interest, i.e., monetary interest, which has accrued
when demand was judicially made. In cases where no monetary
interest had been stipulated by the parties, no accrued monetary
interest could further earn compensatory .interest upon judicial
demand.

Thus, the principal amount and monetary interest due to respondent

shall earn compensatory interest of twelve percent (12%) per