CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST

ATTY. R. R. DUJUNCO

RCBC v CA penalties despite express stipulation therefor in a valid
G.R. No. 128833, 128834 and 128866, April 20, 1998 agreement, may not equally justify non-payment of
interest. The charging of interest for loans forms a
[Rationale of Interest] very essential and fundamental element of the
banking business, which may truly be considered to
FACTS: be at the very core of its existence or being. It is
inconceivable for a bank to grant loans for which it will
Respondent Goyu & Sons, Inc. (GOYU) applied for not charge any interest at all. We fail to find
credit facilities with petitioner RCBC. P117M was justification for the Court of Appeals outright deletion
approved. of the payment of interest as agreed upon in the
respective promissory notes. This constitutes gross
As security, respondent executed 2 REM and 2 error.
chattel mortgages, insured the same with company
approved by the petitioner, and endorsed and
delivered the policies to the said bank.

Fire destroyed GOYU’s Valuenzuela factory.

Consequently, Malayan Insurance Company, Inc.
(MICO) denied GOYU & RCBC’s claim on the ground
that the policies were either attached pursuant to writs
of attachments/garnishments issued by various courts
or other creditors also claimed the proceeds.

RTC: Rendered in favor of GOYU, ordering MICO to

pay the fire loss claims with interest and RCBC to pay
damages.

CA: Sustained the RTC findings as regards MICO &

RCBC’s liabilities and declared the latter as entitled to
payment without interest from GOYU.

ISSUE:

Whether or not the deletion of the payment of

[monetary] interest as agreed upon in the parties’
respective promissory notes is justified?

RULING:

NO.

The need for the payment of interest due upon the

principal amount of the obligation, which is the cost of
money to RCBC, the primary end and the ultimate
reason for RCBCs existence and being, was duly
recognized by the trial court when it ruled favorably on
RCBCs counterclaim, ordering GOYU to pay its loan
obligation with RCBC in the amount of
P68,785,069.04, as of April 27,1992, with interest
thereon at the rate stipulated in the respective
promissory notes (without surcharges and penalties)
per computation. Inexplicably, the Court of Appeals,
without even laying down the factual or legal
justification for its ruling, modified the trial courts ruling
and ordered GOYU to pay the principal amount of
P68,785,069.04 without any interest, surcharges and
penalties.

The essence or rationale for the payment of interest

or cost of money is separate and distinct from that of
surcharges and penalties. What may justify a court in
not allowing the creditor to charge surcharges and

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

EASTERN SHIPPING v CA 1. When the obligation is breached, and it

G.R. No. No. 97412, July 12, 1994 consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
[Reckoning and Legal Rate of Interest] interest due should be that which may have
been stipulated in writing. Furthermore, the
FACTS: interest due shall itself earn legal interest
from the time it is judicially demanded. In the
Respondent Mercantile Insurance Company, Inc. absence of stipulation, the rate of interest
(MIC), insurer-subrogee, filed an action for damages shall be 12% per annum to be computed
against then defendants for damages sustained by a from default, i.e., from judicial or extrajudicial
shipment while in their custody. demand under and subject to the provisions
of Article 1169 of the Civil Code.
Two (2) drums of riboflavin were shipped from Japan
to Manila via Eastern Shipping Lines, Inc. (Eastern 2. When an obligation, not constituting a loan
Shipping), discharged unto custody of Metro Port or forbearance of money, is breached, an
Service, Inc. (Metro Port), forwarded to Allied interest on the amount of damages awarded
Brokerage Corporation (Allied) and finally, delivered to may be imposed at the discretion of the court
consignee. at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated
Metro Port except to 1 drum which was said to be in claims or damages except when or until the
bad order. The consignee also excepted to 1 drum demand can be established with reasonable
which contained spillages while the rest of the certainty. Accordingly, where the demand is
contents were said to be adulterated/fake. established with reasonable certainty, the
interest shall begin to run from the time the
Due to the losses sustained, MIC paid the consignee claim is made judicially or extrajudicially (Art.
under its marine insurance policy so that it became 1169, Civil Code) but when such certainty
subrogated to all the rights of the latter. cannot be so reasonably established at the
time the demand is made, the interest shall
TC: Ordered Eastern Shipping, et al to pay MIC with begin to run only from the date of the
legal interest of 12% pa from the date of the filing of judgment of the court is made (at which time
the complaint. the quantification of damages may be
deemed to have been reasonably
CA: Affirmed TC in toto. ascertained). The actual base for the
computation of legal interest shall, in any
ISSUE: case, be on the amount of finally adjudged.

(a) W/N the grant of interest should commence from 3. When the judgment of the court awarding
the date of the filing of the complaint or from the a sum of money becomes final and
decision of the TC? executory, the rate of legal interest, whether
the case falls under paragraph 1 or
(b) W/N the applicable rate of interest is 12% or 6%? paragraph 2, above, shall be 12% per annum
from such finality until its satisfaction, this
RULING: interim period being deemed to be by then
an equivalent to a forbearance of credit.
(a) Decision of the TC
NOTE:
(b) 6% on the amount due
The guideline laid down in this case has been
Guideline: accordingly modified to conform to BSP-MB Circular
No. 799 and the same is now embodied in the ruling
I. When an obligation, regardless of its source, i.e., in NACAR v Gallery Frames (G.R. No. 189871,
law, contracts, quasi-contracts, delicts or quasi-delicts August 13, 2013).
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 reoverable damages.

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:

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

NACAR v GALLERY FRAMES New Guideline:
G.R. No. 189871, August 13, 2013
I. When an obligation, regardless of its source, i.e.,
[Reckoning and Legal Rate of Interest] law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for
FACTS: damages. The provisions under Title XVIII on
“Damages” of the Civil Code govern in determining
Petitioner Nacar filed a complaint for constructive the measure of recoverable damages.
dismissal.
II. With regard particularly to an award of interest in
LA: In favor of petitioner with award of backwages and the concept of actual and compensatory damages,
separation pay the rate of interest, as well as the accrual thereof, is
imposed, as follows:
NLRC + CA: Dismissed. MR denied.
1. When the obligation is breached, and it
SC: Denied. consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due
Entry of judgment was issued certifying that the should be that which may have been stipulated in
resolution became final and executory. writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
Later, petitioner filed a Motion for Correct demanded. In the absence of stipulation, the rate
Computation, praying that his backwages be of interest shall be 6% per annum to be
computed from the date of his dismissal up to the computed from default, i.e., from judicial or
finality of the resolution. extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
NLRC: Arrived at an updated amount in the sum of
P471,320.31. 2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest
Subsequently, petitioner moved for the recomputation on the amount of damages awarded may be
of the monetary award to include appropriate imposed at the discretion of the court at the rate
interests. of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages,
LA: Partially granted motion. except when or until the demand can be
established with reasonable certainty.
NLRC + CA: Denied appeal. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin
Petitioner alleged that the reckoning point for the to run from the time the claim is made judicially
computation of the backwages and separation pay or extrajudicially (Art. 1169, Civil Code), but when
should be on the date of the entry of judgment not such certainty cannot be so reasonably
when the LA decision was rendered. Also, he posited established at the time the demand is made, the
his entitlement to the payment of interest from the interest shall begin to run only from the date the
finality of the decision until fully paid. judgment of the court is made (at which time the
quantification of damages may be deemed to
Respondents, in their defense, asserted that no more have been reasonably ascertained). The actual
recomputation is allowed since separation pay and base for the computation of legal interest shall, in
backwages are computed only up to the promulgation any case, be on the amount finally adjudged.
of the decision.
3. When the judgment of the court awarding a
ISSUE: sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
(a) W/N backwages and separation pay should be paragraph 1 or paragraph 2, above, shall be 6%
computed until the date of the resolution of the SC? per annum from such finality until its satisfaction,
this interim period being deemed to be by then
(b) W/N petitioner is entitled to interest from the an equivalent to a forbearance of credit.
finality of the decision until full payment by the
respondents? And, in addition to the above, judgments that have
become final and executory prior to July 1, 2013, shall
RULING: not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.
(a) YES

(b) YES

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

FIRST FIL-SIN v PADILLO

G.R. No.160533, January 12, 2005 (b) NO.

[Usurious Compensatory Interest; Construction of Perusal of the promissory notes and the disclosure
Contracts] statements pertinent to the July 22, 1997 and
September 7, 1997 loan obligations of respondent
FACTS: clearly and unambiguously provide for interest rates of
4.5% per annum and 5% per annum, respectively.
Respondent Padillo obtained two (2) loans amounting Nowhere was it stated that the interest rates shall be
to P1M. In both instances, respondent executed a PN applied on a monthly basis.
and disclosure statement. Thus, when the terms of the agreement are clear and
explicit that they do not justify an attempt to read into
For the first loan, respondent alleged made 13 it any alleged intention of the parties, the terms are to
monthly interest payments of P22,500 each before be understood literally just as they appear on the face
settling the principal obligation of P500,000. As of the contract. It is only in instances when the
regards the second loan, the same made 11 monthly language of a contract is ambiguous or obscure that
interest payments of P25,000 each before paying the courts ought to apply certain established rules of
principal loan of P500,000. construction in order to ascertain the supposed intent
of the parties. However, these rules will not be used to
Padillo filed an action to recover the amounts she paid make a new contract for the parties or to rewrite the
in excess of her actual obligations. She alleged that old one, even if the contract is inequitable or harsh.
she agreed to pay 4.5% and 5% per annum They are applied by the court merely to resolve
respectively not 4.5% and 5% per month. doubts and ambiguities within the framework of the
agreement.
TC: Dismissed. Respondent is estopped from
questioning the provisions of the PNs representing The TC and the CA mistook the Loan
interest at 4.5% and 5% monthly rates. Transactions Summary for the Disclosure Statement.
The former was prepared exclusively by petitioner and
CA: Reversed TC. merely summarizes the payments made by
respondent and the income earned by petitioner.
ISSUE: There was no mention of any interest rates and
having been prepared exclusively by petitioner, the
(a) W/N the Court may reduce the applicable interest same is self serving. On the contrary, the Disclosure
rate despite clear agreement of the parties on another Statements were signed by both parties and
applicable rate? categorically stated that interest rates were to be
imposed annually, not monthly.
(b) W/N there is a need to resort to the Loan
Transaction Summary to ascertain the true intention As such, since the terms and conditions
of the parties? contained in the promissory notes and disclosure
statements are clear and unambiguous, the same
RULING: must be given full force and effect. The expressed
intention of the parties as laid down on the loan
(a) YES. documents controls.
Also, reformation cannot be resorted to as the
As regards the penalty charges, The SC agrees with
documents have not been assailed on the ground of
the CA in ruling that the 1% penalty per day of delay
mutual mistake. When a party sues on a written
is highly unconscionable. Applying Article 1229 of the
contract and no attempt is made to show any vice
Civil Code, courts shall equitably reduce the penalty
therein, he cannot be allowed to lay claim for more
when the principal obligation has been partly or
than what its clear stipulations accord. His omission
irregularly complied with, or if it is iniquitous or
cannot be arbitrarily supplied by the courts by what
unconscionable.
their own notions of justice or equity may dictate.
The same promissory note provides that x x x any and
all remaining amount due on the principal upon
maturity hereof shall earn interest at the rate of _____
from date of maturity until fully paid. The CA thus
properly imposed the legal interest of 12% per annum
from the time the loans matured until the same has
been fully paid on February 2, 1999. As decreed in
Eastern Shipping Lines, Inc. v. Court of Appeals, in
the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default.

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

INTEGRATED REALTY CORP. v PNB of the certificates of time deposit and that respondent
G.R. No.L-60705, June 28, 1989 Santos is not entitled to interest after the maturity
dates had expired, unless the contracts are renewed.
[Liability for Interest in the Absence of Stipulation; This is true with respect to the stipulated interest, but
Exception to Art. 1956, NCC] the obligations consisting as they did in the payment
of money, under Article 1108 of the Civil Code he has
FACTS: the right to recover damages resulting from the default
of OBM and the measure of such damages is interest
Petitioner Santos made time deposits with defendant at the legal rate of six percent (6%) per annum on the
Overseas Bank of Manila (OBM) worth P700,000. amounts due and unpaid at the expiration of the
periods respectively provided in the contracts. In fine,
Subsequently, petitioner Integrated Realty OBM is being required to pay such interest, not as
Corporation (IRC) applied for loan amounting to interest income stipulated in the certificates of time
P700,000 [with defendant PNB] secured by the time deposit, but as damages for failure and delay in the
deposits of its company president, Santos. payment of its obligations which thereby compelled
IRC and Santos to resort to the courts.
OBM did not pay PNB. As a result, PNB demanded
payment from petitioners who replied that the The applicable rule is that legal interest, in the nature
obligation has been deemed paid with the irrevocable of damages for non-compliance with an obligation to
assignment of the time deposits. pay a sum of money, is recoverable from the date
judicial or extra-judicial demand is made, which latter
PNB filed a complaint to collect from petitioners the mode of demand was made by PNB, after the
loan amount with interests and attorney’s fees. Cross- maturity of the certificates of time deposit, on March 1,
claim was filed against OBM. 1968. The measure of such damages, there being no
stipulation to the contrary, shall be the payment of the
LC: Deed of assignment is only a pledge. It did not interest agreed upon in the certificates of
extinguish the debt. Petitioner was ordered to pay deposit which is six and onehalf percent (6-1/2%).
PNB while OBM was ordered to reimburse with Such interest due or accrued shall further earn legal
interest the amounts the IRC petitioners will pay PNB. interest from the time of judicial demand.

CA: Deleted the obligation of OBM to pay IRC and Conversely, on the issue of whether OBM should be
Santos. held liable for interests on the time deposits of IRC
and Santos from the time it ceased operations until it
ISSUE: resumed its business, the answer is in the negative.

Whether or not OBM should reimburse the IRC and In The Overseas Bank of Manila vs. Court of Appeals
Santos for whatever amounts they may be adjudged and Tony D. Tapia, the SC held:
to pay PNB by way of compensation for damages
incurred? “It is a matter of common knowledge, which the Court
take judicial notice of, that what enables a bank to pay
RULING: stipulated interest on money deposited with it is that
thru the other aspects of its operation it is able to
YES. generate funds to cover the payment of such interest.
Unless a bank can lend money, engage in
When PNB demanded from OBM payment of the international transactions, acquire foreclosed
amounts due on the two time deposits which matured mortgaged properties or their proceeds and generally
on January 11, 1968 and February 6, 1968, engage in other banking and financing activities from
respectively, there was as yet no obstacle to the which it can derive income, it is inconceivable how it
faithful compliance by OBM of its liabilities thereunder. can carry on as a depository obligated to pay
Consequently, for having incurred in delay in the stipulated interest. Conventional wisdom dictated; this
performance of its obligation, OBM should be held inexorable fair and just conclusion. And it can be said
liable for damages. When respondent Santos invested that all who deposit money in banks are aware of
his money in time deposits with OBM they entered such a simple economic proposition petition.
into a contract of simple loan or mutuum, not a Consequently, it should be deemed read into every
contract of deposit. contract of deposit with a bank that the obligation to
pay interest on the deposit ceases the moment the
While it is true that under Article 1956 of the Civil operation of the bank is completely suspended by the
Code no interest shall be due unless it has been duly constituted authority, the Central Bank.”
expressly stipulated in writing, this applies only to
interest for the use of money. It does not comprehend
interest paid as damages. OBM contends that it had
agreed to pay interest only up to the dates of maturity

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

BATAAN SEEDLING v REPUBLIC returned to respondent upon completion of the project

G.R. No.141009, July 2, 2002 or deducted from the periodic releases of money.
Clearly therefrom, the amount of Fifty Six Thousand
[Forbearance, Definition] Two Hundred Ninety Pesos and Sixty Nine Centavos
(P56,290.69) was neither a loan nor forbearance of
FACTS: money.

Petitioner Bataan Seedling Association, Inc. (BSAI)

entered into a reforestation contract of a 50-hectare
open/denuded forestland in Bataan with defendant
RP-DENR.

Respondent sent notice of cancellation believing that

petitioners failed to comply with their obligations,
asking to show cause why the contract should not be
terminated.

For failure to reply, respondent filed a complaint for

damages against petitioners. The latter denied the
allegations, arguing that the fire was without their fault
and negligence and the same was duly reported.
Moreover, cancellation was arbitrary.

RTC: Ordered petitioners to pay.

CA: Modified RTC, adjudicating the balance of the

mobilization fund with 12% interest.

ISSUE:

W/N the award of interest on the mobilization fund

was palpably erroneous as being contrary to the
facts?

RULING:

YES.

Interest at the rate of 12% per annum is imposable if

there is no stipulation in the contract. Herein subject
contract does not contain any stipulation as to
interest. However, the amount that is due the
respondent does not represent a loan or forbearance
of money.

The word forbearance is defined, within the context of

usury law, as a contractual obligation of lender or
creditor to refrain, during given period of time, from
requiring borrower or debtor to repay loan or debt
then due and payable. The contract between
petitioner and respondent is a Community Based
Reforestation Contract by virtue of which petitioner
undertook the reforestation of a fifty-hectare
open/denuded forest land. The amount of Fifty Six
Thousand Two Hundred Ninety Pesos and Sixty Nine
Centavos (P56,290.69) due to respondent, represents
the balance of the mobilization fund which petitioner is
obliged to return because of its failure to fully comply
with its undertaking to plant the entire area with
seedlings within the period contracted for
reforestation. Under the reforestation contract, the
fund released to petitioner was supposed to be

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

CATUNGAL v HAO
G.R. No. 134972, March 22, 2001

[Forbearance, Expanded Definition]

FACTS:

Galang, original property owner, leased a 3-storey

building to BPI who subleased the ground floor to
respondent Hao.
nd rd
Subsequently, Galang leased the 2 and 3 floors of
the building to Hao.

Petitioners Catungal bought the property and

demanded Hao to vacate the building upon expiration
of the lease. Unheeded, an ejectment case was filed.

On the other hand, Hao filed an action for annulment

of sale with damages, invoking her “right of first
refusal” based on her lease contract with Galang. The
same also filed an injunction case.

RTC: Granted the injunction and annulled the sale

between Galang and Catungal.

CA: Reversed RTC. SC: Denied.

MeTC: Ordered Hao to vacate and pay rent.

RTC: Affirmed MeTC and increased the amount of

rental payment. MR denied.

CA: Modified. Amount of rental payment was lowered.

ISSUE:

W/N back rentals are equivalent to a loan or

forbearance of money?

RULING:

YES.
The back rentals in this case being equivalent to a
loan or forbearance of money, the interest due
thereon in twelve percent (12%) per annum from the
time of extra-judicial demand on September 27, 1988.

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

BANCO FILIPINO v CA reduction of the stipulated interest in the event that

G.R. No. 129227, May 30, 2000 the maximum rate of interest is reduced by law or by
the Monetary Board.
[Validity of Escalation Clauses; Prescription of
Actions] In Banco Filipino Savings & Mortgage Bank v.
Navarro, which involved a similar escalation clause,
FACTS: the SC ruled that Central Bank Circular 494, although
it has the force and effect of law, is not a law and is
Respondent Sps. Arcilla secured 3 loans from not the law contemplated by the parties which
petitioner Banco Filipino as evidenced by a PN and authorizes the petitioner to unilaterally raise the
secured by REMs. interest rate of the loan. Consequently, the reliance by
the petitioner on Central Bank Circular 494 to
Under said deeds, petitioner may increase the rate of unilaterally raise the interest rates on the loan in
interest on said loans within the limits allowed by law, question was without any legal basis.
the maximum rate being 12% at that time.
(b) NO.
Later, loan was increased to P188,000 with an
interest of 12% p.a. Petitioner’s claim that the action of the private
respondents has, prescribed is bereft of merit. Under
Subsequently, Central Bank Circular No. 494 was Article 1150 of the Civil Code, the time for prescription
issued, increasing the maximum rate of interest to of all kinds of actions, when there is no special
19%. provision which ordains otherwise, shall be counted
from the day they may be brought. Thus, the period of
When petitioner issued a SOA on Sps. Arcilla’s loan, prescription of any cause of action is reckoned only
on October 30, 1978, interest rate was unilaterally from the date the cause of action accrued. And a
increased to 17%. cause of action arises when that which should have
been done is not done, or that which should not have
Repondents defaulted. REM was foreclosed. An been done is done. The period should not be made to
action was filed for the annulment of the loan contract, retroact to the date of the execution of the contract on
foreclosure sale. January 15, 1975 as claimed by the petitioner for at
that time, there would be no way for the respondents
In defense, petitioner averred that action has to know of the violation of their rights. The Court of
prescribed. Appeals therefore correctly found that respondents’
cause of action accrued on October 30, 1978, the
RTC + CA: Ordered Banco Filipino to pay Sps. Arcilla. date they received the statement of account showing
the increased rate of interest, for it was only from that
ISSUE: moment that they discovered the petitioner’s unilateral
increase thereof. We quote with approval the pertinent
(a) W/N Banco Filipino may increase the stipulated portions of the Court of Appeals decision as follows:
interest pursuant to the CB Circular 494 from 12% to
17%? "It is the legal possibility of bringing the action that
determines the starting point for the computation of
(b) W/N the filing of the complaint for the annulment of the period of prescription. In fine, the ten-year
the loan is already barred by prescription? prescriptive period is to be reckoned from the accrual
of Appellees’ right of action, not necessarily on the
RULING: very date of the execution of the contracts subject of
the action. A party’s right of action accrues only when
(a) NO. the confluence of the following elements is
established:
The loan contracts with real estate mortgage entered a) a right in favor of the plaintiff by whatever
into by and between the petitioner and respondent means and under whatever law it arises or is
stated that the petitioner may increase the interest on created;
said loans, within the limits allowed by law, as
petitioner’s Board of Directors may prescribe for its b) an obligation on the part of defendant to
borrowers. At the time the contracts were entered respect such right; and
into, said escalation clause was valid. It was only
pursuant to P.D. No. 1684 which became effective c) an act or omission on the part of such
March 17, 1980 wherein to be valid, escalation defendant violative of the right of the plaintiff
clauses should provide: 1.) that there can be an
increase in interest if increased by law or by the It is only when the last element occurs or takes place
Monetary Board; and 2.) in order for such stipulation that it can be said in law that a cause of action has
to be valid, it must include a provision for the arisen.

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

CONSOLIDATED BANK v CA conditions, there should always be a reference rate
G.R. No. 114286, April 19, 2001 upon which to peg such variable interest rates.

[Floating Interest] An example of such a valid variable interest rate was

found in Polotan, Sr. v. Court of Appeals. In that case,
FACTS: the contractual provision stating that if there occurs
any change in the prevailing market rates, the new
Respondents Continental Cement Corporation and interest rate shall be the guiding rate in computing
Gregory Lim obtained from petitioner Consolidated the interest due on the outstanding obligation without
Bank and Trust Corporation a letter of credit (LC). need of serving notice to the Cardholder other than
the required posting on the monthly statement served
The LC was used to purchase bunker fuel oil from to the Cardholder was considered valid. The
Petrophil Corp, which the latter delivered to the aforequoted provision was upheld notwithstanding
respondent corporation’s plant in Bulacan. that it may partake of the nature of an escalation
clause, because at the same time it provides for the
A trust receipt agreement was executed by decrease in the interest rate in case the prevailing
respondents which contained a provision fixing the market rates dictate its reduction. In other words,
interest rate to wit: unlike the stipulation subject of the instant case, the
interest rate involved in the Polotan case is designed
“I, WE jointly and severally agree to any increase or to be based on the prevailing market rate.
decrease in the interest rate which may occur after
July 1, 1981, when the Central Bank floated the On the other hand, a stipulation ostensibly signifying
interest rate, and to pay additionally the penalty of 1% an agreement to any increase or decrease in the
per month until the amount/s or installment/s due and interest rate, without more, cannot be accepted by this
unpaid under the trust receipt on the reverse side Court as valid for it leaves solely to the creditor the
hereof is/are fully paid.” determination of what interest rate to charge against
an outstanding loan.
Petitioner filed a complaint for sum of money, claiming
that respondents failed to turn over the goods covered
by the trust receipt or its proceeds.

In their answer, respondents claim averred that their

transaction was a simple loan and not a trust receipts
transaction. Moreover, they alleged overpayment in
their counterclaim.

TC: Dismissed. Petitioner was ordered to pay amount

specified in the counterclaim.

CA: Set aside as invalid the floating rate of interest

exhorted by petitioner to be applicable. Also, attorney
fees were modified.

ISSUE:

Whether or not the agreement among the parties as

to the floating of interest rate is valid?

RULING:

NO.

We agree with respondent Court of Appeals that the

foregoing stipulation is invalid, there being no
reference rate set either by it or by the Central Bank,
leaving the determination thereof at the sole will and
control of petitioner.

While it may be acceptable, for practical reasons

given the fluctuating economic conditions, for banks to
stipulate that interest rates on a loan not be fixed and
instead be made dependent upon prevailing market

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

MENDOZA v CA contracts ordained in Article 1308 of the Civil Code.

GR. No. 116710. June 25, 2001 As held in one case:

[Consent] It is basic that there can be no contract in the true

sense in the absence of the element of agreement, or
FACTS: of mutual assent of the parties. If this assent is
wanting on the part of one who contracts, his act has
Petitioner Mendoza was granted a P500,000 credit no more efficacy than if it had been done under
line and a P1M LC/TR line. As security, he mortgaged duress or by a person of unsound mind.
several properties. The REM contained an escalation
clause, an increase in rates as allowed by law.
Similarly, contract changes must be made with the
Petitioner executed 3PNs and 11 LCs containing a consent of the contracting parties. The minds of all the
stipulation for 12% & 9% interest p.a. respectively, parties must meet as to the proposed modification,
which may be raised by the bank anytime without especially when it affects an important aspect of the
notice. agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital
Respondent PNB sent a letter raising the interest rate component, for it can make or break a capital venture.
to 14% p.a. in line with a CB-MB Res. No. 2126.
Estoppel will not lie against the petitioner regarding
Later, petitioner requested for the restructuring of his the increase in the stipulated interest on the subject
past due accounts and for an additional LC/TR line Promissory Notes Nos. 127/82 and 128/82 inasmuch
which respondent allegedly approved. as he was not even informed beforehand by
respondent bank of the change in the stipulated
However, petitioner and his wife were allegedly asked interest rates. However, we also note that the said two
to sign 2 blank PNs to supersede and novate the 3 (2) subject Promissory Notes Nos. 127/82 and 128/82
earlier PNs. The respondent subsequently filled the expressly provide for a penalty charge of 3% per
same out fraudulently. annum to be imposed on any unpaid amount when
due.
Interest rates were increased subsequently to as high
as 32% for both PNs. As a result, petitioner failed to
pay. Respondent extra-judicially foreclosed the
mortgaged properties.

Petitioner filed a complaint for specific performance,

nullification of the foreclosure and damages.

RTC: Ordered the restructuring of the loan and

nullification of the extrajudicial foreclosure.

CA: Reversed RTC.

ISSUE:

W/N unilateral increase of interest rate authorized

under the escalation clause of a contract can be
implemented?

RULING:

NO.

It appears that respondent bank increased the interest

rates on the two (2) subject Promissory Notes Nos.
127/82 and 128/82 without the prior consent of the
petitioner. The petitioner did not agree to the increase
in the stipulated interest rate of 21% per annum on
Promissory Note No. 127/82 and 18% per annum on
Promissory Note No. 128/82. As held in several
cases, the unilateral determination and imposition of
increased interest rates by respondent bank is
violative of the principle of mutuality of

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

FMIC v ESTE DEL SOL Underwriting and Consultancy Agreements which
G.R. No. 141811. November 15, 2001 were executed and delivered contemporaneously with
the Loan Agreement on January 31, 1978 were
[Usurious Loans] exacted by petitioner FMIC as essential conditions for
the grant of the loan. An apparently lawful loan is
FACTS: usurious when it is intended that additional
compensation for the loan be disguised by an
Petitioner First Metro Investment Corporation (FMIC) ostensibly unrelated contract providing for payment by
granted respondent Este del Sol a loan to finance a the borrower for the lenders services which are of little
sports/resort complex project in Rizal. value or which are not in fact to be rendered, such as
in the instant case. In this connection, Article 1957 of
Terms are as follows: the New Civil Code clearly provides that:
• 16% per annum interest
• 36 equal and monthly amortizations Art. 1957. Contracts and stipulations, under any cloak
• acceleration clause, 20% penalty which shall or device whatever, intended to circumvent the laws
bear interest at highest rate possible until full against usury shall be void. The borrower may
payment plus liquidated damages and recover in accordance with the laws on usury.
attorney’s fees in case of default
In usurious loans, the entire obligation does not
To secure the loan, respondent also executed a real become void because of an agreement for
estate (REM) mortgage over 2 parcels of land, a usurious interest; the unpaid principal debt still
surety agreement and an underwriting and stands and remains valid but the stipulation as to
consultancy agreement. the usurious interest is void, consequently, the
debt is to be considered without stipulation as to
Este del Sol failed to pay. Accordingly, FMIC the interest. The reason for this rule was adequately
foreclosed the REM but failed to secure the alleged explained in the case of Angel Jose Warehousing Co.,
deficiency from the surety. Inc. v. Child Enterprises where this Court held:

Collection suit was instituted with 21% interest and In simple loan with stipulation of usurious interest, the
25% attorney’s fees against respondents to collect the prestation of the debtor to pay the principal debt,
said deficiency balance. which is the cause of the contract (Article 1350, Civil
Code), is not illegal. The illegality lies only as to the
In their answer, respondent alleged that the prestation to pay the stipulated interest; hence, being
underwriting and consultancy agreements executed separable, the latter only should be deemed void,
simultaneously with and as integral parts of the loan since it is the only one that is illegal.
were in reality subterfuges to camouflage the usurious
interest being charged by the petitioner. Thus, the nullity of the stipulation on the usurious
interest does not affect the lenders right to receive
TC: Ordered FMIC to pay with interest and attorney’s back the principal amount of the loan. With respect to
fees. the debtor, the amount paid as interest under a
usurious agreement is recoverable by him, since the
CA: Reversed TC. It declared that the fees provided payment is deemed to have been made under
for in the underwriting and consultancy agreements restraint, rather than voluntarily.
were mere subterfuges to camouflage the excessively
usurious interest charged by the petitioner on the
loan. Damages and attorney’s fees were also deleted.

ISSUE:

W/N the underwriting and consultancy agreements

are “mere subterfuges to camouflage the usurious
interest charged” by the petitioner?

RULING:

YES.

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

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

SOLID BANK v PERMANENT HOMES In order that obligations arising from contracts may
G.R. No. 171925, July 23, 2010 have the force of law between the parties, there must
be a mutuality between the parties based on their
[Requisites for Valid Escalation Clauses] essential equality. A contract containing a condition
which makes its fulfillment dependent exclusively
FACTS: upon the uncontrolled will of one of the contracting
parties is void. There was no showing that either
Petitioner Solid Bank granted respondent Permanent Solidbank or Permanent coerced each other to enter
Homes an “Omnibus Line” credit facility worth P60M into the loan agreements. The terms of the Omnibus
—P59M with interest at prevailing market rates Line Agreement and the promissory notes were
subject to monthly repricing and P1M was available mutually and freely agreed upon by the parties.
for domestic bills purchase.

The loan agreement authorized the parties to do the

following: (1) For Solid Bank to increase or decrease
at any time the interest rate agreed on the basis of
prevailing rates in capital markets.

It also provided Permanent Homes the option to

prepay all amounts due within 30 days from receipt of
a written notice should it disagree to the interest rate
adjustment.

In view of its 3 loan availments, respondent averred

that petitioner unilaterally and arbitrarily accelerated
the interest rates without any declared basis, of which
respondent had not agreed to or been informed of.

RTC: Dismissed complaint.

CA: Reversed RTC.

ISSUE:

W/N the provision for interest rate adjustment is valid?

RULING:

YES.

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.

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

SILOS v PNB decrease interest rates unilaterally, without the
G.R. No. 181045, July 2, 2014 consent of the borrower, and depending on complex
and subjective factors. Because they have been lured
[Validity of Escalation Clauses] into these contracts by initially low interest rates,
borrowers get caught and stuck in the web of
FACTS: subsequent steep rates and penalties, surcharges
and the like. Being ordinary individuals or entities,
Petitioners Sps. Silos obtained a revolving credit line they naturally dread legal complications and cannot
with respondent PNB secured by REM. afford court litigation; they succumb to whatever
charges the lenders impose. At the very least,
Silos issued 8 PNs and signed a Credit Agreement borrowers should be charged rightly; but then again
containing a stipulation of 19.5% interest p.a. and this is not possible in a one-sided credit system where
agreeing that respondent may modify the interest rate the temptation to abuse is strong and the willingness
in the loan depending on whatever policy it may adopt to rectify is made weak by the eternal desire for profit.
in the future.

Petitioners regularly renewed their line until they

faltered due to the Asian financial crisis.

For failure to pay, REM was foreclosed.

Petitioners filed an action for annulment of foreclosure

sale. They theorized that the determination of the
interest rate in their loan agreement was left to the
sole will of the respondent bank.

On the other hand, PNB argued that Sps. Silos

agreed that without prior notice, the former may
modify interest rates and the imposition of penalties
was agreed upon in the Credit Agreement.

RTC: Dismissed. MR granted, reducing the award for

attorney’s fees from 10% to 1%.

CA: Modified RTC. Interest rate to be applied is 12%

p.a. after the expiration of the 30-day interest period.

ISSUE:

W/N PNB may unilaterally modify the interest rate in a

loan agreement without violating the mutuality of
contracts?

RULING:

NO.

Any modification in the contract, such as the interest

rates, 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 agreements, the rate of interest is a
principal condition, if not the most important
component. Thus, any modification thereof must be
mutually agreed upon; otherwise, it has no binding
effect.

Loan and credit arrangements may be made enticing

by, or “sweetened” with, offers of low initial interest
rates, but actually accompanied by provisions written
in fine print that allow lenders to later on increase or

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

IMPERIAL v JAUCIAN
G.R. No. 149004, April 14, 2004

[Usurious Monetary Interest]

FACTS:

Respondent Jaucian filed a case for a collection of a

sum of money against petitioner Imperial, alleging the
non-payment of 6 loans.

The face value of each PN is bigger [than] the amount

released because the said face value already
included interest rate of 16% per month to date of
maturity.

TC + CA: Reduced interest rate to 1.167% per month

or 14% per annum.

ISSUE:

W/N the interest rate of 16% per month may be

considered iniquitous, unconscionable and
exorbitant?

RULING:

YES.
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.
In Medel v. CA, 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.
Since the stipulation on the interest rate is void, it is
as if there were no express contract thereon. 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.

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CREDIT TRANSACTIONS|CASE DIGESTS—INTEREST
ATTY. R. R. DUJUNCO

ADVOCATES FOR TILA v BSMB It is settled that nothing in CB Circular No. 905 grants
G.R. No. 192986, January 15, 2013 lenders a carte blanche authority to raise interest
rates to levels which will either enslave their
[Suspension of the Usury Law] borrowers or lead to a hemorrhaging of their assets.
As held in Castro v. Tan:
FACTS:
The imposition of an unconscionable rate of interest
Petitioner and Olaguer filed a petition on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a
RA 2655 empowered the CB-MB to set maximum repugnant spoliation and an iniquitous deprivation of
interest rates which banks may charge for all types of property, repulsive to the common sense of man. It
loans ad other credit operations. has no support in law, in principles of justice, or in the
human conscience nor is there any reason
Later, PD 1684 amended the Usury Law, giving the whatsoever which may justify such imposition as
CB-MB the authority to prescribe different maximum righteous and as one that may be sustained within the
rates of interest which may be imposed. sphere of public or private morals.ςrνl1

In this light, CB-MB issued CB Circular No. 905, Stipulations authorizing iniquitous or unconscionable
removing the ceilings on interest rates on loans or interests have been invariably struck down for being
forbearance of any money, goods or credits. contrary to morals, if not against the law. Indeed,
under Article 1409 of the Civil Code, these contracts
In 1993, FVR signed into law RA 7653 establishing are deemed inexistent and void ab initio, and
BSP to replace CB. therefore cannot be ratified, nor may the right to set
up their illegality as a defense be waived.
ISSUE:

W/N CB-MB exceeded its authority when it removed

all interest ceilings and thus suspending RA 2655 as
regards usurious interest rates?

RULING:

NO.

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, citing
several cases, CB Circular No. 905 "did not repeal nor
in anyway amend the Usury Law but simply
suspended the latters effectivity;” that "a CB Circular
cannot repeal a law, [for] only a law can repeal
another law;” that "by virtue of CB Circular No. 905,
the Usury Law has been rendered ineffective;” and
"Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender
and borrower may agree upon.

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.

The lifting of the ceilings for interest rates does not

authorize stipulations charging excessive,
unconscionable, and iniquitous interest.

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