REPUBLIC vs BAGTAS

The appellant contends that the contract was commodatum and that, for that reason, as the
appellee retained ownership or title to the bull it should suffer its loss due to force majeure. And
even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil
Code provides that a bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used
the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore,
when lent and delivered to the deceased husband of the appellant the bulls had each an appraised
book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at
P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late
husband of the appellant would be exempt from liability.

QUINTOS vs BECK

The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to return the furniture to the
plaintiff, upon the latters demand,

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the
deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place
the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the
furniture, because the defendant wanted to retain the three gas heaters and the four electric
lamps.

The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the
latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture with the
Sheriff shall be for the account of the defendant.

PAJUYO vs GUEVARRA

We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so
that the latter may use the same for a certain time and return it.63 An essential feature of
commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing
belonging to another is for a certain period.64 Thus, the bailor cannot demand the return of the
thing loaned until after expiration of the period stipulated, or after accomplishment of the use for
which the commodatum is constituted.65 If the bailor should have urgent need of the thing, he
may demand its return for temporary use.66 If the use of the thing is merely tolerated by the
bailor, he can demand the return of the thing at will, in which case the contractual relation is
called a precarium.67 Under the Civil Code, precarium is a kind of commodatum.68

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of permission
would result in the termination of the lease.69 The tenant’s withholding of the property would
then be unlawful. This is settled jurisprudence.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo, the
bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum.70 These contracts
certainly involve the obligation to deliver or return the thing received.71

PANTALEON vs AMEX

A credit card is defined as "any card, plate, coupon book, or other credit device existing for the
purpose of obtaining money, goods, property, labor or services or anything of value on credit."9

The bank credit card system involves a tripartite relationship between the issuer bank, the
cardholder, and merchants participating in the system. The issuer bank establishes an account on
behalf of the person to whom the card is issued, and the two parties enter into an agreement
which governs their relationship. This agreement provides that the bank will pay for cardholder’s
account the amount of merchandise or services purchased through the use of the credit card and
will also make cash loans available to the cardholder. It also states that the cardholder shall be
liable to the bank for advances and payments made by the bank and that the cardholder’s
obligation to pay the bank shall not be affected or impaired by any dispute, claim, or demand by
the cardholder with respect to any merchandise or service purchased.

The merchants participating in the system agree to honor the bank’s credit cards. The bank
irrevocably agrees to honor and pay the sales slips presented by the merchant if the merchant
performs his undertakings such as checking the list of revoked cards before accepting the card. x
x x.

These slips are forwarded to the member bank which originally issued the card. The cardholder
receives a statement from the bank periodically and may then decide whether to make payment
to the bank in full within a specified period, free of interest, or to defer payment and ultimately
incur an interest charge.

Simply put, every credit card transaction involves three contracts, namely: (a) the sales contract
between the credit card holder and the merchant or the business establishment which accepted
the credit card; (b) the loan agreement between the credit card issuer and the credit card holder;
and lastly, (c) the promise to pay between the credit card issuer and the merchant or business
establishment.16

We note that a card membership agreement is a contract of adhesion as its terms are prepared
solely by the credit card issuer, with the cardholder merely affixing his signature signifying his
adhesion to these terms. This circumstance, however, does not render the agreement void; we
have uniformly held that contracts of adhesion are "as binding as ordinary contracts, the reason
being that the party who adheres to the contract is free to reject it entirely."23 The only effect is
that the terms of the contract are construed strictly against the party who drafted it.24

On AMEX’s obligations to Pantaleon

Although we recognize the existence of a relationship between the credit card issuer and the
credit card holder upon the acceptance by the cardholder of the terms of the card membership
agreement (customarily signified by the act of the cardholder in signing the back of the credit
card), we have to distinguish this contractual relationship from the creditor-debtor relationship
which only arises after the credit card issuer has approved the cardholder’s purchase request. The
first relates merely to an agreement providing for credit facility to the cardholder. The latter
involves the actual credit on loan agreement involving three contracts, namely: the sales contract
between the credit card holder and the merchant or the business establishment which accepted
the credit card; the loan agreement between the credit card issuer and the credit card holder; and
the promise to pay between the credit card issuer and the merchant or business establishment.

From the loan agreement perspective, the contractual relationship begins to exist only upon the
meeting of the offer and acceptance of the parties involved. In more concrete terms, when
cardholders use their credit cards to pay for their purchases, they merely offer to enter into loan
agreements with the credit card company. Only after the latter approves the purchase requests
that the parties enter into binding loan contracts, in keeping with Article 1319 of the Civil Code,
which provides:
Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a counter-offer.

This view finds support in the reservation found in the card membership agreement itself,
particularly paragraph 10, which clearly states that AMEX "reserve[s] the right to deny
authorization for any requested Charge." By so providing, AMEX made its position clear that it
has no obligation to approve any and all charge requests made by its card holders.

ii. AMEX not guilty of culpable delay

Since AMEX has no obligation to approve the purchase requests of its credit cardholders,
Pantaleon cannot claim that AMEX defaulted in its obligation. The three requisites for a finding
of default are: (a) that the obligation is demandable and liquidated; (b) the debtor delays
performance; and (c) the creditor judicially or extrajudicially requires the debtor’s performance.

Based on the above, the first requisite is no longer met because AMEX, by the express terms of
the credit card agreement, is not obligated to approve Pantaleon’s purchase request. Without a
demandable obligation, there can be no finding of default.

Apart from the lack of any demandable obligation, we also find that Pantaleon failed to make the
demand required by Article 1169 of the Civil Code.

As previously established, the use of a credit card to pay for a purchase is only an offer to the
credit card company to enter a loan agreement with the credit card holder. Before the credit
card issuer accepts this offer, no obligation relating to the loan agreement exists between
them. On the other hand, a demand is defined as the "assertion of a legal right; xxx an asking
with authority, claiming or challenging as due." A demand presupposes the existence of an
obligation between the parties.

Thus, every time that Pantaleon used his AMEX credit card to pay for his purchases, what the
stores transmitted to AMEX were his offers to execute loan contracts. These obviously could not
be classified as the demand required by law to make the debtor in default, given that no
obligation could arise on the part of AMEX until after AMEX transmitted its acceptance of
Pantaleon’s offers. Pantaleon’s act of "insisting on and waiting for the charge purchases to be
approved by AMEX"28 is not the demand contemplated by Article 1169 of the Civil Code.

For failing to comply with the requisites of Article 1169, Pantaleon’s charge that AMEX is guilty
of culpable delay in approving his purchase requests must fail.

iii. On AMEX’s obligation to act on the offer within a specific period of time

AMEX’s credit authorizer, Edgardo Jaurigue, explained that having no pre-set spending limit in
a credit card simply means that the charges made by the cardholder are approved based on his
ability to pay, as demonstrated by his past spending, payment patterns, and personal resources.29
Nevertheless, every time Pantaleon charges a purchase on his credit card, the credit card
company still has to determine whether it will allow this charge, based on his past credit history.
This right to review a card holder’s credit history, although not specifically set out in the card
membership agreement, is a necessary implication of AMEX’s right to deny authorization for
any requested charge.

Pantaleon failed to present any evidence to support his assertion that AMEX acted on purchase
requests in a matter of three or four seconds as an established practice. More importantly, even if
Pantaleon did prove that AMEX, as a matter of practice or custom, acted on its customers’
purchase requests in a matter of seconds, this would still not be enough to establish a legally
demandable right; as a general rule, a practice or custom is not a source of a legally demandable
or enforceable right.30

Significantly, there is no provision in this agreement that obligates AMEX to act on all
cardholder purchase requests within a specifically defined period of time. Thus, regardless of
whether the obligation is worded was to "act in a matter of seconds" or to "act in timely
dispatch," the fact remains that no obligation exists on the part of AMEX to act within a specific
period of time. Even Pantaleon admits in his testimony that he could not recall any provision in
the Agreement that guaranteed AMEX’s approval of his charge requests within a matter of
minutes.

In light of the foregoing, we find and so hold that AMEX is neither contractually bound nor
legally obligated to act on its cardholders’ purchase requests within any specific period of time,
much less a period of a "matter of seconds" that Pantaleon uses as his standard. The standard
therefore is implicit and, as in all contracts, must be based on fairness and reasonableness, read
in relation to the Civil Code provisions on human relations, as will be discussed below.

AMEX acted with good faith

Thus far, we have already established that: (a) AMEX had neither a contractual nor a legal
obligation to act upon Pantaleon’s purchases within a specific period of time; and (b) AMEX has
a right to review a cardholder’s credit card history. Our recognition of these entitlements,
however, does not give AMEX an unlimited right to put off action on cardholders’ purchase
requests for indefinite periods of time. In acting on cardholders’ purchase requests, AMEX must
take care not to abuse its rights and cause injury to its clients and/or third persons. We cite in this
regard Article 19, in conjunction with Article 21, of the Civil Code

In the context of a credit card relationship, although there is neither a contractual stipulation nor
a specific law requiring the credit card issuer to act on the credit card holder’s offer within a
definite period of time, these principles provide the standard by which to judge AMEX’s actions.
According to Pantaleon, even if AMEX did have a right to review his charge purchases, it abused
this right when it unreasonably delayed the processing of the Coster charge purchase, as well as
his purchase requests at the Richard Metz’ Golf Studio and Kids’ Unlimited Store; AMEX
should have known that its failure to act immediately on charge referrals would entail
inconvenience and result in humiliation, embarrassment, anxiety and distress to its cardholders
who would be required to wait before closing their transactions.39

Although it took AMEX some time before it approved Pantaleon’s three charge requests, we find
no evidence to suggest that it acted with deliberate intent to cause Pantaleon any loss or injury, or
acted in a manner that was contrary to morals, good customs or public policy. We give credence
to AMEX’s claim that its review procedure was done to ensure Pantaleon’s own protection as a
cardholder and to prevent the possibility that the credit card was being fraudulently used by a
third person. It is but natural for AMEX to want to ensure that it will extend credit only to people
who will have sufficient means to pay for their purchases. AMEX, after all, is running a
business, not a charity, and it would simply be ludicrous to suggest that it would not want to earn
profit for its services. Thus, so long as AMEX exercises its rights, performs its obligations, and
generally acts with good faith, with no intent to cause harm, even if it may occasionally
inconvenience others, it cannot be held liable for damages.

JALANDONI vs ENCOMIENDA

The RTC likewise harped on the fact that if Encomienda really intended the amounts to be a
loan, nonnal human behavior would have prompted at least a handwritten acknowledgment or a
promissory note the moment she parted with her money for the purpose of granting a loan. This
would be particularly true if the loan obtained was part of a business dealing and not one
extended to a close friend who suddenly needed monetary aid. In fact, in case of loans between
friends and relatives, the absence of acknowledgment receipts or promissory notes is more
natural and real.

The existence of a contract of loan cannot be denied merely because it was not reduced in
writing. Surely, there can be a verbal loan. Contracts are binding between the parties, whether
oral or written. The law is explicit that contracts shall be obligatory in whatever form they may
have been entered into, provided all the essential requisites for their validity are present. A
simple loan or mutuum exists when a person receives a loan of money or any other fungible thing
and acquires its ownership. He is bound to pay to the creditor the equal amount of the same kind
and quality.

Jalandoni posits that the more logical reason behind the disbursements would be what
Encomienda candidly told the trial court, that her acts were plainly an "unselfish display of
Christian help" and done out of "genuine concern for Georgia's children." However, the "display
of Christian help" is not inconsistent with the existence of a loan. Encomienda immediately
offered a helping hand when a friend asked for it. But this does not mean that she had already
waived her right to collect in the future. Indeed, when Encomienda felt that Jalandoni was
beginning to avoid her, that was when she realized that she had to protect her right to demand
payment. The fact that Encomienda kept the receipts even for the smallest amounts she had
advanced, repeatedly sent demand letters, and immediately filed the instant case when Jalandoni
stubbornly refused to heed her demands sufficiently disproves the latter’s belief that all the sums
of money she received were merely given out of charity.
 PASCUAL VS RAMOS 2002

The PASCUALs filed before us the instant petition raising the sole issue of whether they are
liable for 5% interest per month from 3 June 1987 to 3 April 1995. Invoking this Court’s ruling
in Medel v. Court of Appeals, they argue that the 5% per month interest is excessive, iniquitous,
unconscionable and exorbitant.

After the trial court sustained petitioners’ claim that their agreement with RAMOS was actually a
loan with real estate mortgage, the PASCUALs should not be allowed to turn their back on the
stipulation in that agreement to pay interest at the rate of 7% per month.

Our ruling in Medel v. Court of Appeals14 is not applicable to the present case. In that case, the
excessiveness of the stipulated interest at the rate of 5.5 % per month was put in issue by the
defendants in the Answer. Moreover, in addition to the interest, the debtors were also required,
as per stipulation in the promissory note, to pay service charge of 2% per annum and a penalty
charge of 1% per month plus attorney’s fee of equivalent to 25% of the amount due. In the case
at bar, there is no other stipulation for the payment of an extra amount except interest on the
principal loan. Thus, taken in conjunction with the stipulated service charge and penalty, the
interest rate of 5.5% in the Medel case was found to be excessive, iniquitous, unconscionable,
exorbitant and hence, contrary to morals, thereby making such stipulation null and void.

Considering the variance in the factual circumstances of the Medel case and the instant case, we
are not prepared to apply the former lest it be construed that we can strike down anytime interest
rates agreed upon by parties in a loan transaction.

The interest rate of 7% per month was voluntarily agreed upon by RAMOS and the PASCUALs.
There is nothing from the records and, in fact, there is no allegation showing that petitioners
were victims of fraud when they entered into the agreement with RAMOS. Neither is there a
showing that in their contractual relations with RAMOS, the PASCUALs were at a disadvantage
on account of their moral dependence, ignorance, mental weakness, tender age or other handicap,
which would entitle them to the vigilant protection of the courts as mandated by Article 24 of the
Civil Code.

With the suspension of the Usury Law and the removal of interest ceiling, the parties are free to
stipulate the interest to be imposed on loans. Absent any evidence of fraud, undue influence, or
any vice of consent exercised by RAMOS on the PASCUALs, the interest agreed upon is
binding upon them. This Court is not in a position to impose upon parties contractual stipulations
different from what they have agreed upon.

It is not the province of the court to alter a contract by construction or to make a new contract for
the parties; its duty is confined to the interpretation of the one which they have made for
themselves without regard to its wisdom or folly as the court cannot supply material stipulations
or read into the contract words which it does not contain.
Thus, we cannot supplant the interest rate, which was reduced to 5% per month without
opposition on the part of RAMOS.

MEDEL vs CA 1998

The Supreme Court, while agreeing with the Court of Appeals that the Usury Law was legally
inexistent with the issuance of CB Circular 905, and that interest could be charged as lender and
borrower may agree upon, nevertheless found the stipulated interest iniquitous, unconscionable,
and contrary to morals.

The Court found the interest at 5.5% per month, or 66% per annum, stipulated upon by the
parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals
(“contra bonos mores”), if not against the law. The stipulation was void. The courts may reduce
equitably liquidated damages, whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable.

The Court disagreed with the Court of Appeals which upheld the stipulation of the parties.
Rather, it agreed with the trial court that, under the circumstances, interest at 12% per annum,
and an additional 1% a month penalty charge as liquidated damages would be more reasonable.

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

The lower court ruled that although the Usury Law had been repealed, the interest charged by the
plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the trial
court applied "the provision of the New [Civil] Code" that the "legal rate of interest for loan or
forbearance of money, goods or credit is 12% per annum."

SOLANGON vs SALAZAR 2001

In the case at bench, petitioners stand on a worse situation. They are required to pay the
stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and
inordinate. Surely, it is more consonant with justice that the said interest rate be reduced
equitably. An interest of 12% per annum is deemed fair and reasonable.

WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the
MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12 % per annum.

IMPERIAL vs JAUCIAN 2004

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

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

The records show that there was a written agreement between the parties for the payment of
interest on the subject loans at the rate of 16 percent per month. As decreed by the lower courts,
this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. While
the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said
circular grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets.1[13]

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 was 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.

ESTORES VS SUPANGAN

Petitioner insists that she is not bound to pay interest on the ₱3.5 million because the Conditional
Deed of Sale only provided for the return of the down payment in case of failure to comply with
her obligations.

Interest may be imposed even in the absence of stipulation in the contract.

It is proper to impose interest notwithstanding the absence of stipulation in the contract. Article
2210 of the Civil Code expressly provides that "[i]nterest may, in the discretion of the court, be
allowed upon damages awarded for breach of contract."

In this case, there is no question that petitioner is legally obligated to return the ₱3.5 million
because of her failure to fulfill the obligation under the Conditional Deed of Sale, despite
demand. She has in fact admitted that the conditions were not fulfilled and that she was willing
to return the full amount of ₱3.5 `million but has not actually done so. Petitioner enjoyed the use
of the money from the time it was given to her until now. Thus, she is already in default of her
obligation from the date of demand, i.e., on September 27, 2000.

The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale.
However, the contract provides that the seller (petitioner) must return the payment made by the
buyer (respondent-spouses) if the conditions are not fulfilled. There is no question that they have
in fact, not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand by
the buyer (respondent-spouses), the seller (petitioner) has failed to return the money and should
be considered in default from the time that demand was made on September 27, 2000.

We believe that the phrase "forbearance of money, goods or credits" is meant to have a separate
meaning from a loan, otherwise there would have been no need to add that phrase as a loan is
already sufficiently defined in the Civil Code. Forbearance of money, goods or credits should
therefore refer to arrangements other than loan agreements, where a person acquiesces to the
temporary use of his money, goods or credits pending happening of certain events or fulfillment
of certain conditions. In this case, the respondent-spouses parted with their money even before
the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller
(petitioner) to use their money pending fulfillment of the conditions. They were deprived of the
use of their money for the period pending fulfillment of the conditions and when those
conditions were breached, they are entitled not only to the return of the principal amount paid,
but also to compensation for the use of their money. And the compensation for the use of their
money, absent any stipulation, should be the same rate of legal interest applicable to a loan since
the use or deprivation of funds is similar to a loan.

Petitioner’s unwarranted withholding of the money which rightfully pertains to respondent-

spouses amounts to forbearance of money which can be considered as an involuntary loan. Thus,
the applicable rate of interest is 12% per annum. In Eastern Shipping Lines, Inc. v. Court of
Appeals,35 cited in Crismina Garments, Inc. v. Court of Appeals,36 the Court suggested the
following guidelines:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on ‘Damages’ of the Civil Code govern in determining the measure of recoverable
damages.

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

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

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.37

Eastern Shipping Lines, Inc. v. Court of Appeals38 and its predecessor case, Reformina v.
Tongol39 both involved torts cases and hence, there was no forbearance of money, goods, or
credits. Further, the amount claimed (i.e., damages) could not be established with reasonable
certainty at the time the claim was made. Hence, we arrived at a different ruling in those cases.

Since the date of demand which is September 27, 2000 was satisfactorily established during trial,
then the interest rate of 12% should be reckoned from said date of demand until the principal
amount and the interest thereon is fully satisfied.

BARRERA VS LORENZO

The sole issue for our resolution is whether the 5% monthly interest on the loan was only for
three (3) months, or from May 14, 1991 up to August 14, 1991, as maintained by petitioners, or
until the loan was fully paid, as claimed by respondents.

It is clear from the above stipulations that the loan shall be payable within three (3) months, or
from May 14, 1991 up to August 14, 1991. During such period, the loan shall earn an interest of
5% per month. Furthermore, the contract shall have no force and effect once the loan shall have
been fully paid within the three-month period, otherwise, the mortgage shall be foreclosed
extrajudicially under Act No. 3135.

Records show that upon maturity of the loan on August 14, 1991, petitioners failed to pay their
entire obligation. Instead of exercising their right to have the mortgage foreclosed, respondents
allowed petitioners to pay the loan on a monthly installment basis until December, 1993. It bears
emphasis that there is no written agreement between the parties that the loan will continue to
bear 5% monthly interest beyond the agreed three-month period.

Article 1956 of the Civil Code mandates that (n)o interest shall be due unless it has been
expressly stipulated in writing. Applying this provision, the trial court correctly held that the
monthly interest of 5% corresponds only to the three-month period of the loan, or from May 14,
1991 to August 14, 1991, as agreed upon by the parties in writing. Thereafter, the interest rate for
the loan is 12% per annum.

EASTERN SHIPPING LINES VS CA

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when … IT HELD THAT THE GRANT OF
INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM
THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE
TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the
corresponding rulings rendered by the court.

In the "first group", a common time frame in the computation of the 6% interest per annum has
been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The "second group" varied on the commencement of the running of the legal interest. Malayan
held that the amount awarded should bear legal interest from the date of the decision of the court
a quo, explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the
date of the decision.'" American Express International v. IAC, introduced a different time frame
for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision
until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.

The factual circumstances may have called for different applications, guided by the rule that the
courts are vested with discretion, depending on the equities of each case, on the award of
interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest
the following rules of thumb for future guidance.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE
PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount
upon finality of this decision until the payment thereof.

SIGA-AN VS VILLANUEVA

Interest is a compensation fixed by the parties for the use or forbearance of money. This is
referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest.18 The right to interest arises only by
virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on
which interest is demanded.19

Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates that no
interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from
the foregoing provision, payment of monetary interest is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the agreement for the payment of interest
was reduced in writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any stipulation therefor
in writing is prohibited by law.21

It appears that petitioner and respondent did not agree on the payment of interest for the loan.
Neither was there convincing proof of written agreement between the two regarding the payment
of interest. Respondent testified that although she accepted petitioner’s offer of loan amounting
to ₱540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest on
the loan.22

There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states
that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a
legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on
the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or
damages for breach of contractual obligations. It cannot be charged as a compensation for the use
or forbearance of money. In other words, the two instances apply only to compensatory interest
and not to monetary interest.29 The case at bar involves petitioner’s claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was due
on the loan because there was no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not
apply to the instant case. Thus, he cannot be compelled to return the alleged excess amount paid
by respondent as interest.30

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been
no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be
applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision
provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the creditor who then
has the right to demand the return of payment made by mistake, and the person who has no right
to receive such payment becomes obligated to return the same. The quasi-contract of solutio
indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the
expense of another.31 The principle of solutio indebiti 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.32 We have held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest.33

It was duly established that respondent paid interest to petitioner. Respondent was under no duty
to make such payment because there was no express stipulation in writing to that effect. There
was no binding relation between petitioner and respondent as regards the payment of interest.
The payment was clearly a mistake. Since petitioner received something when there was no right
to demand it, he has an obligation to return it.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount
refundable to respondent computed from 3 March 1998 until its full payment. This is erroneous.

In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not
from a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on
the amount to be refunded as well as on the damages awarded and on the attorney’s fees, to be
computed from the time of the extra-judicial demand on 3 March 1998,46 up to the finality of this
Decision. In addition, the interest shall become 12% per annum from the finality of this Decision
up to its satisfaction.

ABELLA VS ABELLA

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.

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.

DINO VS JARDINES

There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous,
unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article
1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. In the ordinary course, the codal provision may be
invoked to annul the excessive stipulated interest.

Applying the afore-cited rulings to the instant case, the inescapable conclusion is that the agreed
interest rate of 9% per month or 108% per annum, as claimed by respondent; or 10% per month
or 120% per annum, as claimed by petitioner, is clearly excessive, iniquitous, unconscionable
and exorbitant. Although respondent admitted that she agreed to the interest rate of 9%, which
she believed was exorbitant, she explained that she was constrained to do so as she was badly in
need of money at that time. As declared in the Medel case19 and Imperial vs. Jaucian,20
"[i]niquitous and unconscionable stipulations on interest rates, penalties and attorney’s fees are
contrary to morals." Thus, in the present case, the rate of interest being charged on the principal
loan of P165,000.00, be it 9% or 10% per month, is void. The CA correctly reduced the
exorbitant rate to "legal interest."

In Eastern Shipping Lines, Inc. v. Court of Appeals, this Court ruled: 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.

Applied to the present case, since the agreed interest rate is void, the parties are considered to
have no stipulation regarding the interest rate. Thus, the rate of interest should be 12% per
annum to be computed from judicial or extrajudicial demand, subject to the provisions of Article
1169 of the Civil Code. The records do not show any of the circumstances enumerated above.
Consequently, the 12% interest should be reckoned from the date of extrajudicial demand.

The only evidence which clearly shows the date when petitioner made a demand on respondent
is the demand letter dated March 19, 1989, which was received by respondent or her agent on
March 29, 1989 per the Registry Return Receipt. Hence, the interest of 12% per annum should
only begin to run from March 29, 1989, the date respondent received the demand letter from
petitioner.

LIAM LAW VS OLYMPIC

Usury has been legally non-existent. Interest can now be charged as lender and borrower may
agree upon.

ADVOCATES FOR TRUTH IN LENDING VS BSP

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

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

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.

Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down
for being contrary to morals, if not against the law. Indeed, under Article 1409 of the Civil Code,
these contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor
may the right to set up their illegality as a defense be waived.

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

PNB VS CA

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate
freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward,
the interest previously stipulated. However, contrary to the stubborn insistence of petitioner
bank, the said law and circular did not authorize either party to unilaterally raise the interest rate
without the other's consent.

It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind.6

Similarly, contract changes must be made with the consent of the contracting parties. The minds
of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.

In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void . . . . Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the loan,
that license would have been null and void for being violative of the principle of mutuality
essential in contracts.

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

FLORENDO VS CA

We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it
does not make any reference to increases or decreases in the interest rate on loans.

However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation
provision, and therefore, the parties were and are bound by the said stipulation that "(t)he rate of
interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life
of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and
circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the
Mortgagee (respondent bank) may prescribe for its debtors . . . ."

The Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts
to maintain fiscal stability and to retain the value of money in long term contracts.

What is actually central to the disposition of this case is not really the validity of the escalation
clause but the retroactive enforcement of the ManCom Resolution as against petitioner-
employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no
Central Bank rule, regulation or other issuance which would have triggered an application of the
escalation clause as to her factual situation.

In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on
January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued
February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest
rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in
1982. These and other relevant CB issuances had already come into existence prior to the
perfection of the housing loan agreement and mortgage contract, and thus it may be said that
these regulations had been taken into consideration by the contracting parties when they first
entered into their loan contract. In light of the CB issuances in force at that time, respondent
bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate
for the housing loans of its employees, but it did not. In the subject loan, the respondent bank
knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB
issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and
the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were
concerned, all other onerous factors, such as employee resignations, which could have been used
to trigger an application of the escalation clause were considered barred or waived. If the
intention were otherwise, they — especially respondent bank — should have included such
factors in their loan agreement.

ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board,
cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate increase be in accordance
with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund
Board . . . may prescribe." Without such CB issuance, any proposed increased rate will never
become effective.

Let it be clear that this Court understands respondent bank's position that the concessional
interest rate was really intended as a means to remunerate its employees and thus an escalation
due to resignation would have been a valid stipulation. But no such stipulation was in fact made,
and thus the escalation provision could not be legally applied and enforced as against herein
petitioners.

JUICO VS CHINA BANKING

While the latter is not strictly an escalation clause, its clear import was that interest rates would
vary as determined by prevailing market rates. Evidently, the parties intended the interest on
petitioners’ loan, including any upward or downward adjustment, to be determined by the
prevailing market rates and not dictated by respondent’s policy. It may also be mentioned that
since the deregulation of bank rates in 1983, the Central Bank has shifted to a market-oriented
interest rate policy.

There is no indication that petitioners were coerced into agreeing with the foregoing provisions
of the promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply
business, admitted having understood his obligations before signing them. At no time did
petitioners protest the new rates imposed on their loan even when their property was foreclosed
by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent
the power to impose an increased rate of interest without a written notice to petitioners and their
written consent. Respondent’s monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing statement based on the new
imposed interest with corresponding computation of the total debt should have been provided by
the respondent to enable petitioners to make an informed decision. An appropriate form must
also be signed by the petitioners to indicate their conformity to the new rates. Compliance with
these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided
impositions do not have the force of law between the parties, because such impositions are not
based on the parties’ essential equality.45

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result
of an agreement between the parties. Unless such important change in the contract terms is
mutually agreed upon, it has no binding effect.46 In the absence of consent on the part of the
petitioners to the modifications in the interest rates, the adjusted rates cannot bind them. Hence,
we consider as invalid the interest rates in excess of 15%, the rate charged for the first year.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal
obligation under the two promissory notes which they failed to settle is ₱10,355,000. However,
due to China Bank’s unilateral increases in the interest rates from 15% to as high as 24.50% and
penalty charge of 1/10 of 1% per day or 36.5% per annum for the period November 4, 1999 to
February 23, 2001, petitioners’ balance ballooned to ₱19,201,776.63. Note that the original
amount of principal loan almost doubled in only 16 months. The Court also finds the penalty
charges imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or
12% per annum.

NACAR VS GALLERY FRAMES

By the nature of an illegal dismissal case, the reliefs continue to add up until full satisfaction, as
expressed under Article 279 of the Labor Code. The recomputation of the consequences of
illegal dismissal upon execution of the decision does not constitute an alteration or amendment
of the final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is not a violation of
the principle of immutability of final judgments.30

That the amount respondents shall now pay has greatly increased is a consequence that it cannot
avoid as it is the risk that it ran when it continued to seek recourses against the Labor Arbiter's
decision. Article 279 provides for the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when separation pay in lieu of
reinstatement is allowed. When that happens, the finality of the illegal dismissal decision
becomes the reckoning point instead of the reinstatement that the law decrees. In allowing
separation pay, the final decision effectively declares that the employment relationship ended so
that separation pay and backwages are to be computed up to that point.

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: 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.

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 Lines40 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.

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.1âwphi1

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:

a. 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.

b. 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
 (2210) at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.
c. 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.
 BPI vs IAC

The document which embodies the contract states that the US$3,000.00 was received by the
bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties
was really for the bank to safely keep the dollars and to return it to Zshornack at a later time,
Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later.

The above arrangement is a contract of depositum. A deposit is constituted from the moment a
person receives a thing belonging to another, with the obligation of safely keeping it and of
returning the same. If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.

Note that the object of the contract between Zshornack and COMTRUST was foreign exchange.
The parties did not intend to sell the US dollars to the Central Bank within one business day from
receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the
mere safekeeping of the greenbacks, without selling them to the Central Bank within one
business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must
be considered as one which falls under the general class of prohibited transactions.

Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a
cause of action against the other. When the nullity proceeds from the illegality of the cause or
object of the contract, and the act constitutes a criminal offense, both parties being in pari
delicto, they shall have no cause of action against each other. The only remedy is one on behalf
of the State to prosecute the parties for violating the law.

JAVELLANA vs LIM

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit
with the defendants a given sum of money which they were jointly and severally obliged to
return on a certain date fixed in the document. When the document was executed, it was
acknowledged that the amount deposited had not yet been returned to the creditor, and the return
was again stipulated with the further agreement that the amount deposited should bear interest at
the rate of 15 per cent per annum.

It must be understood that the debtors were lawfully authorized to make use of the amount
deposited, as they have done so. When Jose Lim went to the office of the creditor asking for an
extension of one year, since neither he nor the other defendant was able to return the amount
deposited, it was because he did not have in his possession the amount deposited, he having
made use of the same in his business and for his own profit. The creditor, by granting them the
extension, evidently confirmed the express permission previously given to use and dispose of the
amount deposited, which, in accordance with the loan, to all intents and purposes gratuitously.
Such conduct on the part of the debtors is unquestionable evidence that the transaction entered
into between the interested parties was not a deposit, but a real contract of loan.

The depository cannot make use of the thing deposited without the express permission of the
depositor. Otherwise he shall be liable for losses and damages. When the depository has
permission to make use of the thing deposited, the contract loses the character of a deposit and
becomes a loan or bailment. The permission shall not be presumed, and its existence must be
proven.

As a matter of course, it may be inferred here that there was no conversion of the deposit into a
loan, because the defendants received said amount by virtue of real loan contract under the name
of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly shown.

BARON vs DAVID

The palay was placed by the plaintiffs in the defendant's mill with the understanding that the
defendant was at liberty to convert it into rice and dispose of it at his pleasure. Considering the
active milling business and the daily iflux of palay, it was impossible to keep the plaintiffs' palay
segregated. It was in fact admitted that the plaintiffs' palay was mixed with that of others.

Necessarily, it becomes clear that all of the plaintiffs' palay, which was put in before June 1,
1920, has been milled and disposed of long prior to the fire. Furthermore, the proof shows that
when the fire occurred, there could not have been more than about 360 cavans of palay in the
mill, none of which by any reasonable probability could have been any part of the palay
delivered by the plaintiffs.

Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay
prior to the date of the fire, he is thus bound to account for its value, and his liability was not
extinguished by the occurrence of the fire.

Even supposing that the palay may have been delivered in the character of deposit, subject to
future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the
defendant might mill the palay and he has in fact appropriated it to his own use, he is of course
bound to account for its value.

Under article 1768 of the Civil Code, when the depository has permission to make use of the
thing deposited, the contract loses the character of mere deposit and becomes a loan or a
commodatum; and of course by appropriating the thing, the bailee becomes responsible for its
value.
In this connection we wholly reject the defendant's pretense that the palay delivered by the
plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability
of the defendant in any wise affected by the circumstance that, by a custom prevailing among
rice millers in this country, persons placing palay with them without special agreement as to
price are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a
thing that is sometimes done, though rarely.

INTEGRATED REALTY CORP vs PNB

Where a certificate of deposit in a bank, payable at a future day, was handed over by a debtor to
his creditor, it was not payment, unless there was an express agreement on the part of the creditor
to receive it as such, and the question whether there was or was not such an agreement, was one
of facts to be decided by the jury.

In the case at bar, it would not have been necessary on the part of IRC and Santos to execute
promissory notes in favor of PNB if the assignment of the time deposits of Santos was really
intended as an absolute conveyance. There are cogent reasons to conclude that the parties
intended said deed of assignment to complement the promissory notes.

For all intents and purposes, the deed of assignment in this case is actually a pledge. The
character of the transaction between the parties is to be determined by their intention, regardless
of what language was used or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was some other intention, it is
not a pledge.

The facts and circumstances leading to the execution of the deed of assignment, as found by the
court a quo and the respondent court, yield said conclusion that it is in fact a pledge. The deed of
assignment has satisfied the requirements of a contract of pledge (1) that it be constituted to
secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the
thing pledged; (3) that the persons constituting the pledge have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose. The further
requirement that the thing pledged be placed in the possession of the creditor, or of a third person
by common agreement was complied with by the execution of the deed of assignment in favor of
PNB.

GULLAS vs PNB

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor.

We next consider if that remedy was enforced properly.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of
a third party, it has been held that he has a right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the bank has applied the funds so deposited in
extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2
Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle it would
seem that notice is not necessary to a maker because the right is based on the doctrine that the
relationship is that of creditor and debtor.

However, as to an indorser, the situation is different, and notice should actually have been given
him in order that he might protect his interests. The general indorser of a negotiable instrument
engages that if it be dishonored and the necessary proceedings of dishonor be duly taken, he will
pay the amount thereof to the holder. In this connection, it has been held by a long line of
authorities that notice of dishonor is necessary in order to charge an indorser and that the right of
action against him does not accrue until the notice is given.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas
(indorser).

GUINGONA vs CITY FISCAL OF MANILA

Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans
and are to be covered by the law on loans. Current and saving deposits are loans to a bank
because it can use the same. Failure of the respondent Bank to honor the time deposit is failure to
pay its obligation as a debtor and not a breach of trust arising from a depositary's failure to return
the subject matter of the deposit.

Hence, the relationship between the private respondent and the Nation Savings and Loan
Association is that of creditor and debtor; consequently, the ownership of the amount deposited
was transmitted to the Bank upon the perfection of the contract and it can make use of the
amount deposited for its banking operations, such as to pay interests on deposits and to pay
withdrawals.

While the Bank has the obligation to return the amount deposited, it has, however, no obligation
to return or deliver the same money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation punishable under Article
315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the
public respondents have no- jurisdiction.

In order that a person can be convicted of estafa, it must be proven that he has the obligation to
deliver or return the some money, goods or personal property that he received. It can be readily
noted from the above-quoted provisions that in simple loan (mutuum), as contrasted to
commodatum, the borrower acquires ownership of the money, goods or personal property
borrowed Being the owner, the borrower can dispose of the thing borrowed and his act will not
be considered misappropriation thereof.
 BPI vs REYES

We are not disposed to believe private respondent's allegation that he did not give any verbal
authorization. His testimony is uncorroborated. Nor does he inspire credence. He concealed from
petitioner bank the death of Emeteria. As of that date, he knew that Emeteria was no longer
entitled to receive any pension. Nonetheless, he received the U.S. Treasury Warrant of Emeteria,
and deposited the same in Emeteria’s account. To pre-empt a refund, private respondent closed
his joint account with Emeteria and transferred its balance to his joint account with his wife,
Worse, private respondent declared under the penalties of perjury in the withdrawal slip 17 dated
March 8, 1990 that his co-depositor, Emeteria, is still living. By his acts, private respondent has
stripped himself of credibility.

Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other. When all the requisites mentioned in Article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even though
the creditors and debtors are not aware of the compensation. Legal compensation operates even
against the will of the interested parties and even without the consent of them. Since this
compensation takes place ipso jure, its effects arise on the very day on which all its requisites
concur. When used as a defense, it retroacts to the date when its requisites are fulfilled.

Article 1279 states that in order that compensation may be proper, it is necessary: (1) That each
one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other; (2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated; (3) That the
two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them
there be any retention or controversy, commenced by third persons and communicated in due
time to the debtor.

The elements of legal compensation are all present in the case at bar. The obligors bound
principally are at the same time creditors of each other. Petitioner bank stands as a debtor of the
private respondent, a depositor. At the same time, said bank is the creditor of the private
respondent with respect to the dishonored U.S. Treasury Warrant which the latter illegally
transferred to his joint account. The debts involved consist of a sum of money. They are due,
liquidated, and demandable. They are not claimed by a third person.

LUCMAN vs MALAWI

Although the pleading filed before the lower court was denominated as a Petition for Mandamus
With Prayer For Writ of Preliminary Injunction, the allegations thereof indicate that it is an
action for specific performance, particularly to compel petitioner to allow withdrawal of funds
from the accounts of the barangays headed by respondents with the LBP, Marawi Branch.
From the records of the case, it appears that the shares of the barangays in the IRA had already
been remitted by the DBM to the LBP Marawi Branch where they were kept in the accounts
opened in the names of the barangays.

By virtue of the deposits, there exists between the barangays as depositors and LBP a creditor-
debtor relationship. Fixed, savings, and current deposits of money in banks and similar
institutions are governed by the provisions concerning simple loan. In other words, the barangays
are the lenders while the bank is the borrower.

The relationship being contractual in nature, mandamus is therefore not an available remedy
since mandamus does not lie to enforce the performance of contractual obligations.
 ALLIED BANKING vs YUJUICO

The undertaking of Jesus was that of a surety, not a guarantor

Written on Genbank letterhead, the continuing guaranty dated 1966 and the continuing guaranty
dated 1967 contained identical principal provisions to the effect that: (a) he had guaranteed the
"punctual payment at maturity" of the loans secured by the continuing guaranty; (b) Genbank, as
the creditor bank of YLTC, could "make or cause" payments under the terms and conditions of
their loan agreement; (c) under paragraph II, Jesus had offered as security for the loans of YLTC
his own properties in the possession of Genbank or for which Genbank had attached a lien,
which, upon default by YLTC in paying the loan, Genbank, "without demand or notice" upon
respondent, would have the full power and authority to sell; (d) should YLTC incur in default,
Genbank could "proceed directly" against Jesus "without exhausting the property" of YLTC; and
(e) the liability of the signatory or signatories to the continuing guaranty would be "joint and
several."

The usage of term guaranty or guarantee in the caption of the documents, or of the word
guarantor in the contents of the documents did not conclusively characterize the nature of the
obligations assumed therein. What properly characterized and defined the undertakings were the
contents of the documents and the intention of the parties.

Guaranty Surety
The liability of the guarantor is secondary to Solidarily bound to the obligation of the
that of the principal debtor because he cannot principal debtor
be compelled to pay the creditor unless the
latter has exhausted all the property of the
debtor, and has resorted to all the legal
remedies against the debtor.
the insurer of the solvency of the debtor and the insurer of the debt, and he obligates
thus binds himself to pay if the principal is himself to pay if the principal does not pay
unable to pay

With the stipulations in the continuing guaranties indicating that he was the surety of the credit
line extended to YLTC, Jesus was solidarity liable to Genbank for the indebtedness of YLTC. In
other words, he thereby rendered himself "directly and primarily responsible" with YLTC,
"without reference to the solvency of the principal."

ERMA INDUSTRIES vs SECURITY BSNK

While respondent Ortiz signed the Credit Agreement as an officer of Erma, as shown by his
signature under Erma Industries Inc. (Borrower), this does not absolve him from liability because
he subsequently executed a Continuing Suretyship agreement wherein he guaranteed the "due
and full payment and performance" of all credit accommodations granted to Erma and bound
himself solidarily liable with Ernesto Marcelo for the obligations of Erma.

That he is a mere accommodation party is immaterial and does not discharge him as a surety. He
remains to be liable according to the character of his undertaking and the terms and conditions of
the Continuing Suretyship, which he signed in his personal capacity and not in representation of
Erma.

Individual gratuitous private surety/ Corporate surety/ compensated surety

accommodated surety
someone doing a rather foolish act for is in business to make a profit and charges a
praiseworthy motives premium depending upon the amount of
guaranty and the risk involved
usually does not prepare the note or bond like an insurance company, prepares the
which he signs instrument, which is a type of contract of
adhesion
assumed simply on the basis of the debtor's not bind itself until a full investigation has
representations and without legal advice been made
rule of strict construction of the surety contract rule of strictissimi juris is not applicable, and
is commonly applied to an accommodation courts apply the rules of interpretation . . . of
surety but is not extended to favor a appertaining to contracts of insurance
compensated corporate surety.
acts without motive of pecuniary gain and, business association organized for the purpose
hence, should be protected against unjust of assuming classified risks in large numbers,
pecuniary impoverishment by imposing on the for profit and on an impersonal basis, through
principal duties akin to those of a fiduciary. the medium of standardized written contractual
forms drawn by its own representatives with
the primary aim of protecting its own interests

The nature and extent of respondent Ortiz's liability are set out in clear and unmistakable terms
in the Continuing Suretyship agreement. Under its express terms, respondent Ortiz, as surety, is
"bound by all the terms and conditions of the credit instruments."[77] His liability is solidary with
the debtor and co-sureties; and the surety contract remains in full force and effect until full
payment of Erma's obligations to the Bank.

YULIM vs INTL EXCHANGE

In a contract of suretyship, one lends his credit by joining in the principal debtor’s obligation so
as to render himself directly and primarily responsible with him without reference to the
solvency of the principal.26 According to the above Article, if a person binds himself solidarily
with the principal debtor, the provisions on joint and solidary obligations, shall be observed.
Thus, where there is a concurrence of two or more creditors or of two or more debtors in one and
the same obligation, Article 1207 provides that among them, "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity."

"A surety is considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable." And it is well settled that when the obligor or obligors undertake to be "jointly and
severally" liable, it means that the obligation is solidary,28 as in this case.

There can be no mistaking the same import of Article I of the Continuing Surety Agreement
executed by the individual petitioners: Thereunder, in addition to binding themselves "jointly and
severally" with Yulim to "unconditionally and irrevocably guarantee full and complete payment"
of any and all credit accommodations that have been granted to Yulim, the petitioners further
warrant that their liability as sureties "shall be direct, immediate and not contingent upon the
pursuit [by] the BANK of whatever remedies it may have against the PRINCIPAL of other
securities."

There can thus be no doubt that the individual petitioners have bound themselves to be solidarily
liable with Yulim for the payment of its loan with iBank.

TRADERS INSURANCE vs DY ENG GIOK

FIRST REASON: In the absence of express stipulation, a guaranty or suretyship operates

prospectively and not retroactively; that is to say, it secures only the debts contracted after the
guaranty takes. This rule is a consequence of the statutory directive that a guaranty is not
presumed, but must be express, and cannot extend to more than what is stipulated.

To apply the payments made by the principal debtor to the obligations he contracted prior to the
guaranty is, in effect, to make the surety answer for debts incurred outside of the guaranteed
period, and this cannot be done without the express consent of the guarantor.

The suretyship agreement did not guarantee the payment of any outstanding balance due from
the principal debtor, Dy Eng Giok; but only that he would turn over the proceeds of the sales to
the Destilleria, and this he has done, since his remittances during the period of the guaranty
exceed the value of his sales. There is no evidence that these remittances did not come from his
sales.

SECOND REASON: Since the obligations of Dy Eng Giok between August 4, 1951 to August 4,
1952, were guaranteed, while his indebtedness prior to that period was not secured, then in the
absence of express application by the debtor, or of any receipt issued by the creditor specifying a
particular imputation of the payment, any partial payments made by him should be imputed or
applied to the debts that were guaranteed, since they are regarded as the more onerous debts from
the standpoint of the debtor. ART. 1254. When the payment cannot be applied in accordance with
the preceding rules, or if application cannot be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due, shall be deemed to have been satisfied.

Guaranteed debts are deemed more onerous to the debtor than the simple obligations because, in
their case, the debtor may be subjected to action not only by the creditor, but also by the
guarantor, and this even before the guaranteed debt is paid by the guarantor; hence, the payment
of the guaranteed debt liberates the debtor from liability to the creditor as well as to the
guarantor, while payment of the unsecured obligation only discharges him from possible action
by only one party, the unsecured creditor.

Guaranteed debts are deemed more onerous to the debtor than those not guaranteed, and entitled
to priority in the application of the debtor's payments.

It is thus clear that the payment voluntarily made by appellant was improper since it was not
liable under its bond; consequently, it cannot demand reimbursement from the counterbondsmen
but only from Dy Eng Giok, who was anyway benefited pro tanto by the Surety Company's
payment.

The present case is to be clearly distinguished from cases wherein the debt owned the creditor
one single debt of which only a portion was guaranteed. In those cases, guarantors had no right
to demand that the partial payments made by the principal debtor should be applied precisely to
the portion guaranteed. The legal rules of imputation of payments presuppose that the debtor
owes several distinct debts of the same nature; and does not distinguish between portions of the
same debt.

RCBC vs ARRO

The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique Go,
Sr., President and General Manager, respectively of Daicor, to cover existing as well as future
obligations which Daicor may incur with the petitioner bank, subject only to the proviso that
their liability shall not exceed at any one time the aggregate principal sum of P100,000.00

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, the comprehensive
surety agreement was admittedly in full force and effect. The loan was, therefore, covered by the
said agreement, and private respondent, even if he did not sign the promisory note, is liable by
virtue of the surety agreement. The only condition that would make him liable thereunder is that
the Borrower "is or may become liable as maker, endorser, acceptor or otherwise". There is no
doubt that Daicor is liable on the promissory note evidencing the indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note.

ESTATE OF HEMADY vs LUZON SURETY

The general rule is that a party's contractual rights and obligations are transmissible to the
successors. It is a consequence of the progressive "depersonalization" of patrimonial rights and
duties.

FIRST EXCEPTION? The nature of the obligation of the surety or guarantor does not warrant
the conclusion that his peculiar individual qualities are contemplated as a principal inducement
for the contract. Luzon Surety expects nothing but the reimbursement of the moneys that it might
have to disburse on account of the obligations of the principal debtors. This reimbursement is a
payment of a sum of money, resulting from an obligation to give; and to the Luzon Surety Co., it
was indifferent that the reimbursement should be made by Hemady himself or by some one else
in his behalf, so long as the money was paid to it.

SECOND EXCEPTION? It is intransmissibility by stipulation of the parties. Being exceptional

and contrary to the general rule, this intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable from the provisions of the contract
itself, and the text of the agreements sued upon nowhere indicate that they are non-transferable.

The Luzon Surety Co,. did not require bondsman Hemady to execute a mortgage indicates
nothing more than the company's faith and confidence in the financial stability of the surety, but
not that his obligation was strictly personal.

THIRD EXECEPTION? Third one is those "not transmissible by operation of law". The
provision makes reference to those cases where the law expresses that the rights or obligations
are extinguished by death, as is the case in legal support (Article 300), parental authority (Article
327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership (Article
1830 and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty
or suretyship (Articles 2047 to 2084) contain no provision that the guaranty is extinguished upon
the death of the guarantor or the surety.

One who is obliged to furnish a guarantor must present a person who possesses integrity,
capacity to bind himself, and sufficient property to answer for the obligation, which he
guarantees. The law requires these qualities to be present only at the time of the perfection of the
contract of guaranty. Once the contract has become perfected and binding, the supervening
incapacity of the guarantor would not operate to exonerate him of the eventual liability he has
contracted; and if that be true of his capacity to bind himself, it should also be true of his
integrity, which is a quality mentioned in the article alongside the capacity.

The supervening dishonesty of the guarantor (that is to say, the disappearance of his integrity
after he has become bound) does not terminate the contract but merely entitles the creditor to
demand a replacement of the guarantor. But the step remains optional in the creditor: it is his
right, not his duty; he may waive it if he chooses, and hold the guarantor to his bargain.

The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being
rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the
contracts themselves, nor by provision of law, his eventual liability thereunder necessarily passed
upon his death to his heirs.