Credtrans commodatum and mutuum

8/18/2019 Credtrans commodatum and mutuum

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Credit TransactionsCourse OutlineSY 2015-2016

Fiscal Blair DuraBased on Atty. Stephanie V. Gomez-Somera’s outline

The concept of credit

A.Credit, Debt, Security

1987 Philippine Constitution Article III, Section 20.

No person shall be imprisoned for debt or non-payment of a poll tax.

B.Credit and Credit Transaction dened

Credit transactions include a ll transactions involving th e purchase o rloan of goods, services, or money in the present with a promise to pay ordeliver i n the future.

Two types of credit transactions/contracts of security

1.Secured transactions or contracts of real security – supported by acollateral or an encumbrance of property

2. Unsecured transactions or con tracts of personal security – f ulllment

by the debtor is supported only by a promise to pay or the personalcommitment of another.

Truth in Lending Act, Section 3, par. 2:"Credit " means a ny loan, mortgage, deed of trust, advance, or discount;any conditional sales co ntract; any contract to s ell, or sale o r contract ofsale o f property or services, either for present or f uture d elivery, under


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which p art or all of the p rice is p ayable su bsequent to the m aking of suchsale o r contract; any rental-purchase co ntract; any contract or arrangement

for the hire, bailment, or leasig pledge, or other claim against, or f

any purchase, or ot her a cquisition of, or a ny credit upon the s ecurity of,any obligation of claim arising out of any of the foregoing; and anytransaction or series of transactions h aving a similar purpose o r effect.

Case: People vs. Concepcion, GR L-19190, November 29, 1922

Held: The "credit" of an individual means h is ability to borrow money by virtue of the condence or trust reposed by a lender that he i

he m ay promise. The concession of a "credit" necessarily involves t hegranting of "loans" up to the limit of the amount xed in the "credit”.(citations omitted)

C.Commercial Credit Transactions

Code of Commerce, Article 1The following a re m erchants for the p urposes o f this C ode:

1. Those who, having legal capacity to t rade, devote t hemselves theretocustomarily.

2. Commercial or i ndustrial associations which are formed in accordancewith this co de.

Articles 4 to 9 and 11 x the persons who may trade; who can not trade; and 15, the cond itions u nder which foreigners m ay doso.

Code of Commerce, Article 2

Commercial transactions, be they e xecuted by merchants or not, whetherthey are s pecied in this C ode o r not, shall be g overned by the p rovisionscontained in the sa me; in the a bsence of which, by the com mercial customsgenerally observed in each p lace; and in the a bsence of both, by those ofthe common law.


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Commercial transactions sh all be con sidered those em braced in this Codeand any others o f a similar character.

Code of Commerce, Article 3

The legal presumption of a customary engagement in commerce exists f romthe t ime t he p erson who d esires to t rade g ives n otice t hrough circulars,newspapers, handbills, posters exhibited to t he public, or i n any othermanner whatsoever, of an establishment, the p urpose o f which is t oconduct any commercial transaction.

Part 1. LOAN

The concept of loan

A.General Concepts

Civil Code, Article 1933By the contract of loan, one of the parties delivers to another, eithersomething not consumable so t hat the latter may use t he sa me for acertain time a nd return it, in which case the co ntract is ca lled acommodatum; or money or other consumable thing, upon the cond ition that

the sa me a mount of the sa me k ind and quality shall be paid, in whichcase the con tract is si mply called a loan or mutuum.

Commodatum is esse ntially gratuitous.

Simple l oan may be gratuitous o r with a stipulation to p ay interest.

In commodatum the b ailor retains t he ow nership of the thing loaned, whilein simple loan, ownership passes t o the b orrower.

B.Obligation to deliver

Civil Code, Article 1934 An accepted promise to deliver something by way of commodatum or

simple loan is b inding u pon parties, but the com modatum or simple loanitself shall not b e perfected until the delivery of the object of t he contract.


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Case: Garcia vs. Thio GR 154878, March 6, 2007 (copied fromhttp://lextheorica.blogspot.com/2012/02/garcia-vs-thio-credit-digest.html )

Facts: Respondent Thio received from petitioner Garcia two crossedchecks which amount to US$100,000 and US$500,000, respectively,payable to the order of Marilou Santiago. According to petitioner,respondent failed to pay the principal amounts of the loans when theyfell due and so she led a com plaint for sum of money and damages withthe RTC. Respondent denied that she contracted the two loans andcountered that it was Marilou Santiago to whom petitioner lent themoney. She claimed she was merely asked by petitioner to give thechecks to Santiago. She issued the checks for P76,000 and P20,000 notas payment of interest but to accommodate petitioner’s request that

respondent use her own checks instead of Santiago’s.

Issue: Was there a contract of loan between the parties?Held: Yes, there was. A loan is a real contract, not consensual, and assuch is p erfected only u pon the delivery o f the object of the contract.Upon delivery of the contract of loan (in this ca se t he money was received

by the debtor when the checks were encashed), the debtor acquiresownership of such money or loan proceeds and is bound to pay thecreditor an equal amount. It is u ndisputed that the checks were deliveredto respondent.

Issue 2: Who borrowed money from petitioner, the respondent or MarilouSantiago?

Held: The checks were crossed and payable not to the order of therespondent but to the order of a certain Marilou Santiago. Delivery is t heact by which the res or su bstance is thereof placed within the actual orconstructive possession or con trol of another. Although respondent didnot physically receive the proceeds of the checks, these instruments were

placed in her control and possession under an arrangement whereby sheactually re-lent the amount to Santiago.

C.Kinds of loan

1.Object of a loanCivil Code, Article 1933

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By the contract of l oan, one of the parties delivers to another, eithersomething not consumable so t hat the latter may use t he sa me for acertain time a nd return it, in which case the co ntract is ca lled acommodatum; or money or other consumable thing, upon the cond itionthat the sa me a mount of the sa me k ind and quality shall be paid, inwhich case the con tract is si mply called a loan or mutuum. xxx

Civil Code, Article 418Movable p roperty is ei ther consumable or non-consumable. To the rstclass bel ong those m ovables w hich cannot be used in a mannerappropriate t o their nature w ithout their being co nsumed; to the s econdclass belong all the others.

2.Consideration of a loanCivil Code, Article 1933

XxxCommodatum is es sentially gratuitous.

Simple l oan may be g ratuitous o r with a stipulation to pay interest.

3.Obligation to return or pay

Civil Code, Article 1933By the contract of l oan, one of the parties delivers to another, eithersomething not consumable so t hat the latter may use t he sa me for acertain time a nd return it, in which case the co ntract is ca lled acommodatum; or money or other consumable thing, upon the cond itionthat the sa me a mount of the sa me k ind and quality shall be paid, inwhich case the con tract is si mply called a loan or mutuum. xxx

Civil Code, Article 1232 – 1233 Article 1232. Payment means not only the delivery of money but also

the p erformance, in any other manner, of an obligation.

Article 1233. A debt shall not be understood to have been the t hing or servi ce i n which the o bligation consists h as b een completelydelivered or rendered, as t he ca se m ay be.


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D.Contract to Loan

Civil Code, Article 1934

An accepted promise to deliver something by way of commodatum orsimple loan is b inding u pon parties, but the com modatum or simple loanitself shall not b e perfected until the delivery of the object of t he contract.

Case 1: Saura Import and Export Co. Inc. vs. DBP GR L-24968, April27, 1972 (copied from http://antslegal.blogspot.com/2011/12/digests-credit-transactions.html )

Facts: Saura Inc. applied to the Rehabilitation Finance Corp (before i tsconversion to DBP) for a l oan of 500k secured by a rst mortgage of thefactory building to nance for t he construction of a jute m ill factory andpurchase of factory implements. RFC accepted and approved the loanapplication subject to some conditions which Saura admitted it could notcomply with. Without having received the amount being loaned, andsensing that it could not at anyway obtain the full amount of loan, SauraInc. then asked for can cellation of the mortgage which RFC alsoapproved. Nine years af ter the cancellation of the mortgage, Saura suedRFC for d amages for its n on-fulllment of obligations a rguing th at there

was indeed a perfected consensual contract between them.

Issue: Was there a perfected consensual contract? Was there a realcontract of loan which would warrant recovery of damages a rising out of

breach of such contract?

Held: On the rst issue, yes, there was indeed a perfected consensualcontract, as recognized in Article 1934 of the Civil Code. There wasundoubtedly offer and acceptance in this case: the application of Saura,Inc. for a l oan of P500,000.00 was ap proved by resolution of thedefendant, and the corresponding mortgage was executed and registered.But this fact alone falls sh ort of resolving th e seco nd issue and the basicclaim that the defendant failed to fulll its obligation and the p laintiff istherefore en titled to recover damages. The action thus taken by bothparties—Saura's request for cancellation and RFC's su bsequent approvalof such cancellation—was in the nature of mutual desistance — what

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Manresa terms "mutuo disenso"— which is a m ode of extinguishingobligations. It is a concept derived from the principle t hat since m utualagreement can create a con tract, mutual disagreement by the parties cancause its ext inguishment. In view of such extinguishment, said perfectedconsensual contract to deliver d id not constitute a rea l contract of loan.

Case 2: BPI Investment vs. CA, ALS Management and DevelopmentGR 133632, February 15, 2002

ISSUE: Whether or not a contract of loan is a con sensual contract.

HELD: A loan contract is not a consensual contract but a real contract. Itis p erfected only upon delivery o f the object of the contract. A contract ofloan involves a reciprocal obligation, wherein the obligation or p romise o feach party is t he consideration for that of the oth er; it is a basic principlein reciprocal obligations th at neither p arty incurs i n delay, if the otherdoes not comply or is not ready to comply is a p roper manner with whatis incumbent upon him.

Case 3: Pantaleon vs. American Express International Inc. GR

174269, August 25, 2010

Important do ctrines:

1.Nature of credit card t ransactionsEvery credit card transaction involves three contracts, namely: (a)the sales contract between the credit card h older and the merchant orthe business establishment which accepted the credit card; (b)the loan agreement between the credit card issuer an d the credit cardholder; and lastly, (c) the promise to pay between the credit cardissuer and the merchant or business establishment.

2.Credit card issuer-cardholder relationshipthe relationship between the credit car d issuer and the credit cardholder as a contractual one that is governed by the terms andconditions found in the card membership agreement. [21] This contractprovides the rights and liabilities of a credit card company to itscardholders an d vice versa.

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3.The contractual relationship from the creditor-debtor relationship which only arises after the credit card issuer has approved the

cardholders purchase request involves the actual credit on loan

agreement involving three contracts, namely: the salescontract between the credit card holder and the merchant or the

business establishment which accepted the credit card; the loanagreement between the credit card issuer an d the credit card holder;and the promise to pay between the credit card issuer and themerchant or business establishment.

4.The use of a credit card to pay for a p urchase is only an offer to the

credit card company to enter a l oan agreement with the credit cardholder. Before the credit ca rd issuer a ccepts this offer, no obligationrelating to the loan agreement exists between them.

Commodatum

A.General ConceptsCivil Code, Article 1933

By the contract of loan, one of the parties delivers to another, eithersomething not consumable so t hat the latter may use t he sa me for acertain time a nd return it, in which case the co ntract is ca lled acommodatum; or money or other consumable thing, upon the cond ition thatthe sa me a mount of the sa me k ind and quality shall be paid, in whichcase the con tract is si mply called a loan or mutuum.




B.Object of commodatum


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Civil Code, Article 1936Consumable goods m ay be the su bject of commodatum if the purpose ofthe co ntract is n ot the co nsumption of the object, as when it is m erely for

exhibition.

Civil Code, Article 1937Movable or immovable property may be the object of commodatum.

Case: Producers Bank vs. CA GR 115324, February 19, 2003

Held: If consumable goods a re loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to

have the very same goods returned at the end of the period agreed upon,the loan is a commodatum and not a mutuum.

The rule is that the intention of the partiprimordial consideration in determining the act ual character of acontract. In case of doubt, the contemporaneous and subsequent acts ofthe parties sh all be considered in such determination.

C.Consideration in commodatum


xxxCommodatum is esse ntially gratuitous.


The bailee in commodatum acquires t he u sed of the thing loaned but not its fruits; if any compensation is to be

contract ceases t o be a commodatum.

Civil Code, Article 1939Commodatum is p urely personal in character. Consequently:


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(1) The death of either t he bailor or t he bailee extinguishes the contract;

(2) The bailee can neither l end nor l ease the object of the contract to a third

person. However, the members of the bailee's household may make use of

the t hing loaned, unless t here is a stipulation to t he contrary, or u nless thenature of the thing forbids such use.

D. Parties to a com modatum

1. Ownership by bailor

Civil Code, Article 1938The b ailor in commodatum need not be the ow ner of the thing loaned.

Civil Code, Article 1933xxx In commodatum the b ailor retains t he ow nership of the thing

loaned, while in simple loan, ownership passes t o the b orrower.

2.Use by bailee

Civil Code, Article 1935The bailee in commodatum acquires t he u sed of the thing loaned but

not its f ruits; if any compensation is t o b e p aid by him who a cquires theuse, the contract ceases t o be a commodatum.

Civil Code, Article 1939, par. 2Commodatum is p urely personal in character. Consequently:

xxx

(2) The b ailee can neither l end nor l ease the o bject of the co ntract to a

third person. However, the m embers of the b ailee's h ousehold maymake u se of the t hing loaned, unless t here is a stipulation to the

contrary, or unless t he n ature o f the t hing forbids s uch use.

3. Solidary liability of bailees


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Civil Code, Article 1945When there a re two or more bailees t o w hom a thing is loaned in the

same contract, they are l iable s olidarily.

E.Liability for expenses and damages

1. Ordinary expenses

Civil Code, Article 1933 By the contract of l oan, one of the parties delivers to another, eithersomething not consumable so t hat the latter may use t he sa me for acertain time a nd return it, in which case the co ntract is ca lled acommodatum; or money or other consumable thing, upon the cond itionthat the sa me a mount of the sa me k ind and quality shall be paid, inwhich case the con tract is si mply called a loan or mutuum.

Commodatum is es sentially gratuitous.

Simple l oan may be g ratuitous o r with a stipulation to pay interest.

In commodatum the b ailor retains t he ow nership of the thing loaned,while in simple loan, ownership passes t o the b orrower.

Civil Code, Article 1935The bailee in commodatum acquires t he u sed of the thing loaned butnot its f ruits; if any compensation is t o b e p aid by him who a cquires theuse, the contract ceases t o be a commodatum.

Civil Code, Article 1941The b ailee is ob liged to p ay for the or dinary expenses for the u se a nd

preservation of the thing loaned.

Civil Code, Article 1943The b ailee does not answer for the d eterioration of the t hing loaned due

only to the u se thereof and without his f ault.

Case: Pajuyo vs. CA GR 146364, June 3, 2004


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Held: In a contract of commodatum, one of the parties delivers toanother something not consumable so t hat the latter may use thesame for a certain time and return it. An essential feature ofcommodatum is that it is gratuitous. Another feature of commodatumis t hat the u se o f the thing belonging to another i s for a certainperiod. Thus, the bailor can not demand the return of the thing loaneduntil after exp iration of the period stipulated, or a fter acc omplishmentof the use for which the commodatum is constituted. If the bailorshould have urgent need of the thing, he may demand its return fortemporary use. If the u se o f the t hing is m erely tolerated by th e bailor,he can demand the return of the thing at will, in which case thecontractual relation is ca lled a precarium. Under t he Civil Code,precarium is a ki nd of commodatum. The Kasunduan reveals that the

accommodation accorded by Pajuyo to Guevarra was not essentiallygratuitous. While the Kasunduan did not require Guevarra to payrent, it obligated him to maintain the property in good condition. Theimposition of this obligation makes the Kasunduan a contractdifferent from a commodatum. The effects of the Kasunduan are alsodifferent from that of a commodatum. Case law on ejectment hastreated relationship based on tolerance as on e that is akin to alandlord-tenant relationship where the withdrawal of permission

would result in the termination of the lease. The tenant’s withholdingof the property would then be unlawful.

2.Extraordinary expenses

Civil Code, Article 1949The bailor sh all refund the extraordinary expenses d uring the con tract

for the preservation of the thing loaned, provi

same to the k nowledge of the b ailor before incurring them, except when

they are s o u rgent that the r eply to the n otication cannot be a waited

without danger.

If the e xtraordinary expenses a rise on the o ccasion of the a ctual use of

the t hing b y the b ailee, even though he a cted without fault, they shall

be b orne equally by both the b ailor an d the b ailee, unless there i s a

stipulation to t he contrary.


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3.Other expenses

Civil Code, Article 1950If, for the p urpose o f making u se of a thing, the b ailee incurs e xpenses

other t han those r eferred to in Article 1 941 and Article 1 949, he i s n otentitled to reimbursement.

4.Abandonment by bailor

Civil Code, Article 1952 The bailor cannot exempt himself from the payment of expenses or

damages by a bandoning the thing to the bailee.

F. Liability for loss

Civil Code, Article 1933By the contract of loan, one of the parties delivers to another, either

something not consumable so t hat the latter may use t he sa me for a

certain time a nd return it, in which case the co ntract is ca lled a

commodatum; or money or other consumable thing, upon the cond ition that

the sa me a mount of the sa me k ind and quality shall be paid, in which

case the con tract is si mply called a loan or mutuum.




Civil Code, Article 1 942The bailee is liable for t he loss of the thing, even if it should be through a fortuitous event:

(1)If he d evotes the t hing to a ny purpose d ifferent from that for w hich ithas been l oaned;


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(2)If he keeps it longer t han the period stipulated, or a fter t heaccomplishment of the use f or which the commodatum has beenconstituted;

(3)If the t hing loaned has b een delivered with appraisal of its v alue,unless there is a stipulation exemption the b ailee from responsibility incase of a fortuitous e vent;

(4)If he lends or l eases the t hing to a third person, who is n ot a member ofhis h ousehold;

(5) If, being able to save either t he t hing borrowed or h is o wn thing, hechose to save the latter.

Case: Republic vs. Bagtas GR L-17474, October 25, 1962 (copied fromhttps://thelawiscool.wordpress.com/2014/02/20/republic-v-bagtas/ )

Facts: Bagtas borrowed three bulls from the Bureau of Animal Industryfor on e year f or breeding purposes su bject to payment of breeding fee of10% of book value of the bull. Upon expiration, Bagtas a sked for renewal.

The renewal was granted only to one bull. Bagtas offered to buy the bullsat its book value less d epreciation but the Bureau refused. The Bureausaid that Bagtas sh ould either return or bu y it at book value. Bagtas

proved that he already returned two of the bulls, and the other bu ll diedduring a Huk raid, hence, obligation already extinguished. He claimsthat the contract is a com modatum hence, loss through fortuitous eventshould be borne by t he owner.

Issue: WON Bagtas is liable for t he death of the bull.

Held: Yes. Commodatum is essen tially gratuitous. However, in this case,

there is a 1 0% charge. If this is con sidered compensation, then the caseat bar is a lease. Lessee is liable as p ossessor in bad faith because t heperiod already lapsed.

Even if this is a commodatum, Bagtas is st ill liable because t hefortuitous event happened when he held the bull and the periodstipulated already expired and he is liable because t he thing loaned was

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delivered with appraisal of value an d there was no contrary st ipulationregarding his l iability in case there i s a fortuitous e vent

G.Obligation to return

1.General concepts

Civil Code, Article 1 946The b ailor can not demand the r eturn of the t hing loaned till after t he

expiration of the p eriod stipulated, or a fter t he a ccomplishment of the

use f or which the com modatum has b een constituted. However, if in the

meantime, he sh ould have urgent need of the thing, he may demand its

return or temporary use.

In case of temporary use b y the b ailor, the con tract of commodatum is

suspended while t he thing is i n the p ossession of the bailor.

Civil Code, Article 1 947The b ailor m ay demand the t hing at will, and the con tractual relation iscalled a precarium, in the following cases:

(1)If neither t he duration of the contract nor t he use to which the thingloaned should be d evoted, has b een stipulated; or

(2) If the u se of the thing is m erely tolerated by the o wner.

Civil Code, Article 1 948The b ailor may demand the immediate return of the thing if the b ailee

commits a ny act of ingratitude s pecied in Article 7 65.

Case: Quintos & Ansaldo vs. Beck GR L-46240, November 3, 1939

Held: The contract entered into between the parties is oneof commadatum, because under it the plaintiff gratuitously grantedthe u se o f the furniture t o th e defendant, reserving for h erself theownership thereof; by this contract the defendant bound himself to


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return the furniture to the plaintiff, upon the latter’s demand. Theobligation voluntarily assumed by the defendant to return thefurniture upon the plaintiff's demand, means that he should returnall of them to the plaintiff at the latter's resi dence or h ouse. The

defendant did not comply with this obligation when he merely placedthem at the d isposal of the p laintiff, retaining for h is b enet the t hreegas h eaters an d the four electric lamps. The provisions of article 1169of the Civil Code cited by counsel for t he parties a re n ot squarelyapplicable. The trial court, therefore, erred when it came to th e legalconclusion that the plaintiff failed to comply with her ob ligation to getthe furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all thefurniture to the plaintiff, upon the latter's d emand, the Court couldnot legally compel her to bear the expenses occa sioned by the depositof the furniture a t the defendant's b ehest. The latter, as b ailee, wasnot entitled to place th e furniture on deposit; nor was t he p laintiffunder a duty to accept the offer to return the furniture, because thedefendant wanted to retain the three gas h eaters a nd the four electriclamps.

As to the value of the furniture, we do not believe that the entitled to the payment thereof by the defendant in case of hisinability to return some of the furniture because u nder paragraph 6 ofthe st ipulation of facts, the defendant has n either ag reed to noradmitted the correct ness o f the sa id value. Should the defendant failto deliver som e of the furniture, the value thereof should be latterdetermined by the trial Court through evidence which the parties maydesire t o present.

2.Right of retention of bailee

Civil Code, Article 1944The bailee cannot retain the thing loaned on the g round that the bailor

owes h im something, even though it may be by reason of expenses.


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However, the b ailee has a right of retention for damages mentioned in

Article 1951.


The b ailor who, knowing the aws of the thing loaned, does n ot advisethe b ailee of the s ame, shall be liable to the l atter f or t he damages

which he may suffer by reason thereof.

Simple Loan

A.General concepts

Civil Code, Article 1933.By the contract of loan , one of t he parties delivers to another, either

something not consumable so t hat the latter may use t he sa me for a

certain time a nd return it, in which case the co ntract is ca lled a

commodatum ; or money or other consumable t hing, upon the con dition

that the sa me a mount of the sa me k ind and quality shall be paid, in which

case the co ntract is s imply called a loan or mutuum .





Fixed, savings, and current deposits of money in banks a nd similarinstitutions s hall be g overned by the p rovisions co ncerning s imple loan.

B.Object of simple loan



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xxx money or other consumable thing, upon the con dition that the sa meamount of the sa me k ind and quality shall be p aid, in which case thecontract is s imply called a loan or mutuum . xxx


A person who receives a loan of money or any other fungib

the ow nership thereof, and is b ound to pay to the creditor an equal amount

of the sa me k ind and quality.

Civil Code, Article 1954 A contract whereby one person transfers the ownership of

things to another w ith the obligation on the part of the latter t o give things

of the same kind, quantity, and quality shall be considered a barter.

Act No. 2137, The Warehouse Receipts Law, Section 58“Fungible go ods” m eans g oods of which any unit is, from its n ature b y

mercantile cu stom, treated as t he e quivalent of any other u nit.

Case 1: People vs. Puig & Porras GR 173654-765, August 28, 2008

Doctrines:

1. Depositors who place their money with the bank are consideredcreditors of the bank. The bank acquires ownership of the moneydeposited by its clients, making the money taken by respondents as

belonging to the bank.

2. The relationship between banks and depositors has been held to bethat of creditor an d debtor. (See Articles 1953 and 1980 of the NewCivil Code)

3. The Bank acquires ownership of the money deposited by its clients;and the employees of the Bank, who are entrusted with thepossession of money of the Bank due to the condence reposed inthem, occupy positions of condence. The Informations, therefore,sufficiently allege a ll the esse ntial elements constituting the cri me ofQualied Theft.


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Case 2: BPI Family Bank vs. Franco GR 123498, November 23, 2007

Held: As there is a d ebtor-creditor relationship between a bank and its

depositor, BPI-FB ultimately acquired ownership of Franco’s deposits, but such ownership is coupled with a corresponding obligation to pay

him an equal amount on demand. Although BPI-FB owns the deposits inFranco’s accounts, it cannot prevent him from demanding payment ofBPI-FB’s obligation by drawing checks against his cu rrent account, orasking for the release of the funds in his savings account. Thus, whenFranco issued checks drawn against his current account, he had everyright as cre ditor to expect that those checks would be honored by BPI-FB

as d ebtor.

C.Obligation to pay

Civil Code, Article 1955The ob ligation of a person who borrows m oney shall be governed by the

provisions of Articles 1249 and 1250 of this ode

If what was loaned is a fungible t hing other than money, the d ebtor owesanother t hing o f the s ame k ind, quantity and quality, even if it should

change in value. In case it is i mpossible t o deliver the s ame k ind, its v alue

at the t ime o f the p erfection of the l oan shall be p aid.

Civil Code, Article 1249The p ayment of debts in money shall be made in the curr ency st ipulated,

and if it is n ot possible t o d eliver such currency, then in the cu rrency which

is legal tender in the Philippines.

The d elivery of promissory n otes payable t o o rder, or bi lls o f exchange or

other mercantile d ocuments sh all produce the eff ect of payment only w hen

they have b een cashed, or when through the fault of the cr editor they have

been impaired.


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In the m eantime, the a ction derived from the o riginal obligation shall be

held in the a beyance.

Civil Code, Article 1250In case an extraordinary ination or d eation of the currency stipulated

should supervene, the va lue o f the cu rrency at the t ime of the

establishment of the obligation shall be the b asis o f payment, unless t here

is a n agreement to the con trary.

D.Interest

1.Conventional interesta.General Concepts

Civil Code, Article 1933 xxx Simple loan may be gr atuitous or with a stipulation to pay

interest. xxx

Civil Code, Article 1956No interest shall be d ue u nless i t has b een expressly stipulated in

writing.

Civil Code, Article 1306The contracting parties may establish such stipulations, clauses,

terms a nd conditions a s t hey may deem convenient, provided they

are not contrary to law, morals, good customs, public or der, or pu blic

policy.

Civil Code, Article 1253If the debt produces interest, payment of the principal shall not be

deemed to have be en made until the interests h ave be en covered.



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In the determination of t he interest, if it is payable in kind, its value

shall be a ppraised at the cu rrent price of the p roducts o r goods a t

the time a nd place of payment.

Civil Code, Article 1960If the b orrower pays interest when there h as b een no st ipulation

therefor, the provisions of this Code concerning solutio indebiti, or

natural obligations, shall be a pplied, as t he ca se may be.

Civil Code, Article 2154If something is r eceived when there is no right to d emand it, and it

was u nduly delivered through mistake, the o bligation to return it

arises.

Civil Code, Article 1423Obligations are civil or n atural. Civil obligations give a right of action

to compel their performance. Natural obligations, not being based on

positive law but on equity and natural law, do not grant a r

action to e nforce t heir performance, but after vol untary fulllment by

the o bligor, they authorize the r etention of what has b een delivered

or rendered by reason thereof. Some n atural obligations a re s et forth

in the following articles.

b.Monetary interest

Case 1: Frias vs. San Diego-Sison GR 155223, April 3, 2007

Held: The payment of regular interest constitutes t he price or costof the use of money and thus, until the principal sum due is

returned to th e cred itor, regular interest continues t o accrue sincethe debtor continues to use such principal amount. It has beenheld that for a debtor t o continue in possession of the principal ofthe loan and to continue to use the sam e after maturity of the loan

without payment of the monetary interest, would constitute unjustenrichment on the part of the debtor at the expense of the creditor.


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Case 2: Siga-an vs. Villanueva GR 173227, January 20, 2009(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )

Interests:a) Monetary interest is a compensation xed by the parties forthe use or forbearance of money.

b) Compensatory interest - imposed by law or by courts aspenalty or i ndemnity for damages.

The right to interest arises only by virtue of a contract or by vof damages for delay or failure to pay the principal loan on whichinterest is demanded.

Article 1956 of the Civil Code, which refers to monetaryinterest, specically mandates t hat no interest shall be due unlessit has been expressly st ipulated in writing.

I. Hence, payment of monetary interest is a llowed only if:1) there was an express st ipulation for the payment of interest; and2) 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 h eld that collection of interest without any stipulation therefor in writing is prohibited by law.

Monetary interest is due only when these requirements arepresent.

II. However, there are instances in which an interest may beimposed even in the absence of express st ipulation, verbal or

written, regarding payment of interest. Article 2209 of the CivilCode states that if the obligation consists in the payment of a su mof money, and the debtor incurs delay, a legal interest of 12% (now6%) per annum may be imposed as indemnity for damages if nostipulation on the payment of interest was agreed upon.(Compensatory interest)

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This interest may be imposed only as a penalty or damages for breach of contractual obligations. It cannot be charged as a

compensation for the use or f orbearance of money. This appliesonly to compensatory interest and not to monetary interest.

Solutio IndebitiUnder Article 1960 of the Civil Code, if the borrower of loan paysinterest when there has been no st ipulation therefor, the provisionsof the Civil Code concerning solutio indebiti shall be applied.

Article 2154 provides that if something is received when there is noright to demand it, and it was unduly delivered through mistake,the obligation to return it arises. We have held that the principleof solutio indebiti applies in case of erroneous payment of undue

interest.

HELD: It was duly established that respondent paid interest topetitioner. 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 t he payment of interest. The payment was clearly amistake. Since petitioner received something when there was n oright to demand it, he has a n obligation to ret urn it.

c. Interest rate

Usury Law, Section 1The r ate o f interest for t he l oan or forbearance of any money goods,

or credits a nd the r ate a llowed in judgments, in the a bsence of

express contract as to such rate of interest, shall be six per cen tum

per annum or such rate as may be prescribed by the Monetary

Board of the C entral Bank of the P hilippines for t hat purpose inaccordance w ith the authority hereby granted.

d.Escalation clauses



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The contract must bind both contracting parties; its validity or

compliance ca nnot be left to the w ill of one o f them.

Usury Law, Section 7

All covenants and stipulations contained in conveyances, mortgages,bonds, bills, notes, and other con tracts or evi dences of debts, and all

deposits o f goods o r other things, whereupon or whereby there s hall

be st ipulated, charged, demanded, reserved, secured, taken, or

received, directly or indirectly, a higher rate o r greater sum or va lue

for the loan or renewal or forbearance of money, goods, or credi

than is h ereinbefore a llowed, shall be vo id: Provided, however, That

no merely clerical error i n the computation of interest, made w ithout

intent to e vade a ny of the p rovisions o f this Act, shall render a

contract void: Provided, further, That parties to a loan agreement, the

proceeds of which may be availed of partially or fully at some f

time, may stipulate t hat the r ate o f interest agreed upon at the t ime

the loan agreement is entered into, which rate s hall not exceed the

maximum allowed by law, shall prevail notwithstanding su bsequent

changes in the maximum rates that may be made by t he Monetary

Board: And Provided, nally, That nothing h erein contained shall be

construed to prevent the p urchase b y an innocent purchaser of a

negotiable mercantile paper, usurious or ot herwise, for va luable

consideration before m aturity, when there h as b een no intention on

the part of said purchaser to e vade t he p rovisions of this Act and

said purchase was not a part of the original usurious transaction. In

any case, however, the m aker of said note sh all have t he r ight to

recover from said original holder the w hole interest paid by him

thereon and, in case of litigation, also the co sts a nd such attorney's

fees as may be allowed by the court.

Usury Law, Section 7-aParties to a n agreement pertaining to a loan or forbearance o f

money, goods o r credits m ay stipulate t hat the r ate o f interest agreed

upon may be increased in the event that the a pplicable maximum

rate o f interest is i ncreased by law or by the Monetary


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Board: Provided, That such stipulation shall be v alid only if there i s

also a stipulation in the a greement that the ra te o f interest agreed

upon shall be reduced in the even t that the a pplicable m aximum rate

of interest is r educed by law or by the Monetary

Board: Provided, further, That the a djustment in the r ate o f interestagreed upon shall take effect on or after the effectivity of the

increase o r decrease i n the m aximum rate of interest.

Case 1: Spouses Juico vs. China Bank GR 187678, April 10,

2013 (copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )

RULES on Escalation Clauses:

a)Escalation clauses are n ot void per se.

Escalation clauses refer t o st ipulations a llowing an increase in theinterest rate agreed upon by the con tracting parties. This Courthas long recognized that there is nothing inherently wrong withescalation clauses w hich are valid stipulations in commercialcontracts to maintain scal stability and to ret ain the value ofmoney in long term contracts. Hence, such stipulations a re not

void per se.

b)Escalation clauses violating the principle of mutuality ofcontracts a re void.

Nevertheless, an escalation clause "which grants the creditor anunbridled right to adjust the interest independently and upwardly,completely depriving the debtor of the right to assent to animportant modication in the agreement" is void. A stipulation ofsuch nature violates t he principle of mutuality of contracts. Thus,

this Court has previously nullied the unilateral determinationand imposition by cred itor b anks of increases in the rat e of interestprovided in loan contracts.

Ø Banco Filipino Savings & Mortgage Bank v. Navarro: Whileescalation clauses i n general are co nsidered valid, we ru led thatBanco Filipino may not increase t he interest on respondent

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borrower’s loan, pursuant to Circular No. 494 issued by theMonetary Board, because sai d circular is n ot a law although it hasthe force and effect of law and the escalation clause has n o de-escalation clause.

Ø De-escalation Clause: provision for reduction of the stipulatedinterest "in the even t that the applicable maximum rate of interestis reduced by law or by the Monetary Board."

It is n ow settled that an escalation clause is void where t he cred itorunilaterally determines a nd imposes an increase in the st ipulatedrate of interest without the express co nformity of the debtor. Suchunbridled right given to creditors t o adjust the interest

independently and upwardly would completely take away from thedebtors t he right to assent to an important modication in theiragreement and would also negate the element of mutuality in theircontracts. While a ceiling on interest rates u nder the Usury Law

was already lifted under Central Bank Circular No. 905, nothingtherein "grants lenders ca rte blanche authority to raise i nterestrates t o levels which will either en slave their b orrowers o r lead to ahemorrhaging of their asset s."

Escalation clause in this case: I/We hereby authorize the CHINABANKING CORPORATION to increase or decrease as the case may

be, the interest rate/service charge presently stipulated in thisnote without any advance notice to me/us in the event a law orCentral Bank regulation is passed or promulgated by the CentralBank of the Philippines o r ap propriate government entities,increasing or d ecreasing such interest rate or servi ce ch arge.

RULING: At no time did petitioners protest the new rates imposedon their loan even when their property was foreclosed byrespondent. This n otwithstanding, we hold that the escal ationclause is st ill VOID because it grants respondent the power toimpose an increased rate of interest without a written notice topetitioners and their written consent. Respondent’s m onthlytelephone calls t o petitioners a dvising th em of the p revailing


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interest rates would not suffice. A detailed billing statement basedon the new imposed interest with corresponding computation ofthe total debt should have been provided by the respondent toenable petitioners to make an informed decision. An appropriate

form must also be signed by the petitioners t o indicate theirconformity to the new rates. Compliance with these r equisites isessential to preserve t he m utuality of contracts. For indeed, one-sided impositions d o not have the force of law between the parties,

because such impositions are not based on the parties’ essentialequality.

Effect: Modications in the rate of interest for loans pursuant to anescalation clause must be the result of an agreement between theparties. Unless su ch important change in the contract terms ismutually agreed upon, it has n o binding effect. In the absence ofconsent on the part of the petitioners to the modications in theinterest rates, the adjusted rates ca nnot bind them.

NOTE: The lender and the borrower should agree on the imposedrate, and such imposed rate should be in writing. Escalationclauses are n ot basically wrong or legally objectionable a s long asthey are not solely potestative but based on reasonable and validgrounds.

Case 2: Spouses Silos vs. PNB GR 181045, July 2, 2014

Held: P.D. No. 1684 and C.B. Circular No. 905 no more than allowcontracting parties t o stipulate freely regarding any subsequentadjustment in the interest rate that sh all accrue on a loan or

forbearance of money, goods or cr edits. In ne, they can agree toadjust, upward or d ownward, the interest previously stipulated.However, contrary to the stubborn insistence of petitioner bank,the sa id law and circular did not authorize either pa rty tounilaterally ra ise th e interest rate without the oth er’s co nsent.


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It is basic that there can be no contract in the true sen se in theabsence of the element of agreement, or of mutual assent of theparties. If this as sent is wanting on the part of the one whocontracts, his act has no more efficacy than if it had been done

under duress or by a p erson of unsound mind.

Similarly, contract changes must be made with the consent of thecontracting parties. The minds of all the parties m ust meet as tothe proposed modication, especially when it affects an importantaspect of the agreement. In the case of loan contracts, it cannot begainsaid that the ra te of interest is a lways a vital component, for i tcan make or break a capital venture. Thus, any change must bemutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank’s posturing that theescalation clause at bench gives it unbridled right to unilaterallyupwardly adjust the interest on private respo ndents’ loan. That

would completely take away from private respondents the right toassent to an important modication in their agreement, and wouldnegate the element of mutuality in contracts.

Citing the case of Spouses Almeda v. Court of Appeals:

It is p lainly obvious, therefore, from the u ndisputed facts o f thecase t hat respondent bank unilaterally altered the terms of itscontract with petitioners b y increasing th e interest rates o n theloan without the prior a ssent of the latter. In fact, the manner ofagreement is itself explicitly stipulated by the C ivil Code when itprovides, in Article 1956 that "No interest shall be due u nless i thas been expressly stipulated in writing." What has been"stipulated in writing" from a perusal of interest rate provision ofthe cred it agreement signed between the parties is t hat petitioners

were bound merely to pay 21% interest, subject to a possibleescalation or de-escalation, when 1) the circumstances warrantsuch escalation or de-escalation; 2) within the limits a llowed bylaw; and 3) upon agreement.


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e. Interest on interest


Without prejudice t o the provisions of Article 2212, interest due andunpaid shall not earn interest. However, the contracting parties may

by stipulation capitalize t he interest due a nd unpaid, which as

added principal, shall earn new interest.

Civil Code, Article 2212Interest due s hall earn legal interest from the time it is j udicially

demanded, although the ob ligation may be si lent upon this p oint.

2.Compensatory interesta.General concepts

Civil Code, Article 1169Those o bliged to d eliver or to d o s omething incur in delay from the

time t he o bligee j udicially or ext rajudicially demands f rom them the

fulllment of their obligation.

However, the d emand by the creditor shall not be n ecessa ry in order

that delay may exist:

(1) When the obligation or t he law expressly so declare; or

(2) When from the n ature a nd the ci rcumstances o f the o bligation it

appears t hat the d esignation of the t ime w hen the thing is t o be

delivered or t he s ervice i s t o be r endered was a controlling motive for

the e stablishment of the co ntract; or

(3) When demand would be useless, as w hen the obligor hasrendered it beyond his p ower to perform.

In reciprocal obligations, neither p arty incurs in delay if the otherdoes n ot comply or is n ot ready to comply in a proper manner withwhat is incumbent upon him. From the moment one of the pa rties

fullls his obligation, delay by the other begins.


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Civil Code, Article 2209If the ob ligation consists i n the p ayment of a sum of money, and the

debtor incurs in delay, the indemnity for damages, there b eing n ostipulation to the contrary, shall be the payment of the interestagreed upon, and in the a bsence o f stipulation, the legal interest,which is si x per cent per an num.

Civil Code, Article 1226In obligations with a penal clause, the penalty shall substitute the

indemnity for damages a nd the p ayment of interests in case of

noncompliance, if there is no stipulation to the contrary.Nevertheless, damages shall be paid if the obligor refuses t o p ay the

penalty or is guilty of fraud in the fulllment of

The pen alty may be en forced on ly w hen it is d emandable in

accordance w ith the p rovisions o f this C ode.

Civil Code, Article 2210Interest may, in the discretion of the court, be allowed upondamages a warded for breach of contract.

Civil Code, Article 2213Interest cannot be r ecovered upon unliquidated claims o r damages,except when the demand can be established with reasonablycertainty.

Civil Code, Article 2226Liquidated damages a re those a greed upon by the parties t o acontract, to b e p aid in case of breach thereof.



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Liquidated damages, whether intended as a n indemnity or a penalty, shall be equitably reduced if they are iniqui

unconscionable.

Case: Ligutan vs. CA GR 138677, February 12, 2002 (copied fromhttp://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )

Held: The ess ence or r ationale for t he payment of interest, quiteoften referred to as cost of money, is n ot exactly the sa me as that ofa surcharge or a penalty. A penalty st ipulation is n ot necessarilypreclusive of interest, if there i s a n agreement to that effect, thetwo being distinct concepts which may separately bedemanded. What may justify a court in not allowing the creditor toimpose full surcharges an d penalties, despite an expressstipulation therefor in a valid agreement, may not equally justifythe non-payment or reduction of interest. Indeed, the interestprescribed in loan nancing arrangements is a f undamental partof the banking business an d the core of a bank's existence.

b.Interest rate

Civil Code, Article 2209If the ob ligation consists i n the p ayment of a sum of money, and thedebtor incurs in delay, the indemnity for damages, there b eing n ostipulation to the contrary, shall be the payment of the interestagreed upon, and in the a bsence o f stipulation, the legal interest,which is si x per cent per an num.

Usury Law, Section 1The r ate o f interest for t he l oan or forbearance of any money goods,

or credits a nd the r ate a llowed in judgments, in the a bsence of

express contract as to such rate of interest, shall be six per cen tum

per annum or such rate as may be prescribed by the Monetary

Board of the C entral Bank of the P hilippines for t hat purpose in

accordance w ith the a uthority hereby granted.

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Case 1: Eastern Shipping Lines vs. CA GR 97412, July 12,

1994(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-

doctrines.html )

Rules on Interest:• Interest upon an obligation which calls for t he payment of

money, absent a stipulation, is t he legal rate. Such interestnormally is a llowable from the date of demand, judicial orextrajudicial. The trial court opted for judicial demand as t hestarting point.

• But then upon the provisions of Article 2213 of the CivilCode, interest "cannot be recovered upon unliquidatedclaims or damages, except when the demand can beestablished with reasonable certainty. Here, interest should

be counted from the date of the decision (when the amountof damages a re ascertained).

• Art. 2209, CC. — If the obligation consists in the payment ofa sum of money, and the debtor incurs in delay, theindemnity for da mages, there being no stipulation to thecontrary, shall be the payment of interest agreed upon, andin the absence o f stipulation, the legal interest which is si xpercent per annum.

Rules of thumb (on the award of interests):*NOTE: The legal rate of 12% has been amended to 6%. SeeCircular No. 799 (amending Circular No. 905) effective July 1,2013, and the case of NACAR V. GALLERY FRAMES AND/ORBORDEY (2013). Therefore, there is no need to distinguish nowthe obligations breach ed as th e legal interest applicable is 6%.

1) When an obligation, regardless o f its so urce, i.e., law, contracts,

quasi-contracts, delicts or quasi-delicts is b reached, thecontravenor 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.

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2) With regard particularly to an award of interest in the conceptof ACTUAL AND COMPENSATORY DAMAGES, the rate of interest,as well as t he accrual thereof, is imposed, as follows:a) Obligation breached: consists in the payment of a sum ofmoney, i.e., a loan or forbearance of money

Interest Due:

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

interest from the time it is judicially demanded.

ii) In the a bsence of stipulation, the ra te of interest shall be12% per annum to be computed from default, i.e., from

judicial or extrajudicial demand under and subject to theprovisions of Article 1169 of the Civil Code. (amended to 6%)

b) Obligation breached: not constituting a loan or forbearance ofmoney,

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

Ø No interest, however, shall be adjudged on unliquidatedclaims or damages except when or un til the demand can beestablished with reasonable cert ainty.

o Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from

the t ime the cl aim is m ade judicially or extr ajudicially (Art.1169, Civil Code)

o 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 quantication of damages may bedeemed to have been reasonably ascertained). The actual basefor the computation of legal interest shall, in any ca se, be onthe amount nally adjudged.


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c) When the judgment of the court awarding a s um of money becomes nal and executory, the rate of legal interest, whether the

case falls u nder paragraph 1 or pa ragraph 2, above, shall be12% per annum from such nality until its sat isfaction, thisinterim period being deemed to be by t hen an equivalent to aforbearance of credit. (amended to 6%)

Case 2: Estores vs. Spouses Supangan GR 175139, April 18,

2012.

Held: Interest may be imposed even in the absence of stipulationin the contract.

Article 2210 of the Civil Code expressly provides that “[i]nterestmay, in the discretion of the court, be allowed upon damagesawarded for breach of contract.” In this cas e, there is no questionthat petitioner i s l egally obligated to return the P3.5 million

because of her failure to fulll the obligation under the ConditionalDeed of Sale, despite demand. Petitioner enjoyed the use of themoney from the time it was given to her until now. Thus, she isalready in default of her ob ligation from the date of demand.

Forbearance is d ened as a “contractual obligation of lender orcreditor t o ref rain during a given period of time, from requiring the

borrower or debtor to repay a loan or debt then due andpayable.” This denition describes a loan where a debtor is given aperiod within which to pay a l oan or debt. In such case,“forbearance of money, goods o r cr edits” will have no distinctdenition from a loan. We believe however, that the phrase“forbearance of money, goods or cr edits” is meant to have aseparate meaning from a loan, otherwise there would have been noneed to add that phrase as a loan is already sufficiently dened inthe Civil Code.

Forbearance of money, goods or credits sh ould therefore refer toarrangements other than loan agreements, where a p ersonacquiesces t o the temporary u se of his m oney, goods or cr edits


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pending happening of certain events or fulllment of certainconditions.

In this case, the respondent-spouses pa rted with their money even

before the conditions were fullled. They have therefore allowed or granted forbearance t o th e sel ler (petitioner) to use t heir m oneypending fulllment of the conditions. They were deprived of theuse of their money for the period pending fulllment of theconditions an d when those conditions were breached, they areentitled not only to the return of the principal amount paid, butalso to compensation for the use of their money. And thecompensation for the use of their money, absent any stipulation,should be the sa me rat e of legal interest applicable to a loan sincethe u se o r de privation of funds is si milar to a loan.

Case 3: Nacar vs. Gallery Frames GR 189871, August 13, 2013(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )

*Amending the Eastern Shipping Doctrine*Important: because this case di scusses the amendment of thelegal interest in loan and forbearance of money, credits or goods

from 12% to 6% effective July 1, 2013.

Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in itsResolution No. 796, approved the amendment of Section 2 ofCircular No. 905, Series of 1982 and, accordingly, issued CircularNo. 799, Series of 2013, effective July 1, 2013, the pertinentportion of which reads:

Section 1. The rat e of interest for the loan or forbearance of anymoney, goods or cr edits an d the rate allowed in judgments, in theabsence of an express co ntract as to such rate of interest, shall besix percent (6%) per annum.

Thus, from the foregoing, in the absence of an express stipulationas t o the rat e of interest that would govern the parties, the rat e oflegal interest for loans or forbearance of any money, goods or



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credits an d the rate allowed in judgments sh all no longer be 12%per annum but will now be 6% per annum effective July 1, 2013.

Ø It should be noted, nonetheless, that the new rate could only beapplied prospectively and not retroactively. Consequently, the 12%per annum legal interest shall apply only until June 30, 2013.Come July 1, 2013 the new rate of 6% per annum shall be theprevailing rate of interest when applicable.

To recapitulate and for future guidance, the guidelines laiddown in the case of Eastern Shipping Lines areaccordingly modied to embody BSP-MB Circular No. 799, asfollows:

I. When an obligation, regardless of its so urce, i.e., law, contracts,quasi-contracts, delicts or quasi-delicts is b reached, thecontravenor can be held liable for damages. The provisions u nder

Title XVIII on "Damages" of the Civil Code govern in determiningthe measure of recoverable damages.

II. With regard particularly to an award of interest in the conceptof actual and compensatory damages, the rate of interest, as wellas th e a ccrual thereof, is imposed, as follows:

New guidelines in the award of interest:1.) When the obligation is breached, and it consists in the paymentof a sum of money, i.e., a loan or forbearance of money, the interestdue should be that which may have been stipulated in writing.Furthermore, the interest due sh all itself earn legal interest fromthe time it is judicially demanded. In the absence of stipulation,the rate of interest shall be 6% per annum to be computed fromdefault, i.e., from judicial or extr ajudicial demand under an dsubject to th e provisions of Article 1169 of the Civil Code.

2.) When an obligation, not constituting a l oan or forbearance ofmoney, is breached, an interest on the amount of damagesawarded may be imposed at the discretion of the court at the rateof 6% per annum. No interest, however, shall be adjudged onunliquidated claims or damages, except when or until the demandcan be est ablished with reasonable cert ainty. Accordingly, where


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the demand is est ablished with reasonable cert ainty, the interestshall begin to run from the time the claim is m ade judicially orextrajudicially (Art. 1169, Civil Code), but when such certaintycannot be so r easonably established at the time the demand ismade, the interest shall begin to ru n only from the date the

judgment of the court is made (at which time the quantication ofdamages may be deemed to have been reasonably ascertained). Theactual base for t he computation of legal interest shall, in any ca se,

be on the amount nally adjudged.

3.) When the judgment of the court awarding a s um of money becomes nal and executory, the rate of legal interest, whether the

case falls u nder paragraph 1 or paragraph 2, above, shall be6% perannum from such nality until its sa tisfaction, this interim period

being deemed to be by then an equivalent to a forbearance ofcredit.

Application in this case: The interest of 12% per annum of the totalmonetary awards, computed from May 27, 2002 to June 30, 2013and 6% per annum from July 1, 2013 until their full satisfaction,is awarded.

c. Interest on interest

Civil Code, Article 2212.Interest due s hall earn legal interest from the time it is j udicially

demanded, although the ob ligation may be si lent upon this p oint.

3.Finance charges

Truth in Lending Act, Section 4 Any creditor shall furnish to each person to whom credit prior to the consummation of the transaction, a clear

writing setting forth, to the extent applicable and in accordance withrules and regulations prescribed by the Board, the followinginformation:


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(1)the ca sh price o r delivered price o f the p roperty or servi ce t o b eacquired;

(2)the a mounts, if any, to be cr edited as d own payment and/or trade-in;

(3)the d ifference bet ween the a mounts set forth under clauses ( 1) and(2);

(4)the charges, individually itemized, which are p aid or t o be p aid bysuch person in connection with the t ransaction but which are n otincident to the extension of credit;

(5)the total amount to be nanced;

(6)the nance charge exp ressed in terms of pesos a nd centavos; and

(7) the p ercentage that the nance b ears t o the t otal amount to b e

nanced expressed as a simple annual rate on the outstanding unpaid

balance o f the o bligation.

Truth in Lending Act, Section 6

(a) Any creditor w ho in connection with any credit transaction fails t odisclose t o a ny person any information in violation of this A ct or a nyregulation issued thereunder sh all be l iable t o s uch person in theamount of P100 or in a n a mount equal to twice the nance chargedrequired by such creditor i n connection with such transaction,whichever i s the greater, except that such liability shall not exceedP2,000 on any credit transaction. Action to recover such penalty may bebrought by such p erson within one year from the d ate of the occurr enceof the v iolation, in any court of competent jurisdiction. In any actionunder this s ubsection in which any person is e ntitled to a recovery, thecreditor sh all be l iable f or r easonable a ttorney's fees a nd court costs asdetermined by the cou rt.

(b) Except as s pecied in subsection (a) of this s ection, nothingcontained in this Act or a ny regulation contained in this Act or a ny


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regulation thereunder sh all affect the validity or en forceability of anycontract or t ransactions.

(c) Any person who w illfully violates any provision of this A ct or a ny

regulation issued thereunder shall be ned by not less than P1,00 ormore than P5,000 or imprisonment for not less t han 6 months, nor more

than one year or both.

(d) No p unishment or penalty provided by this Act shall apply to the

Philippine G overnment or any agency o r any political subdivision

thereof.

(e) A nal judgment hereafter rendered in any criminal proceeding

under t his Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant i

proceeding brought by any other party against such defendant under

this Act as t o a ll matters r especting w hich said judgment would be a n

estoppel as between the parties thereto.

Case: United Coconut Planters Bank vs. Spouses Beluso GR

159912, August 17, 2007

Held: Rationale of Truth in Lending Act, Section 6 (a): to protect thepublic from hidden or u ndisclosed charges on their loan obligations,requiring a full disclosure t hereof by th e lender.

Section 4 of the Tru th in Lending Act clearly provides t hat thedisclosure statement must be furnished prior to the consummation ofthe t ransaction. Rationale: to protect u sers o f credit from a lack ofawareness of the true cost thereof, proceeding from the experiencethat banks are ab le to conceal such true cost by hidden charges,uncertainty of interest rates, deduction of interests from the loanedamount, and the like. The law thereby seeks to protect debtors bypermitting th em to fully appreciate the true cost of their loan, toenable them to give full consent to the contract, and to properlyevaluate their op tions in arriving at business decisions.


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The promissory notes, the copies of which were presented to thespouses Beluso after execution, are n ot sufficient notication fromUCPB. As ea rlier discussed, the interest rate provision therein doesnot sufficiently indicate with particularity th e interest rate to beapplied to the loan covered by said promissory n otes.

4.Usurya.General concepts

Civil Code, Article 1175Usurious t ransactions s hall be g overned by special laws.

Civil Code, Article 1957Contracts a nd stipulations, under any cloak or device w hatever,intended to circumvent the laws a gainst usury shall be vo id. Theborrower may recover in accordance w ith the laws on usury.

Civil Code, Article 1961Usurious cont racts sh all be governed by the Usury Law and otherspecial laws, so far as t hey are n ot inconsistent with this C ode.

Usury LawSection 1The r ate o f interest for t he l oan or forbearance of any money goods,or credits a nd the r ate a llowed in judgments, in the a bsence ofexpress contract as to such rate of interest, shall be six per cen tum

per annum or such rate as may be prescribed by the MonetaryBoard of the C entral Bank of the P hilippines for t hat purpose inaccordance w ith the a uthority hereby granted.

Section 1-aThe Monetary Board is h ereby authorized to prescribe the m aximumrate or r ates of interest for the l oan or renewal thereof or the

forbearance of any money, goods or credits, and to change such rateor rates w henever warranted by prevailing econ omic an d socialconditions.


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In the exercise of the a uthority herein granted, the Monetary Boardmay prescribe h igher maximum rates for loans o f low priority, suchas consu mer loans or renewals thereof as w ell as su ch loans m adeby pawnshops nance companies a nd other similar creditinstitutions although the rates prescribed for t hese institutions neednot necessa rily be u niform. The Monetary Board is a lso a uthorizedto p rescribe d ifferent maximum rate or r ates f or different types o fborrowings, including deposits a nd deposit substitutes, or l oans o f

nancial intermediaries.

Section 4-aThe Monetary Board may eliminate, exempt from, or suspend theeffectivity of, interest rate ceilings on certain types of loans orrenewals t hereof or forbearances o f money, goods, or credit,whenever warranted by prevailing econ omic and social conditions.

Section 4-bIn the e xercise of its a uthority to x the m aximum rate o r rates ofinterest under this Act, the Monetary Board shall be guided by the

following:

1. The e xisting e conomic con ditions i n the cou ntry and the g eneralrequirements of the n ational economy;

2. The su pply of and demand for credit;

3. The rate of increase in the price levels; and

4. Such other relevant criteria as t he Monetary Board may adopt.

Section 5In computing the interest on any obligation, promissory n ote o r otherinstrument or con tract, compound interest shall not be reckoned,except by agreement: Provided, That whenever compound interest isagreed upon, the effective rate of interest charged by the cr editorshall not exceed the eq uivalent of the m aximum rate p rescribed bythe Monetary Board, or, in default thereof, whenever the d ebt is

judicially claimed, in which last case it shall drw per annum interest or such rate as may be prescribed by the


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Monetary Board. No p erson or corporation shall require interest to b e paid in advance for a period of more than one year: Provided,

however, That whenever interest is p aid in advance, the eff ectiverate o f interest charged by the cr editor sh all not exceed theequivalent of the maximum rate prescribed by the Monetary Board.

Section 9-aThe Monetary Board shall promulgate su ch rules a nd regulations a smay be n ecessary to implement effectively the p rovisions of this Act.

Central Bank Circular No. 905, Series of 1982, Section 1The r ate o f interest, including commissions, premiums, fees a ndother charges, on a loan or forbearance of any money, goods, orcredits, regardless of maturity and whether secured or unsecured,that may be cha rged or collected by any person, whether natural or

juridical, shall not be subject to any ceiling pursuant to the Usury Law, as amended.

Case: Advocates for Truth in Lending Inc. and Olaguer vs.Bangko Sentral Monetary Board GR 192986, January 15, 2013(copied from http://lestatuesque.blogspot.com/2015/02/credit-transactions-case-doctrines.html )

Relevant Laws:

· Act No. 2655, or the Usury Law of 1916.· R.A. No. 265 - created the Central Bank (CB) of the Philippines on June 15, 1948, empowered the CB-MB to, among others, set the

maximum interest rates which banks may charge for all types ofloans a nd other cr edit operations, within limits p rescribed by theUsury Law.

· P.D. No. 1684 – Amended the Usury Law was amended on March17, 1980, giving the CB-MB authority to prescribe differentmaximum rates of interest which may be i mposed for a loan orrenewal thereof or the forbearance of any money, goods or cr edits,provided that the changes are effected gradually and announced inadvance.

· CB Circular No. 905, Series of 1982 – issued by the CB-MB,effective on January 1 , 1983. Section 1 of the Circular, under its



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General Provisions, removed the ceilings on interest rates on loansor forbearance of any money, goods or credits.

· RA 7653 – es tablished BSP to replace CB. Repealed RA 265.

CB Circular No. 905 did not repeal nor in anyway amend theUsury Law but simply su spended the latter’s effectivity. By virtueof CB Circular No. 905, the Usury Law has been renderedineffective and legally non-existent in our jurisdiction. Interest cannow be charged as l ender and borrower may agree upon.

Effect of PD 1684 and CB 905 suspending the effectivity of theUsury Law:1) Lifted interest ceiling.

2) Upheld the parties’ freedom of contract to agree freely on therate of interest.

The BSP-MB has authority to enforce CB Circular No. 905Under Section 1-a of the Usury Law, as amended, the BSP-MB mayprescribe the maximum rate or rates o f interest for al l loans orrenewals thereof or the forbearance of any money, goods or cr edits,including those for loans of low priority su ch as consumer loans,as well as such loans made by pawnshops, nance companies andsimilar cr edit institutions. It even authorizes t he BSP-MB toprescribe different maximum rate or rates for different types of

borrowings, including deposits and deposit substitutes, or loans ofnancial intermediaries.

The lifting of the ceilings for interest rates does not authorstipulations ch arging excessive, unconscionable, and iniquitousinterestIt is set tled that nothing in CB Circular No. 905 grants lenders acarte blanche authority to ra ise i nterest rates t o levels which will

either enslave their borrowers or lead to a hemorrhaging of theirassets. Stipulations a uthorizing iniquitous or u nconscionableinterests h ave been invariably st ruck down for b eing (void) contraryto morals, if not against the law.

Nonetheless, the n ullity of the st ipulation of usurious interest doesnot affect the lender’s ri ght to recover t he principal of a loan, nor


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affect the other terms thereof. Thus, in a usurious loan withmortgage, the right to foreclose the mortgage su bsists, and thisright can be exerci sed by the creditor u pon failure by the debtor topay the debt due. The debt due is considered as without thestipulated excessive interest, and a legal interest of 12% (now6%) per annum will be added in place of the excessive interestformerly imposed.

b.Usurious acts

Usury LawSection 2No person or corp oration shall directly or i ndirectly take or receive inmoney or ot her p roperty, real or pe rsonal, or c hoses in action, ahigher r ate o f interest or gr eater su m or va lue, includingcommissions, premiums, nes a nd penalties, for the loan or renewalthereof or forbearance of money, goods, or credits, where s uch loanor renewal or forbearance i s s ecured in whole o r in part by amortgage upon real estate t he t itle t o w hich is d uly registered, or byany document conveying such real estate o r an interest therein, thantwelve per centum per annum or the maximum rate prescribed bythe Monetary Board and in force a t the t ime the loan or renewal

thereof or f orbearance is granted: Provided, That the rate of interestunder this se ction or the m aximum rate of interest that may be

prescribed by the Monetary Board under this section may likewiseapply to loans secu red by other types of security a s m ay bespecied by the Monetary Board.

Section 3No person or cor poration shall directly or i ndirectly demand, take,receive or a gree to ch arge in money or ot her p roperty, real or

personal, a higher rate or greater sum or value for the forbearance of money, goods, or credits where such loan or forbearance is not secured as provided in Section two hereof, tan fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan

or f orbearance i s granted.


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Section 4No pawnbroker or pawnbroker's a gent shall directly or i ndirectlystipulate, charge, demand, take o r receive any higher r ate o r greater

sum or value for any loan or forbearance than two a nd one-half percentum per month when the sum lent is less t han one hundred pesos; two per centum per month when the sum lent is one hundred pesos or more, but not exceeding ve hundred pesos; and fourteen per centum per annum when it is more than the amount last

mentioned; or the m aximum rate or rates p rescribed by the MonetaryBoard and in force a t the t ime t he loan or forbearance i s g ranted. A

pawnbroker or pawnbroker's agent shall be considered such, for thebenets o f this Act, only if he b e d uly licensed and has a nestablishment open to the p ublic.

It shall be u nlawful for a pawnbroker or pawnbroker's a gent todivide the p awn offered by a person into two or m ore fractions inorder to co llect greater interest than the permitted by this s ection.

It shall also b e u nlawful for a pawnbroker or pawnbroker's a gent torequire the pawner to pay an additional charge a s insurance

premium for the safekeeping and conservation of the article pawned.

c.Remedies

Civil Code, Article 1413Interest paid in excess of the interest allowed by the u sury laws m ay

be r ecovered by the d ebtor, with interest thereon from the d ate o f the

payment.

Usury LawSection 6

Any person or corporation who, for any such loan or renewal thereofor f orbearance, shall have paid or d elivered a higher r ate or gr eatersum or value t han is h ereinbefore a llowed to b e t aken or received,may recover the w hole interest, commissions, premiums p enaltiesand surcharges paid or delivered with costs a nd attorneys' fees insuch sum as m ay be allowed by the cour t in an action against the

person or corporation who took or received them if such action is


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brought within two years a fter such p ayment or delivery: Provided,however, That the creditor sh all not be obliged to return the interest,commissions an d premiums for a period of not more than one yea rcollected by him in advance w hen the d ebtor shall have p aid theobligation before it is d ue, provided such interest, and commissionsand premiums d o not exceed the rates xed in this Act.

Section 7 All covenants and stipulations contained in conveyances, mortgages,

bonds, bills, notes, and other con tracts or evi dences of debts, and alldeposits o f goods o r other things, whereupon or whereby there s hallbe st ipulated, charged, demanded, reserved, secured, taken, orreceived, directly or indirectly, a higher rate o r greater sum or va lue

for the loan or renewal or forbearance of money, goods, or credithan is h ereinbefore a llowed, shall be vo id: Provided, however, Thatno merely clerical error i n the computation of interest, made w ithoutintent to e vade a ny of the p rovisions o f this Act, shall render acontract void: Provided, further, That parties to a loan agreement, the

proceeds of which may be availed of partially or fully at some ftime, may stipulate t hat the r ate o f interest agreed upon at the t imethe loan agreement is entered into, which rate s hall not exceed themaximum allowed by law, shall prevail notwithstanding su bsequentchanges in the maximum rates that may be made by t he Monetary

Board: And Provided, nally, That nothing h erein contained shall beconstrued to prevent the p urchase b y an innocent purchaser of anegotiable mercantile paper, usurious or ot herwise, for va luableconsideration before m aturity, when there h as b een no intention onthe part of said purchaser to e vade t he p rovisions of this Act andsaid purchase was not a part of the original usurious transaction. Inany case, however, the m aker of said note sh all have t he r ight torecover from said original holder the w hole interest paid by himthereon and, in case of litigation, also the co sts a nd such attorney's

fees as may be allowed by the court.

Section 8 All loans under which payment is to be made in agricultural products or seed or in any other kind of commodities shall also be

null and void unless they provide t hat such products o r seed or othercommodities shall 6e a ppraised at the t ime w hen the o bligation falls


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due a t the cu rrent local market price: Provided, That unlessotherwise st ated in a document written in a language o r dialectintelligible t o t he d ebtor a nd subscribed in the p resence o f not lessthan two witnesses, any contract advancing money to be repaidlater i n agricultural products o r seed or a ny other k ind ofcommodities sh all be u nderstood to be a loan, and any person orcorporation having paid otherwise shall be e ntitled in case action isbrought within two years a fter such p ayment or delivery t o recoverall the products or se ed delivered as interest, or t he value thereof,together with the cost s a nd attorney's fees i n such sum as m ay beallowed by the co urt. Nothing contained in this s ection shall beconstrued to prevent the lender from taking interest for the m oneylent, provided such interest be n ot in excess of the r ates herein xed.

Section 9The p erson or corporation sued shall le its a nswer in writing u nderoath to a ny complaint brought or led against said person orcorporation before a competent court to recover t he m oney or other

personal or real property, seeds or agricultural products received in violation of the provisions of this Act. The lack of takingan oath to a n answer to a complaint will mean the a dmission of the

facts contained in the latter.

Section 10Without prejudice t o t he p roper ci vil action violation of this A ct andthe implementing rules a nd regulations p romulgated by theMonetary Board shall be s ubject to cr iminal prosecution and theguilty person shall, upon conviction, be s entenced to a ne o f notless t han fty pesos n or more than ve h undred pesos, or toimprisonment for not less than thirty days nor more t han one y ear,or b oth, in the d iscretion of the court, and to r eturn the e ntire sumreceived as i nterest from the p arty aggrieved, and in the case of non-

payment, to suffer subsidiary imprisonment at the rate of one day for every two pesos: Provided, That in case of corporations,

associations, societies, or companies the m anager, administrator orgerent or the person who has charge of the management oradministration of the b usiness s hall be cri minally responsible forany violation of this Act.


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1.Remedy of debtor2.Remedy of creditor

Case: Carpo vs. Chua & Dy Ng GR 150773, September 30,

2005

Held:• The invali

Credtrans commodatum and mutuum

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