2.

Obligations not involving loans or forbearance of money (or

Interest: 6% vs. 12% judgments related thereto)
If the obligation breached does not consist in the payment of a sum of
Posted on September 9, 2009 by Hector M. de Leon Jr. Posted in Civil Law loaned money, the court, in its discretion, may impose interest on the
Tagged interest amount of damages awarded at the rate of 6% per annum (see Civil
In the event that a party breaches his obligation to the other contracting Code, art. 2209). However, no interest can be adjudged on unliquidated
party, what rate of interest can he expect to be held liable for? In Maria claims or damages except when or until the demand can be established
Soledad Tomimbang vs. Atty. Jose Tomimbang, G.R. No. 165116, with reasonable certainty. Accordingly, where the demand is established
August 4, 2009, the Supreme Court reminds us when the rate of 6% per with reasonable certainty, the interest shall begin to run from the time
annum applies and when the rate of 12% per annum applies. the claim is made judicially or extrajudicially (Art. 1169, Civil Code),
In Tomimbang, the respondent gave a loan to the petitioner (his sibling). but when such certainty cannot be so reasonably established at the time
However, the petitioner stopped making monthly repayments on the the demand is made, the interest shall begin to run only from the date
loan. The regional trial court and the Court of Appeals ruled that the the judgment of the court is made (at which time the quantification of
petitioner must pay interest on the indebtedness at the rate of 12% per damages may be deemed to have been reasonably ascertained). The
annum. The Supreme Court agreed. actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
The Supreme Court reiterated its ruling in the 1994 case of Eastern
Shipping, Inc. vs. Court of Appeals, 234 SCRA 78, 95-96 (1994). The 3. Court judgment
holding can be summarized as follows: When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls
1. Loans or forbearance of money, goods, or credits, as well as to under paragraph 1 or paragraph 2, above, shall be 12% per annum from
judgments involving such loan or forbearance of money, goods, or credit such finality until its satisfaction, this interim period being deemed to be
(a) Parties agreed on interest payable by then an equivalent to a forbearance of credit.
If the parties agreed on the interest payable, the interest due is what has
been stipulated upon by the parties. Pursuant to Article 1856 of the Civil Since the obligation in Tomimbang involves a loan and there is no
Code, the agreed interest must have been expressly stipulated in writing. stipulation in writing as to interest due, the Supreme Court ruled that the
rate of interest shall be 12% per annum computed from the date of
Under Article 2212 of the Civil Code, the interest due shall itself earn extrajudicial demand
legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point.

(b) Parties did not agree on interest payable

ACT NO. 2655

In the absence of stipulation between the parties on the rate of interest
payable, the rate of interest will be 12% per annum to be computed from
default, i.e., from the judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.
CT NO. 2655 - AN ACT FIXING RATES OF INTEREST UPON
per month when theLOANS
sum lentAND
is less than one hundred pesos; two per centum per month when the
one hundred pesos or more, but not exceeding five hundred pesos; and fourteen per centum per an
LARING THE EFFECT OF RECEIVING OR TAKING USURIOUS
it is more RATES
than the amount lastAND
mentioned; or the maximum rate or rates prescribed by the Mone
FOR OTHER PURPOSESand in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker's age
considered such, for the benefits of this Act, only if he be duly licensed and has an establishment o
public.

It shall be unlawful for a pawnbroker or pawnbroker's agent to divide the pawn offered by a person
The rate of interest for the loan or forbearance of any money goods, or credits and the rate allowed
more fractions in order to collect greater interest than the permitted by this
ts, in the absence of express contract as to such rate of interest, shall be six per centum per annum
te as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that
It shall also be unlawful for a pawnbroker or pawnbroker's agent to require the pawner to pay an
in accordance with the authority hereby granted.
charge as insurance premium for the safekeeping and conservation of the article
he Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the
Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest ra
ewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates
on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever
warranted by prevailing economic and social conditions.
by prevailing economic and social
rcise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for
Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under th
w priority, such as consumer loans or renewals thereof as well as such loans made by pawnshops
Monetary Board shall be guided by the
mpanies and other similar credit institutions although the rates prescribed for these institutions
ecessarily be uniform. The Monetary Board is also authorized to prescribe different maximum rate or
1. The existing economic conditions in the country and the general requirements of the nationa
different types of borrowings, including deposits and deposit substitutes, or loans of financial
ries.
2. The supply of and demand for
person or corporation shall directly or indirectly take or receive in money or other property, real or
3. The rate of increase in the price levels;
or choses in action, a higher rate of interest or greater sum or value, including commissions,
fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits,
4. Such other relevant criteria as the Monetary Board may
h loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the
ch is duly registered, or by any document conveying such real estate or an interest therein, than
Sec. 5. In computing the interest on any obligation, promissory note or other instrument o
centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time
compound interest shall not be reckoned, except by agreement: Provided, That whenever compound
renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or
agreed upon, the effective rate of interest charged by the creditor shall not exceed the equiva
um rate of interest that may be prescribed by the Monetary Board under this section may likewise
maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt i
loans secured by other types of security as may be specified by the Monetary Board.
claimed, in which last case it shall draw six per centum per annum interest or such rate as may be
by the Monetary Board. No person or corporation shall require interest to be paid in advance for
person or corporation shall directly or indirectly demand, take, receive or agree to charge in money
more than one year: Provided, however, That whenever interest is paid in advance, the effect
operty, real or personal, a higher rate or greater sum or value for the loan or forbearance of money,
interest charged by the creditor shall not exceed the equivalent of the maximum rate prescrib
credits where such loan or forbearance is not secured as provided in Section two hereof, than
Monetary
er centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force
the time the loan or forbearance is granted.
Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall h
delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or rec
pawnbroker or pawnbroker's agent shall directly or indirectly stipulate, charge, demand, take or
recover the whole interest, commissions, premiums penalties and surcharges paid or delivered with
y higher rate or greater sum or value for any loan or forbearance than two and one-half per centum
attorneys' fees in such sum as may be allowed by the court in an action against the person or corpo
ceived them if such action is brought within two yearsSec. after10.
such
Without
payment prejudice
or delivery:
to theProvided,
proper civil action violation of this Act and the implementing
hat the creditor shall not be obliged to return the interest,
regulations
commissions
promulgated
and premiumsby the for
Monetary
a period Board shall be subject to criminal prosecution and the gu
e than one year collected by him in advance when the debtorshall,shall
uponhave
conviction,
paid the beobligation
sentenced before
to a fine
it of not less than fifty pesos nor more than five hundre
ovided such interest, and commissions and premiums to do imprisonment
not exceed the forrates
not less
fixed
than
in thirty
this Act.
days nor more than one year, or both, in the discretion of
and to return the entire sum received as interest from the party aggrieved, and in the case of non-p
covenants and stipulations contained in conveyances, suffermortgages,
subsidiary
bonds, imprisonment
bills, notes, atandtheotherrate of one day for every two pesos: Provided, That
r evidences of debts, and all deposits of goods or othercorporations,
things, whereupon
associations,
or wherebysocieties,
thereor shall
companies the manager, administrator or gerent or the p
ed, charged, demanded, reserved, secured, taken, or received,
has charge
directlyof or
theindirectly,
managementa higheror rate
administration
or of the business shall be criminally responsib
m or value for the loan or renewal or forbearance of money,violation
goods, or credits than is hereinbefore of this
hall be void: Provided, however, That no merely clerical error in the computation of interest, made
ent to evade any of the provisions of this Act, shall render
Sec. a 11.
contract
All Acts
void: and
Provided,
parts of further,
Acts That
inconsistent with the provisions of this Act are hereby
a loan agreement, the proceeds of which may be availed of partially or fully at some future time,
ate that the rate of interest agreed upon at the time theSec.
loan12.
agreement
This Act shall
is entered
take effect
into, which
on therate
first day of May, nineteen hundred and sixtee
exceed the maximum allowed by law, shall prevail notwithstanding subsequent changes in the
rates that may be made by the Monetary Board: And Provided, finally, That nothing herein contained
onstrued to prevent the purchase by an innocent purchaser of a negotiable mercantile paper,
Case Digest: G.R. No. 173227.
r otherwise, for valuable consideration before maturity, when there has been no intention on the
d purchaser to evade the provisions of this Act and said purchase was not a part of the original
ansaction. In any case, however, the maker of said note shall have the right to recover from said
January 20, 2009
lder the whole interest paid by him thereon and, in case of litigation, also the costs and such
fees as may be allowed by the
Sebastian court.
Siga-an, petitioner, vs. Alicia Villanueva,
loans under which payment is to be made in agricultural products or seed or in respondent.
any other kind of
es shall also be null and void unless they provide that such products or seed or other commodities
praised at the time when the obligation falls due at the current local market price: Provided, That
erwise stated in a document written in a language or dialect intelligible to the debtor and subscribed
ence of not less than two witnesses, any contract advancing money to be repaid later in agricultural
Facts: Respondent filed a complaint for sum of money against
r seed or any other kind of commodities shall be understood to be a loan, and any person or
n having paid otherwise shall be entitled in case action is brought within twopetitioner.
years afterRespondent
such claimed that petitioner approached her
r delivery to recover all the products or seed delivered as interest, or the valueinside
thereof,
thetogether
PNO and offered to loan her the amount
osts and attorney's fees in such sum as may be allowed by the court. NothingofcontainedP540,000.00in this
of which the loan agreement was not reduced
ll be construed to prevent the lender from taking interest for the money lent, provided such interest
not in excess of the rates in writing andfixed.
herein there was no stipulation as to the payment of
interest for the
loan. Respondent issued a check
person or corporation sued shall file its answer in writing under oath to any complaint brought or
worth P500,000.00
to petitioner as partial payment of the
st said person or corporation before a competent court to recover the money or other personal or
loan.
ty, seeds or agricultural products, charged or received in violation of the provisions [Link]
of this issued another check in the amount
The
ng an oath to an answer to a complaint will mean the admission of the facts contained in the latter.
of P200,000.00 to
petitioner as payment of the remaining
balance of the loan of which the excess amount
he Monetary Board shall promulgate such rules and regulations as may be necessary to implement
the provisions of this of P160,000.00Act.
would be applied as interest for the loan. Not
satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest and threatened to block instant case because it was not duly proven that respondent
or disapprove her transactions with the PNO if she would not defaulted in paying the loan and no interest was due on the
comply with his demand. Thus, she paid additional amounts in loan because there was no written agreement as regards
cash and checks as interests for the loan. She asked payment of interest. Article 1956 of the Civil Code, which
petitioner for receipt for the payments but was told that it was refers to monetary interest, specifically mandates that no
not necessary as there was mutual trust and confidence interest shall be due unless it has been expressly stipulated in
between them. According to her computation, the total amount writing. As can be gleaned from the foregoing provision,
she paid to petitioner for the loan and interest accumulated payment of monetary interest is allowed only if: (1) there was
to P1,200,000.00. an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in
The RTC rendered a Decision holding that respondent made writing. The concurrence of the two conditions is required for
an overpayment of her loan obligation to petitioner and that the the payment of monetary interest. Thus, we have held that
latter should refund the excess amount to the former. It collection of interest without any stipulation therefor in writing
ratiocinated that respondents obligation was only to pay the is prohibited by law.
loaned amount of P540,000.00, and that the alleged interests
due should not be included in the computation of respondents (2) Petitioner cannot be compelled to return the alleged excess
total monetary debt because there was no agreement between amount paid by respondent as interest. Under Article 1960 of
them regarding payment of interest. It concluded that since the Civil Code, if the borrower of loan pays interest when there
respondent made an excess payment to petitioner in the has been no stipulation therefor, the provisions of the Civil
amount of P660,000.00 through mistake, petitioner should Code concerning solutio indebiti shall be applied. Article 2154
return the said amount to respondent pursuant to the principle of the Civil Code explains the principle of solutio indebiti. Said
of solutio indebiti. Also, petitioner should pay moral damages provision provides that if something is received when there is
for the sleepless nights and wounded feelings experienced by no right to demand it, and it was unduly delivered through
respondent. Further, petitioner should pay exemplary mistake, the obligation to return it arises. In such a case, a
damages by way of example or correction for the public good, creditor-debtor relationship is created under a quasi-contract
plus attorneys fees and costs of suit. whereby the payor becomes the creditor who then has the
right to demand the return of payment made by mistake, and
Issue: (1) Whether or not interest was due to petitioner; and the person who has no right to receive such payment becomes
(2) whether the principle of solutio indebiti applies to the case obligated to return the same. The quasi-contract of solutio
at bar. indebiti harks back to the ancient principle that no one shall
enrich himself unjustly at the expense of another. The
Ruling: (1) No. Compensatory interest is not chargeable in the principle of solutio indebiti applies where (1) a payment is
made when there exists no binding relation between the payor, June 6, 1962, the approved loan was restored to P350,000 and was
who has no duty to pay, and the person who received the denominated as Account No. 31055. As a consequence, the Medinas
payment; and (2) the payment is made through mistake, and subsequently executed an Amendment of Real Estate Mortgage.
not through liberality or some other cause. We have held that Upon application by the Medinas, GSIS adopted Resolution No. 121,
the principle of solutio indebiti applies in case of erroneous as amended by Resolution No. 348, granting an additional loan of
payment of undue interest. P230,000 on the security of the same mortgaged properties and
additional properties. The loan was denominated as Account No.
Article 2232 of the Civil Code states that in a quasi-contract,
31442. Beginning 1965, the Medinas defaulted in their payments
such as solutio indebiti, exemplary damages may be imposed
and in 1967, they began defaulting in the payment of their fire
if the defendant acted in an oppressive manner. Petitioner
acted oppressively when he pestered respondent to pay insurance premiums. On May 3, 1974, GSIS informed the debtors
interest and threatened to block her transactions with the PNO that they had arrearages in the amount of P575,652.42 as of April
if she would not pay interest. This forced respondent to pay 18, 1974 and demanded payment within 7 days, otherwise, it would
interest despite lack of agreement thereto. Thus, the award of foreclose the mortgage. On Apr. 21, 1975, GSIS applied for
exemplary damages is appropriate so as to deter petitioner foreclosure of the mortgage. The Medinas filed a complaint, praying
and other lenders from committing similar and other serious for the issuance of a restraining order or writ of PI, but no such RO
wrongdoings. or WPI was issued in view of PD No. 385. On Apr. 25, 1975, the
Medinas made a last partial payment in the amount of P209,
GSIS vs. CA G.R. No. L-52478 | 30 October 1986
662.80. The properties of the medinas were sold at public auction
with GSIS as the highest bidder. Hence, the Medinas filed an
amended complaint, praying for the declaration of nullity of their 2
FACTS Sps. Medina applied for a loan with GSIS in the amount of REM contracts with the GSIS, as well as of the EJ foreclosure
P600,000. But only P350,000 had been approved (BR 5041) subject proceedings, and for the refund of excess payments, damages and
to the conditions: a. that 9% per annum shall be the interest rate, AF. TC: N&V + Medinas to pay GSIS P1,611.12 in fully payment of
compounded monthly; b. that the loan shall be repayable in 10 their obligation with 9% p.a. interest from Dec. 11, 1975 CA:
years at a monthly mortization of P4,433.65 including principal and Affirmed: GSIS to reimburse P9,580 OP and pay Sp Medina P3,000
interest, and that any installment or amortization due and unpaid AF and P1,000 litigation exp; SC: PRC ; MR: due course
shall bear an interest of 9%/12 per month. The Office of the
Economic Coordinator, in a 2nd Indorsement, further reduced the
approved amount to P295,000. The Medinas accepted the reduced
amount, executed a promissory note and a REM in favor of GSIS. On
ISSUE # 1 WON the CA erred in holding that the amendment of the
REM dated July 6, 1962 superseded the mortgage contract dated
Apr. 4, 1962, particularly wrt the compounding of interest ISSUE # 3 WON the CA erred in holding that the interest rates on the
loan accounts of the Medinas are usurious

HELD
HELD NO. Usury Law applies only to interest by way of
Said Amendment was never intended to completely supersede the compensation for the use or forbearance of money. Interest by way
mortgage contract dated April 4, 1962. In fact, GSIS, as a matter of of damages is governed by Article 2209 of the Civil Code
policy, imposes uniform terms and conditions for all its real estate
loans, particularly with respect to compounding of interest. GSIS:
Did not supersede; amended only wrt the amount secured thereby ISSUE # 4: WON the CA erred in affirming the annulment of the
and the amount of monthly amortizations; others deemed subject EJ foreclosure and sheriffs Certificate of Sale
rewritten Medinas: no express stipulation on the compounded
interest OP o The difference in the computation lies in the
inclusion of the compounded interest as demanded by the GSIS on
HELD Since the Medinas failed to settle their accounts with the GSIS,
the one hand and the exclusion thereof, as insisted by the Medinas
the latter had a perfect right to foreclose the mortgage.
on the other.

Reversed and set asideVALID.

ISSUE # 2 WON the CA erred in sustaining the Sp. Medinas claim of
OP, by crediting the fire insurance proceeds in the sum of
P11,152.02 to the total payment made by said spouses as of Dec.
11, 1975 ADVOCATES FOR TRUTH IN LENDING, INC. VS. BANGKO
SENTRAL MONETARY BOARD, [Link].

Parties of the Case

HELD YES. The plaintiffs were not entitled to a credit of P19,381.07
Petitioners: Advocates for Truth in Lending, INC. & Eduardo B.
as FI proceeds, as they were only entitled to and were credited with Olaguer (President of AFTIL).
P11,152.02.
Respondents: Bangko Sentral Monetary Board
Facts of the Case 265, as amended, or parts thereof, which may be
inconsistent with the provisions of this Act are hereby
Advocates for Truth in Lending, Inc. (AFTIL) is a non-profit, non- repealed. President Decree No. 1792 is likewise repealed.
stock corporation organized to engage in pro bono concerns and
activities relating to money lending issues. It was incorporated in July
9, 2010, and a month later, it filed this petition, joined by its founder Issues of the Case
and president, Eduardo Olaguer, suing as a taxpayer and a citizen.
1. Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-
History of Central Banks power to fix max interest rates MB had the statutory or constitutional authority to prescribe
the maximum rates of interest for all kinds of credit
1. R.A. No. 265, which is created the Central Bank on June 15, transactions and forbearance of money, goods or credit
19481. R.A. No. 265, which is created the Central Bank on beyond the limits prescribed in the Usury Law;
June 15, 1948, empowered the CB-MB to set the maximum
interest rates which banks may charge for all types of loans 2. If so, whether the CB-MB exceeded its authority when it
and other credit operations. issued CB Circular No. 905, which removed all interest
ceilings and thus suspended Act No. 2655 as regards
2. The Usury Law was amended by P.D. 1684 giving the CB- usurious interest rates;
MB authority to prescribe different maximum rates of interest
which may be imposed for a loan or renewal thereof of the 3. Whether under R.A. No. 7653, the new BSP-MB may
forbearance of any money, goods or credits, provided that continue to enforce CB Circular No. 905.
the changes are affected gradually and announced in
advance. Section 1-a of Act No. 2655 now reads:

3. In its Resolution No. 2224 dated December 3, 1982, the CB- Ruling of the SC
MB issued CB Circular No. 905, Series of 1982, effective on
January 1, 1983. It removed the ceilings on interest rates on 1. CB-MB has the statutory or constitutional authority to
loans or forbearance of any money, goods or credits: Sec. 1. prescribe the max rates of interest for all kinds of credit
The rate of interest, including commissions, premiums, fees transactions and forbearance of money, goods or credit
and other fees charges, on loan or forbearance of any beyond the limits prescribed in the Usury Law both
money be charged or collected by any person, whether under RA 265 and PD 1684
natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury law, as amended. 2. The CB-MB merely suspended the effectivity of the
Usury Law when it issued CB Circular No. 905.
4. R.A. No. 7653 establishing the BSP (Bangko Sentral ng
Pilipinas) to replace CB: The power of the CB to effectively suspend the Usury Law
pursuant to P.D. No. 1684 has long been recognized and
Sec. 135. Repealing Clause except as may be provided for upheld in many cases. As the Court explained in the
in Sections 46 and 132 of this Act, Republic Act No. 265, as landmark case of Medel v. CA, citing several cases, CB
amended, the provisions of any other law, special charters, Circular No. 905 did not repeal nor in anyway amend the
rule or regulation issued pursuant to said Republic Act No. Usury Law but simply suspended the latters effectivity.
 Thus, according to the Court, by lifting the interest ceiling, the legal interest shall be subject to the condition that the
CB Circular No. 905 merely upheld the parties freedom of courts are vested with discretion, depending on the equities
contract to agree freely on the rate of interest. It cited Art. of each case, on the award of interest.
1306 of the New Civil Code, under which the contracting
parties may establish such stipulations, clauses, terms and Dispositive portion:
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or Petition for certiorari is DISMISSED.
public policy.

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

Antonio Tan vs. Court of Appeals/CCP
GR No. 116285
905.
Moreover, the rule is settled that repeals by implication are
FACTS:
not favored, because laws are presumed to be passed with
deliberation and full knowledge of all laws existing pertaining 1. Petition for review.
to the subject. An implied repeal is predicated upon the 2. TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.
condition that a substantial conflict or repugnancy is found 1. Executed a promissory note in amount of P3,411,421.32; payable in 5
between the new and prior laws unless irreconcilable installments.
inconsistency and repugnancy exists in the terms of the new 2. TAN failed to pay any installment on the said restructured loa.
and old laws. We find no such conflict between the 3. In a letter, TAN requested and proposed to respondent CCP a mode of
provisions of Act 2655 and RA NO. 7653. paying the restructured loan
i. 20% of the principal amount of the loan upon the respondent giving its
The lifting of the ceilings for interest rates does not conformity to his proposal
authorize stipulations charging excessive, ii. Balance on the principal obligation payable 36 monthly installments until
unconscionable, and iniquitous interest. fully paid.
4. TAN requested for a moratorium on his loan obligation until the
With regard particularly to an award of interest in the following year allegedly due to a substantial deduction in the volume of
concept of actual and compensatory damages, the rate his business and on account of the peso devaluation.
of interest, as well as the accrual thereof, is imposed, as i. No favorable response was made to said letters.
follows: ii. CCP demanded full payment, within ten (10) days from receipt of said
The 12% per annum rate under CB Circular No. 416 letter P6,088,735.03.
shall apply only to loans or forbearance of money, goods, or
3. CCP FILED COMPLAINT collection of a sum of money
credits, as well as to judgments involving such loan or
1. TAN interposed the defense that he accommodated a friend who asked
forbearance of money, goods, or credit, while the 6% per
annum under Art. 2209 of the Civil Code applies when the
for help to obtain a loan from CCP.
transaction involves the payment of indemnities in the i. Claimed that cannot find the friend.
concept of damage arising from the breach or a delay in the 2. TAN filed a Manifestation wherein he proposed to settle his
performance of obligations in general with the application of indebtedness to CCP by down payment of P140,000.00 and to issue1 2
both rates reckoned from the time the complaint was filed checks every beginning of the year to cover installment payments for
until the amount is fully paid. In either instance, the one year, and every year thereafter until the balance is fully paid.
reckoning period for the commencement of the running of
 i. CCP did not agree to the petitioners proposals and so the trial of the case
ensued. WON interest may accrue on the penalty or compensatory interest
4. TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67, without violating ART 1959: Without prejudice to the provisions of
representing defendants outstanding account as of August 28, 1986, Article 2212, interest due and unpaid shall not earn interest. However,
with the corresponding stipulated interest and charges thereof, until fully the contracting parties may by stipulation capitalize the interest due and
paid, plus attorneys fees in an amount equivalent to 25% of said unpaid, which as added principal, shall earn new interest.
outstanding account, plus P50,000.00, as exemplary damages, plus TAN- No legal basis for the imposition of interest on the penalty charge
costs. for the reason that the law only allows imposition of interest on
1. REASONS: monetary interest but not the charging of interest on penalty. Penalties
i. Reason of loan for accommodation of friend was not credible. should not earn interest.
ii. Assuming, arguendo, that the TAN did not personally benefit from loan, he
should have filed a 3rd-party complaint against Wilson Lucmen WON TAN can file reduction of penalty due to made partial payments.
iii. 3 times the petitioner offered to settle his loan obligation with CCP. Petitioner contends that reduction of the penalty is justifiable under ART
iv. TAN may not avoid his liability to pay his obligation under the promissory 1229: The judge shall equitably reduce the penalty when the principal
note which he must comply with in good faith. obligation has been partly or irregularly complied with by the
v. TAN is estopped from denying his liability or loan obligation to the private debtor. Even if there has been no performance, the penalty may also be
respondent. reduced by the courts if it is iniquitous or unconscionable.
5. TAN APPEALED TO CA, asked for the reduction of the penalties and
charges on his loan obligation.
1. Judgment appealed from is hereby AFFIRMED. HELD
1. No alleged partial or irregular performance. CA DECISION AFFIRMED with MODIFICATION in that the penalty
2. However, the appellate court modified the decision of the trial court by charge of two percent (2%) per month on the total amount due,
deleting exemplary damages because not proportionate to actual damage compounded monthly, is hereby reduced to a straight twelve percent
caused by the non-performance of the contract (12%) per annum starting from August 28, 1986. With costs against the
petitioner.

ISSUES: 1. WON there are contractual and legal bases for the imposition of the
WON there are contractual and legal bases for the imposition of the penalty, interest on the penalty and attorneys fees. YES. WITH
penalty, interest on the penalty and attorneys fees. LEGAL BASES.
TAN imputes error on CA in not fully eliminating attorney fees and in 1. ART 1226: In obligations with a penal clause, the penalty shall
not reducing the penalties considering that he made partial payments on substitute the indemnity for damages and the payment of interests in
the loan. case of non-compliance, if there is no stipulation to the
And if penalty is to be awarded, TAN asking for non-imposition of contrary. Nevertheless, damages shall be paid if the obligor refuses to
interest on the surcharges because compounding of these are not pay the penalty or is guilty of fraud in the fulfillment of the obligation.
included in promissory note. i. The penalty may be enforced only when it is demandable in accordance
No basis in law for the charging of interest on the surcharges for the with the provisions of this Code.
reason that the New Civil Code is devoid of any provision allowing the
imposition of interest on surcharges.
 2. CASE AT BAR: promissory note expressed the imposition of both 3. CASE AT BAR: interest began to run on the penalty interest upon the
interest and penalties in case of default on the part of the petitioner in filing of the complaint in court by CCP.
the payment of the subject restructured loan. i. Hence, the courts did not err in ruling that the petitioner is bound to pay the
3. PENALTY IN MANY FORMS: interest on the total amount of the principal, the monetary interest and
i. If the parties stipulate penalty apart monetary interest, two are different and the penalty interest.
distinct from each other and may be demanded separately.
ii. If stipulation about payment of an additional interest rate partakes of the 3. WON TAN can file reduction of penalty due to made partial payments.
nature of a penalty clause which is sanctioned by law: YES. BUT NOT 10% REDUCTION AS SUGGESTED BY
1. ART 2209: If the obligation consists in the payment of a sum of money, PETITIONER.
and the debtor incurs in delay, the indemnity for damages, there being 1. REDUCED TO 2% REDUCTION:
no stipulation to the contrary, shall be the payment of the interest agreed i. PARTIAL PAYMENTS showed his good faith despite difficulty in
upon, and in the absence of stipulation, the legal interest, which is six complying with his loan obligation due to his financial problems.
per cent per annum. 1. However, we are not unmindful of the respondents long overdue
4. CASE AT BAR: Penalty charge of 2% per month began to accrue from deprivation of the use of its money collectible.
the time of default by the petitioner. 4. The petitioner also imputes error on the part of the appellate court for
i. No doubt petitioner is liable for both the stipulated monetary interest and not declaring the suspension of the running of the interest during period
the stipulated penalty charge. when the CCP allegedly failed to assist the petitioner in applying for
1. PENALTY CHARGE = penalty or compensatory interest. relief from liability
1. Alleges that his obligation to pay the interest and surcharge should have
2. WON interest may accrue on the penalty or compensatory interest been suspended because the obligation to pay such interest and
without violating ART 1959. surcharge has become conditional
1. Penalty clauses can be in the form of penalty or compensatory interest. i. Dependent on a future and uncertain event which consists of whether the
i. Thus, the compounding of the penalty or compensatory interest is petitioners request for condonation of interest and surcharge would be
sanctioned by and allowed pursuant to the above-quoted provision of recommended by the Commission on Audit.
Article 1959 of the New Civil Code considering that: 1. Since the condition has not happened due to the private respondents
1. There is an express stipulation in the promissory note (Exhibit A) reneging on its promise, his liability to pay the interest and surcharge on
permitting the compounding of interest. the loan has not arisen.
a. 5th paragraph of the said promissory note provides that: Any interest 2. COURT ANSWER:
which may be due if not paid shall be added to the total amount when i. Running of the interest and surcharge was not suspended.
due and shall become part thereof, the whole amount to bear interest at ii. CCP correctly asserted that it was the primary responsibility of petitioner to
the maximum rate allowed by law.. inform the Commission on Audit of his application for condonation of
2. Therefore, any penalty interest not paid, when due, shall earn the legal interest and surcharge.
interest of twelve percent (12%) per annum, in the absence of express
stipulation on the specific rate of interest, as in the case at bar.
2. ART 2212: Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this
point.