INTEREST AS DAMAGES

Art. 2209. If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per
annum. (1108)
Art. 2210. Interest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract.
Art. 2211. In crimes and quasi-delicts, interest as a part of the damages
may, in a proper case, be adjudicated in the discretion of the court.
Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point. (1109a)
Art. 2213. Interest cannot be recovered upon unliquidated claims or
damages, except when the demand can be established with reasonably
certainty.
Jurisprudence
1. Plaintiff claims that interest should be paid on the amount of damages
from the date of the filing of the complaint instead of from the date of
the decision of the trial court. If the suit were for the payment of a
definite sum of money, the contention might be tenable. However, it is
for damages, unliquidated and not known until definitely ascertained,
assessed and determined by the court after proof, interest should be
from the date of decision. (Rivera vs. Matute, 98 Phil. 516)
2. If the suit were for damages, unliquidated and not known until
definitely ascertained, assessed and determined by the court after
proof, interest should be from the date of decision (Malayan Insurance
vs. Manila Port Service, 28 SCRA 65)
3. Petitioner admitted his indebtedness to respondent in the amount of
P3,000.00 representing the unpaid balance of the unpaid equipment,
yet he did not tender payment of the said amount nor did he deposit
the same in court, but instead sought to have the sale rescinded upon
claims of violations of warranties that the court found not to have been
proved or established. Therefore, it is clear that petitioner was in
default on the date of the filing of the complaint by respondent and
under Art. 2209 of NCC, he must pay legal interest thereon from said
date. (Bareng vs. CA, GR L-12973, 1960)

4. Where payment of interest is not stipulated, the court may not order
the payment of the same. In the present case, however, since the
defendant failed to pay the balance agreed upon, it should be made to
pay the interest on said balance at the legal rate from the date of the
filing of the complaint. (Tan Book Diok vs. Appari Farmers, GR L-14153,
1960)
5. The most practical basis for assessing damages would be the payment
of legal interest from the value of property ordered by the court to be
returned. This form or basis of damages is widely accepted and
employed. When a piece of personal property is the subject of estafa or
theft, the accused if found guilty, is sentenced to return the property
stolen or misappropriated, or to pay its value. Even interest is seldom,
if at all, ordered. And when a party defendant is declared liable to pay
a certain amount of money which he owes, he is sentenced to pay said
amount with legal interest from the date that he was supposed to have
paid the same, or when the action to collect was brought in court. No
speculative damages as to the profit which the creditor have obtained
by the use of said money, its investments, etc. is allowed. In the
present case, appellant should pay the legal interest on the amount of
P1,552.25 until the motor engine is returned or its value of P1,552.25
is paid to respondent. This is in lieu of the payment of P7.00 a day,
which is highly speculative, contingent and arbitrary. (Kairuz vs. Pacio,
GR L-14505, 1960)
Legal Interest Rates - Modified by New Supreme Court Ruling The
Supreme Court has recently promulgated a decision modifying the rule on
interest rates awarded in the form of actual and compensatory damages.
In a decision penned by Justice Peralta, the Supreme Court in Nacar vs.
Gallery Frames, G.R. No. 189871 (13 August 2013), laid down a uniform rate
of six percent (6%) for the award of interest in the form of actual and
compensatory damages. The foregoing rate shall take effect on 01 July 2013.
The Supreme Courts pronouncement in Nacar vs. Gallery Frames modified
the previous guidelines laid down in Eastern Shipping Lines, Inc. vs. Court of
Appeals, G.R. No. 97412 (12 July 1994). Previously, in Eastern Shipping Lines,
Inc. vs. Court of Appeals, the Supreme Court held that for loans and
forbearance of money, in the absence of stipulation, the rate of interest shall
be twelve percent (12%) while for obligations not constituting a loan or
forbearance of money, the rate of interest shall be six percent (6%). When
the judgment of the court becomes final and executory, the rate of interest

shall be twelve percent (12%) since it is akin to a forbearance of money.

Now, with Nacar vs. Gallery Frames, the interest rate, regardless of the
source of the obligation, is pegged at a uniform rate of six percent (6%).
The Supreme Court further held in Nacar vs. Gallery Frames that for
judgments which became final and executory prior to 01 July 2013, they shall
not be disturbed and shall continue to apply the rates provided for therein.
The Supreme Court cited as basis BSP-MB Resolution No. 796 dated 16 May
2013 and BSP Circular No. 799, Series of 2013, which pegged the interest
rates for loans and forbearance of money, goods and credits, as well as
judgments, at six percent (6%). The Supreme Court held that the BSP is
authorized to set interest rates and to enforce its Circulars, citing its previous
ruling in Advocates for Truth in Lending Act, Inc. vs. Bangko Sentral Monetary
Board, G.R. No. 192986 (15 January 2013).
To summarize and for future guidance, the guidelines laid down in Eastern
Shipping Lines are accordingly modified to embody the ruling in Nacar, as
follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the

interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph
1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to
a forbearance of credit.
Judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of
interest fixed therein.
Stated otherwise, the interest rate, regardless of the source of the obligation,
is pegged at a uniform rate of six percent (6%)

LIQUIDATED DAMAGES
While penalties and liquidated damages are dealt with separately in Arts.
1229 and 2227 of the Civil Code, the fundamental rules governing them still
remain basically the same, leaving them subject to reduction where equity
so requires. (Joes Radio and Electrical Supply vs. Alto Electronics Corp., GR L12376, 1958)
Liquidated damages, whether intended as indemnity or penalty, shall be
equitably reduced if they are iniquitous or unconscionable. The reason is that
in both cases, the stipulation is contra bonos mores (against good morals)
under Art. 1306 of the Civil Code. It is mere technicality to refuse to lessen
the damages to their just amount simply because the stipulation is not
meant to be a penalty. An immoral stipulation is none the less immoral
because it is called an indemnity.
Where there is partial or irregular performance in a contract providing for
liquidated damages, it can be said that the court may mitigate the sum

stipulated therein since it is to be presumed that the parties only

contemplated a total breach of contract. And this is usually so because of the
difficulty or sometimes inability of the parties to ascertain or gauge
beforehand, the amount of indemnity in case of a partial breach, just as it is
equally perplexing to foresee the extent of a partial or irregular performance.
Art. 2216. No proof of pecuniary loss is necessary in order that moral,
nominal, temperate, liquidated or exemplary damages, may be adjudicated.
The assessment of such damages, except liquidated ones, is left to the
discretion of the court, according to the circumstances of each case.
Definition Art. 2226. Liquidated damages are those agreed upon by the
parties to a contract, to be paid in case of breach thereof.
Nature of Liquidated Damages In effect, liquidated damages and
penalty are the same. Neither requires proof of actual damages. (Lambert vs.
Fox, 26 Phil. 588) After all, they had been previously agreed upon.
Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or unconscionable.
The question of whether a stipulated sum is a penalty or for liquidated
damages is answered by the application of one or more aspects of the
following rule:
A stipulated sum is for liquidated damages only:
1. Where the damages which the parties might reasonably anticipate are
difficult to ascertain because of their indefiniteness or uncertainty, and
2. Where the amount stipulated is either a reasonable estimate of the
damages which would probably be caused by a breach
or
is
reasonably proportionate to the damage which have actually been
caused by the breach.
Art. 2228. When the breach of the contract committed by the defendant is
not the one contemplated by the parties in agreeing upon the liquidated
damages, the law shall determine the measure of damages, and not the
stipulation.
LIQUIDATED DAMAGES PENALTY / PENAL CLAUSE
Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of

noncompliance, if there is no stipulation to the contrary. Nevertheless,

damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with
the provisions of this Code. (1152a)
The Supreme Court of the Philippine Islands has expressly laid down the
doctrine that in this jurisdiction "there is no difference between a penalty
and liquidated damages so far as the legal results are concerned. Whatever
difference exists between them as a matter of language, they are treated the
same legally. In either ease the party to whom payment is to be made is
entitled to recover the sum stipulated without the necessity of proving
damages. (Lambert vs. Fox, 26 Phil. 590.)
Characteristics of a Penal Clause
1. An accessory agreement
2. A medium for reinforcing the principal obligation in whole or in part
3. A conventional estimation of damages in case of non-performance of
the principal obligation
Purpose of Penal Clause A penal clause is an accessory undertaking to
assume greater liability in case of breach. It is attached to an obligation in
order to insure performance and has a double function:
1. to provide for liquidated damages, and
2. to strengthen the coercive force of the obligation by the threat of
greater responsibility in the event of breach. (Filinvest Land, Inc. v.
Court of Appeals, G.R. No. 138980, 20 September 2005, 470 SCRA 260,
269)
Principal Purpose of Penal Clause
1. To insure performance
2. To substitute for damages and the payment of interest in case of noncompliance
In obligations with a penal clause, the penalty generally substitutes the
indemnity for damages and the payment of interests in case of noncompliance. Usually incorporated to create an effective deterrent against
breach of the obligation by making the consequences of such breach as
onerous as it may be possible, the rule is settled that a penal clause is not
limited to actual and compensatory damages. (Heirs of Manuel Uy Ek Liong v.

Mauricia Meer Castillo, Heirs of Buenaflor C. Umali, represented by Nancy

Umali, et al., G.R. No. 176425, June 5, 2013.)
Obligations with a Penal Clause vs. Other Obligations
1. OPC vs. Suspensive
- OPC constitutes an obligation
- Suspensive does not
2. OPC vs. Alternative
- OPC contains only one principal object due only in non-performance
- Alternative contains two principal objects/prestations; payment or
performance of one extinguishes the other; obligor generally and
obligee by exception can elect either
3. OPC vs. Potestative
- OPC, obligor cannot arbitrarily offer the penalty instead of the
principal prestation
- Potestative, obligor may prefer to liberate himself from the
prestation put in facultate solutionis
Penal Clause vs. Condition
the former constitutes an obligation
although accessory while the latter does not. Therefore, the former may
become demandable in default of the unperformed principal obligation while
the latter is never demandable
Instances When Additional Damages May Be Recovered (Exceptions
to the General Rule that Penalty takes the place of Indemnity for
Damages and for the Payment of Interest)
1. When there is express stipulation that damages or interest may still be
recovered despite the presence of the penalty clause
2. When debtor refuses to pay the penalty
3. When debtor is guilty of fraud there can be renunciation of an action
to enforce liability for future fraud; against public policy and law
Note: Breach of obligation WITHOUT fraud cannot constitute one of
the exceptions
Art. 1227. The debtor cannot exempt himself from the performance of the
obligation by paying the penalty, save in the case where this right has been
expressly reserved for him. Neither can the creditor demand the fulfillment of
the obligation and the satisfaction of the penalty at the same time, unless
this right has been clearly granted him. However, if after the creditor has
decided to require the fulfillment of the obligation, the performance thereof

should become impossible without his fault, the penalty may be enforced.
(1153a)
Art. 1228. Proof of actual damages suffered by the creditor is not necessary
in order that the penalty may be demanded. (n)
Reason: When a penal clause has been agreed upon in a contract, more as
a punishment for the infraction thereof than a mere security, it is a lawful
means for repairing losses and damages, and upon evidence of the violation
of the conditions stipulated, the injured party is not obliged to prove losses
and damages suffered, nor the extent of the same in order to demand the
enforcement of the penal clause agreed upon. (Palacios vs. Municipality of
Cavite, 12 Phil. 140)
Extent of Recovery
Are the parties confined to the amount of damages stipulated in case of
breach or total loss of the object of the obligation?
The writer, Lorenzo D. Licup in his book A COMPARATIVE STUDY OF PENALTY
UNDER THE CIVIL LAW AND LIQUIDATED DAMAGES AND PENALTY UNDER THE
COMMON LAW, does not think so. In support of his opinion he cites Manresa,
Vol. 8, page 239, wherein the commentator says in case of fraud, the obligee
has to prove this fact in order to recover more besides the penalties
stipulated. Art. 1109, CivilCode, provides that interest due shall produce legal
interest from the date on which it was judicially demanded, even if the
obligation is silent on this point. Georgi says on this point: "The judge can
besides the penalty concede an indemnification for injuries arising from acts
which thc agreed penalty does not cover, or for acts of losses different from
those stipulated for by the penalty." For instance, there is an agreement to
pay five pesos for every day's delay of delivery of thing purchased. Now,
suppose the vendor delays and 'besides destroys or injures the thing. Is it not
reasonable that the vendee is entitled both to the value of the thing and
compensation for the delay? (Georgi, Vol. IV, p. 473.)
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if
there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable. (1154a)
Instances when Penalty may be Reduced by the Court:
1. Obligation has been partly complied with by the debtor

2. Obligation has been irregularly complied with by the debtor

3. Penalty is iniquitous or unconscionable, even if there has been no
performance at all
"The courts shall reduce equitably liquidated damages, whether intended as
an indemnity or a penalty, if they are iniquitous or unconscionable. The
question of whether a penalty is reasonable or iniquitous is addressed to the
sound discretion of the courts. To be considered in fixing the amount of
penalty are factors such as but not limited to the type, extent and
purpose of the penalty; the nature of the obligation; the mode of the breach
and its consequences; the supervening realities; the standing and
relationship of the parties; and the like. Applying settled jurisprudence in this
case, we find that the interest stipulated upon by the parties in the
promissory note at the rate of 36% is iniquitous and unconscionable.
Consequently, an interest of 12% per annum and an attorneys fees of
P50,000.00 is deemed reasonable." (POLTAN vs. BPI FAMILY SAVING BANK, GR
No. 164307, March 5, 2007)
That the rate of interest was subsequently declared illegal and
unconscionable does not entitle petitioners-spouses to stop payment of
interest.1wphi1 It should be emphasized that only the rate of interest was
declared void. The stipulation requiring petitioners-spouses to pay interest on
their loan remains valid and binding. (Spouses Andal vs. PNB, G.R. No.
194201, November 27, 2013)
Art. 1230. The nullity of the penal clause does not carry with it that of the
principal obligation.
The nullity of the principal obligation carries with it that of the penal clause.
(1155)
Reason: The parties, when contracting, have in mind the performance of the
principal obligation. The penal clause is nothing more than a guarant.ee for
its fulfillment. The performance of the obligation should not therefore be
frustrated by the mere nullity of the accessory, which is secondary in
character. The nullity of the principal obligation carries with it that of the
penal clause. It is a maxim of law that the accessory follows the principal. A
penalty presupposes an offended right. If the principal obligation is void,
there is no right offended.
Penalty vs. Liquidated Damages

The Supreme Court of the Philippine Islands has expressly laid down the
doctrine that in this jurisdiction "there is no difference between a penalty
and liquidated damages so far as the legal results are concerned. Whatever
difference exists between them as a matter of language, they are treated the
same legally. In either ease the party to whom payment is to be made is
entitled to recover the sum stipulated without the necessity of proving
damages. (Lambert vs. Fox, 26 Phil. 590.)
In the Philippines, courts give much weight to the intention of the parties.
The freedom of making contracts is given a wide sphere. Within the liberty to
make contract, sanctioned by our laws, everyone is free to execute the
contracts he may consider suitable, provided they are not contrary to law,
morality and good customs (Gsell vs. Kock, Phil. 6).
In this jurisdiction, penalties provided in contracts of this character are
enforced. It is the rule that parties who are competent to contract may make
such agreement within the limitation of the law and public policy as they
desire, and that courts will enforce them according to their terms. (Fornow
vs. Hoffmeister, 6 Phil. 33; Palacios vs. Municipality of Cavit.e. 12 Phil. 140;
Gsell vs, Kock, 16 Phil. ....)
It is not necessary that the amount or importance of the losses and injuries
should be established; if their existence is proven that is all is required.
(Sentence of Feb. '19, 1914, Spain; Palacios vs. Municipality of Cavite, 12
Phil., 140.)
Attorneys Fees may be in the nature of Liquidated Damages
The law allows a party to recover attorneys fees under a written agreement.
In Barons Marketing Corporation v. Court of Appeals, the Court ruled that:
[T]he attorneys fees here are in the nature of liquidated damages
and the stipulation therefor is aptly called a penal clause. It has been
said that so long as such stipulation does not contravene law, morals, or
public order, it is strictly binding upon defendant. The attorneys fees so
provided are awarded in favor of the litigant, not his counsel.
On the other hand, the law also allows parties to a contract to stipulate on
liquidated damages to be paid in case of breach. A stipulation on liquidated
damages is a penalty clause where the obligor assumes a greater liability in
case of breach of an obligation. The obligor is bound to pay the stipulated

amount without need for proof on the existence and on the measure of
damages caused by the breach.
Liability for liquidated damages is governed by Articles 2226 to 2228 of
the Civil Code. A stipulation for liquidated damages is attached to an
obligation in order to ensure performance and has a double function: (1) to
provide for liquidated damages, and (2) to strengthen the coercive force of
the obligation by the threat of greater responsibility in the event of breach.
The amount agreed upon answers for damages suffered by the owner due to
delays in the completion of the project. As a precondition to such award,
however, there must be proof of the fact of delay in the performance
of the obligation.
A penalty clause, expressly recognized by law, is an accessory undertaking
to assume greater liability on the part of the obligor in case of breach of an
obligation. It functions to strengthen the coercive force of obligation and to
provide, in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach. It is well-settled that so long as
such stipulation does not contravene law, morals, or public order, it is strictly
binding upon the obligor. (J Plus Asia Development Corporation v. Utility
Assurance Corporation, G.R. No. 199650, June 26, 2013)