SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,

vs.
SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.

As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple
loan or mutuum, rather than a joint venture, with petitioners.

Respondents’ claims, as articulated in their testimonies before the trial court, cannot prevail over the
clear terms of the document attesting to the relation of the parties. "If the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control."32

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual
relation is one of simple loan or mutuum:

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called
a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.

_______

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (Emphasis
supplied)

On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:

Batan, Aklan

March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from
Mrs. Alma R. Abella, payable within one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33 (Emphasis supplied)

The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first,
respondents’ receipt of the sum of P500,000.00 from petitioner Alma Abella; second, respondents’
duty to pay back this amount within one (1) year from March 22, 1999; and third, respondents’ duty
to pay interest. Consistent with what typifies a simple loan, petitioners delivered to respondents with
the corresponding condition that respondents shall pay the same amount to petitioners within one (1)
year.
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 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.43 (Emphasis supplied, citations omitted)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple
loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At
present, this is 6% per annum, subject to Nacar’s qualification on prospective application.

Applying this, the loan obtained by respondents from petitioners is deemed subjected to
conventional interest at the rate of 12% per annum, the legal rate of interest at the time the parties
executed their agreement. Moreover, should conventional interest still be due as of July 1, 2013, the
rate of 12% per annum shall persist as the rate of conventional interest.

This is so because interest in this respect is used as a surrogate for the parties’ intent, as expressed
as of the time of the execution of their contract. In this sense, the legal rate of interest is an
affirmation of the contracting parties’ intent; that is, by their contract’s silence on a specific rate, the
then prevailing legal rate of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in the legal rate of
interest. Stated otherwise, the legal rate of interest, when applied as conventional interest, shall
always be the legal rate at the time the agreement was executed and shall not be susceptible to
shifts in rate.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per
annum. They argue that the acknowledgment receipt fails to show the complete and accurate
intention of the contracting parties. They rely on Article 1371 of the Civil Code, which provides that
the contemporaneous and subsequent acts of the contracting parties shall be considered should
there be a need to ascertain their intent.44 In addition, they claim that this case falls under the
exceptions to the Parol Evidence Rule, as spelled out in Rule 130, Section 9 of the Revised Rules
on Evidence.45

It is a basic precept in legal interpretation and construction that a rule or provision that treats a
subject with specificity prevails over a rule or provision that treats a subject in general terms.46

The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil
Code and specifically governs simple loans or mutuum. Mutuum is a type of nominate contract that
is specifically recognized by the Civil Code and for which the Civil Code provides a specific set of
governing rules: Articles 1953 to 1961. In contrast, Article 1371 is among the Civil Code provisions
generally dealing with contracts. As this case particularly involves a simple loan, the specific rule
spelled out in Security Bank and Spouses Toring finds preferential application as against Article
1371.

Contrary to petitioners’ assertions, there is no room for entertaining extraneous (or parol) evidence.
In Spouses Bonifacio and Lucia Paras v. Kimwa Construction and Development Corporation,47 we
spelled out the requisites for the admission of parol evidence:

In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence
of any of the four (4) exceptions has been put in issue in a party’s pleading or has not been objected
to by the adverse party; and second, that the parol evidence sought to be presented serves to form
the basis of the conclusion proposed by the presenting party.48
The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of
a case. Petitioners raised the issue of applying the exceptions to the Parol Evidence Rule only in the
Reply they filed before this court. This is the last pleading that either of the parties has filed in the
entire string of proceedings culminating in this Decision. It is, therefore, too late for petitioners to
harp on this rule. In any case, what is at issue is not admission of evidence per se, but the
appreciation given to the evidence adduced by the parties. In the Petition they filed before this court,
petitioners themselves acknowledged that checks supposedly attesting to payment of monthly
interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2," "3," "4," "5,"
"6," "7," and "8").49 What petitioners have an issue with is not the admission of these pieces of
evidence but how these have not been appreciated in a manner consistent with the conclusions they
advance.

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is
unconscionable. As emphasized in Castro v. Tan,50 the willingness of the parties to enter into a
relation involving an unconscionable interest rate is inconsequential to the validity of the stipulated
rate:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may
justify such imposition as righteous and as one that may be sustained within the sphere of public or
private morals.51

The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and
the law."52

In determining whether the rate of interest is unconscionable, the mechanical application of pre-
established floors would be wanting. The lowest rates that have previously been considered
unconscionable need not be an impenetrable minimum. What is more crucial is a consideration of
the parties’ contexts. Moreover, interest rates must be appreciated in light of the fundamental nature
of interest as compensation to the creditor for money lent to another, which he or she could
otherwise have used for his or her own purposes at the time it was lent. It is not the default vehicle
for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism
for the creditor’s unjust enrichment at the expense of another.

Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at
this rate, respondents’ obligation would have more than doubled—increased to 219.7% of the
principal—by the end of the third year after which the loan was contracted if the entire principal
remained unpaid. By the end of the ninth year, it would have multiplied more than tenfold (or
increased to 1,060.45%). In 2015, this would have multiplied by more than 66 times (or increased to
6,654.17%). Thus, from an initial loan of only P500,000.00, respondents would be obliged to pay
more than P33 million. This is grossly unfair, especially since up to the fourth year from when the
loan was obtained, respondents had been assiduously delivering payment. This reduces their best
efforts to satisfy their obligation into a protracted servicing of a rapacious loan.

The legal rate of interest is the presumptive reasonable compensation for borrowed money. While
parties are free to deviate from this, any deviation must be reasonable and fair. Any deviation that is
far-removed is suspect. Thus, in cases where stipulated interest is more than twice the prevailing
legal rate of interest, it is for the creditor to prove that this rate is required by prevailing market
conditions. Here, petitioners have articulated no such justification.
YAM VS MALIK

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

Art. 1933. — By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing upon the condition that the same amount of the same kind and
quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple
loam ownership passes to the borrower.

Art. 1953. — A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality.

It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted
to commodatum, the borrower acquires ownership of the money, goods or personal property
borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code)
and his act will not be considered misappropriation thereof.

In U.S. vs. Ibañez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse
to nay his debt or to deny its existence.

We are of the opinion and so decide that when the relation is purely that of debtor
and creditor, the debtor can not be held liable for the crime of estafa, under said
article, by merely refusing to pay or by denying the indebtedness.

It appears that respondent judge failed to appreciate the distinction between the two types of loan,
mutuum and commodatum, when he performed the questioned acts, He mistook the transaction
between petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor to be
commodatum wherein the borrower does not acquire ownership over the thing borrowed and has the
duty to return the same thing to the lender.

GEORGIA OSMEÑA-JALANDONI, Petitioner

vs
CARMEN A. ENCOMIENDA, Respondent
The RTC likewise harped on the fact that if Encomienda really intended the amounts to be a loan,
nonnal human behavior would have prompted at least a handwritten acknowledgment or a
promissory note the moment she parted with her money for the purpose of granting a loan. This
would be particularly true if the loan obtained was part of a business dealing and not one extended
to a close friend who suddenly needed monetary aid. In fact, in case of loans between friends and
relatives, the absence of acknowledgment receipts or promissory notes is more natural and real. In a
similar case,11 the Court upheld the CA' s pronouncement that the existence of a contract of loan
cannot be denied merely because it was not reduced in writing. Surely, there can be a verbal loan.
Contracts are binding between the parties, whether oral or written. The law is explicit that contracts
shall be obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present. A simple loan or mutuum exists when a person receives a
loan of money or any other fungible thing and acquires its ownership. He is bound to pay to the
creditor the equal amount of the same kind and quality. Jalandoni posits that the more logical reason
behind the disbursements would be what Encomiendacandidly told the trial court, that her acts were
plainly an "unselfish display of Christian help" and done out of "genuine concern for Georgia's
children." However, the "display of Christian help" is not inconsistent with theexistence of a loan.
Encomienda immediately offered a helping hand when a friend asked for it. But this does not mean
that she had already waived herright to collect in the future. Indeed, when Encomienda felt that
Jalandoni was beginning to avoid her, that was when she realized that she had to protect her right to
demand payment. The fact that Encomienda kept the receipts even for the smallest amounts she
had advanced, repeatedly sent demand letters, and immediately filed the instant case when
Jalandoni stubbornly refused to heed her demands sufficiently disproves the latter’s belief that all the
sums of money she received were merely given out of charity.

THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.

The Petition is bereft of merit.

At the outset, the relevant issues in this case are (1) whether petitioner breached its contract with
respondents, and (2) if so, whether it is liable for damages. The issue of whether petitioner’s
employees were negligent in allowing the withdrawal of Liu Chiu Fang’s dollar deposits has no
bearing in the resolution of this case. Thus, we find no need to discuss the same.

The "Hold Out" clause does not apply

to the instant case.

Petitioner claims that it did not breach its contract with respondents because it has a valid reason for
issuing the "Hold Out" order. Petitioner anchors its right to withhold respondents’ deposits on the
Application and Agreement for Deposit Account, which reads:

Authority to Withhold, Sell and/or Set Off:

The Bank is hereby authorized to withhold as security for any and all obligations with the Bank, all
monies, properties or securities of the Depositor now in or which may hereafter come into the
possession or under the control of the Bank, whether left with the Bank for safekeeping or otherwise,
or coming into the hands of the Bank in any way, for so much thereof as will be sufficient to pay any
or all obligations incurred by Depositor under the Account or by reason of any other transactions
between the same parties now existing or hereafter contracted, to sell in any public or private sale
any of such properties or securities of Depositor, and to apply the proceeds to the payment of any
Depositor’s obligations heretofore mentioned.
The Bank may, at any time in its discretion and with or without notice to all of the Depositors, assert
a lien on any balance of the Account and apply all or any part thereof against any indebtedness,
matured or unmatured, that may then be owing to the Bank by any or all of the Depositors. It is
understood that if said indebtedness is only owing from any of the Depositors, then this provision
constitutes the consent by all of the depositors to have the Account answer for the said
indebtedness to the extent of the equal share of the debtor in the amount credited to the Account.78

Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for Deposit Account
is misplaced.

The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the
sources of obligation enumerated in Article 115779 of the Civil Code, to wit: law, contracts, quasi-
contracts, delict, and quasi-delict. In this case, petitioner failed to show that respondents have an
obligation to it under any law, contract, quasi-contract, delict, or quasi-delict. And although a criminal
case was filed by petitioner against respondent Rosales, this is not enough reason for petitioner to
issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been
rendered against respondent Rosales. In fact, it is significant to note that at the time petitioner issued
the "Hold Out" order, the criminal complaint had not yet been filed. Thus, considering that
respondent Rosales is not liable under any of the five sources of obligation, there was no legal basis
for petitioner to issue the "Hold Out" order. Accordingly, we agree with the findings of the RTC and
the CA that the "Hold Out" clause does not apply in the instant case.

In view of the foregoing, we find that petitioner is guilty of breach of contract when it unjustifiably
refused to release respondents’ deposit despite demand. Having breached its contract with
respondents, petitioner is liable for damages.

In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner when it refused to release the deposits of respondents without any legal basis.
We need not belabor the fact that the banking industry is impressed with public interest.87 As such,
"the highest degree of diligence is expected, and high standards of integrity and performance are
even required of it."88 It must therefore "treat the accounts of its depositors with meticulous care and
always to have in mind the fiduciary nature of its relationship with them."89 For failing to do this, an
award of exemplary damages is justified to set an example.

SPOUSES FLORANTE E. JONSAY and LUZVIMINDA L. JONSAY and MOMARCO IMPORT CO.,
INC., Petitioners,
vs.
SOLIDBANK CORPORATION (now METROPOLITAN BANK AND TRUST
COMPANY), Respondent.

The stipulated rate of interest was 18.75% per annum, along with an escalation clause tied to
increases in pertinent Central Bank-declared interest rates, by which Solidbank was eventually able
to unilaterally increase the interest charges up to 30% per annum.

An escalation clause in a loan

agreement granting the lending
bank authority to unilaterally
increase the interest rate without
prior notice to and consent of the
borrower is void.

After annulling the foreclosure of mortgage, the RTC reduced the interest imposable on the
petitioners' loans to 12%, the legal interest allowed for a loan or forbearance of credit, citing Medel v.
CA.69 In effect, the RTC voided not just the unilateral increases in the monthly interest, but also the
contracted interest of 18.75%. The implication is to allow the petitioners to recover what they may
have paid in excess of what was validly due to Solidbank, if any.

In Floirendo, Jr. v. Metropolitan Bank and Trust Co., 70 the promissory note provided for interest at
15.446% per annum for the first 30 days, subject to upward/downward adjustment every 30 days
thereafter.71 It was further provided that:

The rate of interest and/or bank charges herein stipulated, during the term of this Promissory Note,
its extension, renewals or other modifications, may be increased, decreased, or otherwise changed
from time to time by the Bank without advance notice to me/us in the event of changes in the interest
rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, in the
rediscount rate of member banks with the Central Bank of the Philippines, in the interest rates on
savings and time deposits, in the interest rates on the banks borrowings, in the reserve
requirements, or in the overall costs of funding or money[.]72 (Italics ours)

The Court ordered the "reformation" of the real estate mortgage contract and the promissory note, in
that any increases in the interest rate beyond 15.446% per annum could not be collected by
respondent bank since it was devoid of prior consent of the petitioner, as well as ordered that the
interest paid by the debtor in excess of 15.446% be applied to the payment of the principal
obligation. 73

In Philippine National Bank v. CA, 74 the Court declared void the escalation clause in a credit
agreement whereby the "bank reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future x x x."75 The Court said:

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

Similarly, contract changes must be made with the consent of the contracting parties. The minds of
all the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest
is always a vital component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts. x x
x. 76 (Citation omitted and italics in the original)

n New Sampaguita Builders Construction, Inc. (NSBCJ) v. PNB,77 the Court condemned as the
"zenith of farcicality" a mortgage contract whereby the parties "specify and agree upon rates that
could be subsequently upgraded at whim by only one party to the agreement."78 The Court declared
as a contract of adhesion a pro forma promissory note which creates a "take it or leave it" dilemma
for borrower and gives the mortgagee bank an unbridled right to adjust the interest independently
and upwardly, thereby completely taking away from the borrower the "right to assent to an important
modification in their agreement," thus negating the element of mutuality in their contracts.79The Court
quotes:

Increases in Interest Baseless

Promissorv Notes. In each drawdown, the Promissory Notes specified the interest rate to be
charged: 19.5 percent in the first, and 21.5 percent in the second and again in the third. However, a
uniform clause therein permitted respondent to increase the rate "within the limits allowed by law
at any time depending on whatever policy it may adopt in the future x x x," without even
giving prior notice to petitioners. The Court holds that petitioners' accessory duty to pay interest
did not give respondent unrestrained freedom to charge any rate other than that which was agreed
upon. No interest shall be due, unless expressly stipulated in writing. It would be the zenith of
farcicality to specify and agree upon rates that could be subsequently upgraded at whim by only one
party to the agreement.

The "unilateral detennination and imposition" of increased rates is "violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code." One-sided impositions do not have
the force of law between the parties, because such impositions are not based on the parties'
essential equality.

Although escalation clauses are valid in maintaining fiscal stability and retaining the value of money
on long-term contracts, giving respondent an unbridled right to adjust the interest independently and
upwardly would completely take away from petitioners the "right to assent to an important
modification in their agreement" and would also negate the element of mutuality in their contracts.
The clause cited earlier made the fulfillment of the contracts "dependent exclusively upon the
uncontrolled will" of respondent and was therefore void. Besides, the pro forma promissory notes
have the character of a contract d'adhesion, "where the parties do not bargain on equal footing, the
weaker party's [the debtor's] participation being reduced to the alternative 'to take it or leave it."'

"While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular No. 905, nothing
in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets." In fact, we have declared
nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury Law,
"authorized either party to unilaterally raise the interest rate without the other's consent."

Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing
signified a capital transfusion from lending institutions to businesses and industries and was done for
the purpose of stimulating their growth; yet respondent's continued "unilateral and lopsided policy" of
increasing interest rates "without the prior assent" of the borrower not only defeats this purpose, but
also deviates from this pronouncement. Although such increases are not usurious, since the "Usury
Law is now legally inexistent" - the interest ranging from 26 percent to 35 percent in the statements
of account - "must be equitably reduced for being iniquitous, unconscionable and exorbitant." Rates
found to be iniquitous or unconscionable are void, as if it there were no express contract thereon.
Above all, it is undoubtedly against public policy to charge excessively for the use of
money. 80 (Citations omitted and emphasis ours)

In New Sampaguita, the Court invoked Article 131081 of the Civil Code which grants courts authority
to reduce or increase interest rates equitably. It eliminated the escalated rates, insurance and
penalties and imposed only the stipulated interest rates of 19.5% and 21.5% on the notes, to be
reduced to the legal rate of 12% upon their automatic conversion into medium-term loans after
maturity: 82

[T]o give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and 21.5
percent stipulated in the Promissory Notes may be imposed by respondent on the respective
availments. After 730 days, the portions remaining unpaid are automatically converted into medium-
term loans at the legal rate of 12 percent. In all instances, the simple method of interest computation
is followed.x x x.83

Thus, all payments made by the petitioners were applied pro-rated to the notes, and after eliminating
the charges, penalties and insurance, the result of the recomputation was an overcollection by the
bank of P3,686, 101.52, which the Court ordered refunded to the petitioners with straight interest at
6% per annum from the filing of the complaint until Finality.84

In Equitable PCI Bank v. Ng Sheung Ngor, 85 the Court annulled the escalation clause and imposed
the original stipulated rate of interest on the loan, until maturity, and thereafter, the legal interest of
12% per annum was imposed on the outstanding loans. Thus, the Court ordered the borrower to pay
Equitable the stipulated interest rate of 12.66% per annum for the dollar denominated loans, and the
stipulated 20% per annum for the peso denominated loans, up to maturity, and afterwards Equitable
was to collect legal interest of 12% per annum on all loans due.86 Incidentally, under Monetary Board
Circular No. 799, the rate of interest for the loan or forbearance of money, in the absence of
stipulation, shall now be 6% per annum starting July 1, 2013.87

Thus, the Court disregarded the unilaterally escalated interest rates and imposed the mutually
stipulated rates, which it applied up to the maturity of the loans. Thereafter, the Court imposed the
legal rate of 12% per annum on the outstanding loans, or 6% per annum legal rate on the excess of
the borrower's payments.

The recomputation of the

petitioners' total loan indebtedness
based on the stipulated interest, and
the exclusion of the penalties and
reduction of the attorney's fees
results in an excess of the auction
proceeds which must be paid to the
petitioners.

Coming now to the question of whether Solidbank must refund any excess interest to the petitioners,
the CA agreed with the RTC that the loans should earn only 12% for Solidbank, which would result
in a drastic reduction in the interest which the petitioners would be obliged to pay to Solidbank.
Notwithstanding what this Court has said concerning the invalidity of the unilateral increases in the
interest rates, the ruling nonetheless violates the contractual agreement of the parties imposing an
interest of 18.75% per annum, besides the fact that an interest of 18.75% per annum cannot per
se be deemed as unconscionable back in 1995 or in 1997.

In the recent cases of Mallari v. Prudential Bank (now Bank of the Philippine Islands)90 and Spouses
Villanueva v. The CA, et al.,91 the Court did not consider unconscionable the contractual interest
rates of 23% or 24% per annum. In Mallari, the Court upheld the loans obtained between 1984 and
1989 which bore interest from 21 % to 23% per year; in Spouses Villanueva, the loans secured in
1994 carried interest of 24% per year were upheld. In Advocates for Truth in Lending, Inc. v. Bangko
Sentral Monetary Board,92 the Court noted that in the later 1990s, the banks' prime lending rates
which they charged to their best borrowers ranged from 26% to 31%.93
 To answer, then, the question of whether Solidbank must refund anything to the petitioners, the
contracted rate of 18.75%, not the legal rate of 12%, will be applied to the petitioners' loans. Any
excess either in the interest payments of the petitioners or in the auction proceeds, over what is
validly due to Solidbank on the loans, will be refunded or paid to the petitioners. Thus:

(1) The first loan of P40,000.000.00 carried a stipulated interest of 18.75% per annum, and
from November 9, 1995 to March 5, 1999, which is the auction date and the date the
mortgage was terminated, a period of 3 years and 116 days, or 3.3178 years, and total
interest earned by the bank thereon is P24,883,500.00; the second loan, for P20,000,000.00,
was also agreed to earn 18. 75% per annum, and from April 28, 1997 to March 5, 1999, a
period of 1 year and 311 days, or 1.8520 years, it earned P6,945,000.00 in interest. In all,
Solidbank earned P31,828,500.00 in interest up to March 5, 1999 from both loans. 1âwphi1

(2) From November 9, 1995 to April 1998, the petitioners paid monthly interests
totaling P24,277,283.22. Deducting P24,277,283.22 from the sum of the total loan principal
of P60,000,000.00 and the total interest due of P31,828,500.00, which
is P91,828,500.00, leaves the amount of P67,551,216.78 in interest owed by the petitioners
as of March 5, 1999.

(3) As in New Sampaguita Builders, the Court shall exclude all the penalties or surcharges
charged by the bank, and shall allow the bank to recover only 1% as attorney's fees,
or P675,512.17, not the P3,600,000.00 awarded by the RTC. Thus, all in all, the petitioners
owed the bank P68,226,728.95 (P67,551,216.78 plus P675,512.17) as of March 5, 1999. 1âwphi1

(4) Deducting P68,226,728.95 from Solidbank's winning bid of P82,327,000.00 leaves an

excess of P14,100,271.05 in the proceeds of the auction over the outstanding loan obligation
of the petitioners. This amount must be paid by Solidbank to the petitioners.

(5) Since the P14,100,271.05 is the excess in the auction proceeds, thus an ordinary
monetary obligation and not a loan or a forbearance of credit, it shall earn simple interest at
six percent (6%) per annum from judicial demand up to finality, following Eastern Shipping
Lines, Inc. v. Court of Appeals; 94 thereafter, both the said amount and the accumulated
interest shall together earn six percent (6%) per annum, pursuant to Monetary Board Circular
No. 799, until full satisfaction.

Thus:
1âw phi1

Particulars Amount
Solidbank’s Winning Bid P82,327,000.00
Less: Amount Due from Petitioners, as March 5, 1999
Loan No. 1 Principal P40,000,000.00
Loan No. 2 Principal 20,000,000.00
Total 60,000,000.00
Add: Interest Due

Loan No. 1 – November 9, 1995

to March 5, 1999 P24,883,500.00 31,828,500.00 68,226,728.95
 (P40,000,000.00x18.75%p.a. x 3.3178)
Loan No. 2 – April 28, 1997 to
March 5, 1999 or
(P20,000,000.00 x 18.75% p.a. x 1.8520) 6,945,000.00
Total 91,828,500.00
Less: Interest paid from November 1995 to April 1998 24,277,283.22
Net Amount Due from Petitioners 67,551,216.78
Add: Attorney’s fees (1% of P67,551,216.78) 675,512.17
Balance Payable to Petitioners P14,100,271.05

WHEREFORE, premises considered, the Amended Decision dated November 26, 2012 of the Court
of Appeals in CA-G.R. CV No. 94012 is AFFIRMED with MODIFICATION in that the stipulated
interest rate on the loan obligation of 18.75% shall be applied, resulting in P67,551,216.78 as the
amount due from the Spouses Florante E. Jonsay and Luzviminda L. Jonsay and Momarco Import
Co., Inc. to Solidbank Corporation (now Metropolitan Bank and Trust Company). In addition, the
Spouses Florante E. Jonsay and Luzviminda L. Jonsay and Momarco Import Co., Inc.
are ORDERED to PAY atton1ey's fees in the amount of P675,512.17, which is one percent (1%) of
the loan obligation.

Thus, Solidbank Corporation (now Metropolitan Bank and Trust Company) is ORDERED to PAY to
the petitioners the amount of P14,100,271.05, representing the excess of its auction bid over the
total loan obligation due from the petitioners, plus interest at six percent (6%) per annum computed
from the date of filing of the complaint or March 15, 2000 up to finality; and thereafter, both the
excess of the auction proceeds and the cumulative interest shall earn six percent (6%) per
annum until fully paid.

FLORANTE VITUG, Petitioner,

vs.
EVANGELINE A. ABUDA, Respondent.

Under the circumstances of this case, we find no reason to uphold the stipulated interest rates of 5%
to 10% per month on petitioner's loan. Petitioner obtained the loan out of extreme necessity. As
pointed out by respondent, the property would have been earlier foreclosed by the National Housing
Authority if not for the loan. Moreover, it would be unjust to impose a heavier burden upon petitioner,
who would already be losing his and his family's home. Respondent would not be unjustly deprived if
the interest rate is reduced. After all, respondent still has the right to foreclose the property. Thus, we
affirm the Court of Appeals Decision to reduce the interest rate to I% per month or 12% per annum.

However, we modify the rates in accordance with the guidelines set forth in Nacar v. Gallery
Frames:118
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 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.

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

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

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 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.

And, in addition to the above, 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.119

Thus, the interest rate for petitioner's loan should be further reduced to 6% per annum from July 1,
2013 until full satisfaction.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated October 26, 2011 and
its Resolution dated March 8, 2012 are AFFIRMED. The interest rate for the loan of P600,000.00 is
further reduced to 6% per annum from July 1, 2013 until fully paid.

G.R. No. 158622

SPOUSES ROBERT ALAN L. and NANCY LEE LIMSO, Petitioners,

vs.
PHILIPPINE NATIONAL BANK and THE REGISTER OF DEEDS OF DAVAO CITY, Respondents.

x-----------------------x
G.R. No. 169441

DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES

ROBERT ALAN and NANCY LIMSO, Petitioners,
vs.
HON. JESUS V. QUITAIN, in his capacity as Presiding Judge of Regional Trial Court, Davao
City, Branch 15 and PHILIPPINE NATIONAL BANK, Respondents.

x-----------------------x

G.R. No. 172958

DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION represented by its

President ROBERT ALAN L. LIMSO, and SPOUSES ROBERT ALAN and NANCY LEE
LIMSO, Petitioners,
vs.
HON. JESUS V. QUITAIN, in his capacity as Presiding Judge of Regional Trial Court, Davao
City, Branch 15 and PHILIPPINE NATIONAL BANK, Respondents.

x-----------------------x

G.R. No. 173194

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES
ROBERT ALAN LIMSO and NANCY LEE LIMSO, Respondents.

x-----------------------x

G.R. No. 196958

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES
ROBERT ALAN L. LIMSO and NANCY LEE LIMSO, Respondents.

x-----------------------x

G.R. No. 197120

DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES

ROBERT ALAN AND NANCY LEE LIMSO, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.

x-----------------------x

G.R. No. 205463

IN THE MATTER OF THE PETITION EX-PARTE FOR THE ISSUANCE OF THE WRIT OF
POSSESSION UNDER LRC RECORD NO. 12973, 18031 AND LRC RECORD NO. 317,
PHILIPPINE NATIONAL BANK,

There is no mutuality of contract when the interest rate in a loan agreement is set at the sole
discretion of one party. Nor is there any mutuality when there is no reasonable means by which the
other party can determine the applicable interest rate. These types of interest rates stipulated in the
loan agreement are null and void. However, the nullity of the stipulated interest rate does not
automatically nullify the provision requiring payment of interest. Certainly, it does not nullify the
obligation to pay the principal loan obligation.

These consolidated cases arose from three related actions filed before the trial courts of Davao City.

In 1993, Spouses Robert Alan L. Limso and Nancy Lee Limso (Spouses Limso)1 and Davao Sunrise
Investment and Development Corporation (Davao Sunrise) took out a loan secured by real estate
mortgages from Philippine National Bank.2

The loan was in the total amount of P700 million, divided into two (2) kinds of loan accommodations:
a revolving credit line of P300 million, and a seven-year long-term loan of P400 million.3

To secure the loan, real estate mortgages were constituted on four (4) parcels of land registered with
the Registry of Deeds of Davao City.4 The parcels of land covered by TCT Nos. T-147820, T-
151138, and T-147821 were registered in the name of Davao Sunrise, while the parcel of land
covered by TCT No. T-140122 was registered in the name of Spouses Limso.5

In 1995, Spouses Limso sold the parcel of land covered by TCT No. T-140122 to Davao Sunrise.6

Spouses Limso and Davao Sunrise had difficulty in paying their loan. In 1999, they requested that
their loan be restructured. After negotiations, Spouses Limso, Davao Sunrise, and Philippine
National Bank executed a Conversion, Restructuring and Extension Agreement.7

The principal obligation in the restructured agreement totalled ₱1.067 billion. This included ₱217.15
million unpaid interest.8

There is no mutuality of contracts when the determination or imposition of interest rates is at the sole
discretion of a party to the contract. Further, escalation clauses in contracts are void when they allow
the creditor to unilaterally adjust the interest rates without the consent of the debtor.

The Petitions docketed as G.R. Nos. 196958 and 197120 assail the Decision in CA-G.R. CV No.
79732-MIN.316

Philippine National Bank argues that the principle of mutuality of contracts was not violated because
Spouses Limso and Davao Sunrise were notified as to the applicable interest rates, and their
consent was obtained before the effectivity of the agreement.317 There was no unilateral imposition of
interest rates since the rates were dependent on the prevailing market rates.318

Philippine National Bank also argues that Spouses Limso and Davao Sunrise were regularly
informed by Philippine National Bank of the interest rates imposed on their loan, as shown by Robert
Alan L. Limso’s signatures on the letters sent by Philippine National Bank.319
Philippine National Bank further argues that loan agreements with escalation clauses, by their
nature, "would not indicate the exact rate of interest applicable to a loan precisely because it is made
to depend by the parties to external factors such as market indicators and/or government regulations
affecting the cost of money."

Philippine National Bank cites Solidbank Corp., (now Metropolitan Bank and Trust Company) v.
Permanent Homes, Incorporated,321 where this court held that "contracts with escalation clause do
not violate the principle of mutuality of contracts."322

Philippine National Bank contends that the Conversion, Restructuring and Extension Agreement
novated the previous contracts with Spouses Limso and Davao Sunrise. In addition, the alleged
infirmities in the previous contracts were set aside upon the execution of the Conversion,
Restructuring and Extension Agreement. 323

On the other hand, Spouses Limso and Davao Sunrise argue that the Court of Appeals did not err in
ruling that the interest rates were imposed unilaterally. Spouses Limso and Davao Sunrise allege
that the interest rates were not stipulated in writing, in violation of Article 1956 of the Civil
Code.324 Also, the Court of Appeals did not err in reducing the penalties and attorney’s fees since
Article 2227 of the Civil Code states:325

Article 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.

Spouses Limso and Davao Sunrise add that the letters sent by Philippine National Bank to Davao
Sunrise were not agreements but mere notices that the interest rates were increased by Philippine
National Bank.326 Moreover, the letters were received by Davao Sunrise’s employees who were not
authorized to receive such letters.327 Some of the letters did not even appear to have been received
by anyone at all.328

. [W]e hold that the escalation clause is . . . void because it grants respondent the power to impose
an increased rate of interest without a written notice to petitioners and their written consent.
Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest rates
would not suffice. A detailed billing statement based on the new imposed interest with corresponding
computation of the total debt should have been provided by the respondent to enable petitioners to
make an informed decision. An appropriate form must also be signed by the petitioners to indicate
their conformity to the new rates. Compliance with these requisites is essential to preserve the
mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the
parties, because such impositions are not based on the parties' essential equality.357 (Citations
omitted)

This court explained that:

Similarly, contract changes must be made with the consent of the contracting parties. The minds of
all the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest
is always a vital component, for it can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.363

In a subsequent case364 also involving Philippine National Bank, this court likewise nullified the
interest rate provisions of Philippine National Bank and discussed:
In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents’ assent to the increases cannot be
implied from their lack of response to the letters sent by PNB, informing them of the increases. For
as stated in one case, no one receiving a proposal to change a contract is obliged to answer the
proposal.365 (Citation omitted)

However, only the interest rate imposed is nullified; hence, it is deemed not written in the contract.
The agreement on payment of interest on the principal loan obligation remains. It is a basic rule that
a contract is the law between contracting parties.366 In the original loan agreement and the
Conversion, Restructuring and Extension Agreement, Spouses Limso and Davao Sunrise agreed to
pay interest on the loan they obtained from Philippine National Bank. Such obligation was not
nullified by this court. Thus, their obligation to pay interest in their loan obligation subsists.367

Spouses Abella v. Spouses Abella368 involved a simple loan with an agreement to pay interest.
Unfortunately, the applicable interest rate was not stipulated by the parties. This court discussed that
in cases where the parties fail to specify the applicable interest rate, the legal rate of interest applies.
This court also discussed that the applicable legal rate of interest shall be the prevailing rate at the
time when the agreement was entered into:369

This is so because interest in this respect is used as a surrogate for the parties’ intent, as expressed
as of the time of the execution of their contract. In this sense, the legal rate of interest is an
affirmation of the contracting parties’ intent; that is, by their contract’s silence on a specific rate, the
then prevailing legal rate of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in the legal rate of
interest. Stated otherwise, the legal rate of interest, when applied as conventional interest, shall
always be the legal rate at the time the agreement was executed and shall not be susceptible to
shifts in rate.370

Further, Spouses Abella cited Article 2212371 of the Civil Code and the ruling in Nacar v. Gallery
Frames,372 which both state that "interest due shall itself earn legal interest from the time it is
judicially demanded:"373

[T]he interest due on conventional interest shall be at the rate of 12% per annum from [date of
judicial demand] to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of 6%
per annum.374

In this case, the Conversion, Restructuring and Extension Agreement was executed on January 28,
1999. Thus, the applicable interest rate on the principal loan obligation (conventional interest) is at
12% per annum. With regard to the interest due on the conventional interest, judicial demand was
made on August 21, 2000 when Philippine National Bank filed a Petition375 for Extrajudicial
Foreclosure of Real Estate Mortgage.376 Thus, from August 21, 2000 to June 30, 2013, the interest
rate on conventional interest shall be at 12%. From July 1, 2013 until full payment, the applicable
interest rate on conventional interest shall be at 6%.

Interest on the principal loan obligation shall be at the rate of 12% per annum and computed from
January 28, 1999, the date of the execution of the Conversion, Restructuring and Extension
Agreement. Interest rate on the conventional interest shall be at the rate of 12% per annum from
August 21, 2000, the date of judicial demand, to June 30, 2013. From July 1, 2013 until full
satisfaction, the interest rate on the conventional interest shall be computed at 6% per annum in
view of this court’s ruling in Nacar v. Gallery Frames.444