ll. LAWS ON CREDIT TRANSACTION 45 C. INTEREST C.1,__Legal provisions and rules governing interest The provisions of law and rules pertaining to interest and interest rates can be found in, inter alia, Articles 1956 to 1961,'°* 2209,""° 2212, 2213,'"" and 1169" of the Civil Code, as well as Monetary Board (MB) Resolution No. 796, dated May 16, 2013, as implemented by "© «Art. 1956.No interest shall be due unless it has been expressly stipulated in writing. “Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. “Art. 1958. In the determination of the interest, ift is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment. “Art. 1959. Without prejudice to the provisions of Art. 2212, interest due ‘and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid which, as added principal, shall ‘eam new interest. “Art. 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code conceming solutio indebiti, or natural obligations, shall be applied, as the case may be. ‘Art. 1961. Usurious contracts shall be governed by the Usury Law and special laws, s0 far as they are not inconsistent with this Code." "° “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.” “Art, 2212. Interest due shall eam legal interest from the time it is Judicial demanded, although the obligation may be silent upon this point ‘At. 2213. Interest cannot be recovered upon unliquidated claims or ‘damages, except wien the demand can be established with reasonable certainty. ' “Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfilment of their obligation. ‘However, the demand by the creditor shall not be necessary in order that delay may exist: ‘(1) When the obligation or the law expressly so declare; or 2) When from the nature and the circumstances of the obligation it ‘appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform."46 COMMERCIAL LAWS | Credit Transactions Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013,''? which took effect on July 1, 2013. C.2.__ Interest defined “Interest” is the compensation allowed by law_or fixed by the parties for the loan or forbearance of money, goods, or credits. Simply put, it is nothing more than the agreed compensation which the borrower is obliged to pay for the use of the money loaned to him by the lender. C.3.__Rule on payment of interest The general rule is that no interest shall be due unless it is stipulated in writing." This simply means that payment of monetary interest is allowed only if: (a) there is an express agreement for the payment of interest; and (b) such agreement is reduced to written form. *® "BSP CIRCULAR NO. 799, Series of 2013 "Subject: Rate of interest in the absence of stipulation “The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982: “Sec. 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum. “Sec. 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q. 1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly. “This Circular shall take effect on 1 July 2013.” "4 Art. 1956, CC, which provides: “No interest shall be due unless it has been expressly stipulated in writing.”ll, LAWS ON CREDIT TRANSACTION 47 The concurrence of the two (2) conditions is required for the payment of monetary interest. Thus, the collection of interest without any stipulation for it in writing is prohibited by law.''® Excepted from the above rule is interest on damages or indemnity for damages (or compensatory interest). C4, Right to recover interest The right to interest arises either: (a) by virtue of a contract (stipulation in writing re: interest);'"® or (b) by way of damages for delay or failure (demora)'"” to pay the principal on which interest is demanded, at the time when the debtor is obliged to make such payment.''® Interest will not be allowed in the absence of proof of such contract or of delay or failure (demora) in the payment of the principal at the time when the debtor is obligated to make such payment.’ C.5._Recovery of interest; requisites In order that interest may be imposed and recovered, the following requisites must concur: (a) The payment of interest must be expressly agreed upon by the parties;'° * Gonzales-Saldana v. Niamatali, GR 226587. Nov. 21, 2018, 886 SCRA 479 "® Monetary interest "T Compensatory interest "* Barretto v. Santa Marina and "La Insular’, GR L-11908. Feb. 04, 1918, 37 Phil, 668 " Tan v, Valdehueza, GR L-38745. Aug. 6, 1975, 66 SCRA 6148 COMMERCIAL LAWS | Credit Transactions (b) The agreement must be reduced to writing:'*’ and (c) The interest stipulated must be lawful and not unconscionable or iniquitous. C.6.__Return or retention of unstipulated interest paid Under Article 1960 of the Civil Code, “fijf the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be.” Put more succinctly, the creditor is obliged to return to the debtor the payment he has mistakenly received from the latter for interest that is not stipulated in the contract of loan on the ground of solutio indebiti or undue payment." “Solutio indebiti” applies in interest payment where: (a) payment is made when there exists no binding (contractual) relation (with respect to interest) between the payor, who has no duty to pay, and the person who received the payment; and (b) such payment (of interest) is made through mistake, and not through the liberality of ‘the payor or some other cause. However, the debtor who pays the interest, though it is not stipulated or, even if stipulated, the same is not in writing, of his own free will and out of his sheer liberality and not through mistake, is obliged to recognize the right "2 art, 1956, CC, supra. ™ ‘Art. 2164, /d., which states: “if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises.”ll, LAWS ON CREDIT TRANSACTION 49 of the creditor to retain what the debtor has voluntarily paid as in the case of natural obligations. ¢.7.__Unconscionable interest rates “Unconscionable interest rates” are agreed interest rates which are considered as void ab initio for being “contrary to morals, and the law.” In one case, the Supreme Court held that “[sjtipulated interest rates of three percent (3%) per month and higher are excessive, iniquitous, unconscionable, and exorbitant. Such stipulations are void for being contrary to morals, if not against the law.”"** Thus, where the stipulation on the interest rate is void, it will be deemed as though there was no express contract on it. Hence, the courts may reduce the interest rate as reason and equity demand. C.8.__Kinds of interest There are two (2) kinds of interest; namely: (a) monetary interest; and (b) compensatory interest. “Monetary interest” refers to the compensation set by the parties for the use or forbearance of money. No such interest shall be due unless it has been expressly stipulated in writing. "3 ad. 1423, Id, which reads: “Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, ‘not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Xxx.” Louh, Jr. v. Bank of the Phil Islands, GR 225562, Mar, 8, 2017, 820 SCRA 103 "5 MCMP Construction Corp. v. Monark Equipment Corp., GR 201001. Nov. 10, 2014, 739 SCRA 43250 COMMERCIAL LAWS | Credit Transactions On the other hand, “compensatory interest” refers to the penalty or indemnity for damages imposed by law or by the courts. The interest mentioned in Articles 2209 and 2212 of the Civil Code applies to compensatory interest. ‘7° Clearly, compensatory interest is the interest imposed against the borrower by reason of his default which shall be: (a) the interest agreed upon; or {127 (b) in the absence of stipulation, the /ega/ interes: which is six percent (6%) per annum. C.9._Monetary interest not inclusive of penalty An agreement upon a penalty apart from the monetary interest is allowed by law. If the parties enter into this kind of agreement, the penalty does not include the monetary interest and as such, the two are different and distinct from each other and may be demanded separately. C.10._ Compensatory interest; basis of interest rate The bases for the determination of the interest rate for compensatory interest include: %° Philrock, Inc. v. Construction Industry Arbitration Commission, GR 132848-49, June 26, 2001, 359 SCRA 632 7 Legal interest is the interest earned by a loan or forbearance of money after the obligation to pay it is breached at the legal rate of, in the absence of stipulation, 6% per annum, to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Art. 1169 of the Civil Code. [See MB Res. 796 dated May 16, 2013].Il. LAWS ON CREDIT TRANSACTION 51 (a) MB_Resolution No. 796 _as_implemented_by BSP. Circular No. 799, Series of 2013 - six percent (6%) per annum in cases of: (1) Loans; (2) Forbearance of money, goods, or credits; and (3) Judgment involving such loan or forbearance, in the absence of express agreement as to such rate of interest, where the interest rate applies during the interim period from the date of judgment until actual payment. In the absence of a stipulation as to interest, the loan due will now earn interest at the legal rate of six percent (6%) per annum. (b) Article 2209 of the Civil Code - six percent (6%) per annum in cases of: (1) Other sources (e.g., sale); (2) Damages arising from injury from a person; and (3) Loss of property which does not involve a loan. It bears stressing that, in view of the issuance of MB Resolution No. 796, as implemented by BSP Circular No. 799, in 2013, which pegged the rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, to a single rate 6% per annum (discarding the 12% rate),52 COMMERCIAL LAWS | Credit Transactions the same coincided with the legal rate of interest provided for under Article 2209 of the Civil Code which is also placed at 6% per annum, and (c) Interest accruing from unpaid interest - the interest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point. C.11. Classes of interest Interest may also be classified into: (a) Simple interest — that interest which is paid for the use of the money, at a certain rate stipulated in writing by the parties; Compound interest — that interest which is im- posed upon an accrued interest, that is, the in- terest due and unpaid; = (c) Legal interest — that interest which the law di- rects to be paid in the absence of any agree- ment as to the rate; S Lawful Interest — that interest which the laws allow or do not prohibit; and (e) Unlawful or usurious Interest — that interest which is paid or stipulated to be paid beyond the maximum rate fixed by law. However, by virtue of CBP Circular No. 905 which lifted the ceilings for interest rates, the usury law is ‘merely “suspended” for the time being by such administrative action.Il, LAWS ON CREDIT TRANSACTION 53 It is submitted that the law is not really “legally inexistent” as it still exists in the statute books and may possibly regain its efficacy by virtue of another act from the monetary authority. Besides, the Monetary Board is still drawing its power to issue policies on interest rates from its mandate under Section 1(a) of the “extant” Usury Law (Act No. 2655), as amended by PD 116. C.12. Interest_allowed_on_the penalty; when recoverable Article 2210 of the Civil Code provides that, in the discretion of the court, interest may be allowed upon damages awarded for breach of contract. This interest is recoverable from the time of delay, that is, from the date of demand, either judicial or extrajudicial. If there is no showing as to when demand for payment was made, plaintiff must be considered to have made such demand only from the filing of the complaint.'** C.13._ New guidelines on computation of interest The guidelines laid down in the case of Eastern Shipping Lines v. Court of Appeals'®® are accordingly modified'®° by the Supreme Court to embody MB Resolution No. 796, as implemented by BSP Circular No. 799, Series of 2013, as follows: (a) When an obligation, regardless of its source. ie.,.law, contracts, quasi-contracts, delicts, or quasi-delicts, is breached, the contravenor can be held liable for damages. ° Cabarroguis v. Vicente, GR L-14304, Mar. 23, 1960, 107 Phil. 340 ™ GR 97412. July 12, 1994, 234 SCRA 78 * Odiamar v. Valencia, GR 213582, Sep. 12, 2018, 880 SCRA 16754 COMMERCIAL LAWS | Credit Transactions The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. With regard particularly to an award of interest in the concept of actual and compensatory dam- ages, the rate of interest, as well as its accrual, 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 six percent (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 six percent (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.Il, LAWS ON CREDIT TRANSACTION 55 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.'° But when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to tun 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 six percent (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. C.14, Forbearance of money or credit “Forbearance of money, goods, or credits” refers to arrangements, other than loan agreements, where a person acquiesces to the temporary use of his money, goods, or credits pending the happening of certain events or fulfillment of certain conditions. ‘Art. 1169, CC, supra. '% GR 175139, Apr. 18, 2012, 670 SCRA 9556 COMMERCIAL LAWS | Credit Transactions The phrase is intended to have a separate and distinct meaning from the term “loan.” This new definition is a departure from the old one which describes the phrase as a "contractual obligation of lender or creditor to refrain during a given period of time, from requiring the borrower or debtor to repay a loan or debt then due and payable.'"*> The Supreme Court finds the previous definition as descriptive of a loan where a debtor is given a period within which to pay a loan or debt. Thus, it adopted the new or more logical definition of "forbearance" in Estores v. Sps. Supangan'™ and even extended its coverage to sales on installment and sales of anything on credit. In that case, petitioner and respondents entered into a Conditional Deed of Sale whereby petitioner offered to sell, and respondents offered to buy, a parcel of land for the sum of Php 4.7 million. After almost seven (7) years from the time of the execution of the contract and notwithstanding payment of Php 3.5 million on the part of respondents, petitioner still failed to comply with her obligations, as expressly provided in the contract, that would have led to the transfer of ownership to the respondents. Having parted with their money even before the conditions were fulfilled, the respondents have in effect allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of the conditions. *8° Crismina Garments, Inc. v.CA, GR 128721. Mar. 9, 1999, 304 SCRA 356 ™ GR 175139, Apr. 18, 2012, 670 SCRA 95Il, LAWS ON CREDIT TRANSACTION 57 They were thus deprived of the use of their money for the period pending fulfillment of the conditions and when those conditions were breached, it is but proper that they be entitled not only to the return of the principal amount paid, but also to compensation for the use of their money which, absent any stipulation, should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.'** C.15. Stipulation to pay interest; rules Where there exists stipulation to pay interest, the following rules will find application: (a) Where a particular rate of interest has been expressly agreed upon in writing by the parties, that rate, and not the legal rate, shall apply;""° (b) Should there be no mention in the contract of the exact rate of interest, the legal rate of 12% (now pegged at 6%) shall be applicable;'%” (c) No increase in interest shall be due unless such increase has also been expressly stipulated; (d) It is only in contracts of loan, with or without security, that interest may be stipulated and demanded," (e) The receipt by the creditor of interest payment up to a certain date for a loan that has already matured does not ipso _facto_result_in the "stores v. Supangan, supra. Casa Filipina Dev't. Corp. v. Deputy Executive Secretary, GI May 28, 1992, 200 ‘SCRA 399 i eter SH se4en: Security Bank and Trust Company v, RTC of Makati, Br. 61, GR 113926. Oct. 23, 1996, 263 SCRA 483; Toring v. Ganzon-Olan, GR i 40, 2008 568 SCRA 376 9 lan, GR 168782. Oct. ™® Soncuya v. Azarraga., GR 43579. June 14, 1938, 65 Phil. 63558 COMMERCIAL LAWS | Credit Transactions renewal_or_ extension of the maturity period of the loan up to said date;'*° and (f) The stipulation of interest must be mutually agreed upon by the parties and may not be unilaterally increased by only one of the parties without violating the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. "*° However, the parties can mutually adopt a formula for setting the interest rate over which neither of them has control or influence. C.16. No stipulation to pay interest While the general rule prescribed by Article 1956 of the Civil Code states that “[njo interest shall be due unless it has been expressly stipulated in writing,” still itis subject to the following exceptions, to wit: (a) Indemnity for damages (1) When the debtor is in delay — A defaulting debtor is liable to pay legal interest as indemnity for damages even in the absence of a stipulation for the payment of interest; (2) When the demand in a suit for damages can be established with reasonable certainty - Interest should be from the date the judgment of the court is rendered, at which time the quantification of damages may be deemed to be reasonably ascertained; 4? 19 Bonnevie v. CA, GR L-49101. Oct. 24, 1983, 125 SCRA 122 *© “art, 1308. The contract must bind bath contracting parties; its validity or compliance cannot be left to the will of one of them." Mt art. 2213, CC * Lim v. CA, GR 125817. Jan. 16, 2002, 373 SCRA 394Il. LAWS ON CREDIT TRANSACTION 59 (3) In case of loans or forbearance of any money, goods, or credits, or judgments involving such loans or forbearance, in the absence of express stipulation as to such rate of interest - MB Resolution No. 796, as implemented by BSP Circular No. 799, Series of 2013, has fixed the legal rate of interest at six percent (6%) per annum, thus abandoning the old rate of twelve percent (12%) prescribed under Central Bank Circular No. 905, Series of 1982;"° (4) When the judgment of the court awarding a sum of money becomes final and executory - The rate of legal interest, irrespective of whether the obligation involves a loan or forbearance of money, shall be six percent (6%) per annum from the finality, of the judgment until its full satisfaction;'4 and (5) When interest is demanded _as indemnity for damages - Compensatory interest is payable only in case of default or non- performance of the contract. Being distinct claims, they may be demanded separately; and (b) Interest accruing from unpaid interest The provision of Article 2212 of the Civil Code that interest shall earn interest from the time it is ® CB Circ, 905 removed the ceiling on interest rates under the Usury Law. “ Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc, GR 151890, GR 151991, June 20, 2006, 491 SCRA 411; International Container Terminal Services, Inc. v. FGU Insurance Corp., GR 161539, June 27, 2008, 556 SCRA 19460 COMMERCIAL LAWS | Credit Transactions judicially demanded although the obligation may be silent on this point shall apply only where interest has been stipulated by the parties. In other words, the law contemplates the presence of a stipulated or conventional_interest, i.e., monetary interest which has accrued when demand was judicially made. But in cases where no monetary interest had been stipulated by the parties, no accrued monetary interest could further earn compensatory interest upon judicial demand. C.17. Penalty clause The monetary interest on the principal of the loan (the payment of which is often referred to as “cost of money”) is separate and distinct from the stipulated penalty in the form of penalty charge."*® Penalty on delinquent loans may take different forms. The law permits an agreement upon _a penalty apart from the monetary interest. Such a stipulation about payment of an additional interest rate partakes of the nature of a “penalty clause” which is sanctioned by law, more particularly under Article 2209 of the Civil Code which provides: ‘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, “5 David v. CA, GR 115821. Oct, 13, 1999, 316 SCRA 710, citing Phil. ‘American Accident Insurance Company, Inc. v. Flores, GR L-47180. May 19, 1980, 97 SCRA 811 8 Tan v. CA, GR 116285, Oct. 19, 2001, 367 SCRA 571 “7 GSIS v. CA, GRL-52478. Oct. 30, 1986, 145 SCRA 311Il, LAWS ON CREDIT TRANSACTION 61 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,"*® C.18, Accrued interest “Accrued interest” simply refers to interest due and unpaid which, under Article 1959 of the Civil Code, shall not earn interest, except: (a) when it is judicially demanded:"*° or (b) when there is express stipulation that interest due _and_unpaid_is capitalized or added to principal obligation and the resulting amount shall earn interest. This compounding of interest is allowed by the Usury Law."®° C.19. Compounding of interest “Compounding of interest” is the calculation of the interest on a loan or deposit based on both: (a) the initial principal; and (b) the accumulated or accrued interest from previous periods. “Compound interest” is simply "interest on interest," which will make a sum grow at a faster rate than simple interest which is computed only on the principal amount.'*" iq Equtable Banking Corp. v. Livanag, GR L-26335, Mar. 30, 1970, 32 SCRA 298 "Art 2212, CC ‘ Mambulao Lumber Co. v. PNB, GR L-22973, Jan, 30, 1968, 22 SCRA 369 '' https:/ww.investopedia.com/terms/c/compoundinterest.asp - Last accessed on Aug. 6, 2021