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EN BANC
[ G.R. No. 225433, September 20, 2022 ]
LARA'S GIFTS & DECORS, INC., PETITIONER, VS. MIDTOWN INDUSTRIAL SALES, INC. RESPONDENT.
RESOLUTION
LEONEN,** ACTING C.J.:
For resolution is respondents' Motion for Reconsideration[1] of this Court's August 28, 2019 Decision,[2] which denied the Petition of Lara's Gifts & Decors, Inc. and affirmed the Court of Appeals' Decision[3] with modification as to damages.
As recalled from the facts of the Petition,[4] Lara's Gifts & Decors, Inc. (Lara's Gifts) purchased from Midtown Industrial Sales, Inc. (Midtown) various industrial and construction materials, from January to December 2007, in the total amount of P1,263,104.22.
The purchases were on a 60-day credit term, subject to the condition that 24% per annum would be charged on all accounts overdue. Lara's Gifts issued post-dated checks to pay for its purchases. However, these checks were later dishonored due to "insufficiency of funds" or "account closed." Midtown informed Lara's Gifts of the bounced checks and demanded the settlement of its accounts, through a demand letter dated January 21, 2008. However, Lara's Gifts still failed to pay. Thus, on February 5, 2008, Midtown filed a Complaint for Sum of Money with Prayer for Attachment.[5]
Lara's Gifts admitted its purchases, but claimed that most of the deliveries were substandard and of poor quality. As such, the finished products, using those raw materials, were rejected by U.S. buyers. Lara's Gifts added that clue to the economic recession, some of the orders made by its U.S. buyers were cancelled. Also, on February 19, 2008, a fire razed its factory destroying its equipment, machineries, and inventories.
On January 27, 2014, the Regional Trial Court, Branch 128, Caloocan City rendered a decision[6] in favor of Midtown. It found insufficient evidence to prove Lara's Gifts' claim that the products were substandard. On the other hand, it found the amount claimed by Midtown to be supported by the sales invoices and checks. It also found the 24% interest not unconscionable. The dispositive of the Decision reads:
In an August 28, 2019 Decision,[9] this Court denied Lara's Gifts' Petition, and affirmed the Court of Appeals' Decision with modification as to damages. This Court held that: (1) petitioner's general denial amounts to an admission of the genuineness and due execution of the sales invoices; (2) petitioner failed to prove its claim that the materials delivered did not comply with the specifications or were substandard or of poor quality; and (3) the 24% stipulated interest is valid and binding on petitioner, which is reckoned from date of extrajudicial demand on January 22, 2008 until full payment.
This Court further applied legal interest on the 24% interest, at the rate of: (i) 12%, reckoned from date of judicial demand on February 5, 2008 until June 30, 2013; and (ii) 6%, from July 1, 2013 until full payment. The Decision disposed thus:
In its Comment/Opposition,[18] respondent asserts that the Motion for Reconsideration must be denied outright as no new matters have been raised therein by the petitioner.
This Court partially grants the Motion for Reconsideration.
Petitioner's first to fourth arguments have already been sufficiently passed upon and discussed by this Court in the assailed Decision. We have held that petitioner's general denial in its Answer amounts to an admission of the genuineness and due execution of the sales invoices:
Moreover, in upholding the validity of the 24% per annum interest, we ruled:
The only matter left for this Court to resolve is whether or not the imposition of legal interest on the compensatory interest of 24% per annum is excessive.
To answer this, an elucidation of the concept and functions of interest is first appropriate.
I
Interest is of two major kinds—conventional interest, on one hand, and compensatory interest on the other.[22] These two kinds of interest are conceptually different, subsume the other types and kinds of interest, and are governed by different rules that must be consistently applied, otherwise the computation of interest "present[s] intricate situations."[23]
I(A)
A simple loan, whether the object is money or other consumable thing, may be gratuitous or onerous.[24] If it is onerous, the compensation to be paid by the borrower is referred to as conventional interest, as it is the interest agreed to by the parties themselves as distinguished from that prescribed by law.[25]
Conventional interest is therefore paid not as a consequence of default, nor is it compensatory or a result of a provision of law. It is "rigorously lucrative," and the result of the express will of the parties in a contract.[26] In onerous simple loans, the payment of conventional interest is a principal condition, if not the most important condition, of the loan. In that case, "any modification must be mutually agreed upon; otherwise, it has no binding effect."[27] As it is a stipulation covenanted in a valid and effective contract, conventional interest continues to run from the date stipulated, with no break in the continuity of the obligation to pay it.[28]
However, payment of conventional interest is allowed only if the following conditions concur:
The most common type of conventional interest is monetary interest, also referred to as regular interest. It is the conventional interest in a simple loan of money. The payment of both principal and interest is made in money gradually extinguishing[30] the loan of money. Monetary interest is, therefore, generally viewed as the "cost of the use of money."[31]
"The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount."[32] It has been held that "[f]or [a debtor] to continue in possession of the principal of the loan... and to continue to use the same after maturity of the loan without payment of regular or monetary interest, would constitute unjust enrichment on the part of the [debtor] at the expense of [the creditor][.]"[33]
Pursuant to the Usury Law,[34] "the applicable interest rate in the loan of money, goods, or credits (simple loans), shall be determined as follows:
(1) If there is an interest rate stipulated, then the interest rate as stipulated shall be applicable.
(2) If there is no stipulation on the interest rate, then the interest rate prescribed by statute (or legal interest[35]) shall be applicable."[36]
But insofar as simple loans are concerned, this rule on legal interest applies only if in the first place, conventional interest was expressly stipulated in writing and only the rate of interest was left unstipulated.
With regard to interest on interest, the following provisions are pertinent:
Consequently, interest on interest, that is, the compensation for interest that is due and unpaid, is generally not demandable.
It is only demandable if, in the first place, there is conventional interest—that is, an express stipulation in writing to pay interest in a contract of loan—and any or both of the following instances are applicable:
(1) When by stipulation of the parties, compounding or capitalizing of interest is agreed upon, in which case, previously accumulated interest is added as principal and earns interest as such (compound interest).[40]
(2) When interest that is due and unpaid is judicially demanded, whether or not there is an agreement or stipulation to this effect. Judicial demand is reckoned from the date of filing of a complaint in court. The rate of interest shall be the legal rate applicable to loans or forbearance of money.[41]
I(B)
Compensatory interest, also referred to as penalty interest, indemnity, or moratory interest,[42] is the indemnity for damages arising from delay on the part of the debtor in an obligation consisting in the payment of a sum of money. It is interest allowed by law in the absence of a promise to pay interest as compensation for delay in paying a fixed sum or a delay in assessing and paying damages.[43]
Since a simple loan of money is necessarily an obligation consisting in the payment of a sum of money, then compensatory interest is always demandable in case the borrower in a simple loan of money incurs delay.
As recalled from the facts of the Petition,[4] Lara's Gifts & Decors, Inc. (Lara's Gifts) purchased from Midtown Industrial Sales, Inc. (Midtown) various industrial and construction materials, from January to December 2007, in the total amount of P1,263,104.22.
The purchases were on a 60-day credit term, subject to the condition that 24% per annum would be charged on all accounts overdue. Lara's Gifts issued post-dated checks to pay for its purchases. However, these checks were later dishonored due to "insufficiency of funds" or "account closed." Midtown informed Lara's Gifts of the bounced checks and demanded the settlement of its accounts, through a demand letter dated January 21, 2008. However, Lara's Gifts still failed to pay. Thus, on February 5, 2008, Midtown filed a Complaint for Sum of Money with Prayer for Attachment.[5]
Lara's Gifts admitted its purchases, but claimed that most of the deliveries were substandard and of poor quality. As such, the finished products, using those raw materials, were rejected by U.S. buyers. Lara's Gifts added that clue to the economic recession, some of the orders made by its U.S. buyers were cancelled. Also, on February 19, 2008, a fire razed its factory destroying its equipment, machineries, and inventories.
On January 27, 2014, the Regional Trial Court, Branch 128, Caloocan City rendered a decision[6] in favor of Midtown. It found insufficient evidence to prove Lara's Gifts' claim that the products were substandard. On the other hand, it found the amount claimed by Midtown to be supported by the sales invoices and checks. It also found the 24% interest not unconscionable. The dispositive of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff MIDTOWN INDUSTRIAL SALES, INC. and against the defendant LARA'S GIFTS [&] DECORS, INC. ordering the latter to pay the former the following amount:On appeal, the Court of Appeals upheld the Regional Trial Court's decision[7] which prompted Lara's Gifts to file a Petition for Review[8] before this Court.
1. ONE MILLION TWO HUNDRED SIXTY THREE THOUSAND ONE HUNDRED FOUR PESOS and 22/100 (Php 1,263,104.22) plus interest fixed at 24% per annum to be computed from February 5, 2008, the date of judicial demand, until the judgment obligation is fully paid.
2. The sum of FIFTY THOUSAND PESOS (Php50,000.00) as and by way of attorney's fees.
Finally, defendant is ordered to pay the cost of suit.
SO ORDERED.
In an August 28, 2019 Decision,[9] this Court denied Lara's Gifts' Petition, and affirmed the Court of Appeals' Decision with modification as to damages. This Court held that: (1) petitioner's general denial amounts to an admission of the genuineness and due execution of the sales invoices; (2) petitioner failed to prove its claim that the materials delivered did not comply with the specifications or were substandard or of poor quality; and (3) the 24% stipulated interest is valid and binding on petitioner, which is reckoned from date of extrajudicial demand on January 22, 2008 until full payment.
This Court further applied legal interest on the 24% interest, at the rate of: (i) 12%, reckoned from date of judicial demand on February 5, 2008 until June 30, 2013; and (ii) 6%, from July 1, 2013 until full payment. The Decision disposed thus:
WHEREFORE, the Decision dated 21 April 2016 of the Court of Appeals in CA-G.R. CV No. 102465, affirming the 27 January 2014 Decision of the Regional Trial Court, Branch 128, Caloocan City, is AFFIRMED with MODIFICATION, as follows:Petitioner filed a Motion for Reconsideration.[11] It argues that: (1) the due execution of the sales invoices was specifically denied in its Answer;[12] (2) it cannot be considered in default of its obligation since it did not receive any demand;[13] (3) it had sufficiently established that the materials delivered by respondent were substandard and of poor quality;[14] (4) the 24% interest stated in the sales invoices is null and void for being excessive, unconscionable, and exorbitant,[15] and was unilaterally imposed by respondent without petitioner's consent;[16] and (5) the imposition of legal interest on the 24% compensatory interest is excessive.[17]Petitioner Lara's Gifts & Decors, Inc. is ordered to pay respondent Midtown Industrial Sales, Inc. the following:
- ONE MILLION TWO HUNDRED SIXTY THREE THOUSAND ONE HUNDRED FOUR PESOS and 22/100 (P1,263,104.22) representing the principal amount plus stipulated interest at 24% per annum to be computed from 22 January 2008, the date of extrajudicial demand, until full payment.
- Legal interest on the 24% per annum interest due on the principal amount accruing as of judicial demand, at the rate of 12% per annum from the date of judicial demand on 5 February 2008 until 30 June 2013, and thereafter at the rate of 6% per annum from 1 July 2013 until full payment.
- The sum of FIFTY THOUSAND PESOS (P50,000.00) as attorney's fees, plus legal interest thereon at the rate of 6% per annum to be computed from the finality of this Decision until full payment.
- Cost of the suit.[10] (Emphasis in the original)
In its Comment/Opposition,[18] respondent asserts that the Motion for Reconsideration must be denied outright as no new matters have been raised therein by the petitioner.
This Court partially grants the Motion for Reconsideration.
Petitioner's first to fourth arguments have already been sufficiently passed upon and discussed by this Court in the assailed Decision. We have held that petitioner's general denial in its Answer amounts to an admission of the genuineness and due execution of the sales invoices:
In this case, petitioner did not state the facts or substance of the matters relied upon to support its denial of the due execution of the sales invoices. As held in Sy-Quia v. Marsman, "the Rules require that besides specifying the allegations of fact not admitted, the answer should set forth the matters relied upon in support of the denial; so that, in effect, the Rules are no longer satisfied with mere denials, even if specific, but demand that defendant manifest what he considers to be the true facts." The purpose of the specific denial is to compel the defendant to specify the allegations which he or she intends to disprove and disclose the matters relied upon to support such denial, thereby limiting the issues and avoiding unnecessary delays and surprises. Petitioner's general denial amounts to an admission of the genuineness and due execution of the sales invoices.[19] (Citations omitted)As to the poor quality of delivered products, this Court held that "other than its bare allegation that the materials delivered were substandard and of poor quality, petitioner failed to prove or substantiate its claims. As found by the trial court, none of petitioner's witnesses was able to present proof that the materials delivered were substandard or of poor quality.”[20]
Moreover, in upholding the validity of the 24% per annum interest, we ruled:
In the present case, petitioner, which has been doing business since 1990 and has been purchasing various materials from respondent since 2004, cannot claim to have been misled into agreeing to the 24% interest rate which was expressly stated in the sales invoices. Besides, this Court has already ruled in several cases that an interest rate of 24% per annum agreed upon between the parties is valid and binding and not excessive and unconscionable. Thus, the stipulated 24% interest per annum is binding on petitioner.[21] (Citations omitted)We find no valid justification to compel a modification or reversal of our Decision as to those issues.
The only matter left for this Court to resolve is whether or not the imposition of legal interest on the compensatory interest of 24% per annum is excessive.
To answer this, an elucidation of the concept and functions of interest is first appropriate.
Interest is of two major kinds—conventional interest, on one hand, and compensatory interest on the other.[22] These two kinds of interest are conceptually different, subsume the other types and kinds of interest, and are governed by different rules that must be consistently applied, otherwise the computation of interest "present[s] intricate situations."[23]
A simple loan, whether the object is money or other consumable thing, may be gratuitous or onerous.[24] If it is onerous, the compensation to be paid by the borrower is referred to as conventional interest, as it is the interest agreed to by the parties themselves as distinguished from that prescribed by law.[25]
Conventional interest is therefore paid not as a consequence of default, nor is it compensatory or a result of a provision of law. It is "rigorously lucrative," and the result of the express will of the parties in a contract.[26] In onerous simple loans, the payment of conventional interest is a principal condition, if not the most important condition, of the loan. In that case, "any modification must be mutually agreed upon; otherwise, it has no binding effect."[27] As it is a stipulation covenanted in a valid and effective contract, conventional interest continues to run from the date stipulated, with no break in the continuity of the obligation to pay it.[28]
However, payment of conventional interest is allowed only if the following conditions concur:
1) | There is an express stipulation for the payment of interest, and |
2) | The stipulation for the payment of interest is in writing.[29] |
The most common type of conventional interest is monetary interest, also referred to as regular interest. It is the conventional interest in a simple loan of money. The payment of both principal and interest is made in money gradually extinguishing[30] the loan of money. Monetary interest is, therefore, generally viewed as the "cost of the use of money."[31]
"The payment of regular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount."[32] It has been held that "[f]or [a debtor] to continue in possession of the principal of the loan... and to continue to use the same after maturity of the loan without payment of regular or monetary interest, would constitute unjust enrichment on the part of the [debtor] at the expense of [the creditor][.]"[33]
Pursuant to the Usury Law,[34] "the applicable interest rate in the loan of money, goods, or credits (simple loans), shall be determined as follows:
(1) If there is an interest rate stipulated, then the interest rate as stipulated shall be applicable.
(2) If there is no stipulation on the interest rate, then the interest rate prescribed by statute (or legal interest[35]) shall be applicable."[36]
But insofar as simple loans are concerned, this rule on legal interest applies only if in the first place, conventional interest was expressly stipulated in writing and only the rate of interest was left unstipulated.
With regard to interest on interest, the following provisions are pertinent:
Civil CodeFor conventional interest, the general rule is that interest is paid on the principal only (simple interest).[39]
ARTICLE 1959. Without prejudice to the provisions of Article 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 earn new interest.
ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.
Usury Law
SECTION 5. In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement; Provided, That whenever compound interest is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate[37] prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially claimed, in which last case it shall draw six per centum per annum interest or such rate as may be prescribed by the Monetary Board.[38]
Consequently, interest on interest, that is, the compensation for interest that is due and unpaid, is generally not demandable.
It is only demandable if, in the first place, there is conventional interest—that is, an express stipulation in writing to pay interest in a contract of loan—and any or both of the following instances are applicable:
(1) When by stipulation of the parties, compounding or capitalizing of interest is agreed upon, in which case, previously accumulated interest is added as principal and earns interest as such (compound interest).[40]
(2) When interest that is due and unpaid is judicially demanded, whether or not there is an agreement or stipulation to this effect. Judicial demand is reckoned from the date of filing of a complaint in court. The rate of interest shall be the legal rate applicable to loans or forbearance of money.[41]
Compensatory interest, also referred to as penalty interest, indemnity, or moratory interest,[42] is the indemnity for damages arising from delay on the part of the debtor in an obligation consisting in the payment of a sum of money. It is interest allowed by law in the absence of a promise to pay interest as compensation for delay in paying a fixed sum or a delay in assessing and paying damages.[43]
Since a simple loan of money is necessarily an obligation consisting in the payment of a sum of money, then compensatory interest is always demandable in case the borrower in a simple loan of money incurs delay.
However, a simple loan of money is not the only obligation that consists in the payment of a sum of money.[44] Moreover, not every obligation consists in the payment of a sum of money.[45]
Although compensatory interest, unlike conventional interest, need not be expressly stipulated in writing, the parties may freely stipulate on compensatory interest through a penalty or penal clause.[46] The nature of a penal clause was expounded in Ligutan v. Court of Appeals:[47]
The "rules of thumb" for the rate of compensatory interest were established in Eastern Shipping Lines, Inc. v. Court of Appeals,[50] and restated[51] in Nacar v. Gallery Frames:[52]
A question arises on whether interest on interest is applicable to compensatory interest. Jurisprudence supports its application as shown in the following cases.
In Philippine American Accident Insurance Company, Inc. v. Flores & Navalta,[65] this Court stated that Article 2212[66] of the Civil Code "contemplate[s] the presence of stipulated or conventional interest which had accrued when demand was judicially made."[67] Although the statement was made as basis for ruling that Article 2212 cannot be invoked to justify the payment of compound interest if the judgment only involves the payment of simple interest, it also raised the issue of whether Article 2212 can serve as basis for the payment of interest on compensatory interest.
Eastern Shipping Lines, Inc., as restated in Nacar, provides:
Isla v. Estorga,[71] reiterated that Article 2212 applies to "stipulated or conventional interest, i.e., monetary interest[.]"
II
Stipulated interest rates, whether conventional or compensatory, are subject to the "unconscionability" standard. The concept of unconscionability is a matter of law and equity. Jurisprudence empowers courts to equitably reduce interest rates; and the law[73] empowers them to reduce penalty charges.[74] Eastern Shipping Lines recognized that "factual circumstances [of a case] may [call] for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest."[75]
II (A)
Central Bank Circular No. 905 issued by the Monetary Board of the Central Bank, pursuant to the powers granted by the Usury Law, effectively lifted the ceilings on interest rates. Consequently, usury, although illegal, is legally non-existent and interest can be charged as agreed upon by creditor and borrower[76] pursuant to the freedom of contract principle"[77] under Article 1306 of the Civil Code, viz:
The reduction of interest rates is not limited to monetary interest. It is not dependent on the type of interest imposed on the party, but on whether the interest rate was unconscionable or not. Thus, compensatory interest, when found to be unconscionable, may also be reduced.
Articles 1229 and 2227 of the Civil Code allow the reduction of penalty charges or damages that are unconscionable:
Accordingly, in several cases,[91] this Court reduced or removed altogether penalty interests or charges that were unconscionable.
II(B)
"Interest rates become unconscionable in light of the context in which they were imposed or applied."[92] Thus, the determination of whether an interest rate or penalty charge is reasonable or iniquitous rests on the sound discretion of the courts based on the established facts of a particular case.[93]
This Court had struck down stipulated monthly interest rates of 2.5%,[94] 5%,[95] 6%,[96] and 10%[97] for being unconscionable. Meanwhile, in Toledo v. Hyden,[98] a monthly interest rate of 6% to 7% was deemed valid. In that case, this Court noted that the borrower was not in dire need of money when she obtained a loan, and it was the borrower herself who was guilty of inequitable acts:
In Vitug, the stipulated interest rates of 5% to 10% per month were found iniquitous considering the "extreme necessity" which compelled petitioner to obtain the loan and the possibility of his property being foreclosed if not for the loan. This Court further said that "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."[104]
Also, in another case,[105] this Court noted that the payment of the principal loan of P500,000 and interest of P425,000, computed at a monthly interest rate of 5% already "sufficiently compensated for the loan and the interest earned, and [the creditor] cannot be allowed to further recover on an interest rate which is unconscionable."[106]
To determine whether an interest rate is unconscionable, we are guided by the following pronouncements in Sps. Abella v. Sps. Abella:[107]
Furthermore, where the monetary interest rate is found to be unconscionable, only the rate is nullified and deemed not written into the contract; the parties' agreement on the payment of interest remains. In such instance, "the legal rate of interest prevailing at the time the agreement was entered into"[112] is applied by the courts.
As for compensatory interest, this Court in Ligutan v. Court of Appeals[113] held:
II(C)
However, the standards of unconscionability cannot apply to interest on interest under Article 2212 of the Civil Code, viz:
Article 2212's interest on interest is penalty or indemnity for delay in the payment of stipulated interest.[120] It is expressly prescribed by law, and deemed written into every contract. This, all contracting parties should be aware of when they stipulate on the payment of interest.
In view of the foregoing discussions, and taking into consideration the viewpoints of Justice Caguioa, the summary of rules on the imposition of interest, as provided in Eastern Shipping Lines and Nacar, are amended as follows:
Rules on the Imposition of Compensatory Interest
III
Now to this case, we modify our earlier Decision and hold that the contract involved is not a loan or forbearance of money, goods, or credit,[136] but a sale of goods on credit. From January to December 2007, petitioner Lara's Gifts purchased from respondent Midtown various industrial and construction materials totaling P1,263,104.22. The purchases were on a 60-day credit term, with the condition that a 24% interest rate per annum would be charged on all accounts overdue. This means that the 24% interest rate per annum would run only upon petitioner's failure to pay on the due date.
Thus, the 24% interest rate is a compensatory interest, imposed as indemnity for damages caused by the delay in the payment of the raw materials' purchase price, pursuant to Article 2209.
By the express provision of Article 2212, the 24% compensatory interest, which have accrued at the time of judicial demand, may be subject to "interest on interest."
However, as Justice Amy C. Lazaro-Javier pointed out, the Regional Trial Court adjudged in favor of Midtown Industrial Sales only P1,263,104.22 plus interest at 24% per annum, computed from February 5, 2008 until fully paid; and P50,000.00 as attorney's fees. This judgment award became final and executory as to Midtown Industrial Sales as it did not appeal. Thus, the additional award of legal interest on the 24% interest, in an appeal brought by Lara's Gifts, is ultra vires.[137]
ACCORDINGLY, the Motion for Reconsideration is PARTIALLY GRANTED. This Court's August 28, 2019 Decision is MODIFIED in that the award of legal interest on the 24% per annum compensatory interest is hereby DELETED.
Petitioner Lara's Gifts & Decors, Inc. is ordered to PAY respondent Midtown Industrial Sales, Inc. the following:
The total monetary award shall bear legal interest at the rate of 6% per annum from finality of this Resolution until full payment.[138]
SO ORDERED.
Hernando, Inting, Zalameda, Gaerlan, Rosario, J. Lopez, Dimaampao, Marquez, Kho, Jr., and Singh, JJ., concur.
Gesmundo,* C.J., and M. Lopez,* J., on official business.
Caguioa, J., see concurring opinion.
Lazaro-Javier, J., I concur in the result. See separate opinion.
* On official business.
** Per Special Order No. 2914 dated September 15, 2022.
[1] Rollo, pp. 379-396.
[2] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales. Inc., G.R. No. 225433, August 28, 2019 , <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[3] Rollo, pp. 44-58. The Court of Appeals' Decision dated April 21, 2016 was penned by Associate Justice Stephen C. Cruz and concurred in by Associate Justices Jose C. Reyes, Jr. (retired Supreme Court Justice) Ramon Paul L. Hernando (now a Member of this Court) of the Fifth Division, Court of Appeals, Manila.
[4] As narrated in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28, 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[5] Id.
[6] Rollo, pp. 62-71.
[7] Id. at 57.
[8] Id. at 13-43. Filed under Rule 45.
[9] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28, 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[10] Id.
[11] Rollo, pp. 379-396.
[12] Id. at 381.
[13] Id. at 384-385.
[14] Id. at 386.
[15] Id. at 390.
[16] Id. at 389 and 391.
[17] Id. at 391.
[18] Id. at 405-412.
[19] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[20] Id.
[21] Id.
[22] This dichotomy goes back to Banal v. Safont & Puig, 19 Phil. 372 (191 1) [Per CJ Arellano, En banc], but it should be noted that in Reinsurance Company of the Orient, Inc. v. Court of Appeals, et al., 275 Phil. 20 (1991) [Per J. Feliciano, Third Division], Siga-an v. Villanueva, 596 Phil. 760 (2009) [Per J. Chico-Nazario, Third Division], Asiatrust Development Bank v. Tuble, 691 Phil. 732 (2012) [Per J. Sereno, Second Division] and Sun Life of Canada (Phils.) v. Tan Kit, 745 Phil. 482 (2014), and several other cases, the Supreme Court established the dichotomy as monetary interest, on one hand, and compensatory interest, on the other. Nevertheless, the Banal dichotomy is used here as conventional interest subsumes monetary interest, and therefore, allows a broader understanding of the concept.
[23] Robinson v. Macleod & Postal Savings Bank of the Philippine Islands, 46 Phil. 539, 540 (1924) [Per J. Malcolm, Second Division]. In this section, we adopt and share the views on this topic in Stephanie V. Gomez-Somera's book, Credit Transactions: Notes and Cases, Vol. 1 (2nd ed., 2015).
[24] CIVIL CODE, art. 1933 provides:
ARTICLE 1933. By the contract of loan, one of the parties delivers to another, . . . 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.
. . . .
Simple loan may be gratuitous or with a stipulation to pay interest. . . .
[25] 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 95 (2nd ed., 2015). See also BLACK'S LAW DICTIONARY (9th ed. 2009).
[26] Banal v. Safont & Puig, 19 Phil. 372, 374 (1911) [Per CJ Arellano, En banc].
[27] Spouses Silos v. Philippine National Bank, 738 Phil. 156, 160 (2014) [Per J. Del Castillo, Second Division].
[28] Banal v. Safont & Puig, 19 Phil. 372 (1911) [Per CJ Arellano, En banc].
[29] CIVIL CODE, art. 1956 provides:
ARTICLE. 1956. No interest shall be due unless it has been expressly stipulated in writing.
See also De la Paz v. L & J Development Co., 742 Phil. 420 (2014) [Per J. Del Castillo, Second Division]; and Siga-an v. Villanueva, 596 Phil. 760 (2009) [Per J. Chico-Nazario, Third Division]; and 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 95 (2nd ed., 2015).
[30] BLACK S LAW DICTIONARY (9th ed. 2009).
[31] State Investment House, Inc. v. Court of Appeals, 275 Phil 433, 444 (1991) [Per J. Feliciano, Third Division]. See 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 96 (2nd ed., 2015).
[32] Id.
[33] Id. at 445.
[34] Act No. 2655 (1916), An Act Fixing Rates of Interest Upon Loans and Declaring the Effect of Receiving or Taking Usurious Rates and for Other Purposes, as amended by Presidential Decrees No. 116, 858, and 1684, is generally known as the Usury Law.
[36] Currently 6% for loans and forbearance of money, goods, or credits pursuant to Bangko Sentral ng Pilipinas Circular No. 799, series of 2013, effective July 1, 2013, which was issued and promulgated by the Monetary Board pursuant to the authority granted to the Bangko Sentral ng Pilipinas by P.D. No. 116, which amended the Usury Law.
[36] Usury Law, sec. 1 provides:
SECTION 1. The rate of interest for the loan. . . of any money, goods, or credits. . . in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. See 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 109 (2nd ed., 2015).
[37] Central Bank Circular No. 905, Series of 1982, effectively lifted the ceiling on interest rates.
[38] Currently 6% pursuant to Bangko Sentral ng Pilipinas Circular No. 799, series of 2013.
[39] BLACK'S LAW DICTIONARY (9th ed. 2009).
[40] Central Bank of the Philippines v. Cloribel, 150-A Phil. 86 (1972) [Per J. Concepcion, Second Division].
[41] Currently 6% pursuant to Bangko Sentral ng Pilipinas Circular No. 799, series of 2013. See 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 142 (2nd ed., 2015)
[42] National Marketing Corp. v. Marquez, et al., 136 Phil. 143 (1969) [Per J. JBL Reyes, En banc]; and Mendoza & Lim v. Spouses Gomez, 736 Phil. 460 (2014) [Per J. Perez, Second Division].
[43] BLACK'S LAW DICTIONARY (9th ed. 2009).
[47] 427 Phil. 42 (2002) [Per J. Vitug, Third Division].
[48] Id. at 51.
[49] See State Investment House, Inc. v. Court of Appeals, 275 Phil. 433 (1991) [Per J. Feliciano, Third Division], which involved the application of monetary interest.
[50] 304 Phil. 236 (1994) [Per J. Vitug, En banc].
[51] Taking into account Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013, effective July 1, 2013.
[52] 716 Phil. 267, 282-283 (2013) [Per J. Peralta, En banc].
[53] CIVIL CODE, art. 1157.
[54] CIVIL CODE, art. 1170 provides:
ARTICLE 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages
[55] CIVIL CODE, art. 2195 provides:
ARTICLE 2195. The provisions of this Title (on Damages) shall be respectively applicable to all obligations mentioned in article 1157.
[56] CIVIL CODE, art. 1956 provides:
ARTICLE 1956. No interest shall be due unless it has been expressly stipulated in writing.
[57] CIVIL CODE, art. 2212 provides:
ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.
[58] As explained in State Investment House, Inc. v. Court of Appeals, 275 Phil. 433 (1991) [Per J. Feliciano Third Division]: ". . . in the absence of a stipulation of a particular rate of penalty interest, then the payment of additional interest at a rate equal to the regular monetary interest; and if no regular interest had been agreed upon, then payment of legal interest. . ." (Emphasis supplied)
[59] CIVIL CODE, art. 2210 provides:
ARTICLE 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.
[60] CIVIL CODE, art. 2209 provides:
ARTICLE 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 percent per annum.
[61] CIVIL CODE, art. 2213 provides:
ARTICLE 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty.
[62] It should be noted, however, that several cases (see for example: Cuaton v. Salud, 465 Phil. 999 (2004) [Per J. Ynares-Santiago, First Division], Rizal Commercial Banking Corporation v. Court of Appeals, 352 Phil. 101 (1998) [Per J. Melo, Second Division]) consider Eastern Shipping Lines, Inc. as a comprehensive summary of existing rules on the computation of interest, without distinguishing between conventional and compensatory interest.
[63] See Reinsurance Company of the Orient, Inc. v. Court of Appeals, 275 Phil. 20 (1991) [Per J. Feliciano, Third Division] and State Investment House, Inc. v. Court of Appeals, 275 Phil. 433 (1991) [Per J. Feliciano, Third Division].
[64] Bangko Sentral ng Pilipinas Circular No. 799, series of 2013.
[65] 186 Phil. 563 (1980) [Per J. Abad Santos, Second Division] as cited in David v. Court of Appeals et al. 375 Phil. 177 (1999) [Per J. Quisumbing, Second Division].
[66] ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.
[67] Philippine American Accident Insurance Company, Inc. v. Flores & Navalta, 186 Phil. 563, 566 (1980) [Per J. Abad Santos, Second Division].
[68] Nacar v. Gallery Frames, 716 Phil. 267, 282 (2013) [Per J. Peralta En banc].
[69] 419 Phil. 857 (2001) [Per J. De Leon, Jr., Second Division].
[70] However, Article 1959 of the Civil Code should only be invoked in cases involving conventional interest. It provides:
ARTICLE 1959. Without prejudice to the provisions of Article 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 earn new interest.
[71] 834 Phil. 884 (2018) [Per J. Perlas-Bernabe, Second Division].
[72] Id. at 894 citing David v. Court of Appeals, et al., 375 Phil. 177 (1999) [Per J. Quisumbing, Third Division], which in turn cited Philippine American Accident Insurance Co., Inc. v. Flores, 186 Phil. 563 (1980) [Per J. Abad Santos, Second Division].
[73] CIVIL CODE, art. 1229 provides:
ARTICLE 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 partial performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.
[74] Land Bank of the Phils. v. David, 585 Phil. 167 (2008) [Per J. Carpio-Morales, Second Division].
[75] Eastern Shipping Lines, Inc. v. Court of Appeals, 304 Phil. 236, 252 (1994) [Per J. Vitug, En banc].
[76] Liam Law v. Olympic Sawmill Co. & Chi, 214 Phil. 385 (1984) [Per J. Melencio-Herrera, First Division].
[78] 508 Phil. 462, 468-469 (2005) [Per J. Tinga, Second Division].
[79] 412 Phil. 816 (2001) [Per J. Sandoval-Gutierrez, Third Division].
[80] 471 Phil. 484 (2004) [Per J. Panganiban, First Division].
[81] 449 Phil. 419 (2003) [Per J. Puno, Third Division].
[82] 465 Phil. 999 (2004) [Per J. Ynares-Santiago, First Division].
[83] 490 Phil. 179 (2005) [Per J. Carpio, First Division].
[84] 620 Phil. 239 (2009) [Per J. Del Castillo, Second Division].
[85] Id. at 242-243.
[86] 776 Phil. 540 (2016) [Per J. Leonen, Second Division].
[87] Id. at 568-569.
[88] Id. at 569.
[89] 37 Phil. 273 (1917) [Per J. Torres, First Division].
[90] Id. at 282.
[91] See Macalinao v. Bank of the Philippine Islands, 616 Phil. 60 (2009) [Per J. Velasco, Jr., Third Division]; State Investment House, Inc. v. Court of Appeals, 413 Phil. 518 (2001) [Per J. Kapunan, First Division]; Palmares v. Court of Appeals, 351 Phil. 664 (1998) [Per J. Regalado, Second Division]; and Rizal Commercial Banking Corporation v. Court of Appeals, 352 Phil. 101 (1998) [Per J. Melo, Second Division].
[92] Vitug v. Abuda, 776 Phil. 540, 569 (2016) [Per J. Leonen, Second Division].
[93] Land Bank of the Phils. v. David, 585 Phil. 167 (2008) [Per J. Carpio Morales, Second Division].
[94] Spouses Abella v. Spouses Abella, 763 Phil. 372, 388 (2015) [Per J. Leonen, Second Division].
[95] Spouses Castro v. Tan, 620 Phil. 239 (2009) [Per J. Del Castillo, Second Division].
[96] De La Paz v. L & J Development Company, Inc., 742 Phil. 420, 430-432 (2014) [Per J. Del Castillo, Second Division] and Spouses Solangon v. Salazar, 412 Phil. 816, 823 (2001) [Per J. Sandoval-Gutierrez, Third Division].
[97] Isla v. Estorga, G.R. No. 233974, July 2, 2018, <http://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/64438> [Per J. Perlas-Bernabe, Second Division].
[98] 652 Phil. 70 (2010) [Per J. Del Castillo, First Division].
[99] Id. at 79-80.
[100] Spouses Bautista v. Pilar Development Corporation, 371 Phil. 533, 543 (1999) [Per J. Puno, First Division].
[101] Trade & Investment Development Corporation of the Phils. v. Roblett, 523 Phil. 360 (2006) [Per J. Tinga, Special Second Division].
[102] Id. at 367.
[103] Land Bank of the Phils. v. David, 585 Phil. 167 (2008) [Per J. Carpio-Morales, Second Division].
[104] Vitug v. Abuda, 776 Phil. 540, 572 (2016) [Per J. Leonen, Second Division].
[105] Menchavez v. Bermudez, 697 Phil. 447 (2012) [Per J. Velasco, Jr., Third Division].
[106] Id. at 458.
[107] 763 Phil. 372 (2015) [Per J. Leonen, Second Division].
[108] Id. at 389.
[109] Id.
[110] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28, 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[111] See Philippine National Bank v. Court of Appeals, 308 Phil 18, 24 (1994) [Per J. Puno, Second Division].
[112] Isla v. Estorga, 834 Phil. 884, 891 (2018) [Per J. Perlas-Bernabe, Second Division].
[113] 427 Phil. 42 (2002) [Per J. Vitug, Third Division].
[114] Id. at 52.
[115] 351 Phil. 664 (1998) [Per J. Regalado, Second Division].
[116] Id. at 693-691.
[117] 349 Phil. 769 (1998) [Per J. Kapunan, Third Division].
[118] 419 Phil. 857 (2001) [Per J. De Leon, Jr., Second Division].
[119] J. Caguioa, Reflections, p. 2.
[120] Article 2212 is within Title XVIII, Chapter 2 of the Civil Code, on "Actual or Compensatory Damages."
[121] CIVIL CODE, arts. 1226 and 2209.
[122] CIVIL CODE, art. 1306.
[123] CIVIL CODE, art. 2209.
[124] CIVIL CODE, art. 1306.
[125] CIVIL CODE, art. 2209 and Usury Law, sec. 1.
[126] CIVIL CODE, art. 1169.
[127] CIVIL CODE, art. 2212.
[128] CIVIL CODE, art. 1226 and 2209.
[129] CIVIL CODE, art. 1306.
[130] CIVIL CODE, art. 2209.
[131] CIVIL CODE, art. 1169.
[132] CIVIL CODE, art. 2212.
[133] CIVIL CODE, art. 2209.
[134] CIVIL CODE, art. 2213.
[135] CIVIL CODE, art. 2213.
[136] Estores v. Spouses Supangan, 686 Phil. 86, 96 (2012) [Per J. Del Castillo, First Division], defined forbearance as an arrangement other than a loan where a person agrees to the temporary use of his money goods, or credits subject to the fulfilment of certain conditions.
[137] J. Lazaro-Javier, Reflections, pp. 2-3.
[138] Nacar v. Gallery Frames, 716 Phil. 267 (2013) [Per J. Peralta, En Banc].
CONCURRING OPINION
CAGUIOA, J.:
For resolution is the Motion for Reconsideration of the Court's August 28, 2019 Decision[1] denying the Petition for Review on Certiorari filed by petitioner Lara's Gifts & Decors, Inc. (Lara's Gifts).
The dispositive portion of the August 28, 2019 Decision reads:
I wish to concur, even as I clarify, that the imposition of legal interest on the 24% per annum interest is deleted only because its imposition became final and executory as to Midtown Industrial Sales, Inc. (Midtown) as it did not appeal the same, and not because it was unconscionable. In my view, the principle of unconscionability applies only to justify the reduction of unconscionable rates stipulated upon by the parties, and not legal rates, or those rates prescribed by law.
While the "interest on interest" (hereinafter, interest on accrued interest) as stipulated by the parties may be nullified when found to be iniquitous or unconscionable, interest on accrued interest is fully provided for and sanctioned by Article 2212 of the Civil Code, which states:
The same rule applies to the simple or regular interest which serves as the "indemnity for damages" when the debtor incurs in delay in obligations consisting in the payment of a sum of money. Such interest, which is referred to as compensatory interest (hereinafter, regular compensatory interest) is treated under Article 2209 of the Civil Code, thus:
On this basis, I find that courts are precluded from effecting the wholesale deletion of regular compensatory interest and interest on accrued interest, as this would run counter to the express mandate of Articles 2209 and 2212 of the Civil Code. These provisions are clear and leave no room for interpretation — regular compensatory interest and interest on accrued interest shall run on account of delay either in the payment of the principal obligation (in the case of regular compensatory interest) or in the payment of interest due and unpaid (in the case of interest on accrued interest) at the rate stipulated by the parties, or in case of nullity or absence thereof, at the applicable legal rate.
In this connection, I reiterate that the applicable legal rate shall depend on the nature of the obligation.
If the obligation constitutes a loan or forbearance contemplated under the Usury Law,[4] the applicable legal rate shall be that prescribed by the Bangko Sentral ng Pilipinas (BSP). On the other hand, if the obligation is one for payment of a sum of money which is not a loan or forbearance, the applicable rate shall be 6% per annum, as set by Article 2209 of the Civil Code. Since the obligation subject of this Petition is one for payment of a sum of money which does not constitute a loan or forbearance under the context of the Usury Law, the applicable legal rate of interest on accrued interest is therefore 6% per annum.
To this end, I wish to explain the reasons why the principle of unconscionability should only be construed to apply to rates stipulated upon by the parties. Further, I will discuss what I view to be the clear import of Articles 2209 and 2212 with respect to the mandatory imposition of regular compensatory interest and interest on accrued interest.
Finally, I will proceed to reiterate the position set forth in my Concurring and Dissenting Opinion on the August 28, 2019 Decision[5] (Opinion) with respect to the differential treatment of loans and forbearances under the Usury Law and all other obligations for payment of a sum of money not falling under the latter's scope.
DISCUSSION
Legal rates (i.e., interest rates
prescribed by law) are not subject
to reduction or deletion based on
the unconscionability standard
For purposes of further clarifying the matter of imposing legal interests to interests, I wish to add that unlike interest rates stipulated upon by the parties which are subject to the unconscionability standard, legal rates prescribed by law are not for the simple reason that the Court's duty is to simply apply the law. As a result, legal rates may not be further reduced or altogether deleted by the courts based on the ground of unconscionability.
To further explain, it is best to begin with a run-down of relevant concepts relating to the imposition of interest.
Conventional interest is the stipulated "cost of borrowing money" or the "presumptive reasonable compensation for borrowed money."[6] Conventional interest arises from contract for the use or forbearance of money.[7] Since conventional interest arises from contract, the contracting parties are free to stipulate on their preferred rate. However, the rate of conventional interest stipulated upon by the parties may be declared void if found to be iniquitous, unconscionable, or exorbitant, pursuant to the principles of autonomy and mutuality of contract.
To note, the principle of autonomy under Article 1306 of the Civil Code permits the contracting parties to establish their own stipulations as they may deem convenient. However, such stipulations may be nullified if found to be contrary to law, morals, good customs, public order, or public policy.[8] Moreover, the principle of mutuality enshrined in Article 1308 of the same statute espouses that a contract "must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." Thus, the principle of mutuality of contracts dictates that a contract or a stipulation therein must be rendered void when the execution of its terms is skewed in favor of one party.[9]
Thus, with respect to unconscionable interest rates, the Court held in Spouses Abella v. Spouses Abella,[10] the following:
On the other hand, regular compensatory interest treated in Article 2209 is the interest which is imposed by law as indemnity for damages on account of delay in the payment of the principal obligation. It is demandable even in the absence of an express stipulation regarding the payment of interest and applies in all cases where there is delay in the payment of any sum of money.[13] To quote anew the provision:
When the parties agree on the imposition of a penal clause or a fixed amount of liquidated damages as indemnity for damages, such fixed amounts should be understood to take the place of regular compensatory interest which, as Article 2209 explicitly states, applies as "indemnity for damages" only in cases where there is "no stipulation to the contrary."
However, in cases where the contracting parties agree upon the imposition of stipulated regular compensatory interest as indemnity for damages, the stipulated rate will apply. Nevertheless, such stipulated rate, being the result of the agreement of the parties, may also be equitably reduced if found to be unconscionable.
In turn, Article 2209 provides that regular compensatory interest shall be applied at the legal rate prevailing at the time the obligation in question was entered into where: (1) there is no stipulation on the payment of regular compensatory interest; or (2) there is a stipulation as to the payment of regular compensatory interest, but rate agreed upon is found to be iniquitous or unconscionable.
As explained in my Opinion and further reiterated below, the applicable legal interest rate shall depend on the nature of the obligation involved. When the obligation is a loan or forbearance of money within the context of the Usury Law, the legal interest rate applicable shall be the BSP-prescribed rate. However, if the obligation is one for the payment of a sum of money which is neither a loan nor a forbearance, the interest rate applicable shall be the 6% per annum as set by Article 2209 of the Civil Code.
Interest on accrued interest under Article 2212 also partakes the nature of compensatory interest as it also arises on account of delay in payment. However, unlike the compensatory interest contemplated in Article 2209 which arises on account of delay in the payment of the principal obligation, interest on accrued interest arises on account of delay in the payment of stipulated interest.[15] Justice Eduardo P. Caguioa explains that Article 2212 serves as an exception to the general rule on compounding of interest laid down in Article 1959, thus:
Finally, it should be emphasized that interest runs solely in connection with obligations consisting of a payment of sum of money. This is apparent from Article 1956 which permits the imposition of conventional interest on simple loans, Article 2209 which constitutes regular compensatory interest as the indemnity for damages in obligations for payment of a sum of money where the parties do not agree on a penal clause or a fixed amount of liquidated damages, and Article 2212 which applies to obligations for payment of a sum of money containing a stipulation on the payment of interest.
At this juncture, a distinction must be drawn between the treatment of interest rates stipulated by the parties and the legal rates prescribed by law. While rates stipulated by the parties are subject to the unconscionability standard, legal interest rates which are prescribed by law are not.
In Spouses Dela Cruz v. Planters Products, Inc.,[18] the Court held that interest which accrues as a direct application of law and jurisprudence cannot be deemed inequitable and unconscionable, thus:
Thus, I disagree with the sweeping statement that "interest rates, whether conventional or compensatory, are subject to the 'unconscionability' standard."[23] I respectfully submit that this simplification fails to draw the important distinction between stipulated interest rates and legal interest rates. Since legal interest rates are set by law, they can neither be deemed inequitable nor unconscionable. For this reason, legal interest rates cannot be subject to the unconscionability standard. To repeat, they can neither be reduced nor deleted on the ground of unconscionability.
Therefore, I humbly suggest that for purposes of clarity and accuracy, such sweeping statement be properly qualified to read "stipulated interest rates, whether conventional or compensatory, are subject to the 'unconscionability' standard."
Regular compensatory interest
under Article 2209 and interest on
accrued interest under Article
2212 apply by operation of law
Proceeding from the foregoing discussion, I also submit that regular compensatory interest and interest on accrued interest shall apply by operation of law, and at the very least, at the applicable legal rate.
To recall, regular compensatory interest is that which is contemplated under Article 2209. To restate:
On this score, I am unable to agree with the conclusion that Articles 1229 and 2227 of the Civil Code serve as basis to cause a wholesale deletion of interest on accrued interest in this particular case.[24]
Foremost, Articles 1229 and 2227 of the Civil Code pertain to the reduction of stipulated penalties and liquidated damages:
It may not be amiss to point out that in the cases referenced in the Resolution where the Court resolved to reduce interest rates based on the unconscionability standard, the rates reduced in those cases were in the nature of stipulated rates and/or stipulated penalties agreed upon by the parties.
In Ligutan v. Court of Appeals[25] (Ligutan), petitioners therein obtained a P120,000.00 loan from Security Bank and Trust Company. Petitioners were obliged to pay, upon maturity: (i) the principal with conventional interest at the stipulated rate of 15.189% per annum; and (ii) a 5% monthly penalty applied on the sum of the outstanding principal and accrued conventional interest in case of default. Further, petitioners were bound to pay 10% of the total amount due by way of attorney's fees.
Ultimately, the Court resolved to affirm the reduction of the rate of monthly penalty from 5% to 3%. It held:
Moreover, in Barons Marketing Corp. v. Court of Appeals[27] (Barons Marketing) private respondent therein appointed petitioner as one of its dealers for electrical wires and cables. As dealer, petitioner was granted a 60-day credit for its purchases. The credit term was to be reckoned from the date of delivery.
Between December 1986 to August 1987, petitioner purchased, on credit, various products from private respondent in the total amount of P4,102,438.30. Under the contract executed by the parties, petitioner bound itself to pay interest at 12% per annum on all overdue accounts plus "25% on said amount for attorney's fees and collection." On September 7, 1987, petitioner paid the amount of P300,000.00, leaving an unpaid balance of P3,802,478.20. Petitioner defaulted, prompting the private respondent to file a collection suit.
While the Court there upheld the liability of petitioner for the unpaid balance and the 12% stipulated compensatory interest, the Court characterized the additional 25% penalty charge as liquidated damages which had been intended to take the place of attorney's fees, and ultimately reduced the same to 10%, thus:
As well, in Tan v. Court of Appeals[29] (Tan), the Court had the occasion to examine the interest and penalties imposed on a loan amounting to P3,411,421.32. The promissory note detailing the loan's conditions read, in part:
Ultimately, the Court reduced the stipulated 2% monthly compounded penalty charge to a straight interest at the rate of 12% per annum which, at the time, was the prevailing legal rate applicable to loans and forbearances of money.[31] In so doing, the Court clarified that the 2% monthly compounded penalty assumes the nature of the indemnity for damages contemplated under Article 2209 of the Civil Code, that is, stipulated regular compensatory interest arising on account of delay in payment of the principal obligation. The relevant portions of the Decision state:
Upon Spouses Azarraga's default, M.B. Lending Corporation filed a complaint for sum of money against Estrella to the exclusion of Spouses Azarraga who were allegedly insolvent. In her Answer, Estrella argued that she previously offered to settle the obligation but that M.B. Lending Corporation told her not to worry as there has already been partial payment in the amount of P17,010.00. She further claimed that the 6% monthly compounded interest and 3% monthly penalty charge were unconscionable.
The Regional Trial Court (RTC) dismissed the complaint without prejudice to the filing of a separate action against Spouses Azarraga. According to the RTC, the filing of the complaint against Estrella alone amounted to a "discharge of a prior party"[35] and that her prior offer to pay the obligation "is considered a valid tender of payment sufficient to discharge a person's secondary liability."[36]
The CA reversed on appeal and ordered Estrella to pay: (i) the balance of P13,700.00 with compounded interest at 6% per month computed from the date the loan was contracted until fully paid; (ii) the sum equivalent to the stipulated monthly penalty of 3% of the outstanding balance; (iii) attorney's fees at 25% of the total amount due; and (iv) costs of suit. Aggrieved, Estrella filed a Petition for Review on Certiorari before the Court.
The Court resolved to strike down the 3% stipulated monthly penalty and reduce the 25% attorney's fees, thus:
To digress, stipulated penalties may be enforced either for a compensatory or strictly penal purpose. As explained in D.M. Ragasa Enterprises, Inc. v. Banco de Oro, Inc.:[39]
On the other hand, stipulated penalties imposed in the punitive sense apply in addition to the regular compensatory interest contemplated under Article 2209. Such punitive penalties, when imposed in the form of additional interest, may be reduced below the applicable legal rate or even deleted altogether.
Now, in Palmares, the principal loan in question was purportedly for a term of two months. However, the fact that the 6% monthly interest was "computed every 30 days" from the date of its issuance and likewise compounded each month indicates that the principal amount was actually deemed due 30 days after its issuance.
Viewed in the proper light and bearing in mind that stipulated penalties are imposed either in the compensatory or punitive sense, the charges imposed on the principal loan subject of Palmares constitute: (i) regular compensatory interest at the rate of 6% per month applied on the principal loan; (ii) interest on accrued interest also at the rate of 6% per month applied on the outstanding obligation (that is, the sum of the principal loan and accrued regular compensatory interest); and (iii) an additional 3% monthly penalty charge imposed on the outstanding balance for a punitive purpose.
Therefore, what was deleted in Palmares was neither the regular compensatory interest nor the interest on accrued interest, but rather, the 3% monthly penalty charge imposed in addition thereto. As explained, such monthly penalty charge, being punitive in nature, is subject to reduction below the legal rate or even deletion at the courts' discretion as it is imposed not by operation of law, but solely upon agreement of the contracting parties.
All told, I submit that regular compensatory interest and interest on accrued interest imposed at the legal rate may not be deleted on the ground of unconscionability. The interest on accrued interest thus due on the 24% stipulated penalty charge subject of this Petition must therefore apply by operation of law.
In determining whether stipulated
interest rates are unconscionable,
courts must assess the economic
impact of the stipulated interest
rates and penalties in conjunction
with the legal interest which
accrues by operation of law
I recognize that the verba legis application of Articles 2209 and 2212 coupled with the limited application of the unconscionability standard as detailed above may be viewed as an unwarranted crippling of the courts' power to prevent inequity and afford innocent parties protection against unscrupulous individuals who are out to take advantage. However, I find that such a view unduly disregards the fact that courts may take these matters into account in assessing the total economic impact of the interest, penalties, and other changes imposed upon the obligation in question.
Thus, in determining whether stipulated interest rates are unconscionable, courts must assess stipulated interest rates and stipulated penalties in conjunction with such legal interest accruing thereon by operation of law. While a stipulated interest rate may not appear unconscionable per se, it may nevertheless be reduced if its application vis-à-vis the prevailing legal interest imposed by law would yield iniquitous results. To note, this is precisely the approach which the Court has taken in the cases above-discussed.
Guidelines on imposition of
interest
In the course of resolving the present Motion for Reconsideration, the Resolution also proposes to amend the prevailing guidelines for the imposition of interest set forth in the case of Eastern Shipping Lines, Inc. v. Court of Appeals[41] (Eastern Shipping Lines) and restated in Nacar v. Gallery Frames[42] (Nacar). These amended guidelines read:
Given the foregoing, and after a careful reexamination of the application of interests with respect to unliquidated damages, I have reconsidered my view with respect thereto. I am now of the view that the delay in the payment of the unliquidated damages should serve as the basis for the application of interest, even though the base amount may be initially unascertained and it is for the courts to determine the exact amount owed. Thus, the application of the interest on the amount, as finally adjudged by the court, should retroact to the point of delay or default, i.e., upon extrajudicial or judicial demand because it is at that point wherein the obligation to pay a sum of money thereby arises. This is akin to just compensation cases wherein the exact amount of just compensation is court-driven but the reckoning point wherein interest is imposed retroacts to the time of taking of the real property, wherein the obligation to pay the just compensation arises, and runs until full payment.
Considering the aforementioned observations, I re-submit the following proposed guidelines which take into comprehensive account the different permutations of applications of interests and their rates across types of obligations consisting of the payment of a sum of money. Given the plurality of the different scenarios wherein impositions of interests may be had, a flow chart reflecting a full rundown of the same is hereto attached to facilitate an overall appreciation of the different conceivable applications of interests at a glance.
At the outset, it must be recognized that interest applies exclusively to obligations consisting of the payment of a sum of money (OCPSM), which may consist of: (1) either loans and forbearances of money, goods, or credit (L/Fs); or (2) non-loans or non-forbearances (NL/NFs). The discourse of interests, the applicable rates and the reckoning points depend on the nature of the subject transactions. The differentiated applicable rates and reckoning points vis-à-vis the types of transactions they pertain to are outlined below.
I. Loans and Forbearances of Money, Goods, or Credit
L/Fs may contain a stipulated rate of interest and/or reckoning point (when interest commences to run) and the rate may be upheld as valid or void for being unconscionable and deemed not written. They may also be silent on the rate and/or reckoning point, or without stipulation.
The sum of money due in NL/NFs may be liquidated or unliquidated. These NL/NFs cover OCPSM arising from the sources of obligations namely, law, contracts other than L/Fs, quasi-contracts, quasi-delicts and delicts. For example, in a lease contract, the amount of unpaid rentals is generally liquidated. The same holds true in a contract of sale where the seller sues the buyer for the unpaid purchase price. On the other hand, in a just compensation (JC) action based on eminent domain, the exact amount of JC is court-determined, thus the sum due may be considered unliquidated. In a quasi-delict case, the victim may want to proceed to collect from the tortfeasor medical expenses, loss of earning, etc., the exact amount of which is unliquidated.
Nevertheless, for the reasons set forth herein, I find that the August 28, 2019 Decision should be MODIFIED in that: (1) the guidelines be amended accordingly; and (2) the dispositive portion be restated as follows:
[1] G.R. No. 225433, August 28, 2019, 916 SCRA 1.
[2] Id. at 56.
[3] Ponencia, p. 23.
[4] Act No. 2655, as amended by Presidential Decree No. (P.D.) 116.
[5] Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 71.
[6] Id. at 128.
[7] Id.
[8] See generally Camarines Sur Teachers and Employees Association, Inc. v. Province of Camarines Sur, G.R. No. 199666, October 7, 2019, 921 SCRA 532.
[9] See generally Vasquez v. Philippine National Bank, G.R. Nos. 228355 & 228397, August 28, 2019, 916 SCRA 194, 220-221.
[10] 763 Phil. 372 (2015).
[11] Id. at 388. Citations omitted.
[12] See USURY LAW, Sec. 1, as amended by P.D. 116, Sec. 1, which states:
[14] Liquidated damages are treated under Article 2226 of the Civil Code, which states, "[l]iquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof." Like rates of regular compensatory interest, liquidated damages shall also be equitably reduced if they are found to be iniquitous or unconscionable as provided in Article 2227 of the Civil Code.
[15] See Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 141, which states that "Article 2212 applies to any accrued stipulated interest."
[16] Eduardo P. Caguioa, COMMENTS AND CASES ON CIVIL LAW, Vol. VI (1970), p. 441.
[17] See Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 141-142. Citations omitted.
[18] 704 Phil. 28 (2013).
[19] Id. at 59-60. Citation omitted.
[20] Jeffrey C. Fort, Understanding Unconscionability: Defining the Principle, LOYOLA UNIVERSITY CHICAGO JOURNAL, Vol. 9, Issue 4, p. 767.
[21] Colleen McCullough, Unconscionability as a Coherent Legal Concept, UNIVERSITY OF PENNSYLVANIA LAW REVIEW, Vol. 164, pp. 781-782.
[22] Brady Williams, Unconscionability as a Sword: The Case for an Affirmative Cause of Action, CALIFORNIA LAW REVIEW, pp. 2016-2017.
[23] Ponencia, p. 13.
[24] Id. at 14-15.
[25] 427 Phil. 42 (2002).
[26] Id. at 51-53. Citations omitted.
[27] 349 Phil. 769 (1998).
[28] Id. at 779-781. Citations omitted.
[29] 419 Phil. 857 (2001).
[30] Id. at 865.
[31] On the legal rate then prevailing, see Eastern Shipping Lines, Inc. v. Court of Appeals, 304 Phil. 236, 252-253 (1994) where the Court held that "[w]hen 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."
[32] Tan v. Court of Appeals, supra note 29, at 864-866. Citations omitted.
[33] Id. at 866-867.
[34] 351 Phil. 664 (1998).
[35] Id. at 674.
[36] Id.
[37] Id. at 690-691. Citations omitted.
[38] Id. at 691.
[39] 833 Phil. 640 (2018).
[40] Id. at 661. Citations omitted.
[41] Supra note 31.
[42] 716 Phil. 267 (2013).
[43] Ponencia, pp. 20-21.
[44] Id.
[45] Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 101-106. Citations omitted.
CONCURRENCE & DISSENT
LAZARO-JAVIER, J.:
Additional award of legal interest on
conventional interest must be deleted
as it was never put in issue
The Resolution, through the highly esteemed Senior Associate Justice Marvic Mario Victor F. Leonen, adopted my humble suggestion to delete the additional award of legal interest on conventional interest as Midtown Industrial Sales (Midtown) did not appeal the trial court's judgment which notably did not include the aforesaid award; nor was Article 2212[1] of the Civil Code ever brought to fore since the inception of the case up until it got elevated to the Court.[2] Thus, the Resolution ruled that there is no valid justification to modify or reverse the Majority Decision save for the imposition of legal interest on the 24% per annum interest which was consequently ordered deleted. The Resolution likewise recognized that the judgment award already became final and executory insofar as Midtown is concerned. As it was, the Majority Decision earlier imposed, albeit motu proprio, legal interest on top of the conventional interest of 24%. But as correctly enunciated in the present Resolution the sudden and unsought award of legal interest on interest in the Majority Decision was ultra vires.
Surely, in civil cases, only errors claimed and assigned by a party will be considered by the Court, except errors affecting its jurisdiction over the subject matter. Further, while it is true that the Court has recognized that appellate court is imbued with sufficient discretion to review matters, not otherwise assigned as errors on appeal, in the following instances: (a) grounds not assigned as errors affect the jurisdiction of the court over the subject matter; (b) matters not assigned as errors on appeal are evidently plain or clerical errors within contemplation of law; (c) the consideration of matters not assigned as errors on appeal is necessary in arriving at a just decision and complete resolution of the case or to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters not specifically assigned as errors on appeal were raised in the trial court and are matters of record having some bearing on the issue submitted which the parties failed to raise or which the lower court ignored; (e) matters not assigned as errors on appeal but are closely related to an error assigned; and (f) the determination of a question properly assigned is dependent on matters not assigned as errors on appeal[3]— the present case does not fall under any of these exceptions. As stated, therefore, the present Resolution deleting the award of legal interest on interest is in order.
In any event, I respectfully submit that the deletion of the award of legal interest on interest is enough to put closure to the present case. With due respect however, the present Resolution went on to lay down the rule that the award of interest on interest under Article 2212 is dictated by law and consequently proceeded to formulate the guidelines on its imposition, among others. For me, the substantive discussion on the subject is not necessary at all, hence, it is a mere obiter. Inarguably, these guidelines were not even applied to the present case which was simply disposed of, in this wise:
In any event, while it is true that the Majority Decision sought to be reconsidered itself prescribed guidelines or standards for imposition of legal interest on interest, the same should be considered to have been rendered nugatory considering the award thereof was already deleted in the present Resolution.
I, therefore, concur in the result but dissent from the substantive discussion on the application of Article 2212 on legal interest on interest, including the formulation of guidelines for its imposition, among others, for being a mere obiter.
[1] ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may he silent upon this point. (1109a), (Republic Act No. 386, CIVIL CODE OF THE PHILIPPINES. Approved on June 18, 1949).
[2] [Letter] dated September 6, 2022, Associate Justice Amy Lazaro-Javier, Lara's Gift v. Midtown, G.R. No. 255433.
[3] See Law Firm of Abrenica v. Court of Appeals, 430 Phil. 53, 61-62 (2002).
[4] G.R. No. 224552, March 3, 2021.
[5] Id.
[6] See People v. Sandiganbayan, 723 Phil. 444, 465 (2013).
[7] Villanueva, Jr. v. Court of Appeals, 429 Phil, 194 (2002).
Although compensatory interest, unlike conventional interest, need not be expressly stipulated in writing, the parties may freely stipulate on compensatory interest through a penalty or penal clause.[46] The nature of a penal clause was expounded in Ligutan v. Court of Appeals:[47]
A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the 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. Although a court may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with.[48] (Citations omitted)In distinguishing between conventional interest and compensatory interest, this Court has explained that if the debtor is not in delay, it is properly liable only for the principal of the loan and conventional interest. Even if the debtor is not liable for compensatory interest, this does not mean that it is, as a matter of law, relieved from the payment of conventional interest. The conventional interest continues to accrue under the terms of the loan until actual payment is effected. The payment of conventional interest, specifically monetary interest, constitutes the price or cost of the use of money and thus, continues to accrue until the principal sum due is returned to the creditor.[49] Corollary to this, if the debtor were in delay, then compensatory interest, as a matter of law, will accrue in addition to conventional interest.
The "rules of thumb" for the rate of compensatory interest were established in Eastern Shipping Lines, Inc. v. Court of Appeals,[50] and restated[51] in Nacar v. Gallery Frames:[52]
It should be stressed that the Eastern Shipping Lines and Nacar rules govern only compensatory interest, not conventional interest,[62] and should be read in conjunction with the provisions of Articles 2209 and 1226 of the Civil Code.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. (Emphasis supplied)
- When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts,[53] is breached, the contravenor can be held liable for damages.[54] The provisions under Title XVIII on "Damages" of the 4Civil Code govern in determining the measure of recoverable damages.[55]
- 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.[56] Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.[57] In the absence of stipulation,[58] 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[59] at the rate of 6% per annum.[60] No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty.[61] 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.
ARTICLE 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.Thus, the applicable compensatory interest in contracts consisting in the payment of a sum of money should be determined as follows:[63]
ARTICLE 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. . . . (Emphasis supplied)
| (1) | If there is a penal clause that stipulates the penalty or indemnity, then the stipulated penalty or indemnity shall be applicable. |
| (2) | If there is no penal clause, but there is a stipulation on conventional or monetary interest, then the conventional or monetary interest shall be applicable. |
| (3) | If there is no stipulation on the penalty or on conventional interest, then the legal interest rate shall be applicable. In contracts of simple loan of money, the legal interest rate is currently 6%.[64] |
A question arises on whether interest on interest is applicable to compensatory interest. Jurisprudence supports its application as shown in the following cases.
In Philippine American Accident Insurance Company, Inc. v. Flores & Navalta,[65] this Court stated that Article 2212[66] of the Civil Code "contemplate[s] the presence of stipulated or conventional interest which had accrued when demand was judicially made."[67] Although the statement was made as basis for ruling that Article 2212 cannot be invoked to justify the payment of compound interest if the judgment only involves the payment of simple interest, it also raised the issue of whether Article 2212 can serve as basis for the payment of interest on compensatory interest.
Eastern Shipping Lines, Inc., as restated in Nacar, provides:
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:In Tan v. Court of Appeals & Cultural Center of the Philippines,[69] this Court ruled that Articles 1959[70] and 2212 of the Civil Code sanction the compounding of penalty charges in the parties' contract.
- 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.[68] (Emphasis supplied)
Isla v. Estorga,[71] reiterated that Article 2212 applies to "stipulated or conventional interest, i.e., monetary interest[.]"
In addition, not only the principal amount but also the monetary interest due to respondent as discussed above shall itself earn compensatory interest at the legal rate, pursuant to Article 2212 of the Civil Code, which states that "[i]nterest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. To be sure, Article 2212 contemplates the presence of stipulated or conventional interest, i.e., monetary interest, which has accrued when demand was judicially made. In cases where no monetary interest had been stipulated by the parties, no accrued monetary interest could further earn compensatory interest upon judicial demand. Thus, the principal amount and monetary interest due to respondent shall earn compensatory interest of twelve percent (12%) per annum from judicial demand, i.e., the date of the filing of the complaint on July 24, 2007, to June 30, 2013, and thereafter, at the rate of six percent (6%) per annum from July 1, 2013 until fully paid.[72] (Emphasis in the original, citations omitted)
Stipulated interest rates, whether conventional or compensatory, are subject to the "unconscionability" standard. The concept of unconscionability is a matter of law and equity. Jurisprudence empowers courts to equitably reduce interest rates; and the law[73] empowers them to reduce penalty charges.[74] Eastern Shipping Lines recognized that "factual circumstances [of a case] may [call] for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest."[75]
Central Bank Circular No. 905 issued by the Monetary Board of the Central Bank, pursuant to the powers granted by the Usury Law, effectively lifted the ceilings on interest rates. Consequently, usury, although illegal, is legally non-existent and interest can be charged as agreed upon by creditor and borrower[76] pursuant to the freedom of contract principle"[77] under Article 1306 of the Civil Code, viz:
ARTICLE 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.However, courts have not hesitated to void conventional interest that is "excessive, iniquitous, unconscionable and exorbitant," for being violative of the same provision of Article 1306 of the Civil Code. As held in Carpo v. Chua & Dy Ng:[78]
In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v. Salazar[79] we annulled the stipulation of 6% per month or 72% per annum interest on a P60,000.00 loan. In Imperial v. Jaucian,[80] we reduced the interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals,[81] we equitably reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per annum interest. The 10% and 8% interest rates per month on a P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud.[82] Recently, this Court, in Arrofo v. Quiño,[83] reduced the 7% interest per month on a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.Conventional interest rates that are unconscionable are deemed unjust, immoral, and contrary to public policy. In Sps. Castro v. Tan et al.:[84]
There is no need to unsettle the principle affirmed in Medel and like cases. From that perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest.
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.[85] (Citation omitted)In Vitug v. Abuda,[86] we held that while parties are free, in view of the suspension of the Usury Law, to set interest rates in their loan contract, they must ensure that their stipulated interest rates are neither iniquitous nor unconscionable. Otherwise, the same would be void for being against public morals. We emphasized that "[t]he lifting of the ceiling on interest rates may not be read as 'grant[ing] lenders carte blanche to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.'"[87] Thus, when stipulated interest rates are later found to be iniquitous or unconscionable, courts have the discretionary power to equitably reduce them, approximating the prevailing market rate "under the circumstances had the parties had equal bargaining power."[88]
The reduction of interest rates is not limited to monetary interest. It is not dependent on the type of interest imposed on the party, but on whether the interest rate was unconscionable or not. Thus, compensatory interest, when found to be unconscionable, may also be reduced.
Articles 1229 and 2227 of the Civil Code allow the reduction of penalty charges or damages that are unconscionable:
ARTICLE 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.In Ibarra v. Aveyro,[89] this Court even held that if a penalty clause is so unconscionable that its enforcement constitutes "a repugnant spoliation and an iniquitous deprivation of property,"[90] it can be struck down for being invalid.
ARTICLE 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.
Accordingly, in several cases,[91] this Court reduced or removed altogether penalty interests or charges that were unconscionable.
"Interest rates become unconscionable in light of the context in which they were imposed or applied."[92] Thus, the determination of whether an interest rate or penalty charge is reasonable or iniquitous rests on the sound discretion of the courts based on the established facts of a particular case.[93]
This Court had struck down stipulated monthly interest rates of 2.5%,[94] 5%,[95] 6%,[96] and 10%[97] for being unconscionable. Meanwhile, in Toledo v. Hyden,[98] a monthly interest rate of 6% to 7% was deemed valid. In that case, this Court noted that the borrower was not in dire need of money when she obtained a loan, and it was the borrower herself who was guilty of inequitable acts:
In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used the money from the loans to make advance payments for prospective clients of educational plans offered by her employer. In this way, her sales production would increase, thereby entitling her to 50% rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business transaction of this nature between Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the agreed amount of interest until she ordered for stop payment on some of the checks issued to Marilou. The checks were in fact sufficiently funded when she ordered the stop payment and then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or unconscionable and, hence, contrary to morals.Furthermore, while we have sustained the validity of a 21% per annum interest in one case,[100] we have also reduced an 18% per annum interest rate to 12% per annum in another,[101] after finding that "the resulting interest charge has turned out to be excessive in the context of its base computation period, and hence, unwarranted[.]"[102] In Land Bank of the Phils, v. David,[103] we upheld the reduction of the interest rate of 17% per annum and the penalty charge of 12% per annum to 12% and 5% per annum, respectively, on equitable grounds. This was because the loan extended to respondent was part of the social assistance program to farmers and this Court considered respondent's efforts to pay even after she had suffered business losses.
It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said loans, an advance interest of 6% to 7% was already deducted from the loan amount, yet she never uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man.[99] (Emphasis supplied, citations omitted)
In Vitug, the stipulated interest rates of 5% to 10% per month were found iniquitous considering the "extreme necessity" which compelled petitioner to obtain the loan and the possibility of his property being foreclosed if not for the loan. This Court further said that "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."[104]
Also, in another case,[105] this Court noted that the payment of the principal loan of P500,000 and interest of P425,000, computed at a monthly interest rate of 5% already "sufficiently compensated for the loan and the interest earned, and [the creditor] cannot be allowed to further recover on an interest rate which is unconscionable."[106]
To determine whether an interest rate is unconscionable, we are guided by the following pronouncements in Sps. Abella v. Sps. Abella:[107]
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.[108]Hence, this guiding parameter:
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.[109] (Emphasis supplied)Conformable to the foregoing pronouncements, "[t]he maximum interest rate that will not cross the line of conscionability is 'not more than twice the prevailing legal rate of interest.' If the stipulated interest exceeds this standard, the creditor must show that the rate is necessary under current market conditions."[110] The creditor must also show that the parties were on an equal footing when they stipulated on the interest rate.[111]
Furthermore, where the monetary interest rate is found to be unconscionable, only the rate is nullified and deemed not written into the contract; the parties' agreement on the payment of interest remains. In such instance, "the legal rate of interest prevailing at the time the agreement was entered into"[112] is applied by the courts.
As for compensatory interest, this Court in Ligutan v. Court of Appeals[113] held:
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court.[114] (Citations omitted)In Palmares v. Court of Appeals,[115] this Court removed the monthly 3% penalty charge for being highly inequitable and unreasonable. Palmares involved a P30,000.00 loan, payable in two months with interest at 6% per annum that would be compounded every month. Palmares held:
In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization:In Barons Marketing Corp. v. Court of Appeals, [117] this Court reduced the 25% penalty charge to cover the attorney's fees and collection fees, which was in addition to the 12% annual interest, to 10% for being manifestly exorbitant. Also, in Tan v. Court of Appeals,[118] the continued monthly accrual of the 2% penalty on the total amount due of about P7.996 million was held to be unconscionable. Considering the debtor's partial payments and offer to settle his outstanding loan in good faith, this Court found it fair and equitable in that case to reduce the 2% penalty charge, compounded monthly, to a straight 12% per annum.Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3%) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended — that is, to punish the obligor — will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties" promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether.[116] (Emphasis supplied, citation omitted)
However, the standards of unconscionability cannot apply to interest on interest under Article 2212 of the Civil Code, viz:
ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (Emphasis supplied)As Justice Alfredo Benjamin S. Caguioa elucidated, "interest on interest" is fixed by law. In the absence of a contractual stipulation between the parties on the rate of interest on accrued interest, the legal rate shall apply by operation of law. Its imposition is not subject to the court's discretionary power.[119]
Article 2212's interest on interest is penalty or indemnity for delay in the payment of stipulated interest.[120] It is expressly prescribed by law, and deemed written into every contract. This, all contracting parties should be aware of when they stipulate on the payment of interest.
In view of the foregoing discussions, and taking into consideration the viewpoints of Justice Caguioa, the summary of rules on the imposition of interest, as provided in Eastern Shipping Lines and Nacar, are amended as follows:
With regard 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:
- A. In obligations consisting of loans or forbearances of money, goods or credit:
The foregoing guidelines are illustrated in the table below:B. In obligations not consisting of loans or forbearances of money, goods or credit:
- 1. The compensatory interest due shall be that which is stipulated by the parties in writing as the penalty or compensatory interest rate,[121] provided it is not unconscionable.[122] In the absence of a stipulated penalty or compensatory interest rate, the compensatory interest due shall be that which is stipulated by the parties in writing as the conventional interest rate,[123] provided it is not unconscionable.[124] In the absence of a stipulated penalty or a stipulated conventional interest rate, or if these rates are unconscionable, the compensatory interest shall be the prevailing legal interest rate prescribed by the Bangko Sentral ng Pilipinas.[125] Compensatory interest, in the absence of a stipulated reckoning date, shall be computed from default, i.e., from extrajudicial or judicial demand, until full payment.[126]
2. Interest on conventional/monetary interest and stipulated compensatory interest shall accrue at the stipulated interest rate (compounded interest) from the stipulated reckoning point or, in the absence thereof, from extrajudicial or judicial demand until full payment, provided it is not unconscionable. In the absence of a stipulated compounded interest rate or if this rate is unconscionable, the prevailing legal interest rate prescribed by the Bangko Sentral ng Pilipinas shall apply from the time of judicial demand until full payment.[127]
- For liquidated claims:
The compensatory interest due shall be that which is stipulated by the parties in writing as the penalty or compensatory interest rate,[128] provided it is not unconscionable.[129] In the absence of a stipulated penalty or compensatory interest rate, or if these rates are unconscionable, the compensatory interest shall be at the rate of 6%.[130] Compensatory interest, in the absence of a stipulated reckoning date, shall be computed from default, i.e., from extrajudicial or judicial demand, until full payment.[131]
- Interest on stipulated compensatory interest shall accrue at the stipulated interest rate (compounded interest) from the stipulated reckoning point or, in the absence thereof, from extrajudicial or judicial demand until full payment, provided it is not unconscionable. In the absence of a stipulated compounded interest rate or if this rate is unconscionable, legal interest at the rate of 6% shall apply from the time of judicial demand until full payment.[132]
- For unliquidated claims:
Compensatory interest on the amount of damages awarded may be imposed in the discretion of the court at the rate of 6% per annum.[133] No compensatory interest, however, shall be adjudged on unliquidated claims or damages until the demand can be established with reasonable certainty.[134] Thus, 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 of the judgment of the trial court (at which time the quantification of damages may be deemed to have been reasonably ascertained) until full payment.[135] The actual base for the computation of the interest shall, in any case, be on the principal amount finally adjudged.
| When obligation consists in: | Compensatory interest (scenario) | Interest rate | Interest Accrual | ||||||||
| LOANS OR FORBEARANCE OF MONEY, GOODS OR CREDIT |
| Stipulated penalty or compensatory interest |
| ||||||||
| Stipulated conventional interest |
| |||||||||
| BSP-prescribed legal rate | From judicial demand | |||||||||
| Interest on Interest | Interest rate | Interest Accrual | |||||||||
| (i) Interest on conventional interest | Stipulated rate (compound interest rate) |
| |||||||||
| BSP-prescribed legal rate, if not stipulated or unconscionable. | From judicial demand | ||||||||||
| (ii) Interest on compensatory interest | Stipulated rate (compound interest rate) |
| |||||||||
| BSP-prescribed legal rate, if not unconscionable | From judicial demand | ||||||||||
| NON-LOAN OR NON- FORBEARANCE OF MONEY, GOODS OR CREDIT | Is demand established with reasonable certainty? | Compensatory interest rate | Interest Accrual | ||||||||
| Yes | Stipulated penalty or compensatory interest Legal rate at 6%, if not stipulated or unconscionable. |
| |||||||||
| Interest on interest at 6% | From judicial demand | ||||||||||
| No | Discretionary at 6% | From date of judgment |
Now to this case, we modify our earlier Decision and hold that the contract involved is not a loan or forbearance of money, goods, or credit,[136] but a sale of goods on credit. From January to December 2007, petitioner Lara's Gifts purchased from respondent Midtown various industrial and construction materials totaling P1,263,104.22. The purchases were on a 60-day credit term, with the condition that a 24% interest rate per annum would be charged on all accounts overdue. This means that the 24% interest rate per annum would run only upon petitioner's failure to pay on the due date.
Thus, the 24% interest rate is a compensatory interest, imposed as indemnity for damages caused by the delay in the payment of the raw materials' purchase price, pursuant to Article 2209.
By the express provision of Article 2212, the 24% compensatory interest, which have accrued at the time of judicial demand, may be subject to "interest on interest."
However, as Justice Amy C. Lazaro-Javier pointed out, the Regional Trial Court adjudged in favor of Midtown Industrial Sales only P1,263,104.22 plus interest at 24% per annum, computed from February 5, 2008 until fully paid; and P50,000.00 as attorney's fees. This judgment award became final and executory as to Midtown Industrial Sales as it did not appeal. Thus, the additional award of legal interest on the 24% interest, in an appeal brought by Lara's Gifts, is ultra vires.[137]
ACCORDINGLY, the Motion for Reconsideration is PARTIALLY GRANTED. This Court's August 28, 2019 Decision is MODIFIED in that the award of legal interest on the 24% per annum compensatory interest is hereby DELETED.
Petitioner Lara's Gifts & Decors, Inc. is ordered to PAY respondent Midtown Industrial Sales, Inc. the following:
| (1) | ONE MILLION TWO HUNDRED SIXTY-THREE THOUSAND ONE HUNDRED FOUR PESOS and 22/100 (P1,263,104.22) representing the principal amount plus stipulated interest at 24% per annum to be computed from January 22, 2008, the date of extrajudicial demand, until full payment; |
| (2) | The sum of FIFTY THOUSAND PESOS (P50,000.00) as attorney's fees; and |
| (3) | Cost of the suit. |
The total monetary award shall bear legal interest at the rate of 6% per annum from finality of this Resolution until full payment.[138]
SO ORDERED.
Hernando, Inting, Zalameda, Gaerlan, Rosario, J. Lopez, Dimaampao, Marquez, Kho, Jr., and Singh, JJ., concur.
Gesmundo,* C.J., and M. Lopez,* J., on official business.
Caguioa, J., see concurring opinion.
Lazaro-Javier, J., I concur in the result. See separate opinion.
* On official business.
** Per Special Order No. 2914 dated September 15, 2022.
[1] Rollo, pp. 379-396.
[2] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales. Inc., G.R. No. 225433, August 28, 2019 , <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[3] Rollo, pp. 44-58. The Court of Appeals' Decision dated April 21, 2016 was penned by Associate Justice Stephen C. Cruz and concurred in by Associate Justices Jose C. Reyes, Jr. (retired Supreme Court Justice) Ramon Paul L. Hernando (now a Member of this Court) of the Fifth Division, Court of Appeals, Manila.
[4] As narrated in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28, 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[5] Id.
[6] Rollo, pp. 62-71.
[7] Id. at 57.
[8] Id. at 13-43. Filed under Rule 45.
[9] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28, 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[10] Id.
[11] Rollo, pp. 379-396.
[12] Id. at 381.
[13] Id. at 384-385.
[14] Id. at 386.
[15] Id. at 390.
[16] Id. at 389 and 391.
[17] Id. at 391.
[18] Id. at 405-412.
[19] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[20] Id.
[21] Id.
[22] This dichotomy goes back to Banal v. Safont & Puig, 19 Phil. 372 (191 1) [Per CJ Arellano, En banc], but it should be noted that in Reinsurance Company of the Orient, Inc. v. Court of Appeals, et al., 275 Phil. 20 (1991) [Per J. Feliciano, Third Division], Siga-an v. Villanueva, 596 Phil. 760 (2009) [Per J. Chico-Nazario, Third Division], Asiatrust Development Bank v. Tuble, 691 Phil. 732 (2012) [Per J. Sereno, Second Division] and Sun Life of Canada (Phils.) v. Tan Kit, 745 Phil. 482 (2014), and several other cases, the Supreme Court established the dichotomy as monetary interest, on one hand, and compensatory interest, on the other. Nevertheless, the Banal dichotomy is used here as conventional interest subsumes monetary interest, and therefore, allows a broader understanding of the concept.
[23] Robinson v. Macleod & Postal Savings Bank of the Philippine Islands, 46 Phil. 539, 540 (1924) [Per J. Malcolm, Second Division]. In this section, we adopt and share the views on this topic in Stephanie V. Gomez-Somera's book, Credit Transactions: Notes and Cases, Vol. 1 (2nd ed., 2015).
[24] CIVIL CODE, art. 1933 provides:
ARTICLE 1933. By the contract of loan, one of the parties delivers to another, . . . 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.
. . . .
Simple loan may be gratuitous or with a stipulation to pay interest. . . .
[25] 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 95 (2nd ed., 2015). See also BLACK'S LAW DICTIONARY (9th ed. 2009).
[26] Banal v. Safont & Puig, 19 Phil. 372, 374 (1911) [Per CJ Arellano, En banc].
[27] Spouses Silos v. Philippine National Bank, 738 Phil. 156, 160 (2014) [Per J. Del Castillo, Second Division].
[28] Banal v. Safont & Puig, 19 Phil. 372 (1911) [Per CJ Arellano, En banc].
[29] CIVIL CODE, art. 1956 provides:
ARTICLE. 1956. No interest shall be due unless it has been expressly stipulated in writing.
See also De la Paz v. L & J Development Co., 742 Phil. 420 (2014) [Per J. Del Castillo, Second Division]; and Siga-an v. Villanueva, 596 Phil. 760 (2009) [Per J. Chico-Nazario, Third Division]; and 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 95 (2nd ed., 2015).
[30] BLACK S LAW DICTIONARY (9th ed. 2009).
[31] State Investment House, Inc. v. Court of Appeals, 275 Phil 433, 444 (1991) [Per J. Feliciano, Third Division]. See 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 96 (2nd ed., 2015).
[32] Id.
[33] Id. at 445.
[34] Act No. 2655 (1916), An Act Fixing Rates of Interest Upon Loans and Declaring the Effect of Receiving or Taking Usurious Rates and for Other Purposes, as amended by Presidential Decrees No. 116, 858, and 1684, is generally known as the Usury Law.
[36] Currently 6% for loans and forbearance of money, goods, or credits pursuant to Bangko Sentral ng Pilipinas Circular No. 799, series of 2013, effective July 1, 2013, which was issued and promulgated by the Monetary Board pursuant to the authority granted to the Bangko Sentral ng Pilipinas by P.D. No. 116, which amended the Usury Law.
[36] Usury Law, sec. 1 provides:
SECTION 1. The rate of interest for the loan. . . of any money, goods, or credits. . . in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted. See 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 109 (2nd ed., 2015).
[37] Central Bank Circular No. 905, Series of 1982, effectively lifted the ceiling on interest rates.
[38] Currently 6% pursuant to Bangko Sentral ng Pilipinas Circular No. 799, series of 2013.
[39] BLACK'S LAW DICTIONARY (9th ed. 2009).
[40] Central Bank of the Philippines v. Cloribel, 150-A Phil. 86 (1972) [Per J. Concepcion, Second Division].
[41] Currently 6% pursuant to Bangko Sentral ng Pilipinas Circular No. 799, series of 2013. See 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 142 (2nd ed., 2015)
[42] National Marketing Corp. v. Marquez, et al., 136 Phil. 143 (1969) [Per J. JBL Reyes, En banc]; and Mendoza & Lim v. Spouses Gomez, 736 Phil. 460 (2014) [Per J. Perez, Second Division].
[43] BLACK'S LAW DICTIONARY (9th ed. 2009).
[44] 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 144-145 (2nd ed., 2015).
[45] Id.
[46] Id.
[47] 427 Phil. 42 (2002) [Per J. Vitug, Third Division].
[48] Id. at 51.
[49] See State Investment House, Inc. v. Court of Appeals, 275 Phil. 433 (1991) [Per J. Feliciano, Third Division], which involved the application of monetary interest.
[50] 304 Phil. 236 (1994) [Per J. Vitug, En banc].
[51] Taking into account Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013, effective July 1, 2013.
[52] 716 Phil. 267, 282-283 (2013) [Per J. Peralta, En banc].
[53] CIVIL CODE, art. 1157.
[54] CIVIL CODE, art. 1170 provides:
ARTICLE 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages
[55] CIVIL CODE, art. 2195 provides:
ARTICLE 2195. The provisions of this Title (on Damages) shall be respectively applicable to all obligations mentioned in article 1157.
[56] CIVIL CODE, art. 1956 provides:
ARTICLE 1956. No interest shall be due unless it has been expressly stipulated in writing.
[57] CIVIL CODE, art. 2212 provides:
ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.
[58] As explained in State Investment House, Inc. v. Court of Appeals, 275 Phil. 433 (1991) [Per J. Feliciano Third Division]: ". . . in the absence of a stipulation of a particular rate of penalty interest, then the payment of additional interest at a rate equal to the regular monetary interest; and if no regular interest had been agreed upon, then payment of legal interest. . ." (Emphasis supplied)
[59] CIVIL CODE, art. 2210 provides:
ARTICLE 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.
[60] CIVIL CODE, art. 2209 provides:
ARTICLE 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 percent per annum.
[61] CIVIL CODE, art. 2213 provides:
ARTICLE 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty.
[62] It should be noted, however, that several cases (see for example: Cuaton v. Salud, 465 Phil. 999 (2004) [Per J. Ynares-Santiago, First Division], Rizal Commercial Banking Corporation v. Court of Appeals, 352 Phil. 101 (1998) [Per J. Melo, Second Division]) consider Eastern Shipping Lines, Inc. as a comprehensive summary of existing rules on the computation of interest, without distinguishing between conventional and compensatory interest.
[63] See Reinsurance Company of the Orient, Inc. v. Court of Appeals, 275 Phil. 20 (1991) [Per J. Feliciano, Third Division] and State Investment House, Inc. v. Court of Appeals, 275 Phil. 433 (1991) [Per J. Feliciano, Third Division].
[64] Bangko Sentral ng Pilipinas Circular No. 799, series of 2013.
[65] 186 Phil. 563 (1980) [Per J. Abad Santos, Second Division] as cited in David v. Court of Appeals et al. 375 Phil. 177 (1999) [Per J. Quisumbing, Second Division].
[66] ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.
[67] Philippine American Accident Insurance Company, Inc. v. Flores & Navalta, 186 Phil. 563, 566 (1980) [Per J. Abad Santos, Second Division].
[68] Nacar v. Gallery Frames, 716 Phil. 267, 282 (2013) [Per J. Peralta En banc].
[69] 419 Phil. 857 (2001) [Per J. De Leon, Jr., Second Division].
[70] However, Article 1959 of the Civil Code should only be invoked in cases involving conventional interest. It provides:
ARTICLE 1959. Without prejudice to the provisions of Article 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 earn new interest.
[71] 834 Phil. 884 (2018) [Per J. Perlas-Bernabe, Second Division].
[72] Id. at 894 citing David v. Court of Appeals, et al., 375 Phil. 177 (1999) [Per J. Quisumbing, Third Division], which in turn cited Philippine American Accident Insurance Co., Inc. v. Flores, 186 Phil. 563 (1980) [Per J. Abad Santos, Second Division].
[73] CIVIL CODE, art. 1229 provides:
ARTICLE 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 partial performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.
[74] Land Bank of the Phils. v. David, 585 Phil. 167 (2008) [Per J. Carpio-Morales, Second Division].
[75] Eastern Shipping Lines, Inc. v. Court of Appeals, 304 Phil. 236, 252 (1994) [Per J. Vitug, En banc].
[76] Liam Law v. Olympic Sawmill Co. & Chi, 214 Phil. 385 (1984) [Per J. Melencio-Herrera, First Division].
[77] 1 STEPHANIE V. GOMEZ-SOMERA, CREDIT TRANSACTIONS: NOTES AND CASES 181-182 (2nd ed., 2015).
[78] 508 Phil. 462, 468-469 (2005) [Per J. Tinga, Second Division].
[79] 412 Phil. 816 (2001) [Per J. Sandoval-Gutierrez, Third Division].
[80] 471 Phil. 484 (2004) [Per J. Panganiban, First Division].
[81] 449 Phil. 419 (2003) [Per J. Puno, Third Division].
[82] 465 Phil. 999 (2004) [Per J. Ynares-Santiago, First Division].
[83] 490 Phil. 179 (2005) [Per J. Carpio, First Division].
[84] 620 Phil. 239 (2009) [Per J. Del Castillo, Second Division].
[85] Id. at 242-243.
[86] 776 Phil. 540 (2016) [Per J. Leonen, Second Division].
[87] Id. at 568-569.
[88] Id. at 569.
[89] 37 Phil. 273 (1917) [Per J. Torres, First Division].
[90] Id. at 282.
[91] See Macalinao v. Bank of the Philippine Islands, 616 Phil. 60 (2009) [Per J. Velasco, Jr., Third Division]; State Investment House, Inc. v. Court of Appeals, 413 Phil. 518 (2001) [Per J. Kapunan, First Division]; Palmares v. Court of Appeals, 351 Phil. 664 (1998) [Per J. Regalado, Second Division]; and Rizal Commercial Banking Corporation v. Court of Appeals, 352 Phil. 101 (1998) [Per J. Melo, Second Division].
[92] Vitug v. Abuda, 776 Phil. 540, 569 (2016) [Per J. Leonen, Second Division].
[93] Land Bank of the Phils. v. David, 585 Phil. 167 (2008) [Per J. Carpio Morales, Second Division].
[94] Spouses Abella v. Spouses Abella, 763 Phil. 372, 388 (2015) [Per J. Leonen, Second Division].
[95] Spouses Castro v. Tan, 620 Phil. 239 (2009) [Per J. Del Castillo, Second Division].
[96] De La Paz v. L & J Development Company, Inc., 742 Phil. 420, 430-432 (2014) [Per J. Del Castillo, Second Division] and Spouses Solangon v. Salazar, 412 Phil. 816, 823 (2001) [Per J. Sandoval-Gutierrez, Third Division].
[97] Isla v. Estorga, G.R. No. 233974, July 2, 2018, <http://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/64438> [Per J. Perlas-Bernabe, Second Division].
[98] 652 Phil. 70 (2010) [Per J. Del Castillo, First Division].
[99] Id. at 79-80.
[100] Spouses Bautista v. Pilar Development Corporation, 371 Phil. 533, 543 (1999) [Per J. Puno, First Division].
[101] Trade & Investment Development Corporation of the Phils. v. Roblett, 523 Phil. 360 (2006) [Per J. Tinga, Special Second Division].
[102] Id. at 367.
[103] Land Bank of the Phils. v. David, 585 Phil. 167 (2008) [Per J. Carpio-Morales, Second Division].
[104] Vitug v. Abuda, 776 Phil. 540, 572 (2016) [Per J. Leonen, Second Division].
[105] Menchavez v. Bermudez, 697 Phil. 447 (2012) [Per J. Velasco, Jr., Third Division].
[106] Id. at 458.
[107] 763 Phil. 372 (2015) [Per J. Leonen, Second Division].
[108] Id. at 389.
[109] Id.
[110] Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433, August 28, 2019, <https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/65527> [Per J. Carpio, En banc].
[111] See Philippine National Bank v. Court of Appeals, 308 Phil 18, 24 (1994) [Per J. Puno, Second Division].
[112] Isla v. Estorga, 834 Phil. 884, 891 (2018) [Per J. Perlas-Bernabe, Second Division].
[113] 427 Phil. 42 (2002) [Per J. Vitug, Third Division].
[114] Id. at 52.
[115] 351 Phil. 664 (1998) [Per J. Regalado, Second Division].
[116] Id. at 693-691.
[117] 349 Phil. 769 (1998) [Per J. Kapunan, Third Division].
[118] 419 Phil. 857 (2001) [Per J. De Leon, Jr., Second Division].
[119] J. Caguioa, Reflections, p. 2.
[120] Article 2212 is within Title XVIII, Chapter 2 of the Civil Code, on "Actual or Compensatory Damages."
[121] CIVIL CODE, arts. 1226 and 2209.
[122] CIVIL CODE, art. 1306.
[123] CIVIL CODE, art. 2209.
[124] CIVIL CODE, art. 1306.
[125] CIVIL CODE, art. 2209 and Usury Law, sec. 1.
[126] CIVIL CODE, art. 1169.
[127] CIVIL CODE, art. 2212.
[128] CIVIL CODE, art. 1226 and 2209.
[129] CIVIL CODE, art. 1306.
[130] CIVIL CODE, art. 2209.
[131] CIVIL CODE, art. 1169.
[132] CIVIL CODE, art. 2212.
[133] CIVIL CODE, art. 2209.
[134] CIVIL CODE, art. 2213.
[135] CIVIL CODE, art. 2213.
[136] Estores v. Spouses Supangan, 686 Phil. 86, 96 (2012) [Per J. Del Castillo, First Division], defined forbearance as an arrangement other than a loan where a person agrees to the temporary use of his money goods, or credits subject to the fulfilment of certain conditions.
[137] J. Lazaro-Javier, Reflections, pp. 2-3.
[138] Nacar v. Gallery Frames, 716 Phil. 267 (2013) [Per J. Peralta, En Banc].
CAGUIOA, J.:
For resolution is the Motion for Reconsideration of the Court's August 28, 2019 Decision[1] denying the Petition for Review on Certiorari filed by petitioner Lara's Gifts & Decors, Inc. (Lara's Gifts).
The dispositive portion of the August 28, 2019 Decision reads:
WHEREFORE, the Decision dated [April 21, 2016] of the Court of Appeals in CA-G.R. CV No. 102465, affirming the [January 27, 2014] Decision of the Regional Trial Court, Branch 128, Caloocan City, is AFFIRMED with MODIFICATION, as follows:The Resolution affirms the awards in paragraphs 1, 3, and 4, but modifies the August 28, 2019 Decision by deleting the additional award of "interest on interest" in paragraph 2, because the same would be ultra vires in an appeal brought by Lara's Gifts.[3]
Petitioner Lara's Gifts & Decors, Inc., is ordered to pay respondent Midtown Industrial Sales, Inc. [(Midtown)] the following:SO ORDERED. [2]
- ONE MILLION TWO HUNDRED SIXTY THREE THOUSAND ONE HUNDRED FOUR PESOS and 22/100 (P1,263,104.22) representing the principal amount plus stipulated interest at 24% per annum to be computed from [January 22, 2008], the date of extrajudicial demand, until full payment.
- Legal interest on the 24% per annum interest due on the principal amount accruing as of judicial demand, at the rate of 12% per annum from the date of judicial demand on [February 5, 2008] until [June 30, 2013], and thereafter at the rate of 6% per annum from [July 1, 2013] until full payment.
- The sum of FIFTY THOUSAND PESOS (P50,000.00) as attorney's fees, plus legal interest thereon at the rate of 6% per annum to be computed from the finality of this Decision until full payment.
- Cost of the suit.
I wish to concur, even as I clarify, that the imposition of legal interest on the 24% per annum interest is deleted only because its imposition became final and executory as to Midtown Industrial Sales, Inc. (Midtown) as it did not appeal the same, and not because it was unconscionable. In my view, the principle of unconscionability applies only to justify the reduction of unconscionable rates stipulated upon by the parties, and not legal rates, or those rates prescribed by law.
While the "interest on interest" (hereinafter, interest on accrued interest) as stipulated by the parties may be nullified when found to be iniquitous or unconscionable, interest on accrued interest is fully provided for and sanctioned by Article 2212 of the Civil Code, which states:
Article 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (Emphasis supplied)Concomitantly, in obligations which consist in the payment of a sum of money where the parties do not stipulate on the rate of interest on accrued interest, the legal rate shall apply by operation of law, and may not be further reduced or deleted.
The same rule applies to the simple or regular interest which serves as the "indemnity for damages" when the debtor incurs in delay in obligations consisting in the payment of a sum of money. Such interest, which is referred to as compensatory interest (hereinafter, regular compensatory interest) is treated under Article 2209 of the Civil Code, thus:
Article 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.While the stipulated rate of regular compensatory interest may be similarly nullified when found to be iniquitous or unconscionable, regular compensatory interest shall remain imposable also at the legal rate. Moreover, in situations where the parties do not stipulate on the rate of regular compensatory interest, the legal rate shall apply by operation of law, and may not be further reduced or deleted.
On this basis, I find that courts are precluded from effecting the wholesale deletion of regular compensatory interest and interest on accrued interest, as this would run counter to the express mandate of Articles 2209 and 2212 of the Civil Code. These provisions are clear and leave no room for interpretation — regular compensatory interest and interest on accrued interest shall run on account of delay either in the payment of the principal obligation (in the case of regular compensatory interest) or in the payment of interest due and unpaid (in the case of interest on accrued interest) at the rate stipulated by the parties, or in case of nullity or absence thereof, at the applicable legal rate.
In this connection, I reiterate that the applicable legal rate shall depend on the nature of the obligation.
If the obligation constitutes a loan or forbearance contemplated under the Usury Law,[4] the applicable legal rate shall be that prescribed by the Bangko Sentral ng Pilipinas (BSP). On the other hand, if the obligation is one for payment of a sum of money which is not a loan or forbearance, the applicable rate shall be 6% per annum, as set by Article 2209 of the Civil Code. Since the obligation subject of this Petition is one for payment of a sum of money which does not constitute a loan or forbearance under the context of the Usury Law, the applicable legal rate of interest on accrued interest is therefore 6% per annum.
To this end, I wish to explain the reasons why the principle of unconscionability should only be construed to apply to rates stipulated upon by the parties. Further, I will discuss what I view to be the clear import of Articles 2209 and 2212 with respect to the mandatory imposition of regular compensatory interest and interest on accrued interest.
Finally, I will proceed to reiterate the position set forth in my Concurring and Dissenting Opinion on the August 28, 2019 Decision[5] (Opinion) with respect to the differential treatment of loans and forbearances under the Usury Law and all other obligations for payment of a sum of money not falling under the latter's scope.
Legal rates (i.e., interest rates
prescribed by law) are not subject
to reduction or deletion based on
the unconscionability standard
For purposes of further clarifying the matter of imposing legal interests to interests, I wish to add that unlike interest rates stipulated upon by the parties which are subject to the unconscionability standard, legal rates prescribed by law are not for the simple reason that the Court's duty is to simply apply the law. As a result, legal rates may not be further reduced or altogether deleted by the courts based on the ground of unconscionability.
To further explain, it is best to begin with a run-down of relevant concepts relating to the imposition of interest.
Conventional interest is the stipulated "cost of borrowing money" or the "presumptive reasonable compensation for borrowed money."[6] Conventional interest arises from contract for the use or forbearance of money.[7] Since conventional interest arises from contract, the contracting parties are free to stipulate on their preferred rate. However, the rate of conventional interest stipulated upon by the parties may be declared void if found to be iniquitous, unconscionable, or exorbitant, pursuant to the principles of autonomy and mutuality of contract.
To note, the principle of autonomy under Article 1306 of the Civil Code permits the contracting parties to establish their own stipulations as they may deem convenient. However, such stipulations may be nullified if found to be contrary to law, morals, good customs, public order, or public policy.[8] Moreover, the principle of mutuality enshrined in Article 1308 of the same statute espouses that a contract "must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." Thus, the principle of mutuality of contracts dictates that a contract or a stipulation therein must be rendered void when the execution of its terms is skewed in favor of one party.[9]
Thus, with respect to unconscionable interest rates, the Court held in Spouses Abella v. Spouses Abella,[10] the following:
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.In turn, when the parties stipulate on the payment of conventional interest but the rate agreed upon is found to be void for being unconscionable, the stipulated interest rate is deemed not written in the contract, and shall be replaced by the legal interest rate prevailing at the time the parties entered into the loan or forbearance in question. In such cases, only the unconscionable stipulated interest is nullified; the obligation to pay conventional interest remains. The legal interest is therefore made to stand as a "surrogate" or "substitute" for the rate of interest so nullified. At present, the rate of legal interest applicable to loans or forbearances of money is that prescribed by the BSP.[12]
The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law."[11]
On the other hand, regular compensatory interest treated in Article 2209 is the interest which is imposed by law as indemnity for damages on account of delay in the payment of the principal obligation. It is demandable even in the absence of an express stipulation regarding the payment of interest and applies in all cases where there is delay in the payment of any sum of money.[13] To quote anew the provision:
Article 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.As plainly stated in Article 2209, contracting parties are free to stipulate on the indemnity for damages on account of delay in the payment of the principal obligation. The indemnity for damages in obligations consisting of a payment of sum of money may come in the form of: (1) stipulated regular compensatory interest to be applied on the principal obligation; (2) a penal clause imposed in its compensatory (as opposed to punitive) sense; or (3) a fixed amount of liquidated damages.[14]
When the parties agree on the imposition of a penal clause or a fixed amount of liquidated damages as indemnity for damages, such fixed amounts should be understood to take the place of regular compensatory interest which, as Article 2209 explicitly states, applies as "indemnity for damages" only in cases where there is "no stipulation to the contrary."
However, in cases where the contracting parties agree upon the imposition of stipulated regular compensatory interest as indemnity for damages, the stipulated rate will apply. Nevertheless, such stipulated rate, being the result of the agreement of the parties, may also be equitably reduced if found to be unconscionable.
In turn, Article 2209 provides that regular compensatory interest shall be applied at the legal rate prevailing at the time the obligation in question was entered into where: (1) there is no stipulation on the payment of regular compensatory interest; or (2) there is a stipulation as to the payment of regular compensatory interest, but rate agreed upon is found to be iniquitous or unconscionable.
As explained in my Opinion and further reiterated below, the applicable legal interest rate shall depend on the nature of the obligation involved. When the obligation is a loan or forbearance of money within the context of the Usury Law, the legal interest rate applicable shall be the BSP-prescribed rate. However, if the obligation is one for the payment of a sum of money which is neither a loan nor a forbearance, the interest rate applicable shall be the 6% per annum as set by Article 2209 of the Civil Code.
Interest on accrued interest under Article 2212 also partakes the nature of compensatory interest as it also arises on account of delay in payment. However, unlike the compensatory interest contemplated in Article 2209 which arises on account of delay in the payment of the principal obligation, interest on accrued interest arises on account of delay in the payment of stipulated interest.[15] Justice Eduardo P. Caguioa explains that Article 2212 serves as an exception to the general rule on compounding of interest laid down in Article 1959, thus:
[Article 2212] is an exception to the general rule on compounding interest, i.e., interest on interest, provided for in Article 1959. x x x Under [Article 1959], interest due and unpaid, that is, accrued interest, shall not earn interest unless there is an express agreement between the parties, which agreement must, furthermore, be in writing as required by Article 1956. However, under [Article 2212], interest due and unpaid shall earn legal interest from the time of judicial demand, despite lack of agreement to that effect.[16]Thus, Article 2212 must be taken in conjunction with Article 1959 which reads:
Article 1959. Without prejudice to the provisions of article 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 earn new interest. (Emphasis supplied)Moreover, as explained in my Opinion, Article 2212 applies only to obligations containing a stipulation on the payment of interest. To reiterate:
In Hun Hyung Park v. Eung Won Choi, the Court explained however that—Accordingly, contracting parties are also free to stipulate on the rate of interest on accrued interest pursuant to Article 1959. Like the stipulated rate of regular compensatory interest contemplated under Article 2209, the stipulated rate of interest on accrued interest may also be equitably reduced if found to be unconscionable. In such cases, the stipulated rate of interest on accrued interest will be deemed as not written in the contract, and shall be replaced by the applicable legal rate prevailing at the time the contract in question was entered into. Moreover, if there is no rate of interest on accrued interest agreed upon, interest on accrued interest shall nevertheless run from the time of judicial demand at the applicable legal rate, which, as stated, may either be the BSP-prescribed rate, or the rate of 6% specified in Article 2209, depending on the nature of the obligation consisting in the payment of a sum of money.x x x "interest due" in Article 2212 refers only to accrued interest. A look at the counterpart provision of Article 2212 of the new Civil Code, Article 1109 of the old Civil Code, supports this. It provides:In interpreting the above provision of the old Civil Code, the Court in Zobel v. City of Manila, ruled that Article 1109 applies only to conventional obligations containing a stipulation on interest. Similarly, Article 2212 of the new Civil Code contemplates, and therefore applies, only when there exists stipulated or conventional interest. x x x[17] (Emphasis supplied)Art. 1109. Accrued interest shall draw interest at the legal rate from the time the suit is filed for its recovery, even if the obligation should have been silent on this point.
In commercial transactions the provisions of the Code of Commerce shall govern.
Pawnshops and savings banks shall be governed by their special regulations. x x x
Finally, it should be emphasized that interest runs solely in connection with obligations consisting of a payment of sum of money. This is apparent from Article 1956 which permits the imposition of conventional interest on simple loans, Article 2209 which constitutes regular compensatory interest as the indemnity for damages in obligations for payment of a sum of money where the parties do not agree on a penal clause or a fixed amount of liquidated damages, and Article 2212 which applies to obligations for payment of a sum of money containing a stipulation on the payment of interest.
At this juncture, a distinction must be drawn between the treatment of interest rates stipulated by the parties and the legal rates prescribed by law. While rates stipulated by the parties are subject to the unconscionability standard, legal interest rates which are prescribed by law are not.
In Spouses Dela Cruz v. Planters Products, Inc.,[18] the Court held that interest which accrues as a direct application of law and jurisprudence cannot be deemed inequitable and unconscionable, thus:
Relevantly, the likelihood of the aggregate interest charged exceeding the principal indebtedness is not remote. In Apo Fruits Corporation v. Land Bank of the Philippines, a case involving just compensation for landholdings with legal interest, however, the Court has appropriately observed that the realization of such likelihood was not necessarily inequitable or unconscionable due to its resulting directly from the application of law and jurisprudence, to wit:To bolster the proposition that a rate of interest provided for by law is conceptually incapable of unconscionability, it is fitting to recall that this judicially developed concept resulted from the delicate balancing act between the parties' freedom to contract, on the one hand, and protection against oppressive abuses of such freedom, on the other. As early literature on the matter suggests:That the legal interest due is now almost equivalent to the principal to be paid is not per se an inequitable or unconscionable situation, considering the length of time the interest has remained unpaid — almost twelve long years. From the perspective of interest income, twelve years would have been sufficient for the petitioners to double the principal, even if invested conservatively, had they been promptly paid the principal of the just compensation due them. Moreover, the interest, however enormous it may be, cannot be inequitable and unconscionable because it resulted directly from the application of law and jurisprudence — standards that have taken into account fairness and equity in setting the interest rates due for the use or forbearance of money.That is true herein. Although this case was commenced in 1981, the decision of the trial court was rendered only in 1997, or more than 15 years ago. By appealing to the CA and then to this Court, the petitioners chose to prolong the final resolution of the case; hence, they cannot complain, but must bear the consequences to them of the application of the pertinent law and jurisprudence, no matter how unfavorable to them.[19] (Emphasis supplied)
Most writers agree that the doctrine of unconscionability was included in the Code to avoid these circuitous or indirect objections to form contracts, along with other potential abuses of the bargaining process. Whether it was a good idea to define unconscionability in the words of section 2-302 was the subject of dispute. Surely, unconscionability decisions may be prompted by an emotional reaction to an apparently unjustifiable, unequal exchange. This notion appears to conflict with the policy of freedom of contract which holds that persons should be able to allocate the burdens of the exchange by agreement, including risks of loss. Some took the position that if unconscionability could be invoked at any time to change the prior allocation of the risks, havoc would result in the commercial world; no one would be able to predict their financial exposure, and litigation costs would rise sharply.Although the degree of unconscionability may be far from clear cut, its rather amorphous or varying application nevertheless makes use of the same litmus test to measure possible unconscionability, that is whether the rate of interest may be so exorbitant and prohibitive as to "shock the conscience," as another scholar describes:
This argument might be valid if courts were motivated solely by emotional and intellectual considerations, i.e., doing justice on an ad hoc basis. In fact, however, courts appear to be no more and no less concerned with doing justice where a claim of unconscionability is made than in any other dispute. While an intellectual/emotional component is undoubtedly present, the decisions nevertheless point to a definition of the concept of unconscionability.[20]
x x x Unconscionability was an arcane, nebulous concept in contract law that courts had used to avoid enforcing contracts that "shock the conscience." The doctrine seeks "the prevention of oppression and unfair surprise" and directs against the "disturbance of allocation of risks because of superior bargaining power." The distinctive element of the unconscionability defense, as opposed to fraud or duress, is its two-pronged analysis: traditionally, a provision must be both procedurally and substantively unconscionable to be held unenforceable. Procedural unconscionability "arises out of defects in the process by which the contract was formed, and can include a variety of inadequacies, such as age, literacy, lack of sophistication, hidden or unduly complex contract terms, bargaining tactics, and the particular setting existing during the contract formation process." Substantive unconscionability "suggests the exchange of obligations so one-sided as to shock the court's conscience." If a court finds that a provision is substantively unconscionable, it can void the specific provision and leave the rest of the contract intact. Using unconscionability, it is possible for courts to step in and prevent the enforcement of a variety of contract provisions.[21] (Emphasis and underscoring supplied)Finally, as yet another scholar elucidates, the doctrine of unconscionability is an instrument of defense against the inequities of strict contract enforcement, to wit:
The doctrine of unconscionability reflects the long-settled principle that courts will not be used as "instruments of inequity and injustice" in the name of freedom of contract. To that end, courts have long invoked the doctrine as a "flexible safety net" to strike down contract terms that are "unreasonably and unexpectedly harsh," "unduly oppressive," or "so one-sided as to shock the conscience." When asked to enforce a contract bearing such terms, courts may invoke unconscionability and refuse to enforce all or portions of the contract at their discretion.[22]In other words, the historical underpinning of the concept of unconscionability is largely anchored on protecting parties against cruel interest rates that they themselves may have freely imposed in a contract, and is therefore theoretically inapplicable to interest rates that have been provided for not by parties' liberties but by the law. The reduction of a legal interest that is clearly prescribed by law may only be legally plausible on the pretext that the law itself which prescribed such a rate is erroneous. In such case, the solution would be an amendment of the law, and not an ad hoc reduction of statutorily imposed interest rates on a case to case basis.
Thus, I disagree with the sweeping statement that "interest rates, whether conventional or compensatory, are subject to the 'unconscionability' standard."[23] I respectfully submit that this simplification fails to draw the important distinction between stipulated interest rates and legal interest rates. Since legal interest rates are set by law, they can neither be deemed inequitable nor unconscionable. For this reason, legal interest rates cannot be subject to the unconscionability standard. To repeat, they can neither be reduced nor deleted on the ground of unconscionability.
Therefore, I humbly suggest that for purposes of clarity and accuracy, such sweeping statement be properly qualified to read "stipulated interest rates, whether conventional or compensatory, are subject to the 'unconscionability' standard."
Regular compensatory interest
under Article 2209 and interest on
accrued interest under Article
2212 apply by operation of law
Proceeding from the foregoing discussion, I also submit that regular compensatory interest and interest on accrued interest shall apply by operation of law, and at the very least, at the applicable legal rate.
To recall, regular compensatory interest is that which is contemplated under Article 2209. To restate:
Article 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. (Emphasis supplied)On the other hand, the application of interest on accrued interest is anchored on Article 2212 which reads:
Article 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (Emphasis supplied)The language of these provisions clearly signal the mandatory imposition of the interest contemplated therein, and thus reinforces the view that legal rates fall outside of the unconscionability standard, as both provisions set the legal rate as the floor for regular compensatory interest and interest on accrued interest. Hence, while the rate of regular compensatory interest and interest on accrued interest agreed upon by the parties may be reduced, they can neither be reduced below the applicable legal rate nor deleted altogether precisely because they accrue by operation of law in case of delay.
On this score, I am unable to agree with the conclusion that Articles 1229 and 2227 of the Civil Code serve as basis to cause a wholesale deletion of interest on accrued interest in this particular case.[24]
Foremost, Articles 1229 and 2227 of the Civil Code pertain to the reduction of stipulated penalties and liquidated damages:
Article 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.To my mind, the authority of the courts to reduce stipulated penalties or liquidated damages referred to in Articles 1229 and 2227 is precisely intended as a protective measure to preclude iniquitous stipulations, and to prevent situations where contracts are unduly skewed in favor of one party. Notably, these dangers do not obtain in the context of interest which accrues at the legal rate prescribed by law.
Article 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.
It may not be amiss to point out that in the cases referenced in the Resolution where the Court resolved to reduce interest rates based on the unconscionability standard, the rates reduced in those cases were in the nature of stipulated rates and/or stipulated penalties agreed upon by the parties.
In Ligutan v. Court of Appeals[25] (Ligutan), petitioners therein obtained a P120,000.00 loan from Security Bank and Trust Company. Petitioners were obliged to pay, upon maturity: (i) the principal with conventional interest at the stipulated rate of 15.189% per annum; and (ii) a 5% monthly penalty applied on the sum of the outstanding principal and accrued conventional interest in case of default. Further, petitioners were bound to pay 10% of the total amount due by way of attorney's fees.
Ultimately, the Court resolved to affirm the reduction of the rate of monthly penalty from 5% to 3%. It held:
A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the 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. Although a court may not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly complied with.What was therefore reduced by the Court in Ligutan was the stipulated rate of regular compensatory interest imposed in the form of a monthly penalty charge, and not regular compensatory interest imposed at the legal rate. Stated differently, that the Court in Ligutan reduced the rate of monthly interest from 5% to 3% is of no moment insofar as the legal rate is concerned, since the interest so reduced was one stipulated by the parties. The reduction of the stipulated rate of regular compensatory interest ordered in Ligutan was within the Court's judicial prerogative to reduce a stipulated interest rate which it found to be oppressive and unconscionable.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals, just an example, the Court has tempered the penalty charges after taking into account the debtor's pitiful situation and its offer to settle the entire obligation with the creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular performance is made by the debtor. The stipulated penalty might even be deleted such as when there has been substantial performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it.
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest from 5% a month to 3% a month which petitioner still disputes. Given .the circumstances, not to mention the repeated acts of breach by petitioners of their contractual obligation, the Court sees no cogent ground to modify the ruling of the appellate court.
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has not been raised and ventilated before the courts below. In any event, the interest stipulation, on its face, does not appear as being that excessive. The essence or rationale for the payment of interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be demanded. What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify the nonpayment or reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank's existence.[26] (Emphasis and underscoring supplied)
Moreover, in Barons Marketing Corp. v. Court of Appeals[27] (Barons Marketing) private respondent therein appointed petitioner as one of its dealers for electrical wires and cables. As dealer, petitioner was granted a 60-day credit for its purchases. The credit term was to be reckoned from the date of delivery.
Between December 1986 to August 1987, petitioner purchased, on credit, various products from private respondent in the total amount of P4,102,438.30. Under the contract executed by the parties, petitioner bound itself to pay interest at 12% per annum on all overdue accounts plus "25% on said amount for attorney's fees and collection." On September 7, 1987, petitioner paid the amount of P300,000.00, leaving an unpaid balance of P3,802,478.20. Petitioner defaulted, prompting the private respondent to file a collection suit.
While the Court there upheld the liability of petitioner for the unpaid balance and the 12% stipulated compensatory interest, the Court characterized the additional 25% penalty charge as liquidated damages which had been intended to take the place of attorney's fees, and ultimately reduced the same to 10%, thus:
Under said contract, petitioner is liable to private respondent for the unpaid balance of its purchases from private respondent plus 12% interest. Private respondent's sales invoices expressly provide that:Hence, what was reduced in Barons Marketing was the amount of attorney's fees agreed upon by the parties. Again, such attorney's fees were neither in the nature of regular compensatory interest nor interest on accrued interest imposed at the legal rate. The rate so reduced in this case was the rate imposed as attorney's fees, and the Court was, therefore, also within its prerogative to reduce the same for being excessive.x x x Interest at 12% per annum will be charged on all overdue account plus 25% on said amount for attorney's fees and collection. x x xIt may also be noted that the above stipulation, insofar as it provides for the payment of "25% on said amount for attorney's fees and collection (sic)," constitutes what is known as a penal clause. Petitioner is thus obliged to pay such penalty in addition to the 12% annual interest, there being an express stipulation to that effect.
Petitioner nevertheless urges this Court to reduce the attorney's fees for being "grossly excessive," "considering the nature of the case which is a mere action for collection of a sum of money." It may be pointed out however that the above penalty is supposed to answer not only for attorney's fees but for collection fees as well. Moreover:x x x the attorneys' fees here provided is not, strictly speaking, the attorneys' fees recoverable as between attorney and client spoken of and regulated by the Rules of Court. Rather, the 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. It is the litigant, not counsel, who is the judgment creditor entitled to enforce the judgment by execution.Nonetheless, courts are empowered to reduce such penalty if the same is "iniquitous or unconscionable." Article 1229 of the Civil Code states thus: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. x x xThe sentiments of the law are echoed in Article 2227 of the same Code:ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.It is true that we have upheld the reasonableness of penalties in the form of attorney's fees consisting of twenty-five percent (25%) of the principal debt plus interest. In the case at bar, however, the interest alone runs to some four and a half million pesos (P4.5M), even exceeding the principal debt amounting to almost four million pesos (P4.0M). Twenty five percent (25%) of the principal and interest amounts to roughly two million pesos (P2M). In real terms, therefore, the attorney's fees and collection fees are manifestly exorbitant. Accordingly, we reduce the same to ten percent (10%) of the principal.[28] (Emphasis and underscoring supplied)
As well, in Tan v. Court of Appeals[29] (Tan), the Court had the occasion to examine the interest and penalties imposed on a loan amounting to P3,411,421.32. The promissory note detailing the loan's conditions read, in part:
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, x x x.Thus, the promissory note in Tan imposed the following: (i) conventional interest at the rate of 14% per annum on the principal loan computed from the date of issuance of the promissory note until full payment, plus a flat 3% service charge also applied on the principal loan; and (ii) regular compensatory interest at the rate of 2% per month, compounded monthly, computed from the time of delay until full payment.
x x x x
With interest at the rate of FOURTEEN per cent (14%) [per annum] from the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until paid, payable and computed monthly. Default of payment of this note or any portion thereof when clue shall render all other installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable.[30] (Emphasis supplied)
Ultimately, the Court reduced the stipulated 2% monthly compounded penalty charge to a straight interest at the rate of 12% per annum which, at the time, was the prevailing legal rate applicable to loans and forbearances of money.[31] In so doing, the Court clarified that the 2% monthly compounded penalty assumes the nature of the indemnity for damages contemplated under Article 2209 of the Civil Code, that is, stipulated regular compensatory interest arising on account of delay in payment of the principal obligation. The relevant portions of the Decision state:
In the case at bar, the promissory note x x x expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. x x xNotwithstanding the reduction of the stipulated penalty to the legal rate of 12% per annum, the Court nevertheless upheld the imposition of legal interest on said reduced penalty based on the terms of the promissory note in question, and, more relevantly, Article 2212. Hence, the Court added:
x x x x
The stipulated fourteen percent (14%) [per annum] interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code. On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary [or conventional] interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals, this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate 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. Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to state that 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 New Civil Code x x x[.]
x x x x
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or [regular] compensatory interest. x x x[32] (Emphasis and underscoring supplied)
x x x [T]he next issue to be resolved is whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code, which provides that:Equally notable is the case of Palmares v. Court of Appeals[34] (Palmares). Therein, the Court assessed the validity of the interest and other charges imposed on a short-term loan of P30,000.00 obtained by Spouses Osmeña and Merlyn Azarraga (Spouses Azarraga) together with their surety, therein petitioner Estrella Palmares (Estrella). Said loan was issued on March 13, 1990 and payable "on or before May 12, 1990."Without prejudice to the provisions of Article 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 earn new interest.According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the reason that the law only allows imposition of interest on monetary interest but not the charging of interest on penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties should not earn interest. But as we have already explained, penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of interest. The fifth paragraph of the said promissory note provides that: "Any interest which may be due if not paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law." Therefore, any penalty interest not paid, when due, shall earn the legal interest of twelve percent (12%) [per annum], in the absence of express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." In the instant case, interest likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on the total amount of the principal, the monetary interest and the penalty interest.[33] (Emphasis supplied)
Upon Spouses Azarraga's default, M.B. Lending Corporation filed a complaint for sum of money against Estrella to the exclusion of Spouses Azarraga who were allegedly insolvent. In her Answer, Estrella argued that she previously offered to settle the obligation but that M.B. Lending Corporation told her not to worry as there has already been partial payment in the amount of P17,010.00. She further claimed that the 6% monthly compounded interest and 3% monthly penalty charge were unconscionable.
The Regional Trial Court (RTC) dismissed the complaint without prejudice to the filing of a separate action against Spouses Azarraga. According to the RTC, the filing of the complaint against Estrella alone amounted to a "discharge of a prior party"[35] and that her prior offer to pay the obligation "is considered a valid tender of payment sufficient to discharge a person's secondary liability."[36]
The CA reversed on appeal and ordered Estrella to pay: (i) the balance of P13,700.00 with compounded interest at 6% per month computed from the date the loan was contracted until fully paid; (ii) the sum equivalent to the stipulated monthly penalty of 3% of the outstanding balance; (iii) attorney's fees at 25% of the total amount due; and (iv) costs of suit. Aggrieved, Estrella filed a Petition for Review on Certiorari before the Court.
The Court resolved to strike down the 3% stipulated monthly penalty and reduce the 25% attorney's fees, thus:
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable.Nevertheless, even with the wholesale deletion of the 3% stipulated monthly penalty, the debtor's liability to pay the 6% monthly compounded interest remained. This is clear from the dispositive portion in Palmares:
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization:Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3%) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended — that is, to punish the obligor — will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether.Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable. To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or public policy. The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case.[37] (Emphasis supplied)
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.[38]A close reading of the penalties imposed in Palmares shows that the 3% stipulated monthly penalty deleted by the Court was in the nature of a punitive rather than a compensatory penalty charge intended to be imposed in addition to the regular compensatory interest and interest on accrued interest provided by law.
To digress, stipulated penalties may be enforced either for a compensatory or strictly penal purpose. As explained in D.M. Ragasa Enterprises, Inc. v. Banco de Oro, Inc.:[39]
A penal clause has a three-fold purpose: (1) a coercive purpose or one of guarantee — this is to urge the debtor to the fulfillment of the main obligation under pain of paying the penalty; (2) to serve as liquidated damages — this is to evaluate in advance the damages that may be occasioned by the non-compliance of the obligation; and (3) a strictly penal purpose — this is to punish the debtor for non-fulfillment of the main obligation. While the first purpose is always present, the second purpose is presumed and the third purpose must be expressly agreed upon.Stipulated penalties imposed in the compensatory sense constitutes the indemnity for damages arising from delay contemplated under Article 2209. Accordingly, while the rate of such stipulated penalties may be reduced based on the unconscionability standard as explained above, such rate may not be reduced below the legal rate or altogether deleted as such penalty, in the form of regular compensatory interest, accrues by operation of law, and at the very least, at the applicable legal rate.
Stated otherwise, the purposes of penalty or penal clause are: (1) funcion coercitiva o de guarantia or to insure the performance of the obligation; (2) funcion liquidatoria or to liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation; and (3) funcion estrictamente penal or to punish the obligor in case of breach of the principal obligation, in certain exceptional cases. The second is evidently compensatory and the third is punitive in character, while the first is the general, purpose regardless of whether the penalty is compensatory or punitive.
Evidently, the penal clause may be considered either reparation, compensation or substitute for damages, on one hand, or as a punishment in case of breach of the obligation, on the other. x x x[40] (Emphasis supplied)
On the other hand, stipulated penalties imposed in the punitive sense apply in addition to the regular compensatory interest contemplated under Article 2209. Such punitive penalties, when imposed in the form of additional interest, may be reduced below the applicable legal rate or even deleted altogether.
Now, in Palmares, the principal loan in question was purportedly for a term of two months. However, the fact that the 6% monthly interest was "computed every 30 days" from the date of its issuance and likewise compounded each month indicates that the principal amount was actually deemed due 30 days after its issuance.
Viewed in the proper light and bearing in mind that stipulated penalties are imposed either in the compensatory or punitive sense, the charges imposed on the principal loan subject of Palmares constitute: (i) regular compensatory interest at the rate of 6% per month applied on the principal loan; (ii) interest on accrued interest also at the rate of 6% per month applied on the outstanding obligation (that is, the sum of the principal loan and accrued regular compensatory interest); and (iii) an additional 3% monthly penalty charge imposed on the outstanding balance for a punitive purpose.
Therefore, what was deleted in Palmares was neither the regular compensatory interest nor the interest on accrued interest, but rather, the 3% monthly penalty charge imposed in addition thereto. As explained, such monthly penalty charge, being punitive in nature, is subject to reduction below the legal rate or even deletion at the courts' discretion as it is imposed not by operation of law, but solely upon agreement of the contracting parties.
All told, I submit that regular compensatory interest and interest on accrued interest imposed at the legal rate may not be deleted on the ground of unconscionability. The interest on accrued interest thus due on the 24% stipulated penalty charge subject of this Petition must therefore apply by operation of law.
In determining whether stipulated
interest rates are unconscionable,
courts must assess the economic
impact of the stipulated interest
rates and penalties in conjunction
with the legal interest which
accrues by operation of law
I recognize that the verba legis application of Articles 2209 and 2212 coupled with the limited application of the unconscionability standard as detailed above may be viewed as an unwarranted crippling of the courts' power to prevent inequity and afford innocent parties protection against unscrupulous individuals who are out to take advantage. However, I find that such a view unduly disregards the fact that courts may take these matters into account in assessing the total economic impact of the interest, penalties, and other changes imposed upon the obligation in question.
Thus, in determining whether stipulated interest rates are unconscionable, courts must assess stipulated interest rates and stipulated penalties in conjunction with such legal interest accruing thereon by operation of law. While a stipulated interest rate may not appear unconscionable per se, it may nevertheless be reduced if its application vis-à-vis the prevailing legal interest imposed by law would yield iniquitous results. To note, this is precisely the approach which the Court has taken in the cases above-discussed.
Guidelines on imposition of
interest
In the course of resolving the present Motion for Reconsideration, the Resolution also proposes to amend the prevailing guidelines for the imposition of interest set forth in the case of Eastern Shipping Lines, Inc. v. Court of Appeals[41] (Eastern Shipping Lines) and restated in Nacar v. Gallery Frames[42] (Nacar). These amended guidelines read:
I wish to add, however, that the categorization of obligations adopted by the proposed guidelines fails to distinguish loans and forbearances within the context of the Usury Law from all other obligations for payment of a sum of money. As discussed in my Opinion, this distinction is crucial in the determination of applicable legal interest rates, as only loans, forbearances, and judgments involving loans and forbearances are subject to the BSP-prescribed interest rates. To quote:
- In obligations consisting of loans or forbearances of money, goods or credit:
- The compensatory interest due shall be that which is stipulated by the parties in writing as the penalty or compensatory interest rate, provided it is not unconscionable. In the absence of a stipulated penalty or compensatory interest rate, the compensatory interest due shall be that which is stipulated by the parties in writing as the conventional interest rate, provided it is not unconscionable. In the absence of a stipulated penalty or a stipulated conventional interest rate, or if these rates are unconscionable, the compensatory interest shall be the prevailing legal interest rate prescribed by the Bangko Sentral ng Pilipinas. Compensatory interest, in the absence of a stipulated reckoning date, shall be computed from default, i.e., from extrajudicial or judicial demand until full payment.
- Interest on conventional/monetary interest and stipulated compensatory interest shall accrue at the stipulated interest rate (compounded interest) from the stipulated reckoning point or, in the absence thereof, from extrajudicial or judicial demand until full payment, provided it is not unconscionable. In the absence of a stipulated compounded interest rate or if this rate is unconscionable, the prevailing legal interest rate prescribed by the Bangko Sentral ng Pilipinas shall apply from the time of judicial demand until full payment.[43]
- In obligations not consisting of loans or forbearances of money, goods or credit:
- For liquidated claims:
The compensatory interest due shall be that which is stipulated by the parties in writing as the penalty or compensatory interest rate, provided it is not unconscionable. In the absence of a stipulated penalty or compensatory interest rate, or if these rates are unconscionable, the compensatory interest shall be at the rate of 6%. Compensatory interest, in the absence of a stipulated reckoning date, shall be computed from default, i.e., from extrajudicial or judicial demand, until full payment.
- Interest on stipulated compensatory interest shall accrue at the stipulated interest rate (compounded interest) from the stipulated reckoning point or in the absence thereof, from extrajudicial or judicial demand until full payment, provided it is not unconscionable. In the absence of a stipulated compounded interest rate or if this rate is unconscionable, legal interest at the rate of 6% shall apply from the time of judicial demand until full payment.
- For unliquidated claims:
Compensatory interest on the amount of damages awarded may be imposed in the discretion of the court at the rate of 6% per annum. No compensatory interest, however, shall be adjudged on unliquidated claims or damages until the demand can be established with reasonable certainty. Thus, 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 of judgment of the trial court (at which time, the quantification of damages may be deemed to have been reasonably ascertained) until full payment. The actual base for the computation of the interest shall, in any case, be on the principal amount finally adjudged.[44]
The term "forbearance" must beAccordingly, I maintain that the guidelines on the imposition of interest must take into account the differential treatment between loans and forbearances on one hand, and all other obligations for payment of a sum of money on the other.
construed in light of the Usury Law
The ponencia adopts the definition of forbearance in Estores, and holds that a forbearance has a separate meaning from a loan and should be construed to refer to "arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending happening of certain events or fulfillment of certain conditions." As a result, the ponencia concludes that the same covers even a sale of goods on installment and a sale of anything on credit.
I completely disagree. The definition in Estores cites no legal bases. Contrary to the discussion in the ponencia, the definition in Estores does not at all appear in Crismina Garments. In fact, Crismina Garments expressly adopted the definition in Eastern Shipping Lines that "a 'forbearance' in the context of the usury law is 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'" and thus, correctly concluded that "an action for the enforcement of an obligation for payment of money arising from a contract for a piece of work xxx was obviously not a forbearance of money, goods or credit."
Instead, I subscribe to the well-reasoned conclusion in Reformina that:x x x Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the [Usury Law] for it is not within the ambit of the authority granted to the Central Bank. The Monetary Board may not tread on forbidden grounds. It cannot rewrite other laws. That function is vested solely with the legislative authority. It is axiomatic in legal hermeneutics that statutes should be construed as a whole and not as a series of disconnected articles and phrases. In the absence of a clear contrary intention, words and phrases in statutes should not be interpreted in isolation from one another. A word or phrase in a statute is always used in association with other words or phrases and its meaning may thus be modified or restricted by the latter.Applying the foregoing rationale, I submit that the phrase "forbearance of money, goods, or credits" must be construed in the narrow context of the Usury Law and in relation to the other provisions found therein. Hence, I find that the BSP has no authority (1) to prescribe interest rates in the absence of stipulation under Section 1 of the Usury Law or (2) to set interest rate ceilings under its Section 1-a, on any transaction that does not fall within the context of usury.
As the Usury Law is of American origin, resort to American jurisprudence on the construction of the term "forbearance" is apropos.
It has been held that "[i]nterest is the premium allowed by law for the use of money, while usury is the taking of more for its use than the law allows." In American jurisprudence, it is generally understood that "statutes are passed prohibiting usury; in order to protect needy and necessitous persons from the oppression of usurers, who are eager to take advantage of the distresses of others, and who violate the law only to complete their ruin." This is explained in Monk v. Goldstein, viz.:The test of usury is that there should be a contract for the forbearance of an existing indebtedness or a loan of money or, as otherwise expressed, a profit greater than the lawful rate of interest, intentionally exacted as a bonus for the loan of money, imposed upon the necessities of the borrower in a transaction where the treaty is for a loan and the money is to be returned at all events, which is a violation of the usury laws, it matters not what form or disguise it may assume. x x x "In order to constitute a usurious transaction, four requisites must appear: (1) There must be a loan, express or implied; (2) an understanding between the parties that the money lent shall be returned; (3) that for such loan a greater rate of interest than is allowed by law shall be paid or agreed to be paid, as the case may be; and (4) there must exist a corrupt intent to take more than the legal rate for the use of the money loaned.["] The text-writers declare that these rules are applicable everywhere and under the usury laws of every State, and that unless these four things concur in every transaction it is safe to say that no case of usury can be declared.In Hogg v. Ruffner, the United States of America (US) Supreme Court explained that "[t]o constitute usury, there must either be a loan and a taking of usurious interest, or the taking of more than legal interest for the forbearance of a debt or sum of money due."
Several US cases define forbearance as "the giving of further time for the payment of a debt or an agreement not to enforce a claim at its due date." Similarly, it has been held that "[t]he term 'forbearance' as used in the law of usury, signifies a contractual obligation of a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to pay a loan or debt then due and payable." It occurs when "the collection of a mature obligation is postponed in return for some compensation," i.e., interest.
Like the US, Philippine Usury Law penalizes the taking of excessive interest for the loan or forbearance of money, goods, or credits in order to protect the needy from those who seek to exploit them. I believe usury statutes govern such kinds of situations because an opportunity to extort excessive interest in exchange for a reprieve from the immediate performance of a mature obligation is often present. I accordingly subscribe to the definition of forbearance provided in Eastern Shipping Lines and Crismina Garments, which adopted the definition in American jurisprudence that a "'forbearance' in the context of the usury law is a 'contractual obligation of a 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'" as it is the definition that is most in line with the nature and purpose of the Usury Law. Hence, I find that "forbearance" is no different from a loan and that the use of the conjunctive "or" precisely specifies this — meaning the word "loan" is not confined to a forbearance of only money, but also of goods or services. But even if "forbearance" is "separate from a loan" as the ponencia suggests, I believe that "forbearance" is or must be understood as akin to a loan and must involve (1) an agreement or contractual obligation (2) to refrain from enforcing payment or to extend the period for the payment of (3) an obligation that has become due and demandable, (4) in return for some compensation, i.e., interest.
Based on the foregoing disquisition, I therefore submit that not all obligations constituting the payment of a sum of money may be considered forbearances within the context of the Usury Law and within the authority of the BSP. The mere fact that there is delay or refusal to pay the sums due under a contract of sale, service, employment, lease, or insurance will not constitute a forbearance of money, goods, or credit. In such cases, the obligee or creditor does not actually agree or even acquiesce and is not contractually obliged to refrain from enforcing payment in exchange for interest, but merely fails to exact payment. Hence, the BSP-prescribed rate cannot apply. Instead, the 6% per annum interest rate under the Civil Code should apply.
In like manner, the fact that the payment of interest in case of delay is stipulated in a contract will not automatically transform an obligation into a forbearance. Thus, the presence of a provision on the payment of interest in case of delay in the payment of the purchase price in a contract to sell or of sale, or in the payment of rents under a lease contract, does not transform the sale or lease into a forbearance. In the same vein, a construction contract cannot be deemed a forbearance even if there is a stipulation on the payment of interest in case the party who engaged the services of the contractor does not pay the progress billings on time. The payment of interest in case of delay is in the nature of a penalty clause, which parties may validly stipulate on in agreements involving both loans/forbearances and non-loans/non-forbearances.[45] (Emphasis and underscoring supplied)
Given the foregoing, and after a careful reexamination of the application of interests with respect to unliquidated damages, I have reconsidered my view with respect thereto. I am now of the view that the delay in the payment of the unliquidated damages should serve as the basis for the application of interest, even though the base amount may be initially unascertained and it is for the courts to determine the exact amount owed. Thus, the application of the interest on the amount, as finally adjudged by the court, should retroact to the point of delay or default, i.e., upon extrajudicial or judicial demand because it is at that point wherein the obligation to pay a sum of money thereby arises. This is akin to just compensation cases wherein the exact amount of just compensation is court-driven but the reckoning point wherein interest is imposed retroacts to the time of taking of the real property, wherein the obligation to pay the just compensation arises, and runs until full payment.
Considering the aforementioned observations, I re-submit the following proposed guidelines which take into comprehensive account the different permutations of applications of interests and their rates across types of obligations consisting of the payment of a sum of money. Given the plurality of the different scenarios wherein impositions of interests may be had, a flow chart reflecting a full rundown of the same is hereto attached to facilitate an overall appreciation of the different conceivable applications of interests at a glance.
At the outset, it must be recognized that interest applies exclusively to obligations consisting of the payment of a sum of money (OCPSM), which may consist of: (1) either loans and forbearances of money, goods, or credit (L/Fs); or (2) non-loans or non-forbearances (NL/NFs). The discourse of interests, the applicable rates and the reckoning points depend on the nature of the subject transactions. The differentiated applicable rates and reckoning points vis-à-vis the types of transactions they pertain to are outlined below.
I. Loans and Forbearances of Money, Goods, or Credit
L/Fs may contain a stipulated rate of interest and/or reckoning point (when interest commences to run) and the rate may be upheld as valid or void for being unconscionable and deemed not written. They may also be silent on the rate and/or reckoning point, or without stipulation.
I.A. With stipulated rate and/or reckoning pointII. All Other Monetary Obligations Not Constituting Loans or Forbearances (NL/NFs)
I.A.1. Valid stipulation — If the parties stipulate on the payment of regular/conventional compensatory interest (R/CCI) with the rate specified, and the rate is upheld as valid, the R/CCI due shall be based on the stipulated rate, and the reckoning point will be either that which is stipulated or, in the absence of a stipulated reckoning point, the same shall be the time of default or delay from either extrajudicial or judicial demand (EX/JD), as the case may be. From the pertinent reckoning point, the R/CCI shall continue to run until full payment. Such stipulated R/CCI rate shall be controlling and the BSP-prescribed interest rate will not apply.I.A.1.a. Interest on accrued interest (IOAI) — In addition to the R/CCI as determined in I.A.1., the L/F will also earn IOAI. In case there is a stipulated rate of interest on any unpaid/accrued interest (compounding interest or IOAI rate), and such rate is upheld as valid, the IOAI shall be based on the stipulated rate, and the reckoning point will be either that which is stipulated or, in the absence of a stipulated reckoning point, the same shall be the time of default or delay from either EX/JD.I.A.2. Void stipulation — If the stipulated R/CCI rate is adjudged as unconscionable or void and deemed not written, the BSP-prescribed interest rate at the time of the execution of the L/F shall apply as the "surrogate" R/CCI rate, and the reckoning point will be either that which is stipulated; or, in the absence of a stipulated reckoning point, the same shall be at the time of default or delay from either EX/JD until full payment.
If the IOAI rate is adjudged as unconscionable or void and deemed not written, the BSP-prescribed interest rate at the time of the execution of the L/F shall be the "surrogate" IOAI rate on the accrued interest to be reckoned from the stipulated reckoning point until full payment. In the absence of a stipulated reckoning point, the accrued interest as at judicial demand (JD) shall earn IOAI at the BSP-prescribed interest rate at the time of the execution of the L/F as the "surrogate" IOAI rate until full payment.I.A.2.a. IOAI — In addition to the R/CCI as determined in I.A.2., the L/F will also earn IOAI. If there is no stipulated IOAI rate, or if such is found to be unconscionable and deemed not written, the prevailing BSP-prescribed rate of interest at the time of the execution of the L/F will apply as the surrogate IOAI rate. The accrued R/CCI as at JD shall earn the said prevailing BSP-prescribed rate until full payment. (Art. 2212)I.B. Without stipulated rate
I.B.1. R/CCI — If the parties do not stipulate on the payment of interest, the indemnity for damages for delay shall be the payment of interest at the prevailing BSP-prescribed rate at the time of the execution of the L/F to be reckoned from the date of EX/JD and shall continue to run until full payment. (Article 1956 and Article 2209)
I.B.2. IOAI — In addition to the R/CCI as determined in I.B.1., the L/F will also earn IOAI. The accrued R/CCI as at JD shall earn interest at the prevailing BSP-prescribed rate at the time of the execution of the L/F from JD until full payment. (Article 2212)
I.C. Other monetary awards by the court, e.g., moral damages, exemplary damages, temperate damages, attorney's fees — Any Other monetary award decreed by the court in relation to the L/Fs shall bear interest at the prevailing BSP-prescribed rate at the time of the finality of the decision/judgment, from such time until full payment.
The sum of money due in NL/NFs may be liquidated or unliquidated. These NL/NFs cover OCPSM arising from the sources of obligations namely, law, contracts other than L/Fs, quasi-contracts, quasi-delicts and delicts. For example, in a lease contract, the amount of unpaid rentals is generally liquidated. The same holds true in a contract of sale where the seller sues the buyer for the unpaid purchase price. On the other hand, in a just compensation (JC) action based on eminent domain, the exact amount of JC is court-determined, thus the sum due may be considered unliquidated. In a quasi-delict case, the victim may want to proceed to collect from the tortfeasor medical expenses, loss of earning, etc., the exact amount of which is unliquidated.
II.A. NL/NFs with Liquidated AmountsWHEREFORE, based on the foregoing premises, I vote to DENY the Motion for Reconsideration filed by petitioner Lara's Gifts & Decors, Inc.
II.A.1. With valid stipulation — If the parties stipulate on the payment of R/CCI and the rate thereof, and the stipulated rate is deemed as valid, the R/CCI rate shall be that which is stipulated, to be reckoned from the time which is stipulated or, in the absence of a stipulated reckoning point, the same shall be the time of default or delay from either EX/JD, and shall continue to run until full payment.II.A.1.a. IOAI — In addition to the R/CCI as determined in II.A.1., the R/CCI that has accrued shall itself earn interest at the stipulated IOAI rate, if deemed valid, to be reckoned from either the reckoning point so stipulated or, in the absence of stipulated reckoning point, from EX/JD until full payment. If there is no stipulated IOAI rate, or if such is found to be unconscionable and deemed not written, the legal rate of 6% per annum provided in Article 2209 shall apply as the IOAI rate on the accrued R/CCI as at JD from JD until full payment.II.A.2. With void stipulation — If the stipulated R/CCI rate is void for being unconscionable and deemed not written, the indemnity for damages for delay shall be the payment of legal interest at the rate of 6% per annum under Article 2209 reckoned either from the reckoning point so stipulated or, in the absence thereof, from the date of EX/JD until full payment.II.A.2.a. IOAI — In addition to the R/CCI as determined in II.A.2., the creditor shall be entitled to IOAI pursuant to Article 2212 wherein the accrued R/CCI as at JD shall itself earn legal interest at the rate of 6% per annum from JD until full payment.II.A.3. Without stipulation — If there is no stipulation as to the R/CCI rate, the indemnity for damages for delay shall be the payment of legal interest at the rate of 6% per annum under Article 2209 reckoned either from the date of EX/JD.II.A.3.a. IOAI — In addition to the R/CCI as determined in II.A.3., the creditor shall be entitled to IOAI pursuant to Art. 2212 wherein the accrued R/CCI as at JD shall itself earn interest at the legal interest of 6% per annum from JD until full payment.II.B. NL/NFs with Unliquidated Amounts — The amount or sum owed as awarded in the final and executory decision/judgment shall earn legal interest at the rate of 6% per annum from default or delay either from EX/JD until full payment.
With regard to unliquidated claims or damages (including obligations arising from law, quasi-delict, quasi-contract, delict, and NL/NFs contracts), the sum of money claimed, being unliquidated, will be subject to the determination of the court, and the exact amount owed will be indicated in the final decision/judgment. Given that the debtor may delay the payment of the sum due through protracted litigation, to compensate the creditor for this delay, legal interest at the rate of 6% per annum should be imposed on the amount finally adjudged but given retroactive effect to begin from the reckoning point of default or delay either from EX/JD, until full payment, unless the court orders a bigger amount under the premises. This is akin to JC cases wherein the JC determined with finality is the amount that earns interest from the time of taking of the real property.
II.C. Other monetary awards by the court — Any other monetary award decreed by the court in relation to NL/NFs shall bear legal interest at the rate of 6% per annum under Article 2209 from the time the decision/judgment becomes final and executory until full payment.
Finally, with respect to penalty interest, the penal clause will be ascertained as to whether it is to be imposed in its compensatory aspect or punitive aspect. If imposed in its compensatory aspect, the penal clause shall be deemed the indemnity of actual damages and will be subject to the guidelines on R/CCI as formulated above. If imposed in its punitive aspect, the penal clause shall be imposed in addition to actual damages, i.e., on top of the R/CCI awarded. However, the penal clause in its punitive aspect may be totally disregarded by reason of unconscionability.
Nevertheless, for the reasons set forth herein, I find that the August 28, 2019 Decision should be MODIFIED in that: (1) the guidelines be amended accordingly; and (2) the dispositive portion be restated as follows:
Petitioner Lara's Gifts & Decors, Inc. is ordered to pay respondent Midtown Industrial Sales, Inc. the following:
- ONE MILLION TWO HUNDRED SIXTY-THREE THOUSAND ONE HUNDRED FOUR PESOS and 22/100 (P1,263,104.22) representing the principal amount plus stipulated interest at 24% per annum to be computed from January 22, 2008, the date of extrajudicial demand, until full payment.
- The sum of FIFTY THOUSAND PESOS (P50,000.00) as attorney's fees, plus legal interest thereon at the rate of 6% per annum to be computed from the finality of this August 28, 2019 Decision until full payment.
- Cost of the suit.
[1] G.R. No. 225433, August 28, 2019, 916 SCRA 1.
[2] Id. at 56.
[3] Ponencia, p. 23.
[4] Act No. 2655, as amended by Presidential Decree No. (P.D.) 116.
[5] Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 71.
[6] Id. at 128.
[7] Id.
[8] See generally Camarines Sur Teachers and Employees Association, Inc. v. Province of Camarines Sur, G.R. No. 199666, October 7, 2019, 921 SCRA 532.
[9] See generally Vasquez v. Philippine National Bank, G.R. Nos. 228355 & 228397, August 28, 2019, 916 SCRA 194, 220-221.
[10] 763 Phil. 372 (2015).
[11] Id. at 388. Citations omitted.
[12] See USURY LAW, Sec. 1, as amended by P.D. 116, Sec. 1, which states:
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 express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted.[13] See Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1.
[14] Liquidated damages are treated under Article 2226 of the Civil Code, which states, "[l]iquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof." Like rates of regular compensatory interest, liquidated damages shall also be equitably reduced if they are found to be iniquitous or unconscionable as provided in Article 2227 of the Civil Code.
[15] See Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 141, which states that "Article 2212 applies to any accrued stipulated interest."
[16] Eduardo P. Caguioa, COMMENTS AND CASES ON CIVIL LAW, Vol. VI (1970), p. 441.
[17] See Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 141-142. Citations omitted.
[18] 704 Phil. 28 (2013).
[19] Id. at 59-60. Citation omitted.
[20] Jeffrey C. Fort, Understanding Unconscionability: Defining the Principle, LOYOLA UNIVERSITY CHICAGO JOURNAL, Vol. 9, Issue 4, p. 767.
[21] Colleen McCullough, Unconscionability as a Coherent Legal Concept, UNIVERSITY OF PENNSYLVANIA LAW REVIEW, Vol. 164, pp. 781-782.
[22] Brady Williams, Unconscionability as a Sword: The Case for an Affirmative Cause of Action, CALIFORNIA LAW REVIEW, pp. 2016-2017.
[23] Ponencia, p. 13.
[24] Id. at 14-15.
[25] 427 Phil. 42 (2002).
[26] Id. at 51-53. Citations omitted.
[27] 349 Phil. 769 (1998).
[28] Id. at 779-781. Citations omitted.
[29] 419 Phil. 857 (2001).
[30] Id. at 865.
[31] On the legal rate then prevailing, see Eastern Shipping Lines, Inc. v. Court of Appeals, 304 Phil. 236, 252-253 (1994) where the Court held that "[w]hen 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."
[32] Tan v. Court of Appeals, supra note 29, at 864-866. Citations omitted.
[33] Id. at 866-867.
[34] 351 Phil. 664 (1998).
[35] Id. at 674.
[36] Id.
[37] Id. at 690-691. Citations omitted.
[38] Id. at 691.
[39] 833 Phil. 640 (2018).
[40] Id. at 661. Citations omitted.
[41] Supra note 31.
[42] 716 Phil. 267 (2013).
[43] Ponencia, pp. 20-21.
[44] Id.
[45] Concurring and Dissenting Opinion of Associate Justice Alfredo Benjamin S. Caguioa in Lara's Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., supra note 1, at 101-106. Citations omitted.
LAZARO-JAVIER, J.:
Additional award of legal interest on
conventional interest must be deleted
as it was never put in issue
The Resolution, through the highly esteemed Senior Associate Justice Marvic Mario Victor F. Leonen, adopted my humble suggestion to delete the additional award of legal interest on conventional interest as Midtown Industrial Sales (Midtown) did not appeal the trial court's judgment which notably did not include the aforesaid award; nor was Article 2212[1] of the Civil Code ever brought to fore since the inception of the case up until it got elevated to the Court.[2] Thus, the Resolution ruled that there is no valid justification to modify or reverse the Majority Decision save for the imposition of legal interest on the 24% per annum interest which was consequently ordered deleted. The Resolution likewise recognized that the judgment award already became final and executory insofar as Midtown is concerned. As it was, the Majority Decision earlier imposed, albeit motu proprio, legal interest on top of the conventional interest of 24%. But as correctly enunciated in the present Resolution the sudden and unsought award of legal interest on interest in the Majority Decision was ultra vires.
Surely, in civil cases, only errors claimed and assigned by a party will be considered by the Court, except errors affecting its jurisdiction over the subject matter. Further, while it is true that the Court has recognized that appellate court is imbued with sufficient discretion to review matters, not otherwise assigned as errors on appeal, in the following instances: (a) grounds not assigned as errors affect the jurisdiction of the court over the subject matter; (b) matters not assigned as errors on appeal are evidently plain or clerical errors within contemplation of law; (c) the consideration of matters not assigned as errors on appeal is necessary in arriving at a just decision and complete resolution of the case or to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters not specifically assigned as errors on appeal were raised in the trial court and are matters of record having some bearing on the issue submitted which the parties failed to raise or which the lower court ignored; (e) matters not assigned as errors on appeal but are closely related to an error assigned; and (f) the determination of a question properly assigned is dependent on matters not assigned as errors on appeal[3]— the present case does not fall under any of these exceptions. As stated, therefore, the present Resolution deleting the award of legal interest on interest is in order.
In any event, I respectfully submit that the deletion of the award of legal interest on interest is enough to put closure to the present case. With due respect however, the present Resolution went on to lay down the rule that the award of interest on interest under Article 2212 is dictated by law and consequently proceeded to formulate the guidelines on its imposition, among others. For me, the substantive discussion on the subject is not necessary at all, hence, it is a mere obiter. Inarguably, these guidelines were not even applied to the present case which was simply disposed of, in this wise:
Now to this case, we modify our earlier Decision and hold that the contract involved is not a loan or forbearance of money, goods, or credit, but a sale of goods on credit. From January to December 2007, petitioner Lara's Gifts purchased from respondent Midtown various industrial and construction materials totaling P1,263,104.22. The purchases were on a 60-day credit term, with the condition that a 24% interest rate per annum would be charged on all accounts overdue. This means that the 24% interest rate per annum would run only upon petitioner's failure to pay on the due date.On this score, Bermon v. Sps. Yaco is apropos:[4]
Thus, the 24% interest rate is a compensatory interest, imposed as indemnity for damages caused by the delay in the payment of the raw materials' purchase price, pursuant to Article 2209.
By the express provision of Article 2212, the 24% compensatory interest, which have accrued at the time of judicial demand, may be subject to "interest on interest." However, as Justice Lazaro-Javier pointed out the Regional Trial Court adjudged in favor of Midtown Industrial Sales only P1,263,104.22 plus interest at 24% per annum, computed from February 5, 2008 until fully paid; and P50,000.00 as attorney's fees. This judgment award became final and executory as to Midtown Industrial Sales as it did not appeal. Thus, the additional award of legal interest on the 24% interest, in an appeal brought by Lara's Gifts, is ultra vires.
WHEREFORE, the Motion for Reconsideration is PARTIALLY GRANTED. The Court's Decision dated August 28, 2019 is modified in that the award of legal interest on the 24% per annum compensatory interest is hereby DELETED.
Petitioner Lara's Gifts & Decors, Inc. is ordered to pay respondent Midtown Industrial Sales. Inc. the following:The total monetary award shall bear legal interest of 6% per annum from finality of this Decision until full payment.
- ONE MILLION TWO HUNDRED SIXTY THREE THOUSAND ONE HUNDRED FOUR PESOS and 22/100 (P1,263,104.22) representing the principal amount plus stipulated interest, at 24% per annum to be computed from 22 January 2008, the date of extrajudicial demand, until full payment.
- The sum of FIFTY THOUSAND PESOS (P50,000.00) as attorney's fees.
- Cost of the suit.
SO ORDERED.
While, this Court is aware that in the recent case of CJH Development Corporation v. Aniceto, it held that a provision in the contract which grants the lessor right to appropriate the improvement without any obligation to reimburse directly contradicts Article 1678 of the Civil Code and that the lessor cannot own the improvement without paying the lessee, the same is simply an obiter dictum since the right of reimbursement was not even put into issue since CJH Development Corporation did not appropriate and used the improvements used by Aniceto. It is settled that "an obiter dictum is a remark made, or opinion expressed, by a judge, in his decision upon a cause by the way, that is, incidentally or collaterally, and not directly upon the question before him, or upon a point not necessarily involved in the determination of the cause, or introduced by way of illustration, or analogy or argument. It does not embody the resolution or determination of the court, and is made without argument, or full consideration of the point. It lacks the force of an adjudication, being a mere expression of an opinion with no binding force for purposes of res judicata." Thus, it cannot be used as a guiding principle in this case to uphold petitioner's right of reimbursement.[5] (Emphases and underscoring supplied)Ratio decidendi is defined as the principle or rule of law on which a court's decision is founded, or the rule of law on which a later court thinks that a previous court founded its decision.[6] An obiter dictum, on the other hand, is an opinion expressed by a court upon some question of law which is not necessary to the decision of the case before it. It is a remark made, or opinion expressed, by a judpe, in his or her decision upon a cause, "by the way," that is, incidentally or collaterally, and not directly upon the question before him or her or upon a point not necessarily involved in the determination of the cause, or introduced by way of illustration, or analogy or argument. Such are not binding as precedents.[7]
In any event, while it is true that the Majority Decision sought to be reconsidered itself prescribed guidelines or standards for imposition of legal interest on interest, the same should be considered to have been rendered nugatory considering the award thereof was already deleted in the present Resolution.
I, therefore, concur in the result but dissent from the substantive discussion on the application of Article 2212 on legal interest on interest, including the formulation of guidelines for its imposition, among others, for being a mere obiter.
[1] ARTICLE 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may he silent upon this point. (1109a), (Republic Act No. 386, CIVIL CODE OF THE PHILIPPINES. Approved on June 18, 1949).
[2] [Letter] dated September 6, 2022, Associate Justice Amy Lazaro-Javier, Lara's Gift v. Midtown, G.R. No. 255433.
[3] See Law Firm of Abrenica v. Court of Appeals, 430 Phil. 53, 61-62 (2002).
[4] G.R. No. 224552, March 3, 2021.
[5] Id.
[6] See People v. Sandiganbayan, 723 Phil. 444, 465 (2013).
[7] Villanueva, Jr. v. Court of Appeals, 429 Phil, 194 (2002).
• Amended as of March 4, 2024.