Commercial Laws 1: Loan — Simple Loan or Mutuum (Arts. 1953-1961)


CHAPTER 2
Simple Loan or Mutuum


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

1. Simple Loan or Mutuum
  • A person who receives a loan of money or any other fungible thing 
    acquires the ownership thereof, 
    and is bound to pay to the creditor
    an equal amount of the same kind and quality.
2. Money or Fungibles.
  • The contract of mutuum requires the receipt of money or other fungible things. 
  • Fungible things are those properties that can be replaced by another property of the same kind, quantity and quality.
    • One unit of the property is equivalent to or is deemed to be the equivalent of and replaceable with another unit of the same kind, quantity and quality. 
    • The fungibility of property is a question of intent of the parties. 
    • Example:
      • Delivery of a sack of rice of a particular kind and quality with the agreement to pay the same with an equal amount of the same kind and quality is a loan of a fungible thing. 
      • Rice is fungible because it is equivalent to and can be replaced by another sack of rice of the same kind and quality.
  •  Note that while Article 1953 uses the term "fungible," Article 1933 uses the term "consumable."
    • However, the term "fungible" is more appropriate. "
    • The things to be returned are, identical to, but not the same ones borrowed.
  • However, it was commented that there can be mutuum where there is transfer of value. 
    • Example:
      • There can be simple loan in case of delivery of a check or assignment of credit or delivery of a thing to be first sold by the debtor. 
    • Money is not delivered. It is only value that is delivered.
3. Borrower Acquires Ownership.
  • In simple loan (mutuum), as contrasted to commodatum, the borrower acquires ownership of the money, goods or other fungible property borrowed. 
    • Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered misappropriation thereof. 
  • Republic v. Sandiganbayan (First Division), G.R. Nos. 166859, 169203, 180702, April 12, 2011:
    • In contract of simple loan, one of the parties (creditor) delivers money or other consumable thing to another (debtor) on the condition that the same amount of the same kind and quality shall be paid. 
    • Owing to the consumable nature of the thing loaned, the resulting duty of the borrower in a contract of loan is to pay, not to return to the creditor or lender the very thing loaned. 
    • This explains why the ownership of the thing loaned is transferred to the debtor upon perfection of the contract. 
    • Ownership of the thing loaned having transferred, the debtor enjoys all the rights conferred to an owner of property, including the right: 
      • to use and enjoy (jus utendi), 
      • to consume the thing by its use (jus abutendi), and 
      • to dispose ( jus disponendi)
        • subject to such limitations as may be provided by law. 
  • Evidently, the resulting relationship between a creditor and debtor in a contract of loan cannot be characterized as fiduciary.
    • This observation is consistent with the explanation of the Code Commission that the Old Civil Code was amended to state that the principal obligation of the borrower "is not to return (devolver) but to pay an equal amount."' 
  • A debtor can appropriate the thing loaned without any responsibility or duty to his creditor:
    • ❌ to return the very thing that was loaned 
    • ❌ to report how the proceeds were used. 
    • ❌ to return the proceeds and fruits of the loan, for there is nothing under our laws that compel a debtor in a contract of loan to do so. 
    • As owner, the debtor can dispose of the thing borrowed and his act will not be considered misappropriation of the thing. 
    • The only liability on his part is to pay the loan together with the interest that is either stipulated or provided under existing laws.
  • Chee Kiong Yam, et al., v. Hon. Nabdar J. Malik, et al., G.R. No. L-50550-52, October 31, 1979:
    • There was no estafa, where the complaint stated on its face that petitioners received the amount from respondent "as a loan." 
    • Moreover, the complaint in an independent action for the collection of the same amount filed by respondent stated that the P50,000.00 was a "simple business loan" which earned interest and was originally demandable six months from July 12, 1973. Such allegations do not support a case for estafa. In order that a person can be convicted for estafa for misappropriation of funds, it must be proven that he has the obligation to deliver or return the same money, goods or personal property that he received. Petitioners had no such obligation to return the same money, i.e .. the bills or coins, which they received from private respondents. This is so because as clearly stated in the criminal complaints, the related civil complaints and the supporting sworn statements, the sums of money that petitioners received were loans. 
    • U.S. v. Ibañez: It was held that it is not estafa for a person to refuse to pay his debt or to deny its existence. When the relation is purely that of debtor and creditor, the debtor cannot be held liable for the crime of estafa, by merely refusing to pay or by denying the indebtedness.
3. What Should be Paid.
  • If the debtor borrowed money, the same amount shall be paid except if Article 1250 of the New Civil Code applies. 
  • If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. 
    • In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid.
    • Thus, even if the price of the thing that was delivered increased after the perfection of the loan, a thing of the same kind and quality must still be delivered to the bailor-creditor.
  • In re: Tomboco, G.R. No. 10900, October 8, 1917:
    • It is true that prevailing rule at the time gave a court exercising probate jurisdiction the power to commit a person to jail for failure to obey its order, sentence, or decree; but it is declared in the proviso to the same section that nothing therein shall be construed to authorize imprisonment for ordinary debt. 
    • It is evident that the receipt executed by Donato Chuatongco in favor of Justina Plaza is a mere acknowledgment of indebtedness, and that the delivery of the money to him constituted a loan. The transaction in question therefore created an ordinary debt, such as is contemplated in the proviso.
    • That the transaction in question does not constitute a technical deposit is also apparent from the circumstance that it was agreed between the parties that the firm of Quian Sieng & Co. should pay interest at the rate of P100 per annum; from which it is manifest that the firm had the right to utilize the money in its business, as was in fact done. This constitutes a loan. 
    • The agreement for the payment of interest in this case, was not expressed in the receipt, but this is not material. Furthermore, if the money was used by the firm with the consent of Justina Plaza, as appears to have been the case, the obligation was converted into a loan under article 1768 of the Civil Code even supposing that it had originally been a deposit.
    • It follows from the foregoing opinion that the order of the court committing Donato Chuatongco to jail for failure to comply with its prior order was improper and should be vacated.
4. Summary of Rules and Distinctions Between Commodatum and Simple Loan

PRIGO-OOLO
CommodatumSimple Loan
The purpose is the use of the thing loaned.
Use of the fruits is not included unless expressly provided for in the contract.		The purpose is for the borrower to consume what was borrowed.
Real Contract - perfected upon delivery.Real Contract
Movable and Immovable Things may be borrowed.Involves Movables.
Essentially Gratuitous.
If onerous or compensation is paid, then the contract may be lease.		May be Gratuitous or Onerous.
Example: Interest is payable
The object of the contract is generally non-fungible or non-consumable.
Exception: The object may be consumable provide that the purpose is not for consumption but for exhibition.		The object is money or other fungible things.
Bailor/Lender retains ownership of the thing delivered.The bailee/borrower becomes the owner of the think delivered.
There is an obligation to return the very same thing loaned.The bailee/borrower becomes the owner; hence, there is no obligation to return the very same thing loaned.
Generally, the bailor bears the loss of the thing due to fortuitous event.The bailee-borrower bears the loss of the thing delivered. Res Perit Domino.
The bailor/lender need not be the owner of the thing loaned.The lender must be the owner or at least capable of transferring ownership.
For the return of the thing, generally, the lender must wait for the the expiration of the period agreed upon or the accomplishment of the use for which the commodatum has been constituted.
Exceptions:
1. In case of Urgent Need;
2. In Precarium;
3. In case of acts of ingratitude by the bailee.		The lender-bailor must wait for the expiration of the period agreed upon for the payment of the loan.


5. Securing Loan Through An Agent
  • A contract of agency may be oral unless the law requires a specific form. 
    • Par. 7, Article 1878 of the New Civil Code expressly requires a special power of authority before an agent can obtain a loan or borrow money in behalf of the principal. 
    • However, a written special power of attorney is not required under Article 1878. The Court explained:
      • Article 1878 does not state that the authority be in writing. As long as the mandate is express, such authority may be either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et al., that the requirement under Article 1878 of the Civil Code refers to the nature of the authorization and not to its form. Be that as it may, the authority must be duly established by competent and convincing evidence other than the self-serving assertion of the party claiming that such authority was verbally given, thus: The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special authority in Rule 138 of the Rules of Court refer to the nature of the authorization and not its form. The requirements are met if there 1S a clear mandate from the principal specifically authorizing the performance of the act. 
      • As early as 1906, this Court in Strong u. Gutierrez-Repide (6 Phil. 680) stated that such a mandate may be either oral or written, the one vital thing being that it shall be express. And more recently, We stated that, if the special authority is not written, then it must be duly established by evidence: x x x the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And while the same does not state that the special authority be in writing the Court has every reason to expect that, if not in writing, the same be duly established by evidence other than the self-serving assertion of counsel himself that such authority was verbally given him. 
6. Bank Deposit
  • Article 1980 of the New Civil Code provides that "fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan."
    • Under this rule, the bank is the debtor while the depositor is the creditor. 
    • When a person deposits an amount to his bank account, he is, in legal effect, lending money to the bank. 
    • The bank deposit must be paid upon demand by the depositor.
  • Consistent with the existence of the debtor-creditor relationship, the following rules were laid down in pertinent jurisprudence:
  1. The bank can make use as its own the money deposited. 
    • Said amount is not being held in trust for the depositor nor is it being held for safekeeping. 
  2. Third persons who may have a right to the money deposited cannot hold the bank responsible unless there is a court order or garnishment. 
    • The duty of the bank is to its creditor-depositor and not to third persons.
    • If a third person has a valid right over the money deposited, he must prove the same before a court of competent jurisdiction. 
  • Liability for Estafa:
    • The officers of the bank cannot be held liable for estafa if they authorized the use of the money deposited by the depositor. 
      • There would be no liability for estafa under Article 315(l)(b) of the Revised Penal Code even if the bank failed to return the amount deposited.
      • The money that is deposited is not held in trust by the bank.
    • If a teller, cashier, bookkeeper or any other bank employee takes the amount deposited, the appropriate crime is qualified theft.
  • Bank deposits are not special preferred credits under the Civil Code; they are ordinary preferred credits under Article 2244(9) of the New Civil Code.
  • The bank has the right to legal compensation. 
    • It can set off the deposits with the indebtedness/loans of the depositor that are due and demandable. 
    • It can likewise set-off the value of dishonored checks that were previously credited.
    • It follows however that compensation can occur only if the depositor has an existing obligation to the bank that is due and demandable. 
    • Legal compensation or compensation based on an agreement, applies only if there is a valid and existing obligation arising from any of the sources of obligation enumerated in Article 1167 of the Civil Code, to wit: 
        1. law
        2. contracts
        3. quasi-contracts
        4. delict
        5. quasi-delict
  • The filing of a criminal case is not enough reason for the bank to issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been rendered against the depositor."' 
  • Bank deposits are subject to regulations issued by the Bangko Sentral n,g Pilipinas (BSP) and pertinent special laws.
Cases:
  1. The Metropolitan Bank and Trust Company v. Rosales, G.R. No. 183204, January 13, 2014
    • When a person deposits an amount to his bank account, he is, in legal effect, lending money to the bank. The bank deposit must be paid upon demand by the depositor.
    • Compensation can occur only if the depositor has an existing obligation to the bank that is due and demandable. Legal compensation or compensation based on an agreement, applies only if there is a valid and existing obligation arising f rom any of the sources of obligation enumerated in Article 1167 of the Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict. 
    • The filing of a criminal case is not enough reason for the bank to issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been rendered against the depositor.
  2. Tan Tiong Tick v. American Apothecaries, 65 Phil 414 (1938):
    • The bank can make use as its own the money deposited. Said amount is not being held in trust for the depositor nor is it being held for safekeeping. 
  3. Fulton Iron Works Co. v. China Banking Corporation, G.R. No. 32576, November 6, 1930:
    • Third persons who may have a right to the money deposited cannot hold the bank responsible unless there is a court order or garnishment. The duty of the bank is to its creditor-depositor and not to third persons
  4. Guingona v. City Fiscal of Manila, 128 SCRA 577 (1984)
    • The officers of the bank cannot be held liable for estafa if they authorized the use of the money deposited by the depositor. There would be no liability for estafa under Article 315(l)(b) of the Revised Penal Code even if the bank failed to return the amount deposited.
  5. People of the Philippines v. Puig, G.R. No. 173654-765, August 28, 2008
    • The money that is deposited is not held in trust by the bank. If a teller, cashier, bookkeeper or any other bank employee takes the amount deposited, the appropriate crime is qualified theft.
  6. Gullas v. Philippine National Bank, 62 SCRA 519
    • The bank has the right to legal compensation. It can set off the deposits with the indebtedness/loans of the depositor that are due and demandable. 
7. Money Market
  • Section X237.l of the Manual of Regulations for Banks of the BSP provides that money market placements shall include investments in debt instruments, including purchase of receivables with recourse to the lending institution, except purchase of government securities on an outright basis.
  • A money market transaction is in the nature of a loan.
    • Citibank, N.A. (Formerly First National City Bank) v. Sabeniano: 
      • A money market placement is a simple loan or mutuum.
    • Cebu International Finance Corporation v. Court of Appeals:
      • A money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. 
      • In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer.
8. Cash Advances.
  • Cash advances can also be in the nature of simple loan. 
    • Examples:
      1. Stockholders may extend loans to their corporation by giving advances in order to finance the activities of the said corporation. 
      2. An employer who extends cash advances to employees. 
        • The employees must liquidate all cash advances within a certain period and/or their salaries may be subject to corresponding salary deduction within the period stipulated. 
        • The employee may also advance money for legitimate expenses subject to liquidation. 
  • The High Court explained: 
    • Liquidation simply means the settling of an indebtedness. An employee, such as herein petitioner, who liquidates a cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, as per diems and allowances. Similarly, as stated in the assailed decision of the lower court, "if the amount of the cash advance he received is less than the amount he spent for actual travel . . . he has the right to demand reimbursement from his employer of the amount he spent coming f rom his personal funds." In other words, the money advanced by either party is actually a loan to the other. Hence, petitioner was under no legal obligation to return the same cash or money, i.e., the bills or coins, which he received from the private respondent.
Article 1954.
A contract whereby one person transfers 
the ownership of non-fungible things to another 
with the obligation on the part of the latter
to give things of the same kind, quantity, and quality shall be considered a barter.

1. Barter.
  •  By the contract of barter or exchange, one of the parties binds himself to give one thing in consideration of the other's promise to give another thing. 
    • There is an exchange of properties in barter without any obligation to return the thing that each party received. 
  • In simple loan, the object is money and other fungible things. If the thing to be exchanged is non-fungible then the contract is barter.
    • "Fungibles" are those properties that can be replaced by another property of the same kind, quantity and quality. 
    • One unit of the property is equivalent to or is deemed to be the equivalent of and replaceable with another unit of the same kind, quantity and quality. 
    • The fungibility of property is a question of intent of the parties.

Article 1955. 
The obligation of a person who borrows money 
shall be governed by the provisions of articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money, 
the debtor owes another thing of the same kind, quantity and quality, 
even if it should change in value. 

In case it is impossible to deliver the same kind, 
its value at the time of the perfection of the loan shall be paid.

1. Rules on Legal Tender and Inflation.
  • Article 1955 makes the following provisions of the New Civil Code applicable to simple loan: 
    • Art. 1249. 
      • The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. 
      • The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. 
    • Art. 1250. 
      • In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
2. Payment Not In Legal Tender
  • Under our present laws, the parties can agree to pay the loan in any currency. 
    • There is no legal impediment to having obligations or transactions paid in foreign currency so long as the parties agree to such an arrangement.
  • Previously, an agreement to pay in foreign currency was invalid under Republic Act No. 529. 
    • However, in 1996, Republic Act No. 8183 was enacted providing that obligations contracted in the Philippines can be denominated and valued at any convertible currency acceptable to the Bangko Sentral ng Pilipinas. 
    • The Supreme Court observed in one case that the repeal of Republic Act No. 529 by Republic Act No. 8183 has the effect of removing the prohibition on the stipulation of currency other than Philippine currency, such that obligations or transactions may now be paid in the currency agreed upon by the parties.
3. What is Legal Tender.
  • In the absence of any stipulation as to currency, payment in money should be in legal tender. 
  • Section 52 of the New Central Bank Act, Republic Act No. 7653, as amended provides that only notes and coins issued by the Bangko Sentral ng Pilipinas are considered legal tender. 
  • Sections 51 and 52 of the New Central Bank Act provide: 
    • SECTION 51. Liability for Notes and Coins. 
      • Notes and coins issued by the Bangko Sentral shall be liabilities of the Bangko Sentral and may be issued only against, and in amounts not exceeding, the assets of the Bangko Sentral. Said notes and coins shall be a first and paramount lien on all assets of the Bangko Sentral.
      • The Bangko Sentral's holdings of Its own notes and coins shall not be considered as part of its currency Issue and, accordingly, shall not form part of the assets or liabilities of the Bangko Sentral. 
    •  SECTION 52. Legal Tender Power.
      • All notes and coins Issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender In the Philippines for all debts, both public and private: Provided, however, That unless otherwise fixed by the Monetary Board, coins shall be legal tender In amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and above, and In amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less.
3.01. Coins.
  • Coins issued by the BSP are also considered legal tender. 
    • However, there is a limit to the amount that can be paid using coins. 
    • Example:
      • If a person purchased a wristwatch f or P5,000.00, the buyer cannot insist on paying for the price in Five Centavo coins. 
  • The maximum amounts that can be paid using coins, as fixed by the BSP in accordance with the power conferred under Section 52 of the New Central Bank Act, are summarized below:
Type of CoinsMaximum Amount
One (1) Peso
Five (5) Pesos
Ten (10) Pesos		One Thousand (1,000) Pesos
One (1) Centavo
Five (5) Centavos
Ten (10) Centavos
Twenty Five (25) Centavos		One Hundred (100) Pesos

  • As of July 18, 2023, the legal tender limit for 1-, 5-, 10-, and 20-peso coins is P2,000 per transaction.


3.02 Mercantile Documents.
  • Delivery of any commercial paper (bills of exchange or promissory notes) whether they are negotiable instruments or not does not produce the effect of payment. 
    • Example:
      •  The creditor may refuse to accept checks in payment of the obligation.
  • In addition, even if the creditor accepts the check, the obligation is not deemed paid. 
  • Checks like other negotiable instruments are merely substitutes for money and not money. 
  • Delivery of checks does not constitute valid tender of payment.
Exceptions:
  • The exceptions to the rule that delivery of commercial paper or mercantile documents does not produce the effect of payment are as follows:
  1. When the paper or document is encashed; or
  2. When the paper or document is impaired due to the fault of the creditor. 
  • There is payment if the creditor accepted a check belonging to a third person from the debtor and the creditor failed to encash the check for a long period of time, and in the meantime, the third person became insolvent. 
    • In this case, the value of the check was impaired due to the fault of the creditor. 
    • If the creditor encashed the check earlier, the check would have been honored but it can no longer be honored because of the insolvency of the third person-issuer of the check. 
  • Note that there is authority for the view that the second exception (impairment of the document or paper) does not apply to a situation where the debtor himself is the issuer of the instrument delivered to the creditor. 
    • The exception applies only to instruments executed by a third person and delivered by the debtor to the creditor.
    • Example:
      • If the creditor fails to encash a check issued by the debtor, the obligation of the debtor remains even if the check becomes stale and can no longer be honored by the drawee bank.
3.03. Applicable Exchange Rate.
  • The general rule is that the value of the currency at the time of the establishment of the obligation shall be the basis of payment. The exceptions to the general rule are:
  1. When there is agreement to the contrary. 
    • Example: 
      • The parties agreed that the value of the currency at the time of payment shall be the basis of payment.
  2. In case of extraordinary inflation or deflation.

4. Extraordinary Inflation or Deflation.
  • Extraordinary inflation or deflation exists when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of establishment of the obligation.
  • Example: 
    • There is extraordinary inflation if the conversion rate of peso against the dollar (US) will suddenly rise from one peso to a million dollars.
  • Express Declaration. 
    • An extraordinary inflation or deflation cannot be assumed.
    • There must be declaration from the appropriate government agency like the Bangko Sentral or the Department of Finance.
    • Hence, there cannot be deemed to be an extraordinary inflation by the mere fact that there was devaluation of the peso.

Article 1956.
No interest shall be due 
unless it has been expressly stipulated in writing.


Article 1957.
Contracts and stipulations, 
under any cloak or device whatever, 
intended to circumvent the laws against usury shall be void. 
The borrower may recover in accordance with the laws on usury.


Article 1958.
In the determination of the interest, 
if it is payable in kind, 
its value shall be appraised 
at the current price of the products or goods 
at the time and place of payment.


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 1960. 
If the borrower pays interest 
when there has been no stipulation therefor, 
the provisions of this Code concerning solutio indebiti, 
or natural obligations, shall be applied, as the case may be.
 
Article 1961. 
Usurious contracts shall be governed
by the Usury Law and other special laws, 
so far as they are not inconsistent with this Code. 

1. Interest.
  • Interest rates refer to the price paid for the use of money for a period of time and are expressed as a percentage of the total outstanding balance that is either fixed or variable.
  • There are two ways by which interest rates can be defined: 
  1. From the point of view of a borrower:
    • It is the cost of borrowing money (borrowing rate); 
  2. From the point of view of a lender:
    • It is the fee charged for lending money (lending rate).
    • This definition refers to what is known as monetary interest.
2. Kinds of Interest.
  • Interest may either be: 
  1. Monetary Interest
    • It is in the nature of income.
  2. Compensatory or Penalty Interest. 
    • It is in the nature of damages.
  • 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. 
    • It has been held that should a debtor continue in possession of the principal of the loan and continue to use the same after maturity of the loan without payment of the monetary interest, unjust enrichment would result on the part of the debtor at the expense of the creditor.
  • Interest as damages is provided for under Articles 2209 to 2213 of the New Civil Code. 
  • Interest as part of penal clause is governed by Article 1226 of the New Civil Code, which provides that "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." 
    • A penal clause is in the nature of an accessory obligation, which makes one party liable or makes him perform another prestation if the principal obligation is not fulfilled. 
    • The Supreme Court observed that a penal clause is an accessory undertaking to assume greater liability in case of breach, attached to an obligation in order to ensure performance and has a double function:
      1. to provide for liquidated damages; and 
      2. to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach.
3. Requisites of Monetary Interest.
  • Interest shall be due if the following concur:
  1. Payment of interest is agreed upon;
  2. The stipulation to pay interest must be in writing; and
  3. The rate must not be against the law (usurious if applicable) or against morals and public policy (unconscionable).
  • Payable In Kind.
    • In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment.
    • The creditor may circumvent the provisions of the usury law by demanding the delivery of expensive products or goods without appraising their value. 
    • Thus, Article 1968 (together with Art. 1967) is meant to make usury harder to perpetrate.
4. Legal Interest.
  • Legal interest is the rate of interest fixed by law or regulation that will be followed where there is a written agreement that interest will be paid or when the law or rule provides for payment of interest, but the rate is not stipulated.
  • Legal Interest Under BSP Rules. 
    • The legal rate of interest is now 6% per annum even for loans or forbearance of money, goods, or credit under BSP Circular No. 799, Series of 2013 dated June 21, 2013 that took effect on July 1, 2013.
5. When Available.
  • The Code Commission included provisions in the Civil Code allowing interest on damages because the Commission believed that "such interest is in fact a part of the loss suffered."
  • Reformina v. Tomol, Jr.:
    • It was stated that the interest rate under CB Circular No. 416 applies to:
      1. loans;
      2. forbearance of money, goods or credits; or 
      3. a judgment involving a loan or forbearance of money, goods or credits.
  • Cases beyond the scope of the said circular are governed by Article 2209 of the New Civil Code, which considers interest a form of indemnity for the delay in the performance of an obligation. 
    • Article 2209 is therefore in the nature of interest as damages.
  • The leading cases with respect to interest are:
    1. Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78
    2. Nacar  v. Gallery Frames, Inc., G.R. No. 189871, August 13, 2013
  • BSP-MB Circular No. 799 dated June 21, 2013:
    1. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts, is breached, the contravenor can be held liable f or damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 
    2. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 
      • When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 
      • When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however shall be adjudged on unliquidated claims or damages, except when or' until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code}, but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
      • When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above., shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 
      • 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 b e implemented applying the rate of interest fixed therein.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,:
  • The interest due should be that which may have been stipulated in writing. 
  • The interest due shall itself earn legal interest from the time it is judicially demanded. 
  • In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached: 
  • The interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. 
  • No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 
  • 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) 
  • When such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). 
    • The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

  • In summary, the rules stated above may be presented as follows:
  1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money
    • Interest Due: 
      • The due interest should be that which may have been stipulated in writing.
    • Additional Interest:
      • 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; 
      • If the Court awards a sum of money and the award becomes final and executory, the rate of legal interest shall be 6% per annum from such finality until its satisfaction.
  2. When an obligation, not constituting a loan or forbearance of money, is breached. 
    • Interest Due: 
      • The interest on the amount damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
    • Additional Interest:
      • Court awards a sum of money that becomes final and executory, the rate of legal interest 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.
  3. Unliquidated claims or damages. 
    • Interest Due: 
      • No interest until final judgment.
      • The legal interest of 6% shall be on the amount finally adjudged the Court.
5.01 Loan and Forbearance.
  • The previous rule is that the legal interest for loan or forbearance of money is 12% per annum. 
    • A loan or forbearance of money, goods or credit is described as a contractual obligation whereby a lender or creditor has refrained during a given period from requiring the borrower or debtor to repay the loan or debt then due and payable.
  • "Forbearance of money, goods or credits" is "meant to have a separate meaning from a loan, otherwise there would have been no need to add that phrase as a loan is already sufficiently defined in the Civil Code. 
    • Forbearance of money, goods or credits should therefore 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."
  • Estores v. Sps. Supangan, G.R. No. 176139, April 18, 2012:
    • The respondent-spouses parted with their money even before the conditions were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner) to use their money pending fulfillment of the conditions. They were deprived of the use of their money for the period pending fulfillment of the conditions and when those conditions were breached, they are entitled not only to the return of the principal amount paid, but also to compensation for the use of their money. 
    • The compensation for the use of their money, absent any stipulation, should be the same rate of legal interest applicable to a loan since the use or deprivation of funds is similar to a loan.
  • A judgment based to pay damages based on quasi-delict is clearly not a loan or forbearance of money.
    • However, the obligation to pay becomes a forbearance of money from the time the judgment becomes final and executory. 
  • Land Bank of the Philippines v. Onate, G.R. No. 192371, January 15, 2014, 713 SCRA 678:
    • There was also forbearance of money which involved the obligation to return the amount that was subjected to offsetting without legal justification. 
    • The interest accrued from the time of judicial demand.
PROBLEMS:
1. The parties in a contract of loan of money agreed that the yearly interest rate is 12% and it can be increased if there is a law that would authorize the increase of interest rates. Suppose OB, the lender, would increase by 6% the rate of interest to be paid by TY, the borrower, without a law authorizing such increase, would OB's action be just and valid? Why? Has TY a remedy against the imposition of the rate increase? Explain. (2004 Bar)
 No, the increase of interest would not be just and valid. Unilateral increase of interest by 5% is not allowed under the law. The act of OB violates the principle of mutuality of contracts; the terms and conditions of the contract must be agreed upon by the parties and cannot be changed except by mutual agreement. The remedy of TY is not to pay the increase and/or to file a case in Court to have the unilateral increase of 5% declared null and void.

2. Samuel borrowed P300,000.00 housing loan from the bank at 18% per annum interest. However, the promissory note contained a proviso that the bank "reserves the right to increase interest within the limits allowed by law." By virtue of such proviso, over the objections of Samuel, the bank increased the interest rate periodically until it reached 48% per annum. Finally, Samuel filed an action questioning the right of the bank to increase the interest rate up to 48%. The bank raised the defense that the Central Bank of the Philippines had already suspended the Usury Law. Will the action prosper or not? Why?
The action of Samuel will prosper. The increase of interest to 48% is void for two reasons. The bank cannot unilaterally increase the rate of interest. The unilateral increase violates the rule on mutuality of contracts. Any increase in the rate of interest should be with the consent of Samuel. Secondly, even if there is an agreement, the 48% interest is unconscionable. Hence, it is void for being contrary to morals and public policy. 

3. In a contract of loan payable in five years, the parties agreed in writing that the interest for the first three years is 12% per annum, while the interest for the last two years is 15% per annum. Is the agreement regarding the increase of interest valid?
Yes, the agreement that the interest rate will increase to 15% is valid. This rate was fixed by mutual agreement of the parties when they entered into the contract of loan. This is not a case of unilateral increase of the rate of interest. In addition, it appears that the rate of interest is reasonable and not unconscionable. 


6. Interest on Interest (Compounding of Interest)
  • General Rule: Interest due and unpaid shall not earn interest.
    • This rule is also consistent with Section 6 of the Usury Law which provides that "in computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement.
  • Exceptions: Interest due shall earn interest in the following cases: 
    1. Stipulated interest shall earn interest upon judicial demand;
    2. Interest shall earn interest when compounding of interest is agreed upon. 
      • The contracting parties may by stipulation capitalize the interest due and unpaid, which, as added principal, shall earn new interest
7. Interest as Damages.
  • Interest may likewise be awarded in the concept of penalty or as damages. 
  • Articles 2209 to 2213 are the New Civil Code provisions on damages pertaining to interest:
    • Art. 2209. 
      • If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.
    •  Art. 2210. 
      • Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.
    • Art. 2211. 
      • In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in the discretion of the court.
    • Art. 2212. 
      • Interest due shall earn legal Interest from the time It Is judicially demanded, although the obligation may be silent upon this point.
    • Art. 2213. 
      • Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty. 
8. Escalation Clause.
  • A party cannot unilaterally increase the rate of interest. 
    • Any stipulation that allows one of the parties to unilaterally increase the interest rate is not valid. 
    • It is well settled that escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds.
    • Escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.
  • Manual of Regulations for Banks: 
    • § X305.2 Escalation clause; when allowable. 
      • Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. 
  • The above-quoted regulation is authorized under Section 7-a of the Usury Law as amended by Section 2 of Presidential Decree No. 1684 thus:
    • Sec. 7-a. 
      • Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of Interest agreed upon may be increased in the event that the applicable maximum rate of Interest is Increased by law or by the Monetary Board; Provided, That such stipulation shall be valid only If there is also a stipulation In the agreement that the rate of Interest agreed upon shall be reduced In the event that the applicable maximum rate of interest Is reduced by law or by the Monetary Board; Provided further, That the adjustment In the rate of Interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.
    • Silos v. Philippine National Bank, G.R. No. 181045, July 2, 2014:
      • In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect. 
      • Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or illegal.
      • The Usury Law as amended by Presidential Decree No. 1684 (and C.B. Circular No. 905) "no more than allow[s] contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. 
      • However, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent. The unbridled right to unilaterally upwardly adjust the interest would completely take away from the debtor the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts that is recognized under Article 1308 of the New Civil Code. Thus, it was further explained: 
        • It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. 
        • Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. 
  • The Supreme Court repeatedly struck down provisions in credit documents issued by a bank to, or required of, its borrowers which allow the bank to increase or decrease interest rates "within the limits allowed by law at any time depending on whatever policy it may adopt in the future."
  • Villa Crista Monte Realty & Development Corp. v. Equitable PCI Bank, G.R. No. 208336, November 21, 2018:
    •  An escalation clause without a concomitant de-escalation clause is void and ineffectual for violating Presidential Decree No. 1684, otherwise known as Amending Further Act No. 2655, as Amended, Otherwise Known as "The Usury Law," as well as the principle of mutuality of contracts unless the established facts and circumstances, as well as the admissions of the parties, indicate that the lender at times lowered the interest rates, or, at least, allowed the borrower the discretion to continue with the repriced rates.
  • Consistently, the Court declared as invalid the provisions of several promissory notes on interest with the common denominator of lack of agreement of the parties to the imposed interest rates. 
    • The lack of consent by the borrowers is made obvious by the fact that they signed the promissory notes in blank for the bank to fill.
    • To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates, must be made with the consent of the contracting parties. 
    • The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. 
    • In the case of loan agreements, the rate of interest is a principal condition, if not the most important component. 
    • Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
  • Estoppel:
    • The borrower cannot be considered as estopped from questioning the illegal unilateral imposition of interest. 
    • Estoppel cannot be predicated on an illegal act. 
    • As between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public policy.
8.02. Effect of Invalidity of Escalation.
  • If the escalation clause is annulled, the principal amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at the rate of 6% per annum in accordance with BSP Monetary Board Circular No. 799. 
  • The interests paid by borrowers should be applied first to the payment of the stipulated or legal and unpaid interest, as the case may be, and later, to the capital or principal.
  • Philippine Savings Bank v. Castillo, G.R. No. 193178, May 30, 2011, 649 SCRA 527, 538:
    • The lender should then refund the excess amount of interest that it has illegally imposed upon borrowers; the amount to be refunded refers to that paid by borrowers when they had no obligation to do so.
9. Unconscionable Interest Rate.
  • Sps. Mallari v. Prudential Bank, G.R. No. 197861, June 5, 2013:
    • Parties are free to enter into agreements and stipulations as to the terms and conditions of their contract, but such freedom is not absolute. 
    • Thus the stipulation as to interest may be considered void if it is unconscionable. 
    • Only the interest is void; the principal obligation is not affected by the invalidity of the stipulation as to interest.
    • Article 1306 of the Civil Code provides, "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."
    • Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is the law between the parties.
  • Rey v. Anson, G.R. No. 211206, November 7, 2018:
    • 'The freedom of contract is not absolute. Article 1306 of the Civil Code provides that "[t]he 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."
    • Sps. Albos v. Sps. Embisan, et al.:
      • As case law instructs, 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.
    • Castro v. Tan:
      • While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on interest effective January 1, 1983, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal. There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
    • Stipulations authorizing iniquitous or unconscionable interests are contrary to morals, if not against the law. 
    • Medel v. Court of Appeals:
      • Annulled a stipulated 5.5% per month or 66% per annum interest on a PS00,000.00 loan and a 6% per month or 72% per annum interest on a PG0,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. 
    • Ruiz v. Court of Appeals:
      • Declared a 3% monthly interest imposed on four separate loans to be excessive. In both cases, the interest rates were reduced to 12% per annum. In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly, stipulated in the Kasulatan is even higher than the 3% monthly interest rate imposed in the Ruiz case. 
      • Thus, we similarly hold the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is therefore void ab initio for being violative of Article 1306 of the Civil Code. With this, and in accord with the Medel and Ruiz cases, we hold that the Court of Appeals correctly imposed the legal interest of 12% per annum in place of the excessive interest stipulated in the Kasulatan.
  • Examples:
    • The Supreme Court declared unconscionable and exorbitant the following interest rates: 
      1. 66% per annum or 5.5% per month on a P500,000.00 loan;
      2. 3% and 3.81 % per month on a P10 million loan; and 
      3. 7% and 5% a month which are equivalent to 84% and 60% per annum.
    • Toring v. Sps. Ganzon Olan:
      • Reduced the interest rate to 1% per annum.
  • Sps. Mallari v. Prudential Bank, G.R. No. 197861, June 5, 2013:
    • However, it was ruled that the provisions fixing the interest rate at 23% per annum and 24% per annum are valid.
    • The Court also found the stipulated 12% per annum penalty charge excessive or unconscionable.
  • Ruiz v. Court of Appeals:
    • The Court held that the 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty stipulated m a loan agreement in case of default partakes of the nature of liquidated damages under Article 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. The obligor would then b e bound to pay the stipulated amount of indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. 
  • Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd:
    • This Court has recognized a penalty clause as an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of proving an excuse - the failure of the performance was due to either force majeure or the acts of the creditor himself.
  • Where in the contract of loan the borrowers agreed to the payment of interest on their loan obligation, the fact that the rate of interest was subsequently declared illegal and unconscionable does not entitle the borrowers to stop payment of interest. 
    • It should be emphasized that only the rate of interest was declared void. 
    • The stipulation requiring borrowers to pay interest on their loan remains valid and binding. 
    • The borrowers are, therefore, liable to pay interest - legal interest - from the time they defaulted in payment until their loan is fully paid.
10. Penalties and Surcharges.
  • The parties may likewise provide for liability to pay surcharges and penalties in case of breach. 
  • However, the stipulation regarding penalties and surcharges must not also be unconscionable.
    • A stipulation providing for unconscionable or excessive penalty is void for being contrary to morals, good customs, public order, or public policy.
  • Metropolitan Bank & Trust Company v. Chuy Lu Tan, G.R. No. 202176, August 1, 2016, 799 SCRA 4:
    • The surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Article 2226 of the Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory under t a k i ng to assume greater liability on the part of an obligor in case of breach of an obligation.
    • Article 2227 of the Civil Code, liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. Similarly, Article 1229 of the same Code provides that "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.
    • The 18% penalty charge imposed by petitioner on the deficiency claim, computed from the time of default, is excessive and, accordingly, reduced it considering that petitioner was already able to recover a large portion of respondents' principal obligation. In consonance with prevailing jurisprudence, the Court reduced the rate of penalty charge imposed on the deficiency claim from 18% per annum to 12% per annum.
11. When Solution Indebiti is Applicable.
  • Article 1960 provides that if the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. 
  • However, the provision has been criticized as self-contradictory. 
    • If solutio indebiti is to be applied, the interest paid is recoverable; on the other hand, if the rules of natural obligations apply, no recovery can be had. 
    • Both rules cannot apply at the same time, and the article should specify the conditions when either principle is to be followed.
  • It is submitted that there is no contradiction. 
    • The application of the rules on solutio indebiti or natural obligations would depend on the circumstances. 
    • If interest is paid knowing that it is not due but as a matter of equity, then the rules on natural obligations apply.
    • If there was mistake in the payment of the interest, then solutio indebiti applies. 
12. Truth in Lending.
  • Loan agreements must comply with the Truth in Lending Act or Republic Act No. 3765. 
    • The said Act was enacted to protect citizens from a lack of awareness of the true cost of credit to the user by using a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.
    • The law "gives a detailed enumeration of the specific information required to be disclosed, among which are the interest and other charges incident to the extension of credit."
    • Undisclosed interest and other charges shall be considered invalidly imposed.
  • Section 4 of the Truth in Lending Act provides that a disclosure statement must be furnished prior to the consummation of the transaction, thus:
    • SEC. 4. Any creditor shall furnish to each person to whom credit Is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules _ and regulations prescribed by the Board, the following information: 
      1. the cash price or delivered price of the property or service to be acquired; 
      2. the amounts, if any, to be credited as down payment and/or trade-in; 
      3. the difference between the amounts set forth under clauses (1) and (2);
      4. the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit;
      5. the total amount to be financed; 
      6. the finance charge expressed in terms of pesos and centavos; and
      7. the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.
  • In Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the extension of credit such as interest or discounts, collection fees, credit investigation fees, attorney's fees, and other service charges. 
  • The total finance charge represents the difference between: 
    1. the aggregate consideration (down payment plus installments) on the part of the debtor; and 
    2. the sum of the cash price and non-finance charges.
  • The rationale of the disclosure requirement under the Truth in Lending Act ''is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like. 
    • The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions."
  • It is a violation of the Truth in Lending Act to require the borrowers to sign the credit documents and the promissory notes in blank, and for the bank to unilaterally fill them up later. 
    • The bank will be remiss in its disclosure obligations. 
    • The defect is not cured by the fact that the bank later gave the borrowers a copy of the accomplished or completed credit document or by the fact that statements of accounts were supplied to the borrowers.
  • Silos v. Philippine National Bank, G.R. No. 181045, July 2, 2014:
    • "The fact that petitioners later received several statements of account detailing its outstanding obligations does not cure respondent's breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an already consummated business decision. 
    •  Neither may the statements be considered proposals sent to secure the petitioners' conformity; they were sent after the imposition and application of the interest rate, and not before. And even if it were to be presumed that these are proposals or offers, there was no acceptance by petitioners. "No one receiving a proposal to modify a loan contract, especially regarding interest, is obliged to answer the proposal."
    • Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but actually accompanied by provisions written in fine print that allow lenders to later on increase or decrease interest rates unilaterally, without the consent of the borrower, and depending on complex and subjective factors. Because they have been lured into these contracts by initially low interest rates, borrowers get caught and stuck in the web of subsequent steep rates and penalties, surcharges and the like. Being ordinary individuals or entities, they naturally dread legal complications and cannot afford court litigation; they succumb to whatever charges the lenders impose. At the very least, borrowers should be charged rightly; but then again this is not possible in a one-sided credit system where the temptation to abuse is strong and the willingness to rectify is made weak by the eternal desire for profit. 
    • Given the above supposition, the Court cannot subscribe to respondent's argument that in every repricing of petitioners' loan availment, they are given the right to question the interest rates imposed. The import of respondent's line of reasoning cannot be other than that if one out of every hundred borrowers questions respondent's practice of unilaterally .fixing interest rates, then only the loan arrangement with that lone complaining borrower will enjoy the benefit of review or re-negotiation; as to the 99 others, the questionable practice will continue unchecked, and respondent will continue to reap the profits from such unscrupulous practice. The Court can no more condone a view so perverse. This is exactly what the Court meant in the immediately preceding cited case when it said that "the belated discovery of the true cost of credit does not reverse the ill effects of an already consummated business decision-''96 as to the 99 borrowers who did not or could not complain, the illegal act shall have become a fait accompli - to their detriment, they have already suffered the oppressive rates. 
    • Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing with the respondent. It is doubtful that any borrower who finds himself in petitioners' position would dare question respondent's power to arbitrarily modify interest rates at any time. In the second place, on what basis could any borrower question such power, when the criteria or standards - which are really one-sided, arbitrary and subjective - for the exercise of such power are precisely lost on him?"

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Equality and Human Rights: The United Nations and Human Rights System (September 16, 2023)

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