Credit Transaction Valid or Void Interest Accelera

UNIVERSITY OF ASIA AND THE PACIFIC
Institute of Law and Governance

School of Law
A Compilation of Digested Cases

VALID or VOID Agreements on Interests or Acceleration Clauses
CREDIT TRANSACTION
Semester AY 2018-2019
Table of Contents
VALID PROVISIONS ....................................................................................................................................................................................... 4
Banco Filipino Savings and Mortgage Bank v. Hon. Miguel Navarro, Presiding Judge, Court of First Instance of Manila, Branch xxxi and
Florante Del Valle,........................................................................................................................................................................................ 4
BPI Family Savings Bank Vs. Margarita Vda. De Coscolluela ...................................................................................................................... 5
Salvador P. Escaño and Mario M. Silos, v. Rafael Ortigas, Jr. ..................................................................................................................... 7
Garcia vs. Court of Appeals, ........................................................................................................................................................................ 8
Metropolitan Bank and Trust Company v. Chuy Lu Tan ............................................................................................................................... 9
Polotan, Sr. v. Court of Appeals ................................................................................................................................................................. 10
Spouses Salvador Abella and Alma Abella vs. Spouses Romeo Abella and Annie Abella .......................................................................... 12
Spouses Mallari v. Prudential Bank, ........................................................................................................................................................... 14
National Marketing Corp. vs. Marquez ....................................................................................................................................................... 16
Plaridel Surety & Ins. Co., Inc. vs. P.L. Galang Machinery Co., Inc. ........................................................................................................... 17
Republic vs. Pal-Fox Lumber Co., Inc. ....................................................................................................................................................... 18
Sps. Bacolor v Banco Filipino Savings and Mortgage Bank ....................................................................................................................... 19
Teofisto Guingona, Jr., Antonio I. Martin, and Teresita Santos, Petitioners,vs. The City Fiscal of Manila, Hon. Jose B. Flaminiano, Asst.
City Fiscal Felizardo N. Lota and Clement David, Respondents ................................................................................................................. 20
Nacar vs. Gallery Frames ........................................................................................................................................................................... 21
Philippine Savings Bank vs. Spouses Alfredo M. Castillo And Elizabeth C. Castillo, And Spouses Romeo B. Capati And Aquilina M. Lobo
................................................................................................................................................................................................................... 23
Banco Filipino Savings And Mortgage Bank vs. Hon. Miguel Navarro, Presiding Judge, Court of First Instance of Manila, Branch XXXI and
Florante Del Valle....................................................................................................................................................................................... 24
Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, Magtatanggol Eusebio and Leila Ventura .................... 25
VOID PROVISIONS....................................................................................................................................................................................... 26
Philippine National Bank v CA .................................................................................................................................................................... 26
Security Bank Corporation v. Spouses Rodrigo and Erlina Mercado .......................................................................................................... 27
Sebastian Siga-an vs Alicia Villanueva ....................................................................................................................................................... 28
Spouses Jonsay v. Solidbank Corporation ................................................................................................................................................. 29
Buenaventura v. Metropolitan Bank and Trust Co. ..................................................................................................................................... 30
Equitable PCI Bank v. Ng Sheung Ngor ..................................................................................................................................................... 31
Floirendo, Jr. v. Metropolitan Bank and Trust Co........................................................................................................................................ 32
Philippine National Bank v. CA ................................................................................................................................................................... 33
SPOUSES ANDAL VS. PNB ...................................................................................................................................................................... 34
Toring vs. Ganzon-Olan ............................................................................................................................................................................. 35
Spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong, Petitioners versus Roban Lending Corporation, Respondent ............................. 37
The United States vs. Francisco Constantino Tan Quingco Chua .............................................................................................................. 38
Aurelio G. Briones vs. Primitivo P. Cammayo, et. al. .................................................................................................................................. 39
Philippine National Bank v. Spouses Rocamora ......................................................................................................................................... 40
First Metro Investment Corporation v. Este Del Sol Mountain Reserve, Inc. ............................................................................................... 41
Juico v. China Banking Corporation ........................................................................................................................................................... 42
New Sampaguita Builders Construction, Inc. v. Philippine National Bank ................................................................................................... 44
Spouses Limso v PNB................................................................................................................................................................................ 46
Private Development Corporation v. Intermediate Appellate Court and Ernesto C. Del Rosario ................................................................. 49
Salvador Chua vs. Rodrigo Timan .............................................................................................................................................................. 50
Spouses Ponciano Almeda And Eufemia P. Almeda vs. The Court Of Appeals And Philippine National Bank .......................................... 51
Ileana Dr. Macalinao v Bank of the Philippine Islands ................................................................................................................................ 53
Sps. Silos v. PNB ....................................................................................................................................................................................... 54
Manila Trading V. Tamaraw Plantation ....................................................................................................................................................... 56
MCMP Construction Corp. v. Monark Equipment Corp............................................................................................................................... 57
Mechavez, Arthur F. vs. Marlyn M, Bermudez ........................................................................................................................................... 58
Sun Life of Canada (PH) Inc. v. Sandra Tan Kit, and the Estate of Deceased Norberto Tan Kit ................................................................. 59
VALID PROVISIONS
Banco Filipino Savings and Mortgage Bank v. Hon. Miguel Navarro, Presiding Judge, Court of First Instance of Manila, Branch xxxi
and Florante Del Valle,
G.R. No. L-46591, 28 July 1987
PROVISION / CASE SCENARIO REASON CASES CITED

The Escalation Clause reads as follows: Some contracts contain what is known as an
"escalator clause," which is defined as one in
“I/We hereby authorize Banco Filipino to which the contract fixes a base price but contains
correspondingly increase the interest rate stipulated a provision that in the event of specified cost
in this contract without advance notice to me/us in the increases, the seller or contractor may raise the
event a law should be enacted increasing the lawful price up to a fixed percentage of the base. Attacks
rates of interest that may be charged on this particular on such a clause have usually been based on the
kind of loan.” claim that, because of the open price-provision, the
contract was too indefinite to be enforceable and
The Escalation Clause is based upon Central Bank did not evidence an actual meeting of the minds of
CIRCULAR No. 494 issued on January 2, 1976. the parties, or that the arrangement left the price to
be determined arbitrarily by one party so that the
On the strength of CIRCULAR No. 494 BANCO contract lacked mutuality. In most instances,
FILIPINO gave notice to the BORROWER on June however, these attacks have been unsuccessful.
30, 1976 of the increase of interest rate on the LOAN
from 12% to 17% per annum effective on March 1, The Court further finds as a matter of law that the
1976. cost of living index adjustment, or escalator clause,
is not substantively unconscionable.
Contending that CIRCULAR No. 494 is not the law
contemplated in the Escalation Clause of the Cost of living index adjustment clauses are widely
promissory note, the BORROWER filed suit against used in commercial contracts in an effort to
BANCO FILIPINO for "Declaratory Relief" with maintain fiscal stability and to retain "real dollar"
respondent Court, praying that the Escalation Clause value to the price terms of long term contracts.
be declared null and void and that BANCO FILIPINO
be ordered to desist from enforcing the increased rate
of interest on the BORROWER's real estate loan.
BPI Family Savings Bank Vs. Margarita Vda. De Coscolluela
GR No. 167724, June 27, 2006

CALLEJO, SR., J.

Sps. Coscolluela executed a real estate mortgage It must be stressed that the parties agreed in the
(REM) in favor of Far East Bank & Trust Co. (FEBTC) Real Estate Mortgage that in the event that
over their parcel of land as security of loans, fixed and respondent shall fail to pay the mortgage
amounting to P7M. Under the REM, the entire obligation or any portion thereof when due, the
principal, with interest, penalties and other charges entire principal, interest, penalties and other
then outstanding will immediately be due upon failure charges then outstanding shall become
to pay the mortgage obligation or any of its portion, or immediately due, payable and defaulted, thus
upon breach of the REM. FEBTC may foreclose extra- under the terms and conditions of the Mortgage
judicially, and act as an authorized agent to enter and Agreement, in the event the Mortgagors fail and/or
sell the mortgaged property without written refuse to pay the Mortgage obligation or any
permission from the spouses. portion thereof when due, the entire principal,
The husband died intestate and was survived by his interest, penalties and other charges then
wife. Eventually, the wife failed to settle her obligation. outstanding, shall, without need for demand,
FEBTC filed a petition for extrajudicial foreclosure of notice, or any other act or deed, become
the property. immediately due, payable and defaulted.
While the petition for foreclosure was pending,
FEBTC filed a complaint with RTC Makati, against Under the deed, the mortgage was to secure the
Coscolluela for collection of P12.6M, with interest and payment of a credit accommodation already
penalty, covering the remaining PNs. obtained by Coscolluela, the principal of all of
The wife answered that FEBTC has not only charged which was fixed at P7,000,000.00, as well as any
but over charged the defendant-spouses with other obligation that may be extended to
excessive and exorbitant interest over and above respondent, including interest and expenses, to
those authorized by law. And in order to add more wit: That for and in consideration of credit
injury to the defendants, plaintiff also included other accommodation obtained from the MORTGAGEE,
charges not legally collectible from the defendant- and to secure the payment of the same and those
spouses. that may hereafter be obtained, the principal of all
of which is hereby fixed at SEVEN MILLION
LIRIOS
PESOS ONLY, as well as those that the
MORTGAGEE may extend to the MORTGAGOR,
including interest and expenses or any other
obligation owing to the MORTGAGEE, whether
direct or indirect, principal or secondary, as
appears in the accounts, books and records of the
MORTGAGEE
LIRIOS
Salvador P. Escaño and Mario M. Silos, v. Rafael Ortigas, Jr.
G.R. No. 151953, November 6, 1928

PDCP entered into a loan agreement with Falcon. When the obligation is breached, and it consists in
Ortigas agreed to be solidarily liable with Falcon for the payment of a sum of money, i.e., a loan or
the payment of the loan with PDCP. Escano executed forbearance of money, the interest due should be
a contract for one guaranty, and another was that which may have been stipulated in writing.
executed by Silos, et. al. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
However, Falcon defaulted in his payment of the loan, the absence of stipulation, the rate of interest shall
so PDCP filed a complaint. be 12% per annum to be computed from default
,i.e., from judicial or extrajudicial demand under
After having settled with PDCP, Ortigas pursued his and subject to the provisions of Article 1169 of the
claims against Escaño, Silos and Matti, on the basis Civil Code.
of the 1982 Undertaking, which was an agreement to
cede control of Falcon to Escaño, Silos, and Matti. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
The RTC issued a Summary Judgment ordering the amount of damages awarded may be imposed
Escaño, Silos and Matti to pay Ortigas, jointly and at the discretion of the court at the rate of 6% per
severally, and awarded Ortigas legal interest of 12% annum.
per annum
Since what was constituted in the
Escaño and Silos argue, assuming they are liable Undertaking consisted of a payment in a sum of
under the 1982 Undertaking, that they are not liable money, the rate of interest thereon shall be 12%
for interest and if at all, the proper interest rate is 6% per annum to be computed from default, i.e., from
and not 12%. judicial or extrajudicial demand. The interest rate
imposed by the RTC is thus proper.
LOPEZ
Garcia vs. Court of Appeals,
G.R. Nos. 82282-83, November 24, 1988.
PROVISION / CASE SCENARIO REASON

In August 1981, Chemark Electric Motors, Inc. was granted a P20M The Court adopted the computation given by Security Bank
credit line by Security Bank and Trust Company (Security Bank). On the account officer Charis Marquez, which stated:
same day, Antonio Garcia, Dynetics, Inc. and Matrix Management
Corporation executed indemnity agreements binding them to pay jointly In the said Statements of Accounts dated June 15, 1985, we
and severally with Chemark. Chemark availed of the P20M credit line, charged 18% and 25% per annum, respectively, because the
with one promissory note for P6,350,750 at 18% interest and another subject loans (Annexes "2" and "3" hereof) were intended to be
for P8,649,250 at 24% interest, both with 36% penalty per annum. rediscounted at the Central Bank at 11% per annum. However,
when Chemark Electric Motors, Inc. failed to give us the required
The obligations were not paid by Chemark when they became due. letter of credit which was a requirement of the Central Bank, we
Garcia, Dynetics, and Matrix Management assailed the interest rates as charged them 18% and 24% instead of 11% interest per annum.
excessive and not supported by evidence. These higher interest charges were based on and authorized
under our Credit Proposal, copies of which are hereto attached as
Annexes "11" to "11-B".
Thus, the Court explained:
“The increased interest rates are expressly provided for in the

amended credit line agreement and in the two promissory notes
executed by Chemark in favor of Security Bank & Trust Co. We
find no reversible error in the award of interests.”
CHUA
Metropolitan Bank and Trust Company v. Chuy Lu Tan
G.R. No. 202176, August 1, 2016

Chuy Lu Tan and Romeo Tanco obtained loans from Metrobank worth The Court ruled as follows:
P19,900,000, with a Real Estate Mortgage over a 1,449.70 square
meter parcel of land in Quezon City as security. Chuy and Tanco failed “In the instant case, the Promissory Notes executed by
to settle their loans despite repeated demands for payment, with total respondents indicate that the interest rates were pegged at sixteen
obligations amounting to P24,252,062.03. Consequently, Metrobank percent (16%) per annum, computed from the dates of execution
foreclosed the mortgage and the property was sold to it as the highest thereof. Under settled jurisprudence [Spouses Mallari v.
bidder for P24,572,268. However, Metrobank claimed that after Prudential Bank, citing Villanueva v. Court of Appeals], twenty-four
application of the bid price to the respondents' outstanding obligation percent (24%) interest rate is not considered unconscionable.
and the payment of the costs of foreclosure, accrued interest, penalty Hence, the Court finds the sixteen percent (16%) interest rate
charges, attorney's fees and other related expenses, there remained a imposed by petitioner as fair.”
deficiency of P1,641,815.
The Promissory Notes executed by respondents indicate that the

interest rates were pegged at sixteen percent (16%) per
annum, computed from the dates of execution thereof, with an 18%
penalty charge on the deficiency claim computed from the time of
default, and attorney’s fees worth 10% of the amount due.
Metrobank sought the enforcement of the 16% interest on the amount

due until its full payment, as well as the 18% penalty charge and 10%
attorney’s fees. On the other hand, Chuy and Tanco contested that the
claims of Metrobank were iniquitous, unconscionable and would
amount to unjust enrichment as the principal obligation had been
covered by the foreclosure and the deficiency sought consisted mainly
of interest and penalty charges.
CHUA
Polotan, Sr. v. Court of Appeals
G.R. No. 119379 | September 25, 1998

Petitioner Rodelio Polotan Sr. applied for membership and credit A contract of adhesion is one in which one of the contracting parties
accomodations with Diners Club. This provision on interest was imposes a ready-made form of contract which the other party may
stipulated in the Diners Club Contract: accept or reject, but cannot modify. One party prepares the
stipulation in the contract, while the other party merely affixes his
PAYMENT OF CHARGES - xxx xxx xxx The Cardholder agrees to pay signature or his adhesion thereto, giving no room for negotiation
interest per annum at 3% plus the prime rate of Security Bank and Trust and depriving the latter of the opportunity to bargain on equal
Company. xxx xxx xxx Provided that if there occurs any change in the footing. Nevertheless, these types of contracts have been declared
prevailing market rates the new interest rate shall be the guiding rate as binding as ordinary contracts, the reason being that the party
of computing the interest due on the outstanding obligation without who adheres to the contract is free to reject it entirely.
need of serving notice to the Cardholder other than the required posting
on the monthly statement served to the Cardholder. The binding effect of any agreement between parties to a contract
is premised on two settled principles: (1) that any obligation arising
The Cardholder hereby authorizes Security Diners to correspondingly from a contract has the force of law between the parties; and (2)
increase the rate of such interest in the event of changes in prevailing that there must be mutuality between the parties based on their
market rates and to charge additional service fees as may be deemed essential equality. Any contract which appears to be heavily
necessary in order to maintain its service to the Cardholder. weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity
or compliance of the contract which is left solely to the will of one
of the parties, is likewise, invalid.
Here, by signing the contract, petitioner and private respondent

agreed upon the rate as stipulated in the subject contract, which is
now allowed by C.B. Circular 905. Petitioner also failed to cite any
particular provision of said Circular which was allegedly violated by
the subject contract.
Furthermore, the provision in question states that if there occurs

any change in the prevailing market rates, the new interest rate
shall be the guiding rate in computing the interest due on the
outstanding obligation without need of serving notice to the
SUMALINOG
Cardhoder other than the required posting on the monthly
statement served to the Cardholder. This could not be considered
an escalation clause for the reason that it neither states an increase
nor a decrease in interest rate. Said clause simply states that the
interest rate should be based on the prevailing market rate.
Interpreting it differently, while said clause does not expressly

stipulate a reduction in interest rate, it nevertheless provides a
leeway for the interest rate to be reduced in case the prevailing
market rates dictate its reduction.
The second paragraph of the questioned proviso which provides

that the Cardholder hereby authorizes Security Diners to
correspondingly increase the rate of such interest in the event of
changes in prevailing market ratesxxx is an escalation clause.
However, it cannot be said to be dependent solely on the will of
private respondent as it is also dependent on the prevailing market
rates.
Escalation clauses are not basically wrong or legally objectionable

as 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. In this case, the fluctuation
in the market rates is beyond the control of private respondent.
SUMALINOG
Spouses Salvador Abella and Alma Abella vs. Spouses Romeo Abella and Annie Abella
G.R. No. 195166, 8 July 2015

On 22 March 1999, respondents Spouses Romeo and Annie Abella The stipulation is valid although no interest rate is specified.
(respondents) obtained a loan from petitioners Spouses Salvador and
Alma Abella (petitioners) in the amount of P500,000.00 and payable Article 1956 of the Civil code states the rule that, “no interest shall
within one (1) year. be due unless it has been expressly stipulated in writing.”
The respondents executed an acknowledgment receipt to petitioners, In the case at bar, the text of the acknowledgment receipt is simple.
which stated: It attests to the contracting parties’ intent to subject interest the on
the subject loan. However, the acknowledgement receipt did not
“This is to acknowledge receipt of the amount of Five Hundred state the rate of interest.
Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable
within one (1) year from date hereof with interest.”
In the cases of Spouses Toring v. Spouses Olan and Security Bank
and Trust Company v. Regional Trial Court of Makati, Branch 61,
Respondents were able to pay P200,000.00 leaving an unpaid balance
the Supreme Court held that,
of P300,000.00. Petitioners filed a complaint for sum of money.
The RTC ruled in favor of the petitioners. The RTC ordered the “In a loan or forbearance of money, according to the Civil Code, the
respondents to pay petitioners the supposedly unpaid balance of interest due should be that stipulated in writing, and in the absence
P300,000.00 plus the allegedly stipulated interest rate of 30% per thereof, the rate shall be 12% per annum.”
annum. The CA reversed and set aside the decision of the RTC. The
CA reasoned that the loan could not have earned interest because However, in Nacar v. Gallery Frames, the legal rate of interest has
Article 1956 of the Civil Code requires that interest be stipulated in been reduced to 6% per annum Furthermore, The Monetary Board,
writing for it to be due. In this case, while the acknowledgment showed in its Resolution No. 796 dated 16 May 2013, provides:
interest was to be charged, no interest rate was specified.
“Section 1. The rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such
rate of interest, shall be six percent (6%) per annum.”
VENUS
The Supreme Court, however, noted that pursuant to the Monetary
Board Resolution No. 796, the new 6% rate could only be applied
prospectively and not retroactively.
“Consequently, the twelve percent (12%) per annum legal

interest shall apply only until June 30, 2013. Come July 1, 2013
the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.”
In the case at bar, the loan was obtained by the respondents on 22

March 1999 and at that time, the legal rate of interest was 12%.
Therefore, the Supreme Court held that in the absence of an

express stipulation as to the rate of interest that would govern the
parties, the loan is subject to 12% interest.
VENUS
Spouses Mallari v. Prudential Bank,
G.R. No. 197861, June 5, 2013.

In 1984, Florentino Mallari acquired a loan from Prudential Bank in the In justifying the validity of the 23% interest rate, the Court explained:
amount of P300,000 at an interest rate of 21%, penalty charge at 12%,
and attorney’s fees at 15%. In 1985, Florentino issued a deed of “In Villanueva v. Court of Appeals, where the issue raised was
assignment authorizing Prudential Bank to pay his loan with his time whether the 24% p.a. stipulated interest rate is unreasonable under
deposit in the amount of P300,000. In 1989, spouses Florentino and the circumstances, we answered in the negative and held:
Aurea Mallari obtained another loan of P1.7M, with interest at 23%,
penalty charge at 12%, and attorney’s fees at 15%. A Real Estate In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco
Mortgage was executed in favor of Prudential Bank to answer for the Filipino Savings and Mortgage Bank, Dagupan City Branch, this
said loan. The spouses failed to settle the loan obligations, and the Court held that the interest rate of 24% per annum on a loan of
bank sent a demand letter for the payment of the obligations, which ₱244,000.00, agreed upon by the parties, may not be considered
reached P571,218.54 and 2,991,294.82, and eventually P594,043.54 as unconscionable and excessive. As such, the Court ruled that the
and P3,171,836.18 respectively. borrowers cannot renege on their obligation to comply with what is
incumbent upon them under the contract of loan as the said
Prudential Bank filed for extrajudicial foreclosure of the mortgaged contract is the law between the parties and they are bound by its
property to satisfy the P1.7M loan. Spouses Mallari contended that the stipulations.
interest rate and penalties on the loan was excessive or
unconscionable.
Also, in Garcia v. Court of Appeals, this Court sustained the
agreement of the parties to a 24% per annum interest on an
₱8,649,250.00 loan finding the same to be reasonable and clearly
evidenced by the amended credit line agreement entered into by
the parties as well as two promissory notes executed by the
borrower in favor of the lender.
Based on the above jurisprudence, the Court finds that the 24%
per annum interest rate, provided for in the subject mortgage
contracts for a loan of ₱225,000.00, may not be considered
unconscionable. Moreover, considering that the mortgage
agreement was freely entered into by both parties, the same is the
law between them and they are bound to comply with the
provisions contained therein.
CHUA
Clearly, jurisprudence establish that the 24% p.a. stipulated
interest rate was not considered unconscionable, thus, the 23%
p.a. interest rate imposed on petitioners' loan in this case can by
no means be considered excessive or unconscionable.”
CHUA
National Marketing Corp. vs. Marquez
26 SCRA 722, January 31, 1969

Plaridel Surety & Insurance Company, as surety, executed a bond for Based on jurisprudence, the surety is made to pay interest, not by
the amount of P12,000. There is no indication on interest. reason of the contract, but by reason of its failure to pay when
demanded and for having compelled the plaintiff to resort to the
The principal, Marquez, paid only P2,000 out of P12000 of its obligation courts to obtain payment.
to National Marketing Corporation.
Article 2055, paragraph 2, of the Civil Code of the Philippines
The Court of First Instance, Manila ordered Plaridel Surety & Insurance states:
Company to pay to NAMARCO, the principal sum of P10,000.00, plus
P9,990.91 in accrued interest up to 1 November 1964, and interest "If it (the guaranty) be simple or indefinite, it shall comprise not only
thereafter at 7% per annum on the principal and 6% on the accrued the principal obligation but also all its accessories, including judicial
interest. costs, provided with respect to the latter, that the guarantor shall
only be liable for those costs incurred after he has been judicially
required to pay."
In this case, the bond executed by the appellant has no reservation

on the interest for failure to pay the obligation.
Therefore, it must pay both the principal obligation of P10,000 and

the P9,990.91 moratory interest for failure to pay the obligation.
BABA
Plaridel Surety & Ins. Co., Inc. vs. P.L. Galang Machinery Co., Inc.
100 Phil. 679, January 11, 1957

The Court of First Instance ordered Plaridel Surety & Insurance Based on jurisprudence, the surety is made to pay interest, not by
Company, jointly and severally with Constancio San Jose, to pay P.L. reason of the contract, but by reason of its failure to pay when
Galang Machinery Co., Inc. the sum of P30,000, with legal interest demanded and for having compelled the plaintiff to resort to the
thereon from the date of the filing of the complaint. courts to obtain payment. Article 1956 of the Civil Code does not
apply.
Petitioner challenges this additional liability for interest because they
were not included in the bond. It invoked the following articles of the In this case, the interest does not run from the time the obligation
Civil Code: became due, but from the filing of the complaint. The interest is
imposed for failure to pay the creditor when demanded. Art. 1956
“ART. 1956. No interest shall be due unless it has been expressly does not apply
stipulated in writing.”
BABA
Republic vs. Pal-Fox Lumber Co., Inc.
43 SCRA 365, February 29, 1972

Far Eastern Surety & Insurance Co., Inc., because of the default of Pal- Article 2055, paragraph 2, of the Civil Code of the Philippines
Fox Lumber Co., was held liable for its surety bond (Forestry Bond No. states:
7004.) It agreed to pay P5,000 as per the surety bond. In a resolution,
the Supreme Court ordered P5,000 as payment of its liability. ‘If it (the guaranty) be simple or indefinite, it shall comprise not only
the principal obligation but also all its accessories, including judicial
Plaintiff petitions the court that the surety be liable for interest as well. costs, provided with respect to the latter, that the guarantor shall
only be liable for those costs incurred after he has been judicially
required to pay.’
In this case, there is no reservation on the bond. Therefore, the

surety must pay the interest as an accessory obligation.
BABA
Sps. Bacolor v Banco Filipino Savings and Mortgage Bank
G.R. No. 148491, February 08, 2007

They executed a promissory note providing that the amount shall be Article 1956 of the Civil Code provides that no interest shall be due
payable within a period of ten (10) years with a monthly amortization of unless it has been expressly stipulated in writing. Here, the parties
P5,380.00 beginning March 11, 1982 and every 11th day of the month agreed in writing on February 11, 1982 that the rate of interest on
thereafter; that the interest rate shall be twenty-four percent (24%) per the petitioners' loan shall be 24% per annum.
annum, with a penalty of three percent (3%) on any unpaid monthly
amortization; that there shall be a service charge of three percent (3%) At the time the parties entered into the loan transaction, the
per annum on the loan; and that in case respondent bank seeks the applicable law was the Usury Law (Act 2655), as amended by P.D.
assistance of counsel to enforce the collection of the loan, petitioners No. 166, which provides that the rate of interest for the forbearance
shall be liable for ten percent (10%) of the amount due as attorney's of money when secured by a mortgage upon real estate, should
fees and fifteen percent (15%) of the amount due as liquidated not be more than 6% per annum or the maximum rate prescribed
damages. by the Monetary Board of the Central Bank of the Philippines in
force at the time the loan was granted. Central Bank Circular No.
783, which took effect on July 1, 1981, removed the ceiling on
interest rates on a certain class of loans, thus:
SECTION 2. The interest rate on a loan forbearance of any money,
goods, or credits with a maturity of more than seven hundred thirty
(730) days shall not be subject to any ceiling.
In the present case, the term of the subject loan is for a period of
10 years. Considering that its maturity is more than 730 days, the
interest rate is not subject to any ceiling following the above
provision. Therefore, the 24% interest rate agreed upon by parties
does not violate the Usury Law, as amended by P.D. 116.
TUOZO
Teofisto Guingona, Jr., Antonio I. Martin, and Teresita Santos, Petitioners,vs. The City Fiscal of Manila, Hon. Jose B. Flaminiano,
Asst. City Fiscal Felizardo N. Lota and Clement David, Respondents
G.R. No. 195166, 8 July 2015

Respondent David invested with the Nation Savings and Loan Bank deposits are in the nature of irregular deposits. They are
Association (NSLA) that because NSLA was urgently in need of funds really 'loans because they earn interest. All kinds of bank
and at David's insistence, his investments were treated as special- deposits, whether fixed, savings, or current are to be treated as
accounts with interest above the legal rate. loans and are to be covered by the law on loans (Art. 1980 Civil
Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and
The amount of indebtedness assumed appears to be bigger than the saving deposits, are loans to a bank because it can use
original claim because of the added interest and the inclusion of other the same. The petitioner here in making time deposits that earn
deposits of private respondent's sister in the amount of P116,613.20. interests will respondent Overseas Bank of Manila was in reality a
creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of the
respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a
depositary's failure to return the subject matter of the deposit.
The relationship between the private respondent and the Nation

Savings and Loan Association is that of creditor and debtor;
consequently, the ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it
can make use of the amount deposited for its banking operations,
such as to pay interests on deposits and to pay withdrawals.
The nature of simple loan is defined in Articles 1933 and 1953 of

the Civil Code x x x ”Simple loan may be gratuitous or with a
stipulation to pay interest x x x
RADOC
Nacar vs. Gallery Frames
G.R. No. 189871, 13 August 2013

Peralta, J.
(cited case in Abella v. Abella)

Petitioner Dario Nacar (Nacar) filed a complaint for constructive Appropriate interests may be claimed by Nacar.
dismissal against respondents Gallery Frames (GF) and/or Felipe
Bordey, Jr., (Gallery Frames) before the National Labor Relations In Eastern Shipping Lines, Inc. v. Court of Appeals, it was held
Commission (NLRC). that:
On 15 October 1998, the NLRC rendered a decision in favor of Nacar “When the judgment of the court awarding a sum of money
and found that he was dismissed from employment without a valid or becomes final and executory, the rate of legal interest x x x
just cause. Nacar was awarded backwages and separation pay in lieu shall be 12% per annum from such finality until its
of reinstatement in the amount of P158,919.92. An Entry of Judgment satisfaction x x x”
was later issued certifying that the resolution became final and
executory on 27 May 2002. Recently, however, The Monetary Board, in its Resolution No.
796 dated 16 May 2013, provides:
Nacar filed a Motion for Correct Computation.Upon recomputation, the
NLRC arrived at an updated amount in the sum of P471,320.31. “Section 1. The rate of interest for the loan or forbearance of
Gallery Frames filed a Motion to Quash Writ of Execution, arguing that any money, goods or credits and the rate allowed in
no more recompilation is required of the said awards. The Motion to judgments, in the absence of an express contract as to such
Quash was denied. Gallery Frames again appealed. The appeal was rate of interest, shall be six percent (6%) per annum.”
granted in favor of Gallery Frames. Upon recomputation, the judgment
award of petitioner was reassessed to be in the total amount of only The Supreme Court, however, noted that pursuant to the
P147,560.19 which Nacar eventually received. Monetary Board Resolution No. 796, the new 6% rate could only
be applied prospectively and not retroactively.
Nacar then filed a Manifestation and Motion praying for the
recomputation of the monetary award to include appropriate “Consequently, the twelve percent (12%) per annum legal
interests. interest shall apply only until June 30, 2013. Come July 1,
2013 the new rate of six percent (6%) per annum shall be the
prevailing rate of interest when applicable.”
VENUS
Hence, Gallery Frames was ordered to pay interest of twelve
percent (12%) per annum of the total monetary awards, computed
from 27 May 2002 to 30 June 2013 and six percent (6%) per
annum from 1 July 2013 until their full satisfaction.
VENUS
Philippine Savings Bank vs. Spouses Alfredo M. Castillo And Elizabeth C. Castillo, And Spouses Romeo B. Capati And Aquilina M.
Lobo

Also, the rate of interest herein provided shall be subject to review Escalation clauses are generally valid and do not contravene
and/or adjustment every ninety (90) days. public policy. They are common in credit agreements as means of
All amortizations which are not paid on due date shall bear a penalty maintaining fiscal stability and
equivalent to three percent (3%) of the amount due for every month retaining the value of money on long-term contracts. To prevent
or fraction of a month’s delay. any one-sidedness that these clauses may cause, we have held
The rate of interest and/or bank charges herein stipulated, during the in Banco Filipino Savings and Mortgage Bank v. Judge Navarro
terms of this promissory note, its extensions, renewals or other that there should be a corresponding de-escalation clause that
modifications, may be increased, decreased or otherwise changed would authorize a
from time to time within the rate of interest and charges allowed under reduction in the interest rates corresponding to downward
present or future law(s) and/or government regulation(s) as the changes made by law or by the Monetary Board. As can be
PHILIPPINE SAVINGS BANK may prescribe for its debtors. gleaned from the parties’ loan agreement, a de-escalation clause
is provided, by virtue of which, petitioner had
lowered its interest rates.
Nevertheless, the validity of the escalation clause did not give

petitioner the unbridled right to unilaterally adjust interest rates.
The adjustment should have still
been subjected to the mutual agreement of the contracting
parties. In light of the absence of consent on the part of
respondents to the modifications in the interest rates, the adjusted
rates cannot bind them notwithstanding the inclusion of a de-
escalation clause in the loan agreement.
BALBOA
Banco Filipino Savings And Mortgage Bank vs. Hon. Miguel Navarro, Presiding Judge, Court of First Instance of Manila, Branch
XXXI and Florante Del Valle

Stamped on the promissory note evidencing the loan is an Escalation While an escalation clause like the one in question can ordinarily
Clause, reading as follows: be held valid,
nevertheless, petitioner Banco Filipino cannot rely thereon to
"I/We hereby authorize Banco Filipino to correspondingly increase the raise the interest on the borrower's loan from 12% to 17% per
interest rate stipulated in this contract without advance notice to annum because Circular No. 494 of the Monetary Board was not
me/us in the event a law should be enacted increasing the lawful the "law" contemplated by the parties, nor should said Circular be
rates of interest that may be charged on this particular kind of loan." held as applicable to loans secured by registered real estate in
the absence of any such specific indication and in contravention
of the policy behind the Usury Law.
BALBOA
Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61, Magtatanggol Eusebio and Leila Ventura
G.R. No. 113926

Private respondent Magtanggol Eusebio executed three Promissory The Court ruled in favor of Security Bank. Based on the records, it
Notes to Petitioner Security Bank. All three Promissory Notes appears indeed that the agreed rate of interest is at 23% per
contained an interest stipulation of 23% per annum. Due to Eusebio’s annum. More so, the rate of interest was agreed upon by the
failure to pay, Security Bank filed a collection against him. The RTC parties freely. Above all, Eusebio did not question or assailed the
Makati ruled in favor of Security Bank and ordered Eusebio to pay 23% per annum upon signing.
adjusting the interest to 12% per annum. This was challenged by
Security Bank contending that the initial agreed interest was 23% per It is not the duty of the Courts to change the stipulations in the
annum. contract where it is not illegal. Furthermore, Article 1306 of the
New Civil Code states that contracting parties may agree on such
stipulations as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public
policy. Also, it is also only upon the absence of interest stipulation
where Courts can impose an interest they deem fit for the
contract.
Furthermore, the promissory notes were signed by both parties

voluntarily. Thus, the stipulations are binding on both parties
HOFILENA
VOID PROVISIONS
Philippine National Bank v CA
G.R. No. 88880, April 30, 1991

The Promissory Notes, in turn, uniformly authorized the PNB to PNB, over the objection of the private respondent, and without
increase the stipulated 18% interest per annum "within the limits authority from the Monetary Board, within a period of only four (4)
allowed by law at any time depending on whatever policy it [PNB] months, increased the 18% interest rate on the private
may adopt in the future; Provided, that, the interest rate on this note respondent’s loan obligation three (3) times: (a) to 32% in July
shall be correspondingly decreased in the event that the applicable 1984; (b) to 41% in October 1984; and (c) to 48% in November
maximum interest rate is reduced by law or by the Monetary Board. 1984. Those increases were null and void.
The Real Estate Mortgage Contract likewise provides Although Section 2, P.D. No. 116 of January 29, 1973, authorizes
the Monetary Board to prescribe the maximum rate or rates of
"The rate of interest charged on the obligation secured by this interest for loans or renewal thereof and to change such rate or
mortgage as well as the interest on the amount which may have been rates whenever warranted by prevailing economic and social
advanced by the MORTGAGEE, in accordance with the provisions conditions, it expressly provides that "such changes shall not be
hereof, shall be subject during the life of this contract to such an made oftener than once every twelve months. "If the Monetary
increase within the rate allowed by law, as the Board of Directors of the Board itself was not authorized to make such changes oftener than
MORTGAGEE may prescribe for its debtors." once a year, even less so may a bank which is subordinate to the
Board.
Unilateral action of the PNB in increasing the interest rate on the

private respondent’s loan, violated the mutuality of contracts
ordained in Article 1308 of the civil Code: "ART. 1308. The contract
must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them
PASCUA
Security Bank Corporation v. Spouses Rodrigo and Erlina Mercado
G.R. Nos. 192934, and 197010, June 27, 2018

“7. Interest on Availments - I hereby agree to pay Security Bank interest Under the Civil Code,
on outstanding Availments at a per annum rate determined from time “ARTICLE 1308. The contract must bind both contracting parties;
to time, by Security Bank and advised through my Statement of its validity or compliance cannot be left to the will of one of them.
Account every month. I hereby agree that the basis for the (1256a)”
determination of the interest rate by Security Bank on my outstanding
Availments will be Security Bank's prevailing lending rate at the date of
In this case,
availment. I understand that the interest on each availment will be 1. The authority to change the interest rate was given to
computed daily from date of availment until paid. xx xx” Security Bank, without need of the written assent of the
spouses Mercado.
“17. Late Payment Charges - If my account is delinquent, l agree to pay
2. The interest rate is determined solely by Security Bank.
Security Bank the payment penalty of 2% per month computed on the
amount due and unpaid or in excess of my Credit Limit.” "Security Bank's prevailing lending rate" is not pegged on
a market-based reference rate as required by the BSP.
The addendum to the revolving credit line agreement further provided
that: “The Banko Sentral ng Pilipinas (BSP) Manual of
Regulations for Banks (MORB) allows banks and borrowers
“I hereby agree to pay Security Bank Corporation (SBC) interest on to agree on a floating rate of interest, provided that it must
outstanding availments based on annual rate computed and billed be based on market-based reference rates:
monthly by SBC on the basis of its prevailing monthly rate. It is
understood that the annual rate shall in no case exceed the total § X305.3 Floating rates of interest. The rate of interest on a
monthly prevailing rate as computed by SBC. I hereby give my floating rate loan during each interest period shall be stated
continuing consent without need of additional confirmation to the on the basis of Manila Reference Rates (MRRs), T-Bill
interests stipulated as computed by SBC. The interests shall be due on Rates or other market based reference rates plus a margin
the first day of every month after date of availment. x x x” as may be agreed upon by the parties. x x x”
The stipulations violate the mutuality of contracts. Therefore, they

are void.
BABA | SUMALINOG
Sebastian Siga-an vs Alicia Villanueva
G.R. No. 173227, January 20, 2009

Respondent Villanueva filed a complaint for a sum of money against Article 1956 of the Civil Code, which refers to monetary interest,
petitioner Sebastian Siga-an. specifically mandates
that no interest shall be due unless it has been expressly
Respondent Siga-an extended a loan to Villanueva worth P540,000. stipulated in writing. As can be gleaned from the foregoing
The loan agreement was not reduced in writing and there was no provision, payment of monetary interest is allowed only if:
stipulation as to the payment of interest for the loan. (1) there was an express stipulation for the payment of interest;
and
Respondent made several payments, which amounted to P700,000. (2) the agreement for the payment of interest was reduced in
Petitioner then told respondent that the excess amount of P160,000 writing.
will instead be applied as interest. The concurrence of the two conditions is required for the
payment of monetary interest.
Collection of interest without any stipulation therefor in

writing is prohibited by law.
It appears that petitioner and respondent did not agree on the

payment of interest for the loan. Neither was there convincing
proof of written agreement between the two regarding the
payment of interest. Respondent testified that although she
accepted petitioners offer of loan amounting to P540,000.00,
there was, nonetheless, no verbal or written agreement for her to
pay interest on the loan.
SANGALANG
Spouses Jonsay v. Solidbank Corporation
G.R. No. 206459, April 6, 2016

Reyes, J.

Momarco obtained loans from Solidbank for which the Spouses Jonsay The lower court was deemed correct in voiding not just the
executed a blanket mortgage over three parcels of land they owned in unilateral increases in the monthly interest, but also the contracted
Calamba City, Laguna. interest of 18.75%.
The stipulated interest rate was 18.75% per annum with an The SC cited New Sampaguita Builders Construction, Inc. (NSBCI)
escalation clause by which Solidbank was eventually able to v. PNB, where it was established that although escalation clauses
unilaterally increase the interest charges up to 30% per annum. are valid in maintaining fiscal stability and retaining the value of
money on long-term contracts, giving respondent an unbridled right
Solidbank proceeded to extrajudicially foreclose on Momarco’s to adjust the interest independently and upwardly would completely
mortgage when the latter failed to satisfy their obligation. take away from petitioners the “right to assent to an important
modification in their agreement” and would also negate the element
Spouses Jonsay filed a complaint against Solidbank for annulment of of mutuality in their contracts.
the extrajudicial foreclosure of mortgage.
RTC declared the extrajudicial foreclosure proceedings null and void

and ordered that the interest rates on the spouses’ indebtedness be
reduced to 12% per annum.
ARIMAO | RADOC
Buenaventura v. Metropolitan Bank and Trust Co.
G.R. No. 167082, August 3, 2016

To secure a pair of loans, Appellant Buenaventura executed two The rulings held that the respondents were entitled to the final
Promissory Notes each in the amount of Php 1,500,000 and payable sum of Php 3,553,444.45 inclusive of of past due interest and
to appellee Metrobank. Both were to mature on different dates. Both penalty charges from July 15, 1998. The total interest rate
notes provided for a penalty of 18% per annum on the unpaid calculated was at 34.991 % (on the
principal from date of default until full payment of the obligation. principal of Pl,500,000.00) and 27.901 % (on the principal of
Appellant defaulted the amounts of Php 2,061,208.08 and Php Php 1,200,000.00). These interest rates were different from the
1,492,236.67 on the first and second promissory notes respectively. interest rates stipulated in the promissory notes, namely:
The amounts included interests and penalty. Despite demands, 14.239% for Promissory Note No. 232711 and 17.532% for
appellant was unable to pay the due amounts. Promissory Note No. 232663.
RTC ruled in favor of Metrobank and and orders Buenaventura to pay Respondent had no legal basis to impose interest rates higher
a total of Php 3,553,445.45 plus all interests and penalties stipulated than those stipulated on the promissory notes. The RTC and CA
in the Promissory Notes and 10% of the Total Amount as Attorney’s erred in applying said higher interest rates. The Supreme Court
fees. shall correct the error.
CA Affirms and Modifies by imposing a penalty at 14.239% per The CA also erred in applying the lower interest rate of 14.239%
annum and 18% per annum, respectively, from July 15, 1998 in contravention of the stipulation of the parties. This is also
until fully paid and 10% of said amount as attorney's fees." subject to correction by the Supreme Court.
VICTA
Equitable PCI Bank v. Ng Sheung Ngor
G.R. No. 171545, December 19, 2007
Azcuna and Leonardo-De Castro, JJ.

Respondents filed a suit against Equitable PCI Bank claiming that
Equitable induced them to avail of its peso and dollar credit facili-ties The Court disregarded the unilaterally escalated interest rates and
by offering low interest rates However, they were unaware that the imposed the mutually stipulated rates, which it applied up to the
documents contained identical escalation clauses granting Equi-table maturity of the loans. Thereafter, the Court imposed the legal rate
authority to increase interest rates without their consent. of 12% per annum on the outstanding loans, or 6% per annum legal
rate on the excess of the borrower’s payments.
The RTC invalidated the escala-tion clause contained therein be-cause
it violated the principle of mutuality of contracts.
ARIMAO
Floirendo, Jr. v. Metropolitan Bank and Trust Co.
G.R. No. 148325, September 3, 2007
Sandoval-Gutierrez, J.

Here, the promissory note provided for interest at 15.446% per annum The Court ordered the “reformation” of the real estate mortgage
for the first 30 days, subject to upward/downward adjustment contract and the promissory note, stating that any increases in the
every 30 days thereafter. interest rate beyond 15.446% per annum could not be collected
by respondent bank since it was devoid of prior consent of the
It further stated that: “The rate of interest and/or bank charges herein petitioner. The Court also ordered that the interest paid by the
stipulated, during the term of this Promissory Note, its extension, debtor in excess of 15.446% be applied to the payment of the
renewals or other modifications, may be increased, decreased, or principal obligation.
otherwise changed from time to time by the Bank without advance
notice to me/us in the event of changes in the interest rate
prescribed by law or the Monetary Board of the Central Bank of the
Philippines, in the rediscount rate of member banks with the
Central Bank of the Philippines, in the interest rates on savings
and time deposits, in the interest rates on the bankÊs borrowings,
in the reserve requirements, or in the overall costs of funding or
money.”
ARIMAO
Philippine National Bank v. CA
G.R. No. 107569, November 8, 1994
Puno, J.

An escalation clause in a credit agreement stated that: “the bank The Court held that in cases of loan contracts, it cannot be gainsaid
reserves the right to increase the interest rate within the limits that the rate of interest is always a vital component, for it can make
allowed by law at any time depending on whatever policy it may or break a capital venture. Thus, any change must be mutually
adopt in the future x x x.” agreed upon, otherwise, it is bereft of any binding effect. In this
case, the petitioner bank’s posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the
interest on private respondents’ loan, would completely take away
from private respondents the right to assent to an important
modification in their agreement, and would negate the element of
mutuality in contracts.
ARIMAO
SPOUSES ANDAL VS. PNB
G.R. No. 194201, November 27, 2013

Sps Andal obtained a loan from PNB in the amount of The interest rates are excessive and arbitrary. The foregoing
₱21,805,000.00, for which they executed twelve (12) promissory interest rates imposed on petitioner’s loan obligation without their
notes undertaking to pay PNB the principal loan with varying interest knowledge and consent should be disregarded, not only for being
rates of 17.5% to 27% per interest period. It was agreed upon by the iniquitous and exorbitant, but also for being violative of the
parties that the rate of interest may be increased or decreased for the principle of mutuality of contracts.
subsequent interest periods, with prior notice to petitioners-spouses,
in the event of changes in interest rates prescribed by law or the Petitioners were made to sign the said promissory notes in blank
Monetary Board or in the bank’s overall cost of funds. with respect to the rate of interest and penalty charges, and
subsequently, PNB bank filled in the blanks, imposing high
Spouses Andal tried to religiously pay their loan obligation to PNB but interest rate beyond which they were made to understand at the
the exorbitant rate of interest unilaterally determined and imposed by time of the signing of the promissory notes.
the latter prevented the former from paying their obligation. The signing by petitioners of the promissory notes in blank
Petitioners alleged that they signed the promissory notes in blank, enabled PNB to impose interest rates on the loan obligation
relying on the representation of PNB that they were merely proforma without prior notice to petitioners. The unilateral determination
bank requirements. and imposition of interest rates by PNB without petitioner’s assent
is obviously violative of the principle of mutuality of contracts
ordained in Article 1308 of the Civil Code.
PNB’s act converted the loan agreement into a contract of

adhesion where the parties do not bargain on equal footing, the
weaker party’s participation, herein petitioners being reduced to
the alternative to take it or leave it. Where the interest rate is
potestative, the entire interest is null and void.
SISON
Toring vs. Ganzon-Olan
G.R. No. 168782, 10 October 2008
Quisimbing, J.
(cited case in Abella v. Abella)

Petitiones Jovenal Toring and Cecilia Escalona-Toring (Spouses The stipulated monthly rates of 3% and 3.81% are
Toring) obtained from respondents Spouses Rosalie Ganzon-Olan and unconscionable.
Gilbert Olan (Spouses Olan) a loan of P6,000,000 at 3% interest per
In a loan or forbearance of money, according to the Civil Code,
month. The loan was secured by a mortgage on a parcel of land.
the interest due should be that stipulated in writing, and in the
absence thereof, the rate shall be 12% per annum.
The parties executed a Deed of Absolute Sale conveying the
mortgaged property in favor of Spouses Olan. Subsequently, Spouses According to the Supreme Court, while the parties are free to
Plan gave Spouses Toring an exclusive option to repurchase the land stipulate on the interest to be imposed on monetary obligations,
for P10,000,000, denominated in a document as an Option to Buy the Court will temper interest rates if they are unconscionable. It
dated 28 September 1998. The Option to Buy provided that: further held that,
“Even if the Usury Law has been suspended by Central Bank

“ x x x if the option is exercised after December 5, 1998, the Circular No. 90582, and parties to a loan agreement have
purchase price shall increase at the rate of P300,000 or 3% of the been given wide latitude to agree on any interest rate, we
purchase price every month until September 5, 1999 and have held that stipulated interest rates are illegal if they are
thereafter at the rate of P381,000 or 3.81% of the purchase price unconscionable.”
every month, with the fifth of every month as the cutoff date for
said increases.” In the case at bar, the Supreme Court held that the Court of
Appeals erred in sustaining the trial court’s decision upholding the
stipulated interest of 3% and 3.81% per month. The Supreme
Thereafter, the parties raised the issue on the amount of interest due.
Court reduced the stipulated interest rates to 1% per month. It
The RTC rendered a decision in favor of Spouses Olan. It stated that held that,
the document of mortgage specified the interest at 3.81% per month
from the time it was obtained, and which was now estimated to be “Thus, we are unanimous now in our ruling to reduce the
P7,239,000.00. This sum should be added to the total loan of above stipulated interest rates to 1% per month, in
P10,000,000.00 The RTC ordered Spouses Toring to pay the sum of conformity with our ruling in Ruiz v. Court of Appeals For as
P20,000,000.00. The CA affirmed the decision of the RTC. well stressed in that case:
VENUS
Spouses Toring contend that they are not liable to pay interest as the ‘... Nothing in the said circular [CB Circular No. 905, s. 1982]
stipulated monthly rates of 3% and 3.81% are unconscionable. On grants lenders carte blanche authority to raise interest rates
the other hand, Spouses Olan contend that the 3% or 3.81% interest to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.’”
is not usurious since Central Bank Circular No. 90582 removed the
ceiling on interest rates on secured and unsecured loans. Hence, Spouses Toring are bound to pay Spouses Olan the
principal loan of P10,000,000, plus what the Supreme Court held
as the appropriate rate of interest of 1% per month, from 6
December 1998.
VENUS
Spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong, Petitioners versus Roban Lending Corporation, Respondent,
G.R. No. 172592 July 9, 2008

Petitioners alleged that the consolidated loans inclusive of charges Respecting the charges on the loans, courts may reduce
thereon which totaled Php 5,916,117.50 extended to them from July interest rates, penalty charges, and attorney’s fees if they are
14, 1999 to March 20, 2000 were founded on several uniform iniquitous or unconscionable.
promissory notes, which provided for 3.5% monthly interest rates,
5% penalty per month on the total amount due and demandable, and The Court finds the monthly interest rate of 3.5%, or 42% per
a further sum of 25% attorney’s fees thereon, and in addition, annum unconscionable and thus reduces it to 12% per
respondent exacted certain sums denominated as EVAT / AR. annum. It finds too the penalty fee at the monthly rate of 5%
(60% per annum) of the total amount due and demandable
Petitioners decried these additional charges as illegal, iniquitous, principal plus interest, with interest not paid when due added to
unconscionable, and revolting to the conscience as they hardly allow and becoming part of the principal and likewise bearing interest at
any borrower any chance of survival in case of default. They prayed the same rate, compounded monthly unconscionable and reduces
for judgment declaring the interests, penalties, Evat and attorney’s it to a yearly rate of 12% of the amount due, to be computed from
fees assessed and loaded into the loan accounts of the plaintiffs with the time of demand. This Court finds the attorney’s fees of 25% of
defendant as unjust, iniquitous, unconscionable and illegal and the principal, interests and interests thereon, and the penalty fees
therefore, stricken out or set aside. unconscionable, and thus reduces the attorney’s fees to 25% of
the principal amount only.
Respondent maintained the legality of accumulated interest as
reasonable.
RTC, finding on the basis of the pleadings that there was no pactum
commissorium, dismissed the complaint.
Court of Appeals upheld the RTC decision.
RADOC
The United States vs. Francisco Constantino Tan Quingco Chua
G.R. No. L-13708

“The tale opens on April 29, 1911, with one, Pedro Andres, borrowing It was opined that the interest stipulated was not a true pacto de
of Francisco Constantino Tan Quingco Chua, the instant defendant, retro but was rather a sham document to cover usurious financial
the sum of P100, with interest of 24 cavanes of palay. In less than manipulation.
three months, or, to be exact, on the 9th of July of the same year, the
debt was raised to P125, with interest of 30 cavanes of palay. Two The Court is in the position that the taking of excessive interest
years pass, and on June 28, 1913, it has become P226.70, secured for the loan of money has been regarded with abhorence that can
by a pacto de retro, with the interest at 44 cavanes of palay”. be traced back from the earliest times.
In the above quoted provision, Pedro Andres borrowed from More so, the Court mentioned that the gist of the offense of usury
respondent and was initially given an interest of 24 cavanes of palay. in Philippine jurisdiction is in the actual taking of unlawful interest.
However, in a short amount of time, the interest gradually increased to Thus, the mere giving of stipulating unconscionable interest has
one which is not acceptable. in its heart a corrupt intent.
HOFILENA
Aurelio G. Briones vs. Primitivo P. Cammayo, et. al.
GR No. L-23559, October 4, 1971

Primitivo Cammayo obtained a loan of P1,200 from Aurelio G. Briones, The stipulation on the interest was void, as it was tainted with
with an interest of P300. The loan was secured by a real estate usury.
mortgage.
The Court ruled that although the interest was usurious, the
Briones only delivered P1,200 instead of P1,500 to Cammayo, defendant was still obliged to pay the principal of his loan to the
withholding P300, which was the advance interest for one year. plaintiff. He was therefore ordered to pay P1,180 with the legal
interest of 6% per annum.
Cammayo paid P330, which Briones refused to consider as part of the
payment of the principal loan, but instead credited it as an interest of
the loan for an extension of another term of one year.
ORTIGAS
Philippine National Bank v. Spouses Rocamora
616 Phil. 369, September 18, 2009.

Spouses Rocamora obtained a loan from Philippine National Bank. To Escalation clauses are valid and do not contravene public policy.
secure their loan obligations, the spouses Rocamora executed two To avoid any resulting one-sided situation that escalation clauses
mortgages: a real estate mortgage, and a chattel mortgage. Both the may bring, the Court requires the inclusion in the parties’
promissory note and the real estate mortgage deed contained an agreement of a de-escalation clause that would authorize a
escalation clause that allowed PNB to increase the 12% interest rate reduction in the interest rates corresponding to downward changes
at anytime without notice, within the limits allowed by law. made by law or by the Monetary Board.
The pertinent portion of the promissory note stated: “For value Escalation clauses may not give creditors the unbridled right to
received, we, jointly and severally, promise to pay to the ORDER of the adjust interest rates unilaterally. Any increase in the rate of interest
PHILIPPINE NATIONAL BANK, at its office in Pto. Princesa City, made pursuant to an escalation clause must be the result of an
Philippines, the sum of xxx together with interest thereon at the rate of agreement between the parties. Any change must be mutually
12% per annum until paid, which interest rate the Bank may at any agreed upon, otherwise, the change carries no binding effect.
time, without notice, raise within the limits allowed by law, and
I/we also agree to pay jointly and severally, 5% per annum penalty PNB’s failure to secure the spouses Rocamora’s consent to the
charge, by way of liquidated damages, should this note be unpaid or is increased interest rates prompts the Court to declare excessive
not renewed on due date.” and illegal the interest rates imposed. PNB imposed interest rates
higher than the agreed 12% per annum rate. Even with a de-
The real estate mortgage provided: escalation clause, no matter how elaborately worded, an
INCREASE OF INTEREST RATE: unconsented increase in interest rates is ineffective if it
The MORTGAGEE reserves the right to increase the interest rate transgresses the principle of mutuality of contracts.
charged on the obligation secured by this mortgage including any
amount which it may have advanced within the limits allowed by
law at any time depending on whatever policy it may adopt in the
future; Provided, that the interest rate on the accommodation/s
secured by the mortgage shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or
by the Monetary Board. In either case, the adjustment in the interest
rate agreed upon shall take effect on the effectivity date of the increase
or decrease in that maximum interest rate.”
MANOTOK
First Metro Investment Corporation v. Este Del Sol Mountain Reserve, Inc.
G.R. No. 141811, November 15 2001

Respondent Este del Sol executed, as provided for in the Loan The Underwriting and Consultancy Agreements were simply
Agreement with petitioner FMIC, an Underwriting Agreement cloaks or devices to cover an illegal scheme employed by
whereby petitioner shall underwrite on a best efforts basis the public petitioner FMIC to conceal and collect excessively usurious
offering of 120,000 common shares of respondent Este del Sol’s interest.
capital stock for a one-time underwriting fee of Two Hundred
Thousand Pesos (Php 200,000). In addition to the underwriting fee, The Underwriting and Consultancy Agreements have the same
the Underwriting Agreement provided that for supervising the public date as the Loan Agreement. Furthermore, under the
offering of the shares, respondent Este del Sol shall pay petitioner Underwriting Agreement payment of the supervision and
FMIC an annual supervision fee of Two Hundred Thousand Pesos consultancy fees was set for a period of four (4) years to coincide
(Php 200,000) per annum for a period of four (4) consecutive years. ultimately with the term of the Loan Agreement. This fact means
that all the said agreements which were executed simultaneously
The Underwriting Agreement also stipulated for the payment by were set to mature or shall remain effective during the same
respondent Este del Sol to petitioner FMIC a consultancy fee of Three period of time.
Hundred Thirty-two Thousand Five Hundred Pesos (Php 332,500) per
annum for a period of four (4) consecutive years. Simultaneous with The Underwriting and Consultancy Agreements which were
the execution of and in accordance with the terms of the Underwriting executed contemporaneously with the Loan Agreement were
Agreement, a Consultancy Agreement was also executed whereby exacted by petitioner FMIC as essential conditions for the grant of
respondent Este del Sol engaged the services of petitioner FMIC for a the loan. An apparently lawful loan is usurious when it is intended
fee as consultant to render general consultancy services. that additional compensation for the loan be disguised by an
unrelated contract providing for payment by the borrower for the
lenders services which are of
little value or which are not in fact to be rendered, such as in the
instant case.
LOPEZ
Juico v. China Banking Corporation
G.R. No. 187678, April 10, 2013

Petitioners Spouses Juico obtained a loan from respondent China Article 1308 of the Civil Code, states that: The contract must bind
Banking Corporation evidenced by two Promissory Notes for the sums both contracting parties; its validity or compliance cannot be left to
of P6,216,000 and P4,139,000 and secured by a Real Estate the will of one of them. Article 1956 of the Civil Code likewise
Mortgage. ordains that "no interest shall be due unless it has been expressly
stipulated in writing."
Interest rate changes every month based on the prevailing market rate
as inidcated in the promissory notes signed by the sopuses: The binding effect of any agreement between parties to a contract
is premised on two settled principles: (1) that any obligation arising
I/We hereby authorize the CHINA BANKING CORPORATION to from contract has the force of law between the parties; and (2) that
increase or decrease as the case may be, the interest rate/service there must be mutuality between the parties based on their
charge presently stipulated in this note without any advance notice to essential equality. Any contract which appears to be heavily
me/us in the event a law or Central Bank regulation is passed or weighed in favor of one of the parties so as to lead to an
promulgated by the Central Bank of the Philippines or appropriate unconscionable result is void. Any stipulation regarding the validity
government entities, increasing or decreasing such interest rate or or compliance of the contract which is left solely to the will of one
service charge. of the parties, is likewise, invalid.
With this, the outstanding balance of the spouses reached Escalation clauses refer to stipulations allowing an increase in the
P19,201,776.63 interest rate agreed upon by the contracting parties. This Court has
long recognized that there is nothing inherently wrong with
escalation clauses which are valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value of money
in long term contracts. Hence, such stipulations are not void per
se.
Nevertheless, an escalation clause "which grants the creditor an

unbridled right to adjust the interest independently and upwardly,
completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. A stipulation of
such nature violates the principle of mutuality of contracts.
SUMALINOG
In this case, the parties intended the interest to be determined by
the prevailing market rates and not dictated by respondent’s policy.
This agreement is valid. However, the Court held that the
escalation clause is still void because it grants respondent the
power to impose an increased rate of interest without a written
notice to petitioners and their written consent. Respondent’s
monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing
statement based on the new imposed interest with corresponding
computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An
appropriate form must also be signed by the petitioners to indicate
their conformity to the new rates. Compliance with these requisites
is essential to preserve the mutuality of contracts.
SUMALINOG
New Sampaguita Builders Construction, Inc. v. Philippine National Bank
G.R. No. 148753 (2004)

New Sampaguita Builders Construction, Inc. (NSBCI) secured a Although escalation clauses are valid in maintaining fiscal
commercial loan with the Philippine National Bank (bank) in an stability and retaining the value of money on long-term contracts,
aggregate amount of Php 8M under the terms agreed by the Bank and giving respondent an unbridled right to adjust the interest
the NSBCI. independently and upwardly would completely take away from
petitioners the right to assent to an important modification in their
One of the instruments that the loan of NSBCI was secured on was agreement and would also negate the element of mutuality in their
a first mortgage on 10 parcels of land. NSBCI also executed the contracts.
following documents, [a] promissory note (PN) dated June 29, 1989 in
the amount of Php 5M with due date on October 27, 1989; [b] PN dated Despite the Usury Law being effectively repealed, courts may
September 1, 1989 in the amount of Php 2.7M with due date on still reduce iniquitous or unconscionable rates charged for the use
December 30, 1989; and [c] PN dated September 6, 1989 in the of money. Rates found to be iniquitous or unconscionable are void,
amount of Php 300K with maturity date on January 4, 1990. as if it there were no express contract thereon. Above all, it is
undoubtedly against public policy to charge excessively for the use
In each drawdown, the Promissory Notes specified the interest rate to of money.
be charged: 19.5 percent in the first, and 21.5 percent in the second
and again in the third. However, a uniform clause therein permitted Furthermore, excessive interests, penalties and other charges not
respondent to increase the rate within the limits allowed by law at any revealed in disclosure statements issued by banks, even if stipulated
time depending on whatever policy it may adopt in the future x x x, in the promissory notes, cannot be given effect under the Truth in
without even giving prior notice to petitioners. Lending Act. The unilateral determination and imposition of
increased rates is violative of the principle of mutuality of contracts
ordained in Article 13081 of the Civil Code. One-sided impositions
do not have the force of law between the parties, because such
impositions are not based on the parties’ essential equality as it
enables lenders to take undue advantage of borrowers.
SABADO
Courts have the authority to strike down or to modify provisions in
promissory notes that grant the lenders unrestrained power to
increase interest rates, penalties and other charges at the latter’s
sole discretion and without giving prior notice to and securing the
consent of the borrowers
SABADO
Spouses Limso v PNB
GR No. 158622 27 January 2016

Interest Rates on Escalation Clauses It grants respondent the power to impose an increased rate of
interest without a written notice to petitioners and their written
In 1993, Spouses Limso and Davao Sunrise took out a loan secured consent. Respondent’s monthly telephone calls to petitioners
by real estate mortgages from Philippine National Bank amounting to advising them of the prevailing interest rates would not suffice. A
P700 Million. The provision under their loan contract on the interest detailed billing statement based on the new imposed interest with
rate states that the same shall be determined "at the rate per annum to corresponding computation of the total debt should have been
be set by the Bank. The interest rate shall be reset by the Bank every provided by the respondent to enable petitioners to make an
month." informed decision. An appropriate form must also be signed by the
petitioners to indicate their conformity to the new rates. Compliance
The Spouses and Davao Sunrise were notified through a letter that with these requisites is essential to preserve the mutuality of
the interest rate approved by the top management of PNB is 20.756% contracts.
and as of December 1998, the interest on the loan amounted to P217
Million. There is no mutuality of contracts when the determination or
imposition of interest rates is at the sole discretion of a party to the
The contents of the letter show that there was no room for negotiation contract. Further, escalation clauses in contracts are void when
among Philippine National Bank, Spouses Limso, and Davao Sunrise they allow the creditor to unilaterally adjust the interest rates
when it came to the applicable interest rate. Since there was no room without the consent of the debtor.
for negotiations between the parties with regard to the increases of the
rates of interest, the principle of mutuality of contracts was violated
because the increases in the interest rates were imposed on them
unilaterally.
Terms of the Contract on Interest Rate The original loan agreement in this case was executed in 1993.
Prior to the execution of the original loan agreement, this court
The restructured loan of Sps. Limso was divided into two (2) parts. promulgated a Decision in 1991 ruling that “the unilateral action of
Loan I was for the principal amount of P583.18 million, while Loan II the [Philippine National Bank] in increasing the interest rate on the
was for the principal amount of P483.78 million. The restructured loan private respondent’s loan, violated the mutuality of contracts
was secured by the same real estate mortgage over four (4) parcels of ordained in Article 1308 of the Civil Code.
land in the original loan agreement. All the properties were registered
in the name of Davao Sunrise. The terms of the agreement states that: Contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed
SECTION 2. TERMS OF LOAN I modification, especially when it affects an important aspect of the
IMBANG | ALGARME
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
2.04 Interest. (a) The Borrowers agree to pay the Bank break a capital venture. Thus, any change must be mutually agreed
interest on Loan I from the Effective Date, until the date of full upon, otherwise, it is bereft of any binding effect.
payment thereof at the rate per annum to be set by the
Bank. The interest rate shall be reset by the Bank every However, only the interest rate imposed is nullified; hence, it
month. is deemed not written in the contract. The agreement on
payment of interest on the principal loan obligation remains.
(b) The interest provided in clause (a) above shall be payable It is a basic rule that a contract is the law between contracting
monthly in arrears to commence on January, 1999. parties In the original loan agreement and the Conversion,
Restructuring and Extension Agreement, Spouses Limso and
Davao Sunrise agreed to pay interest on the loan obtained from
Philippine National Bank. Such obligation was not nullified by this
SECTION 3. TERMS OF LOAN II court. Thus, their obligation to pay interest in their loan obligation
subsists
3.04 Interest. (a) The Borrowers agree to pay the Bank

interest on Loan II from the Effective Date, until the date of full
payment thereof at the rate per annum to be set by the
Bank. The interest rate shall reset by the Bank every month.
(b) The interest provided in clause (a) above shall be payable

monthly in arrears to commence on January 1999.
Interest Rates on the suspension of Usury Law The suspension of the Usury Law did not give creditors an
unbridled right to impose arbitrary interest rates. interest rates must
This court has held that while the Usury Law was suspended by Central be appreciated in light of the fundamental nature of interest as
Bank Circular No. 905, Series of 1982, unconscionable interest rates compensation to the creditor for money lent to another, which he
may be declared illegal. The suspension of the Usury Law did not give or she could otherwise have used for his or her own purposes at
creditors an unbridled right to impose arbitrary interest rates. 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
A reading of the interest provisions in the original agreement and the mechanism for the creditor’s unjust enrichment at the expense of
Conversion, Restructuring and Extension Agreement shows that the another.
interest rates imposed by Philippine National Bank were usurious and
unconscionable.
IMBANG | ALGARME
From the terms of the loan agreements, there was no way for Spouses
Limso and Davao Sunrise to determine the interest rate imposed on
their loan because it was always at the discretion of Philippine National
Bank. Nor could Spouses Limso and Davao Sunrise determine the
exact amount of their obligation because of the frequent changes in the
interest rates imposed. The loan agreements merely stated that
interest rates would be imposed. However, the specific interest rates
were not stipulated, and the subsequent increases in the interest rates
were all at the discretion of Philippine National Bank.
Interest on the principal loan obligation shall be at the rate of 12% per
annum and computed from January 28, 1999, the date of the execution
of the Conversion, Restructuring and Extension Agreement. Interest
rate on the conventional interest shall be at the rate of 12% per annum
from the date of judicial demand until full satisfaction, the interest rate
on the conventional interest shall be computed at 6% per annum.
IMBANG | ALGARME
Private Development Corporation v. Intermediate Appellate Court and Ernesto C. Del Rosario
G.R. No. 73198. September 2, 1992

Davao Timber Corporation and Private Development The usury law as amended by Presidential Decree 116,
Corporation (PDCP) entered into a loan agreement. PDCP fixed all interest rates for all loans with maturity of more
extended to DATICOR a loan in foreign currency equivalent to than 360 days at twelve (12%) per cent per annum
US$ 265,000.00 and another in the amount of P2,500,000.00. including premiums, fines and penalties.
It is to be noted that PDCP was charging penalties at the

Thereafter, PDCP asked DATICOR to pay a service fee of rate of two (2%) percent per month or an effective rate of
one (1%) per cent per annum on the outstanding balance of the twenty four (24%) per cent per annum on the peso loan and
peso loan to cover the cost of administering DATICOR's account one-half (1/2%) per cent per month or an effective six (6%)
and supervision of the project. This service fee was subsequently per cent per annum on the foreign currency loan. It is
increased to six (6%) per cent per annum in addition to the therefore very clear that PDCP has been charging and
twelve (12%) per cent per annum interest on the peso loan. imposing interests in violation of the prevailing usury laws.
DATICOR was also asked to pay penalty charges at the rate of
2% per month. The law should not be interpreted to mean forfeiture of the
principal loan as that would be unjustly enriching the
borrower.
The unpaid principal debt still stands and remains valid

but the stipulation as to the usurious interest is void,
consequently, the debt is to be considered without stipulation
as to the interest.
REYES
Salvador Chua vs. Rodrigo Timan
G.R. No. 170452, August 13, 2008

Respondents’ loans amounting to P864,000 were evidenced by Stipulated interest rates of 3% 9 per month and higher 10 are
promissory notes with interest of 7% per month, which was later excessive, iniquitous, unconscionable and exorbitant. Such
reduced to 5% per month (equivalent to 84% and 60% per annum stipulations are void for being contrary to morals, if not against the
respectively). law.
Respondents paid the loans initially at 7% interest rate per month until While C.B. Circular No. 905-82, which took effect on January 1,
September 1999 and then at 5% interest rate per month from October 1983, effectively removed the ceiling on interest rates for both
to December 1999. Sometime in March 2000, respondents offered to secured and unsecured loans, regardless of maturity, nothing in
pay the principal amount of the loans through a Philippine National the said circular could possibly be read as granting carte blanche
Bank manager's check worth P764,000, but petitioners refused to authority to lenders to
accept the same insisting that the principal amount of the loans totaled raise interest rates to levels which would either enslave their
P864,000. borrowers or lead to a hemorrhaging of their assets.
PALENZUELA
Spouses Ponciano Almeda And Eufemia P. Almeda vs. The Court Of Appeals And Philippine National Bank
G.R. No. 113412, April 17, 1996

Philippine National Bank granted to the spouses Ponciano L. Almeda Art. 1956 that "No interest shall be due unless it has been expressly
and Eufemia P. Almeda several loan/credit accommodations totaling stipulated in writing." What has been "stipulated in writing" from a
P18.0 Million pesos payable in a period of six years at an interest rate perusal of interest rate provision of the credit agreement signed
of 21% per annum. between the parties is that petitioners were bound merely to pay
21% interest, subject to a possible escalation or de-escalation,
On March 31, 1984, respondent bank, over petitioners' protestations, when 1) the circumstances warrant such escalation or de-
raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of escalation; 2) within the limits allowed by law; and 3) upon
its credit agreement. Said interest rate thereupon increased from an agreement.
initial 21% to a high of 68% between March of 1984 to September,
1986. PNB's successive increases of the interest rate, over the spouse's
protest, were arbitrary as they violated an express provision of the
Petitioner protested the increase in interest rates, to no avail. The Credit Agreement (Section 9.01) that its terms "may be amended
spouses filed a petition to sought clarification as to whether or not the only by an instrument in writing signed by the party to be bound as
PNB could unilaterally raise interest rates on the loan, pursuant to the burdened by such amendment."
credit agreement's escalation clause, and in relation to Central Bank
Circular No. 905. In order that obligations arising from contracts may have the force
of law between the parties, there must be mutuality between the
PNB claims it has authority to increase the interest rates under the parties based on their essential equality. A contract containing a
credit agreement and, upon default of the debtor spouses, foreclose on condition which makes its fulfillment dependent exclusively upon
the mortgaged property under P.D. 385 the uncontrolled will of one of the contracting parties, is void
(Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a license (although in
fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts.
Respondent bank's reliance on C.B. Circular No. 905, Series of

1982 did not authorize the bank, or any lending institution for that
matter, to progressively increase interest rates on borrowings to an
extent which would have made it virtually impossible for debtors to
JACKSON
comply with their own obligations. True, escalation clauses in credit
agreements are perfectly valid and do not contravene public policy.
Such clauses, however, (as are stipulations in other contracts) are
nonetheless still subject to laws and provisions governing
agreements between parties, which agreements while they may be
the law between the contracting parties implicitly incorporate
provisions of existing law.
Consequently, while the Usury Law ceiling on interest rates was

lifted by C.B. Circular 905, nothing in the said circular could
possibly be read as granting respondent bank carte blanche
authority to raise interest rates to levels which would either enslave
its borrowers or lead to a hemorrhaging of their assets.
Apart from violating the principle of mutuality of contracts, there is

authority for disallowing the interest rates imposed by respondent
bank, for the credit agreement specifically requires that the
increase be "within the limits allowed by law".
Escalation clauses are not basically wrong or legally objectionable

so long as they are not solely potestative but based on reasonable
and valid grounds. 9 Here, as clearly demonstrated above, not only
the increases of the interest rates on the basis of the escalation
clause patently unreasonable and unconscionable, but also there
are no valid and reasonable standards upon which the increases
are anchored.
JACKSON
Ileana Dr. Macalinao v Bank of the Philippine Islands
G.R. No. 175490, September 17, 2009

Petitioner obtained a BPI Mastercard credit card. She made The stipulated interest rates of 7% and 5% per month imposed on
purchases using said card and received a statement of account respondents'
demanding payment. loans must be equitably reduced to 1% per month or 12% per
annum. We need
Payment due date indicated on the monthly Statement of Accounts not unsettle the principle we had affirmed in a plethora of cases
shall bear interest that
at the rate of 3% per month and an additional penalty fee equivalent stipulated interest rates of 3% per mouth and higher are
to another 3% per excessive,
month or 36% per annum. iniquitous, unconscionable and exorbitant. Such stipulations are
void
for being contrary to morals, if not against the law.
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.
The Court finds it equitable to reduce the interest

rate pegged by the CA at 1.5% monthly to 1% monthly and
penalty charge fixed by the
CA at 1.5% monthly to 1% monthly or a total of 2% per month or
24% per annum in line
with the prevailing jurisprudence and in accordance with Art. 1229
of the Civil Code.
TUOZO
Sps. Silos v. PNB
G.R. No. 181045, July 2, 2014

The Credit Agreement provided inter alia, that — According to the Civil Code, and as emphasized by the
Supreme Court, there is no contract in the true sense in the
(a) The BANK reserves the right to increase the interest rate within absence of the element of agreement, or of mutual assent of
the limits allowed by law at any time depending on whatever policy it the parties. If this assent is wanting on the part of the one
may adopt in the future; Provided, that the interest rate on this who contracts, his act has no more efficacy than if it had
accommodation shall be correspondingly decreased in the event that been done under duress or by a person of unsound mind.
the applicable maximum interest is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate
Similarly, contract changes must be made with the consent
agreed upon shall take effect on the effectivity date of the increase or
decrease in the maximum interest rate. of the contracting parties. The minds of all the parties must
meet as to the proposed modification, especially when it
The Promissory Note, in turn, authorized the PNB to raise the affects an important aspect of the agreement. In the case of
rate of interest, at any time without notice, beyond the stipulated loan contracts, it cannot be gainsaid that the rate of interest
rate of 12% but only "within the limits allowed by law." is always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed
The Real Estate Mortgage contract likewise provided that — upon, otherwise, it is bereft of any binding effect.
(k) INCREASE OF INTEREST RATE: The rate of interest charged on The Supreme Court could not countenance petitioner bank’s
the obligation secured by this mortgage as well as the interest on the posturing that the escalation clause at bench gives it
amount which may have been advanced by the MORTGAGEE, in unbridled right to unilaterally upwardly adjust the interest on
accordance with the provision hereof, shall be subject during the life private respondents’ loan. That would completely take away
of this contract to such an increase within the rate allowed by law, as from private respondents the right to assent to an important
the Board of Directors of the MORTGAGEE may prescribe for its modification in their agreement, and would negate the
debtors. element of mutuality in contracts.
In making the unilateral increases in interest rates, petitioner Hence, the stipulation on interest is void.
bank relied on the escalation clause contained in their credit
agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may
TIROL
adopt in the future and provided, that, the interest rate on this
accommodation shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or
decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree

(P.D.) No. 1684 which further amended Act No. 2655 (The
Usury Law), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section

after Section 7, to read as follows:
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 bylaw 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.
TIROL
Manila Trading V. Tamaraw Plantation
G.R. No. L-22995 February 28, 1925
Villamor, J.

Manila Trading sold goods to Tamaraw Plantation for a certain price if The increase of the price of the thing sold on credit over its
paid in cash but if it was not so paid, there will be an interest added cash sale price is no interest within the purview of the Usury Law,
which is 5% thereon. if the sale is made in good faith and not as mere pretext to cover
a usurious loan. The instant case is of a chattel mortgage given to
To secure said payment, Tamaraw plantation signed Exhibit A secure payment for the agricultural implements sold by the
which was duly registered in the office of the register of deeds. plaintiff to the defendant. The transaction was carried out
between the parties in good faith, and there is no proof that the
Tamaraw paid a few monthly installments for the goods but contract of sale of agricultural effects, secured by a mortgage on
failed to pay the rest; wherefore the said goods were sold by the sheriff the same goods, was executed as a loan of money. This being
of Mindoro at a public auction and the proceeds of the sale were paid so, the parties may freely agree upon the price of the goods sold,
off to Manila Trading and it cannot be said that the credit, greater than the cash, price,
constitutes interest within the meaning of the Usury Law. The
The same happened in the second cause of action, Tamaraw increase of the price, when the sale is on credit, serves not only
only paid upon delivery and did not pay anything more afterwards, to cover the expenses generally entailed by such transactions on
hence, executing Exhibit B, where the said goods were sold at a public credit, but also to encourage cash sales, so useful to commerce
auction again.
The trial court rendered judgement sentencing Tamaraw to pay

Manila Trading all of those under the 3 causes of action with interest at
12 percent per annum.
LIRIOS
MCMP Construction Corp. v. Monark Equipment Corp.
G.R. No. 201001 | November 10, 2014

The creditor cumulatively charged the debtor 60% annually as Such stipulations are void for being contrary to morals, if not
interest, penalty and collection fees, and 25% of the total amount due against the law. While C.B. Circular No. 905-82, which took effect
as attorney's fees. on January 1, 1983, effectively removed the ceiling on interest
rates for both secured and unsecured loans, regardless of maturity,
nothing in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels which
would either enslave their borrowers or lead to a hemorrhaging of
their assets.
The Court found the rates as exorbitant and unconscionable;

hence, directed the reduction of the annual interest to 12%, penalty
and collection charges to 6%, and attorney's fees to 5%. The Court
explained that attorney's fees are in the nature of liquidated
damages, which under Article 2227 of the New Civil Code, "shall
be equitably reduced if they are iniquitous or unconscionable.
PALENZUELA
Mechavez, Arthur F. vs. Marlyn M, Bermudez
G.R. No. 185368, October 11, 2012

Mechavez and Bermudez entered into a loan agreement covering The Court had previously tagged a 5% monthly interest rate
the amount of Php500,000 with a stipulated interest at 5% per month. agreed upon as “excessive, iniquitous, unconscionable and
exorbitant, contrary to morals, and the law.”
Menchavez then issued a check in favor of petitioner. Eventually,
respondent replaced the previous issued check with five postdated We need not unsettle the principle we had affirmed in a
checks totaling Php 565,000. Four of the checks were cleared and plethora of cases that stipulated interest rates of 3% per
encashed covering the sum of Php 465,000. month and higher are excessive, iniquitous, unconscionable,
and exorbitant.
Thereafter, petitioner alleged entering into a verbal compromise
agreement with respondent regarding the delay in payment and the While petitioner harps on voluntariness with which the parties
accumulated interest. agreed upon the 5% per month interest rate, or 60% per annum,
rate of interest is, indeed, iniquitous, and must be struck down.
When presented for payment, the checks were dishonored for the Since the stipulation on the interest rate is void, it is as if there
reason that it was “drawn against insufficient funds”. was no express contract on said interest rate. Hence, the courts
may reduce the interest rate as reason and equity demand.
REYES
Sun Life of Canada (PH) Inc. v. Sandra Tan Kit, and the Estate of Deceased Norberto Tan Kit
G.R. No. 183272 | October 15, 2014
Del Castillo, J.

Sun Life of Canada is an insurance company which approved the The interest imposed is in the nature of compensatory interest. As
insurance policy of Norberto Tan. When Norberto died, Sandra Tan Kit a form of damages, compensatory interest is due only if the
claimed the proceeds from his insurance but Sun Life rejected the claim obligor is proven to have failed to comply with his obligation.
because Norberto’s application was found fraudulent. Sun Life When Sun Life tendered the premium refund by attaching to the
returned the premium refund to Sandra Tan Kit, but she rejected it so said notice a check of P13,080.93, they properly complied with its
she filed a case to collect the insurance claim. The Court of Appeals obligation under the law and contract.
ruled in favor of Sun Life, which states:
“ Accordingly, [petitioner] is ordered to reimburse [respondents] the
sum of P13,080.93 representing the
[premium] paid by the insured with interest at the rate of 12% per
annum from the time of the death of
the insured until fully paid.“
This mandate on interest is not valid.
59

Credit Transaction Valid or Void Interest Accelera

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Credit Transaction Valid or Void Interest Accelera

Uploaded by

Copyright:

Available Formats

UNIVERSITY OF ASIA AND THE PACIFIC

Institute of Law and Governance

A Compilation of Digested Cases

G.R. No. L-46591, 28 July 1987

PROVISION / CASE SCENARIO REASON CASES CITED

GR No. 167724, June 27, 2006

PROVISION / CASE SCENARIO REASON CASES CITED

PROVISION / CASE SCENARIO REASON CASES CITED

PROVISION / CASE SCENARIO REASON

Thus, the Court explained:

“The increased interest rates are expressly provided for in the

G.R. No. 202176, August 1, 2016

PROVISION / CASE SCENARIO REASON

The Promissory Notes executed by respondents indicate that the

Metrobank sought the enforcement of the 16% interest on the amount

G.R. No. 119379 | September 25, 1998

PROVISION / CASE SCENARIO REASON

Here, by signing the contract, petitioner and private respondent

Furthermore, the provision in question states that if there occurs

Interpreting it differently, while said clause does not expressly

The second paragraph of the questioned proviso which provides

Escalation clauses are not basically wrong or legally objectionable

G.R. No. 195166, 8 July 2015

PROVISION / CASE SCENARIO REASON

“Consequently, the twelve percent (12%) per annum legal

In the case at bar, the loan was obtained by the respondents on 22

Therefore, the Supreme Court held that in the absence of an

PROVISION / CASE SCENARIO REASON

PROVISION / CASE SCENARIO REASON

In this case, the bond executed by the appellant has no reservation

Therefore, it must pay both the principal obligation of P10,000 and

100 Phil. 679, January 11, 1957

PROVISION / CASE SCENARIO REASON

43 SCRA 365, February 29, 1972

PROVISION / CASE SCENARIO REASON

In this case, there is no reservation on the bond. Therefore, the

G.R. No. 148491, February 08, 2007

PROVISION / CASE SCENARIO REASON

G.R. No. 195166, 8 July 2015

PROVISION / CASE SCENARIO REASON

The relationship between the private respondent and the Nation

The nature of simple loan is defined in Articles 1933 and 1953 of

G.R. No. 189871, 13 August 2013

PROVISION / CASE SCENARIO REASON

PROVISION / CASE SCENARIO REASON

Nevertheless, the validity of the escalation clause did not give

PROVISION / CASE SCENARIO REASON

G.R. No. 113926

PROVISION / CASE SCENARIO REASON

Furthermore, the promissory notes were signed by both parties

Philippine National Bank v CA

G.R. No. 88880, April 30, 1991

PROVISION / CASE SCENARIO REASON

Unilateral action of the PNB in increasing the interest rate on the

G.R. Nos. 192934, and 197010, June 27, 2018

PROVISION / CASE SCENARIO REASON

The stipulations violate the mutuality of contracts. Therefore, they

G.R. No. 173227, January 20, 2009

PROVISION / CASE SCENARIO REASON

Collection of interest without any stipulation therefor in

It appears that petitioner and respondent did not agree on the

G.R. No. 206459, April 6, 2016

PROVISION / CASE SCENARIO REASON