G.R. No.

195166 interest at the rate of 30% per annum from the time
the complaint was filed on July 31, 2002 until fully
SPS ABELLA VS SPS ABELLA paid;

On July 31, 2002, petitioners Spouses Salvador and Alma 2. Ordering the defendants to pay the plaintiffs the
Abella filed a Complaint5 for sum of money and damages with sum of P2,227.50 as reimbursement for litigation
prayer for preliminary attachment against respondents Spouses expenses, and another sum of P5,000.00 as attorney’s
Romeo and Annie Abella before the Regional Trial Court, fees.
Branch 8, Kalibo, Aklan. The case was docketed as Civil Case
No. 6627.6 For lack of legal basis, plaintiffs’ claim for moral and
exemplary damages has to be denied, and for lack of merit the
In their Complaint, petitioners alleged that respondents counter-claim is ordered dismissed.14
obtained a loan from them in the amount of P500,000.00. The
loan was evidenced by an acknowledgment receipt dated In the Order dated March 13, 2006,15 the Regional Trial Court
March 22, 1999 and was payable within one (1) year. denied respondents’ Motion for Reconsideration.
Petitioners added that respondents were able to pay a total of
P200,000.00— P100,000.00 paid on two separate occasions— On respondents’ appeal, the Court of Appeals ruled that while
leaving an unpaid balance of P300,000.00.7 respondents had indeed entered into a simple loan with
petitioners, respondents were no longer liable to pay the
In their Answer8 (with counterclaim and motion to dismiss), outstanding amount of P300,000.00.16
respondents alleged that the amount involved did not pertain
to a loan they obtained from petitioners but was part of the The Court of Appeals reasoned that the loan could not have
capital for a joint venture involving the lending of money.9 earned interest, whether as contractually stipulated interest or
as interest in the concept of actual or compensatory damages.
Specifically, respondents claimed that they were approached As to the loan’s not having earned stipulated interest, the
by petitioners, who proposed that if respondents were to Court of Appeals anchored its ruling on Article 1956 of the
"undertake the management of whatever money [petitioners] Civil Code, which requires interest to be stipulated in writing
would give them, [petitioners] would get 2.5% a month with a for it to be due.17 The Court of Appeals noted that while the
2.5% service fee to [respondents]."10 The 2.5% that each party acknowledgement receipt showed that interest was to be
would be receiving represented their sharing of the 5% interest charged, no particular interest rate was specified. 18 Thus, at the
that the joint venture was supposedly going to charge against time respondents were making interest payments of 2.5% per
its debtors. Respondents further alleged that the one year month, these interest payments were invalid for not being
averred by petitioners was not a deadline for payment but the properly stipulated by the parties. As to the loan’s not having
term within which they were to return the money placed by earned interest in the concept of actual or compensatory
petitioners should the joint venture prove to be not lucrative. damages, the Court of Appeals, citing Eusebio-Calderon v.
Moreover, they claimed that the entire amount of P500,000.00 People,19 noted that interest in the concept of actual or
was disposed of in accordance with their agreed terms and compensatory damages accrues only from the time that
conditions and that petitioners terminated the joint venture, demand (whether judicial or extrajudicial) is made. It reasoned
prompting them to collect from the joint venture’s borrowers. that since respondents received petitioners’ demand letter only
They were, however, able to collect only to the extent of on July 12, 2002, any interest in the concept of actual or
P200,000.00; hence, the P300,000.00 balance remained compensatory damages due should be reckoned only from
unpaid.11 then. Thus, the payments for the 2.5% monthly interest made
after the perfection of the loan in 1999 but before the demand
In the Decision12 dated December 28, 2005, the Regional Trial was made in 2002 were invalid.20
Court ruled in favor of petitioners. It noted that the terms of
the acknowledgment receipt executed by respondents clearly Since petitioners’ charging of interest was invalid, the Court of
showed that: (a) respondents were indebted to the extent of Appeals reasoned that all payments respondents made by way
P500,000.00; (b) this indebtedness was to be paid within one of interest should be deemed payments for the principal
(1) year; and (c) the indebtedness was subject to interest. Thus, amount of P500,000.00.21
the trial court concluded that respondents obtained a simple
loan, although they later invested its proceeds in a lending The Court of Appeals further noted that respondents made a
enterprise.13 The Regional Trial Court adjudged respondents total payment of P648,500.00, which, as against the principal
solidarily liable to petitioners. The dispositive portion of its amount of P500,000.00, entailed an overpayment of
Decision reads: P148,500.00. Applying the principle of solutio indebiti, the
Court of Appeals concluded that petitioners were liable to
WHEREFORE, premises considered, judgment is hereby reimburse respondents for the overpaid amount of
rendered: P148,500.00.22 The dispositive portion of the assailed Court of
Appeals Decision reads:
1. Ordering the defendants jointly and severally to
pay the plaintiffs the sum of P300,000.00 with
WHEREFORE, the Decision of the Regional Trial Court is Respondents’ claims, as articulated in their testimonies before
hereby REVERSED and SET ASIDE, and a new one issued, the trial court, cannot prevail over the clear terms of the
finding that the Spouses Salvador and Alma Abella document attesting to the relation of the parties. "If the terms
are DIRECTED to jointly and severally pay Spouses Romeo of a contract are clear and leave no doubt upon the intention of
and Annie Abella the amount of P148,500.00, with interest of the contracting parties, the literal meaning of its stipulations
6% interest (sic) per annum to be computed upon receipt of shall control."32
this decision, until full satisfaction thereof. Upon finality of
this judgment, an interest as the rate of 12% per annum, Articles 1933 and 1953 of the Civil Code provide the
instead of 6%, shall be imposed on the amount due, until full guideposts that determine if a contractual relation is one of
payment thereof.23 simple loan or mutuum:

In the Resolution24 dated January 4, 2011, the Court of Art. 1933. By the contract of loan, one of the parties delivers
Appeals denied petitioners’ Motion for Reconsideration. to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which
Aggrieved, petitioners filed the present appeal 25 where they case the contract is called a commodatum; or money or other
claim that the Court of Appeals erred in completely striking consumable thing, upon the condition that the same amount of
off interest despite the parties’ written agreement stipulating it, the same kind and quality shall be paid, in which case the
as well as in ordering them to reimburse and pay interest to contract is simply called a loan or mutuum.
respondents.
Commodatum is essentially gratuitous.
In support of their contentions, petitioners cite Article 1371 of
the Civil Code,26 which calls for the consideration of the Simple loan may be gratuitous or with a stipulation to pay
contracting parties’ contemporaneous and subsequent acts in interest.
determining their true intention. Petitioners insist that
respondents’ consistent payment of interest in the year In commodatum the bailor retains the ownership of the thing
following the perfection of the loan showed that interest at loaned, while in simple loan, ownership passes to the
2.5% per month was properly agreed upon despite its not borrower.
having been expressly stated in the acknowledgment receipt.
They add that during the proceedings before the Regional
Trial Court, respondents admitted that interest was due on the ....
loan.27
Art. 1953. A person who receives a loan of money or any
28
In their Comment,  respondents reiterate the Court of other fungible thing acquires the ownership thereof, and is
Appeals’ findings that no interest rate was ever stipulated by bound to pay to the creditor an equal amount of the same kind
the parties and that interest was not due and demandable at the and quality. (Emphasis supplied)
time they were making interest payments.29
On March 22, 1999, respondents executed an acknowledgment
30
In their Reply,  petitioners argue that even though no interest receipt to petitioners, which states:
rate was stipulated in the acknowledgment receipt, the case
fell under the exception to the Parol Evidence Rule. They also Batan, Aklan
argue that there exists convincing and sufficiently credible
evidence to supplement the imperfection of the March 22, 1999
acknowledgment receipt.31
This is to acknowledge receipt of the Amount of Five Hundred
For resolution are the following issues: Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella,
payable within one (1) year from date hereof with interest.
First, whether interest accrued on respondents’ loan from
petitioners. If so, at what rate? Annie C. Abella (sgd.) Romeo M. Abella (sgd.) 33 (Emphasis
supplied)
Second, whether petitioners are liable to reimburse
respondents for the latter’s supposed excess payments and for The text of the acknowledgment receipt is uncomplicated and
interest. straightforward. It attests to: first, respondents’ receipt of the
sum of P500,000.00 from petitioner Alma Abella; second,
I respondents’ duty to pay back this amount within one (1) year
from March 22, 1999; and third, respondents’ duty to pay
As noted by the Court of Appeals and the Regional Trial interest. Consistent with what typifies a simple loan,
Court, respondents entered into a simple loan or mutuum, petitioners delivered to respondents with the corresponding
rather than a joint venture, with petitioners. condition that respondents shall pay the same amount to
petitioners within one (1) year.
II Recently, however, the Bangko Sentral ng Pilipinas Monetary
Board (BSP-MB), in its Resolution No. 796 dated May 16,
Although we have settled the nature of the contractual relation 2013, approved the amendment of Section 2 of Circular No.
between petitioners and respondents, controversy persists over 905, Series of 1982 and, accordingly, issued Circular No. 799,
respondents’ duty to pay conventional interest, i.e., interest as Series of 2013, effective July 1, 2013, the pertinent portion of
the cost of borrowing money.34 which reads:

Article 1956 of the Civil Code spells out the basic rule that The Monetary Board, in its Resolution No. 796 dated 16 May
"[n]o interest shall be due unless it has been expressly 2013, approved the following revisions governing the rate of
stipulated in writing." interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
On the matter of interest, the text of the acknowledgment
receipt is simple, plain, and unequivocal. It attests to the Section 1. The rate of interest for the loan or forbearance of
contracting parties’ intent to subject to interest the loan any money, goods or credits and the rate allowed in
extended by petitioners to respondents. The controversy, judgments, in the absence of an express contract as to such
however, stems from the acknowledgment receipt’s failure to rate of interest, shall be six percent (6%) per annum.
state the exact rate of interest.
Section 2. In view of the above, Subsection X305.1 of the
Jurisprudence is clear about the applicable interest rate if a Manual of Regulations for Banks and Sections 4305Q.1,
written instrument fails to specify a rate. In Spouses Toring v. 4305S.3 and 4303P.1 of the Manual of Regulations for
Spouses Olan,35 this court clarified the effect of Article 1956
of the Civil Code and noted that the legal rate of interest (then Non-Bank Financial Institutions are hereby amended
at 12%) is to apply: "In a loan or forbearance of money, accordingly.
according to the Civil Code, the interest due should be that
stipulated in writing, and in the absence thereof, the This Circular shall take effect on 1 July 2013.
rate shall be 12% per annum."36
Thus, from the foregoing, in the absence of an express
Spouses Toring cites and restates (practically verbatim) what stipulation as to the rate of interest that would govern the
this court settled in Security Bank and Trust Company v. parties, the rate of legal interest for loans or forbearance of
Regional Trial Court of Makati, Branch 61: "In a loan or any money, goods or credits and the rate allowed in
forbearance of money, the interest due should be that judgments shall no longer be twelve percent (12%) per
stipulated in writing, and in the absence thereof, the annum — as reflected in the case of Eastern Shipping Lines
rate shall be 12% per annum."37 and Subsection X305.1 of the Manual of Regulations for
Banks and Sections 4305Q.1,= 4305S.3 and 4303P.1 of the
Security Bank also refers to Eastern Shipping Lines, Inc. v. Manual of Regulations for Non- Bank Financial Institutions,
Court of Appeals, which, in turn, stated:38 before its amendment by BSP-MB Circular No. 799 — but
will now be six percent (6%) per annum effective July 1, 2013.
1. When the obligation is breached, and it consists in the It should be noted, nonetheless, that the new rate could only be
payment of a sum of money, i.e., a loan or forbearance of applied prospectively and not retroactively. Consequently, the
money, the interest due should be that which may have been twelve percent (12%) per annum legal interest shall apply only
stipulated in writing. Furthermore, the interest due shall itself until June 30, 2013. Come July 1, 2013 the new rate of six
earn legal interest from the time it is judicially demanded. In percent (6%) per annum shall be the prevailing rate of interest
the absence of stipulation, the rate of interest shall be 12% when applicable.42 (Emphasis supplied, citations omitted)
per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Nevertheless, both Bangko Sentral ng Pilipinas Circular No.
Article 1169 of the Civil Code.39 (Emphasis supplied) 799, Series of 2013 and Nacar retain the definite and
mandatory framing of the rule articulated in Eastern
The rule is not only definite; it is cast in mandatory language. Shipping, Security Bank, and Spouses Toring. Nacar even
From Eastern Shipping to Security Bank to Spouses restates Eastern Shipping:
Toring, jurisprudence has repeatedly used the word "shall," a
term that has long been settled to denote something imperative To recapitulate and for future guidance, the guidelines laid
or operating to impose a duty.40 Thus, the rule leaves no room down in the case of Eastern Shipping Lines are accordingly
for alternatives or otherwise does not allow for discretion. modified to embody BSP-MB Circular No. 799, as follows:
It requires the application of the legal rate of interest.
....
Our intervening Decision in Nacar v. Gallery
Frames41 recognized that the legal rate of interest has been 1. When the obligation is breached, and it consists in the
reduced to 6% per annum: payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In Contrary to petitioners’ assertions, there is no room for
the absence of stipulation, the rate of interest shall be 6% per entertaining extraneous (or parol) evidence. In Spouses
annum to be computed from default, i.e., from judicial or Bonifacio and Lucia Paras v. Kimwa Construction and
extrajudicial demand under and subject to the provisions of Development Corporation,47 we spelled out the requisites for
Article 1169 of the Civil Code.43 (Emphasis supplied, citations the admission of parol evidence:
omitted)
In sum, two (2) things must be established for parol evidence
Thus, it remains that where interest was stipulated in writing to be admitted: first, that the existence of any of the four (4)
by the debtor and creditor in a simple loan or mutuum, but no exceptions has been put in issue in a party’s pleading or has
exact interest rate was mentioned, the legal rate of interest not been objected to by the adverse party; and second, that the
shall apply. At present, this is 6% per annum, subject parol evidence sought to be presented serves to form the basis
to Nacar’s qualification on prospective application. of the conclusion proposed by the presenting party.48

Applying this, the loan obtained by respondents from The issue of admitting parol evidence is a matter that is proper
petitioners is deemed subjected to conventional interest at the to the trial, not the appellate, stage of a case. Petitioners raised
rate of 12% per annum, the legal rate of interest at the time the the issue of applying the exceptions to the Parol Evidence
parties executed their agreement. Moreover, should Rule only in the Reply they filed before this court. This is the
conventional interest still be due as of July 1, 2013, the rate of last pleading that either of the parties has filed in the entire
12% per annum shall persist as the rate of conventional string of proceedings culminating in this Decision. It is,
interest. therefore, too late for petitioners to harp on this rule. In any
case, what is at issue is not admission of evidence per se, but
This is so because interest in this respect is used as a surrogate the appreciation given to the evidence adduced by the parties.
for the parties’ intent, as expressed as of the time of the In the Petition they filed before this court, petitioners
execution of their contract. In this sense, the legal rate of themselves acknowledged that checks supposedly attesting to
interest is an affirmation of the contracting parties’ intent; that payment of monthly interest at the rate of 2.5% were admitted
is, by their contract’s silence on a specific rate, the then by the trial court (and marked as Exhibits "2," "3," "4," "5,"
prevailing legal rate of interest shall be the cost of borrowing "6," "7," and "8").49 What petitioners have an issue with is not
money. This rate, which by their contract the parties have the admission of these pieces of evidence but how these have
settled on, is deemed to persist regardless of shifts in the legal not been appreciated in a manner consistent with the
rate of interest. Stated otherwise, the legal rate of conclusions they advance.
interest, when applied as conventional interest, shall always be
the legal rate at the time the agreement was executed and shall Even if it can be shown that the parties have agreed to monthly
not be susceptible to shifts in rate. interest at the rate of 2.5%, this is unconscionable. As
emphasized in Castro v. Tan,50 the willingness of the parties to
Petitioners, however, insist on conventional interest at the rate enter into a relation involving an unconscionable interest rate
of 2.5% per month or 30% per annum. They argue that the is inconsequential to the validity of the stipulated rate:
acknowledgment receipt fails to show the complete and
accurate intention of the contracting parties. They rely on The imposition of an unconscionable rate of interest on a
Article 1371 of the Civil Code, which provides that the money debt, even if knowingly and voluntarily assumed, is
contemporaneous and subsequent acts of the contracting immoral and unjust. It is tantamount to a repugnant spoliation
parties shall be considered should there be a need to ascertain and an iniquitous deprivation of property, repulsive to the
their intent.44 In addition, they claim that this case falls under common sense of man. It has no support in law, in principles
the exceptions to the Parol Evidence Rule, as spelled out in of justice, or in the human conscience nor is there any reason
Rule 130, Section 9 of the Revised Rules on Evidence. 45 whatsoever which may justify such imposition as righteous
and as one that may be sustained within the sphere of public or
It is a basic precept in legal interpretation and construction that private morals.51
a rule or provision that treats a subject with specificity prevails
over a rule or provision that treats a subject in general terms.46 The imposition of an unconscionable interest rate is void ab
initio for being "contrary to morals, and the law."52
The rule spelled out in Security Bank and Spouses Toring is
anchored on Article 1956 of the Civil Code and specifically In determining whether the rate of interest is unconscionable,
governs simple loans or mutuum. Mutuum is a type of the mechanical application of pre-established floors would be
nominate contract that is specifically recognized by the Civil wanting. The lowest rates that have previously been
Code and for which the Civil Code provides a specific set of considered unconscionable need not be an impenetrable
governing rules: Articles 1953 to 1961. In contrast, Article minimum. What is more crucial is a consideration of the
1371 is among the Civil Code provisions generally dealing parties’ contexts. Moreover, interest rates must be appreciated
with contracts. As this case particularly involves a simple in light of the fundamental nature of interest as compensation
loan, the specific rule spelled out in Security to the creditor for money lent to another, which he or she
Bank and Spouses Toring finds preferential application as could otherwise have used for his or her own purposes at the
against Article 1371. time it was lent. It is not the default vehicle for predatory gain.
As such, interest need only be reasonable. It ought not be a
supine mechanism for the creditor’s unjust enrichment at the IV
expense of another.
Proceeding from these premises, we find that respondents
Petitioners here insist upon the imposition of 2.5% monthly or made an overpayment in the amount of P3,379.17.
30% annual interest. Compounded at this rate, respondents’
obligation would have more than doubled—increased to As acknowledged by petitioner Salvador Abella, respondents
219.7% of the principal—by the end of the third year after paid a total of P200,000.00, which was charged against the
which the loan was contracted if the entire principal remained principal amount of P500,000.00. The first payment of
unpaid. By the end of the ninth year, it would have multiplied P100,000.00 was made on June 30, 2001, 55 while the second
more than tenfold (or increased to 1,060.45%). In 2015, this payment of P100,000.00 was made on December 30, 2001.56
would have multiplied by more than 66 times (or increased to
6,654.17%). Thus, from an initial loan of only P500,000.00, The Court of Appeals’ September 30, 2010 Decision stated
respondents would be obliged to pay more than P33 million. that respondents paid P6,000.00 in March 1999.57
This is grossly unfair, especially since up to the fourth year
from when the loan was obtained, respondents had been
assiduously delivering payment. This reduces their best efforts The Pre-Trial Order dated December 2, 2002,58 stated that the
to satisfy their obligation into a protracted servicing of a parties admitted that "from the time the principal sum of
rapacious loan. P500,000.00 was borrowed from [petitioners], [respondents]
ha[d] been religiously paying"59 what was supposedly interest
"at the rate of 2.5% per month."60
The legal rate of interest is the presumptive reasonable
compensation for borrowed money. While parties are free to
deviate from this, any deviation must be reasonable and fair. From March 22, 1999 (after the loan was perfected) to June
Any deviation that is far-removed is suspect. Thus, in cases 22, 2001 (before respondents’ payment of P100,000.00 on
where stipulated interest is more than twice the prevailing June 30, 2001, which was deducted from the principal amount
legal rate of interest, it is for the creditor to prove that this rate of P500,000.00), the 2.5% monthly "interest" was pegged to
is required by prevailing market conditions. Here, petitioners the principal amount of P500,000.00. These monthly interests,
have articulated no such justification. thus, amounted to P12,500.00 per month. Considering that the
period from March 1999 to June 2001 spanned twenty seven
(27) months, respondents paid a total of P337,500.00.61
In sum, Article 1956 of the Civil Code, read in light of
established jurisprudence, prevents the application of any
interest rate other than that specifically provided for by the From June 22, 2001 up to December 22, 2001 (before
parties in their loan document or, in lieu of it, the legal rate. respondents’ payment of another P100,000.00 on December
Here, as the contracting parties failed to make a specific 30, 2001, which was deducted from the remaining principal
stipulation, the legal rate must apply. Moreover, the rate that amount of P400,000.00), the 2.5% monthly "interest" was
petitioners adverted to is unconscionable. The conventional pegged to the remaining principal amount of P400,000.00.
interest due on the principal amount loaned by respondents These monthly interests, thus, amounted to P10,000.00 per
from petitioners is held to be 12% per annum. month. Considering that this period spanned six (6) months,
respondents paid a total of P60,000.00.62
III
From after December 22, 2001 up to June 2002 (when
petitioners filed their Complaint), the 2.5% monthly "interest"
Apart from respondents’ liability for conventional interest at was pegged to the remaining principal amount of P300,000.00.
the rate of 12% per annum, outstanding conventional interest These monthly interests, thus, amounted to P7,500.00 per
—if any is due from respondents—shall itself earn legal month. Considering that this period spanned six (6) months,
interest from the time judicial demand was made by respondents paid a total of P45,000.00.63
petitioners, i.e., on July 31, 2002, when they filed their
Complaint. This is consistent with Article 2212 of the Civil
Code, which provides: Applying these facts and the properly applicable interest rate
(for conventional interest, 12% per annum; for interest on
conventional interest, 12% per annum from July 31, 2002 up
Art. 2212. Interest due shall earn legal interest from the time it to June 30, 2013 and 6% per annum henceforth), the following
is judicially demanded, although the obligation may be silent conclusions may be drawn:
upon this point.
By the end of the first year following the perfection of the
So, too, Nacar states that "the interest due shall itself earn loan, or as of March 21, 2000, P560,000.00 was due from
legal interest from the time it is judicially demanded." 53 respondents. This consisted of the principal of P500,000.00
and conventional interest of P60,000.00.
Consistent with Nacar, as well as with our ruling in Rivera v.
Spouses Chua,54 the interest due on conventional interest shall Within this first year, respondents made twelve (12) monthly
be at the rate of 12% per annum from July 31, 2002 to June payments totalling P150,000.00 (P12,500.00 each from April
30, 2013. Thereafter, or starting July 1, 2013, this shall be at 1999 to March 2000). This was in addition to their initial
the rate of 6% per annum. payment of P6,000.00 in March 1999.
Application of payments must be in accordance with Article payments of P7,500.00 each. At this point, the
1253 of the Civil Code, which reads: supposed monthly interest payments were now
pegged to the supposedly remaining principal of
Art. 1253. If the debt produces interest, payment of the P300,000.00. Thus, during this period, they delivered
principal shall not be deemed to have been made until the three (3) monthly payments totaling P22,500.00.
interests have been covered.
Consistent with Article 1253 of the Civil Code, as respondents
Thus, the payments respondents made must first be reckoned paid a total of P320,000.00 within the third year, the
as interest payments. Thereafter, any excess payments shall be conventional interest of P36,927.50 must be deemed fully paid
charged against the principal. As respondents paid a total of and the remaining amount that respondents paid (i.e.,
P156,000.00 within the first year, the conventional interest of P283,702.40) is to be charged against the principal. This yields
P60,000.00 must be deemed fully paid and the remaining a balance of P18,777.60.
amount that respondents paid (i.e., P96,000.00) is to be
charged against the principal. This yields a balance of By the end of the fourth year following the perfection of the
P404,000.00. By the end of the second year following the loan, or as of March 21, 2003, P21,203.51 would have been
perfection of the loan, or as of March 21, 2001, P452,480.00 due from respondents. This consists of: (a) the outstanding
was due from respondents. This consisted of the outstanding principal of P18,777.60, (b) conventional interest of
principal of P404,000.00 and conventional interest of P2,253.31, and (c) interest due on conventional interest
P48,480.00. starting from July 31, 2002, the date of judicial demand, in the
amount of P172.60. The last (i.e., interest on interest) must be
Within this second year, respondents completed another round pro-rated. There were only 233 days from July 31, 2002 (the
of twelve (12) monthly payments totaling P150,000.00. date of judicial demand) to March 21, 2003 (the end of the
fourth year); this left 63.83% of the fourth year, within which
Consistent with Article 1253 of the Civil Code, as respondents interest on interest might have accrued. Thus, the full annual
paid a total of P156,000.00 within the second year, the interest on interest of 12% per annum could not have been
conventional interest of P48,480.00 must be deemed fully paid completed, and only the proportional amount of 7.66% per
and the remaining amount that respondents paid (i.e., annum may be properly imposed for the remainder of the
P101,520.00) is to be charged against the principal. This yields fourth year.
a balance of P302,480.00.
From the end of March 2002 to June 2002, respondents
By the end of the third year following the perfection of the delivered three (3) more monthly payments of P7,500.00 each.
loan, or as of March 21, 2002, P338,777.60 was due from Thus, during this period, they delivered three (3) monthly
respondents. This consists of the outstanding principal of payments totalling P22,500.00.
P302,480.00 and conventional interest of P36,297.60.
At this rate, however, payment would have been completed by
Within this third year, respondents paid a total of P320,000.00, respondents even before the end of the fourth year. Thus, for
as follows: precision, it is more appropriate to reckon the amounts due
as against payments made on a monthly, rather than an
annual, basis.
(a) Between March 22, 2001 and June 30, 2001,
respondents completed three (3) monthly payments of
P12,500.00 each, totaling P37,500.00. By April 21, 2002, _18,965.38 (i.e., remaining principal of
P18,777.60 plus pro-rated monthly conventional interest at
1%, amounting to P187.78) would have been due from
(b) On June 30, 2001, respondents paid P100,000.00, respondents. Deducting the monthly payment of P7,500.00 for
which was charged as principal payment. the preceding month in a manner consistent with Article 1253
of the Civil Code would yield a balance of P11,465.38.
(c) Between June 30, 2001 and December 30, 2001,
respondents delivered monthly payments of By May 21, 2002, _11,580.03 (i.e., remaining principal of
P10,000.00 each. At this point, the monthly payments P11,465.38 plus pro-rated monthly conventional interest at
no longer amounted to P12,500.00 each because the 1%, amounting to P114.65) would have been due from
supposed monthly interest payments were pegged to respondents. Deducting the monthly payment of P7,500.00 for
the supposedly remaining principal of P400,000.00. the preceding month in a manner consistent with Article 1253
Thus, during this period, they paid a total of six (6) of the Civil Code would yield a balance of P4,080.03.
monthly payments totaling P60,000.00.
By June 21, 2002, P4,120.83 (i.e., remaining principal of
(d) On December 30, 2001, respondents paid P4,080.03 plus pro-rated monthly conventional interest at 1%,
P100,000.00, which, like the June 30, 2001 payment, amounting to P40.80) would have been due from respondents.
was charged against the principal. Deducting the monthly payment of P7,500.00 for the
preceding month in a manner consistent with Article 1253 of
(e) From the end of December 2002 to the end of the Civil Code would yield a negative balance of P3,379.17.
February 2002, respondents delivered monthly
Thus, by June 21, 2002, respondents had not only fully paid the case falls under paragraph 1 or paragraph 2, above, shall
the principal and all the conventional interest that had accrued be 6% per annum from such finality until its satisfaction, this
on their loan. By this date, they also overpaid P3,379.17. interim period being deemed to be by then an equivalent to a
Moreover, while hypothetically, interest on conventional forbearance of credit.68
interest would not have run from July 31, 2002, no such
interest accrued since there was no longer any conventional Thus, interest at the rate of 6% per annum may be properly
interest due from respondents by then. imposed on the total judgment award. This shall be reckoned
from the finality of this Decision until its full satisfaction.
V
WHEREFORE, the assailed September 30, 2010 Decision
As respondents made an overpayment, the principle of solutio and the January 4, 2011 Resolution of the Court of Appeals
indebiti as provided by Article 2154 of the Civil Nineteenth Division in CA-G.R. CV No. 01388 are SET
Code64 applies. Article 2154 reads: ASIDE. Petitioners Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally reimburse
Article 2154. If something is received when there is no right to respondents Spouses Romeo and Annie Abella the amount of
demand it, and it was unduly delivered through mistake, the P3,379.17, which respondents have overpaid. A legal interest
obligation to return it arises. In Moreno-Lentfer v. Wolff,65 this of 6% per annum shall likewise be imposed on the total
court explained the application of solutio indebiti: judgment award from the finality of this Decision until its full
satisfaction.
The quasi-contract of solutio indebiti harks back to
the ancient principle that no one shall enrich himself unjustly SO ORDERED.
at the expense of another. It applies where (1) a payment is
made when there exists no binding relation between the payor,
who has no duty to pay, and the person who received the
payment, and (2) the payment is made through mistake, and
not through liberality or some other cause. 66 As respondents
had already fully paid the principal and all conventional
interest that had accrued, they were no longer obliged to make
further payments.1 Any further payment they made was only
because of a mistaken impression that they were still due.
Accordingly, petitioners are now bound by a quasi-contractual
obligation to return any and all excess payments delivered by
respondents.

Nacar provides that "[w]hen an obligation, not constituting a

loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion
of the court at the rate of 6% per annum." 67 This applies to
obligations arising from quasi-contracts such as solutio
indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment,

shall pay legal interest if a sum of money is involved, or shall
be liable for fruits received or which should have been
received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment

of the thing from any cause, and for damages to the person
who delivered the thing, until it is recovered.

Consistent however, with our finding that the excess payment

made by respondents were borne out of a mere mistake that it
was due, we find it in the better interest of equity to no longer
hold petitioners liable for interest arising from their quasi-
contractual obligation. Nevertheless, Nacar also provides:

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether
 NACAR VS GALLERY FRAMES WHEREFORE, premises considered, judgment is hereby
rendered finding respondents guilty of constructive dismissal
The factual antecedents are undisputed. and are therefore, ordered:

Petitioner Dario Nacar filed a complaint for constructive To pay jointly and severally the complainant the amount of
dismissal before the Arbitration Branch of the National Labor sixty-two thousand nine hundred eighty-six pesos and 56/100
Relations Commission (NLRC) against respondents Gallery (₱62,986.56) Pesos representing his separation pay;
Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC
NCR Case No. 01-00519-97. To pay jointly and severally the complainant the amount of
nine (sic) five thousand nine hundred thirty-three and 36/100
On October 15, 1998, the Labor Arbiter rendered a (₱95,933.36) representing his backwages; and
Decision3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause. All other claims are hereby dismissed for lack of merit.
Thus, petitioner was awarded backwages and separation pay in
lieu of reinstatement in the amount of ₱158,919.92. The SO ORDERED.4
dispositive portion of the decision, reads:
Respondents appealed to the NLRC, but it was dismissed for
With the foregoing, we find and so rule that respondents failed lack of merit in the Resolution5 dated February 29, 2000.
to discharge the burden of showing that complainant was Accordingly, the NLRC sustained the decision of the Labor
dismissed from employment for a just or valid cause. All the Arbiter. Respondents filed a motion for reconsideration, but it
more, it is clear from the records that complainant was never was denied.6
afforded due process before he was terminated. As such, we
are perforce constrained to grant complainant’s prayer for the Dissatisfied, respondents filed a Petition for Review on
payments of separation pay in lieu of reinstatement to his Certiorari before the CA. On August 24, 2000, the CA issued a
former position, considering the strained relationship between Resolution dismissing the petition. Respondents filed a Motion
the parties, and his apparent reluctance to be reinstated, for Reconsideration, but it was likewise denied in a Resolution
computed only up to promulgation of this decision as follows: dated May 8, 2001.7

SEPARATION PAY Respondents then sought relief before the Supreme Court,
docketed as G.R. No. 151332. Finding no reversible error on
Date Hired = August 1990 the part of the CA, this Court denied the petition in the
Rate = ₱198/day Resolution dated April 17, 2002.8

Date of Decision = Aug. 18, 1998 An Entry of Judgment was later issued certifying that the
resolution became final and executory on May 27, 2002. 9 The
Length of Service = 8 yrs. & 1 month
case was, thereafter, referred back to the Labor Arbiter. A pre-
₱198.00 x 26 days x 8 months = ₱41,184.00 execution conference was consequently scheduled, but
respondents failed to appear.10
BACKWAGES
Date Dismissed = January 24, 1997 On November 5, 2002, petitioner filed a Motion for Correct
Computation, praying that his backwages be computed from
Rate per day = ₱196.00 the date of his dismissal on January 24, 1997 up to the finality
of the Resolution of the Supreme Court on May 27,
Date of Decisions = Aug. 18, 1998 2002.11 Upon recomputation, the Computation and
Examination Unit of the NLRC arrived at an updated amount
a) 1/24/97 to 2/5/98 = 12.36 mos.
in the sum of ₱471,320.31.12
₱196.00/day x 12.36 mos. = ₱62,986.56
On December 2, 2002, a Writ of Execution 13 was issued by the
b) 2/6/98 to 8/18/98 = 6.4 months Labor Arbiter ordering the Sheriff to collect from respondents
Prevailing Rate per day = ₱62,986.00 the total amount of ₱471,320.31. Respondents filed a Motion
to Quash Writ of Execution, arguing, among other things, that
₱198.00 x 26 days x 6.4 = ₱32,947.20 since the Labor Arbiter awarded separation pay of ₱62,986.56
mos. and limited backwages of ₱95,933.36, no more recomputation
is required to be made of the said awards. They claimed that
TOTAL = ₱95.933.76 after the decision becomes final and executory, the same
cannot be altered or amended anymore.14 On January 13, 2003,
xxxx the Labor Arbiter issued an Order 15 denying the motion. Thus,
an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June judgment. Consequently, it can no longer be modified in any
30, 2003 issued a Resolution17 granting the appeal in favor of respect, except to correct clerical errors or mistakes.
the respondents and ordered the recomputation of the
judgment award. Petitioner filed a Motion for Reconsideration, but it was
denied in the Resolution25 dated October 9, 2009.
On August 20, 2003, an Entry of Judgment was issued
declaring the Resolution of the NLRC to be final and Hence, the petition assigning the lone error:
executory. Consequently, another pre-execution conference
was held, but respondents failed to appear on time. I
Meanwhile, petitioner moved that an Alias Writ of Execution
be issued to enforce the earlier recomputed judgment award in
the sum of ₱471,320.31.18 WITH DUE RESPECT, THE HONORABLE COURT OF
APPEALS SERIOUSLY ERRED, COMMITTED GRAVE
ABUSE OF DISCRETION AND DECIDED CONTRARY
The records of the case were again forwarded to the TO LAW IN UPHOLDING THE QUESTIONED
Computation and Examination Unit for recomputation, where RESOLUTIONS OF THE NLRC WHICH, IN TURN,
the judgment award of petitioner was reassessed to be in the SUSTAINED THE MAY 10, 2005 ORDER OF LABOR
total amount of only ₱147,560.19. ARBITER MAGAT MAKING THE DISPOSITIVE
PORTION OF THE OCTOBER 15, 1998 DECISION OF
Petitioner then moved that a writ of execution be issued LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
ordering respondents to pay him the original amount as OPINION EXPRESSED IN THE BODY OF THE SAME
determined by the Labor Arbiter in his Decision dated October DECISION.26
15, 1998, pending the final computation of his backwages and
separation pay. Petitioner argues that notwithstanding the fact that there was a
computation of backwages in the Labor Arbiter’s decision, the
On January 14, 2003, the Labor Arbiter issued an Alias Writ same is not final until reinstatement is made or until finality of
of Execution to satisfy the judgment award that was due to the decision, in case of an award of separation pay. Petitioner
petitioner in the amount of ₱147,560.19, which petitioner maintains that considering that the October 15, 1998 decision
eventually received. of the Labor Arbiter did not become final and executory until
the April 17, 2002 Resolution of the Supreme Court in G.R.
Petitioner then filed a Manifestation and Motion praying for No. 151332 was entered in the Book of Entries on May 27,
the re-computation of the monetary award to include the 2002, the reckoning point for the computation of the
appropriate interests.19 backwages and separation pay should be on May 27, 2002 and
not when the decision of the Labor Arbiter was rendered on
On May 10, 2005, the Labor Arbiter issued an October 15, 1998. Further, petitioner posits that he is also
Order20 granting the motion, but only up to the amount of entitled to the payment of interest from the finality of the
₱11,459.73. The Labor Arbiter reasoned that it is the October decision until full payment by the respondents.
15, 1998 Decision that should be enforced considering that it
was the one that became final and executory. However, the On their part, respondents assert that since only separation pay
Labor Arbiter reasoned that since the decision states that the and limited backwages were awarded to petitioner by the
separation pay and backwages are computed only up to the October 15, 1998 decision of the Labor Arbiter, no more
promulgation of the said decision, it is the amount of recomputation is required to be made of said awards.
₱158,919.92 that should be executed. Thus, since petitioner Respondents insist that since the decision clearly stated that
already received ₱147,560.19, he is only entitled to the the separation pay and backwages are "computed only up to
balance of ₱11,459.73. [the] promulgation of this decision," and considering that
petitioner no longer appealed the decision, petitioner is only
Petitioner then appealed before the NLRC,21 which appeal was entitled to the award as computed by the Labor Arbiter in the
denied by the NLRC in its Resolution 22 dated September 27, total amount of ₱158,919.92. Respondents added that it was
2006. Petitioner filed a Motion for Reconsideration, but it was only during the execution proceedings that the petitioner
likewise denied in the Resolution23 dated January 31, 2007. questioned the award, long after the decision had become final
and executory. Respondents contend that to allow the further
Aggrieved, petitioner then sought recourse before the CA, recomputation of the backwages to be awarded to petitioner at
docketed as CA-G.R. SP No. 98591. this point of the proceedings would substantially vary the
decision of the Labor Arbiter as it violates the rule on
immutability of judgments.
On September 23, 2008, the CA rendered a Decision 24 denying
the petition. The CA opined that since petitioner no longer
appealed the October 15, 1998 Decision of the Labor Arbiter, The petition is meritorious.
which already became final and executory, a belated
correction thereof is no longer allowed. The CA stated that The instant case is similar to the case of Session Delights Ice
there is nothing left to be done except to enforce the said Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for
resolution was the propriety of the computation of the awards Clearly implied from this original computation is its currency
made, and whether this violated the principle of immutability up to the finality of the labor arbiter's decision. As we noted
of judgment. Like in the present case, it was a distinct feature above, this implication is apparent from the terms of the
of the judgment of the Labor Arbiter in the above-cited case computation itself, and no question would have arisen had the
that the decision already provided for the computation of the parties terminated the case and implemented the decision at
payable separation pay and backwages due and did not further that point.
order the computation of the monetary awards up to the time
of the finality of the judgment. Also in Session Delights, the However, the petitioner disagreed with the labor arbiter's
dismissed employee failed to appeal the decision of the labor findings on all counts - i.e., on the finding of illegality as well
arbiter. The Court clarified, thus: as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the
In concrete terms, the question is whether a re-computation in labor arbiter's decision. By law, the NLRC decision is final,
the course of execution of the labor arbiter's original reviewable only by the CA on jurisdictional grounds.
computation of the awards made, pegged as of the time the
decision was rendered and confirmed with modification by a The petitioner appropriately sought to nullify the NLRC
final CA decision, is legally proper. The question is posed, decision on jurisdictional grounds through a timely filed Rule
given that the petitioner did not immediately pay the awards 65 petition for certiorari. The CA decision, finding that NLRC
stated in the original labor arbiter's decision; it delayed exceeded its authority in affirming the payment of 13th month
payment because it continued with the litigation until final pay and indemnity, lapsed to finality and was subsequently
judgment at the CA level. returned to the labor arbiter of origin for execution.

A source of misunderstanding in implementing the final It was at this point that the present case arose. Focusing on the
decision in this case proceeds from the way the original labor core illegal dismissal portion of the original labor arbiter's
arbiter framed his decision. The decision consists essentially decision, the implementing labor arbiter ordered the award re-
of two parts. computed; he apparently read the figures originally ordered to
be paid to be the computation due had the case been
The first is that part of the decision that cannot now be terminated and implemented at the labor arbiter's level. Thus,
disputed because it has been confirmed with finality. This is the labor arbiter re-computed the award to include the
the finding of the illegality of the dismissal and the awards of separation pay and the backwages due up to the finality of the
separation pay in lieu of reinstatement, backwages, attorney's CA decision that fully terminated the case on the merits.
fees, and legal interests. Unfortunately, the labor arbiter's approved computation went
beyond the finality of the CA decision (July 29, 2003) and
The second part is the computation of the awards made. On its included as well the payment for awards the final CA decision
face, the computation the labor arbiter made shows that it was had deleted - specifically, the proportionate 13th month pay
time-bound as can be seen from the figures used in the and the indemnity awards. Hence, the CA issued the decision
computation. This part, being merely a computation of what now questioned in the present petition.
the first part of the decision established and declared, can, by
its nature, be re-computed. This is the part, too, that the We see no error in the CA decision confirming that a re-
petitioner now posits should no longer be re-computed computation is necessary as it essentially considered the labor
because the computation is already in the labor arbiter's arbiter's original decision in accordance with its basic
decision that the CA had affirmed. The public and private component parts as we discussed above. To reiterate, the first
respondents, on the other hand, posit that a re-computation is part contains the finding of illegality and its monetary
necessary because the relief in an illegal dismissal decision consequences; the second part is the computation of the
goes all the way up to reinstatement if reinstatement is to be awards or monetary consequences of the illegal dismissal,
made, or up to the finality of the decision, if separation pay is computed as of the time of the labor arbiter's original
to be given in lieu reinstatement. decision.28

That the labor arbiter's decision, at the same time that it found Consequently, from the above disquisitions, under the terms of
that an illegal dismissal had taken place, also made a the decision which is sought to be executed by the petitioner,
computation of the award, is understandable in light of Section no essential change is made by a recomputation as this step is
3, Rule VIII of the then NLRC Rules of Procedure which a necessary consequence that flows from the nature of the
requires that a computation be made. This Section in part illegality of dismissal declared by the Labor Arbiter in that
states: decision.29 A recomputation (or an original computation, if no
previous computation has been made) is a part of the law –
[T]he Labor Arbiter of origin, in cases involving monetary specifically, Article 279 of the Labor Code and the established
awards and at all events, as far as practicable, shall embody in jurisprudence on this provision – that is read into the decision.
any such decision or order the detailed and full amount By the nature of an illegal dismissal case, the reliefs continue
awarded. to add up until full satisfaction, as expressed under Article 279
of the Labor Code. The recomputation of the consequences of
illegal dismissal upon execution of the decision does not
constitute an alteration or amendment of the final decision
being implemented. The illegal dismissal ruling stands; only 3. When the judgment of the court awarding a sum of
the computation of monetary consequences of this dismissal is money becomes final and executory, the rate of legal
affected, and this is not a violation of the principle of interest, whether the case falls under paragraph 1 or
immutability of final judgments.30 paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period
That the amount respondents shall now pay has greatly being deemed to be by then an equivalent to a
increased is a consequence that it cannot avoid as it is the risk forbearance of credit.33
that it ran when it continued to seek recourses against the
Labor Arbiter's decision. Article 279 provides for the Recently, however, the Bangko Sentral ng Pilipinas Monetary
consequences of illegal dismissal in no uncertain terms, Board (BSP-MB), in its Resolution No. 796 dated May 16,
qualified only by jurisprudence in its interpretation of when 2013, approved the amendment of Section 2 34 of Circular No.
separation pay in lieu of reinstatement is allowed. When that 905, Series of 1982 and, accordingly, issued Circular No.
happens, the finality of the illegal dismissal decision becomes 799,35 Series of 2013, effective July 1, 2013, the pertinent
the reckoning point instead of the reinstatement that the law portion of which reads:
decrees. In allowing separation pay, the final decision
effectively declares that the employment relationship ended so The Monetary Board, in its Resolution No. 796 dated 16 May
that separation pay and backwages are to be computed up to 2013, approved the following revisions governing the rate of
that point.31 interest in the absence of stipulation in loan contracts, thereby
amending Section 2 of Circular No. 905, Series of 1982:
Finally, anent the payment of legal interest. In the landmark
case of Eastern Shipping Lines, Inc. v. Court of Appeals, 32 the Section 1. The rate of interest for the loan or forbearance of
Court laid down the guidelines regarding the manner of any money, goods or credits and the rate allowed in
computing legal interest, to wit: judgments, in the absence of an express contract as to such
rate of interest, shall be six percent (6%) per annum.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of Section 2. In view of the above, Subsection X305.1 36 of the
interest, as well as the accrual thereof, is imposed, as follows: Manual of Regulations for Banks and Sections
4305Q.1,37 4305S.338 and 4303P.139 of the Manual of
1. When the obligation is breached, and it consists in Regulations for Non-Bank Financial Institutions are hereby
the payment of a sum of money, i.e., a loan or amended accordingly.
forbearance of money, the interest due should be that
which may have been stipulated in writing. This Circular shall take effect on 1 July 2013.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the Thus, from the foregoing, in the absence of an express
absence of stipulation, the rate of interest shall be stipulation as to the rate of interest that would govern the
12% per annum to be computed from default, i.e., parties, the rate of legal interest for loans or forbearance of any
from judicial or extrajudicial demand under and money, goods or credits and the rate allowed in judgments
subject to the provisions of Article 1169 of the Civil shall no longer be twelve percent (12%) per annum - as
Code. reflected in the case of Eastern Shipping Lines 40 and
Subsection X305.1 of the Manual of Regulations for Banks
2. When an obligation, not constituting a loan or and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of
forbearance of money, is breached, an interest on the Regulations for Non-Bank Financial Institutions, before its
amount of damages awarded may be imposed at the amendment by BSP-MB Circular No. 799 - but will now be
discretion of the court at the rate of 6% per annum. six percent (6%) per annum effective July 1, 2013. It should
No interest, however, shall be adjudged on be noted, nonetheless, that the new rate could only be applied
unliquidated claims or damages except when or until prospectively and not retroactively. Consequently, the twelve
the demand can be established with reasonable percent (12%) per annum legal interest shall apply only until
certainty. Accordingly, where the demand is June 30, 2013. Come July 1, 2013 the new rate of six percent
established with reasonable certainty, the interest (6%) per annum shall be the prevailing rate of interest when
shall begin to run from the time the claim is made applicable.
judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably Corollarily, in the recent case of Advocates for Truth in
established at the time the demand is made, the Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
interest shall begin to run only from the date the Monetary Board,41 this Court affirmed the authority of the
judgment of the court is made (at which time the BSP-MB to set interest rates and to issue and enforce Circulars
quantification of damages may be deemed to have when it ruled that "the BSP-MB may prescribe the maximum
been reasonably ascertained). The actual base for the rate or rates of interest for all loans or renewals thereof or the
computation of legal interest shall, in any case, be on forbearance of any money, goods or credits, including those
the amount finally adjudged. for loans of low priority such as consumer loans, as well as
such loans made by pawnshops, finance companies and
similar credit institutions. It even authorizes the BSP-MB to And, in addition to the above, judgments that have become
prescribe different maximum rate or rates for different types of final and executory prior to July 1, 2013, shall not be disturbed
borrowings, including deposits and deposit substitutes, or and shall continue to be implemented applying the rate of
loans of financial intermediaries." interest fixed therein.

Nonetheless, with regard to those judgments that have become WHEREFORE, premises considered, the Decision dated
final and executory prior to July 1, 2013, said judgments shall September 23, 2008 of the Court of Appeals in CA-G.R. SP
not be disturbed and shall continue to be implemented No. 98591, and the Resolution dated October 9, 2009 are
applying the rate of interest fixed therein.1awp++i1 REVERSED and SET ASIDE. Respondents are Ordered to
Pay petitioner:
To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Lines 42 are accordingly (1) backwages computed from the time petitioner was
modified to embody BSP-MB Circular No. 799, as follows: illegally dismissed on January 24, 1997 up to May
27, 2002, when the Resolution of this Court in G.R.
I. When an obligation, regardless of its source, i.e., No. 151332 became final and executory;
law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for (2) separation pay computed from August 1990 up to
damages. The provisions under Title XVIII on May 27, 2002 at the rate of one month pay per year
"Damages" of the Civil Code govern in determining of service; and
the measure of recoverable damages.1âwphi1
(3) interest of twelve percent (12%) per annum of the
II. With regard particularly to an award of interest in total monetary awards, computed from May 27, 2002
the concept of actual and compensatory damages, the to June 30, 2013 and six percent (6%) per annum
rate of interest, as well as the accrual thereof, is from July 1, 2013 until their full satisfaction.
imposed, as follows:
The Labor Arbiter is hereby ORDERED to make another
When the obligation is breached, and it consists in the recomputation of the total monetary benefits awarded and due
payment of a sum of money, i.e., a loan or forbearance of to petitioner in accordance with this Decision.
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself SO ORDERED.
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.

When an obligation, not constituting a loan or forbearance of

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

When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.
ISLA VS ESTORGA proper to render petitioners solidarily liable to pay respondent
and/or foreclose the subject mortgage should they fail to fulfill
Before the Court is a petition for review on certiorari1 filed by their obligation.16
petitioners Catalina F. Isla (Catalina), Elizabeth Isla, and
Gilbert F. Isla (collectively, petitioners) assailing the Consequently, the RTC directed petitioners to pay respondent
Decision2 dated May 31, 2017 and the Resolution3 dated the amounts of P100,000.00 with twelve percent (12%)
August 24, 2017 of the Court of Appeals (CA) in CA-G.R. CV interest per annum from December 2007 until fully paid and
No. 101743, which affirmed with modification the P20,000.00 as attorney's fees. Alternatively, in the event that
Decision4 dated December 10, 2012 of the Regional Trial petitioners fail to pay or deposit with the Clerk of Court the
Court of Pasay City, Branch 112 (RTC) in Civil Case No. 07- said amounts within a period of six (6) months from receipt of
0014, directing petitioners to pay respondent Genevira P. a copy of the RTC Decision, it held that the subject property
Estorga (respondent) the following sums: (a) P100,000.00 will be foreclosed and sold at public auction to satisfy the
representing the principal of the loan obligation; (b) an amount mortgage debt, and the surplus, if any, will be delivered to
equivalent to twelve percent (12%) of P100,000.00 computed petitioners with reasonable interest under the law.17
from November 16, 2006 until full payment, representing
interest on the loan; (c) an amount equivalent to six percent Aggrieved, respondent appealed18 to the CA.
(6%) of the sums due in (a) and (b) per annum computed from
the finality of the CA Decision until full payment, representing The CA Ruling
legal interest; and (d) P20,000.00 as attorney's fees.
In a Decision19 dated May 31, 2017, the CA affirmed with
The Facts modification the RTC Decision, and accordingly, ordered
petitioners to pay respondent the following sums: (a)
On December 6, 2004, petitioners obtained a loan in the P100,000.00 representing the principal of the loan obligation;
amount of P100,000.00 from respondent, payable anytime (b) an amount equivalent to twelve percent (12%) of
from six (6) months to one (1) year and subject to interest at P100,000.00 computed per year from November 16, 2006
the rate of ten percent (10%) per month, payable on or before until full payment, representing interest on the loan; (c) an
the end of each month. As security, a real estate amount equivalent to six percent (6%) of the sums due in (a)
mortgage5 was constituted over a parcel of land located in and (b) per annum computed from the finality of the CA
Pasay City, covered by Transfer Certificate of Title (TCT) No. Decision until full payment, representing legal interest; and (d)
1326736 and registered under the name of Edilberto Isla P20,000.00 as attorney's fees.20
(Edilberto), who is married to Catalina (subject property).
When petitioners failed to pay the said loan, respondent sought The CA held that in light of the registry return receipt bearing
assistance from the barangay, and consequently, a Kasulatan the signature of Catalina, it was established that petitioners
ng Pautang7 dated December 8, 2005 was executed. indeed received the demand letter dated November 16,
Petitioners, however, failed to comply with its terms, 2006.21 Meanwhile, it did not agree with the RTC's order
prompting respondent to send a demand letter8 dated providing petitioners alternative remedies, which remedies are,
November 16, 2006. Once more, petitioners failed to comply by law, mutually exclusive. Thus, since respondent's Petition
with the demand, causing respondent to file a Petition for for Judicial Foreclosure was essentially an action to collect a
Judicial Foreclosure9 against them before the RTC.10 sum of money, she is then barred from causing the foreclosure
of the subject mortgage.22
For their part,11petitioners maintained that the subject
mortgage was not a real estate mortgage but a mere loan, and Moreover, the CA ruled that the RTC erred in imposing the
that the stipulated interest of ten percent (10%) per month was interest rate of twelve percent (12%) per annum from
exorbitant and grossly unconscionable.12 They also insisted December 2007 until full payment. It likewise held that the
that since petitioners were not the absolute owners of the stipulated interest of ten percent (10%) per month on the real
subject property - as the same was allegedly owned by estate mortgage is exorbitant. And finally, it declared that
Edilberto – they could not have validly constituted the subject respondent is entitled to the award of attorney's fees based on
mortgage thereon.13 equity and in the exercise of its discretion.23

The RTC Ruling Undaunted, petitioners sought partial

reconsideration,24 claiming that the award of attorney's fees
In a Decision14 dated December 10, 2012, the RTC granted the was without factual, legal, and equitable justification and
Petition for Judicial Foreclosure, finding that petitioners should therefore be deleted. 25 The same, however, was denied
themselves admitted that: (a) they obtained a loan in the in a Resolution26 dated August 24, 2017; hence, the instant
amount of P100,000.00 and that the said loan was secured by a petition, claiming that the CA gravely erred not only in
real estate mortgage over the subject property; and (b) the awarding attorney's fees despite the absence of factual
subject mortgage was annotated on TCT No. justification in the body of its Decision but also in imposing
132673.15 Further, the RTC observed that while it is true that interest of twelve percent (12%) per annum interest until full
the present action pertains to a judicial foreclosure, the payment.27
underlying principle is that a real estate mortgage is but a
security and not a satisfaction of indebtedness. Thus, it is only
In her Comment,28 respondent retorted that the CA's award of monetary interest of twelve percent (12%) per annum, which
attorney's fees was proper and within the discretion of the was the prevailing legal rate of interest for loans and
court. Likewise, the CA correctly imposed interest at the rate forbearances of money at the time the loan was contracted on
of twelve percent (12%) per annum to the principal loan December 6, 2004.
obligation of petitioners.29
In Spouses Abella v. Spouses Abella,38 the Court was also
The Issues Before the Court faced with a situation where the parties entered into a loan
with an agreement to pay monetary interest. Since the
The issue for the Court's resolution is whether or not the CA stipulated rate of interest by the parties was found to be
erred in awarding: (a) twelve percent (12%) interest on the unconscionable, the Court struck down the same and
principal obligation until full payment; and (b) attorney's fees. substituted it with the prevailing legal interest rate at the time
the loan was perfected, i.e., twelve percent (12%) per annum.
The Court's Ruling In holding that such rate shall persist in spite of supervening
events, the Court held:
The petition is partly meritorious.
Jurisprudence is clear about the applicable interest rate if a
written instrument fails to specify a rate. In Spouses Toring v.
I. Spouses Olan [(589 Phil. 362 [2008])], this court clarified the
effect of Article 1956 of the Civil Code and noted that the
In their petition, petitioners contest the interest imposed on the legal rate of interest (then at 12%) is to apply: "In a loan or
principal amount of the loan at the rate of twelve percent forbearance of money, according to the Civil Code, the
(12%) per annum from the date of extrajudicial demand until interest due should be that stipulated in writing, and in the
full payment, as stated in paragraph 2 of the CA ruling. In this absence thereof, the rate shall be 12% per annum."
regard, they argue that pursuant to ECE Realty and
Development, Inc. v. Hernandez (ECE Realty),30 the applicable Spouses Toring cites and restates (practically verbatim) what
interest rate should only be six percent (6%).31 this court settled in Security Bank and Trust Company v.
Regional Trial Court of Makati, Branch 61 [(331 Phil. 787
The argument is untenable. [1996])]: "In a loan or forbearance of money, the interest due
should be that stipulated in writing, and in the absence
Case law states that there are two (2) types of interest, namely, thereof, the rate shall be 12% per annum."
monetary interest and compensatory interest. Monetary
interest is the compensation fixed by the parties for the use or xxxx
forbearance of money. On the other hand, compensatory
interest is that imposed by law or by the courts as penalty or The rule is not only definite; it is cast in mandatory language.
indemnity for damages. Accordingly, the right to recover From Eastern Shipping [Lines, Inc. v. CA] [(G.R. No. 97412,
interest arises only either by virtue of a contract (monetary July 12, 1994, 234 SCRA 78)] to Security Bank to Spouses
interest) or as damages for delay or failure to pay the principal Toring, jurisprudence has repeatedly used the word "shall," a
loan on which the interest is demanded (compensatory term that has long been settled to denote something imperative
interest).32 or operating to impose a duty. Thus, the rule leaves no room
for alternatives or otherwise does not allow for discretion.
Anent monetary interest, the parties are free to stipulate their It requires the application of the legal rate of interest.
preferred rate. However, courts are allowed to equitably
temper interest rates that are found to be excessive, iniquitous, Our intervening Decision in Nacar v. Gallery Frames [(716
unconscionable, and/or exorbitant,33 such as stipulated interest Phil. 267 [2013])] recognized that the legal rate of interest has
rates of three percent (3%) per month or higher. 34 In such been reduced to 6% per annum[.]
instances, it is well to clarify that only the unconscionable
interest rate is nullified and deemed not written in the contract;
whereas the parties' agreement on the payment of interest on xxxx
the principal loan obligation subsists.35 It is as if the parties
failed to specify the interest rate to be imposed on the Nevertheless, both Bangko Sentral ng Pilipinas Circular No.
principal amount, in which case the legal rate of interest 799, Series of 2013 and Nacar retain the definite and
prevailing at the time the agreement was entered into is mandatory framing of the rule articulated in Eastern Shipping,
applied by the Court.36 This is because, according to Security Bank, and Spouses Toring. Nacar even
jurisprudence, the legal rate of interest is the presumptive restates Eastern Shipping:
reasonable compensation for borrowed money.37
xxxx
In this case, petitioners and respondent entered into a loan
obligation and clearly stipulated for the payment of monetary Thus, it remains that where interest was stipulated in writing
interest. However, the stipulated interest of ten percent (10%) by the debtor and creditor in a simple loan or mutuum, but no
per month was found to be unconscionable, and thus, the exact interest rate was mentioned, the legal rate of interest
courts a quo struck down the same and pegged a new
shall apply. At present, this is 6% per annum, subject to Nacar 220844 of the Civil Code demands factual, legal, and equitable
's qualification on prospective application. justification.45 It must clearly state the reasons for awarding
attorney's fees in the body of its decision, and not merely in its
Applying this, the loan obtained by respondents from dispositive portion.46
petitioners is deemed subjected to conventional interest at the
rate of 12% per annum, the legal rate of interest at the time the In this case, the CA awarded the amount of P20,000.00 as
parties executed their agreement. Moreover, should attorney's fees premised merely on the general statement
conventional interest still be due as of July 1, 2013, the rate of "upon equity and in the exercise of [its] discretion." 47 Hence,
12% per annum shall persist as the rate of conventional since the CA failed to "clearly state the reasons for awarding
interest. attorney's fees in the body of its decision", the Court finds it
proper to delete the same.
This is so because interest in this respect is used as a surrogate
for the parties' intent, as expressed as of the time of the WHEREFORE, the petition is PARTIALLY GRANTED.
execution of their contract. In this sense, the legal rate of The Decision dated May 31, 2017 and the Resolution dated
interest is an affirmation of the contracting parties' intent; August 24, 2017 of the Court of Appeals in CA-G.R. CV No.
that is, by their contract's silence on a specific rate, the 101743 are hereby MODIFIED as follows:
then prevailing legal rate of interest shall be the cost of
borrowing money. This rate, which by their contract the 1. Petitioners Catalina F. Isla, Elizabeth Isla, and Gilbert
parties have settled on, is deemed to persist regardless of F. Isla are ORDERED to pay respondent Genevira P.
shifts in the legal rate of interest. Stated otherwise, the Estorga:
legal rate of interest, when applied as conventional interest,
shall always be the legal rate at the time the agreement was (a)
executed and shall not be susceptible to shifts in P100,000.00 representing the principal loan obligation;
rate.39 (Emphases and underscoring supplied)   
(b)
Following this pronouncement, the Court rules that the CA Monetary interest on the principal loan obligation at the rate of
correctly imposed a straight monetary interest rate of twelve twelve percent (12%) per annum from the date of default, i.e.,
percent (12%) per annum on the principal loan obligation of extrajudicial demand on November 16, 2006, until finality of
petitioners to respondent, reckoned from the date of this ruling;
extrajudicial demand until finality of this ruling. At this point,   
suffice it to say that petitioner's reliance on ECE Realty is (c)
misplaced primarily because unlike in this case, the amount Compensatory interest on the monetary interest as stated in
due therein does not partake of a loan obligation or letter (b) at the rate of twelve percent (12%) per annum from
forbearance of money. judicial demand, i.e., July 24, 2007, to June 30, 2013, and
thereafter, at the rate of six percent (6%) per annum from July
In addition, not only the principal amount but also the 1, 2013 until finality of this ruling; and
monetary interest due to respondent as discussed above shall   
itself earn compensatory interest at the legal rate, pursuant to (d)
Article 2212 of the Civil Code, which states that "[i]nterest Legal interest at the rate of six percent (6%) per annum
due shall earn legal interest from the time it is judicially imposed on the sums due in letters (a), (b), and (c) from
demanded, although the obligation may be silent upon this finality of this ruling until full payment; and
point."40 To be sure, Article 2212 contemplates the presence of
stipulated or conventional interest, i.e., monetary interest, 2. The award of attorney's fees in favor of respondent
which has accrued when demand was judicially made. In cases is DELETED.
where no monetary interest had been stipulated by the parties,
no accrued monetary interest could further earn SO ORDERED.
compensatory .interest upon judicial demand. 41 Thus, the
principal amount and monetary interest due to respondent shall
earn compensatory interest of twelve percent (12%) per annum
from judicial demand, i.e., the date of the filing of the
complaint on July 24, 2007,42 to June 30, 2013, and thereafter,
at the rate of six percent (6%) per annum from July 1, 2013
until fully paid.

II.

On the issue of attorney's fees, the general rule is that the same
cannot be recovered as part of damages because of the policy
that no premium should be placed on the right to litigate. They
are not to be awarded every time a party wins a suit. 43 The
power of the court to award attorney's fees under Article
G.R. No. 173227               January 20, 2009 Thereafter, respondent consulted a lawyer regarding the
propriety of paying interest on the loan despite absence of
SEBASTIAN SIGA-AN, Petitioner, agreement to that effect. Her lawyer told her that petitioner
vs. could not validly collect interest on the loan because there was
ALICIA VILLANUEVA, Respondent. no agreement between her and petitioner regarding payment of
interest. Since she paid petitioner a total amount of
DECISION ₱1,200,000.00 for the ₱540,000.00 worth of loan, and upon
being advised by her lawyer that she made overpayment to
petitioner, she sent a demand letter to petitioner asking for the
CHICO-NAZARIO, J.: return of the excess amount of ₱660,000.00. Petitioner, despite
receipt of the demand letter, ignored her claim for
Before Us is a Petition1 for Review on Certiorari under Rule reimbursement.8
45 of the Rules of Court seeking to set aside the
Decision,2 dated 16 December 2005, and Resolution,3 dated 19 Respondent prayed that the RTC render judgment ordering
June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, petitioner to pay respondent (1) ₱660,000.00 plus legal interest
which affirmed in toto the Decision,4 dated 26 January 2001, from the time of demand; (2) ₱300,000.00 as moral damages;
of the Las Pinas City Regional Trial Court, Branch 255, in (3) ₱50,000.00 as exemplary damages; and (4) an amount
Civil Case No. LP-98-0068. equivalent to 25% of ₱660,000.00 as attorney’s fees.9

The facts gathered from the records are as follows: In his answer10 to the complaint, petitioner denied that he
offered a loan to respondent. He averred that in 1992,
On 30 March 1998, respondent Alicia Villanueva filed a respondent approached and asked him if he could grant her a
complaint5 for sum of money against petitioner Sebastian loan, as she needed money to finance her business venture
Siga-an before the Las Pinas City Regional Trial Court (RTC), with the PNO. At first, he was reluctant to deal with
Branch 255, docketed as Civil Case No. LP-98-0068. respondent, because the latter had a spotty record as a supplier
Respondent alleged that she was a businesswoman engaged in of the PNO. However, since respondent was an acquaintance
supplying office materials and equipments to the Philippine of his officemate, he agreed to grant her a loan. Respondent
Navy Office (PNO) located at Fort Bonifacio, Taguig City, paid the loan in full.11
while petitioner was a military officer and comptroller of the
PNO from 1991 to 1996. Subsequently, respondent again asked him to give her a loan.
As respondent had been able to pay the previous loan in full,
Respondent claimed that sometime in 1992, petitioner he agreed to grant her another loan. Later, respondent
approached her inside the PNO and offered to loan her the requested him to restructure the payment of the loan because
amount of ₱540,000.00. Since she needed capital for her she could not give full payment on the due date. He acceded to
business transactions with the PNO, she accepted petitioner’s her request. Thereafter, respondent pleaded for another
proposal. The loan agreement was not reduced in writing. restructuring of the payment of the loan. This time he rejected
Also, there was no stipulation as to the payment of interest for her plea. Thus, respondent proposed to execute a promissory
the loan.6 note wherein she would acknowledge her obligation to him,
inclusive of interest, and that she would issue several
On 31 August 1993, respondent issued a check worth postdated checks to guarantee the payment of her obligation.
₱500,000.00 to petitioner as partial payment of the loan. On Upon his approval of respondent’s request for restructuring of
31 October 1993, she issued another check in the amount of the loan, respondent executed a promissory note dated 12
₱200,000.00 to petitioner as payment of the remaining balance September 1994 wherein she admitted having borrowed an
of the loan. Petitioner told her that since she paid a total amount of ₱1,240,000.00, inclusive of interest, from petitioner
amount of ₱700,000.00 for the ₱540,000.00 worth of loan, the and that she would pay said amount in March 1995.
excess amount of ₱160,000.00 would be applied as interest for Respondent also issued to him six postdated checks amounting
the loan. Not satisfied with the amount applied as interest, to ₱1,240,000.00 as guarantee of compliance with her
petitioner pestered her to pay additional interest. Petitioner obligation. Subsequently, he presented the six checks for
threatened to block or disapprove her transactions with the encashment but only one check was honored. He demanded
PNO if she would not comply with his demand. As all her that respondent settle her obligation, but the latter failed to do
transactions with the PNO were subject to the approval of so. Hence, he filed criminal cases for Violation of the
petitioner as comptroller of the PNO, and fearing that Bouncing Checks Law (Batas Pambansa Blg. 22) against
petitioner might block or unduly influence the payment of her respondent. The cases were assigned to the Metropolitan Trial
vouchers in the PNO, she conceded. Thus, she paid additional Court of Makati City, Branch 65 (MeTC).12
amounts in cash and checks as interests for the loan. She asked
petitioner for receipt for the payments but petitioner told her Petitioner insisted that there was no overpayment because
that it was not necessary as there was mutual trust and respondent admitted in the latter’s promissory note that her
confidence between them. According to her computation, the monetary obligation as of 12 September 1994 amounted to
total amount she paid to petitioner for the loan and interest ₱1,240,000.00 inclusive of interests. He argued that
accumulated to ₱1,200,000.00.7 respondent was already estopped from complaining that she
should not have paid any interest, because she was given
several times to settle her obligation but failed to do so. He lodged the instant petition before us assigning the following
maintained that to rule in favor of respondent is tantamount to errors:
concluding that the loan was given interest-free. Based on the
foregoing averments, he asked the RTC to dismiss I.
respondent’s complaint.
THE RTC AND THE COURT OF APPEALS ERRED IN
After trial, the RTC rendered a Decision on 26 January 2001 RULING THAT NO INTEREST WAS DUE TO
holding that respondent made an overpayment of her loan PETITIONER;
obligation to petitioner and that the latter should refund the
excess amount to the former. It ratiocinated that respondent’s II.
obligation was only to pay the loaned amount of ₱540,000.00,
and that the alleged interests due should not be included in the
computation of respondent’s total monetary debt because there THE RTC AND THE COURT OF APPEALS ERRED IN
was no agreement between them regarding payment of APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.17
interest. It concluded that since respondent made an excess
payment to petitioner in the amount of ₱660,000.00 through Interest is a compensation fixed by the parties for the use or
mistake, petitioner should return the said amount to forbearance of money. This is referred to as monetary interest.
respondent pursuant to the principle of solutio indebiti.13 Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory
The RTC also ruled that petitioner should pay moral damages interest.18 The right to interest arises only by virtue of a
for the sleepless nights and wounded feelings experienced by contract or by virtue of damages for delay or failure to pay the
respondent. Further, petitioner should pay exemplary damages principal loan on which interest is demanded.19
by way of example or correction for the public good, plus
attorney’s fees and costs of suit. Article 1956 of the Civil Code, which refers to monetary
interest,20 specifically mandates that no interest shall be due
The dispositive portion of the RTC Decision reads: unless it has been expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment of monetary
interest is allowed only if: (1) there was an express stipulation
WHEREFORE, in view of the foregoing evidence and in the for the payment of interest; and (2) the agreement for the
light of the provisions of law and jurisprudence on the matter, payment of interest was reduced in writing. The concurrence
judgment is hereby rendered in favor of the plaintiff and of the two conditions is required for the payment of monetary
against the defendant as follows: interest. Thus, we have held that collection of interest without
any stipulation therefor in writing is prohibited by law.21
(1) Ordering defendant to pay plaintiff the amount of
₱660,000.00 plus legal interest of 12% per annum It appears that petitioner and respondent did not agree on the
computed from 3 March 1998 until the amount is payment of interest for the loan. Neither was there convincing
paid in full; proof of written agreement between the two regarding the
payment of interest. Respondent testified that although she
(2) Ordering defendant to pay plaintiff the amount of accepted petitioner’s offer of loan amounting to ₱540,000.00,
₱300,000.00 as moral damages; there was, nonetheless, no verbal or written agreement for her
to pay interest on the loan.22
(3) Ordering defendant to pay plaintiff the amount of
₱50,000.00 as exemplary damages; Petitioner presented a handwritten promissory note dated 12
September 199423 wherein respondent purportedly admitted
(4) Ordering defendant to pay plaintiff the amount owing petitioner "capital and interest." Respondent, however,
equivalent to 25% of ₱660,000.00 as attorney’s fees; explained that it was petitioner who made a promissory note
and and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of
(5) Ordering defendant to pay the costs of suit.14 petitioner as comptroller of the PNO; that petitioner threatened
to disapprove her transactions with the PNO if she would not
Petitioner appealed to the Court of Appeals. On 16 December pay interest; that being unaware of the law on interest and
2005, the appellate court promulgated its Decision fearing that petitioner would make good of his threats if she
affirming in toto the RTC Decision, thus: would not obey his instruction to copy the promissory note,
she copied the promissory note in her own handwriting; and
that such was the same promissory note presented by
WHEREFORE, the foregoing considered, the instant appeal is petitioner as alleged proof of their written agreement on
hereby DENIED and the assailed decision [is] AFFIRMED in interest.24 Petitioner did not rebut the foregoing testimony. It is
toto.15 evident that respondent did not really consent to the payment
of interest for the loan and that she was merely tricked and
Petitioner filed a motion for reconsideration of the appellate coerced by petitioner to pay interest. Hence, it cannot be
court’s decision but this was denied. 16 Hence, petitioner gainfully said that such promissory note pertains to an express
stipulation of interest or written agreement of interest on the All the same, the interest under these two instances may be
loan between petitioner and respondent. imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a
Petitioner, nevertheless, claims that both the RTC and the compensation for the use or forbearance of money. In other
Court of Appeals found that he and respondent agreed on the words, the two instances apply only to compensatory interest
payment of 7% rate of interest on the loan; that the agreed 7% and not to monetary interest. 29 The case at bar involves
rate of interest was duly admitted by respondent in her petitioner’s claim for monetary interest.
testimony in the Batas Pambansa Blg. 22 cases he filed against
respondent; that despite such judicial admission by Further, said compensatory interest is not chargeable in the
respondent, the RTC and the Court of Appeals, citing Article instant case because it was not duly proven that respondent
1956 of the Civil Code, still held that no interest was due him defaulted in paying the loan. Also, as earlier found, no interest
since the agreement on interest was not reduced in writing; was due on the loan because there was no written agreement
that the application of Article 1956 of the Civil Code should as regards payment of interest.
not be absolute, and an exception to the application of such
provision should be made when the borrower admits that a Apropos the second assigned error, petitioner argues that the
specific rate of interest was agreed upon as in the present case; principle of solutio indebiti does not apply to the instant case.
and that it would be unfair to allow respondent to pay only the Thus, he cannot be compelled to return the alleged excess
loan when the latter very well knew and even admitted in the amount paid by respondent as interest.30
Batas Pambansa Blg. 22 cases that there was an agreed 7%
rate of interest on the loan.25 Under Article 1960 of the Civil Code, if the borrower of loan
pays interest when there has been no stipulation therefor, the
We have carefully examined the RTC Decision and found that provisions of the Civil Code concerning solutio indebiti shall
the RTC did not make a ruling therein that petitioner and be applied. Article 2154 of the Civil Code explains the
respondent agreed on the payment of interest at the rate of 7% principle of solutio indebiti. Said provision provides that if
for the loan. The RTC clearly stated that although petitioner something is received when there is no right to demand it, and
and respondent entered into a valid oral contract of loan it was unduly delivered through mistake, the obligation to
amounting to ₱540,000.00, they, nonetheless, never intended return it arises. In such a case, a creditor-debtor relationship is
the payment of interest thereon. 26 While the Court of Appeals created under a quasi-contract whereby the payor becomes the
mentioned in its Decision that it concurred in the RTC’s ruling creditor who then has the right to demand the return of
that petitioner and respondent agreed on a certain rate of payment made by mistake, and the person who has no right to
interest as regards the loan, we consider this as merely an receive such payment becomes obligated to return the same.
inadvertence because, as earlier elucidated, both the RTC and The quasi-contract of solutio indebiti harks back to the ancient
the Court of Appeals ruled that petitioner is not entitled to the principle that no one shall enrich himself unjustly at the
payment of interest on the loan. The rule is that factual expense of another.31 The principle of solutio indebiti applies
findings of the trial court deserve great weight and respect where (1) a payment is made when there exists no binding
especially when affirmed by the appellate court. 27 We found relation between the payor, who has no duty to pay, and the
no compelling reason to disturb the ruling of both courts. person who received the payment; and (2) the payment is
made through mistake, and not through liberality or some
Petitioner’s reliance on respondent’s alleged admission in the other cause.32 We have held that the principle of solutio
Batas Pambansa Blg. 22 cases that they had agreed on the indebiti applies in case of erroneous payment of undue
payment of interest at the rate of 7% deserves scant interest.33
consideration. In the said case, respondent merely testified that
after paying the total amount of loan, petitioner ordered her to It was duly established that respondent paid interest to
pay interest.28 Respondent did not categorically declare in the petitioner. Respondent was under no duty to make such
same case that she and respondent made an express stipulation payment because there was no express stipulation in writing to
in writing as regards payment of interest at the rate of 7%. As that effect. There was no binding relation between petitioner
earlier discussed, monetary interest is due only if there was and respondent as regards the payment of interest. The
an express stipulation in writing for the payment of interest. payment was clearly a mistake. Since petitioner received
something when there was no right to demand it, he has an
There are instances in which an interest may be imposed even obligation to return it.
in the absence of express stipulation, verbal or written,
regarding payment of interest. Article 2209 of the Civil Code We shall now determine the propriety of the monetary award
states that if the obligation consists in the payment of a sum of and damages imposed by the RTC and the Court of Appeals.
money, and the debtor incurs delay, a legal interest of 12% per
annum may be imposed as indemnity for damages if no Records show that respondent received a loan amounting to
stipulation on the payment of interest was agreed upon. ₱540,000.00 from petitioner.34 Respondent issued two checks
Likewise, Article 2212 of the Civil Code provides that interest with a total worth of ₱700,000.00 in favor of petitioner as
due shall earn legal interest from the time it is judicially payment of the loan.35 These checks were subsequently
demanded, although the obligation may be silent on this point. encashed by petitioner.36 Obviously, there was an excess of
₱160,000.00 in the payment for the loan. Petitioner claims that
the excess of ₱160,000.00 serves as interest on the loan to
which he was entitled. Aside from issuing the said two checks, exemplary damages is appropriate. The amount of ₱50,000.00
respondent also paid cash in the total amount of ₱175,000.00 imposed as exemplary damages by the RTC and the Court is
to petitioner as interest. 37 Although no receipts reflecting the fitting so as to deter petitioner and other lenders from
same were presented because petitioner refused to issue such committing similar and other serious wrongdoings.41
to respondent, petitioner, nonetheless, admitted in his Reply-
Affidavit38 in the Batas Pambansa Blg. 22 cases that Jurisprudence instructs that in awarding attorney’s fees, the
respondent paid him a total amount of ₱175,000.00 cash in trial court must state the factual, legal or equitable justification
addition to the two checks. Section 26 Rule 130 of the Rules for awarding the same.42 In the case under consideration, the
of Evidence provides that the declaration of a party as to a RTC stated in its Decision that the award of attorney’s fees
relevant fact may be given in evidence against him. Aside equivalent to 25% of the amount paid as interest by respondent
from the amounts of ₱160,000.00 and ₱175,000.00 paid as to petitioner is reasonable and moderate considering the extent
interest, no other proof of additional payment as interest was of work rendered by respondent’s lawyer in the instant case
presented by respondent. Since we have previously found that and the fact that it dragged on for several years. 43 Further,
petitioner is not entitled to payment of interest and that the respondent testified that she agreed to compensate her lawyer
principle of solutio indebiti applies to the instant case, handling the instant case such amount.44 The award, therefore,
petitioner should return to respondent the excess amount of of attorney’s fees and its amount equivalent to 25% of the
₱160,000.00 and ₱175,000.00 or the total amount of amount paid as interest by respondent to petitioner is proper.
₱335,000.00. Accordingly, the reimbursable amount to
respondent fixed by the RTC and the Court of Appeals should Finally, the RTC and the Court of Appeals imposed a 12% rate
be reduced from ₱660,000.00 to ₱335,000.00. of legal interest on the amount refundable to respondent
computed from 3 March 1998 until its full payment. This is
As earlier stated, petitioner filed five (5) criminal cases for erroneous.
violation of Batas Pambansa Blg. 22 against respondent. In the
said cases, the MeTC found respondent guilty of violating We held in Eastern Shipping Lines, Inc. v. Court of
Batas Pambansa Blg. 22 for issuing five dishonored checks to Appeals,45 that when an obligation, not constituting a loan or
petitioner. Nonetheless, respondent’s conviction therein does forbearance of money is breached, an interest on the amount
not affect our ruling in the instant case. The two checks, of damages awarded may be imposed at the rate of 6% per
subject matter of this case, totaling ₱700,000.00 which annum. We further declared that when the judgment of the
respondent claimed as payment of the ₱540,000.00 worth of court awarding a sum of money becomes final and executory,
loan, were not among the five checks found to be dishonored the rate of legal interest, whether it is a loan/forbearance of
or bounced in the five criminal cases. Further, the MeTC money or not, shall be 12% per annum from such finality until
found that respondent made an overpayment of the loan by its satisfaction, this interim period being deemed equivalent to
reason of the interest which the latter paid to petitioner.39 a forbearance of credit.

Article 2217 of the Civil Code provides that moral damages In the present case, petitioner’s obligation arose from a quasi-
may be recovered if the party underwent physical suffering, contract of solutio indebiti and not from a loan or forbearance
mental anguish, fright, serious anxiety, besmirched reputation, of money. Thus, an interest of 6% per annum should be
wounded feelings, moral shock, social humiliation and similar imposed on the amount to be refunded as well as on the
injury. Respondent testified that she experienced sleepless damages awarded and on the attorney’s fees, to be computed
nights and wounded feelings when petitioner refused to return from the time of the extra-judicial demand on 3 March
the amount paid as interest despite her repeated demands. 1998,46 up to the finality of this Decision. In addition, the
Hence, the award of moral damages is justified. However, its interest shall become 12% per annum from the finality of this
corresponding amount of ₱300,000.00, as fixed by the RTC Decision up to its satisfaction.
and the Court of Appeals, is exorbitant and should be
equitably reduced. Article 2216 of the Civil Code instructs that
assessment of damages is left to the discretion of the court WHEREFORE, the Decision of the Court of Appeals in CA-
according to the circumstances of each case. This discretion is G.R. CV No. 71814, dated 16 December 2005, is
limited by the principle that the amount awarded should not be hereby AFFIRMED with the following MODIFICATIONS:
palpably excessive as to indicate that it was the result of (1) the amount of ₱660,000.00 as refundable amount of
prejudice or corruption on the part of the trial court. 40 To our interest is reduced to THREE HUNDRED THIRTY FIVE
mind, the amount of ₱150,000.00 as moral damages is fair, THOUSAND PESOS (₱335,000.00); (2) the amount of
reasonable, and proportionate to the injury suffered by ₱300,000.00 imposed as moral damages is reduced to ONE
respondent. HUNDRED FIFTY THOUSAND PESOS (₱150,000.00); (3)
an interest of 6% per annum is imposed on the ₱335,000.00,
on the damages awarded and on the attorney’s fees to be
Article 2232 of the Civil Code states that in a quasi-contract, computed from the time of the extra-judicial demand on 3
such as solutio indebiti, exemplary damages may be imposed March 1998 up to the finality of this Decision; and (4) an
if the defendant acted in an oppressive manner. Petitioner interest of 12% per annum is also imposed from the finality of
acted oppressively when he pestered respondent to pay interest this Decision up to its satisfaction. Costs against petitioner.
and threatened to block her transactions with the PNO if she
would not pay interest. This forced respondent to pay interest
despite lack of agreement thereto. Thus, the award of SO ORDERED.