TITLE XI LOAN

General Provisions

Article 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. (1740a)

Article 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)

CHAPTER 1 Commodatum

SECTION 1 Nature of Commodatum

Article 1935. The bailee in commodatum acquires the use of the thing loaned but not its fruits; if any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (1941a)

Article 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. (n)

Article 1937. Movable or immovable property may be the object of commodatum. (n)

Article 1938. The bailor in commodatum need not be the owner of the thing loaned. (n)

Article 1939. Commodatum is purely personal in character. Consequently:(1) The death of either the bailor or the bailee extinguishes the contract;

(2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. (n)

Article 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n)

SECTION 2 Obligations of the Bailee

Article 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned. (1743a)

Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:

(1) If he devotes the thing to any purpose different from that for which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted;

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a member of his household;

(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. (1744a and 1745)

Article 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. (1746)

Article 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in article 1951. (1747a)

Article 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (1748a)

SECTION 3 Obligations of the Bailor

ARTICLE 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use.

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. (1749a)

Article 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases:

(1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or

(2) If the use of the thing is merely tolerated by the owner. (1750a)

Article 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in article 765. (n)

Article 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (1751a)

Article 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in articles 1941 and 1949, he is not entitled to reimbursement. (n)

Article 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. (1752)

Article 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (n)

CHAPTER 2 Simple Loan or Mutuum

Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (1753a)

Article 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. (n)

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

If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid. (1754a)

Article 1956. No interest shall be due unless it has been expressly stipulated in writing. (1755a)

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

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

Article 1959. Without prejudice to the provisions of article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. (n)

Article 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. (n)

Article 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (n)

ILLUSTRATIVE CASE:Gratuitous use of furniture was subject to the condition that lessee would return them upon lessor’s demand but notwithstanding such demand, former continued to use furniture until expiration of lease.

Facts: A was a tenant of B with respect to a house. Upon the novation of the contract of lease, B gratuitously granted to A the use of the furniture described in the contract, subject to the condition that A would return them to B upon the latter’s demand. B later sold the property to C, and they notified A of the conveyance, giving him 60 days to vacate the premises. Thereafter, B required A to return all the furniture transferred to him for his use. A wrote B reiterating that B may call for them in the house where they are found. Another letter was written to B informing her that A could not give up the 3 gas heaters and the 4 electric lamps because he would use them until the 15th of the month when the lease was due to expire. B refused to get the furniture in view of the fact that A had declined to make delivery of all of them.

On the 15th of the month, A deposited all the furniture in a warehouse in the custody of the sheriff.

Issues: (1) Has A complied with his obligation to return the furniture upon B’s demand?

(2) Is B bound to bear the deposit fees thereof?

(3) Is B entitled to the costs of litigation?

Held: (1) No. The contract entered into between the parties is one of commodatum because under it, B gratuitously granted the use of the furniture to A reserving for himself the ownership thereof. By this contract, A bound himself to return the furniture to B upon demand. A did not comply with his obligation when he merely placed them at the disposal of B, retaining for his benefi t the 3 gas heaters. The obligation assumed by A to return the furniture means that he should return all of them to B at the latter’s residence or house.

(2) No. As A had voluntarily undertaken to return all the furniture to B upon the latter’s demand, the court could not legally compel B to bear the expenses occasioned by the deposit. A, as bailee, was not entitled to place the furniture on deposit; nor was B under a duty to accept the offer because A wanted to retain the 3 gas heaters and the 4 electric lamps.

(3) Yes. The costs in both instances should be borne by A because B is the prevailing party. A was the one who breached the contract of commodatum and without any reason he refused to return and deliver all the furniture upon demand. In these circumstances, it is just and equitable that he pay the legal expenses and other judicial costs which B could not have

otherwise defrayed. (Quintos and Ansaldo vs. Beck, 69 Phil. 108 [1939].)

EXAMPLE:

If L lends to B his car without informing the latter that its brake is not working properly, L will be liable in case B is injured by reason thereof. The liability imposed by law is a just sanction for the bad faith committed by L. Of course, if the defect is patent or could have been known to B after inspection or L was not aware of the defect, L is not liable. (see Art. 1944.) In the fi rst case, it is presumed that B will adopt the necessary precautions or is willing to take the risk incident to the use of the car. In the second case, L is not liable for the reason that commodatum is gratuitous..

Simple loan distinguished from trust receipt.

Under the Trusts Receipt Law (Pres. Decree No. 115.), trust receipt “shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of [the] Decree.’’ (Sec. 3[j], thereof.) It has also been defi ned as “a document in which is expressed a security transaction, whereunder the lender, having no prior title in the goods on which the lien is to be given, and not having possession which remains in the borrower, lends his money to the borrower on security of the goods, which the borrower is privileged to sell clear of the lien on agreement to pay all or part of the proceeds of the sale to the lender.

The danger in characterizing a simple loan as a trust receipt transaction was explained in a case to wit:

“The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no time did title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of violation of its provisions.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation.’’

In Colinares, the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted. In Consolidated Bank, as in Colinares, the delivery to respondent corporation of the goods subject to the trust receipt occurred long before the trust receipt itself was executed. Furthermore, respondent was not an importer which acquired the banker fuel oil for re-sale; it needed the oil for its own operations at no time did title over the out pass to petitioner bank. Evidently, respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended to the former.

Meaning of fungible things.

Fungible things, are those which are usually dealt with by number, weight, or measure such as rice, oil, sugar, etc. so that any given unit or portion is treated as the equivalent of any other unit or portion. For example, one cavan of “wagwag” rice of a particular quality is, to all intents and purposes, the same as any other portion of the same kind, quality, and quantity.

ILLUSTRATIVE CASE:

Standing crops given as security for a loan of money were destroyed due to a fortuitous event.

Facts: B received money as a loan with interest from L secured by a chattel mortgage on the standing crops on B’s land. The crops were destroyed due to a fortuitous event.

Issue: Is the obligation of B to pay the loan extinguished?

Held: No. The obligation of B is not to deliver a determinate thing, namely: the crops to be harvested on his land, but to pay a generic thing, the amount of money representing the loan with interest. (see Art. 1263.) The loss of the mortgaged crops did not extinguish his obligation to pay, because it could still be paid from other sources aside from the crops. The chattel mortgage simply stood as a security for the fulfi llment of his obligation.

Distinction between fungible and consumable things.

The new Civil Code classifies movable property into consumable or non-consumable (Art. 418 Movable property is either consumable or non-consumable. To the first class belong those movables which cannot be used in a manner appropriate to their nature without their being consumed; to the second class belong all the others.) thereby discarding the old classification into fungible and non-fungible. (Art. 334, old Civil Code) Article 1953 (also Art. 1427 on Natural Obligations, Art. 1464 on Sales, and Art. 1795 on Partnership.), however, still speaks of fungible things. This change of classifi cation seems to be in name only as the definition of fungible things as those which cannot be used without being consumed under the old Civil Code is precisely that of consumable things. (see Art. 418.)

Nevertheless, whether a thing is consumable or not depends upon its nature and whether it is fungible or not depends upon the intention of the parties. Thus, while wine is consumable by its nature, it is non-fungible if the intention is merely for display or exhibition (see Art. 1936.) because the same wine must be returned.

ART. 1954.

Mutuum and commodatum distinguished from barter.

By the contract of barter or exchange, one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. (Art. 1638.)

(1) The distinction between mutuum and barter lies in the subject matter. In the former, it is money or any other fungible things; in the latter, non-fungible (non-consumable) things.

(2) In commodatum, the bailee is bound to return the identical thing borrowed when the time has expired or the purpose has been served. In barter, the equivalent thing is given in return for what has been received.

(3) Mutuum may be gratuitous and commodatum is always gratuitous. (Art. 1933, pars. 2, 3.) Barter, on the other hand, is an onerous contract. It is really a mutual sale. (see Art. 1641.)

ART. 1955.

Form of payment.

The object of simple loan may be either money or consumable or fungible things.

(1) Loan of money. — If the thing loaned is money, payment must be made in the currency stipulated, if it is possible to deliver such currency; otherwise, it is payable in the currency which is legal tender in the Philippines

(Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance. (1170)

and in case of extraordinary inflation or deflation, the basis of payment shall be the value of the currency at the time of the creation of the obligation. (Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.)

Presently, all notes and coins issued by the Bangko Sentral ng Pilipinas are legal tender in the Philippines for all debts, both public or private. A check is not a legal tender and, therefore, cannot constitute valid tender of payment.

EXAMPLE:

D borrowed from C P5,000.00 payable after fi ve years. On the maturity of the obligation, the value of P5,000.00 dropped to P2,500 because of inflation. In this case, the basis of payment shall be the equivalent value of the currency today fi ve years ago. Hence, D is liable to pay C P10,000.00 unless there is an agreement to the contrary.

(2) Loan of fungible thing. — If what was loaned is a fungible thing other than money, the borrower is under obligation to pay the lender another thing of the same kind, quality, and quantity. In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of the loan.

EXAMPLE:

D borrowed from C two sacks of rice of a certain kind and quality. At the time the loan was perfected, the price of each sack was P400.00. D should return to C two sacks of rice of the same kind and quality although at the time of payment, the price had increased to P500.00. If on the due date of the

obligation, the same kind of rice could not be delivered by D because it was not available for some reason, then D should pay C the sum of P800.00 instead, the value of the rice at the time of the perfection of the loan.

ART. 1956.

Requisites for recovery of interest.

In order that interest may be chargeable, the following are the requisites:

(1) The payment of interest must be expressly stipulated

(2) The agreement must be in writing (Art. 1956.); and

(3) The interest must be lawful. (see, however, note to Arts. 1957 and 1961.)

In a case, the promissory note stipulated a late payment penalty of 2.5% monthly to be added to each unpaid installment until fully paid. Payment of interest was not expressly stipulated in the note. Held: It should be deemed included in such penalty. Be that as it may, in the absence of stipulated interest, there can be legal interest pursuant to Article 2209 of the Civil Code. (infra.) In other words, interest may be paid either as compensation for the use of money (monetary interest) referred to in Article 1956 or imposed by law or by courts as penalty or indemnity for damages (compensatory interest) under Articles 2209 and 2212 for breach of contractual obligations. Unilateral impositions of interest do not suffi ce as proof an agreement to pay interest.

Existence of stipulation to pay interest.

(1) If a particular rate of interest has been expressly stipulated by the parties, that interest, not the legal rate of interest, shall be applied.

(2) If the exact rate of the interest is not mentioned, the legal rate of 12% shall be payable.

(3) No increase in interest shall be due unless such increase has also been expressly stipulated.

(4) Sales invoices or slips issued by a store to its customers, stating interests and attorney’s fees in the usual printed forms as terms and conditions, without the signature of the obligor, do

not constitute the express stipulation required by Article 1956. Therefore, the obligor is not liable for the interest except only the legal interest (6%) under Article 2209 (infra.) on the amount due in case he incurs in delay.

(5) It is only in contracts of loan, with or without security, that interest may be stipulated and demanded.

(6) The receipt by the creditor of interest payment up to a certain date on a loan that has already matured does not ipso facto result in the renewal or extension of maturity period of the loan up to said date. Whether or not a loan may be renewed does not solely depend on the debtor but more so on the discretion of the creditor.

(7) Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is, in effect, paying interest on the cash price, whether the fact and rate of such interest payment are disclosed in the contract or not. The contract for the purchase and

sale of a piece of land on the installment plan is not only lawful; it also refl ects a very widespread usage or custom in our present day commercial life.

Liability for interest even in the absence of stipulation.

Article 1956 is subject to two exceptions:

(1) Indemnity for damages. — The debtor in delay is liable to pay legal interest (6%/12%) as indemnity for damages even in the absence of stipulation for the payment of interest. (No interest is due where there was tender of payment prior to any demand to pay or perform an agreed act. A debtor cannot be considered in delay who offered check backed by sufficient deposit or ready to pay cash if the creditor chose that means of payment. (Francisco vs. Gregorio, 115 SCRA 394 [1982].))

(a) Under Article 2209,( If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, an which is six per cent per annum.) the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum or money

(1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

“2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 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 extra judicially (Art. 1169, Civil Code.) but when such certainty cannot be so reasonably established at the time the demand is made, or where the pleadings of the plaintiff in the trial court did not spell out such amounts with certitude, 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 fi nally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 [loan or forbearance of money] or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.’’

The legal interest shall begin to run on the date when the judgment is rendered and not when the complaint was fi led because the amount of the damages to which the plaintiff may be entitled remains unliquidated and unknown, until it is defi nitely ascertained,, is the payment of the by the court and only upon presentation of proof thereon.

In Cristina Garments, Inc. vs. Court of Appeals (304 SCRA 356 [1999]), “because the amount due arose from a contract for a piece of work, not from a loan or forbearance of money, the legal interest of 6%

per annum should be applied. Furthermore, since the amount of the demand could be established with certainty when the complaint was filed, the 6% interest should be computed from the fi ling of said complaint. But after the judgment becomes final and executory until the obligation is satisfi ed, interest should be reckoned at 12% per year.’’)

is the payment of the penalty interest at the rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then the payment of additional interest at a rate equal to the regular monetary interest, and if no regular interest had been agreed upon, then payment of legal interest which is 6% annually or, in the case of loans or forbearances of money, 12% per annum as provided for in Central Bank Circular No. 416, infra.

The “obligation consisting of the payment of a sum of money’’ referred to in Article 2209 is not confined to a loan or forbearance of money. It has also been applied by the Supreme Court in cases involving default in the payment of price or consideration under a contract of sale and an action for damages for injury to persons and loss of property and an action for damages arising from unpaid insurance claims.

(b) Under the provisions of Article 2213, interest “cannot be recovered upon unliquidated claims or damages except when the demand can be established with reasonable certainty.’’ It is axiomatic that if the suit were for damages, unliquidated and not known until definitely assessed and determined by the courts, after proof, interest at rate of 6% per annum should be from the date the judgment of the court is made, i.e., at which time the qualification of damages may be deemed to be reasonably ascertained.

(c) Central Bank Circular No. 416 fixing the legal rate of interest at 12% per annum, deals with

1) loans;

2) forbearance of any money, goods or credits; and

3) judgments involving such loans or forbearance, in the absence of express agreement as to such rate of interest.

If the obligation arises from other sources (e.g., sale) or by way of damages arising from injury to persons and loss of property which does not involve a loan, what is applicable is the rate of 6% annually as provided in Article 2209 and not the rate of 12% per annum provided by Central Bank Circular No. 416.

(d) When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, regardless of whether the obligation involves a loan or forbearance of money shall be 12% per annum from such finality until its satisfaction. This interim period being deemed to be by then an equivalent to a forbearance of credit.

(e) While the interest agreed upon forms part of the consideration of the contract itself, interest as indemnity for damages is payable only in case of default or non-performance of the contract. As they are distinct claims, they may be demanded separately.

In the absence of stipulation, the rate of interest where the obligation constitutes a loan or forbearance of money shall be 12% per annum to be computed from date of default, i.e., from judicial or extrajudicial demand as provided in Article 1169 of the Civil Code.

(2) Interest accruing from unpaid interest. — Interest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point. (Art. 2212; see Sec. 5, Usury Law.) Both Article 2212 of the Civil Code and Section 5 of the Usury Law are applicable only where interest has been stipulated by the parties. Article 1212 contemplates the presence of stipulated or conventional interest which has accrued when demand was judicially made. In cases where no interest had been stipulated by the parties, no accrued conventional interest could further earn interest upon judicial demand.

Where the court’s judgment which did not provide for the payment of interest has already become final, no interest may be awarded. What remains is the ministerial execution of the judgment.

EXAMPLES:

(1) Under a written contract of loan, D obliged himself to pay C the sum of P10,000.00 at 18% interest a year which is lawful. In this case, all the requirements to entitle B to recover interest are present. If D incurs in delay, he is liable to pay the interest agreed upon as damages and not for the use of the money.

(2) If nothing was mentioned about the payment of interest, then no interest is due. If D incurs in delay, he is liable to pay interest at the legal rate which is 12% per annum from the date of delay. (3) Suppose in the fi rst example, D incurred in delay for one year. The indemnity for damages shall also be the stipulated interest of 18% so that D shall be liable to pay a total of P3,600.00: P1,800.00 as compensatory interest for the first year and another P1,800.00, as indemnity for damages for the one year delay.

(4) If the interest was judicially demanded 6 months after D incurred in delay, the interest due (P1,800 + P900 = P2,700.00) shall earn legal interest (12%) from that time until payment is made. (Art. 2212.)

Note: By virtue of Central Bank Circulars No. 416, dated July 29, 1974 and No. 905, dated December 10, 1982, the legal rate is increased from 6% to 12% per annum.

ILLUSTRATIVE CASE:

Interest for 14 years was due on principal obligation when foreclosure was filed.

Facts: The remaining balance of D’s indebtedness to C is P576,573.90 with an agreed interest at the rate of 6% per annum from January 1, 1959. D defaulted. So, C fi led a suit for foreclosure of mortgage on December 12, 1962.

Issue: How much interest is payable?

Held: The interest at 6% per annum from January 1, 1959 to December 12, 1962 is P136,482.13. This is to be added to the principal amount, thus making a total of P713,056.03 which shall earn legal interest at 6% (now 12%) per annum from December 12, 1962 until fully paid. Such interest is not due by stipulation but by the mandate of the law, i.e., Article 2212. (Joven de Cortes vs. Venturanza, 79 SCRA 709 [1977].)

Liability for surcharges and penalties.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides: “ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case.’’

It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by lenders like banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another.

Interest separate and distinct from surcharges and penalties.

The essence or rationale for the payment of interest often referred to as “cost of money,’’ is separate and distinct from that of surcharges and penalties. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be demanded. What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify non-payment or reduction of interest.

The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all.

ART. 1957.

Usurious contracts declared void.

(1) Form of contract not conclusive. — The above provision is deemed necessary to defeat the cunning devices of usurers. The form of the contract is not conclusive. Parol evidence is admissible to show that a written document though legal in form was in fact a cloak or device to cover usury if from a construction of the whole transaction it becomes apparent there exists a corrupt intention to violate the laws on usury.

Cases illustrating the cunning devices of usurers are discussed subsequently under the Usury Law. It is evident that the Civil Code yields to the Usury Law when it comes to the question of

how much of the loans and interests paid by the borrower may be recovered.

(2) Contract void only as to interest involved. — A usurious contract should not be considered void in its entirety but only as to the interest involved. (see Sec. 7, Usury Law, infra.) It is only the stipulation on usurious interest which should be treated as void so that the loan becomes without stipulation to pay interest. In a simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt which is the cause of the contract (Art. 1350.) is not illegal. The nullity of the stipulation on the usurious interest does not affect the lender’s right to receive back the principal amount of the loan.

(3) Right of debtor. — With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily. In a case, however, the Supreme Court affirmed the judgment of the lower

court ordering the debtor to pay the creditor the principal loaned plus interest thereon at the legal rate from the fi ling of the complaint.

Note: Interest rates are no longer subject to any ceiling. The rate will depend on the agreement of the parties. (see Note in II –The Usury Law.)

Instances of contracts disguised to cover usurious loans.

The following may be mentioned:

(1) Credit sale of property at exorbitant price to loan applicant. — When a credit sale of property is made to an applicant for a loan at an exorbitant price to be paid at a future day in order to enable the purchaser to sell it immediately for cash and thus obtain the money of which he is in need, and the purchaser’s obligation is for a greater sum than the fair value of the property sold and lawful interest. It is, however, necessary to show actual intent to reserve usurious interest under the guise of excess of price;

(2) Purchase of lender’s property at an exorbitant price to be taken from loan. — When the lender corruptly requires of the borrower as a condition for securing the loan, the purchase of the lender’s property at an exorbitant price to be taken out of the loan, or payable at a subsequent date and takes the borrower’s obligation for the sum loaned, or for both the loan and purchase price; or as a condition for extending time in which to pay a debt, the purchase of the lender’s property at an exorbitant price. In such case, the principal debt is the amount of the loan plus the fair value of the property at the time of the receipt by the buyer. All in excess of that sum is usury. But if the evidence does not disclose a guilty intent, such a contract will be upheld even though the collateral sale is made at a price higher than the market value of the property sold;

(3) Price of sale with right to repurchase clearly inadequate. — When a vendor sells a property at a clearly inadequate price, reserving an option to repurchase at a price greater than the original price with lawful interest as such contract is in effect to be a mortgage to secure a usurious loan;

(4) Pretended lease by borrower at usurious rental. — Where the borrower wishes to borrow money to enable him to purchase property and the lender furnishes the money taking title in himself, and puts the borrower in possession under a pretended lease at a usurious rental;

(5) Rent free by lender of borrower’s property in addition to interest on loans. — Where the lender, in addition to interest on the sum loaned, is to have the privilege of occupying rent-free, certain property of the borrower. Where other circumstances are present, showing that the purchase and lease are bona fide and not colorable, the transaction will, of course, be perfectly valid;

(6) Date for repayment of loan with interest ante-dates actual transaction. — Where an obligation for the repayment of money bearing interest from its date, ante-dates the actual transaction and receipt of the money loaned to hide a usurious contract. Where, however, the circumstances of the loan show good faith on the part of the contracting parties, as where the delay in the receipt of the money is unavoidably incident of the completion of the transaction or is due merely to the failure of the borrower to make earlier demand for it, the contract will not ordinarily be regarded as usurious, even though the actual result may be to give to the lender something more than the lawful rate of interest, if delay is not unreasonable (Ibid., 612; see Art. 1602.); and

(7) Payment by borrower for lender’s services as additional compensation for loan. — An apparently lawful loan is usurious when it is intended that additional compensation for loan be disguised by an

ostensibly unrelated contract providing for payment by the borrower for the lender’s services which are of little value or which are not, in fact, to be rendered.

ART. 1958.

Determination of interest payable in kind.

This article has the same purpose: to make usury harder to perpetrate.

EXAMPLE:

B borrowed P1,000.00 from L payable in palay in one (1) year which shall be appraised at the current market price at the time and place of payment. When the contract was entered into, the price per cavan of palay was P500.00. On the due date of the loan, the price increased to P600.00. In this case, the value of the palay shall be appraised at P600.00 per cavan.

ART. 1959.

When unpaid interest earns interest.

As a general rule, accrued interest (interest due and unpaid) shall not earn interest except in two instances:

(1) When judicially demanded as provided for in Article 2212 (supra.); and

(2) When there is an express stipulation made by the parties to wit: that the interest due an unpaid shall be added to the principal obligation and the resulting total amount shall earn interest. This practice is called compounding interest and it is allowed by the Usury Law if there is express stipulation.

The parties may stipulate on the imposition of both interest and penalty in case of default on the part of the borrower. (Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. x x x.) Under Article 1959, the compounding of not only of the monetary interest but also of the penalty charge, also called penalty or compensatory interest is allowed. Hence, the borrower may be held liable to pay the interest on the total amount of principal, the monetary interest and the penalty interest.

In view of Article 1956, the stipulation as to compound interest must be in writing.

ART. 1960.

Recovery of unstipulated interest paid.

This article simply means that if unstipulated interest (it is, therefore, not due) is paid by mistake, the debtor may recover as this would be a case of solutio indebiti or undue payment. (Art. 2154. If something is received when there is no right to demand it, and it was

unduly delivered through mistake, the obligation to return it arises.) But where the unstipulated interest, or interest stipulated, there being a stipulation but it is not in writing, is paid voluntarily because the debtor feels morally obliged to do so, there can be no recovery as in the case of natural obligations. (Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel

their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. (Arts. 1424-1430.))

ART. 1961.

Usurious transactions governed by special laws.

The Usury Law and other special laws apply only so far as they are not inconsistent with the Civil Code.

However, according to Article 1175, “usurious transactions shall be governed by special laws.’’ These two provisions have given rise to the question: In case of conflict, which would prevail, the Usury Law or the Civil Code? (see Sec. 6 of the Usury Law.)

Note: Usury is now legally non-existent. The interest legally chargeable depends upon the agreement between the lender and the borrower.

Central Bank Circular No. 905 (Dec. 10, 1982, effective Jan. 1, 1983) removed the Usury Law ceiling on interest rates (Notwithstanding the suspension of the effectivity of the Usury Law, courts are empowered to reduce the stipulated rate of interest, although it can no longer be considered “usurious,’’ if it is inequitous or unconscionable. (see Art. 1229.)) for secured and unsecured loans, regardless of maturity, rendering it legally ineffective. This Circular, however, is of doubtful validity. (see Note in II–Usury Law.) According to the Supreme Court, the Circular which took effect on January 1, 1983 “did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity.’’

The parties are now free to stipulate the interest to be paid on monetary obligations, and absent any evidence of fraud, undue influence or any vice of consent exercised by one party against the other, the interest rate agreed upon is binding upon them. But “while the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrohaging of their assets.’’ When the agreed rate is found to be iniquitous and unconscionable, the courts may reduce the same as reason and equity demand. It has been held that an interest rate of 24% per annum agreed upon by the parties is not unconscionable or excessive. But an interest rate of 4% per month or 48% per annum is highly unconscionable and inordinate.