LAW I.Q.

Sps. Abella vs. Sps. Abella (2015)

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SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners, -versus- SPOUSES ROMEO ABELLA AND
ANNIE ABELLA, Respondents.

G.R. No. 195166 • July 08, 2015 • Second Division • Justice Leonen

Civil Law │ Credit Transactions │ Legal Interest

Article 1956 of the Civil Code spells out the basic rule that “[n]o interest shall be due unless it has been
expressly stipulated in writing.” On the matter of interest, the text of the acknowledgment receipt is
simple, plain, and unequivocal. It attests to the contracting parties’ intent to subject to interest the loan
extended by petitioners to respondents. The controversy, however, stems from the acknowledgment
receipt’s failure to state the exact rate of interest. It remains that where interest was stipulated in
writing by the debtor and creditor in a simple loan or mutuum, but no exact interest rate was
mentioned, the legal rate of interest shall apply. At present, this is 6% per annum, subject to Nacar’s
qualification on prospective application. Applying this, the loan obtained by respondents from
petitioners is deemed subjected to conventional interest at the rate of 12% per annum, the legal rate of
interest at the time the parties executed their agreement. Moreover, should conventional interest still
be due as of July 1, 2013, the rate of 12% per annum shall persist as the rate of conventional interest.
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 execution of their contract. In this sense, the legal rate of interest is an affirmation of the
contracting parties’ intent; that is, by their contract’s silence on a specific rate, the then prevailing legal
rate of interest shall be the cost of borrowing money. This rate, which by their contract the parties have
settled on, is deemed to persist regardless of shifts in the legal rate of interest. Stated otherwise, the
legal rate of interest, when applied as conventional interest, shall always be the legal rate at the time
the agreement was executed and shall not be susceptible to shifts in rate.

FACTS:

The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the December
28, 2005 Decision of the Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case No. 6627. It directed
petitioners to pay respondents P148,500.00 (plus interest), which was the amount respondents
supposedly overpaid. The assailed January 4, 2011 Resolution of the Court of Appeals denied
petitioners’ Motion for Reconsideration.
The Regional Trial Court’s December 28, 2005 Decision ordered respondents to pay petitioners the
supposedly unpaid loan balance of P300,000.00 plus the allegedly stipulated interest rate of 30% per
annum, as well as litigation expenses and attorney’s fees.

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint for sum of money and
damages with prayer for preliminary attachment against respondents Spouses Romeo and Annie Abella
before the Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil Case No. 6627.

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of
P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and was
payable within one (1) year. Petitioners added that respondents were able to pay a total of P200,000.00
—P100,000.00 paid on two separate occasions—leaving an unpaid balance of P300,000.00.

In their Answer (with counterclaim and motion to dismiss), respondents alleged that the amount
involved did not pertain to a loan they obtained from petitioners but was part of the capital for a joint
venture involving the lending of money.

Specifically, respondents claimed that they were approached by petitioners, who proposed that if
respondents were to “undertake the management of whatever money [petitioners] would give them,
[petitioners] would get 2.5% a month with a 2.5% service fee to [respondents].”The 2.5% that each party
would be receiving represented their sharing of the 5% interest that the joint venture was supposedly
going to charge against its debtors. Respondents further alleged that the one year averred by petitioners
was not a deadline for payment but the term within which they were to return the money placed by
petitioners should the joint venture prove to be not lucrative. Moreover, they claimed that the entire
amount of P500,000.00 was disposed of in accordance with their agreed terms and conditions and that
petitioners terminated the joint venture, prompting them to collect from the joint venture’s borrowers.
They were, however, able to collect only to the extent of P200,000.00; hence, the P300,000.00 balance
remained unpaid.

In the Decision dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It noted
that the terms of the acknowledgment receipt executed by respondents clearly showed that: (a)
respondents were indebted to the extent of P500,000.00; (b) this indebtedness was to be paid within
one (1) year; and (c) the indebtedness was subject to interest. Thus, the trial court concluded that
respondents obtained a simple loan, although they later invested its proceeds in a lending enterprise.
The Regional Trial Court adjudged respondents solidarity liable to petitioners. In the Order dated March
13, 2006,the Regional Trial Court denied respondents’ Motion for Reconsideration.
On respondents’ appeal, the Court of Appeals ruled that while respondents had indeed entered into a
simple loan with petitioners, respondents were no longer liable to pay the outstanding amount of
P300,000.00.

The Court of Appeals reasoned that the loan could not have earned interest, whether as contractually
stipulated interest or as interest in the concept of actual or compensatory damages. As to the loan’s not
having earned stipulated interest, the Court of Appeals anchored its ruling on Article 1956 of the Civil
Code, which requires interest to be stipulated in writing for it to be due. The Court of Appeals noted that
while the acknowledgement receipt showed that interest was to be charged, no particular interest rate
was specified. Thus, at the time respondents were making

interest payments of 2.5% per month, these interest payments were invalid for not being properly
stipulated by the parties.

In the Resolution dated January 4, 2011, the Court of Appeals denied petitioners’ Motion for
Reconsideration.

ISSUE:

Whether or not the Court of Appeals erred in completely striking off interest despite the parties’ written
agreement stipulating it, as well as in ordering them to reimburse and pay interest to respondents.

RULING:

Yes. As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple
loan or mutuum, rather than a joint venture, with petitioners.

Respondents’ claims, as articulated in their testimonies before the trial court, cannot prevail over the
clear terms of the document attesting to the relation of the parties. “If the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations
shall control.”

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation
is one of simple loan or mutuum:
Art. 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.

….

Art. 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. (Emphasis
supplied)

On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:

Batan, Aklan

March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from Mrs.
Alma R. Abella, payable within one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)(Emphasis supplied)

The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first,
respondents’ receipt of the sum of P500,000.00 from petitioner Alma Abella; second, respondents’ duty
to pay tack this amount within one (1) year from March 22, 1999; and third, respondents’ duty to pay
interest. Consistent with what typifies a simple loan, petitioners delivered to respondents with the
corresponding condition that respondents shall pay the same amount to petitioners within one (1) year.
Although we have settled the nature of the contractual relation between petitioners and respondents,
controversy persists over respondents’ duty to pay conventional interest, i.e., interest as the cost of
borrowing money.

Article 1956 of the Civil Code spells out the basic rule that “[n]o interest shall be due unless it has been
expressly stipulated in writing.”

On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It
attests to the contracting parties’ intent to subject to interest the loan extended by petitioners to
respondents. The controversy, however, stems from the acknowledgment receipt’s failure to state the
exact rate of interest.

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. In
Spouses Toring v. Spouses Olan, this court clarified the effect of Article 1956 of the Civil Code and noted
that the legal rate of interest (then at 12%) is to apply: “In a loan or forbearance of money, according to
the Civil Code, the interest due should be that stipulated in writing, and in the absence thereof, the rate
shall be 12% per annum.”

Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and Trust
Company v. Regional Trial Court of Makati, Branch 61: “In a loan or forbearance of money, the interest
due should be that stipulated in writing, and in the absence thereof the rate shall be 12% per annum.”

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
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. (Emphasis supplied)

The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security Bank to
Spouses Toring, jurisprudence has repeatedly used the word “shall,” a term that has long been settled to
denote something imperative or operating to impose a duty. Thus, the rule leaves no room for
alternatives or otherwise does not allow for discretion. It requires the application of the legal rate of
interest.
Our intervening Decision in Nacar v. Gallery Frames recognized that the legal rate of interest has been
reduced to 6% per annum:

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796
dated May 16, 2013, approved the amendment of Section 2 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013, the pertinent portion of which
reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section
2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six
percent (6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are
hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would
govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and
the rate allowed in judgments shall no longer be twelve percent (12%) per annum — as reflected in the
case of Eastern Shipping Lines and Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions, before its amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal interest
shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall
be the prevailing rate of interest when applicable. (Emphasis supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain the
definite and mandatory framing of the rule articulated in Eastern Shipping, Security Bank, and Spouses
Toring. Nacar even restates Eastern Shipping:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines
are accordingly modified to embody BSP-MB Circular No. 799, as follows:

….

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a Joan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code. (Emphasis supplied, citations omitted)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple loan
or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At present,
this is 6% per annum, subject to Nacar‘s qualification on prospective application.

Applying this, the loan obtained by respondents from petitioners is deemed subjected to conventional
interest at the rate of 12% per annum, the legal rate of interest at the time the parties executed their
agreement. Moreover, should conventional interest still be due as of July 1, 2013, the rate of 12% per
annum shall persist as the rate of conventional interest.

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 execution of their contract. In this sense, the legal rate of interest is an affirmation of the
contracting parties’ intent; that is, by their contract’s silence on a specific rate, the then prevailing legal
rate of interest shall be the cost of borrowing money. This rate, which by their contract the parties have
settled on, is deemed to persist regardless of shifts in the legal rate of interest. Stated otherwise, the
legal rate of interest, when applied as conventional interest, shall always be the legal rate at the time
the agreement was executed and shall not be susceptible to shifts in rate.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per annum.
They argue that the acknowledgment receipt fails to show the complete and accurate intention of the
contracting parties. They rely on Article 1371 of the Civil Code, which provides that the
contemporaneous and subsequent acts of the contracting parties shall be considered should there be a
need to ascertain their intent. In addition, they claim that this case falls under the exceptions to the
Parol Evidence Rule, as spelled out in Rule 130, Section 9 of the Revised Rules on Evidence.

It is a basic precept in legal interpretation and construction that a rule or provision that treats a subject
with specificity prevails over a rule or provision that treats a subject in general terms. The rule spelled
out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil Code and specifically
governs simple loans or mutuum. Mutuum is a type of nominate contract that is specifically recognized
by the Civil Code and for which the Civil Code provides a specific set of governing rules: Articles 1953 to
1961. In contrast, Article 11371 is among the Civil Code provisions generally dealing with contracts. As
this case particularly involves a simple loan, the specific rule spelled out in Security Bank and Spouses
Toring finds preferential application as against Article 1371.

Contrary to petitioners’ assertions, there is no room for entertaining extraneous (or parol) evidence.
Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is
unconscionable. As emphasized in Castro v. Tan,the willingness of the parties to enter into a relation
involving an unconscionable interest rate is inconsequential to the validity of the stipulated rate. The
legal rate of interest is the presumptive reasonable compensation for borrowed money. While parties
are free to deviate from this, any deviation must be reasonable and fair. Any deviation that is far-
removed is suspect. Thus, in cases where stipulated interest is more than twice the prevailing legal rate
of interest, it is for the creditor to prove that this rate is required by prevailing market conditions. Here,
petitioners have articulated no such justification.

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 parties in their loan document or, in
lieu of it, the legal rate. Here, as the contracting parties failed to make a specific stipulation, the legal
rate must apply. Moreover, the rate that petitioners adverted to is unconscionable. The conventional
interest due on the principal amount loaned by respondents from petitioners is held to be 12% per
annum.

Apart from respondents’ liability for conventional interest at the rate of 12% per annum, outstanding
conventional interest—if any is due from respondents—shall itself earn legal interest from the time
judicial demand was made by petitioners, i.e., on July 31, 2002, when they filed their Complaint. This is
consistent with Article 2212 of the Civil Code, which provides: Art. 2212. Interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent upon this point.

So, too, Nacar states that “the interest due shall itself earn legal interest from the time it is judicially
demanded.” Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,the interest due
on conventional interest shall be at the rate of 12% per annum from July 31, 2002 to June 30, 2013.
Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per annum. Proceeding from these
premises, we find that respondents made an overpayment in the amount of P3,379.17. As respondents
made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil
Codeapplies. Article 2154 reads:

Article 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.

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Categories: Case Brief, Civil Law, Credit transactions, Leonen

Tags: Case Brief, Case Digest, Civil Law, Credit transactions, Legal interest, Leonen

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