Case Summary (G.R. No. 173241)
Core factual allegations
Petitioners allege they loaned respondents P500,000, evidenced by a March 22, 1999 acknowledgment receipt stating the sum was "payable within one (1) year from date hereof with interest." Respondents admitted receipt of funds but characterized the transaction as capital for a joint venture (a lending enterprise) where each side would take a share of 5% charged to borrowers (2.5% each). Respondents admitted making periodic payments (including two principal payments of P100,000 each in 2001 and multiple monthly payments described as interest), and claimed the unpaid balance was P300,000 after collections.
RTC findings and disposition
The Regional Trial Court found the instrument and surrounding facts established a simple loan (mutuum). It determined P500,000 was borrowed, payable in one year, and subject to interest. The RTC entered judgment ordering respondents to pay P300,000 with interest at 30% per annum from filing (July 31, 2002), plus litigation costs and attorney’s fees, and denied plaintiffs’ claim for moral/exemplary damages and respondents’ counterclaim.
Court of Appeals reasoning and holding
The Court of Appeals accepted that the contract was a simple loan but held respondents were not liable for the outstanding P300,000. It reasoned that Article 1956 (no interest due unless expressly stipulated in writing) required an express written rate; the acknowledgment receipt indicated interest but did not specify a rate. Therefore, the monthly 2.5% payments were invalid as stipulated interest. The CA treated those periodic payments as payments on the principal, found respondents had paid a total of P648,500 versus a P500,000 principal, computed an overpayment of P148,500, and ordered petitioners to reimburse respondents with legal interest.
Issues framed on appeal to the Supreme Court
The Supreme Court identified two primary issues: (1) whether the loan bore conventional interest and, if so, at what rate; and (2) whether petitioners must reimburse respondents for alleged excess payments and pay interest on that reimbursement.
Characterization of the contract: loan (mutuum) vs. joint venture
The Supreme Court affirmed the RTC’s finding that the written acknowledgment establishes a simple loan. It emphasized the primacy of the written instrument when terms are clear (Civil Code Art. 1370) and applied Articles 1933 and 1953 to conclude ownership of the money passed to respondents with an obligation to return an equal amount — the hallmark of a mutuum rather than a joint venture. Testimony alleging a joint venture could not prevail over the clear written terms.
Application of Article 1956 and determination of the interest rate
The Court applied Article 1956 ("No interest shall be due unless it has been expressly stipulated in writing") together with controlling jurisprudence (Eastern Shipping, Security Bank, Spouses Toring) to govern a loan where interest is mentioned but the rate is unspecified. Established rules provide that, in the absence of a stipulated rate in writing, the legal rate of interest applies. The Court explained that the applicable legal rate is the rate prevailing at the time the contract was executed; given the parties’ 1999 agreement, the legal rate in effect then (12% per annum until BSP amendment) governs as conventional interest. The Court also cited Nacar to note that the legal rate was later reduced to 6% per annum effective July 1, 2013, but that change applied prospectively. Consequently, the conventional interest on the loan was held to be 12% per annum as the rate reflective of the parties’ silence in 1999.
Interest on conventional interest and the time it accrues
The Court reiterated that conventional interest, once due, shall itself earn legal interest from the time judicial demand is made (Civil Code Art. 2212; Eastern Shipping; Nacar). Thus, any conventional interest outstanding as of the filing of the Complaint (judicial demand, July 31, 2002) would thereafter earn legal interest. The Court applied 12% per annum for the period from July 31, 2002 to June 30, 2013, and 6% per annum thereafter for any continuing interest, in line with Nacar’s prospective application.
Parol evidence, Article 1371, and exceptions to the Parol Evidence Rule
Petitioners urged that contemporaneous and subsequent acts (Article 1371) and exceptions to the Parol Evidence Rule should allow proof of a 2.5% monthly rate. The Court explained the hierarchy of rules: the specific rule governing loans (Article 1956 and related jurisprudence dictating the legal rate where unstipulated) prevails over a general rule like Article 1371. It also noted parol evidence exceptions must be timely pleaded and are matters for trial stage appreciation; petitioners raised these arguments late in the proceedings (only in their Reply before the Supreme Court). Moreover, even if extrinsic evidence could establish a 2.5% monthly pact, that rate would be unconscionable and void under principles applied in Castro v. Tan and Civil Code Art. 1306, because 30% per annum compounded monthly would yield predatory results far beyond reasonable compensation for borrowed money.
Unconscionability analysis and reasonableness of the stipulated rate claimed
The Court found a 2.5% monthly rate (30% per annum) unconscionable in context: it would cause the debt to grow exponentially and would be grossly unfair given respondents’ demonstrated efforts to pay during the early years. The Court explained that while parties may contractually agree to rates different from the legal rate, deviations must be reasonable and supported by market conditions — which petitioners failed to demonstrate.
Accounting of payments, application rules, and computation of overpayment
Applying Article 1253 (payments cover interest first), the Court carefully accounted for the parties’ payments. It computed conventional interest (12% p.a.) and applied the admitted periodic payments first to interest and then to principal, tracing balances year-by-year. The Court found that by June 21, 200
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Case Caption and Procedural Posture
- G.R. No. 195166; Second Division; Decision promulgated July 08, 2015; penned by Justice Leonen.
- Petition for Review on Certiorari under Rule 45 filed by Spouses Salvador and Alma Abella (petitioners) seeking reversal and setting aside of: (a) Court of Appeals Decision dated September 30, 2010, and (b) Court of Appeals Resolution dated January 4, 2011 in CA-G.R. CV No. 01388.
- The Court of Appeals had reversed the Regional Trial Court, Branch 8, Kalibo, Aklan Decision dated December 28, 2005 (Civil Case No. 6627), directing petitioners to pay respondents P148,500.00 plus interest (as allegedly overpaid).
- The RTC had originally ordered respondents to pay petitioners an unpaid loan balance of P300,000.00 with interest at 30% per annum, litigation expenses, and attorney’s fees.
- Petitioners prayed in the Supreme Court that respondents be ordered to pay petitioners 2.5% monthly interest plus the remaining balance of the amount loaned.
- The Court of Appeals’ January 4, 2011 Resolution denied petitioners’ Motion for Reconsideration; petitioners pursued the present appeal.
Statement of Facts
- On March 22, 1999 respondents executed an acknowledgment receipt stating receipt of P500,000.00 from Mrs. Alma R. Abella, payable within one (1) year from date with interest; signed by Annie C. Abella and Romeo M. Abella.
- Petitioners asserted respondents obtained a loan of P500,000.00 evidenced by the March 22, 1999 acknowledgment receipt; respondents allegedly paid a total of P200,000.00 (P100,000.00 on two separate occasions) leaving an unpaid balance of P300,000.00.
- Respondents contended the P500,000.00 was capital for a joint venture in lending money where respondents would manage funds and each party would receive 2.5% a month (each party receiving 2.5%, representing a 5% interest charged debtors) and a 2.5% service fee to respondents.
- Respondents further asserted that the one-year term was a term within which petitioners could withdraw funds if the venture proved unprofitable, not a deadline for payment; they collected only P200,000.00 from borrowers after venture termination, leaving P300,000.00 unpaid.
Pleadings and Trial Proceedings
- Petitioners filed Complaint for sum of money and damages with prayer for preliminary attachment on July 31, 2002 before RTC, Branch 8, Kalibo, docketed as Civil Case No. 6627.
- Respondents filed Answer with counterclaim and motion to dismiss, asserting joint venture characterization and management arrangement including the 2.5% monthly sharing arrangement.
- Pre-Trial Order (Dec. 2, 2002) recorded parties’ admission that respondents had been “religiously paying” what was allegedly interest at the rate of 2.5% per month.
Regional Trial Court (Decision dated December 28, 2005)
- The RTC concluded the relationship was a simple loan (mutuum), not a joint venture, because the acknowledgment receipt clearly showed: (a) indebtedness of P500,000.00; (b) payable within one year; and (c) subject to interest.
- RTC held respondents jointly and severally liable to petitioners.
- Dispositive portion ordered defendants to pay plaintiffs P300,000.00 with interest at the rate of 30% per annum from filing of complaint on July 31, 2002 until fully paid; ordered payment of P2,227.50 for litigation expenses and P5,000.00 as attorney’s fees; denied moral and exemplary damages; dismissed counter-claim.
Court of Appeals Decision (September 30, 2010) and Resolution (January 4, 2011)
On respondents’ appeal, the Court of Appeals found that while a simple loan existed, respondents were not liable to pay the outstanding P300,000.00.
Court of Appeals’ reasoning:
- Article 1956 of the Civil Code requires interest to be expressly stipulated in writing for it to be due.
- The acknowledgment receipt stated that interest would be charged but did not specify an interest rate; consequently the prior 2.5% monthly payments were invalid as not properly stipulated.
- Interest in the concept of actual or compensatory damages accrues only from demand; respondents received petitioners’ demand letter on July 12, 2002, so any compensatory interest would be reckoned from then; payments of 2.5% monthly made between perfection of the loan (1999) and demand (2002) were invalid.
- Because interest charging was invalid, the Court of Appeals treated all interest payments as payments of principal; calculating total payments of P648,500.00 versus principal P500,000.00 yielded overpayment of P148,500.00.
- Applying solutio indebiti, the Court of Appeals directed petitioners to reimburse respondents P148,500.00 with interest (the Decision specified 6% per annum to be computed upon receipt and later provided that upon finality of judgment, interest at 12% per annum instead of 6% shall be imposed — as reflected in the dispositive text cited).
Court of Appeals denied petitioners’ Motion for Reconsideration (Resolution dated Jan. 4, 2011).
Issues Presented to the Supreme Court
- First issue: Whether interest accrued on respondents’ loan from petitioners, and if so, at what rate.
- Second issue: Whether petitioners are liable to reimburse respondents for respondents’ supposed excess payments and for interest.
Legal Provisions and Authorities Cited
Civil Code provisions cited and summarized in the Decision:
- Art. 1933 (definition of loan and commodatum; ownership passes in simple loan; simple loan may be gratuitous or with stipulation to pay interest).
- Art. 1953 (borrower acquires ownership and is bound to pay equal amount).
- Art. 1956: “No interest shall be due unless it has been expressly stipulated in writing.”
- Art. 1253: “If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.”
- Art. 2212: “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.”
- Art. 1371: parties’ contemporaneous and subsequent acts to judge intention.
- Art. 2154 (solutio indebiti): restitution when something is received when there is no right to demand it.
- Art. 2159: consequences for one who in bad faith accepts an undue payment (legal interest, fruits, damages).
Jurisprudence cited:
- Eastern Shipping Lines, Inc. v. Court of Appeals — rule that in absence of written stipulation the rate shall be 12% per annum (as then prevailing) and interest due shall earn legal interest from judicial demand.
- Security Bank and Trust Co. v. RTC of Makati — restating the rule on legal interest when absent of written stipulation.
- Spouses Toring v. Spouses Olan — confirmed rule; in absence of stipulation legal rate applies (12% then).
- Nacar v. Gallery Frames — recognized BSP-MB Circular No. 799 (effective July 1, 2013) reducing legal rate to 6% per annum going forward; clarified prospective application of the new rate; reaffirmed rule that in absence of stipulation legal rate applies and interest due shall earn legal interest from the time of judicial demand.
- Eusebio-Calderon v. People — interest in concept of actual or compensatory damages accrues only from demand.
- Castro v. Tan — unconscionable interest void ab initio and described as immoral and unjust; Court cited imposition of unconscionable rate as contrary to morals and law.
- Spouses Bonifacio and Lucia Paras v. Kimwa Construction and Development Corporation — requisites for admission of parol evidence; two requirements for admission of parol evidence under exceptions in Rules of Evidence.
Monetary Board / BSP authority:
- BSP-MB Circular No. 799, Series of 2013 (amending Section 2 of Circular No. 9