EN BANC Lara's Gifts admitted its purchases, but claimed that most

of the deliveries were substandard and of poor quality. As such,

[ G.R. No. 225433. September 20, 2022 ] the finished products, using those raw materials, were rejected
by U.S. buyers. Lara's Gifts added that clue to the economic
LARA'S GIFTS & DECORS, INC., PETITIONER, VS. recession, some of the orders made by its U.S. buyers were
MIDTOWN INDUSTRIAL SALES, INC. RESPONDENT. cancelled. Also, on February 19, 2008, a fire razed its factory
destroying its equipment, machineries, and inventories.
RESOLUTION
On January 27, 2014, the Regional Trial Court, Branch
LEONEN, ACTING C.J.: 128, Caloocan City rendered a decision6 in favor of Midtown.
It found insufficient evidence to prove Lara's Gifts' claim that
For resolution is respondents' Motion for the products were substandard. On the other hand, it found the
Reconsideration1 of this Court's August 28, 2019 amount claimed by Midtown to be supported by the sales
Decision,2 which denied the Petition of Lara's Gifts & Decors, invoices and checks. It also found the 24% interest not
Inc. and affirmed the Court of Appeals' Decision3 with unconscionable. The dispositive of the Decision reads:
modification as to damages.
WHEREFORE, premises considered, judgment is hereby
As recalled from the facts of the Petition,4 Lara's Gifts & rendered in favor of the plaintiff MIDTOWN INDUSTRIAL
Decors, Inc. (Lara's Gifts) purchased from Midtown Industrial SALES, INC. and against the defendant LARA'S GIFTS [&]
Sales, Inc. (Midtown) various industrial and construction DECORS, INC. ordering the latter to pay the former the
materials, from January to December 2007, in the total amount following amount:
of P1,263,104.22.
1. ONE MILLION TWO HUNDRED SIXTY THREE
The purchases were on a 60-day credit term, subject to the THOUSAND ONE HUNDRED FOUR PESOS and 22/100
condition that 24% per annum would be charged on all (Php 1,263,104.22) plus interest fixed at 24% per annum to be
accounts overdue. Lara's Gifts issued post-dated checks to pay computed from February 5, 2008, the date of judicial demand,
for its purchases. However, these checks were later dishonored until the judgment obligation is fully paid.
due to "insufficiency of funds" or "account closed." Midtown
informed Lara's Gifts of the bounced checks and demanded the 2. The sum of FIFTY THOUSAND PESOS
settlement of its accounts, through a demand letter dated (Php50,000.00) as and by way of attorney's fees.
January 21, 2008. However, Lara's Gifts still failed to pay.
Thus, on February 5, 2008, Midtown filed a Complaint for Finally, defendant is ordered to pay the cost of suit.
Sum of Money with Prayer for Attachment.5
 SO ORDERED. 1. ONE MILLION TWO
HUNDRED SIXTY THREE
On appeal, the Court of Appeals upheld the Regional Trial THOUSAND ONE HUNDRED
Court's decision7 which prompted Lara's Gifts to file a Petition FOUR PESOS and 22/100
for Review8 before this Court. (P1,263,104.22) representing the
principal amount plus stipulated
In an August 28, 2019 Decision,9 this Court denied Lara's interest at 24% per annum to be
Gifts' Petition, and affirmed the Court of Appeals' Decision computed from 22 January 2008,
with modification as to damages. This Court held that: (1) the date of extrajudicial demand,
petitioner's general denial amounts to an admission of the until full payment.
genuineness and due execution of the sales invoices; (2)
petitioner failed to prove its claim that the materials delivered 2. Legal interest on the 24% per
did not comply with the specifications or were substandard or annum interest due on the
of poor quality; and (3) the 24% stipulated interest is valid and principal amount accruing as of
binding on petitioner, which is reckoned from date of judicial demand, at the rate of
extrajudicial demand on January 22, 2008 until full payment. 12% per annum from the date of
judicial demand on 5 February
This Court further applied legal interest on the 24% 2008 until 30 June 2013, and
interest, at the rate of: (i) 12%, reckoned from date of judicial thereafter at the rate of 6% per
demand on February 5, 2008 until June 30, 2013; and (ii) 6%, annum from 1 July 2013 until
from July 1, 2013 until full payment. The Decision disposed full payment.
thus:
3. The sum of FIFTY THOUSAND
WHEREFORE, the Decision dated 21 April 2016 of the PESOS (P50,000.00) as
Court of Appeals in CA-G.R. CV No. 102465, affirming the 27 attorney's fees, plus legal interest
January 2014 Decision of the Regional Trial Court, Branch thereon at the rate of 6% per
128, Caloocan City, annum to be computed from the
is AFFIRMED with MODIFICATION, as follows: finality of this Decision until full
payment.
Petitioner Lara's Gifts & Decors, Inc. is ordered to pay
respondent Midtown Industrial Sales, Inc. the following: 4. Cost of the suit.10 (Emphasis in
the original)
 Petitioner filed a Motion for Reconsideration.11 It argues denials, even if specific, but demand that
that: (1) the due execution of the sales invoices was specifically defendant manifest what he considers to be the
denied in its Answer;12 (2) it cannot be considered in default true facts." The purpose of the specific denial is
of its obligation since it did not receive any demand;13 (3) it to compel the defendant to specify the
had sufficiently established that the materials delivered by allegations which he or she intends to disprove
respondent were substandard and of poor quality;14 (4) the and disclose the matters relied upon to support
24% interest stated in the sales invoices is null and void for such denial, thereby limiting the issues and
being excessive, unconscionable, and exorbitant,15 and was avoiding unnecessary delays and surprises.
unilaterally imposed by respondent without petitioner's Petitioner's general denial amounts to an
consent;16 and (5) the imposition of legal interest on the 24% admission of the genuineness and due execution
compensatory interest is excessive.17 of the sales invoices.19 (Citations omitted)

In its Comment/Opposition,18 respondent asserts that the As to the poor quality of delivered products, this Court held
Motion for Reconsideration must be denied outright as no new that "other than its bare allegation that the materials delivered
matters have been raised therein by the petitioner. were substandard and of poor quality, petitioner failed to prove
or substantiate its claims. As found by the trial court, none of
This Court partially grants the Motion for Reconsideration. petitioner's witnesses was able to present proof that the
materials delivered were substandard or of poor quality.”20
Petitioner's first to fourth arguments have already been
sufficiently passed upon and discussed by this Court in the Moreover, in upholding the validity of the 24% per
assailed Decision. We have held that petitioner's general denial annum interest, we ruled:
in its Answer amounts to an admission of the genuineness and
due execution of the sales invoices: In the present case, petitioner, which has
been doing business since 1990 and has been
In this case, petitioner did not state the facts purchasing various materials from respondent
or substance of the matters relied upon to since 2004, cannot claim to have been misled
support its denial of the due execution of the into agreeing to the 24% interest rate which was
sales invoices. As held in Sy-Quia v. expressly stated in the sales invoices. Besides,
Marsman, "the Rules require that besides this Court has already ruled in several cases that
specifying the allegations of fact not admitted, an interest rate of 24% per annum agreed upon
the answer should set forth the matters relied between the parties is valid and binding and not
upon in support of the denial; so that, in effect, excessive and unconscionable. Thus, the
the Rules are no longer satisfied with mere
 stipulated 24% interest per annum is binding on provision of law. It is "rigorously lucrative," and the result of
petitioner.21 (Citations omitted) the express will of the parties in a contract.26 In onerous
simple loans, the payment of conventional interest is a
We find no valid justification to compel a modification or principal condition, if not the most important condition, of the
reversal of our Decision as to those issues. loan. In that case, "any modification must be mutually agreed
upon; otherwise, it has no binding effect."27 As it is a
The only matter left for this Court to resolve is whether or stipulation covenanted in a valid and effective contract,
not the imposition of legal interest on the compensatory interest conventional interest continues to run from the date stipulated,
of 24% per annum is excessive. with no break in the continuity of the obligation to pay it.28

To answer this, an elucidation of the concept and functions However, payment of conventional interest is allowed only
of interest is first appropriate. if the following conditions concur:

I 1) There is an express stipulation for the

payment of interest, and
Interest is of two major kinds—conventional interest, on
one hand, and compensatory interest on the other.22 These two 2) The stipulation for the payment of
kinds of interest are conceptually different, subsume the other interest is in writing.29
types and kinds of interest, and are governed by different rules
that must be consistently applied, otherwise the computation of The most common type of conventional interest
interest "present[s] intricate situations."23 is monetary interest, also referred to as regular interest. It is
the conventional interest in a simple loan of money. The
I(A) payment of both principal and interest is made in money
gradually extinguishing30 the loan of money. Monetary
A simple loan, whether the object is money or other interest is, therefore, generally viewed as the "cost of the use of
consumable thing, may be gratuitous or onerous.24 If it money."31
is onerous, the compensation to be paid by the borrower is
referred to as conventional interest, as it is the interest agreed "The payment of regular interest constitutes the price or
to by the parties themselves as distinguished from that cost of the use of money and thus, until the principal sum due
prescribed by law.25 is returned to the creditor, regular interest continues to accrue
since the debtor continues to use such principal amount."32 It
Conventional interest is therefore paid not as a has been held that "[f]or [a debtor] to continue in possession of
consequence of default, nor is it compensatory or a result of a the principal of the loan... and to continue to use the same after
maturity of the loan without payment of regular or monetary ARTICLE 2212. Interest due shall earn legal interest from the
interest, would constitute unjust enrichment on the part of the time it is judicially demanded, although the obligation may be
[debtor] at the expense of [the creditor][.]"33 silent upon this point.

Pursuant to the Usury Law,34 the applicable interest Usury Law

rate in the loan of money, goods, or credits (simple
loans), shall be determined as follows: SECTION 5. In computing the interest on any obligation,
promissory note or other instrument or contract, compound
(1) If there is an interest rate stipulated, interest shall not be reckoned, except by
then the interest rate as stipulated shall be agreement; Provided, That whenever compound interest is
applicable. agreed upon, the effective rate of interest charged by the
creditor shall not exceed the equivalent of the maximum
(2) If there is no stipulation on the interest rate37 prescribed by the Monetary Board, or, in default thereof,
rate, then the interest rate prescribed by statute whenever the debt is judicially claimed, in which last case it
(or legal interest35) shall be applicable.36 shall draw six per centum per annum interest or such rate as
may be prescribed by the Monetary Board.38
But insofar as simple loans are concerned, this rule on legal
interest applies only if in the first place, conventional interest For conventional interest, the general rule is that interest is
was expressly stipulated in writing and only the rate of interest paid on the principal only (simple interest).39
was left unstipulated.
Consequently, interest on interest, that is, the compensation
With regard to interest on interest, the following provisions for interest that is due and unpaid, is generally not demandable.
are pertinent:
It is only demandable if, in the first place, there is
Civil Code conventional interest—that is, an express stipulation in writing
to pay interest in a contract of loan—and any or both of the
ARTICLE 1959. Without prejudice to the provisions of Article following instances are applicable:
2212, interest due and unpaid shall not earn interest.
(1) When by stipulation of the parties, compounding or
However, the contracting parties may by stipulation capitalizing of interest is agreed upon, in which case,
capitalize the interest due and unpaid, which as added previously accumulated interest is added as principal and earns
principal, shall earn new interest. interest as such (compound interest).40
 (2) When interest that is due and unpaid is judicially of breach of an obligation. It functions to
demanded, whether or not there is an agreement or stipulation strengthen the coercive force of the obligation
to this effect. Judicial demand is reckoned from the date of and to provide, in effect, for what could be the
filing of a complaint in court. The rate of interest shall be the liquidated damages resulting from such a
legal rate applicable to loans or forbearance of money.41 breach. The obligor would then be bound to pay
the stipulated indemnity without the necessity
I(B) of proof on the existence and on the measure of
damages caused by the breach. Although a
Compensatory interest, also referred to as penalty interest, court may not at liberty ignore the freedom of
indemnity, or moratory interest,42 is the indemnity for the parties to agree on such terms and
damages arising from delay on the part of the debtor in an conditions as they see fit that contravene
obligation consisting in the payment of a sum of money. It is neither law nor morals, good customs, public
interest allowed by law in the absence of a promise to pay order or public policy, a stipulated penalty,
interest as compensation for delay in paying a fixed sum or a nevertheless, may be equitably reduced by the
delay in assessing and paying damages.43 courts if it is iniquitous or unconscionable or if
the principal obligation has been partly or
Since a simple loan of money is necessarily an obligation irregularly complied with.45 (Citations
consisting in the payment of a sum of money, then omitted)
compensatory interest is always demandable in case the
borrower in a simple loan of money incurs delay. However, a In distinguishing between conventional
simple loan of money is not the only obligation that consists in interest and compensatory interest, this Court has explained
the payment of a sum of money. Moreover, not every that if the debtor is not in delay, it is properly liable only for the
obligation consists in the payment of a sum of money. principal of the loan and conventional interest. Even if the
debtor is not liable for compensatory interest, this does not
Although compensatory interest, unlike conventional mean that it is, as a matter of law, relieved from the payment of
interest, need not be expressly stipulated in writing, the parties conventional interest. The conventional interest continues to
may freely stipulate on compensatory interest through a penalty accrue under the terms of the loan until actual payment is
or penal clause. The nature of a penal clause was expounded effected. The payment of conventional interest, specifically
in Ligutan v. Court of Appeals:44 monetary interest, constitutes the price or cost of the use of
money and thus, continues to accrue until the principal sum due
A penalty clause, expressly recognized by is returned to the creditor.46 Corollary to this, if the
law, is an accessory undertaking to assume debtor were in delay, then compensatory interest, as a matter of
greater liability on the part of an obligor in case law, will accrue in addition to conventional interest.
 The "rules of thumb" for the rate of compensatory 2. When an obligation, not
interest were established in Eastern Shipping Lines, Inc. v. constituting a loan or
Court of Appeals,47 and restated48 in Nacar v. Gallery forbearance of money, is
Frames:49 breached, an interest on the
amount of damages awarded
I. When an obligation, regardless of its source, i.e., law, may be imposed at the discretion
contracts, quasi-contracts, delicts or quasi-delicts,50 is of the court56 at the rate of
breached, the contravenor can be held liable for 6% per annum.57 No interest,
damages.51 The provisions under Title XVIII on "Damages" of however, shall be adjudged on
the Civil Code govern in determining the measure of unliquidated claims or damages,
recoverable damages.52 except when or until the demand
can be established with
II. With regard particularly to an award of interest in the reasonable
concept of actual and compensatory damages, the rate of certainty.58 Accordingly, where
interest, as well as the accrual thereof, is imposed, as follows: the demand is established with
reasonable certainty, the interest
1. When the obligation is breached, shall begin to run from the time
and it consists in the payment of the claim is made judicially or
a sum of money, i.e., a loan or extrajudicially (Art. 1169, Civil
forbearance of money, the Code), but when such certainty
interest due should be that which cannot be so reasonably
may have been stipulated in established at the time the
writing.53 Furthermore, the demand is made, the interest
interest due shall itself earn legal shall begin to run only from the
interest from the time it is date the judgment of the court is
judicially demanded.54 In the made (at which time the
absence of stipulation,55 the rate quantification of damages may
of interest shall be 6% per be deemed to have been
annum to be computed from reasonably ascertained). The
default, i.e., from judicial or actual base for the computation
extrajudicial demand under and of legal interest shall, in any
subject to the provisions of case, be on the amount finally
Article 1169 of the Civil Code. adjudged.
 3. When the judgment of the Thus, the applicable compensatory interest in
court awarding a sum of money contracts consisting in the payment of a sum of money should
becomes final and executory, the be determined as follows:60
rate of legal interest, whether the
case falls under paragraph 1 or (1) If there is a penal clause that stipulates the penalty or
paragraph 2, above, shall be indemnity, then the stipulated penalty or indemnity shall be
6% per annum from such applicable.
finality until its satisfaction, this
interim period being deemed to (2) If there is no penal clause, but there is a stipulation on
be by then an equivalent to a conventional or monetary interest, then the conventional or
forbearance of credit. monetary interest shall be applicable.

And, in addition to the above, judgments that have become (3) If there is no stipulation on the penalty or on conventional
final and executory prior to July 1, 2013, shall not be disturbed interest, then the legal interest rate shall be applicable. In
and shall continue to be implemented applying the rate of contracts of simple loan of money, the legal interest rate is
interest fixed therein. (Emphasis supplied) currently 6%.61

It should be stressed that the Eastern Shipping A question arises on whether interest on interest is
Lines and Nacar rules govern only compensatory interest, not applicable to compensatory interest. Jurisprudence supports its
conventional interest,59 and should be read in conjunction with application as shown in the following cases.
the provisions of Articles 2209 and 1226 of the Civil Code.
In Philippine American Accident Insurance Company, Inc.
ARTICLE 2209. If the obligation consists in the payment v. Flores & Navalta,62 this Court stated that Article 221263 of
of a sum of money, and the debtor incurs in delay, the the Civil Code "contemplate[s] the presence of stipulated or
indemnity for damages, there being no stipulation to the conventional interest which had accrued when demand was
contrary, shall be the payment of the interest agreed upon, and judicially made."64 Although the statement was made as basis
in the absence of stipulation, the legal interest, which is six per for ruling that Article 2212 cannot be invoked to justify the
cent per annum. payment of compound interest if the judgment only involves
the payment of simple interest, it also raised the issue of
ARTICLE 1226. In obligations with a penal clause, the whether Article 2212 can serve as basis for the payment of
penalty shall substitute the indemnity for damages and the interest on compensatory interest.
payment of interests in case of noncompliance, if there is no
stipulation to the contrary. . . . (Emphasis supplied)
 Eastern Shipping Lines, Inc., as restated In addition, not only the principal amount
in Nacar, provides: but also the monetary interest due to respondent
as discussed above shall itself earn
II. With regard particularly to an award of interest in the compensatory interest at the legal rate, pursuant
concept of actual and compensatory damages, the rate of to Article 2212 of the Civil Code, which states
interest, as well as the accrual thereof, is imposed, as follows: that "[i]nterest due shall earn legal interest from
the time it is judicially demanded, although the
1. When the obligation is breached, obligation may be silent upon this point. To be
and it consists in the payment of sure, Article 2212 contemplates the presence of
a sum of money, i.e., a loan or stipulated or conventional
forbearance of money, the interest, i.e., monetary interest, which has
interest due should be that which accrued when demand was judicially made. In
may have been stipulated in cases where no monetary interest had been
writing. Furthermore, the stipulated by the parties, no accrued monetary
interest due shall itself earn interest could further earn compensatory
legal interest from the time it is interest upon judicial demand. Thus, the
judicially demanded. In the principal amount and monetary interest due to
absence of stipulation, the rate of respondent shall earn compensatory interest of
interest shall be 6% per twelve percent (12%) per annum from judicial
annum to be computed from demand, i.e., the date of the filing of the
default, i.e., from judicial or complaint on July 24, 2007, to June 30, 2013,
extrajudicial demand under and and thereafter, at the rate of six percent
subject to the provisions of (6%) per annum from July 1, 2013 until fully
Article 1169 of the Civil paid.69 (Emphasis in the original, citations
Code.65 (Emphasis supplied) omitted)

In Tan v. Court of Appeals & Cultural Center of the II

Philippines,66 this Court ruled that Articles 195967 and 2212
of the Civil Code sanction the compounding of penalty charges Stipulated interest rates, whether conventional or
in the parties' contract. compensatory, are subject to the "unconscionability" standard.
The concept of unconscionability is a matter of law and equity.
Isla v. Estorga,68 reiterated that Article 2212 applies to Jurisprudence empowers courts to equitably reduce interest
"stipulated or conventional interest, i.e., monetary interest[.]" rates; and the law70 empowers them to reduce penalty
charges.71 Eastern Shipping Lines recognized that "factual Jaucian,76 we reduced the interest rate from 16% to 1.167%
circumstances [of a case] may [call] for different applications, per month or 14% per annum. In Ruiz v. Court of
guided by the rule that the courts are vested with discretion, Appeals,77 we equitably reduced the agreed 3% per month or
depending on the equities of each case, on the award of 36% per annum interest to 1% per month or 12% per
interest."72 annum interest. The 10% and 8% interest rates per month on a
P1,000,000.00 loan were reduced to 12% per annum in Cuaton
II (A) v. Salud.78 Recently, this Court, in Arrofo v. Quiño,79 reduced
the 7% interest per month on a P15,000.00 loan amounting to
Central Bank Circular No. 905 issued by the Monetary 84% interest per annum to 18% per annum.
Board of the Central Bank, pursuant to the powers granted by
the Usury Law, effectively lifted the ceilings on interest rates. There is no need to unsettle the principle affirmed
Consequently, usury, although illegal, is legally non- in Medel and like cases. From that perspective, it is apparent
existent and interest can be charged as agreed upon by creditor that the stipulated interest in the subject loan is excessive,
and borrower73 pursuant to the freedom of contract principle iniquitous, unconscionable and exorbitant. Pursuant to the
under Article 1306 of the Civil Code, viz: freedom of contract principle embodied in Article 1306 of the
Civil Code, contracting parties may establish such stipulations,
ARTICLE 1306. The contracting parties may clauses, terms and conditions as they may deem convenient,
establish such stipulations, clauses, terms and provided they are not contrary to law, morals, good customs,
conditions as they may deem convenient, public order, or public policy. In the ordinary course, the codal
provided they are not contrary to law, morals, provision may be invoked to annul the excessive stipulated
good customs, public order, or public policy. interest.

However, courts have not hesitated to Conventional interest rates that are unconscionable are
void conventional interest that is "excessive, iniquitous, deemed unjust, immoral, and contrary to public policy. In Sps.
unconscionable and exorbitant," for being violative of the Castro v. Tan et al.:80
same provision of Article 1306 of the Civil Code. As held
in Carpo v. Chua & Dy Ng:74 The imposition of an unconscionable rate of
interest on a money debt, even if knowingly
In a long line of cases, this Court has invalidated similar and voluntarily assumed, is immoral and unjust.
stipulations on interest rates for being excessive, iniquitous, It is tantamount to a repugnant spoliation and
unconscionable and exorbitant. In Solangon v. Salazar75 we an iniquitous deprivation of property, repulsive
annulled the stipulation of 6% per month or 72% per to the common sense of man. It has no support
annum interest on a P60,000.00 loan. In Imperial v. in law, in principles of justice, or in the human
 conscience nor is there any reason whatsoever obligation has been partly or irregularly
which may justify such imposition as righteous complied with by the debtor. Even if there has
and as one that may be sustained within the been no performance, the penalty may also be
sphere of public or private morals.81 (Citation reduced by the courts if it is iniquitous or
omitted) unconscionable.

In Vitug v. Abuda,82 we held that while parties are free, in ARTICLE 2227. Liquidated damages, whether
view of the suspension of the Usury Law, to set interest rates in intended as an indemnity or a penalty, shall be
their loan contract, they must ensure that their stipulated equitably reduced if they are iniquitous or
interest rates are neither iniquitous nor unconscionable. unconscionable.
Otherwise, the same would be void for being against public
morals. We emphasized that "[t]he lifting of the ceiling on In Ibarra v. Aveyro,85 this Court even held that if a penalty
interest rates may not be read as 'grant[ing] lenders carte clause is so unconscionable that its enforcement constitutes "a
blanche to raise interest rates to levels which will either repugnant spoliation and an iniquitous deprivation of
enslave their borrowers or lead to a hemorrhaging of their property,"86 it can be struck down for being invalid.
assets.'"83 Thus, when stipulated interest rates are later found
to be iniquitous or unconscionable, courts have the Accordingly, in several cases,87 this Court reduced or
discretionary power to equitably reduce them, approximating removed altogether penalty interests or charges that were
the prevailing market rate "under the circumstances had the unconscionable.
parties had equal bargaining power."84
II(B)
The reduction of interest rates is not limited to monetary
interest. It is not dependent on the type of interest imposed on "Interest rates become unconscionable in light of the
the party, but on whether the interest rate was unconscionable context in which they were imposed or applied."88 Thus, the
or not. Thus, compensatory interest, when found to be determination of whether an interest rate or penalty charge is
unconscionable, may also be reduced. reasonable or iniquitous rests on the sound discretion of the
courts based on the established facts of a particular case.89
Articles 1229 and 2227 of the Civil Code allow the
reduction of penalty charges or damages that are This Court had struck down stipulated monthly interest
unconscionable: rates of 2.5%,90 5%,91 6%,92 and 10%93 for being
unconscionable. Meanwhile, in Toledo v. Hyden,94 a monthly
ARTICLE 1229. The judge shall equitably interest rate of 6% to 7% was deemed valid. In that case, this
reduce the penalty when the principal Court noted that the borrower was not in dire need of money
when she obtained a loan, and it was the borrower herself who to the conscience of man.95 (Emphasis supplied, citations
was guilty of inequitable acts: omitted)

In this case, there was no urgency of the need for money on the Furthermore, while we have sustained the validity of a
part of Jocelyn, the debtor, which compelled her to enter into 21% per annum interest in one case,96 we have also reduced
said loan transactions. She used the money from the loans to an 18% per annum interest rate to 12% per annum in
make advance payments for prospective clients of educational another,97 after finding that "the resulting interest charge has
plans offered by her employer. In this way, her sales turned out to be excessive in the context of its base
production would increase, thereby entitling her to 50% rebate computation period, and hence, unwarranted[.]"98 In Land
on her sales. This is the reason why she did not mind the 6% to Bank of the Phils, v. David,99 we upheld the reduction of the
7% monthly interest. Notably too, a business transaction of this interest rate of 17% per annum and the penalty charge of
nature between Jocelyn and Marilou continued for more than 12% per annum to 12% and 5% per annum, respectively, on
five years. Jocelyn religiously paid the agreed amount of equitable grounds. This was because the loan extended to
interest until she ordered for stop payment on some of the respondent was part of the social assistance program to farmers
checks issued to Marilou. The checks were in fact sufficiently and this Court considered respondent's efforts to pay even after
funded when she ordered the stop payment and then filed a she had suffered business losses.
case questioning the imposition of a 6% to 7% interest rate for
being allegedly iniquitous or unconscionable and, hence, In Vitug, the stipulated interest rates of 5% to 10% per
contrary to morals. month were found iniquitous considering the "extreme
necessity" which compelled petitioner to obtain the loan and
It was clearly shown that before Jocelyn availed of said the possibility of his property being foreclosed if not for the
loans, she knew fully well that the same carried with it an loan. This Court further said that "it would be unjust to impose
interest rate of 6% to 7% per month, yet she did not complain. a heavier burden upon petitioner, who would already be losing
In fact, when she availed of said loans, an advance interest of his and his family's home. Respondent would not be unjustly
6% to 7% was already deducted from the loan amount, yet she deprived if the interest rate is reduced. After all, respondent
never uttered a word of protest. still has the right to foreclose the property."100

After years of benefiting from the proceeds of the loans Also, in another case,101 this Court noted that the payment
bearing an interest rate of 6% to 7% per month and paying for of the principal loan of P500,000 and interest of P425,000,
the same, Jocelyn cannot now go to court to have the said computed at a monthly interest rate of 5% already "sufficiently
interest rate annulled on the ground that it is excessive, compensated for the loan and the interest earned, and [the
iniquitous, unconscionable, exorbitant, and absolutely revolting creditor] cannot be allowed to further recover on an interest
rate which is unconscionable."102
 To determine whether an interest rate is unconscionable, by prevailing market conditions.105 (Emphasis
we are guided by the following pronouncements in Sps. Abella supplied)
v. Sps. Abella:103
Conformable to the foregoing pronouncements, "[t]he
In determining whether the rate of interest maximum interest rate that will not cross the line of
is unconscionable, the mechanical application conscionability is 'not more than twice the prevailing legal rate
of pre-established floors would be wanting. The of interest.' If the stipulated interest exceeds this standard, the
lowest rates that have previously been creditor must show that the rate is necessary under current
considered unconscionable need not be an market conditions."106 The creditor must also show that the
impenetrable minimum. What is more crucial is parties were on an equal footing when they stipulated on the
a consideration of the parties' contexts. interest rate.107
Moreover, interest rates must be appreciated in
light of the fundamental nature of interest as Furthermore, where the monetary interest rate is found to
compensation to the creditor for money lent to be unconscionable, only the rate is nullified and deemed not
another, which he or she could otherwise have written into the contract; the parties' agreement on the
used for his or her own purposes at the time it payment of interest remains. In such instance, "the legal rate of
was lent. It is not the default vehicle for interest prevailing at the time the agreement was entered
predatory gain. As such, interest need only be into"108 is applied by the courts.
reasonable. It ought not be a supine mechanism
for the creditor's unjust enrichment at the As for compensatory interest, this Court in Ligutan v.
expense of another.104 Court of Appeals109 held:

Hence, this guiding parameter: The question of whether a penalty is

reasonable or iniquitous can be partly
The legal rate of interest is the presumptive subjective and partly objective. Its resolution
reasonable compensation for borrowed money. would depend on such factors as, but not
While parties are free to deviate from this, any necessarily confined to, the type, extent and
deviation must be reasonable and fair. Any purpose of the penalty, the nature of the
deviation that is far-removed is suspect. Thus, obligation, the mode of breach and its
in cases where stipulated interest is more than consequences, the supervening realities, the
twice the prevailing legal rate of interest, it is standing and relationship of the parties, and the
for the creditor to prove that this rate is required like, the application of which, by and large, is
 addressed to the sound discretion of the heavy (albeit still lawful) regular
court.110 (Citations omitted) compensatory interest, the
penalty interest stipulated in the
In Palmares v. Court of Appeals,111 this Court removed parties" promissory note is
the monthly 3% penalty charge for being highly inequitable iniquitous and unconscionable
and unreasonable. Palmares involved a P30,000.00 loan, and may be equitably reduced
payable in two months with interest at 6% per annum that further by eliminating such
would be compounded every month. Palmares held: penalty interest
altogether.112 (Emphasis
In a case previously decided by this Court which likewise supplied, citation omitted)
involved private respondent M.B. Lending Corporation, and
which is substantially on all fours with the one at bar, we In Barons Marketing Corp. v. Court of Appeals, 113 this
decided to eliminate altogether the penalty interest for being Court reduced the 25% penalty charge to cover the attorney's
excessive and unwarranted under the following rationalization: fees and collection fees, which was in addition to the 12%
annual interest, to 10% for being manifestly exorbitant. Also,
Upon the matter of penalty in Tan v. Court of Appeals,114 the continued monthly accrual
interest, we agree with the Court of the 2% penalty on the total amount due of about P7.996
of Appeals that the economic million was held to be unconscionable. Considering the
impact of the penalty interest of debtor's partial payments and offer to settle his outstanding
three percent (3%) per month on loan in good faith, this Court found it fair and equitable in that
total amount due but unpaid case to reduce the 2% penalty charge, compounded monthly, to
should be equitably reduced. The a straight 12% per annum.
purpose for which the penalty
interest is intended — that is, to II(C)
punish the obligor — will have
been sufficiently served by the However, the standards of unconscionability cannot apply
effects of compounded to interest on interest under Article 2212 of the Civil Code, viz:
interest. Under the exceptional
circumstances in the case at ARTICLE 2212. Interest due shall earn legal
bar, e.g., the original amount interest from the time it is judicially demanded,
loaned was only P15,000.00; although the obligation may be silent upon this
partial payment of P8,600.00 point. (Emphasis supplied)
was made on due date; and the
 As Justice Alfredo Benjamin S. Caguioa elucidated, the compensatory interest due
"interest on interest" is fixed by law. In the absence of a shall be that which is stipulated
contractual stipulation between the parties on the rate of by the parties in writing as the
interest on accrued interest, the legal rate shall apply by conventional interest
operation of law. Its imposition is not subject to the court's rate,119 provided it is not
discretionary power.115 unconscionable.120 In the
absence of a stipulated penalty
Article 2212's interest on interest is penalty or indemnity or a stipulated conventional
for delay in the payment of stipulated interest.116 It is interest rate, or if these rates are
expressly prescribed by law, and deemed written into every unconscionable, the
contract. This, all contracting parties should be aware of when compensatory interest shall be
they stipulate on the payment of interest. the prevailing legal interest rate
prescribed by the Bangko
In view of the foregoing discussions, and taking into Sentral ng
consideration the viewpoints of Justice Caguioa, the summary Pilipinas.121 Compensatory
of rules on the imposition of interest, as provided in Eastern interest, in the absence of a
Shipping Lines and Nacar, are amended as follows: stipulated reckoning date, shall
be computed from default, i.e.,
With regard to an award of interest in the concept of actual from extrajudicial or judicial
and compensatory damages, the rate of interest, as well as the demand, until full payment.122
accrual thereof, is imposed, as follows:
2. Interest on conventional/monetary
A. In obligations consisting of loans or forbearances of money, interest and stipulated
goods or credit: compensatory interest shall
accrue at the stipulated interest
1. The compensatory interest due rate (compounded interest) from
shall be that which is stipulated the stipulated reckoning point or,
by the parties in writing as the in the absence thereof, from
penalty or compensatory interest extrajudicial or judicial
rate,117 provided it is not demand until full
unconscionable.118 In the payment, provided it is not
absence of a stipulated penalty unconscionable. In the absence
or compensatory interest rate, of a stipulated compounded
 interest rate or if this rate is absence thereof, from
unconscionable, the prevailing extrajudicial or judicial
legal interest rate prescribed by demand until full
the Bangko Sentral ng Pilipinas payment, provided it is
shall apply from the time of not unconscionable. In
judicial demand until full the absence of a
payment.123 stipulated compounded
interest rate or if this rate
B. In obligations not consisting of loans or forbearances of is unconscionable, legal
money, goods or credit: interest at the rate of 6%
shall apply from the time
1. For liquidated claims: of judicial demand until
full payment.128
The compensatory interest due shall be that
which is stipulated by the parties in writing as 2. For unliquidated claims:
the penalty or compensatory interest
rate,124 provided it is not Compensatory interest on the amount of
unconscionable.125 In the absence of a damages awarded may be imposed in the
stipulated penalty or compensatory interest rate, discretion of the court at the rate of 6% per
or if these rates are unconscionable, the annum.129 No compensatory interest, however,
compensatory interest shall be at the rate of shall be adjudged on unliquidated claims or
6%.126 Compensatory interest, in the absence damages until the demand can be established
of a stipulated reckoning date, shall be with reasonable certainty.130 Thus, when such
computed from default, i.e., from extrajudicial certainty cannot be so reasonably established at
or judicial demand, until full payment.127 the time the demand is made, the interest shall
begin to run only from the date of the judgment
a. Interest on stipulated of the trial court (at which time the
compensatory interest quantification of damages may be deemed to
shall accrue at the have been reasonably ascertained) until full
stipulated interest rate payment.131 The actual base for the
(compounded interest) computation of the interest shall, in any case, be
from the stipulated on the principal amount finally adjudged.
reckoning point or, in the
 The foregoing guidelines are illustrated in the table below:
GOODS Interest Accrual
Rules on the Imposition of Compensatory Interest OR
(i) Interest Stipulated rate ⇒ As
CREDIT
on conventional inter (compound stipulated
est interest rate) ⇒ If not
When
stipulated
obligation Compensatory Interest
Interest rate from
consists Interest (scenario) Accrual
judicial or
in:
extrajucial
demand
⇒ If the penalty or Stipulated ⇒ As
compensatory penalty or stipulated BSP- From
interest rate is compensatory ⇒ If not prescribed judicial
stipulated interest stipulated, legal rate, if demand
from not stipulated
judicial or or
extrajudici unconscionabl
al demand e.
⇒ If the penalty or Stipulated ⇒ As (ii) Interest on Stipulated rate ⇒ As
compensatory conventional stipulated compensatory (compound stipulated
interest is not interest ⇒ If not interest interest rate) ⇒ If not
stipulated or stipulated, stipulated,
unconscionable from from
judicial or judicial or
extrajudici extrajudici
al demand al demand
LOANS
OR If conventional BSP- From BSP- From
FORBEA interest is not prescribed judicial prescribed judicial
RANCE stipulated or legal rate demand legal rate, if demand
OF unconscionable not
unconscionabl
MONEY, e
Interested on Interest rate Interest
 annum would be charged on all accounts overdue. This means
NON- that the 24% interest rate per annum would run only upon
Is demand
LOAN OR petitioner's failure to pay on the due date.
established with Compensator Interest
NON-
reasonable y interest rate Accrual
FORBEA Thus, the 24% interest rate is a compensatory interest,
certainty?
RANCE imposed as indemnity for damages caused by the delay in the
OF Yes Stipulated ⇒ As payment of the raw materials' purchase price, pursuant to
MONEY, penalty or stipulated Article 2209.
GOODS compensatory ⇒ If not
OR interest stipulated, By the express provision of Article 2212, the 24%
CREDIT from compensatory interest, which have accrued at the time of
Legal rate judicial or judicial demand, may be subject to "interest on interest."
6%, if not extrajudici
stipulated or al demand However, as Justice Amy C. Lazaro-Javier pointed out, the
unconscionabl Regional Trial Court adjudged in favor of Midtown Industrial
e. Sales only P1,263,104.22 plus interest at 24% per annum,
Interest on From computed from February 5, 2008 until fully paid; and
interest at 6% judicial P50,000.00 as attorney's fees. This judgment award became
demand final and executory as to Midtown Industrial Sales as it did not
appeal. Thus, the additional award of legal interest on the 24%
No Discretionary From date interest, in an appeal brought by Lara's Gifts, is ultra vires.133
at 6% of
judgment ACCORDINGLY, the Motion for Reconsideration
is PARTIALLY GRANTED. This Court's August 28, 2019
Decision is MODIFIED in that the award of legal interest on
III
the 24% per annum compensatory interest is
hereby DELETED.
Now to this case, we modify our earlier Decision and hold
that the contract involved is not a loan or forbearance of
Petitioner Lara's Gifts & Decors, Inc. is ordered
money, goods, or credit,132 but a sale of goods on credit. From
to PAY respondent Midtown Industrial Sales, Inc. the
January to December 2007, petitioner Lara's Gifts purchased
following:
from respondent Midtown various industrial and construction
materials totaling ₱1,263,104.22. The purchases were on a 60-
day credit term, with the condition that a 24% interest rate per
(1) ONE MILLION TWO HUNDRED SIXTY-THREE
THOUSAND ONE HUNDRED FOUR PESOS and 22/100
(P1,263,104.22) representing the principal amount plus
stipulated interest at 24% per annum to be computed from
January 22, 2008, the date of extrajudicial demand, until full
payment;

(2) The sum of FIFTY THOUSAND PESOS (P50,000.00) as

attorney's fees; and

(3) Cost of the suit.

The total monetary award shall bear legal interest at the

rate of 6% per annum from finality of this Resolution until full
payment.134

SO ORDERED.