THIRD DIVISION

[G.R. No. 197861. June 5, 2013.]

SPOUSES FLORENTINO T. MALLARI and AUREA V. MALLARI ,

petitioners, vs . PRUDENTIAL BANK (now BANK OF THE PHILIPPINE
ISLANDS) , respondent.

DECISION

PERALTA , J : p

Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision 1
dated June 17, 2010 and the Resolution 2 dated July 20, 2011 of the Court of Appeals (CA)
in CA-G.R. CV No. 65993.
The antecedent facts are as follows:
On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from
respondent Prudential Bank-Tarlac Branch (respondent bank), a loan in the amount of
P300,000.00 as evidenced by Promissory Note (PN) No. BD 84-055. 3 Under the
promissory note, the loan was subject to an interest rate of 21% per annum (p.a.),
attorney's fees equivalent to 15% of the total amount due but not less than P200.00 and, in
case of default, a penalty and collection charges of 12% p.a. of the total amount due. The
loan had a maturity date of January 10, 1985, but was renewed up to February 17, 1985.
Petitioner Florentino executed a Deed of Assignment 4 wherein he authorized the
respondent bank to pay his loan with his time deposit with the latter in the amount of
P300,000.00.
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners)
obtained again from respondent bank another loan of P1.7 million as evidenced by PN No.
BDS 606-89 5 with a maturity date of March 22, 1990. They stipulated that the loan will
bear 23% interest p.a., attorney's fees equivalent to 15% p.a. of the total amount due, but
not less than P200.00, and penalty and collection charges of 12% p.a. Petitioners executed
a Deed of Real Estate Mortgage 6 in favor of respondent bank covering petitioners'
property under Transfer Certi cate of Title (TCT) No. T-215175 of the Register of Deeds of
Tarlac to answer for the said loan. EcICDT

Petitioners failed to settle their loan obligations with respondent bank, thus, the latter,
through its lawyer, sent a demand letter to the former for them to pay their obligations,
which when computed up to January 31, 1992, amounted to P571,218.54 for PN No. BD
84-055 and P2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of Tarlac, a
petition for the extrajudicial foreclosure of petitioners' mortgaged property for the
satisfaction of the latter's obligation of P1,700,000.00 secured by such mortgage, thus,
the auction sale was set by the Provincial Sheriff on April 23, 1992. 7
On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate
Statements of Account as of April 23, 1992, i.e., the loan of P300,000.00 was increased to
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 P594,043.54, while the P1,700,000.00 loan was already P3,171,836.18.
On April 20, 1992, petitioners led a complaint for annulment of mortgage, deeds,
injunction, preliminary injunction, temporary restraining order and damages claiming,
among others, that: (1) the P300,000.00 loan obligation should have been considered paid,
because the time deposit with the same amount under Certi cate of Time Deposit No.
284051 had already been assigned to respondent bank; (2) respondent bank still added
the P300,000.00 loan to the P1.7 million loan obligation for purposes of applying the
proceeds of the auction sale; and (3) they realized that there were onerous terms and
conditions imposed by respondent bank when it tried to unilaterally increase the charges
and interest over and above those stipulated. Petitioners asked the court to restrain
respondent bank from proceeding with the scheduled foreclosure sale. DCSETa

Respondent bank led its Answer with counterclaim arguing that: (1) the interest rates
were clearly provided in the promissory notes, which were used in computing for interest
charges; (2) as early as January 1986, petitioners' time deposit was made to apply for the
payment of interest of their P300,000.00 loan; and (3) the statement of account as of April
10, 1992 provided for a computation of interest and penalty charges only from May 26,
1989, since the proceeds of petitioners' time deposit was applied to the payment of
interest and penalty charges for the preceding period. Respondent bank also claimed that
petitioners were fully apprised of the bank's terms and conditions; and that the
extrajudicial foreclosure was sought for the satisfaction of the second loan in the amount
of P1.7 million covered by PN No. BDS 606-89 and the real estate mortgage, and not the
P300,000.00 loan covered by another PN No. 84-055.
In an Order 8 dated November 10, 1992, the RTC denied the Application for a Writ of
Preliminary Injunction. However, in petitioners' Supplemental Motion for Issuance of a
Restraining Order and/or Preliminary Injunction to enjoin respondent bank and the
Provincial Sheriff from effecting or conducting the auction sale, the RTC reversed itself and
issued the restraining order in its Order 9 dated January 14, 1993.
Respondent bank led its Motion to Lift Restraining Order, which the RTC granted in its
Order 1 0 dated March 9, 1993. Respondent bank then proceeded with the extrajudicial
foreclosure of the mortgaged property. On July 7, 1993, a Certi cate of Sale was issued to
respondent bank being the highest bidder in the amount of P3,500,000.00.
Subsequently, respondent bank led a Motion to Dismiss Complaint 1 1 for failure to
prosecute action for unreasonable length of time to which petitioners led their
Opposition. 1 2 On November 19, 1998, the RTC issued its Order 1 3 denying respondent
bank's Motion to Dismiss Complaint.
Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the
plaintiffs. Subsequently, respondent bank filed a Demurrer to Evidence. HICcSA

On November 15, 1999, the RTC issued its Order 14 granting respondent's demurrer to
evidence, the dispositive portion of which reads:
WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no
evidence of bad faith, the Court need not order the plaintiffs to pay damages
under the general concept that there should be no premium on the right to litigate.

NO COSTS.

SO ORDERED. 1 5
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 The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner
Florentino's time deposit in the amount of P300,000.00 in favor of respondent bank, which
maturity coincided with petitioners' loan maturity. Thus, if the loan was unpaid, which was
later extended to February 17, 1985, respondent bank should had just applied the time
deposit to the loan. However, respondent bank did not, and allowed the loan interest to
accumulate reaching the amount of P594,043.54 as of April 10, 1992, hence, the amount
of P292,600.00 as penalty charges was unjust and without basis.
As to the P1.7 million loan which petitioners obtained from respondent bank after the
P300,000.00 loan, it had reached the amount of P3,171,836.18 per Statement of Account
dated April 27, 1993, which was computed based on the 23% interest rate and 12% penalty
charge agreed upon by the parties; and that contrary to petitioners' claim, respondent bank
did not add the P300,000.00 loan to the P1.7 million loan obligation for purposes of
applying the proceeds of the auction sale.
The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7
million and respondent bank's bid price was P3.5 million, the latter should return to
petitioners the difference of P1.8 million. It found that since petitioners' obligation had
reached P2,991,294.82 as of January 31, 1992, but the certi cate of sale was executed by
the sheriff only on July 7, 1993, after the restraining order was lifted, the stipulated interest
and penalty charges from January 31, 1992 to July 7, 1993 added to the loan already
amounted to P3.5 million as of the auction sale. aSIAHC

The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of
interest could not be considered unconscionable, since banks are not hospitable or
equitable institutions but are entities formed primarily for pro t. It also found that Article
1229 of the Civil Code invoked by petitioners for the reduction of the interest was not
applicable, since petitioners had not paid any single centavo of the P1.7 million loan which
showed they had not complied with any part of the obligation.
Petitioners appealed the RTC decision to the CA. A Comment was led by respondent
bank and petitioners filed their Reply thereto.
On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which
reads:
WHEREFORE , the instant appeal is hereby DENIED . The Order dated November
15, 1999 issued by the Regional Trial Court (RTC), Branch 64, Tarlac City, in Civil
Case No. 7550 is hereby AFFIRMED . 1 6

The CA found that the time deposit of P300,000.00 was equivalent only to the principal
amount of the loan of P300,000.00 and would not be suf cient to cover the interest,
penalty, collection charges and attorney's fees agreed upon, thus, in the Statement of
Account dated April 10, 1992, the outstanding balance of petitioners' loan was
P594,043.54. It also found not persuasive petitioners' claim that the P300,000.00 loan
was added to the P1.7 million loan. The CA, likewise, found that the interest rates and
penalty charges imposed were not unconscionable and adopted in toto the ndings of the
RTC on the matter.
Petitioners led their Motion for Reconsideration, which the CA denied in a Resolution
dated July 20, 2011. DHCSTa

Hence, petitioners filed this petition for review arguing that:

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 THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-
BRANCH 64, TARLAC CITY, DATED NOVEMBER 15, 1999, DESPITE THE FACT
THAT THE SAME IS CONTRARY TO SETTLED JURISPRUDENCE ON THE
MATTER. 1 7

The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty
charge on petitioners' P1,700,000.00 loan to which they agreed upon is excessive or
unconscionable under the circumstances.
Parties are free to enter into agreements and stipulate as to the terms and conditions of
their contract, but such freedom is not absolute. As Article 1306 of the Civil Code provides,
"The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy." Hence, if the stipulations in the contract are valid, the parties
thereto are bound to comply with them, since such contract is the law between the parties.
In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest rate on
the P1.7 million loan. However, petitioners now contend that the interest rate of 23% p.a.
imposed by respondent bank is excessive or unconscionable, invoking our ruling in Medel
v. Court of Appeals, 1 8 Toring v. Spouses Ganzon-Olan, 1 9 and Chua v. Timan. 2 0
We are not persuaded.
In Medel v. Court of Appeals , 2 1 we found the stipulated interest rate of 66% p.a. or a 5.5%
per month on a P500,000.00 loan excessive, unconscionable and exorbitant, hence,
contrary to morals if not against the law and declared such stipulation void. In Toring v.
Spouses Ganzon-Olan, 2 2 the stipulated interest rates involved were 3% and 3.81% per
month on a P10 million loan, which we nd under the circumstances excessive and
reduced the same to 1% per month. While in Chua v. Timan, 2 3 where the stipulated interest
rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, we
had reduced the same to 1% per month or 12% p.a. We said that we need not unsettle the
principle we had af rmed in a plethora of cases that stipulated interest rates of 3% per
month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was
void for being contrary to morals. 2 4
In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2%
per month, which are much lower than those interest rates agreed upon by the parties in
the above-mentioned cases. Thus, there is no similarity of factual milieu for the application
of those cases.
We do not consider the interest rate of 23% p.a. agreed upon by petitioners and
respondent bank to be unconscionable.
In Villanueva v. Court of Appeals , 2 5 where the issue raised was whether the 24% p.a.
stipulated interest rate is unreasonable under the circumstances, we answered in the
negative and held:
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and
Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24%
per annum on a loan of P244,000.00, agreed upon by the parties, may not be
considered as unconscionable and excessive. As such, the Court ruled that the
borrowers cannot renege on their obligation to comply with what is incumbent
upon them under the contract of loan as the said contract is the law between the
parties and they are bound by its stipulations.

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 Also, in Garcia v. Court of Appeals , this Court sustained the agreement of the
parties to a 24% per annum interest on an P8,649,250.00 loan nding the same to
be reasonable and clearly evidenced by the amended credit line agreement
entered into by the parties as well as two promissory notes executed by the
borrower in favor of the lender.
IcSHTA

Based on the above jurisprudence, the Court nds that the 24% per annum
interest rate, provided for in the subject mortgage contracts for a loan of
P225,000.00, may not be considered unconscionable. Moreover, considering that
the mortgage agreement was freely entered into by both parties, the same is the
law between them and they are bound to comply with the provisions contained
therein. 2 6

Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not
considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan in
this case can by no means be considered excessive or unconscionable.
We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.
In Ruiz v. CA, 2 7 we held:
The 1% surcharge on the principal loan for every month of default is valid. This
surcharge or penalty stipulated in a loan agreement in case of default partakes of
the nature of liquidated damages under Art. 2227 of the New Civil Code, and is
separate and distinct from interest payment. Also referred to as a penalty clause,
it is expressly recognized by law. It is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach of an obligation. The obligor
would then be bound to pay the stipulated amount of indemnity without the
necessity of proof on the existence and on the measure of damages caused by
the breach. . . . 2 8

And in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd. , 2 9
we held that:
. . . The enforcement of the penalty can be demanded by the creditor only when
the non-performance is due to the fault or fraud of the debtor. The non-
performance gives rise to the presumption of fault; in order to avoid the
payment of the penalty, the debtor has the burden of proving an excuse — the
failure of the performance was due to either force majeure or the acts of the
creditor himself. 3 0
AcHCED

Here, petitioners defaulted in the payment of their loan obligation with respondent bank
and their contract provided for the payment of 12% p.a. penalty charge, and since there
was no showing that petitioners' failure to perform their obligation was due to force
majeure or to respondent bank's acts, petitioners cannot now back out on their obligation
to pay the penalty charge. A contract is the law between the parties and they are bound by
the stipulations therein.
WHEREFORE, the petition for review is DENIED . The Decision dated June 17, 2010 and the
Resolution dated July 20, 2011 of the Court of Appeals are hereby AFFIRMED .
SO ORDERED .
Velasco, Jr., Abad, Mendoza and Leonen, JJ., concur.

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 Footnotes

1.Penned by Associate Justice Juan Q. Enriquez, Jr., with Associate Justices Ramon M. Bato,
Jr. and Florito S. Macalino, concurring; rollo, pp. 30-37.
2.Id. at 40-41.

3.Id. at 43.
4.Id. at 47.

5.Id. at 44.
6.Id. at 45-46.

7.Id. at 48.
8.Per Presiding Judge Edilberto Aquino; id. at 89-93.
9.Rollo, pp. 94-96.
10.Per Executive Judge Augusto N. Felix; id. at 116-117.

11.Rollo, pp. 126-130.

12.Id. at 132-133.
13.Per Presiding Judge Edgardo F. Sundiam; id. at 134-135.
14.Rollo, pp. 199-204.
15.Id. at 204.

16.Id. at 36. (Emphasis in the original.)

17.Id. at 19.
18.359 Phil. 820 (1998).
19.G.R. No. 168782, October 10, 2008, 568 SCRA 376.
20.G.R. No. 170452, August 13, 2008, 562 SCRA 146.

21.Supra note 18.

22.Supra note 19.
23.Supra note 20.
24.Id. at 149-150.

25.G.R. No. 163433, August 22, 2011, 655 SCRA 707.

26.Id. at 716-717. (Italics in the original)
27.449 Phil. 419 (2003).
28.Id. at 435.
29.G.R. No. 180458, July 30, 2009, 594 SCRA 461.

30.Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd., supra, at 473,
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 citing Development Bank of the Philippines v. Go, G.R. No. 168779, September 14, 2007,
533 SCRA 460, 470-471.

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