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195166

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SECOND DIVISION

July 8, 2015

G.R. No. 195166

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,

vs.
SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.

DECISION

LEONEN, J.:

This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that judgment be
rendered reversing and setting aside the September 30, 2010 Decision1 and the January 4, 2011 Resolution2 of the
Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition also prays that respondents Spouses
Romeo and Annie Abella be ordered to pay petitioners Spouses Salvador and Alma Abella 2.5% monthly interest
plus the remaining balance of the amount loaned.

The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the December 28, 2005
Decision3 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.4

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint5 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. 6627.6

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 P300,000.00.7

In their Answer8 (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.9

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]."10 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.11

In the Decision12 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.13 The Regional Trial Court adjudged respondents solidarily liable to
petitioners. The dispositive portion of its Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of P300,000.00 with interest at
the rate of 30% per annum from the time the complaint was filed on July 31, 2002 until fully paid;

2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as reimbursement for litigation
expenses, and another sum of P5,000.00 as attorney’s fees.

For lack of legal basis, plaintiffs’ claim for moral and exemplary damages has to be denied, and for lack of merit the
counter-claim is ordered dismissed.14

In the Order dated March 13, 2006,15 the Regional Trial Court denied respondents’ Motion for Reconsideration.

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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 P300,000.00.16

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.17 The Court of Appeals noted that while the acknowledgement receipt
showed that interest was to be charged, no particular interest rate was specified.18 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. As to the loan’s not having earned interest in the concept of actual or compensatory
damages, the Court of Appeals, citing Eusebio-Calderon v. People,19 noted that interest in the concept of actual or
compensatory damages accrues only from the time that demand (whether judicial or extrajudicial) is made. It
reasoned that since respondents received petitioners’ demand letter only on July 12, 2002, any interest in the
concept of actual or compensatory damages due should be reckoned only from then. Thus, the payments for the
2.5% monthly interest made after the perfection of the loan in 1999 but before the demand was made in 2002 were
invalid.20

Since petitioners’ charging of interest was invalid, the Court of Appeals reasoned that all payments respondents
made by way of interest should be deemed payments for the principal amount of P500,000.00.21

The Court of Appeals further noted that respondents made a total payment of P648,500.00, which, as against the
principal amount of P500,000.00, entailed an overpayment of P148,500.00. Applying the principle of solutio indebiti,
the Court of Appeals concluded that petitioners were liable to reimburse respondents for the overpaid amount of
P148,500.00.22 The dispositive portion of the assailed Court of Appeals Decision reads:

WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET ASIDE, and a new one
issued, finding that the Spouses Salvador and Alma Abella are DIRECTED to jointly and severally pay Spouses
Romeo and Annie Abella the amount of P148,500.00, with interest of 6% interest (sic) per annum to be computed
upon receipt of this decision, until full satisfaction thereof. Upon finality of this judgment, an interest as the rate of
12% per annum, instead of 6%, shall be imposed on the amount due, until full payment thereof.23

In the Resolution24 dated January 4, 2011, the Court of Appeals denied petitioners’ Motion for Reconsideration.

Aggrieved, petitioners filed the present appeal25 where they claim that 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.

In support of their contentions, petitioners cite Article 1371 of the Civil Code,26 which calls for the consideration of
the contracting parties’ contemporaneous and subsequent acts in determining their true intention. Petitioners insist
that respondents’ consistent payment of interest in the year following the perfection of the loan showed that interest
at 2.5% per month was properly agreed upon despite its not having been expressly stated in the acknowledgment
receipt. They add that during the proceedings before the Regional Trial Court, respondents admitted that interest
was due on the loan.27

In their Comment,28 respondents reiterate the Court of Appeals’ findings that no interest rate was ever stipulated by
the parties and that interest was not due and demandable at the time they were making interest payments.29

In their Reply,30 petitioners argue that even though no interest rate was stipulated in the acknowledgment receipt,
the case fell under the exception to the Parol Evidence Rule. They also argue that there exists convincing and
sufficiently credible evidence to supplement the imperfection of the acknowledgment receipt.31

For resolution are the following issues:

First, whether interest accrued on respondents’ loan from petitioners. If so, at what rate?

Second, whether petitioners are liable to reimburse respondents for the latter’s supposed excess payments and for
interest.

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."32

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

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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.)33 (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 back 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.

II

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.34

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,35 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."36

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."37

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:38

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.39 (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.40 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 Frames41 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.42 (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 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 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.43 (Emphasis supplied, citations omitted)

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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.44 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.45

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.46

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 1371 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. In Spouses
Bonifacio and Lucia Paras v. Kimwa Construction and Development Corporation,47 we spelled out the requisites for
the admission of parol evidence:

In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence of any of the
four (4) exceptions has been put in issue in a party’s pleading or has not been objected to by the adverse party; and
second, that the parol evidence sought to be presented serves to form the basis of the conclusion proposed by the
presenting party.48

The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of a case.
Petitioners raised the issue of applying the exceptions to the Parol Evidence Rule only in the Reply they filed before
this court. This is the last pleading that either of the parties has filed in the entire string of proceedings culminating in
this Decision. It is, therefore, too late for petitioners to harp on this rule. In any case, what is at issue is not
admission of evidence per se, but the appreciation given to the evidence adduced by the parties. In the Petition they
filed before this court, petitioners themselves acknowledged that checks supposedly attesting to payment of monthly
interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2," "3," "4," "5," "6," "7," and
"8").49 What petitioners have an issue with is not the admission of these pieces of evidence but how these have not
been appreciated in a manner consistent with the conclusions they advance.

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,50 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 imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to
the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there
any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.51

The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law."52

In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors
would be wanting. The lowest rates that have previously been considered unconscionable need not be an
impenetrable minimum. What is more crucial is a consideration of the parties’ contexts. Moreover, interest rates
must be appreciated in light of the fundamental nature of interest as compensation to the creditor for money lent to
another, which he or she could otherwise have used for his or her own purposes at the time it was lent. It is not the
default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism
for the creditor’s unjust enrichment at the expense of another.

Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at this rate,
respondents’ obligation would have more than doubled—increased to 219.7% of the principal—by the end of the
third year after which the loan was contracted if the entire principal remained unpaid. By the end of the ninth year, it
would have multiplied more than tenfold (or increased to 1,060.45%). In 2015, this would have multiplied by more
than 66 times (or increased to 6,654.17%). Thus, from an initial loan of only P500,000.00, respondents would be
obliged to pay more than P33 million. This is grossly unfair, especially since up to the fourth year from when the loan
was obtained, respondents had been assiduously delivering payment. This reduces their best efforts to satisfy their
obligation into a protracted servicing of a rapacious loan.

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

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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.

III

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."53

Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,54 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.

IV

Proceeding from these premises, we find that respondents made an overpayment in the amount of P3,379.17.

As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which was charged
against the principal amount of P500,000.00. The first payment of P100,000.00 was made on June 30, 2001,55 while
the second payment of P100,000.00 was made on December 30, 2001.56

The Court of Appeals’ September 30, 2010 Decision stated that respondents paid P6,000.00 in March 1999.57

The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted that "from the time the principal
sum of P500,000.00 was borrowed from [petitioners], [respondents] ha[d] been religiously paying"59 what was
supposedly interest "at the rate of 2.5% per month."60

From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents’ payment of P100,000.00
on June 30, 2001, which was deducted from the principal amount of P500,000.00), the 2.5% monthly "interest" was
pegged to the principal amount of P500,000.00. These monthly interests, thus, amounted to P12,500.00 per month.
Considering that the period from March 1999 to June 2001 spanned twenty seven (27) months, respondents paid a
total of P337,500.00.61

From June 22, 2001 up to December 22, 2001 (before respondents’ payment of another P100,000.00 on December
30, 2001, which was deducted from the remaining principal amount of P400,000.00), the 2.5% monthly "interest"
was pegged to the remaining principal amount of P400,000.00. These monthly interests, thus, amounted to
P10,000.00 per month. Considering that this period spanned six (6) months, respondents paid a total of
P60,000.00.62

From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the 2.5% monthly "interest"
was pegged to the remaining principal amount of P300,000.00. These monthly interests, thus, amounted to
P7,500.00 per month. Considering that this period spanned six (6) months, respondents paid a total of
P45,000.00.63

Applying these facts and the properly applicable interest rate (for conventional interest, 12% per annum; for interest
on conventional interest, 12% per annum from July 31, 2002 up to June 30, 2013 and 6% per annum henceforth),
the following conclusions may be drawn:

By the end of the first year following the perfection of the loan, or as of March 21, 2000, P560,000.00 was due from
respondents. This consisted of the principal of P500,000.00 and conventional interest of P60,000.00.

Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00 (P12,500.00 each from
April 1999 to March 2000). This was in addition to their initial payment of P6,000.00 in March 1999.

Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:

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.

Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any excess
payments shall be charged against the principal. As respondents paid a total of P156,000.00 within the first year, the
conventional interest of P60,000.00 must be deemed fully paid and the remaining amount that respondents paid
(i.e., P96,000.00) is to be charged against the principal. This yields a balance of P404,000.00. By the end of the
second year following the perfection of the loan, or as of March 21, 2001, P452,480.00 was due from respondents.
This consisted of the outstanding principal of P404,000.00 and conventional interest of P48,480.00.

Within this second year, respondents completed another round of twelve (12) monthly payments totaling
P150,000.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within the second year,
the conventional interest of P48,480.00 must be deemed fully paid and the remaining amount that respondents paid
(i.e., P101,520.00) is to be charged against the principal. This yields a balance of P302,480.00.

By the end of the third year following the perfection of the loan, or as of March 21, 2002, P338,777.60 was due from
respondents. This consists of the outstanding principal of P302,480.00 and conventional interest of P36,297.60.

Within this third year, respondents paid a total of P320,000.00, as follows:

(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly payments of
P12,500.00 each, totaling P37,500.00.

(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal payment.

(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments of P10,000.00
each. At this point, the monthly payments no longer amounted to P12,500.00 each because the supposed

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monthly interest payments were pegged to the supposedly remaining principal of P400,000.00. Thus, during
this period, they paid a total of six (6) monthly payments totaling P60,000.00.

(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001 payment, was
charged against the principal.

(e) From the end of December 2002 to the end of February 2002, respondents delivered monthly payments of
P7,500.00 each. At this point, the supposed monthly interest payments were now pegged to the supposedly
remaining principal of P300,000.00. Thus, during this period, they delivered three (3) monthly payments
totaling P22,500.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within the third year, the
conventional interest of P36,927.50 must be deemed fully paid and the remaining amount that respondents paid
(i.e., P283,702.40) is to be charged against the principal. This yields a balance of P18,777.60.

By the end of the fourth year following the perfection of the loan, or as of March 21, 2003, P21,203.51 would have
been due from respondents. This consists of: (a) the outstanding principal of P18,777.60, (b) conventional interest of
P2,253.31, and (c) interest due on conventional interest starting from July 31, 2002, the date of judicial demand, in
the amount of P172.60. The last (i.e., interest on interest) must be pro-rated. There were only 233 days from July
31, 2002 (the date of judicial demand) to March 21, 2003 (the end of the fourth year); this left 63.83% of the fourth
year, within which interest on interest might have accrued. Thus, the full annual interest on interest of 12% per
annum could not have been completed, and only the proportional amount of 7.66% per annum may be properly
imposed for the remainder of the fourth year.

From the end of March 2002 to June 2002, respondents delivered three (3) more monthly payments of P7,500.00
each. Thus, during this period, they delivered three (3) monthly payments totalling P22,500.00.

At this rate, however, payment would have been completed by respondents even before the end of the fourth year.
Thus, for precision, it is more appropriate to reckon the amounts due as against payments made on a
monthly, rather than an annual, basis.

By April 21, 2002, _18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly conventional interest at
1%, amounting to P187.78) would have been due from respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article 1253 of the Civil Code would yield a balance of
P11,465.38.

By May 21, 2002, _11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly conventional interest at
1%, amounting to P114.65) would have been due from respondents. Deducting the monthly payment of P7,500.00
for the preceding month in a manner consistent with Article 1253 of the Civil Code would yield a balance of
P4,080.03.

By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly conventional interest at
1%, amounting to P40.80) would have been due from respondents. Deducting the monthly payment of P7,500.00 for
the preceding month in a manner consistent with Article 1253 of the Civil Code would yield a negative balance of
P3,379.17.

Thus, by June 21, 2002, respondents had not only fully paid the principal and all the conventional interest that had
accrued on their loan. By this date, they also overpaid P3,379.17. Moreover, while hypothetically, interest on
conventional interest would not have run from July 31, 2002, no such interest accrued since there was no longer any
conventional interest due from respondents by then.

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil
Code64 applies. 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.

In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio indebiti:

The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at
the expense of another. It applies where (1) a payment is made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received the payment, and (2) the payment is made through
mistake, and not through liberality or some other cause.66

As respondents had already fully paid the principal and all conventional interest that had accrued, they were no
longer obliged to make further payments. Any further payment they made was only because of a mistaken
1awp++i1

impression that they were still due. Accordingly, petitioners are now bound by a quasi-contractual obligation to return
any and all excess payments delivered by respondents.

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum."67
This applies to obligations arising from quasi-contracts such as solutio indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is involved, or
shall be liable for fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the
person who delivered the thing, until it is recovered.

Consistent however, with our finding that the excess payment made by respondents were borne out of a mere
mistake that it was due, we find it in the better interest of equity to no longer hold petitioners liable for interest arising
from their quasi-contractual obligation.

Nevertheless, Nacar also provides:

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its

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satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.68

Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award. This shall be
reckoned from the finality of this Decision until its full satisfaction.

WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution of the Court of
Appeals Nineteenth Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners Spouses Salvador and Alma
Abella are DIRECTED to jointly and severally reimburse respondents Spouses Romeo and Annie Abella the amount
of P3,379.17, which respondents have overpaid.

A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the finality of this
Decision until its full satisfaction.

SO ORDERED.

MARVIC M.V.F. LEONEN

Associate Justice

WE CONCUR:

DIOSDADO M. PERALTA*
Associate Justice

MARIANO C. DEL CASTILLO***

LUCAS P. BERSAMIN**
Associate Justice
Associate Justice
Acting Chairperson

JOSE CATRAL MENDOZA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court's Division.

MARIANO C. DEL CASTILLO

Associate Justice
Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairperson's Attestation, I certify that
the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer
of the opinion of the Court's Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes
*
Designated Acting Member per S.O. No. 2088 dated July 1, 2015.
**
Designated Acting Member per S.O. No. 2079 dated June 29, 2015.
***
Designated Acting Chairperson per S.O. No. 2087 (Revised) dated July 1, 2015.
1
Rollo, pp. 28-42. The Decision was penned by Associate Justice Ramon A. Cruz and concurred in by
Associate Justices Pampio A. Abarintos and Myra V. Garcia-Fernandez of the Court of Appeals Cebu.
2
Jd.at50-51.
3
Id. at 102–112. The Decision was penned by Judge Eustaquio G. Terencio.
4
Id. at 112.
5
Id. at 53–55.
6
Id. at 29.
7
Id. at 53–55.
8
Id. at 58–63.
9
Id. at 59.
10
Id.
11
Id. at 59–60.
12
Id. at 102–112.
13
Id. at 111–112.
14
Id. at 112.
15
Id. at 123.
16
Id. at 39–41.
17
Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.

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18
Rollo, p. 39.
19
484 Phil. 87 (2004) [Per J. Ynares-Santiago, First Division].
20
Rollo, p. 39.
21
Id. at 39–40.
22
Id.
23
Id. at 41.
24
Id. at 50–51.
25
Id. at 10–25.
26
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered.
27
Rollo, pp. 19–20.
28
Id. at 128–137.
29
Id. at 133–136.
30
Id. at 178–181.
31
Id. at 178–179.
32
CIVIL CODE, art. 1370.
33
Id. at 57.
34
Cf. interest on interest (i.e., interest due on conventional interest) and compensatory interest / penalty
interest / indemnity interest (i.e., damages paid arising from delay in paying a fixed sum of money or delay in
assessing and paying damages).
35
589 Phil. 362 (2008) [Per J. Quisumbing, Second Division].
36
Id. at 368, citing CIVIL CODE, art. 1956 and Security Bank and Trust Company v. RTC of Makati, Br. 61,
331 Phil. 787 (1996) [Per J. Hermosisima, Jr., First Division], emphasis supplied.
37
331 Phil. 787, 794 (1996) [Per J. Hermosisima, Jr., First Division], citing Eastern Shipping Lines, Inc. v.
Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug, En Banc], emphasis supplied.
38
G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug, En Banc].
39
Id. at 95, citing CIVIL CODE, art. 2195, 1956, and 1169.
40
See Philippine Registered Electrical Practitioners, Inc. v. Francia, Jr., 379 Phil. 634 (2000) [Per J.
Quisumbing, Second Division]; University of Mindanao, Inc. v. Court of Appeals, 659 Phil. 1 (2011) [Per J.
Peralta, Second Division]; and Bersabal v. Salvador, 173 Phil. 379 (1978) [Per J. Makasiar, First Division].
41
G.R. No. 189871, August 13, 2013, 703 SCRA 439 [Per J. Peralta, En Banc].
42
Id. at 454–456.
43
Id. at 457–458.
44
CIVIL CODE, art. 1371.
45
Section 9. Evidence of written agreements. — When the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be, between the parties and
their successors in interest, no evidence of such terms other than the contents of the written agreement.

However, a party may present evidence to modify, explain or add to the terms of written agreement if he puts
in issue in his pleading:

(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;

(b) The failure of the written agreement to express the true intent and agreement of the parties thereto;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties or their successors in interest after the execution of
the written agreement.

The term "agreement" includes wills.

46
See National Power Corporation v. Presiding Judge, RTC, 10th Judicial Region, Br. XXV, Cagayan De Oro
City, 268 Phil. 507 (1990) [Per C.J. Fernan, Third Division].
47
G.R. No. 171601, April 8, 2015, <http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2015/april2015/171601.pdf> [Per J. Leonen, Second Division].
48
Id.
49
Rollo, p. 19.
50
620 Phil. 239, (2009) [Per J. Del Castillo, Second Division].
51
Id. at 242-243, citing Ibarra v. Aveyro, 37 Phil. 273, 282 (1917) [Per J. Torres, First Division].

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52
Id. at 248, citing CIVIL CODE, art. 1306.
53
G.R. No. 189871, August 13, 2013, 703 SCRA 439, 457 [Per J. Peralta, En Banc].
54
G.R. No. 184458, January 14, 2015,

<http://sc.judiciary.gov.ph/jurisprudence/2015/january2015/184458.pdf> [Per J. Perez, First Division].

55
Rollo, p. 31.
56
Id.
57
Id. at 40.
58
Id. at 125–126.
59
Id. at 125.
60
Id.
61
Id. at 40.
62
Id.
63
Id.
64
Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.
65
484 Phil. 552 (2004) [Per J. Quisumbing, First Division].
66
Id. at 559–560, citing Power Commercial and Industrial Corp. v. Court of Appeals, 340 ]Phil. 705 (1997)
[Per J. Panganiban, Third Division]; and National Commercial Bank of Saudi Arabia v. Court of Appeals, 480
Phil. 391 (2003) [Per J. Carpio-Morales, Third Division].
67
Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439, 458 [Per J. Peralta, En
Banc].
68
Id.

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