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Title XI. LOAN Introductory Comment Credit refers to belief or trust by a person in anothers ability to comply with an obligation. Credit Transactions refers to the agreements based on said trust or credit. SCO E O! CREDIT TRANSACTIONS contracts or

deli-ers to anot)er+ eit)er somet)in. not consuma/le so t)at t)e latter may use t)e same *or a certain time and return it+ in 0)ic) case t)e contract is called a commodatum1 or money or ot)er consuma/le t)in.+ u,on t)e condition t)at t)e same amount o* t)e same 2ind and 3uality s)all /e ,aid+ in 0)ic) case t)e contract is sim,ly called a loan or mutuum. Commodatum is essentially .ratuitous. Sim,le loan may /e .ratuitous or 0it) a sti,ulation to ,ay interest. In commodatum t)e /ailor retains t)e o0ners)i, o* t)e t)in. loaned+ 0)ile in sim,le loan+ o0ners)i, ,asses to t)e /orro0er. T0o 4inds o* Loans a. 5utuum or sim,le loan /. Commodatum


RINCI AL CONTRACTS O! LOAN (Both commodatum and mutuum and deposit (these are of course founded on !belief" or !faith" or !trust" . CONTRACTS which generally depend on the e#istence of the aforementioned contracts and which tends to strengthen said !belief" or !trust" because of the security gi$en% 1.personal guaranty (a persons personal credit is in$ol$ed as in guaranty proper and suretyship &. real guaranty (here the !belief" is strengthened with the use of property ' if real property( the contracts of real mortgage and antichresis) if personal property( the contracts of pledge and chattel mortgage .


5#T##5 a. e*ui$alent amount to be returned (sub+ect matter is fungible

CO55ODAT#5 a. same thing to be returned (sub+ect matr is nonfungible




b. may be gratuitous onerous (with interest


Art. %&''. (y t)e contract o* loan+ one o* t)e ,arties

c. ownership goes to borrower or bailee. d. refers to personal

b. essentially gratuitous (if there is compensation it ceases to be commodatum. c. ownership retained by lender or bailor. d. may in$ol$e real and


property only. e. referred to as loan for consumption. f. borrower( because of his ownership( bears ris,s of loss. g. can be generally obliged to pay only at end of period.

personal property. e. referred to as a loan for use or temporary possession. f. lender( because of his ownership( bears ris, of loss.

unless there is deli$ery( the borrower in commodatum (for e#ample cannot e#ercise due diligence o$er the thing loaned. Consent o* t)e arties

h. not personal in character.

g. while generally obliged to return ob+ect at the end of period( still in some cases the return can be demanded e$en before the end of the period. h. personal in character.

.he borrower and the lender must of course consent either personally or through an authori0ed agent( as in e$ery obligation founded upon a contact. 1owe$er( the necessary acceptance need not be actual but may be implied from circumstances. Consensual Contract o* !uture Loans Aside from the real contracts of commodatum and loan( there can also be a consensual contract created by an accepted promise to deli$er something by way of commodatum or simple loan.

Art. %&'6. An acce,ted ,romise to deli-er somet)in. /y 0ay o* commodatum or sim,le loan is /indin. u,on ,arties+ /ut t)e commodatum or sim,le loan itsel* s)all not /e ,er*ected until t)e deli-ery o* t)e o/7ect o* t)e contract. 8n9

2#ample% A promised to lend 31(444(444 to B. .he promise was accepted by B. .his contract (consensual is already binding upon the parties so that if A does not fulfill his promise( B has the right to demand compliance thereof. But note here that the real contract of loan does not yet e#ist.

Nature o* t)e Contract o* Loan -ommodatum and loan are real contracts. .hey are perfected by the deli$ery of the ob+ect loaned. /n the other hand( consensual contracts are perfected by mere consent. (Art. 1316, Civil Code) Need *or Deli-ery .o effect either a commodatum or a mutuum( a deli$ery( either real or constructi$e( is essential. .his is so because Art. %&'<. T)e /ailee in commodatum ac3uires t)e used o* t)e t)in. loaned /ut not its *ruits1 i* any C:A TER % CO55ODAT#5 SECTION % ; Nature o* Commodatum



com,ensation is to /e ,aid /y )im 0)o ac3uires t)e use+ t)e contract ceases to /e a commodatum. Commodatum a real( principal( essentially gratuitous and personal contract where one of the parties (called the bailor or lender deli$ers to another (called the bailee or borrower a non-consumable ob+ect( so that the latter may 562 the same for a certain period and later return it.

S,anis) Terms Comodatario bailor (lender Comodante bailee (borrower Art. %&'=. Consuma/le .oods may /e t)e su/7ect o* commodatum i* t)e ,ur,ose o* t)e contract is not t)e consum,tion o* t)e o/7ect+ as 0)en it is merely *or e>)i/ition. Su/7ect matter o* Commodatum 5sually( only non-consumable goods may be the ob+ect of a commodatum for the thing itself should not be consumed and must be returned( but when a +ar of $inegar is gi$en merely for e#hibition( the thing itself is not consumed. ;t is only use ad ostentationem. :ote that the $inegar in this case is non-fungible( for the same $inegar must be returned. Art. %&'?. 5o-a/le or immo-a/le ,ro,erty may /e t)e o/7ect o* commodatum. Art. %&'@. T)e /ailor in commodatum need not /e t)e o0ner o* t)e t)in. loaned. Reason *or t)e La0 .he contract of commodatum does not transfer ownership. All that is ac*uired is that the bailor has the right to the use of the property which he is lending( and that he be allowed to alienate this right to use. 1ence( in lease( for e#ample( a lessee may become a sub-lessor( unless he has been e#pressly prohibited to do so in the contract of lease. (Art. 1650, Civil Code)

.he term is deri$ed from the 7atin !commodum" (usefulness or !commodo" (particular usefulness to a borrower.

!eatures or c)aracteristics o* Commodatum as a Contract a. 8eal (because perfected by deli$ery b. 3rincipal (because it can stand alone by itself c. 9ratuitous (otherwise( the contract is one of lease d. 3ersonal in :ature (because of the trust. W)at (ailee 8(orro0er9 in Commodatum Ac3uires -ommodatum gi$es the right to% .he use (+ust utendi And not to the fruits (+us fruendi /therwise( the contract may be one of usufruct. But of course a stipulation that the bailee may ma,e use of the fruits of the thing loaned is $alid. (Art. 1940) ;n such a case( howe$er( the right to get the fruits is merely incidental and not the main cause of the contract.


Art. %&'&. Commodatum c)aracter. Conse3uentlyA




in Reason *or t)e La0

8%9 T)e deat) o* eit)er t)e /ailor or t)e /ailee e>tin.uis)es t)e contract1 8B9 T)e /ailee can neit)er lend nor lease t)e o/7ect o* t)e contract to a t)ird ,erson. :o0e-er+ t)e mem/ers o* t)e /aileeCs )ouse)old may ma2e use o* t)e t)in. loaned+ unless t)ere is a sti,ulation to t)e contrary+ or unless t)e nature o* t)e t)in. *or/ids suc) use. Art. %&6D. A sti,ulation t)at t)e /ailee may ma2e use o* t)e *ruits o* t)e t)in. loaned is -alid. Does /ailee )a-e ri.)t to use t)e *ruitsE a.As a rule( the bailee is not entitled to the fruits( otherwise the contract may be one of usufruct. ;t should be noted that the right to use is distinct from the right to en+oy the fruits( since under the law fruits should as a rule pertain to the owner of the thing producing the fruits. (Art. 441, Civil Code) b.1owe$er( to stipulate that the bailee ma,es use of the fruits would not destroy the essence of a commodatum( for liberality is still the actual cause or consideration of the contract. SECTION B. ; O/li.ations o* t)e (ailee

.he bailee is supposed to return the identical thing (Art. 1933), so he is obliged to ta,e care of the thing with( as a rule( the diligence of a good father of a family. (Art. 1163). ;t follows necessarily that ordinary e#penses for the use and preser$ation of the thing loaned must be borne the bailee. :/.2% .he rule is different in the case of e#traordinary e#penses. Art. %&6B. T)e /ailee is lia/le *or t)e loss o* t)e t)in.+ e-en i* it s)ould /e t)rou.) a *ortuitous e-entA 8%9 I* )e de-otes t)e t)in. to any ,ur,ose di**erent *rom t)at *or 0)ic) it )as /een loaned1 Reason *or t)e La0 ; .his amounts to bad faith or abuse of generosity considering the fact that commodatum is gratuitous.

(2) I* )e 2ee,s it lon.er t)an t)e ,eriod

sti,ulated+ or a*ter t)e accom,lis)ment o* t)e use *or 0)ic) t)e commodatum )as /een constituted1 Reason *or t)e La0 1e is guilty of a certain ,ind of default. (mora 8'9 I* t)e t)in. loaned )as /een deli-ered 0it) a,,raisal o* its -alue+ unless t)ere is a sti,ulation e>em,tion t)e /ailee *rom res,onsi/ility in case o* a *ortuitous e-ent1

Art. %&6%. T)e /ailee is o/li.ed to ,ay *or t)e ordinary e>,enses *or t)e use and ,reser-ation o* t)e t)in. loaned.



Reason *or t)e La0 2$idently( the gi$ing of the $alue was made to hold the bailee liable for after all this is not a sale( and neither is ownership transferred in commodatum. 2#ception ' when there is a stipulation to the contrary. ;t may in a sense be said that the appraisal con$erts the commodatum into a mutuum. 869 I* )e lends or leases t)e t)in. to a t)ird ,erson+ 0)o is not a mem/er o* )is )ouse)old1 Reason *or t)e La0 .his is prohibited by the law for it amounts to a $iolation of the personal character of a commodatum. 8<9 I*+ /ein. a/le to sa-e eit)er t)e t)in. /orro0ed or )is o0n t)in.+ )e c)ose to sa-e t)e latter. Reason *or t)e La0 .his amounts to an act of ingratitude and to a failure to e#ercise due diligence( considering the fact that commodatum is gratuitous.

Art. %&66. T)e /ailee cannot retain t)e t)in. loaned on t)e .round t)at t)e /ailor o0es )im somet)in.+ e-en t)ou.) it may /e /y reason o* e>,enses. :o0e-er+ t)e /ailee )as a ri.)t o* retention *or dama.es mentioned in Article %&<%. $enerally+ (orro0er Cannot Retain. Reason *or t)e La0 Bailment implies a trust that as soon as the time has e#pired( or the purpose accomplished( the bailed property must be restored to the bailor. (Cobb v. Walla e) Art. %&6<. W)en t)ere are t0o or more /ailees to 0)om a t)in. is loaned in t)e same contract+ t)ey are lia/le solidarily. .his is one more instance when solidary liability is imposed by law.

SECTION '. ; O/li.ations o* t)e (ailor

5isuse or A/use A misuse or abuse of the property is ordinarily a con$ersion for which the bailee is generally held responsible( to the full e#tent of the loss. (Fros v. Plumb) Art. %&6'. T)e /ailee does not ans0er *or t)e deterioration o* t)e t)in. loaned due only to t)e use t)ereo* and 0it)out )is *ault. :on-liability for =eterioration without fault.

Art. %&6=. T)e /ailor cannot demand t)e return o* t)e t)in. loaned till a*ter t)e e>,iration o* t)e ,eriod sti,ulated+ or a*ter t)e accom,lis)ment o* t)e use *or 0)ic) t)e commodatum )as /een constituted. :o0e-er+ i* in t)e meantime+ )e s)ould )a-e ur.ent need o* t)e t)in.+ )e may demand its return or tem,orary use. In case o* tem,orary use /y t)e /ailor+ t)e contract o* commodatum is sus,ended 0)ile t)e t)in. is in t)e ,ossession o* t)e /ailor.



$enerally+ (ailor cannot demand immediate return A commodatum is for a certain time. (art. 1933). .his is the reason for the first sentence( first par. of Art. 19<6. .his is based on e*uitable ground for otherwise( the bailee may not be able to ma,e proper use of the thing borrowed. Reason *or Necessity9 second sentence+ *irst ,ar. 8#r.ent

b. .he possession of the borrower in precariumis precarious( that is( dependent on the lenders will( hence the name precarium.

Art. %&6@. T)e /ailor may demand t)e immediate return o* t)e t)in. i* t)e /ailee commits any act o* in.ratitude s,eci*ied in Article ?=<. E**ect o* Commission o* Act o* In.ratitude .he bailor can demand ;??2=;A.2 82.58:. Art. !65. "#e donation ma$ also be revo%ed at t#e instan e o& t#e donor, b$ reason o& in'ratitude in t#e &ollo(in' ases) (1) *& t#e donee s#ould ommit some o&&ense a'ainst t#e +erson, t#e #onor or t#e +ro+ert$ o& t#e donor, or o& #is (i&e or #ildren under #is +arental aut#orit$, (-) *& t#e donee im+utes to t#e donor an$ riminal o&&ense, or an$ a t involvin' moral tur+itude, even t#ou'# #e s#ould +rove it, unless t#e rime or t#e a t #as been ommitted a'ainst t#e donee #imsel&, #is (i&e or #ildren under #is aut#orit$, (3) *& #e undul$ re&uses #im su++ort (#en t#e donee is le'all$ or morall$ bound to 'ive su++ort to t#e donor. Art. %&6&. T)e /ailor s)all re*und t)e e>traordinary e>,enses durin. t)e contract *or t)e ,reser-ation o* t)e t)in. loaned+ ,ro-ided t)e /ailee /rin.s t)e same to t)e 2no0led.e o* t)e /ailor /e*ore incurrin. t)em+ e>ce,t 0)en t)ey are so ur.ent t)at t)e re,ly to t)e noti*ication cannot /e a0aited 0it)out dan.er.

A bailor usually lends his property because he does not need. ;t. 1ence( the reason for the e#ception. :ote that the return may be only temporary( but it can also be permanent. Art. %&6?. T)e /ailor may demand t)e t)in. at 0ill+ and t)e contractual relation is called a ,recarium+ in t)e *ollo0in. casesA 8%9 I* neit)er t)e duration o* t)e contract nor t)e use to 0)ic) t)e t)in. loaned s)ould /e de-oted+ )as /een sti,ulated1 or 8B9 I* t)e use o* t)e t)in. is merely tolerated /y t)e o0ner. recarium a. 3recarium is a special form of commodatum. ;n a true commodatum( the possession of the borrower is more secure.


I* t)e e>traordinary e>,enses arise on t)e occasion o* t)e actual use o* t)e t)in. /y t)e /ailee+ e-en t)ou.) )e acted 0it)out *ault+ t)ey s)all /e /orne e3ually /y /ot) t)e /ailor and t)e /ailee+ unless t)ere is a sti,ulation to t)e contrary. E>traordinary E>,enses a.As a rule( the e#traordinary e#penses should be paid by the bailor because it is he who profits by said e#penses) otherwise( the thing borrowed would be destroyed. b.9enerally( notice is re*uired because the bailor should be gi$en discretion as to what he wants to do with his own property. Reason *or t)e second ,ar. 8Actual #se /y (ailee9 .his is an e*uitable solution. .he bailee pays one half because of the benefit deri$ed from the use of the thing loaned to him( and the bailor pays the other half because he is the owner and the thing will be returned to him. 2#ample% A borrowed a motorbi,e from B. @hile A was riding on it( he met an accident which greatly damaged the bi,e. A was not at fault for he was dri$ing carefully. Both A and B should share e*ually in the e#traordinary e#penses unless there is a stipulation to the contrary. Art. %&<D. I*+ *or t)e ,ur,ose o* ma2in. use o* t)e t)in.+ t)e /ailee incurs e>,enses ot)er t)an t)ose re*erred to in Articles %&6% and %&6&+ )e is not entitled to reim/ursement. E>am,leA 8Ot)er E>,enses9

.he borrower of a car buys an e#tra +ac, to be used as a reser$e on a trip. 1ere( he is not entitled to reimbursement.

Art. %&<%. T)e /ailor 0)o+ 2no0in. t)e *la0s o* t)e t)in. loaned+ does not ad-ise t)e /ailee o* t)e same+ s)all /e lia/le to t)e latter *or t)e dama.es 0)ic) )e may su**er /y reason t)ereo*. W)en (ailor 2no0s !la0s E>am,leA A lent B a Aisher B 3ay,el( the electric connections of which were defecti$e. ;f although he ,nows said defect( A does not inform B thereof( A will be liable in case B is in+ured by reason thereof. Reason *or t)e La0 @hen a person lends( he ought to confer a benefit( and not to do a mischief. ;f he does not re$eal the flaws( he is liable for his bad faith. (.a'non v. /ana) :/.2% But the obligation of a gratuitous lender goes no further than this( and he cannot therefore be made liable for not communicating anything which he did not ,now( whether he ought to ha$e ,nown it or not. (.a'non v. /ana) Ri.)t o* Retention Aor the damages spo,en of in this Article( the bailee has the right of retention until paid of said damages. (Art. 1944, Civil Code) Nature o* t)e !la0s


;t is e$ident that the flaws referred to in this Article are hidden defects( not ob$ious ones. Art. %&<B. T)e /ailor cannot e>em,t )imsel* *rom t)e ,ayment o* e>,enses or dama.es /y a/andonin. t)e t)in. to t)e /ailee. E**ect o* (ailorFs A/andonment or $i-in. o* t)e O/7ect E>am,leA Aor e#traordinary e#penses on As car( B the borrower spent 1&>(444. A cannot e#empt himself from payment thereof by +ust gi$ing B the thing borrowed. Reason *or t)e La0 .he $alue of the thing borrowed might be less than the $alue of the e#penses or damages.

his obligation to pay a generic thing ' money representing the loan with interest( because the account can still be paid from sources other than said mortgaged crops. 8Carlos $elano+ et. al. -. CA9 .he con+ugal partnership is liable under Art. 161 of the -i$il code now Art. 1&1( last par. of the Aamily -ode. ;t is wrong to say that the con+ugal partnership is liable +ointly and se$erally( for the con+ugal partnership is a single entity. 8(onne-ie -. CA9 1. A contract of loan is consensual (author belie$es it to be a real contract ' a borrower of money who has not yet been gi$en the money is not yet a borrower) he is only a would-be borrower . &. ;f a loan (money is gi$en only some time after the e#ecution of a mortgage( the mortgage is still $alid. After all( the promissory note is only e$identiary of the debt. .he late e#ecution of the promissory note does not mean that the mortgage had no consideration. - ?utuum is similar to an abnormal usufruct. (an2 Accounts 8$ulas -. N(9 Ai#ed( sa$ings( and current deposits of money in ban,s and similar institutions shall be go$erned by the pro$isions concerning simple loans. (e)est Loans 8 residential Ad :oc !act;!indin. Committee on (e)est Loans -. :on. Aniano a. Desierto Reco-ery o* Ill;$otten Wealt)9 .he behest nature of the loans could not be reasonably ,nown by a mere eye e#amination of the mortgage contracts.


Art. %&<'. A ,erson 0)o recei-es a loan o* money or any ot)er *un.i/le t)in. ac3uires t)e o0ners)i, t)ereo*+ and is /ound to ,ay to t)e creditor an e3ual amount o* t)e same 2ind and 3uality. O0ners)i, asses in 5utuum

/wnership passes to the borrower( but( of course( he must pay later.

8Re,u/lic -. Gose $ri7aldo9 .he loss of the crops (destroyed as a result of enemy action did not e#tinguish


Lia/ility o* (orro0er o* 5oney Behest loans are part of the ill-gotten wealth which former 3resident Aerdinand 2. ?arcos and his cronies accumulated and which the 9o$ernment thru the 3residential -ommission on 9ood 9o$ernment (3-99 see,s to reco$er. Art. %&<6. A contract 0)ere/y one ,erson trans*ers t)e o0ners)i, o* non;*un.i/le t)in.s to anot)er 0it) t)e o/li.ation on t)e ,art o* t)e latter to .i-e t)in.s o* t)e same 2ind+ 3uantity+ and 3uality s)all /e considered a /arter. (arter o* Non;Consuma/le T)in.s 1ere( the word non-fungible does not really mean non-fungible but non-consumable. 8eason% ;f the thing were really non-fungible( the identical thing must be returned. 1ere( an e*ui$alent thing is returned. a. 7iability is go$erned by Arts. 1&<9 and 1&>4. b. Art. 1&<9. .he payment of debts in money shall be made in the currency stipulated( and if it is not possible to deli$er such currency( then in the currency which is legal tender in the 3hilippines. .he deli$ery of promissory notes payable to order( or bills of e#change or other mercantile documents shall produce the effect of payment only when they ha$e been cashed( or when through the fault of the creditor they ha$e been impaired. c. Art. 1&>4. ;n case an e#traordinary inflation or deflation of the currency stipulated should super$ene( the $alue of the currency at the time of the establishment of the obligation shall be the basis of payment( unless there is an agreement to the contrary. B. E>am,le o* Second ot)er t)an 5oney9 ara.ra,) 8Loan o* T)in.s

2#ample% A got a fountain pen from B and he (A became the owner thereof( with the obligation of gi$ing another pen of the same ,ind and *uality. .his shall be considered a barter. ;t is not a commodatum nor a mutuum. Art. %&<<. T)e o/li.ation o* a ,erson 0)o /orro0s money s)all /e .o-erned /y t)e ,ro-isions o* Articles %B6& and %B<D o* t)is Code. I* 0)at 0as loaned is a *un.i/le t)in. ot)er t)an money+ t)e de/tor o0es anot)er t)in. o* t)e same 2ind+ 3uantity and 3uality+ e-en i* it s)ould c)an.e in -alue. In case it is im,ossi/le to deli-er t)e same 2ind+ its -alue at t)e time o* t)e ,er*ection o* t)e loan s)all /e ,aid.

A borrowed from B fi$e sac,s of rice. At the time the loan was perfected( each sac, cost 31(D44. 2$en if at the time of payment the price would change( fi$e sac,s of the same ,ind and *uality of rice should be returned. 1owe$er( if it is impossible to deli$er the same ,ind( 31(D44 should be paid. :ote that the $alue at the time of 328A2-.;/: (not payment applies. Art. %&<=. No interest s)all /e due unless it )as /een e>,ressly sti,ulated in 0ritin.. !ormality *or Interest 8*or use o* t)e 5oney9


.he interest must be stipulated in @8;.;:9.

4inds o* Interest ;nterest may be paid either as 1. -ompensation for the use of the money (monetary interest ) or as &. =amages (compensatory interest . Art. 19>6 refers to interest for use of the money.

shall be the payment of the interest agreed upon( and in the absence of stipulation( the legal interest( which is si# per cent per annum. (.he rate now is 1&E per annum. 5unici,al Cor,orations are Lia/le *or Interest 8Io/el -. City o* 5anila9 A municipal corporation does not en+oy immunity from liability for interest when assessed as damages for the non-payment of a debt( to the same e#tent as the national go$ernment. Interest durin. t)e 5oratorium La0s 8Warner+ (arnes J Co. -. "asay+ et. al.9 ;nterest ran during the moratorium laws. ;f debtors had wanted to a$oid liability for all the interest falling due during the time that the moratorium laws were in effect( they could ha$e renounced the benefits of the said laws and paid the debts( or in the $ery least paid the interest as they accrued. 8Re,u/lic -. $ri7aldo9 @hat the moratorium laws suspended was the running of the period of prescription of actions. ;nterest during the war years howe$er can be eliminated if the creditors were enemies of the Fapanese( for their payment to them could not ha$e been made. Com,utations *or Com,ensatory Dama.es As already stated( this is interest not imposed for the use of the money( but to ser$e as penalty or damages for the breach of contractual obligations. .his ,ind of interest need not be stipulated in writing( for the law gi$es the rate (6E per annum in the absence of agreement as to the penalty. Art. --09, Civil Code). ;n the following e#amples( legal interest was computed at 6E per annum. :ote howe$er that today the legal rate is 1&E per annum. .he e#amples must( therefore( be amended correspondingly.

:o0 Interest Arises 8(arreto -. Santa 5arina9 .he right to interest arises only be $irtue of a contract or by $irtue of damages for delay or failure to pay principal on which interest is demanded. W)en Interest Earns Interest ;nterest due shall earn legal interest from the time it is +udicially demanded( although the obligation may be silent upon this point. (Art. --1-, Civil Code) Interest /y Way o* Dama.es 8Lo,eH -. Del Rosario9 ;n contracts for the payment of a sum of money( the measure of damages for delay is limited to the interest pro$ided for by law. .he depri$ation of an opportunity for ma,ing money( which might ha$e pro$ed beneficial or might ha$e been ruinous is of too uncertain a character to be weighed in the e$en balances of the law. Art. &&49 ' ;f the obligation consists in the payment of a sum of money( and the debtor incurs in delay( the indemnity for damages( there being no stipulation to the contrary(



85onHon+ et. al. -. IC and T)eo :. Da-ies J Co.+ !ar East Ltd.9 2liminating the interest on the $arious damages from the date of the filing of the suit is clearly an unwarranted act. ;t must be borne in mind that interest begins to accrue upon demand( e#tra+udicial or +udicial. A complain is a +udicial demand. 8Antonio Tan -. CA J Cultural Center9 .he stipulated 1<E per annum interest change until full payment of the loan constitutes the monetary interest on the note and is allowed under Art. 19>6. ;n the case at bar( the stipulated &E per month penalty is in the form of a penalty charge which is separate and distinct from the monetary interest on the principal of the loan. Art. %&<?. Contracts and sti,ulations+ under any cloa2 or de-ice 0)ate-er+ intended to circum-ent t)e la0s a.ainst usury s)all /e -oid. T)e /orro0er may reco-er in accordance 0it) t)e la0s on usury. #sury La0 S)ould not /e Circum-ented. Art. %&<@. In t)e determination o* t)e interest+ i* it is ,aya/le in 2ind+ its -alue s)all /e a,,raised at t)e current ,rice o* t)e ,roducts or .oods at t)e time and ,lace o* ,ayment. Determination o* Interest i* in 4ind

W)en Accrued Interest Earns Interest .he general rule is that accrued interest (interest due and unpaid will not bear interest( B5. a. ;f there is agreement to this effect (Art. 19>9 . 3r b. ;f there is +udicial demand. (Art. &&1& .12:( such accrued interest will bear interest at the legal rate (Art. &&1& unless( a different rate is stipulated. (0od'es v. 1e'alado) Com,ound Interest -ompound ;nterest is interest on accrued interest. ;t is $alid to charge compound interest( but there must be a written agreement to this effect) otherwise said compound interest should not be charged. (2olan v. 3a4ina$) unless it be the interest charged upon +udicial demand. (Art. --1-) #sury La0 not Violated 8Villareal -. Al-ayda9 .he interest on accrued or capitali0ed interest is not considered on the original principal( and should not be considered usurious( if( when added to the original interest( the sum should e#ceed the rated allowed by the 5sury 7aw. W)en Com,ound Interest cannot /e Damanded .he agreement on compound interest must be e#pressly made. Reason 0)y Com,ound Interest are not Allo0ed E>ce,t in t)e Cases ,ro-ided *or /y La0

Galue should be at time and place of 3AH?2:..

Art. %&<&. Wit)out ,re7udice to t)e ,ro-isions o* Article BB%B+ interest due and un,aid s)all not earn interest. :o0e-er+ t)e contractin. ,arties may /y sti,ulation ca,italiHe t)e interest due and un,aid+ 0)ic) as added ,rinci,al+ s)all earn ne0 interest.



=ebts would accumulate with a rapidity beyond all ordinary calculation and endurance. ;t would tend also to inflame the a$arice and harden the heart of the creditor. 6ome allowance must be made for the indolence of man,ind. Art. %&=D. I* t)e /orro0er ,ays interest 0)en t)ere )as /een no sti,ulation t)ere*or+ t)e ,ro-isions o* t)is Code concernin. solutio indebiti+ or natural o/li.ations+ s)all /e a,,lied+ as t)e case may /e. ayment o* Interest 0)en t)ere is No Sti,ulation a. it( where ot A borrower borrowed money. :o interest was stipulated. ;f by mista,e he pays( then this will be a *uestion of undue payment or solution indebiti. @e should then apply the rules on the sub+ect. b. ;f a borrower borrows money and orally agrees to pay legal interest at 14E per annum( there is really no obligation to pay since the interest was not agreed upon in writing. ;f he ne$ertheless pays because he considers it his moral obligation to pay said interest( he cannot reco$er the interest that he has gi$en $oluntarily. .his will not be a natural obligation( and the pro$isions on said sub+ect should apply. Art. %&=%. #surious contracts s)all /e .o-erned /y t)e #sury La0 and ot)er s,ecial la0s+ so *ar as t)ey are not inconsistent 0it) t)is Code.

8#.S. -. Constantino9 Act &6>> as amended is our 5sury 7aw( and was enacted on Aeb. &<( 1916. .he law was passed to curb usury( since the ta,ing of e#cessi$e interest for the loan of money has been regarded with abhorrence from the earliest times. Rules on Construction 8Dic2erman -. ay9 6ince the 5sury 7aw is penal in nature( it should be construed strictly. 8#.S. -. Conde9 7i,e other laws( prospecti$e effect should be gi$en to it( where such construct may be permitted. 7aws adopted after the e#ecution of a contract( changing or altering the rate of interest( cannot apply to such a contract without $iolating the pro$ision of the -onstitution which prohibits the adoption of a law impairing the obligations of a contract. W)en #sury La0 does not A,,ly a.A contract for the lease of property is not a loan) hence( the rental paid is not go$erned by the 5sury 7aw. ("olentino v. .on5ales) b..he increase of the price of a thing sold on credit o$er its cash sale price is not interest within the pur$iew of the 5sury 7aw( if the sale is made in good faith and not as a mere prete#t to co$er a usurious loan. (3anila "radin' v. "amara(). 6uch price is the selling price for a sale made on the installment plan.

Com,ound Interest #sury La0 8$o-Ft -. Conde9 ;n one case( it was held that an e#press agreement to charge compound interest is not to be ta,en



into consideration in determining whether or not the stipulated interest e#ceed the limit prescribed by the 5sury 7aw. .his was changed by a subse*uent case which held that charging compound interest $iolates the 5sury 7aw when the sums charged as such added to the stipulated interest e#ceeds the a$erage rate of interest that may legally be charged for a loan. 8:od.es -. Salas9 ;n a still later case( the 6- re$erted to the ruling in the -onde -ase. 8$o-Ft -. Calderon9 Ad-ance Interest 8:od.es -. Salas9 -harging interest in ad$ance is permissible pro$ided said interest does not correspond to interest for more than one year. La0*ul Interest Rates ;nterest rates are now fi#ed from time to time by the ?onetary Board. Central (an2 Circular 6%= -entral Ban, -ircular :o. <16( fi#ing the rate of interest at 1&E per annum( deals with% 1. 7oans) &. Aorbearance of any money( goods or credit) and 3. Fudgments.