Legal interest rate applies if stipulated interest is absent

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."

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate. In Spouses Toring v. Spouses Olan,[1] the Supreme 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."[2]Spouses Toring cites and restates (practically verbatim) what the Supreme 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."[3]

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:[4]

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.[5] (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.[6] 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.

The intervening Decision of the High Court in Nacar v. Gallery Frames[7] 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.[8] (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 Joan 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.[9] (Emphasis supplied, citations omitted)

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.

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[1] 589 Phil. 362 (2008) [Per J. Quisumbing, Second Division].

[2] 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.

[3] 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.

[4] G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug, En Banc].

[5] Id. at 95, citing CIVIL CODE, art. 2195, 1956, and 1169.

[6] 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].

[7] G.R. No. 189871, August 13, 2013, 703 SCRA 439 [Per J. Peralta, En Banc].

[8] Id. at 454-456.

[9] Id. at 457-458.