SECOND DIVISION

PRISMA CONSTRUCTION &

DEVELOPMENT
CORPORATION and ROGELIO S.
PANTALEON,

Petitioners,

G.R. No. 160545

Present:

NACHURA, J.,

versus

BRION, Acting Chairperson,

DEL CASTILLO,
ABAD, and
PEREZ, JJ.

ARTHUR F. MENCHAVEZ ,
Respondent.
Promulgated:

Designated additional Member of the Second Division in lieu of Associate Justice

Antonio T. Carpio per Raffle dated March 1, 2010.

March 9, 2010

x------------------------------------------------------------------------------------------x
DECISION

BRION, J.:

We resolve in this Decision the petition for review on certiorari1[1] filed by

petitioners Prisma Construction & Development Corporation (PRISMA) and
Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse
and set aside the Decision2[2] dated May 5, 2003 and the Resolution3[3] dated
October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in
CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision of the
Regional Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-4552
that held the petitioners liable for payment of P3,526,117.00 to respondent Arthur
F. Menchavez (respondent), but modified the interest rate from 4% per month to
12% per annum, computed from the filing of the complaint to full payment. The
assailed CA Resolution denied the petitioners Motion for Reconsideration.
1[1] Filed under Rule 45 of the 1997 RULES OF CIVIL PROCEDURE.
2[2] Penned by Associate Justice Jose L. Sabio, Jr. (retired), with Associate Justice
B.A. Adefuin-De La Cruz (retired) and Associate Justice Hakim S. Abdulwahid
concurring. See rollo, pp. 29-38.
3[3] Id. at 52-53.

FACTUAL BACKGROUND

The facts of the case, gathered from the records, are briefly summarized below.

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA,
obtained a P1,000,000.004[4] loan from the respondent, with a monthly interest of
P40,000.00 payable for six months, or a total obligation of P1,240,000.00 to be paid within six
(6) months,5[5] under the following schedule of payments:

January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.006[6]
Total

P1,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note7[7] that states:

4[4] Exhibit A, Folder II, Exhibits A to E and Submarkings (for the Plaintiff), p.
1; TSN, Testimony of Arthur F. Menchavez, April 12, 1999, pp. 2-4.
5[5] TSN, Testimony of Arthur F. Menchavez, April 12, 1999, pp. 9-10.
6[6] Original Records, p. 8.
7[7] Exhibit C, Folder II, Exhibits A to E and Submarkings (for the Plaintiff), p.
5.

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE

MILLION TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000),
Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-month
loan payable according to the following schedule:
January 8, 1994 . P40,000.00
February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00
The checks corresponding to the above amounts are hereby acknowledged.8[8]

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the
promissory note in his personal capacity,9[9] and as duly authorized by the Board of Directors of
PRISMA.10[10] The petitioners failed to completely pay the loan within the stipulated six (6)month period.

From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to
the respondent:

September 8, 1994 P320,000.00

October 8, 1995.P600,000.00
November 8, 1995.....P158,772.00
8[8] Original Records, p. 8.
9[9] Ibid.
10[10] Exhibit B, Folder II, Exhibits A to E and Submarkings (for the Plaintiff), p.
2.

January 4, 1997 P30,000.0011[11]

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the
respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of
January 4, 1997, to which it applied a 4% monthly interest.12[12] Thus, on August 28, 1997,
the respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance,
plus 4% monthly interest, P30,000.00 in attorneys fees, P1,000.00 per court appearance and
costs of suit.13[13]

In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but
denied the stipulation on the 4% monthly interest, arguing that the interest was not provided in
the promissory note. Pantaleon also denied that he made himself personally liable and that he
made representations that the loan would be repaid within six (6) months.14[14]

THE RTC RULING

The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for
P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of 4% or
P40,000.00 per month, or a total of P240,000.00 for a 6-month period. It noted that the
11[11] Exhibit E, Folder II, Exhibits A to E and Submarkings (for the Plaintiff), p.
2.
12[12] Ibid.
13[13] Original Records, pp. 1-7.
14[14] Id. at 29-31.

petitioners made several payments amounting to P1,228,772.00, but they were still indebted to
the respondent for P3,526,117.00 as of February 11,15[15] 1999 after considering the 4%
monthly interest. The RTC observed that PRISMA was a one-man corporation of Pantaleon and
used this circumstance to justify the piercing of the veil of corporate fiction. Thus, the RTC
ordered the petitioners to jointly and severally pay the respondent the amount of P3,526,117.00
plus 4% per month interest from February 11, 1999 until fully paid.16[16]

The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of
Court, insisting that there was no express stipulation on the 4% monthly interest.

THE CA RULING

The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4%
monthly interest principally based on the board resolution that authorized Pantaleon to transact a
loan with an approved interest of not more than 4% per month. The appellate court, however,
noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be
reduced to 12% per annum. The CA affirmed the RTCs finding that PRISMA was a mere
instrumentality of Pantaleon that justified the piercing of the veil of corporate fiction. Thus, the
CA modified the RTC Decision by imposing a 12% per annum interest, computed from the filing

15[15] The date of the last payment made by the petitioners should be February
12, 1999, per Exhibit E, Folder II, Exhibits A to E and Submarkings (for the
Plaintiff), p. 2.
16[16] Id. at 99-106.

of the complaint until finality of judgment, and thereafter, 12% from finality until fully paid.17

[17]

After the CA's denial18[18] of their motion for reconsideration,19[19] the petitioners filed the
present petition for review on certiorari under Rule 45 of the Rules of Court.

THE PETITION

The petitioners submit that the CA mistakenly relied on their board resolution to conclude that
the parties agreed to a 4% monthly interest because the board resolution was not an evidence of a
loan or forbearance of money, but merely an authorization for Pantaleon to perform certain acts,
including the power to enter into a contract of loan. The expressed mandate of Article 1956 of the
Civil Code is that interest due should be stipulated in writing, and no such stipulation exists.
Even assuming that the loan is subject to 4% monthly interest, the interest covers the six (6)month period only and cannot be interpreted to apply beyond it. The petitioners also point out the
glaring inconsistency in the CA Decision, which reduced the interest from 4% per month or 48%
per annum to 12% per annum, but failed to consider that the amount of P3,526,117.00 that the
RTC ordered them to pay includes the compounded 4% monthly interest.

THE CASE FOR THE RESPONDENT

17[17] Supra note 2.
18[18] Resolution of October 22, 2003; rollo, pp.52-53.
19[19] Id. at 43-60.

The respondent counters that the CA correctly ruled that the loan is subject to a 4%
monthly interest because the board resolution is attached to, and an integral part of, the
promissory note based on which the petitioners obtained the loan. The respondent further
contends that the petitioners are estopped from assailing the 4% monthly interest, since they
agreed to pay the 4% monthly interest on the principal amount under the promissory note and the
board resolution.

THE ISSUE

The core issue boils down to whether the parties agreed to the 4% monthly interest on the
loan. If so, does the rate of interest apply to the 6-month payment period only or until full
payment of the loan?

OUR RULING

We find the petition meritorious.

Interest due should be stipulated in

writing; otherwise, 12% per annum

Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.20[20] When the terms of a contract are clear and
leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations
governs.21[21] In such cases, courts have no authority to alter the contract by construction or to
make a new contract for the parties; a court's duty is confined to the interpretation of the contract
the parties made for themselves without regard to its wisdom or folly, as the court cannot supply
material stipulations or read into the contract words the contract does not contain.22[22] It is only
when the contract is vague and ambiguous that courts are permitted to resort to the interpretation
of its terms to determine the parties intent.

In the present case, the respondent issued a check for P1,000,000.00.23[23] In turn, Pantaleon, in
his personal capacity and as authorized by the Board, executed the promissory note quoted
above. Thus, the P1,000,000.00 loan shall be payable within six (6) months, or from January 8,
1994 up to June 8, 1994. During this period, the loan shall earn an interest of P40,000.00 per
month, for a total obligation of P1,240,000.00 for the six-month period. We note that this
agreed sum can be computed at 4% interest per month, but no such rate of interest was
stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed
upon.

20[20] Article 1159, CIVIL CODE; Dumlao v. Marlon Realty Corporation, G.R. 131491,
August 17, 2007, 530 SCRA 427, 430.
21[21] Article 1370, CIVIL CODE.
22[22] Cuison v. Court of Appeals, G.R. No. 102096, August 22, 1996, 260 SCRA 645,
667.
23[23] Exhibit A, Folder II, Exhibits A to E and Submarkings (for the Plaintiff), p.
1; TSN, Testimony of Arthur F. Menchavez, April 12, 1999, pp. 2-4.

Article 1956 of the Civil Code specifically mandates that no interest shall be due unless
it has been expressly stipulated in writing. Under this provision, the payment of interest in loans
or forbearance of money is allowed only if: (1) there was an express stipulation for the payment
of interest; and (2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of interest at a stipulated rate.
Thus, we held in Tan v. Valdehueza24[24] and Ching v. Nicdao25[25] that collection of interest
without any stipulation in writing is prohibited by law.

Applying this provision, we find that the interest of P40,000.00 per month corresponds only to
the six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by
the parties in the promissory note. Thereafter, the interest on the loan should be at the legal
interest rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals:26[26]

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. (Emphasis supplied)

24[24] 160 Phil. 760, 767 (1975).

25[25] G.R. No. 141181, April 27, 2007, 522 SCRA 316, 361.
26[26] G.R. No. 97412, July 12, 1994, 234 SCRA 78.

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,27[27] Sulit v.
Court of Appeals,28[28] Crismina Garments, Inc. v. Court of Appeals,29[29] Eastern Assurance
and Surety Corporation v. Court of Appeals,30[30] Sps. Catungal v. Hao,31[31] Yong v. Tiu,32[32]
and Sps. Barrera v. Sps. Lorenzo.33[33] Thus, the RTC and the CA misappreciated the facts of
the case; they erred in finding that the parties agreed to a 4% interest, compounded by the
application of this interest beyond the promissory notes six (6)-month period. The facts show
that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for
six months, not to a 4% rate of interest payable within a six (6)-month period.

Medel v. Court of Appeals not applicable

The CA misapplied Medel v. Court of Appeals34[34] in finding that a 4% interest per month
was unconscionable.

27[27] 331 Phil. 787 (1996).

28[28] 335 Phil. 914 (1997).
29[29] 363 Phil. 701 (1999).
30[30] 379 Phil. 84 (2000).
31[31] 407 Phil. 309 (2001).
32[32] 426 Phil. 331 (2002).
33[33] 438 Phil. 42 (2002).
34[34] 359 Phil. 820 (1998).

In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per
month, a service charge of 2% per annum, and a penalty charge of 1% per month, plus attorneys
fee equivalent to 25% of the amount due, until the loan is fully paid. Taken in conjunction with
the stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive,
iniquitous, unconscionable, exorbitant and hence, contrary to morals, thereby rendering the
stipulation null and void.

Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon
v. Salazar35[35] of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v.
Court of Appeals,36[36] of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in
Imperial v. Jaucian,37[37] of 16% per month or 192% per annum interest on a P320,000.00 loan; in
Arrofo v. Quio,38[38] of 7% interest per month or 84% per annum interest on a P15,000.00 loan;
in Bulos, Jr. v. Yasuma,39[39] of 4% per month or 48% per annum interest on a P2,500,000.00 loan;
and in Chua v. Timan,40[40] of 7% and 5% per month for loans totalling P964,000.00. We note that
in all these cases, the terms of the loans were open-ended; the stipulated interest rates were
applied for an indefinite period.

35[35] 412 Phil. 816 (2001).

36[36] 449 Phil. 419 (2003).
37[37] 471 Phil. 484 (2004).
38[38] 490 Phil. 179 (2005).
39[39] G.R. No. 139290, May 19, 2006, 490 SCRA 1.
40[40] G.R. No. 170452, August 13, 2008.

Medel finds no application in the present case where no other stipulation exists for the
payment of any extra amount except a specific sum of P40,000.00 per month on the principal of
a loan payable within six months. Additionally, no issue on the excessiveness of the stipulated
amount of P40,000.00 per month was ever put in issue by the petitioners;41[41] they only
assailed the application of a 4% interest rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law between them,
the only limitation being that these stipulations, clauses, terms and conditions are not contrary to
law, morals, public order or public policy.42[42] The payment of the specific sum of money of
P40,000.00 per month was voluntarily agreed upon by the petitioners and the respondent. There
is nothing from the records and, in fact, there is no allegation showing that petitioners were
victims of fraud when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per
month for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total
principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per annum
shall apply. The amounts already paid by the petitioners during the pendency of the suit,
amounting to P1,228,772.00 as of February 12, 1999,43[43] should be deducted from the total
amount due, computed as indicated above. We remand the case to the trial court for the actual
computation of the total amount due.

Doctrine of Estoppel not applicable

41[41] See Sps. Pascual v. Ramos, 433 Phil. 449 (2002).
42[42] Barredo v. Leao, G.R. No. 156627, June 4, 2004, 431 SCRA 106, 113-114;
Odyssey Park, Inc. v. CA, 345 Phil. 475, 485 (2001).
43[43] Supra note 14.

The respondent submits that the petitioners are estopped from disputing the 4% monthly interest
beyond the six-month stipulated period, since they agreed to pay this interest on the principal
amount under the promissory note and the board resolution.

We disagree with the respondents contention.

We cannot apply the doctrine of estoppel in the present case since the facts and
circumstances, as established by the record, negate its application. Under the promissory note,44

[44] what the petitioners agreed to was the payment of a specific sum of P40,000.00 per month
for six months not a 4% rate of interest per month for six (6) months on a loan whose
principal is P1,000,000.00, for the total amount of P1,240,000.00. Thus, no reason exists to
place the petitioners in estoppel, barring them from raising their present defenses against a 4%
per month interest after the six-month period of the agreement. The board resolution,45[45] on
the other hand, simply authorizes Pantaleon to contract for a loan with a monthly interest of not
more than 4%. This resolution merely embodies the extent of Pantaleons authority to contract
and does not create any right or obligation except as between Pantaleon and the board. Again, no
cause exists to place the petitioners in estoppel.

Piercing the corporate veil unfounded

44[44] Original Records, p. 8.

45[45] Exhibit B, Folder II, Exhibits A to E and Submarkings (for the Plaintiff), p.
2.

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of
PRISMA.

The doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely: a) when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in
fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a
crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.46[46] In the absence of malice, bad faith, or a specific provision
of law making a corporate officer liable, such corporate officer cannot be made personally liable
for corporate liabilities.47[47]

In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or
unlawful act on the part of PRISMA to justify piercing its corporate veil. While Pantaleon
denied personal liability in his Answer, he made himself accountable in the promissory note in
his personal capacity and as authorized by the Board Resolution of PRISMA.48[48] With this
statement of personal liability and in the absence of any representation on the part of PRISMA

46[46] General Credit Corporation v. Alsons Development and Investment

Corporation, G.R. No. 154975, January 29, 2007, 513 SCRA 225, 235, 238, 239; PNB
v. Ritratto Group, Inc., 414 Phil. 494, 505 (2001).
47[47] McLeod v. National Labor Relations Commission, G.R. No. 146667, January
23, 2007, 512 SCRA 222, 253.
48[48]Exhibit C, Folder II, Exhibits A to E and Submarkings (for the Plaintiff), p.
5.

that the obligation is all its own because of its separate corporate identity, we see no occasion to
consider piercing the corporate veil as material to the case.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and

SET ASIDE the Decision dated May 5, 2003 of the Court of Appeals in CA-G.R.
CV No. 69627. The petitioners loan of P1,000,000.00 shall bear interest of
P40,000.00 per month for six (6) months from December 8, 1993 as indicated in
the promissory note. Any portion of this loan, unpaid as of the end of the six-month
payment period, shall thereafter bear interest at 12% per annum. The total amount
due and unpaid, including accrued interests, shall bear interest at 12% per annum
from the finality of this Decision. Let this case be REMANDED to the Regional
Trial Court, Branch 73, Antipolo City for the proper computation of the amount
due as herein directed, with due regard to the payments the petitioners have already
remitted. Costs against the respondent.

SO ORDERED.

ARTURO D. BRION
Associate Justice
Acting Chairperson

WE CONCUR:

ANTONIO EDUARDO B. NACHURA

Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice

ROBERTO A. ABAD
Associate Justice

JOSE PORTUGAL PEREZ

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 Courts
Division.

ARTURO D. BRION
Associate Justice
Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, it is hereby certified 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 Courts Division.

REYNATO S. PUNO
Chief Justice

G.R. No. 160545 March 9, 2010PRISMA CONSTRUCTION & DEVELOPMENT

CORPORATION and ROGELIOS. PANTALEON,Petitioners,vs.ARTHUR F.
MENCHAVEZ, RespondentFACTS:On December 8,1993 PRISMA obtained a 1 million
loan from respondent with a monthlyinterest of 40,000.00 andis payable for six months
which is secured by a promissory note issuedbyRogelio S Pantaleon, President and
Chairmanof the Board of PRISMA. Its total obligation is1,240,000.00 to be paid under the
following schedule of payments:January 8, 1994......40,000.00February 8,
1994.....40,000.00March 8, 1994.........40,000.00April 8, 1994............40,000.00May 8,
1994.............40,000.00June 8,1994.............1,040,000.00The petitioners failed to completely
pay the loan within the stipulated 6 month period. FromSeptember 8, 1994 to January 4,
1997, thepetitioners paid a total of 1,108,772.00. However, therespondent found that the
petitioners still had an outstanding balanceof 1,364,151.00 as of January4, 1997 to which it
applied a 4% monthly interest.On August 28, 1997, respondent filed a complaintfor sum of
money with the RTC to enforcethe unpaid balance plus 4% monthly interest.The RTC
ordered the petitionersto jointly and severally pay the respondent the amount of
3,526,117.00 plus 4% per month interest from February11,1999 until fully paid.CA
affirmed the RTCDecision by imposing a 12% per annum interest, computed from the
filling of the complaint untilfinality of judgment and thereafter.ISSUE:Whether or not the
parties agreed to the 4% monthly interest on the loan? If so, does the rateof interest apply
to the 6-month paymentperiod only or until full payment of the loan?RULING: NO.The

parties did not agree to the 4% monthly interest on the loan. Interest due should be
stipulated in writing; otherwise,12% per annum. Obligations arising from contracts have
the force of law between the contracting parties and shouldbe complied with in good faith.
When the terms of a contract are clear and leave no doubt as to the intention of
thecontracting parties, the literal meaning of its stipulations governs In such cases, courts
have no authority to alter the contract byconstruction or to make a new contract for the
parties; a court's duty is confined to the interpretation of the contract theparties made for
themselves without regard to its wisdom or folly, as the court cannot supply material
stipulationsor read into the contract words the contract does not contain. It is only when
the contract is vague and ambiguousthat courts are permitted to resort to the
interpretation of its terms to determine the parties intent. The 1 million loan with
40,000.00per month interest for six months having a total obligation f 1,240,000.00 for the
total six month period is an agreed sumwhich can be computed at 4% interest per month,
but no such rate of interest was stipulated in the promissory note; rather afixed sum
equivalent to this fixed rate was agreed upon Article 1956 of the Civil Code specifically
mandates that "no interest shall bedue unless it has been expressly stipulated in writing."
Under this provision, the payment of interest in loans or forbearance of money is allowed
only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreementfor the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of interest at a stipulated rate. Applying this
provision, we find that the interest of P40, 000.00 per month correspondsonly to the six (6)month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by
theparties in the promissory note. Thereafter, the interest on the loan should be at the legal
interest rate of 12%per annum.It is a familiar doctrine in obligations and contracts that the
parties are bound by the stipulations, clauses, terms and conditions theyhave agreed to,
which is the law between them, the only limitation being that these stipulations, clauses,
terms and conditions are notcontrary to law, morals, public order or public policy.The
payment of the specific sum of money of P 40,000.00 per month was voluntarily agreed
upon by the petitioners andthe respondent. There is nothing from the records and, in fact,
there is no allegation showing that petitioners werevictims of fraud when they entered into
the agreement with the respondent. Therefore, as agreed by the parties,the loan of
P1,000,000.00 shall earn P 40,000.00 per month for a period of six (6) months, or from
December 8,1993 to June 8, 1994, for a total principal and interest amount of
P1,240,000.00. Thereafter, interest at the rate of 12% per annum shall apply. The amounts
already paid by the petitioners during the pendency of the suit,amounting toP1,228,772.00
as of February12, 1999 should be deducted from the total amount due, computed
asindicated above.

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S.

PANTALEON vs ARTHUR F. MENCHAVEZ
G.R. No. 160545; March 9, 2010
FACTS:
December 8, 1993, Pantaleon, President and Chairman of the Board of PRISMA, obtained a
P1M loan from the respondent, with monthly interest of P40,000.00 payable for 6 months, or a
total obligation of P1,240,000.00 payable within 6 mos. To secure the payment of the loan,
Pantaleon issued a promissory. Pantaleon signed the promissory note in his personal capacity and
as duly authorized by the Board of Directors of PRISMA. The petitioners failed to completely
pay the loan within the 6-month period.
As of January 4, 1997, respondent found that the petitioners still had an outstanding balance of
P1,364,151.00, to which respondent applied a 4% monthly interest.
On August 28, 1997, respondent filed a complaint for sum of money to enforce the unpaid
balance, plus 4% monthly interest. In their Answer, the petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the interest
was not provided in the promissory note. Pantaleon also denied that he made himself personally
liable and that he made representations that the loan would be repaid within six (6) months.
RTC found that the respondent issued a check for P1M in favor of the petitioners for a loan that
would earn an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month
period. RTC ordered the petitioners to jointly and severally pay the respondent the amount of
P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid.
Petitioners appealed to CA insisting that there was no express stipulation on the 4% monthly
interest. CA favored respondent but noted that the interest of 4% per month, or 48% per annum,
was unreasonable and should be reduced to 12% per annum. MR denied hence this petition.
ISSUE:
Whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest
apply to the 6-month payment period only or until full payment of the loan?
RULING:
Petition is meritorious. Interest due should be stipulated in writing; otherwise, 12% per annum
Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. When the terms of a contract are clear and leave no doubt
as to the intention of the contracting parties, the literal meaning of its stipulations governs.
Courts have no authority to alter the contract by construction or to make a new contract for the

parties; a courts duty is confined to the interpretation of the contract the parties made for
themselves without regard to its wisdom or folly, as the court cannot supply material stipulations
or read into the contract words the contract does not contain. It is only when the contract is vague
and ambiguous that courts are permitted to resort to the interpretation of its terms to determine
the parties intent.
In the present case, the respondent issued a check for P1M. In turn, Pantaleon, in his personal
capacity and as authorized by the Board, executed the promissory note. Thus, the P1M loan shall
be payable within 6 months. The loan shall earn an interest of P40,000.00 per month, for a total
obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be
computed at 4% interest per month, but no such rate of interest was stipulated in the promissory
note; rather a fixed sum equivalent to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. The payment of interest in loans or forbearance of money
is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of interest at a stipulated rate. The collection of interest
without any stipulation in writing is prohibited by law.
The interest of P40,000.00 per month corresponds only to the six-month period of the loan, or
from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note.
Thereafter, the interest on the loan should be at the legal interest rate of 12% per annum.
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.
The facts show that the parties agreed to the payment of a specific sum of money of P40,000.00
per month for six months, not to a 4% rate of interest payable within a 6-month period.
No issue on the excessiveness of the stipulated amount of P40,000.00 per month was ever put in
issue by the petitioners; they only assailed the application of a 4% interest rate, since it was not
agreed upon.
It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations,
clauses, terms and conditions they have agreed to, which is the law between them, the only
limitation being that these stipulations, clauses, terms and conditions are not contrary to law,

morals, public order or public policy. The payment of the specific sum of money of P40,000.00
per month was voluntarily agreed upon by the petitioners and the respondent. There is nothing
from the records and, in fact, there is no allegation showing that petitioners were victims of fraud
when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1M shall earn P40,000.00 per month for a period
of 6 months, for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the
rate of 12% per annum shall apply. The amounts already paid by the petitioners during the
pendency of the suit, amounting toP1,228,772.00 as of February 12, 1999, should be deducted
from the total amount due, computed as indicated above. We remand the case to the trial court
for the actual computation of the total amount due.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision
CA