New legal rate of interest

By: Raul J. Palabrica

@inquirerdotnet
Philippine Daily Inquirer
03:08 AM July 5th,

2013

Philippine Daily Inquirer

By: Raul J. Palabrica, July 5th, 2013 03:08 AM
Last week, the

Monetary Boardthe countrys policy-making

body on money, banking and creditchanged the legal rate of interest for loan and
credit agreements.
Through

Circular No. 799, the board declared that,

effective July 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

percent per
annum.

This means that if the parties fail to state in writing the interest payable on any of
the transactions mentioned, or on account of a court judgment involving a related
money claim, the imposable interest is 6 percent every year.
ADVERTISEMENT

The circular amends an issuance

of the board in 1974, or 39 years
ago, that fixed the legal interest
at 12 percent per year.
The rate reduction comes in the wake of the countrys low inflation rate which
dipped to a five-year low of 3.2 percent last year. Besides, the capital market is so
liquid that banks are awash in money waiting to be borrowed by interested parties.
The rule of the thumb in interest rate setting of this nature is to peg it at a level that
reflects the inflation rate and add extra points to enable the moneylenders to earn
some profit from the transaction.
Agreement
A loan is the act of lending money to another person on condition that he will repay
it within a specific period of time.
If the parties have agreed on the amount of interest payable on the loan, that
agreement is binding on them. In the absence of such agreement, the interest due
is 6 percent per year.
The inclusion of forbearance of money, goods and credits in the coverage of legal
interest has been a bone of contention in transactions where certain conditions, in
addition to standard payment clauses, are imposed, as in the case of conditional
sale of property and consignment of goods.
This situation is often seized upon as justification by unscrupulous parties to refuse
payment of the legal interest if, due to inadvertence or some false sense of trust
and confidence, the parties (usually the creditor) failed to clear up this matter in the
agreement.
In Hermojina Estores vs Spouses Arturo and Laura Sapangan, G.R. No. 175139,
dated April 18, 2012, the Supreme Court said forbearance of money, goods or
credits refers to arrangements other than loan agreements where a person

acquiesces to the temporary use of his money, goods or credits pending the
happening of certain events or fulfillment of certain conditions.
Refusal
The instant case involves the conditional sale of a parcel of land where the sellers
agreed that, after receipt of certain sums of money from the buyers, they will
secure the necessary government permits to enable the buyers to immediately
move into the property.
Seven years after receipt of P3.5 million from the buyers, the sellers failed to live up
to their commitments. The delay prompted the buyers to demand the return of their
money with interest at 12 percent a year compounded annually.
The sellers refused to pay the interest sought. They argued that since the
conditional deed of sale provided only for the return of the down payment in case of
breach, they cannot be held liable to pay legal interest on it.
The case wended its way through the judicial mill for 12 years, from the regional
trial court to the Court of Appeals and finally to the tribunal.
The tribunal ruled that the buyers were deprived of the use of their money pending
the fulfillment of the conditions and when those conditions were breached, they are
entitled not only to the return of the principal amount paid, but also to
compensation for the use of their money.
And the compensation for the use of their money absent, any stipulation should be
the same rate of legal interest applicable to a loan since the use or deprivation of
funds is similar to a loan.
Bottom line, the sellers were ordered to return the P3.5 million, plus 12 percent
interest computed from the day the demand for repayment was made in 2000 until
fully paid, and attorneys fees.
Information
Although meant for general commercial application, the implementation of the new
legal interest rate will rest primarily with our courts and administrative offices that
process and enforce money claims and awards.
The judges who decide on money claims brought before them and the sheriffs who
will enforce judicial awards through direct payment or garnishment of bank
accounts, should be properly informed of the change in legal interest rate.
Since there has been scant publicity about this change, these officials may still think
the 39-year-old 12 percent per-year legal interest is still in effect.

Government offices that handle money claims or impose fines for violation of
regulatory rules that impose interest for delayed payments should be similarly put
on notice about the reduction of the legal interest rate.
For example, at the National Labor Relations Commission, awards of separation pay
or backwages to employees are entitled to legal interest from the time they were
due or for every day of delay of payment from the date of the award.
Nasty disagreements in the computation of such awards may arise if the sheriffs
who will implement them are not apprised of the interest adjustment.
It should be borne in mind that since the new rate is effective only on July 1, money
awards entitled to legal interest that started to run before that date and continue to
remain unpaid up to the present will have two interest rates depending on when the
interest accrued.
Some people are going to be unhappy about this change of fortune.
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