PRISMA CONSTRUCTION V MANCHAVEZ

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION VS.
MANCHAVEZ
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 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. 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

PRISMA CONSTRUCTION V MANCHAVEZ

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PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION VS.

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