Two legal rates of interest

There are two (2) legal rates of interest in our jurisdiction – the first being that under Article 2209 of the Civil Code which provides that if the debtor incurs default, in the absence of stipulation, the indemnity shall be the legal interest which is 6% per annum. The second is under the Usury Law or Act No. 2655 which provided for a legal rate of 6% per annum applicable for “loan or forbearance of any money, good or credits and in judgments.” How do these two rates correlate with each other?

For some background, the Usury Law provided as an alternative to the 6% interest such rate as may be prescribed by the Monetary Board. In 1974 the Monetary Board issued Circular No. 416 increasing such legal rate of interest from 6% to 12%. The same rate of 12% was reincorporated in Circular No. 905 issued by the Monetary Board in 1982. In 2013, the Monetary Board issued Circular No. 799 providing that the legal rate of interest shall be back to 6%.

Article 2209 of the Civil Code refers to monetary obligations in general while the Usury Law refers to “loans, forbearances and judgments”. “Loans” refers to a contract giving rise to a debtor-creditor relationship (Article 1933, Civil Code). On the other hand, “forbearance” refers to an agreement by the lender to refrain during a given period of time, from requiring the debtor to repay a loan (Fitch, Dictionary of Banking Terms). In the celebrated PIATCO case (G.R. No. 181892, September 8, 2015), the Supreme Court amplified that “the just compensation due to the property owner (in expropriation) is effectively a forbearance of money, and not indemnity for damages.”

Regarding the rate “in judgments” as used in the Usury Law, the Supreme Court held that it does not apply to any judgment which has nothing to do with, nor involving loans or forbearance of any money, for it is not within the ambit of the authority granted to the Monetary Board (Reformina et..al. vs. Hon. Tomol Jr., et. al., L-59096, Oct. 11, 1985). In another case, the Supreme Court stated that Circular No. 416 does not apply to actions based on a breach of employment contract (Florendo vs. Hon. Ruiz, et. al., G.R. No. 64571, Feb. 21, 1989).

Subsequently, there was jurisprudence applying the legal rate of interest under the BSP Circulars to insurance claims. Under the Insurance Code (Sections 248 and 249), if there is failure or refusal to pay insurance claims, the beneficiary or assured shall be entitled to collect interest “at the rate of twice the ceiling prescribed by the Monetary Board.” The Supreme Court held that this ceiling means the legal rate of interest of 12% per annum as prescribed in Circular No. 416 (Prudential Guarantee and Assurance, Inc., Inc. vs. Trans-Asia Shipping Lines, Inc. G.R. No.151890, June 20, 2006).

The conclusion that can be derived is that the legal rate of interest provided for under the Usury Law, as now implemented by Circular No. 799, applies to (a) loans, (b) forbearances and (c) judgments involving loans or forbearances, just compensation and insurance claims. For transactions other than this enumeration, the legal rate of interest shall be that under Article 2209 of the Civil Code. For practical considerations, however, making such distinction may appear unnecessary now since both types of legal interest have been unified at 6%, unlike before when there was a variance between the two. Nonetheless, when charging the legal rate of interest, it would still be good policy to have a clear citation in law for the imposition. ***** The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph