REQUISITES FOR RECOVERY OF INTEREST1. The payment of interest must be expressly stipulated
2. The agreement must be in writing
3. The interest must be lawful
EXISTENCE OF STIPULATION TO PAY INTEREST1. If a particular rate of interest has been expressly stipulated by the parties, that interest, and not the legal rate of interest, shall be applied
2. If the exact rate of interest is not mentioned, the legal rate of 12% shall be payable
3. No increase in interest shall be due unless such increase has also been expressly stipulated
4. It is only in contracts of loan, with or without security, that interest may be stipulated and demanded.
5. The receipt of the creditor of interest payment up to a certain date of a loan that has already matured does not ipso facto result in the renewal or extension of maturity period of the loan up to said date.
6. Stipulation of interest must be mutually agreed upon by the parties and may not be unilaterally increased by only one of the parties. This would violate consensuality and mutuality of contract (PNB v. CA). But the parties can agree upon a formula for determining the interest rate,
over which neither party has control (ex: interest will be adjusted quarterly at a rate of 3% plus the prevailing 91-day T-bill rate, etc.). But if the formula says “interest will be based on T-bill rates and other interest-setting policies as the bank may determine,” this is not valid.
ESCALATION CLAUSE Clause which authorizes the automatic increase in the interest
An escalation clause is valid when it is accompanied by a De-Escalation Clause. A de-escalation clause is a clause, which provides that the rate of interest agreed upon will also be automatically reduced. There must be a specified formula for arriving at the adjusted interest rate, over which neither party has any discretion.
LIABILITY FOR INTEREST EVEN IN THE ABSENCE OF STIPULATION
1. Indemnity for damages—the debtor in delay is liable to pay legal interest as indemnity for damages even in the absence of stipulation for the payment of interest
a. Rate of penalty interest agreed upon
b. Interest cannot be recovered upon unliquidated claims or damages except when the demand can be established with reasonable certainty
c. In the absence of express agreement as to the rate of interest, CB Circular #416 fixes the interest at 12% per annum for loans, forbearance, goods and credits; and judgments involving such loans and
d. Interest as indemnity for damages is payable only in case of default or non-performance of the
2. Interest accruing from unpaid interest—interest due shall earn interest from the time it is judicially demanded although the obligation may be silent upon this point