G.R. No.

173227               January 20, 2009

SEBASTIAN SIGA-AN, Petitioner, 
vs.
ALICIA VILLANUEVA, Respondent.

FACTS:

Respondent Alicia Villanueva filed a complaint for sum of money against petitioner Sebastian Siga-an.
Respondent alleged that she was a businesswoman engaged in supplying office materials and equipments
to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a
military officer and comptroller of the PNO from 1991 to 1996. 

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan
her the amount of ₱540,000.00. Since she needed capital for her business transactions with the PNO, she
accepted petitioner’s proposal. The loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan. On 31 August 1993, respondent issued a check worth
₱500,000.00 to petitioner as partial payment of the loan. On 31 October 1993, she issued another check in
the amount of ₱200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told
her that since she paid a total amount of ₱700,000.00 for the ₱540,000.00 worth of loan, the excess
amount of ₱160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as
interest, petitioner pestered her to pay additional interest. Petitioner threatened to block or disapprove her
transactions with the PNO if she would not comply with his demand. As all her transactions with the PNO
were subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might
block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid
additional amounts in cash and checks as interests for the loan. She asked petitioner for receipt for the
payments but petitioner told her that it was not necessary as there was mutual trust and confidence
between them. According to her computation, the total amount she paid to petitioner for the loan and
interest accumulated to ₱1,200,000.00.

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite
absence of agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on
the loan because there was no agreement between her and petitioner regarding payment of interest. Since
she paid petitioner a total amount of ₱1,200,000.00 for the ₱540,000.00 worth of loan, and upon being
advised by her lawyer that she made overpayment to petitioner, she sent a demand letter to petitioner
asking for the return of the excess amount of ₱660,000.00. Petitioner, despite receipt of the demand letter,
ignored her claim for reimbursement.

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) ₱660,000.00
plus legal interest from the time of demand; (2) ₱300,000.00 as moral damages; (3) ₱50,000.00 as
exemplary damages; and (4) an amount equivalent to 25% of ₱660,000.00 as attorney’s fees.

Petitioner insisted that there was no overpayment because respondent admitted in the latter’s promissory
note that her monetary obligation as of 12 September 1994 amounted to ₱1,240,000.00 inclusive of
interests. He argued that respondent was already estopped from complaining that she should not have paid
any interest, because she was given several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount to concluding that the loan was given interest-
free. Based on the foregoing averments, he asked the RTC to dismiss respondent’s complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an
overpayment of her loan obligation to petitioner and that the latter should refund the excess amount to the
former. It ratiocinated that respondent’s obligation was only to pay the loaned amount of ₱540,000.00,
and that the alleged interests due should not be included in the computation of respondent’s total
monetary debt because there was no agreement between them regarding payment of interest. It concluded
that since respondent made an excess payment to petitioner in the amount of ₱660,000.00 through
mistake, petitioner should return the said amount to respondent pursuant to the principle of solutio
indebiti.

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded
feelings experienced by respondent. Further, petitioner should pay exemplary damages by way of
example or correction for the public good, plus attorney’s fees and costs of suit.

The dispositive portion of the RTC Decision reads: WHEREFORE, in view of the foregoing evidence and
in the light of the provisions of law and jurisprudence on the matter, judgment is hereby rendered in favor
of the plaintiff and against the defendant as follows: (1) Ordering defendant to pay plaintiff the amount of
₱660,000.00 plus legal interest of 12% per annum computed from 3 March 1998 until the amount is paid
in full; (2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral damages; (3)
Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary damages; (4) Ordering
defendant to pay plaintiff the amount equivalent to 25% of ₱660,000.00 as attorney’s fees; and (5)
Ordering defendant to pay the costs of suit.

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its
Decision affirming in toto the RTC Decision, thus: WHEREFORE, the foregoing considered, the instant
appeal is hereby DENIED and the assailed decision [is] AFFIRMED in toto. Petitioner filed a motion for
reconsideration of the appellate court’s decision but this was denied.

ISSUE:

WoN THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS
DUE TO PETITIONER; and WoN THE RTC AND THE COURT OF APPEALS ERRED IN
APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.

RULING:

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as
monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages.
This is called compensatory interest. The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is demanded. Article 1956 of the
Civil Code, which refers to monetary interest, specifically mandates that no interest shall be due unless it
has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of
monetary interest 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 monetary interest. Thus, we have held that collection of interest
without any stipulation therefor in writing is prohibited by law. There was, nonetheless, no verbal or
written agreement for her to pay interest on the loan.

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. In such
a case, a creditor-debtor relationship is created under a quasi-contract whereby the payor becomes the
creditor who then has the right to demand the return of payment made by mistake, and the person who has
no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio
indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of
another. The principle of solutio indebiti applies where (1) a payment is made when there exists no
binding relation between the payor, who has no duty to pay, and the person who received the payment;
and (2) the payment is made through mistake, and not through liberality or some other cause. We have
held that the principle of solutio indebiti applies in case of erroneous payment of undue interest.

Although no receipts reflecting the same were presented because petitioner refused to issue such to
respondent, petitioner, nonetheless, admitted in his Reply-Affidavit in the Batas Pambansa Blg. 22 cases
that respondent paid him a total amount of ₱175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the declaration of a party as to a relevant fact may be
given in evidence against him. Aside from the amounts of ₱160,000.00 and ₱175,000.00 paid as interest,
no other proof of additional payment as interest was presented by respondent. Since we have previously
found that petitioner is not entitled to payment of interest and that the principle of solutio indebiti applies
to the instant case, petitioner should return to respondent the excess amount of ₱160,000.00 and
₱175,000.00 or the total amount of ₱335,000.00. Accordingly, the reimbursable amount to respondent
fixed by the RTC and the Court of Appeals should be reduced from ₱660,000.00 to ₱335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against
respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for
issuing five dishonored checks to petitioner. Nonetheless, respondent’s conviction therein does not affect
our ruling in the instant case. The two checks, subject matter of this case, totaling ₱700,000.00 which
respondent claimed as payment of the ₱540,000.00 worth of loan, were not among the five checks found
to be dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which the latter paid to petitioner.

Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injury. Respondent testified that she experienced sleepless
nights and wounded feelings when petitioner refused to return the amount paid as interest despite her
repeated demands. Hence, the award of moral damages is justified. However, its corresponding amount of
₱300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably
reduced. Article 2216 of the Civil Code instructs that assessment of damages is left to the discretion of the
court according to the circumstances of each case. This discretion is limited by the principle that the
amount awarded should not be palpably excessive as to indicate that it was the result of prejudice or
corruption on the part of the trial court. To our mind, the amount of ₱150,000.00 as moral damages is
fair, reasonable, and proportionate to the injury suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages
may be imposed if the defendant acted in an oppressive manner. Petitioner acted oppressively when he
pestered respondent to pay interest and threatened to block her transactions with the PNO if she would not
pay interest. This forced respondent to pay interest despite lack of agreement thereto. Thus, the award of
exemplary damages is appropriate. The amount of ₱50,000.00 imposed as exemplary damages by the
RTC and the Court is fitting so as to deter petitioner and other lenders from committing similar and other
serious wrongdoings.

Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the factual, legal or
equitable justification for awarding the same. In the case under consideration, the RTC stated in its
Decision that the award of attorney’s fees equivalent to 25% of the amount paid as interest by respondent
to petitioner is reasonable and moderate considering the extent of work rendered by respondent’s lawyer
in the instant case and the fact that it dragged on for several years. Further, respondent testified that she
agreed to compensate her lawyer handling the instant case such amount. The award, therefore, of
attorney’s fees and its amount equivalent to 25% of the amount paid as interest by respondent to
petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable
to respondent computed from 3 March 1998 until its full payment. This is erroneous. 

In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not from a
loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be
refunded as well as on the damages awarded and on the attorney’s fees, to be computed from the time of
the extra-judicial demand on 3 March 1998, up to the finality of this Decision. In addition, the interest
shall become 12% per annum from the finality of this Decision up to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December
2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of ₱660,000.00 as
refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
(₱335,000.00); (2) the amount of ₱300,000.00 imposed as moral damages is reduced to ONE
HUNDRED FIFTY THOUSAND PESOS (₱150,000.00); (3) an interest of 6% per annum is imposed on
the ₱335,000.00, on the damages awarded and on the attorney’s fees to be computed from the time of the
extra-judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of 12% per
annum is also imposed from the finality of this Decision up to its satisfaction. Costs against petitioner.