The Rule on ‘The Interest on Damages’ and the Nacar vs. Gallery Frames Ruling

GR L 1084; (November, 1902) (Critique)

April 1, 2026

GR L 855; (November, 1902) (Critique)

April 1, 2026

I. Introduction

This memorandum provides an exhaustive analysis of the rule on the award of interest on damages in Philippine civil law, with a specific focus on the jurisprudential landmark established in Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013. The primary objective is to delineate the legal framework governing when and how interest is imposed on monetary awards, distinguishing between interest as damages and interest as a measure of actual loss. The ruling in Nacar fundamentally modified prior doctrines, particularly those set forth in Eastern Shipping Lines, Inc. v. Court of Appeals, by adjusting the applicable legal rate of interest. This memo will trace the doctrinal evolution, explicate the current rule, and discuss its practical application in litigation.

II. Conceptual Foundation: Interest in the Context of Damages

In Philippine obligations and contracts, the award of interest serves two primary, distinct purposes. First, interest may be imposed as indemnity for damages due to delay or mora solvendi in the payment of a sum of money. This is governed by Article 2209 of the Civil Code. Second, interest may itself constitute the measure of actual or compensatory damages arising from the unlawful use or retention of another’s money, as contemplated under Article 2200 of the Civil Code. The distinction is critical: the former is interest by way of damages, while the latter represents the damages themselves. The rules discussed herein primarily concern interest awarded as damages for delay in payment.

III. The Governing Legal Provisions

The statutory basis for awarding interest is found in the Civil Code of the Philippines:
Article 2209: “If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest*, which is six percent (6%) per annum.”
Article 2212: “Interest due shall earn legal interest* from the time it is judicially demanded, although the obligation may be silent on this point.”
Article 2213: “In interest-bearing obligations, when the interest due has been unpaid for one year or more, the unpaid interest shall itself earn interest at the legal rate*.”
These provisions establish the framework for conventional interest (by stipulation) and legal interest (in the absence of stipulation or by command of law).

IV. The Eastern Shipping Lines Doctrine: The Pre-Nacar Framework

Prior to Nacar, the controlling guideline was established in Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994. The Court laid down a definitive outline for the imposition of interest in the adjudication of damages:

When an obligation, regardless of its source (i.e., loan, contract, quasi-contract, delict, or quasi-delict), is breached, and it involves the payment of a sum of money, the legal interest of 6% per annum shall be imposed from the date of judicial demand (i.e., filing of the complaint) until its full payment.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of interest shall be 12% per annum from such finality until its satisfaction. This 12% rate was deemed the prevailing legal interest at that time.

The guideline also provided rules for interest on unliquidated claims and interest upon interest.

V. The Nacar vs. Gallery Frames Ruling: The Pivotal Modification

In Nacar v. Gallery Frames, the Supreme Court revisited the Eastern Shipping Lines doctrine in light of a significant amendment to the Civil Code. The Court noted that Central Bank Circular No. 905 had suspended the usury law but did not repeal Article 2209 of the Civil Code, which pegged the legal interest at 6%. However, the Court took judicial notice of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013, which took effect on July 1, 2013. This Circular amended Section 2 of Presidential Decree No. 116 and mandated that the rate of interest for the loan or forbearance of any money, goods, or credits, in the absence of an express contract, shall be 6% per annum.
The Court in Nacar held that this new BSP circular must be applied prospectively. Consequently, it modified the Eastern Shipping Lines guideline, ruling that the rate of legal interest for the loan or forbearance of money, goods, or credits shall be 6% per annum in the absence of a written stipulation. This 6% rate applies both before the finality of judgment and after its finality. The 12% interest rate prescribed in Eastern Shipping Lines was effectively abandoned.

VI. The Current Rule on Interest on Damages (Post-Nacar)

The consolidated rule, as modified by Nacar, is now as follows:

When the obligation is breached, and it involves the payment of a sum of money (e.g., unpaid loan, unpaid purchase price, unpaid wages, indemnity arising from tort), and there is no stipulation on the interest rate, the legal interest of 6% per annum shall be imposed from the time of judicial demand (or from the time of extrajudicial demand, if properly alleged and proven) until the obligation is fully paid.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest shall be 6% per annum from the time of such finality until its full satisfaction. This is true regardless of whether the interest awarded prior to finality was conventional or legal.

When the agreed conventional interest rate is excessive, the courts may reduce it as provided under the Civil Code.

For judgments that have become final and executory prior to July 1, 2013, the old rate of 12% per annum shall apply. For judgments that become final and executory after July 1, 2013, the new rate of 6% per annum shall apply.

VII. Comparative Analysis: Eastern Shipping vs. Nacar Doctrines

The following table illustrates the key doctrinal shift:

Aspect	Eastern Shipping Lines Doctrine (Pre-2013)	Nacar v. Gallery Frames Doctrine (Post-2013)
Legal Basis for Rate Change	Judicial determination of prevailing rate.	BSP Circular No. 799, amending the legal interest rate by monetary authority.
Legal Interest Rate (No Stipulation)	6% per annum from judicial demand until finality of judgment.	6% per annum from judicial demand until finality of judgment.
Interest Rate After Finality of Judgment	12% per annum from finality until full payment.	6% per annum from finality until full payment.
Rate for Loan/Forbearance of Money	12% per annum was often applied as the prevailing rate.	Expressly set at 6% per annum in the absence of stipulation.
Temporal Application	Applied to all cases until July 1, 2013.	Prospective application; the 6% rate applies to judgments final and executory after July 1, 2013.
Effect on Unliquidated Claims	6% from judicial demand, then 12% after finality.	6% from judicial demand, then 6% after finality.

VIII. Exceptions and Special Applications

The Nacar rule is not absolute. Key exceptions and special applications include:
Stipulated (Conventional) Interest: If the parties validly agreed on an interest rate, that conventional interest shall govern from the time of default until the obligation is paid, unless reduced by the court for being iniquitous or unconscionable*.
Forbearance of Money: The 6% legal interest under BSP Circular No. 799 explicitly applies to loans or forbearance of money. Nacar* extended this rate to judgments for other forms of damages.
Delict (Tort) and Quasi-Delict: Awards for damages arising from culpa contractual, culpa aquiliana, or quasi-delict (e.g., moral damages, temperate damages, actual damages) are subject to legal interest* at 6% from the time of judicial demand, and at 6% after finality of judgment.
Interest on Interest (Anatocism): Pursuant to Article 2212 and 2213, accrued and unpaid interest may itself earn interest at the legal rate* of 6% from the time of judicial demand.

IX. Practical Implications in Litigation

For legal practitioners, the Nacar ruling necessitates careful attention to:

Pleading: The complaint must specifically pray for the award of interest, stating the basis (e.g., by stipulation, by law under Article 2209), the rate sought, and the commencement date (typically, date of extrajudicial or judicial demand).

Computation: Computations of the monetary award must clearly separate the principal obligation from the accrued interest, and further distinguish interest accrued before finality from that accruing after finality.

Execution: The writ of execution must explicitly command the sheriff to compute and collect the interest at the correct rate (6%) from the appropriate dates, ensuring the judgment is satisfied in full.

Temporal Awareness: For cases where the cause of action or judgment finality straddles the July 1, 2013 threshold, a bifurcated computation applying 12% for periods before and 6% for periods after may be required, subject to the specific finality date.

X. Conclusion

The ruling in Nacar v. Gallery Frames represents a significant recalibration of the rules on interest on damages in Philippine jurisprudence, aligning the legal interest rate with the monetary policy enacted by the Bangko Sentral ng Pilipinas. By uniformly setting the legal interest rate at 6% per annum—both before and after the finality of judgment—the Supreme Court has provided a clearer, more consistent framework. This applies to breaches of obligation involving the payment of a sum of money, absent a contractual stipulation to the contrary. Legal practitioners must diligently apply this modified rule in drafting pleadings, computing claims, and implementing judgments to ensure accuracy and compliance with current law. The doctrine underscores the dynamic nature of law, where economic directives appropriately influence the computation of damages intended to achieve full and fair compensation.