Nacar v. Gallery Frames (2013): 6% Legal Interest

Dario Nacar worked for Gallery Frames from August 1990. He filed a complaint for constructive dismissal with the National Labor Relations Commission (NLRC). On October 15, 1998, the Labor Arbiter ruled that he was dismissed without a valid cause and without due process. Because the relationship had become strained, the Labor Arbiter gave him separation pay instead of his job back, plus backwages, for a total of ₱158,919.92. The computation stopped at the date of the 1998 decision.

The employer appealed all the way to the Supreme Court and lost. The ruling against the employer became final on May 27, 2002. During execution, the award was computed several times. Dario received ₱147,560.19 and then asked for a new computation that included interest.

In 2005 the Labor Arbiter gave him only ₱11,459.73, the unpaid balance of the 1998 award. The NLRC and the Court of Appeals upheld that order. The Court of Appeals said the 1998 decision had become final, so it could no longer be changed except to correct clerical errors.

The Court decided two questions. First, can a final award in an illegal dismissal case be recomputed up to the date the case became final, without breaking the rule that final judgments cannot be changed? Second, what interest should the unpaid award earn, now that the BSP had lowered the legal rate?

The Supreme Court granted Dario's petition and reversed the Court of Appeals.

Recomputation is allowed. The finding of illegal dismissal stays. Only the money is recomputed. The Court said that in an illegal dismissal case "the reliefs continue to add up until full satisfaction". When separation pay is given instead of reinstatement, backwages and separation pay are computed up to the date the decision becomes final. The employer had to bear the larger amount, because that was the risk it took by continuing to appeal.

The new 6% rate. The Court quoted BSP Circular No. 799, which took effect on July 1, 2013. It sets 6% a year as the rate for the loan or forbearance of any money, goods or credits, and for judgments, when there is no express contract on the rate. The Court then said:

• The 6% rate applies only going forward. The 12% rate applies until June 30, 2013.
• Judgments that became final before July 1, 2013 are not disturbed. They keep the rate fixed in them.

The new guidelines. The Court rewrote the guidelines of the 1994 case Eastern Shipping Lines v. Court of Appeals to match the Circular:

1. Loans or forbearance of money. The interest due is the one stipulated in writing. The interest due itself earns legal interest from the time it is judicially demanded. If no rate was stipulated, the rate is 6% a year from default, which means from the creditor's judicial or extrajudicial demand.
2. Other obligations, for example damages for breach of contract. The court may impose 6% a year on the damages, at its discretion. No interest runs on an amount that is not yet known with reasonable certainty. If the amount is certain when the claim is made, interest runs from the claim. If not, it runs from the date of the court's judgment.
3. Final money judgments. Once a judgment for money becomes final, it earns 6% a year from finality until it is paid. The Court treats this period as equivalent to a forbearance of credit.

Applied to Dario. The employer was ordered to pay:

• backwages from his dismissal on January 24, 1997 up to May 27, 2002;
• separation pay from August 1990 up to May 27, 2002, at one month's pay for every year of service;
• interest of 12% a year on the total from May 27, 2002 to June 30, 2013, and 6% a year from July 1, 2013 until full payment.

The case went back to the Labor Arbiter for a new computation.

From July 1, 2013, the legal interest on loans or forbearance of money without a stipulated rate, and on final money judgments, is 6% a year under BSP Circular No. 799; the change applies only going forward, and judgments that became final before that date are not disturbed.

When a court orders someone to pay money, such as an unpaid loan, an unpaid price, damages or a labor award, the Nacar guidelines tell it which interest rate applies and from what date.

Here is a made-up illustration, with invented names. Liza lends her friend Jun ₱80,000 under a signed note with a due date but no interest. Jun does not pay. Liza sends him a written demand. Because no interest was written down, Liza cannot collect agreed interest (see Article 1956 of the Civil Code). But from her demand, a court applying the Nacar guidelines would add legal interest of 6% a year, or ₱4,800 a year, as damages for the delay. If Liza wins and the judgment becomes final, the total amount then earns 6% a year until Jun pays.

Nacar is no longer the full picture. In Lara's Gifts & Decors v. Midtown Industrial Sales, the Court said a stipulated rate runs until full payment and that interest is not compounded unless agreed in writing or required by law. In its 2022 Resolution in the same case, it said every stipulated rate can be reduced if it is unconscionable, and it described the legal interest rate for simple loans of money as "currently 6%". And in Sameer Overseas Placement Agency v. Cabiles, the Court said Circular No. 799 did not change the 12% interest that Republic Act No. 8042 set for refunds of an overseas worker's placement fee.

For a plain answer on the rules, read What is the legal interest rate in the Philippines? and the meaning of legal interest. This page explains a court decision. It is not advice on your own debt or case; for that, see where to find legal help.