1. Not usurious but considering the factual milieu of this case, the same was correctly reduced by the CA. Whether an interest rate or penalty charge is reasonable or iniquitous is addressed to the sound discretion of the courts. In determining what is iniquitous and unconscionable, courts must consider the circumstances of each case, for what may be just in one case may be iniquitous and unconscionable in another. Thus, while this Court sustained the validity of a 21% per annum interest in Spouses Bautista v. Pilar Development Corporation, it reduced an 18% per
annum interest rate to 12% per annum in Trade & Investment Development Corporation of the Phils. v. Roblett:
Section 24 of R.A. No. 8435 (The Agriculture and Fisheries Modernization Act of 1997) provides that "[t]he Land Bank of the Philippines shall, in accordance with its original mandate, focus primarily on plans and programs in relation to the financing of agrarian reform and the delivery of credit services to the agriculture and fisheries sectors, especially to small farmers and fisherfolk." In the case at bar, the purpose of the loan was to finance the construction of two broiler houses and a feeds warehouse. The observation by the Court of Appeals that the loan extended to respondent was part of the social assistance program to improve the plight of farmers is thus well-taken. Given the business losses that respondent suffered, coupled with the fact that she had made partial payments on both the original loan and the restructured loan, the reduction by the appellate court of the interest rate and penalty charge is justified.
2. Void. While, as petitioner argues, the nullity of the interest rate and penalty charge does not affect its right to recover the principal amount of the loan, the public auction of the mortgaged property is nevertheless void, the amount indicated as mortgage indebtedness having included excessive, iniquitous, and exorbitant interest rate and penalty charge.
The nullity of the stipulation on the usurious interest does not affect the lender's right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. The foreclosure proceedings cannot be considered valid since the total amount of the indebtedness during the foreclosure proceedings was pegged at P874,125.00 which included interest and which this Court now nullifies for being excessive, iniquitous, and exorbitant.
David is, however, directed to PAY appellee LBP the amount of Five Hundred Ninety Two Thousand and Seven Hundred Ninety Two Pesos and 42/100 (P592,792.42) with interest at the legal rate from March 29, 1999, upon payment of which appellee LBP shall RETURN title of the mortgaged property to plaintiff-appellant and RESTORE her in possession thereof.
Macalinao v BPI
Macalinao was sued by the BPI for unpaid credit card charges. Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% per month.
In the complaint, BPI prayed for the payment of the amount of one hundred fifty-four thousand six hundred eight pesos and seventy-eight centavos (PhP154,608.78) plus 3.25% finance charges and late payment charges equivalent to 6% of the amount due from February 29, 2004 and an amount equivalent to 25% of the total amount due as attorney's fees, and of the cost of suit.
The MeTC ruled in favor of respondent BPI and ordered petitioner Macalinao and her husband to pay the amount of PhP141,518.34 plus interest and penalty charges of 2% per month. This was affirmed by the RTC. On appeal to the CA, the appellate court increased the rate: The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos and Seventy Centavos plus interest and penalty charges of 3% per month from January 5, 2004 until fully paid.
The CA also emphasized that respondent BPI should not compound the interest in the instant case absent a stipulation to that effect. The CA also held, however, that the MeTC erred in modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner Macalinao freely availed herself of the credit card facility offered by respondent BPI to the general public.
Issue
Are the increased rates proper? Held
No. The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be Reduced to 2% Per Month or 24% Per Annum
BPI originally imposed the interest and penalty charges at the rate of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest and penalty charge and increased them to 3% per month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent BPI.
In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest. On the other hand, respondent BPI asserts that said interest rate and penalty charge are reasonable as the same are based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card.
We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per month should be equitably reduced to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of 36% per annum as excessive and
unconscionable. We held in Chua vs. Timan:
The stipulated interest rates of 7% and 5% per month imposed on respondents' loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per mouth and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.
Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand.
The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another.
In the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent BPI, as indicated in her Billing Statements. Further, the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and
unconscionable.
Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1%
monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code.
Asian Cathay v Sps Gravador
Asian Cathay granted a loan to the Sps G for 800T secured by a REM and a PN. The Sps G paid the initial installment due in November 1999. However, they were unable to pay the subsequent ones. Consequently, on February 1, 2000, they received a letter demanding payment of P1,871,480.00 within five (5) days from receipt thereof. The properties were eventually foreclosed. The sps filed a suit for annulment of real estate mortgage. This was denied by the RTC. On appeal to the CA, the appellate court reversed the RTC ruling that the amount of P1,871,480.00 demanded by ACFLC from the sps is unconscionable and excessive. Thus, it declared the sps’ principal loan to be
P800,000.00, and fixed the interest rate at 12% per annum and reduced the penalty charge to 1% per month. It explained that ACFLC could not insist on the interest rate provided on the note
because it failed to provide the sps with the disclosure statement prior to the consummation of the loan transaction.
Issue
Was the CA correct in replacing the interest rates in the transaction for being unconscionable? Held
Yes. Records show that the amount of loan obtained by respondents on October 22, 1999 was P800,000.00. Respondents paid the installment for November 1999, but failed to pay the
subsequent ones. On February 1, 2000, ACFLC demanded payment of P1,871,480.00. In a span of three months, respondents' obligation ballooned by more than P1,000,000.00. ACFLC failed to show any computation on how much interest was imposed and on the penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is unconscionable.
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law.
The nullity of the stipulation on the usurious interest does not, however, affect the lender's right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed. The nullification by the CA of the interest rate and the penalty charge and the consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible error.
Insular Bank v Sps Salazar
The sps Salazar obtained a P42,050.00 loan from Insular Bank secured by a PN. This loan transaction was evidenced by a promissory note where the sps bound themselves jointly and severally to pay the amount with interest at 19% per annum and with the express authority to increase without notice the rate of interest up to the maximum allowed by law and subject further to penalty charges or liquidated damages upon default equivalent to 2% per month on any amount due and unpaid. In the event the account was referred to an attorney for collection, the sps were also bound to pay 25% of any amount due as attorney's fees plus expenses of litigation and costs. The sps were able to pay, little by little, a total of P68,676.75 which payments were applied to partially satisfy the penalty and interest charges. Since the principal remained unpaid, Insular filed a complaint with the RTC alleging that the sps were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984, including interest at 21% per annum, penalty charges, and attorney's fees. The RTC reduced the amounts payable by the sps to P11,253.25, with interest thereon at the rate of 19% per annum from the filing of the complaint on September 12, 1984 until fully paid. The defendants are further ordered to pay the plaintiff attorney's fees in the amount of One Thousand Pesos( P1,000.00) and to pay the costs.
Issues
Was the CA correct in ignoring the escalation clause and the other stipulated rates in the loan contract by the parties herein?
Held Yes.
Escalation clause
In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L-46591, July 28, 1987), the interest rate may not be increased by the plaintiff-appellant in the instant case. It is the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money in long term contracts. However, the enforceability of such stipulations is subject to certain conditions.
In the light of Central Bank Circulars Nos. 492-498:
"1. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existing as of January 2, 1976, provided that:
"a. The pertinent loan contract documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and
"b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and
"2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date."
The Central Bank took the position that the issuance of its circulars is a valid exercise of its
authority to prescribe maximum rates of interest and based on the general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that — (1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase and (3) the remaining maturities of the loans are more than 730 days as of the effectivity or the law or regulation authorizing such an increase.
In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before November 12, 1980. Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1, 1979. Obviously, as of this date, December 1, 1979, the remaining maturity of the loan was less than 730 days. Hence, Insular Bank's second assignment of error is without merit.
Penalty Clause
With respect to the penalty clause, we have upheld the validity of such agreements in several cases. Should there be such an agreement, the penalty does not include the interest, and as such the two are different and distinct things which may be demanded separately.
Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date. However, with earnest efforts, they tried to pay the loan little by little so that as of November 25, 1983, a total of P68,676.75 had been paid. We do not find any evidence of bad faith on the part of the defendants-appellees in their failure to pay the loan on time. Efforts were indeed made to make good their promise.
Furthermore, we agree with the trial court that the bank has already profited considerably from the loan. In a span of about six (6) years, the bank was enriched by P26,626.75. The penalty charges of 2% a month are, therefore, out of proportion to the damage incurred by the bank. In accordance with Article 1229 of the Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous.
Atty’s Fees
With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or unconscionable notwithstanding the express contract for attorney's fees. The award of one thousand (P1,000.00) pesos by the trial court appears to be enough.
Llorin v CA
L loaned from Apex a certain amount. Their agreement reads:
'I/We hereby authorize APEX MORTGAGE AND LOAN CORPORATION to accordingly increase the rate of interest and/or service charges stipulated in this contract without notice to me/us in the event of a law or any applicable Presidential Decree and/or Central Bank regulation which should be
enacted increasing the lawful rate of interest and/or service charges that may be charged on this particular kind of loan.'
Pursuant to this agreement, Apex increased the interest rate and thereafter decreased the same after the reduced interest rates prescribed by the Central Bank. L eventually failed to pay despite demands, prompting Apex to file a collection case against it. One of the issues in the case was the validity of the escalation clause in light of the rulings in Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, and Florante Valle and Insular Bank of Asia and America vs. Spouses Salazar. The trial court ruled in favor of Apex and ordered L to pay his obligations. It apparently upheld the validity of the escalation clause. L now asseverates that the escalation clause should not be given effect because of (1) its one-sidedness in favor of the lender, and (2) the absence of a de-escalation clause. Hence, he argues, the same should likewise be declared null and void.
Issue
Is the escalation clause herein valid? Held
Yes. The legality of the escalation clause, as in the case at bar, has been recognized in this jurisdiction. In the aforecited case of Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, et al., supra, we declared such clause to be valid and held that:
Some contracts contain what is known as an `escalator clause,' which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost
increases, the seller or contractor may increase the price up to a fixed percentage of the base. Attacks on such a clause nave usually been based on the claim that, because of the open price provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by