unconscionable interest

April 12, 2010

leana Macalinao v. Bank of the Philippine Islands

G.R. No. 175490, 17 September 2009.

 

The Supreme Court ruled in this case that the interest rate and penalty charge of 3% per month or 36% per annum should be reduced as this rate is unconscionable for being clearly excessive.  This is, notwithstanding the fact 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 credit card.  It should be noted that this is not the first time that the Court has considered the interest rate of 36% per annum as excessive and unconscionable. The principle has been affirmed in a plethora of cases that stipulated interest rates of 3% per month 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. 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.

 

 

 

Rodelo G. Polotan, Sr. vs CA

G.R. No. 119379, 25 September 1998.

Petitioner’s contract with private respondent in this case, provides for an expressly provides for an escalation clause but not a de-escalation clause.  The Supreme Court ruled that notwithstanding this, the contract provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction and that said provision on the increase of interest rates is not dependent solely on the will of private respondent as it is also dependent on the prevailing market rates.

It is the Court’s discussion on contracts of adhesion that deserves attention:

A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his “adhesion” thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing.

Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by the Company. There is no way a prospective credit card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against the Company. Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely.

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from a contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. It is important to stress that the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided.

 

 

 

Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial Construction Corporation, et al.

G.R. No. 139290, 19 May 2006.

 

            The resulting interest charge in this case has turned out to be excessive in the context of its base computation period, and hence, unwarranted in fact and in operation.

            While the Court recognizes the right of the parties to enter into contracts and who are expected to comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. In exercising this vested power to determine what is iniquitous and unconscionable, the circumstances of each case should be considered. What may be iniquitous and unconscionable in one case, may be just in another. In a number of cases, the Supreme Court equitably reduced the interest rate agreed upon by the parties for being iniquitous, unconscionable, and/or exhorbitant.

 

Development Bank of the Philippines v. Court of Appeals

G.R. No. 137557, October 30, 2000.

            The Supreme Court held in this case that respondents were liable for the stipulated interest rate of 18% per annum but equitably reduced the same to 10% per annum after finding that the interests and penalty charges alone exceeded the amount of the principal debt. As such, the interests were found to be excessive. It was further held that the additional penalty charge of 8% per annum would sufficiently cover whatever else damages petitioner may have incurred such as attorney’s fees and litigation expenses.

 

Leticia Medel vs. CA

G.R. No. 131622, 27 November 1998.

            In this case, the Supreme Court found the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties iniquitous or unconscionable, and, hence, contrary to morals (”contra bonos mores”), if not against the law.  The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.