Tempered rate

Can a party who freely stipulates on the interest of his monetary obligation later on still challenge the said stipulated rate of interest? This is the question answered in this case of the spouses Cely and Jovi.

On September 4, 1998 Cely and Jovi obtained a loan of P6 million from the spouses Gil and Sally and the latter’s sister Rona at 3% interest per month. The loan was secured by a mortgage on a parcel of land covered by TCT No. T-24781 dated September 8, 1998.

On September 23, 1998, Cely and Jovi executed another document, a Deed of Absolute Sale conveying the mortgaged property in favor of Gil, Sally and Rona. Subsequently, on September 28, 1998 the parties again executed an Option Buy wherein Gil, Sally and Rona gave the spouses Cely and Jovi an exclusive option to repurchase the land for P10 million after acknowledging receipt of the total sum of P10 million as consideration of the purchase of the land. The Option to Buy likewise provided that if the option is exercised after December 5, 1998, the purchase price shall increase at the rate of P300,000 or 3% of the purchase price every month until September 5, 1999 and thereafter at the rate of 3.81% or P381,000 of the purchase price every month.

The spouses Jovi and Cely failed to pay the repurchase price under the Option to Buy. But they filed an action on July 28, 2000 before the Regional Trial Court (RTC) for reformation of instruments and damages against the spouses Gil and Sally, and Rona. They prayed that the Deed of Absolute Sale and the Option to Buy be treated as an equitable mortgage instead of sale.

At the pre-trial, the parties agreed that the principal amount of P10 million has long become overdue as no payment has been made. But it was also agreed that the transactions embodied in the Deed of Absolute Sale and the Option to Buy were really an equitable mortgage and the P300,000 and P381,000 successive increases stated in the Option to Buy represent monthly interest.

On June 2, 2002, the RTC issued its resolution directing the spouses Cely and Jovi to pay Gil, Sally and Rona the sum of P20 million within one month from receipt of its decision. The court said that since the loan is not denied and the document specified the interest of 3.81% a month which was then estimated to be P7,239,000 already, the said interest should be added to the total loan of P10 million. Cely and Jovi questioned said ruling before the Court of Appeals (CA). They contended that they are not liable to pay interest as the stipulated monthly rates of 3% and 3.81% are unconscionable. But the CA affirmed the RTC ruling. Was the CA correct?

No. While the parties are free to stipulate on the interest to be imposed on a monetary obligation, the Court will temper interest rates if they are unconscionable. Even if the Usury Law has been suspended by Central Bank Circular 905-82 and parties to a loan agreement have been given wide latitude to agree on any interest rate, the stipulated interest rates are illegal if they are unconscionable. Consequently, the CA erred in sustaining the RTC decision upholding the stipulated interest of 3% and 3.81% per month. Nothing in the said CB circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to hemorrhaging of their assets.

However since Cely and Jovi failed to pay the principal loan, they have to comply with what is incumbent upon them. They are bound to pay Sally, Gil and Rona the principal loan of P10 million plus the appropriate rate of interest of 1% per month from December 6, 1998 until fully paid (Spouses Toring vs. Spouses Olan et. al. G.R. 168782, October 10, 2008)

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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