Published 9 August 2019, The Daily Tribune

In my previous article, I pointed out that with the suspension of the Usury Law by virtue of CB Circular 905 series of 1982, parties to a contract of loan are free to stipulate the rate of interest. Nevertheless, if the agreed interest rate is unconscionable, courts may set it aside.  Even if knowingly and voluntarily assumed, unconscionable interest rates are void ab initio for being “contrary to morals, and the law.”

In determining whether the rate of interest is unconscionable, it is crucial to consider the parties’ contexts and appreciated in light of compensation to the creditor for money lent to another, which he or she could otherwise have used for his or her own purposes at the time it was lent. Hence, the rule of thumb is reasonability.

As to what may be deemed unconscionable interest, the Supreme Court, in William C. Louh, Jr. and Irene L. Louh vs. Bank of the Philippine Islands (G.R. No. 225562, 8 March 2017) found that the finance charges of 3.35% interest per month and 6% penalty per month were excessive.

In Leticia Medel vs. Court of Appeals (G.R. No. 131622 November 27, 1998), the Supreme Court, while conceding that the Usury Law was legally inexistent with the issuance of CB Circular 905, and that interest could be charged as lender and borrower may agree upon, nevertheless found the stipulated interest iniquitous, unconscionable, and contrary to morals. In that case, the high court has annulled a stipulated 5.5 percent per month or 66 percent per annum interest on a P500,000 loan and a 6 percent per month or 72 percent per annum interest on a P60,000 loan, for being excessive, iniquitous, unconscionable and exorbitant.

Since the stipulation is void, the courts may reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.

In another case, the debtor had been paying an interest of 6% per month for more than two and a half years. In fact, in his pleadings before the court, the debtor merely prayed for the reduction of interest from 6% monthly to 1% monthly or 12% per annum. However, the court considered that payments of the debtor to the lender may be considered as payment of the principal amount of the loan because Article 1956 was not complied with – notwithstanding the debtor’s admission that the payments made were for the interests due.

Citing the case of Ching vs. Court of Appeals, the  Supreme Court categorically ruled  that estoppel cannot give validity to an act that is prohibited by law or one that is against public policy. Hence, even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan is unconscionable, regardless of who between the parties proposed the rate.

Indeed at present, usury has been legally non-existent in view of the suspension of the Usury Law but the courts have the power to equitably reduce unreasonable interest rates, but the parties’ right to enter into contracts 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 Court must consider the circumstances of each case. What may be iniquitous and unconscionable in one case, may be just in another.

It is perhaps in light of these considerations that there are proposals to restore the ceiling on interest rate. Inasmuch as the courts are empowered to reduce interests if found unconscionable, the delay in the proceedings and the additional cost to the parties by way of court and legal fees may merely offset any interest payment ordered shaved off, for being iniquitous.

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