G.R. No.

183360 September 8, 2014

ROLANDO C. DE LA PAZ vs. L & J DEVELOPMENT COMPANY

TOPIC: “No interest shall be due unless it has been expressly stipulated in writing."1

FACTS:

On December 27, 2000, Petitioner Roland lent P 350,0000 without any security to respondent L & J,
a property developer with Atty. Esteban Salonga as its President and General Manager.The loan,
with no specified maturity date, carried a 6% monthly interest, i.e., ₱21,000.00. From December
2000 to August 2003, L&J paid Rolando a total of ₱576,000.007 representing interest charges.

As L&J failed to pay despite repeated demands, Rolando filed a Complaint for Collection of Sum of
Money with Damages against L&J and Atty. Salonga in his personal capacity before the MeTC,
Rolando alleged, among others, that L&J’s debta s of January 2005, inclusive of the monthly
interest, stood at ₱772,000.00; that the 6% monthly interest was upon Atty. Salonga’s suggestion;
and, that the latter tricked him into parting with his money without the loan transaction being reduced
into writing.

In their Answer, L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged the
loan as a corporate debt, they claimed that the failure to pay the same was due to a fortuitous event,
that is, the financial difficulties brought about by the economic crisis. They further argued that
Rolando cannot enforce the 6% monthly interest for being unconscionable and shocking to the
morals. Hence, the payments already made should be applied to the ₱350,000.00 principal loan.

MeTC Ruling: Upheld 6% monthly interest. In so ruling, it ratiocinated that since L&J agreed thereto
and voluntarily paid the interest at such rate from 2000 to 2003, it I salready estopped from
impugning the same. Nonetheless, for reasons of equity, the said court reduced the interest rate to
12% per annum on the remaining principal obligation of ₱350,000.00

RTC Ruling: Affirmed MeTC decision.

CA Ruling: Reversed and set aside RTC Decision. CA stressed that the parties failed to stipulate in
writing the imposition of interest on the loan. Hence, no interest shall be due thereon pursuant to
Article 1956 of the Civil Code. And even if payment of interest has been stipulated in writing, the 6%
monthly interest is still outrightly illegal and unconscionable because it is contrary to morals, if not
against the law. Being void, this cannot be ratified and may be set up by the debtor as defense. For
these reasons, Rolando cannot collect any interest even if L&J offered to pay interest. Consequently,
he has to return all the interest payments of ₱576,000.00 to L&J.

Considering further that Rolando and L&J thereby became creditor and debtor of each other, the CA
applied the principle of legal compensation under Article 1279 of the Civil Code. Accordingly, it set
off the principal loan of ₱350,000.00 against the ₱576,000.00 total interest payments made, leaving
an excess of ₱226,000.00, which the CA ordered Rolando to pay L&J plus interest.

ISSUE:

Whether to uphold the judgment of the CA that the principal loan is deemed paid is dependent on
the validity of the monthly interest rate imposed. And in determining such validity, the Court must
necessarily delve into matters regarding a) the form of the agreement of interest under the law and
b) the alleged unconscionability of the interest rate.

HELD:

The Petition is devoid of merit.

The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from
charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated
in writing. Jurisprudence on the matter also holds that for interest to be due and payable, two
conditions must concur: a) express stipulation for the payment of interest; and b) the agreement to
pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest is
due. The collection of interest without any stipulation in writing is prohibited by law.

The Court ruled in the case of Ching v. Nicdao that the daily payments of the debtor to the lender
were considered as payment of the principal amount of the loan because Article 1956 was not
complied with. This was notwithstanding the debtor’s admission that the payments made were for
the interests due. The Court categorically stated therein that "[e]stoppel cannot give validity to an act
that is prohibited by law or one that is against public policy."

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.

While the Court recognizes the right of the parties to enter into contracts and who are expectedto
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 Court must
consider the circumstances of each case. What may be iniquitous and unconscionable in onecase,
may be just in another.

Time and again, it has been ruled 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. The Court, however, stresses that these
rates shall be invalidated and shall be reduced only in cases where the terms of the loans are open-
ended, and where the interest rates are applied for an indefinite period. Hence, the imposition of a
specific sum of ₱40,000.00 a month for six months on a ₱1,000,000.00 loan is not considered
unconscionable.

In the case at bench, there is no specified period as to the payment of the loan. Hence, levying 6%
monthly or 72% interest per annum is "definitely outrageous and inordinate." The situation that it was
the debtor who insisted on the interest rate will not exempt Rolando from a ruling that the rate is
void. As this Court cited in Asian Cathay Finance and Leasing Corporation v. Gravador, "[t]he
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." Indeed, "voluntariness does not
make the stipulation on [an unconscionable] interest valid."
As exhaustibly discussed, no monetary interest is due to Rolando pursuant to Article 1956. The CA
1âwphi1

thus correctly adjudged that the excess interest payments made by L&J should be applied to its
principal loan. As computed by the CA, Rolando is bound to return the excess payment of
₱226,000.00 to L&J following the principle of solutio indebiti.