DE LA PAZ

VS.
L & J DEVELOPMENT COMPANY,
INC.
734 SCRA 364, G.R. NO. 183360
September 8, 2014
FACTS OF THE
CASE
TRANSACTION INVOLVED IN THE CASE
DECEMBER 27, 2000
·Creditor: Rolando De la Paz
·Debtor: L&J Development Company
w/ Atty Salonga as President and GM
·Principal: P350,000
·Interest Rate: 6% per month
·Without any security
With no specified maturity
 DEC 2000 – AUG 2003

L&J paid to De la Paz a total

of P576,000 representing
interest charges;
L&J later on failed to pay the
debt (as of Jan 2005 it is
already worth P772,000
inclusive of interest) despite
the repeated demands thus
filing of the Complaint for
Collection of Sum of Money
with Damages against L&J
METROPOLITAN
TRIAL COURT
PETITIONER'S ARGUMENT
·The 6% monthly interest was
upon Atty. Salonga’s suggestion;
·That he was tricked into parting
his money w/out the loan
transaction reduced into writing;
That it was not he who demanded
for the 6% M.I. it was L&J and Atty.
Salonga thru Arlene the
secretary/treasurer of L&J.
RESPONDENT' ANSWER
corporate debt;
·The loan was acknowledged as a
·Failure to pay was due to a fortuitous
event, that is, the financial difficulties
brought about by the economic crisis;
·That the 6% cannot be enforced for being
unconscionable and shocking to the
morals;
That the payments already made should
be applied to the P350, 000 principal
loan.
METROPOLITAN TRIAL COURT'S
DECISION

Judgment rendered in favor of De la
June 30, 2006 Paz and upheld the 6% monthly

interest:
·Since L&J agreed thereto and
voluntarily paid the interest at such
rate from 2000 – 2003 and already
estopped from impugning the same;
For equity reasons, the court reduced
the interest rate to 12% P.A. on the
remaining principal obligation of
P350,000;
 REGIONAL
TRIAL COURT
RESPONDENT'S ASSERTION
·The total of interest payment
made amounted to P576,000 an
amount which is even more that
the principal obligation of
P350,000;
·6% M.I. is unconscionable and
immoral;
·12% P.A. should have been
applied from the time of the
obligation’s constitution;
That at 12%, amount of interest
should only be P105,000 from
Dec 2000 to Aug 2003;
That if above amount is deducted
from the total interest payments
made the principal loan should
have already been paid.
REGIONAL TRIAL COURT'S
DECISION

Affirmed the MeTC’s Decision.

April 10, 2007

COURT OF
APPEALS
PETITIONER'S ARGUMENT
·That the circumstances exempt
That interest is not
both the application of Art. 1956
unconscionable for being debtor-
and of jurisprudence holding that
imposed.
a 6% monthly interest is
unconscionable, unreasonable,
and exorbitant;
·That Atty. Salonga, legally
maneuvered the transaction that
undocumented loan was w/in
legal bounds;
 COURT OF APPEALS
DECISION

Reversed and set aside RTC’s Decision
February 27, 2008 Parties failed to stipulate in writing the

imposition of interest on the loan hence
no interest shall be due thereon
pursuant to Art. 1956 of the Civil
Code;
That even if payment of interest has
been stipulated in writing, the 6% M.I. is
still outrightly illegal and
unconscionable because it is contrary
to morals, if not against the law.
 COURT OF APPEALS
DECISION

Applying the principle of legal

February 27, 2008 compensation under Art 1279 of the

Civil Code as creditor and debtor of

each other, it set off the principal loan
of P350,000 against the P576,000
total interest payments made, leaving
an excess of P226,000 which De la
Paz has to pay plus interest of 12 %
P.A. from the finality of the decision
to L&J.
ISSUE:
WHETHER THE UNWRITTEN
6% MONTHLY INTEREST
AGREEMENT SHOULD BE
HONORED.
RULING:
NO, BECAUSE NO INTEREST
SHALL BE DUE UNLESS IT
HAS BEEN EXPRESSLY
STIPULATED IN WRITING.
 RATIO
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 lack of written stipulation to pay interest on the loaned amount

disallows a creditor from charging monetary interest.
Under Art. 1956, 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:
1. Express stipulation for the payment of interest;
2. The agreement to pay interest be reduced in writing.
 RATIO
ESTOPPEL CANNOT GIVE VALIDITY TO AN ACT THAT IS PROHIBITED BY LAW OR ONE
THAT IS AGAINST PUBLIC POLICY.

In Ching v. Nicdao, the daily payments of debtor to the lender were

considered as payment of the principal amount of the loan because
Art. 1956 was not complied with. This was notwithstanding the
debtor’s admission that the payments were made for the interest
due.
 RATIO
EVEN IF THE PAYMENT OF INTEREST BE REDUCED IN WRITING, A 6% M.I. RATE ON A
LOAN IS UNCONSCIONABLE, REGARDLESS OF WHO BETWEEN THE PARTIES
PROPOSED THE RATE.

Although Usury Law was suspended by CB Circular No. 905, not all
interest rates levied upon loans are permitted by the courts as they have
the power to equitably reduce unreasonable interest rates.
It has been ruled in plethora of cases that stipulated interest rates of 3%
per month and higher are excessive, iniquitous, unconscionable and
exorbitant.
The Court, however stresses that these rates shall be invalidated and shall
be reduced only in cases where the terms of the loans where open-
ended, and where the interest rates are applied for an indefinite period.
 RATIO
THERE IS NO SPECIFIED PERIOD AS TO THE PAYMENT OF THE LOAN THUS THE
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 De la Paz 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."
 RATIO
THE CA THUS CORRECTLY ADJUDGED THAT THE EXCESS INTEREST PAYMENTS MADE
BY L&J SHOULD BE APPLIED TO ITS PRINCIPAL LOAN. AS COMPUTED BY THE CA, DE
LA PAZ IS BOUND TO RETURN THE EXCESS PAYMENT OF ₱226,000.00 TO L&J
FOLLOWING THE PRINCIPLE OF SOLUTIO INDEBITI.

THE INTEREST RATE IMPOSED BY CA MUST BE MODIFIED FROM 12% TO 6%

PURSUANT TO BSP CIRCULAR 799 THAT TOOK EFFECT JULY 1, 2013.

DISPOSITIVE PORTION
WHEREFORE, the Decision dated
Feb 27, 2008 of the Court of Appeals
is hereby AFFIRMED with
MODIFICATION that petitioner De la
Paz is ordered to pay respondent
P226,000 plus interest of 6% P.A.
from the finality of this Decision until
fully paid.
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