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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning.
No interest shall be due unless it has been expressly stipulated in writing. (Article 1956, Civil Code of the Philippines)
The willingness of the debtor in assuming an unconscionable rate of interest is inconsequential to its validity. The 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. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals. (Megalopolis Properties, Inc. v. D’Nhew Lending Corporation, G.R. No. 243891, May 7, 2021)
In Sps. Abella v. Sps. Abella (G.R. No. 195166, July 8, 2015), the Supreme Court expounded on the criteria in determining whether an interest rate is unconscionable and consequently void ab initio:
“In determining whether the rate of interest is unconscionable, the mechanical application of pre-established floors would be wanting. The lowest rates that have previously been considered unconscionable need not be an impenetrable minimum. What is more crucial is a consideration of the parties’ contexts. Moreover, interest rates must be appreciated in light of the fundamental nature of interest as 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. It is not the default vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism for the creditor’s unjust enrichment at the expense of another.
The legal rate of interest is the presumptive reasonable compensation for borrowed money. While parties are free to deviate from this, any deviation must be reasonable and fair. Any deviation that is far-removed is suspect. Thus, in cases where stipulated interest is more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is required by prevailing market conditions. Here, petitioners have articulated no such justification.
In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the application of any interest rate other than that specifically provided for by the parties in their loan document or, in lieu of it, the legal rate. Here, as the contracting parties failed to make a specific stipulation, the legal rate must apply. Moreover, the rate that petitioners adverted to is unconscionable. The conventional interest due on the principal amount loaned by respondents from petitioners is held to be 12% per annum.”
The determination of whether or not interest rates are unconscionable or illegal depends on the circumstances of each case. Stipulated interest rates are not inherently conscionable or unconscionable. These interest rates may be deemed unconscionable only in light of the context in which they were imposed or applied.
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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 09175772207/ 09778050020.
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