In the Philippines, a loan agreement’s interest can only be collected if expressly stipulated in writing. The Supreme Court in Rolando C. De La Paz v. L & J Development Company ruled that if there is no written agreement specifying interest on a loan, the lender cannot legally demand it, even if the borrower had been paying it. Furthermore, the Court deemed the 6% monthly interest rate as unconscionable, which reinforces consumer protection by ensuring fairness and preventing predatory lending practices. This decision highlights the critical importance of documenting loan terms to protect both borrowers and lenders.

Unwritten Promises and Unfair Rates: When Loan Agreements Fall Short

The case revolves around a loan of P350,000.00 made by Rolando C. De La Paz to L & J Development Company, without any security or specified maturity date. While there was a verbal agreement for a 6% monthly interest, this was never put into writing. L & J paid Rolando a total of P576,000.00 in interest from December 2000 to August 2003. However, L & J eventually failed to pay despite repeated demands, prompting Rolando to file a complaint. The central legal question is whether Rolando could legally enforce the 6% monthly interest rate, given the lack of a written agreement and claims that the interest rate was unconscionable.

The Metropolitan Trial Court (MeTC) initially sided with Rolando, upholding the 6% monthly interest but reducing it to 12% per annum for equity. The Regional Trial Court (RTC) affirmed this decision. However, the Court of Appeals (CA) reversed the lower courts, emphasizing that Article 1956 of the Civil Code requires interest stipulations to be in writing. The CA further declared the 6% monthly interest illegal and unconscionable, ordering Rolando to return the interest payments. This ruling was based on the principle that no interest shall be due unless it has been expressly stipulated in writing.

Article 1956 of the Civil Code is at the heart of this case, stating:

“No interest shall be due unless it has been expressly stipulated in writing.”

This provision clearly mandates that for interest to be legally enforceable, the agreement to pay it must be documented in writing. This requirement protects borrowers from hidden or unilaterally imposed interest charges. It also ensures clarity and transparency in loan transactions.

The Supreme Court upheld the CA’s decision, emphasizing the necessity of a written stipulation for interest to be valid. The Court dismissed Rolando’s argument that Atty. Salonga, President and General Manager of L & J, had taken advantage of his legal knowledge. The Court noted that Rolando, an educated architect, could have insisted on a written agreement. The Court stated that “[c]ourts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally incompetent.”

Even if there had been a written agreement, the Court found the 6% monthly interest rate to be unconscionable. While the Usury Law has been suspended, courts still have the power to equitably reduce unreasonable interest rates. In Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction Corporation, the Supreme Court held:

“While the Court recognizes the right of the parties to enter into contracts and who are expected to 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 one case, may be just in another.”

The Court has consistently ruled that interest rates of 3% per month and higher are excessive, iniquitous, and unconscionable. Such stipulations are considered void for being contrary to morals, if not against the law. The Court clarified that these rates are invalidated only in open-ended loan terms where the interest rates are applied indefinitely. Since the loan in this case had no specified period, the 6% monthly interest was deemed “definitely outrageous and inordinate.”

The Court also rejected Rolando’s argument that the borrower proposed the high interest rate. In Asian Cathay Finance and Leasing Corporation v. Gravador, the Court stated: “[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.” The voluntariness of assuming an unconscionable interest rate does not validate it. The Court affirmed the CA’s decision to apply the excess interest payments to the principal loan, invoking the principle of solutio indebiti, where one must return what was unduly received through mistake.

FAQs

What was the key issue in this case?	The central issue was whether the lender could legally enforce a 6% monthly interest rate on a loan when there was no written agreement stipulating the interest.
What does Article 1956 of the Civil Code state?	Article 1956 states that no interest shall be due unless it has been expressly stipulated in writing. This means that verbal agreements about interest on loans are not legally enforceable in the Philippines.
Why did the Court of Appeals reverse the lower courts’ decisions?	The Court of Appeals reversed the lower courts because there was no written agreement specifying the 6% monthly interest rate, which is a requirement under Article 1956 of the Civil Code.
What is considered an unconscionable interest rate in the Philippines?	Philippine courts have consistently ruled that interest rates of 3% per month or higher are excessive, iniquitous, unconscionable, and void for being contrary to morals.
Can a borrower voluntarily agree to an unconscionable interest rate?	No, even if a borrower knowingly and voluntarily agrees to an unconscionable interest rate, the agreement is still considered immoral and unjust and therefore invalid.
What is the principle of solutio indebiti?	Solutio indebiti is a legal principle that arises when someone receives something without having the right to demand it, and it was unduly delivered through mistake, creating an obligation to return it.
What interest rate applies if there is no express contract as to such rate of interest?	In the absence of an express contract, the legal interest rate, as per Central Bank Circular No. 799 s. 2013, is 6% per annum.
What was the final ruling of the Supreme Court in this case?	The Supreme Court affirmed the Court of Appeals’ decision, ordering Rolando to pay L & J Development Company the amount of P226,000.00, plus interest of 6% per annum from the finality of the Decision until fully paid.

The Supreme Court’s decision in De La Paz v. L & J Development Company serves as a firm reminder of the importance of documenting loan agreements, especially interest stipulations. It reinforces consumer protection against unfair lending practices and highlights the judiciary’s role in tempering excessive interest rates. Parties entering into loan agreements should always ensure that all terms and conditions are clearly and expressly stated in writing to avoid future disputes.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Rolando C. De La Paz v. L & J Development Company, G.R. No. 183360, September 08, 2014