Excessive interests, penalties and attorney's fees

Notwithstanding the fact that parties stipulated rates of interest, penalty and attorney's fees, the courts may declare them exorbitant, iniquitous, unconscionable and excessive. The courts can and should reduce astronomical rates as reason and equity demand. Article 1229 of the Civil Code provides:
"The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable."
Article 2227 of the Civil Code ordains:
"Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.
More importantly, Article 1306 of the Civil Code is emphatic:
"The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."
Thus, stipulations imposing excessive rates of interest and penalty are void for being contrary to morals, if not against the law.[1]

Further, the Supreme Court has repeatedly held that while Central Bank Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels that would be unduly burdensome, to the point of oppression on their borrowers.[2]

In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another.[3]

In the recent case of MCMP Construction Corp. v. Monark Equipment Corp.,[4] the interest rate of twenty-four percent (24%) per annum was reduced to twelve percent (12%) per annum; the penalty and collection charge of three percent (3%) per month, or thirty-six percent (36%) per annum, to six percent (6%) per annum; and the amount of attorney's fees from twenty-five percent (25%) of the total amount due to five percent (5%).

Applying the foregoing principles, the Supreme Court, in Marquez v. Elisan Credit (G.R. No. 194642, April 06, 2015), reduced the stipulated rates as follows: the interest of twenty-six percent (26%) per annum is reduced to two percent (2%) per annum; the penalty charge of ten percent (10%) per month, or one-hundred twenty percent (120%) per annum is reduced to two percent (2%) per annum; and the amount of attorney's fees from twenty-five percent (25%) of the total amount due to two percent (2%) of the total amount due.
[1] Planters Development Bank v. Spouses Lopez, G.R. No. 186332, October 23, 2013, 708 SCRA 481, citing Imperial v. Jaucian, 471 Phil. 484, 494-495 (2004); and Castro v. Tan, G.R. No. 168940, November 24, 2009, 605 SCRA 231, 237-238.

[2] Macalinao v. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009, 600 SCRA 67, 76-78, citing Imperial v. Jaucian, G.R. 149004, April 14, 2004, 427 SCRA 517, Tongoy v. Court of Appeals, No. L-45645, June 28, 1983, 123 SCRA 99.

[3] Id.

[4] G.R. No. 201001, November 10, 2014.

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