USURY AND UNCONSCIONABLE INTEREST RATES

By: Atty.Fred | September 19, 2006 in Banking, Corporate and Investments

26 Replies | Related posts at the bottom of article
With the suspension of the Usury Law and the removal of interest ceilings, the parties are generally
free to stipulate the interest rates to be imposed on monetary obligations. As a rule, the interest rate
agreed by the creditor and the debtor is binding upon them. This rule, however, is not absolute.
In a recent case, the SC again dealt with the validity of interest agreed by the parties, stating that:
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.
In that case, the SC reduced the interest rate from 18% to 12% per annum, noting, among others,
that the amount involved has ballooned to an outrageous amount four times the principal debt.
Indeed, there is no hard and fast rule to determine the reasonableness of interest rates. Stipulated
interest rates of 21%, 23% and 24% per annum had been sustained in certain cases.
On the other hand, there are plenty of cases when the SC equitably reduced the stipulated interest
rates; for instance, from 18% to 10% per annum. The SC also voided the stipulated interest of 5.5%
per month (or 66% per annum), for being excessive, iniquitous, unconscionable and exorbitant,
hence, contrary to morals (contra bonos mores), if not against the law . The same is true with
cases involving 36% per annum, 6% per month (or 72% per annum), and 10% and 8% per month. In
these instances, the SC imposed the legal interest of 12%.
Just to be clear, legal interest doesnt mean that anything beyond 12% is illegal. It simply
means that in a loan or forbearance of money, the interest due should be that stipulated in writing,
and in the absence thereof, the rate shall be 12% per annum.

Sources: Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial
Construction Corporation (G.R. No. 139290, 9 May 2006); Development Bank of the Philippines vs.
Court of Appeal; Garcia vs. Court of Appeals; Medel vs. Court of Appeals; Security Bank and Trust
Company vs. RTC Makati; Spouses Solangon vs. Salazar; Cuaton vs. Salud; Ruiz vs. CA; Eastern
Shipping vs. Court of Appeals, G.R. No. 97412 July 12, 1994.

Last week, the Monetary Boardthe countrys policy-making body on money,

banking and creditchanged the legal rate of interest for loan and credit agreements.

Through Circular No. 799, the board declared that, effective July 1, the rate of
interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest,
shall be 6 percent per annum.
This means that if the parties fail to state in writing the interest payable on any of the
transactions mentioned, or on account of a court judgment involving a related money
claim, the imposable interest is 6 percent every year.
The circular amends an issuance of the board in 1974, or 39 years ago, that fixed the
legal interest at 12 percent per year.
The rate reduction comes in the wake of the countrys low inflation rate which dipped
to a five-year low of 3.2 percent last year. Besides, the capital market is so liquid that
banks are awash in money waiting to be borrowed by interested parties.
The rule of the thumb in interest rate setting of this nature is to peg it at a level that
reflects the inflation rate and add extra points to enable the moneylenders to earn
some profit from the transaction.
Agreement
A loan is the act of lending money to another person on condition that he will repay it
within a specific period of time.
If the parties have agreed on the amount of interest payable on the loan, that
agreement is binding on them. In the absence of such agreement, the interest due is 6
percent per year.
The inclusion of forbearance of money, goods and credits in the coverage of legal
interest has been a bone of contention in transactions where certain conditions, in
addition to standard payment clauses, are imposed, as in the case of conditional sale of
property and consignment of goods.
This situation is often seized upon as justification by unscrupulous parties to refuse
payment of the legal interest if, due to inadvertence or some false sense of trust and
confidence, the parties (usually the creditor) failed to clear up this matter in the
agreement.
In Hermojina Estores vs Spouses Arturo and Laura Sapangan, G.R. No. 175139,
dated April 18, 2012, the Supreme Court said forbearance of money, goods or credits
refers to arrangements other than loan agreements where a person acquiesces to the
temporary use of his money, goods or credits pending the happening of certain events
or fulfillment of certain conditions.
Refusal
The instant case involves the conditional sale of a parcel of land where the sellers
agreed that, after receipt of certain sums of money from the buyers, they will secure
the necessary government permits to enable the buyers to immediately move into the
property.

Seven years after receipt of P3.5 million from the buyers, the sellers failed to live up
to their commitments. The delay prompted the buyers to demand the return of their
money with interest at 12 percent a year compounded annually.
The sellers refused to pay the interest sought. They argued that since the conditional
deed of sale provided only for the return of the down payment in case of breach, they
cannot be held liable to pay legal interest on it.
The case wended its way through the judicial mill for 12 years, from the regional trial
court to the Court of Appeals and finally to the tribunal.
The tribunal ruled that the buyers were deprived of the use of their money pending
the fulfillment of the conditions and when those conditions were breached, they are
entitled not only to the return of the principal amount paid, but also to compensation
for the use of their money.
And the compensation for the use of their money absent, any stipulation should be
the same rate of legal interest applicable to a loan since the use or deprivation of funds
is similar to a loan.
Bottom line, the sellers were ordered to return the P3.5 million, plus 12 percent
interest computed from the day the demand for repayment was made in 2000 until
fully paid, and attorneys fees.
Information
Although meant for general commercial application, the implementation of the new
legal interest rate will rest primarily with our courts and administrative offices that
process and enforce money claims and awards.
The judges who decide on money claims brought before them and the sheriffs who
will enforce judicial awards through direct payment or garnishment of bank accounts,
should be properly informed of the change in legal interest rate.
Since there has been scant publicity about this change, these officials may still think
the 39-year-old 12 percent per-year legal interest is still in effect.
Government offices that handle money claims or impose fines for violation of
regulatory rules that impose interest for delayed payments should be similarly put on
notice about the reduction of the legal interest rate.
For example, at the National Labor Relations Commission, awards of separation pay
or backwages to employees are entitled to legal interest from the time they were due
or for every day of delay of payment from the date of the award.
Nasty disagreements in the computation of such awards may arise if the sheriffs who
will implement them are not apprised of the interest adjustment.
It should be borne in mind that since the new rate is effective only on July 1, money
awards entitled to legal interest that started to run before that date and continue to
remain unpaid up to the present will have two interest rates depending on when the
interest accrued.
Some people are going to be unhappy about this change of fortune.

Read more: http://business.inquirer.net/130427/new-legal-rate-ofinterest#ixzz4DnAah5gZ

Follow us: @inquirerdotnet on Twitter | inquirerdotnet on Facebook
Legal Interest Rates Modified by New Supreme Court Ruling
The Supreme Court has recently promulgated a decision modifying the rule on interest rates awarded
in the form of actual and compensatory damages.
In a decision penned by Justice Peralta, the Supreme Court in Nacar vs. Gallery Frames, G.R. No.
189871 (13 August 2013), laid down a uniform rate of six percent (6%) for the award of interest in the
form of actual and compensatory damages. The foregoing rate shall take effect on 01 July 2013.
The Supreme Courts pronouncement in Nacar vs. Gallery Frames modified the previous guidelines
laid down in Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412 (12 July 1994).
Previously, in Eastern Shipping Lines, Inc. vs. Court of Appeals, the Supreme Court held that for loans
and forbearance of money, in the absence of stipulation, the rate of interest shall be twelve percent
(12%) while for obligations not constituting a loan or forbearance of money, the rate of interest shall be
six percent (6%). When the judgment of the court becomes final and executory, the rate of interest
shall be twelve percent (12%) since it is akin to a forbearance of money. Now, with Nacar vs. Gallery
Frames, the interest rate, regardless of the source of the obligation, is pegged at a uniform rate of six
percent (6%).
The Supreme Court further held in Nacar vs. Gallery Frames that for judgments which became final
and executory prior to 01 July 2013, they shall not be disturbed and shall continue to apply the rates
provided for therein.
The Supreme Court cited as basis BSP-MB Resolution No. 796 dated 16 May 2013 and BSP Circular
No. 799, Series of 2013, which pegged the interest rates for loans and forbearance of money, goods
and credits, as well as judgments, at six percent (6%). The Supreme Court held that the BSP is
authorized to set interest rates and to enforce its Circulars, citing its previous ruling in Advocates for
Truth in Lending Act, Inc. vs. Bangko Sentral Monetary Board, G.R. No. 192986 (15 January 2013).

The Bangko Sentral Issued Circular No. 799 Series of 2013 dated July 1, 2013. It provides:

The Monetary Board in its Resolution No. 796 dated May 16, 2013 approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2of Circular No. 905, Series of 1982:
Section 1. The Rate of interest for the loan or forebearance of any money, goods or credit and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3, and 4303P.1 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on July 1, 2013
This circular is highly questionable. It is an imposition which is not allowed by law. It is illegal and
therefore void ab initio.
It is well entrenched that, in the Philippines, there is a hierarchy of laws. The most important law is
the Constitution. Coming second are statutes made by Congress and approved by the President.
And the last are rules and regulations such as circulars. Accordingly, Article 7 of the Civil Code of the
Philippines is very clear when it provides that laws are repealed only by subsequent ones and
declares that administrative or executive orders and regulations shall be valid only when they are
not contrary to the laws or the Constitution. Consequently, Article 5 of the same Civil Code provides
that acts executed against the provisions of mandatory or prohibitory laws shall be void, except
when the law itself authorizes its validity.
Circular No.799 mandates a new monetary interest rate. It provides that the rate of interest for the
loan or forebearance of any money, goods or credit in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per annum. This mere circular cannot repeal the
law on monetary interest, which is Article 1956 of the Civil Code providing that, no interest shall be
due unless it has been expressly stipulated in writing. Article 1956 is a mandatory law as it uses the
word shall connoting a command. It is likewise a prohibitory law as it starts with the phrase no
interest. Thus, in accordance with Article 5 of the Civil Code, Circular No. 799 may be considered
void. It may be considered to have no effect.
As the Supreme Court said in Sebastian Siga-An vs. Villanueva (G.R. No. 173227 January 20,
2009), collection of interest without any stipulation therefor in writing is prohibited by law. The
Bangko Sentral just issued a circular which is prohibited by law.
Likewise Circular No. 799 provides that the rate allowed in judgments, in the absence of an express
contract as to such rate of interest, shall be six percent (6%) per annum. This is what is called
compensatory interest, which is currently governed by Article 2209 of the Civil Code. Again in the
case of Sebastian Siga-An vs. Villanueva (G.R. No. 173227 January 20, 2009), the Supreme Court
said:

There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that
if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal
interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the
payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
Given the pronouncement of the Supreme Court which cited Article 2209 of the Civil Code providing
a legal interest of 12% per annum as rate allowed in judgments, how then could a mere Bangko
Sentral Circular repeal this rate of 12% and make it at 6%?
Circular No. 799 must be withdrawn. Our regulators must know and follow the law. They cannot
substitute their own discretionary and official acts and decisions over norms and rules mandated by
law. Given their important government positions, it is unforgivable for them not to know the
substantive law precisely having a great bearing on their official functions, thereby resulting in the
issuance of legally improper circulars impacting our economy and prejudicing our business people.
Not even the Bangko Sentral or the Monetary Board can usurp legislative sovereign functions which
are the exclusive domain of the legislature. A mere circular cannot amend an act of Congress. Such
circular likewise cannot revise an interpretation of the law made by the Supreme Court. The Bangko
Sentral and the Monetary Board must know their places in our political and constitutional
system. They cannot act ultra vires.