EN BANC

[ G.R. No. 211363. February 21, 2023 ]

ESTRELLA PABALAN, PETITIONER, VS. VASUDAVE SABNANI,
RESPONDENT.
DECISION
GAERLAN, J.:
This is a Petition for Review on Certiorari1 assailing the
Decision2 dated November 28, 2012 and Resolution3 dated
February 12, 2014 of the Court of Appeals (CA) in CA-G.R. CV No.
91169. The assailed CA rulings affirmed with modification the
Decision4 dated March 28, 2005 of the Regional Trial Court (RTC)
of Makati City, Branch 59, in Civil Case No. 99-1361.

The Antecedent Facts

On April 30, 1999, Vasudave Sabnani (Sabnani), a British national,
obtained a short-term loan from Estrella Pabalan (Pabalan) in the
total amount of ₱7,450,000.00.5 As securities for the loan, he
executed two promissory notes6 (PNs) and a Deed of Real Estate
Mortgage7 (REM) over his condominium unit at the Skyland Plaza
Condominium, Makati City.8
The First PN9 indicated the principal loan amount of
₱1,450,000.00 with an interest rate of eight percent (8%) per
month. This was payable within a period of three months in
accordance with the following payment schedule:
₱116,000.00 representing interest payable on April 30, 1999[;]
₱116,000.00 representing interest payable on May 31, 1999[;]
₱116,000.00 representing interest payable on June 30, 1999[;]
₱1,450,000.00 representing principal payable on July 30, 1999[.]
The Second PN10 indicated a principal loan amount of
P6,000,000.00 with an interest rate of five percent (5%) per
month. This was also payable in three months, in accordance with
the following payment schedule:
₱300,000.00 representing interest payable on April 30, 1999[;]
₱300,000.00 representing interest payable on May 31, 1999[;]
₱300,000.00 representing interest payable on June 30, 1999[;]
₱6,000,000.00 representing principal payable on July 30, 1999[.]
The two PNs had common provisions on the consequences of
default, summarized as follows:
1. If the stipulated interest was not paid when due, Sabnani would
be required to pay a higher interest rate of twenty percent (20%)
per month on the outstanding principal loan.
2. If the case is referred to an attorney for collection or legal
action, Sabnani agreed to pay Pabalan:
2.1. Additional Interest Penalty equivalent to twenty percent
(20%) per month on the total unpaid principal, accrued interest,
and penalty;
2.2. Liquidated Damages equivalent to fifty percent (50%) of the
total unpaid principal, accrued interest, and penalty;
2.3. Attorney's Fees equivalent to twenty-five percent (25%) of
the total unpaid principal, accrued interest, and penalty; and
2.4. Other costs and expenses of litigation.11
The REM reiterated the payment terms in the PNs and provided
Pabalan with the right to foreclose the property in case of default.
It also contained an acceleration clause such that failure to pay
any amounts due under the PNs would render the entire
obligation immediately due and demandable.12
Sabnani failed to pay the installment due on May 31, 1999.
Pabalan sent him the Demand Letter13 dated June 8, 1999,
asking him to pay the total amount of P8,940,000.00 by June 21,
1999. This amount consisted of the principal loan of
₱7,450,000.00, interest and penalty charges of ₱1,490,000.00.14
Still, Sabnani did not pay despite demand which constrained
Pabalan to file an application for the extrajudicial foreclosure of
the mortgaged property with the Office of the Clerk of Court and
Ex-Officio Sheriff of the RTC of Makati City. The foreclosure sale
was set on August 3, 1999, at 10:30 a.m.15
To prevent the foreclosure sale, Sabnani filed a Complaint for
Annulment of REM, PNs, and Notice of Sheriffs Sale with prayer for
the issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction (WPI) and damages.16 In her Answer with
Compulsory Counterclaims,17 Pabalan asserted that her right to
foreclose the mortgage was evidently supported by the terms of
the Deed of REM.18
On July 30, 1999, a hearing on the application for a TRO and/or
WPI was conducted.19 However, in a Resolution dated August 3,
1999, the RTC denied the same on the ground that there was
insufficient basis to prevent the foreclosure sale. It concluded that
he would not suffer any substantial injury since he could
participate in the public bidding or redeem his property within a
year.20 The foreclosure sale therefore proceeded as scheduled
and Pabalan won as the sole and highest bidder amounting to
P17,400,000.00.21 This bid price notably exceeded the amount
indicated in the Notice of Sheriffs Sale because Pabalan used as
basis an updated Statement of Account which reflected additional
interests, penalties, liquidated damages, and attorney's fees that
accrued pursuant to the PNs.22
On March 16, 2000, Sabnani filed an Amended Complaint23 still
seeking to annul the foreclosure sale, demand the payment of
damages, and obtain a WPI. He added that Pabalan made
unauthorized deductions from the loan which, if properly
considered, would prevent him from being in default and make
the foreclosure action premature. Although the principal loan was
P7,450,000.00, Pabalan allegedly released to him only
P6,447,700.00 after unilaterally deducting the following
amounts:24
Advance Interest [₱]416,000.00
 Service Fees (7%) P521,500.00
Real Property Tax ₱31,900.00
Clearance
Tax Declaration ₱500.00
BIR Fees ₱14,900.00
Registry of Deeds fees ₱17,500.00
[₱]1,002,300.0
Total Deductions
025
Sabnani claimed that not all of these deductions were agreed
upon by them and authorized under the PNs. He admitted that the
advance interest pertained to the period – from April 30 to May
30, 1999. However, the service fees had no contractual basis and
should instead be applied as payment for the interest for the
period – from May 31 to June 30, 1999, and as partial payment for
the interest due from June 30 to July 30, 1999. Also, he claimed
that if the deductions were correctly applied to the amount of the
loan, he would not have been in default at the time Pabalan
sought to foreclose the REM.26
He further alleged that the REM and PNs he executed in favor of
Pabalan should be annulled for lack of consideration. He stressed
that he never received any benefit from the loan since he agreed
to obtain it only as an accommodation for his business partner,
Michael Claparols (Claparols). He did not receive any amount of
the loan as it was given immediately to Claparols.27
Lastly, he argued that the rates of interest, penalty charges, and
other fees imposed in the REM and PNs were "illegal, excessive,
exorbitant, and unconscionable" and should be voided.28
The RTC Ruling
After trial, the RTC rendered its Decision29 upholding the validity
of the REM, PNs, and the foreclosure sale conducted. It pertinently
held:
WHEREFORE, above premises is hereby considered, the instant
complaint be dismissed for lack of merit. The counterclaim of
defendant Pabalan is likewise dismissed. No cost.
SO ORDERED.30
The RTC held that there was insufficient basis to nullify Sabnani's
REM and PNs and the terms of the agreements reduced into
writing must necessarily be given effect.31 It also denied his
contention that the service fees deducted were unauthorized and
illegal. It explained that this claim was negated by his signature
on a Receipt acknowledging that he received the entire amount of
the loan despite these deductions being reflected.32
It further rejected Sabnani's argument that the interest rates and
penalty charges imposed were illegal, excessive, and exorbitant.
It emphasized that the usury law was no longer in force and that
parties can freely impose interest rates as they may agree
upon.33
Dissatisfied, Sabnani filed a Motion for Reconsideration with
Motion to Re-open Case for Admission of Newly Discovered
Evidence.34 He reiterated that Pabalan made unauthorized
deductions from the principal loan which should have been
applied to the payment of interest charges. He also raised the
new argument that Pabalan is an American citizen who was not
allowed to engage in the business of extending loans without a
written certificate from the Board of Investments. Hence, due to
his legal incapacity, the loan agreement, REM, and PNs must be
declared null and void.35
The RTC issued an Order36 dated March 22, 2006 which denied
Sabnani's motion for reconsideration, but granted the motion for
new trial. However, after trial anew, it issued an Order37 dated
January 10, 2008 merely reinstating its previous Decision.38
Sabnani appealed the foregoing Order39 to the CA.40
Sabnani filed his Appellant's Brief41 essentially reiterating his
arguments that: (1) the service fees and other charges imposed
and deducted by Pabalan were undisclosed and invalid; (2) the
stipulated interest rates and penalty charges were
unconscionable, exorbitant, and illegal; and (3) Pabalan was an
American citizen who could not legally enter into any contract
pertaining to her financing business or extending loans or
credits.42
Pabalan filed her Appellee's Brief43 stressing that the parties are
allowed by law to enter into contracts that are not contrary to law,
public policy, morals, and custom. Sabnani freely and voluntarily
executed the REM and PNs with full knowledge of its terms and
conditions, and is therefore, contractually bound.44
The CA Ruling
The CA rendered its Decision45 affirming the validity of the loan,
REM, and PNs. However, it reduced the stipulated interest rates,
penalty charges, liquidated damages, and attorney's fees for
being iniquitous and unconscionable. The dispositive portion of
the assailed decision states:
WHEREFORE, judgment is hereby rendered AFFIRMING the trial
court's decision in Civil Case No. 99-1361 in:
A. Upholding the validity of the two (2) Promissory Notes
and the Deed of Real Estate Mortgage dated March 30,
1999 but with MODIFICATION insofar as:
1. the interest rate is reduced to 1 % per month or 12% per
annum;
2. the penalty is reduced to 1% per month or 12% per annum;
3. the liquidated damages is reduced to 10% of the amount due;
and
4. the attorney's fees is reduced to 10% of the amount due.
B. Upholding the validity of the extra-judicial foreclosure
sale of the Real Estate Mortgage conducted on August 3,
1999.
Defendant-Appellee Pabalan is likewise ORDERED to pay
[Sabnani], through the Clerk of Court, the excess of the bid
price with legal interest from August 3, 1999 until it is
paid, such amount representing the difference between the total
obligation of Plaintiff-Appellant [Sabnani], including the costs of
the sale and the purchase price paid by Defendant-Appellee
Pabalan, at the time of the foreclosure sale.
SO ORDERED.46 (Emphases in the original)
The CA denied Sabnani's argument that Pabalan had no legal
capacity to execute the loan agreement because she was an
American citizen. It ruled that there was no competent proof that
Pabalan was engaged in the business of extending loans and
credit in the Philippines to require a certificate from the Board of
Investments.47
It likewise rejected the claim that the REM and PNs should be
nullified on the ground of lack of consideration. It ruled that
obligations arising from contracts have the force of law between
the parties and must be complied with in good faith.48
Nevertheless, while the Deed of REM and PNs were upheld as
valid, the CA deemed it necessary to reduce the interest rates,
penalty charges, liquidated damages, and attorney's fees for
being unconscionable. It reduced the imposed monthly interest
rates of five percent (5%) and eight percent (8%), both to one
percent (1%); the penalty charge of twenty percent (20%) per
month to one percent (1%) per month; and the rates of liquidated
damages and attorney's fees of fifty percent (50%) and twenty
five percent (25%) of the amount due, respectively, to ten percent
(10%) each.49
The CA summarized its revised computation of the interests,
penalties, liquidated damages, and attorney's fees due as
follows:50
Based on the foregoing discussion, We take exception to
the Statement of Account submitted by Defendant-Appellee
[Pabalan] on the date of foreclosure insofar as the unconscionable
interests and other charges imposed on top of the principal
obligation quoted below:
Principal Loan [₱] 7,450,000.00
Accrued Interests & Penalties 4,470,000.00
(May 31, 1999 – July 31,
1999)
Liquidated Damages 5,960,000.00
Attorney's Fees 2,980,000.00
Filing Fee 40,700.00
[₱]
TOTAL
20,900,700.00
On the other hand, We believe that the following computation is
in order using the reduced rates of interests and penalties:
 Principal Loan [₱] 7,450,000.00
Accrued Interests & 447,000.00
Penalties
(May 31, 1999 – July 31,
1999)
Liquidated Damages 789,700.00
Attorney's Fees 789,700.00
Filing Fee 40,700.00
[₱]
TOTAL
9,517,100.0051
Consequently, it ruled that Pabalan's winning bid of
₱17,400,000.00 was in excess of the recomputed mortgage debt,
and ordered her to return the surplus to Sabnani.52
Pabalan filed a Motion for Partial Reconsideration53 insisting that
the rates of interest, penalties, liquidated damages, and
attorney's fees as stipulated by the parties should be upheld.
Further, the CA gravely erred in ordering her to return the
supposed surplus of the bid price to Sabnani.54
The CA issued its Resolution55 denying Pabalan's motion for lack
of merit.
Hence, the instant petition.
The Issues
Whether or not the CA erred: (1) in reducing the stipulated rates
of interest, penalty charges, liquidated damages, and attorney's
fees; and (2) in ordering Pabalan to return the surplus of her
winning bid price to Sabnani.
The Parties' Arguments
Pabalan in her Petition for Review on Certiorari and
Reply56 mainly argued that:
1. Sabnani is estopped from claiming that the interest rate
imposed is unconscionable. He cannot pretend to be victimized by
the rates he voluntarily agreed to, especially since he was a
businessman himself.57
2. Sabnani came to court with unclean hands. Firstly, he
deliberately refused to honor his obligation to Pabalan. Secondly,
he admitted the loan from Pabalan to re-lend the ₱6,000,000.00
to Claparols, who would then use it to invest in one of his
businesses. Claparols then issued a check to him for
₱8,282,000.00 payable a month later. He therefore claims that
five to eight percent (5% to 8%) monthly interest is
unconscionable when in fact, he charged Claparols forty-seven
(47%) interest for one month for the loan he extended him using
the same money.58
3. The stipulated contractual interest rate was not unconscionable
since this was only for a short-term period.59
4. By ordering the payment of the "excess bid" with an interest of
12% per annum from the date of the foreclosure sale on August 3,
1999, the CA "created the outrageous spectacle of [Pabalan]
losing not only the interest that she was supposed to have
earned, but also the principal amount that she had loaned to
[Sabnani]." This order shall result in Sabnani's unjust enrichment
at Pabalan's expense.60
In response, Sabnani in his Comment/Opposition61 maintained
that the court has the power to reduce unconscionable interest
rates when warranted. He also alleged that there was no proof
that he lent the money given to him by Pabalan to Claparols, and
that the former had no personality to question any such alleged
loan since she was not privy to it.62
The Ruling of this Court
After a judicious review, this Court resolves to grant the petition.
It is noted that Central Bank Circular No. 905 s. 198263 which
suspended the Usury Law has granted contracting parties wide
latitude to stipulate interest rates. However, the freedom to
contract is still not absolute. Article 130664 of the New Civil Code
governing the right to contract provides that agreements cannot
be contrary to law, morals, good customs, public order, or public
policy. In this regard, the Court has cautioned that lenders do not
have the "carte blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead to a
hemorrhaging of their assets."65 It thus has discretionary power
to intervene in certain cases and reduce stipulated interest rates
that are found to be unconscionable, iniquitous, and illegal.66
The determination of whether or not interest rates are
unconscionable or illegal depends on the circumstances of each
case. It was explained in Vitug v. Abuda67 (Vitug) that 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."68
The Court in Vitug elucidated that parties' freedom to stipulate is
granted under the assumption that there is a competitive market
for loans where the parties are on equal footing. It is only when
there are imperfections in the loan market resulting in the parties'
unequal bargaining positions that the court can step in to ensure
that the agreement is not iniquitous or unconscionable.69 Its
pertinent discussion is instructive:
The freedom to stipulate interest rates is granted under the
assumption that we have a perfectly competitive market for loans
where a borrower has many options from whom to borrow. It
assumes that parties are on equal footing during bargaining and
that neither of the parties has a relatively greater bargaining
power to command a higher or lower interest rate. It assumes
that the parties are equally in control of the interest rate and
equally have options to accept or deny the other party's
proposals. In other words, the freedom is granted based on the
premise that parties arrive at interest rates that they are willing
but are not compelled to take either by force of another person or
by force of circumstances.
However, the premise is not always true. There are imperfections
in the loan market. One party may have more bargaining power
than the other. A borrower may be in need of funds more than a
lender is in need of lending them. In that case, the lender has
more commanding power to set the price of borrowing than the
borrower has the freedom to negotiate for a lower interest rate.
Hence, there are instances when the state must step in to correct
market imperfections resulting from unequal bargaining positions
of the parties.
xxxx
In stipulating interest rates, parties must ensure that the rates are
neither iniquitous nor unconscionable. Iniquitous or
unconscionable interest rates are illegal and, therefore, void for
being against public morals. The lifting of the ceiling on interest
rates may not be read as "grant[ing] lenders carte
blanche [authority] to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their
assets."70 (Citations omitted)
Hence, although the Court has, in some cases, reduced stipulated
interest rates, there have also been instances when no
intervention was made in view of the peculiar factual
circumstances.
For instance, the Court in Development Bank of the Philippines v.
Family Foods Manufacturing Co., Ltd.71 upheld the stipulated
interest rates of twenty-two percent (22%) and eighteen percent
(18%), and additional penalty charge of eight percent (8%) per
annum. It appreciated the fact that these rates were voluntarily
agreed upon by the parties, and that neither of them was
defrauded or positioned at a disadvantage to warrant protection,
to wit:
Moreover, respondents' own evidence shows that they agreed on
the stipulated interest rates of 18% and 22%, and on the penalty
charge of 8%, in each promissory note. It is a basic principle in
civil law that parties are bound by the stipulations in the contracts
voluntarily entered into by them. Parties are free to stipulate
terms and conditions that they deem convenient, provided these
are not contrary to law, morals, good customs, public order, or
public policy.
There is nothing in the records, and in fact, there is no allegation,
showing that respondents were victims of fraud when they signed
the promissory notes. Neither is there a showing that in their
contractual relations with DBP, respondents were at a
disadvantage on account of their moral dependence, mental
weakness, tender age or other handicap, which would entitle
them to the vigilant protection of the courts as mandated by
Article 24 of the Civil Code.72 (Citation omitted)
Similarly, the interest rate of six to seven percent (6-7%) per
month, or seventy-two to eighty-four percent (72-84%) per
annum, imposed in Toledo v. Hyden73 was held not to be
excessive under the circumstances. It was observed that unlike in
other cases when intervention was necessary, the debtor in this
case was not compelled to enter into the loan transaction and
actually had good business reasons to voluntarily agree on the
stipulated interest rates. As proven, the debtor was found to be
making a business on the amount loaned. She thus, could no
longer deny the validity of the terms of the loan after enjoying its
benefits:
In this case, however, we cannot consider the disputed 6% to 7%
monthly interest rate to be iniquitous or unconscionable vis-à-
vis the principle laid down in Medel. Noteworthy is the fact that
in Medel, the defendant-spouses were never able to pay their
indebtedness from the very beginning and when their obligations
ballooned into a staggering sum, the creditors filed a collection
case against them. In this case, there was no urgency of the
need for money on the part of Jocelyn, the debtor, which
compelled her to enter into said loan transactions. She
used the money from the loans to make advance payments
for prospective clients of educational plans offered by her
employer. In this way, her sales production would
increase, thereby entitling her to 50 % rebate on her
sales. This is the reason why she did not mind the 6% to
7% monthly interest. Notably too, a business transaction of this
nature between Jocelyn and Marilou continued for more than five
years. Jocelyn religiously paid the agreed amount of interest until
she ordered for stop payment on some of the checks issued to
Marilou. The checks were in fact sufficiently funded when she
ordered the stop payment and then filed a case questioning the
imposition of a 6% to 7% interest rate for being allegedly
iniquitous or unconscionable and, hence, contrary to morals.
It was clearly shown that before Jocelyn availed of said loans, she
knew fully well that the same carried with it an interest
rate of 6% to 7% per month, yet she did not complain. In
fact, when she availed of said loans, an advance interest of 6% to
7% was already deducted from the loan amount, yet she never
uttered a word of protest.
After years of benefiting from the proceeds of the loans bearing
an interest rate of 6% to 7% per month and paying for the same,
Jocelyn cannot now go to court to have the said interest rate
annulled on the ground that it is excessive, iniquitous,
unconscionable, exorbitant, and absolutely revolting to the
conscience of man. "This is so because among the maxims of
equity are (1) he who seeks equity must do equity, and (2) he
who comes into equity must come with clean hands. The latter is
a frequently stated maxim which is also expressed in the principle
that he who has done inequity shall not have equity. It signifies
that a litigant may be denied relief by a court of equity on the
ground that his conduct has been inequitable, unfair and
dishonest, or fraudulent, or deceitful as to the controversy in
issue."
We are convinced that Jocelyn did not come to court for equitable
relief with equity or with clean hands. It is patently clear from the
above summary of the facts that the conduct of Jocelyn can by no
means be characterized as nobly fair, just, and reasonable. This
Court likewise notes certain acts of Jocelyn before filing the case
with the RTC. In September 1998, she requested Marilou not to
deposit her checks as she can cover the checks only the following
month. On the next month, Jocelyn again requested for another
extension of one month. It turned out that she was only sweet-
talking Marilou into believing that she had no money at that time.
But as testified by Serapio Romarate, an employee of the Bank of
Commerce where Jocelyn is one of their clients, there was an
available balance of ₱276,203.03 in the latter's account and yet
she ordered for the stop payments of the seven checks which can
actually be covered by the available funds in said account. She
then caught Marilou by surprise when she surreptitiously filed a
case for declaration of nullity of the document and for damages.
xxxx
More significantly, Jocelyn already availed herself of the benefits
of the "Acknowledgment of Debt," the validity of which she now
impugns. As aptly found by the RTC and the CA, Jocelyn was
making a business out of the loaned amounts. She was actually
using the money to make advance payments for her prospective
clients so that her sales production would increase. Accordingly,
she did not mind the 6% to 7% interest per month as she was
getting a 50% rebate on her sales.
Clearly, by her own acts, Jocelyn is estopped from impugning the
validity of the "Acknowledgment of Debt." "[A] party to a
contract cannot deny the validity thereof after enjoying its
benefits without outrage to one's sense of justice and
fairness." "It is a long established doctrine that the law does not
relieve a party from the effects of an unwise, foolish or disastrous
contract, entered into with all the required formalities and with
full awareness of what she was doing. Courts have no power to
relieve parties from obligations voluntarily assumed, simply
because their contracts turned out to be disastrous or unwise
investments."74 (Emphases and underscoring supplied; citations
omitted)
It was further noted in Prisma Construction & Development
Corporation v. Menchavez75 that stipulated interest rates and
charges shall be reduced only if these terms are open-ended and
applied for an indefinite period.76
Finally, the Court is mindful of its recent Resolution rendered en
banc ruling on the Motion for Reconsideration filed in Lara's Gifts
and Decors, Inc. v. Midtown Industrial Sales, Inc.77 (Lara's Gifts)
wherein it established the new and prevailing guidelines on
conventional and compensatory interest rates. It was recognized
in the ponencia of Senior Associate Justice Marvic M.V.F. Leonen
that the standard used in determining the conscionability of a
conventional interest rate is twice the legal rate of interest. If the
stipulated interest rate is higher than this standard, the creditor
has the burden to prove that this was necessary under market
conditions, or show that the parties stood on equal footing when
they agreed on it. It was pertinently pronounced:
Conformable to the foregoing pronouncements, "[t]he maximum
interest rate that will not cross the line of conscionability is 'not
more than twice the prevailing legal rate of interest.' If the
stipulated interest exceeds this standard, the creditor must
show that the rate is necessary under current market
conditions." The creditor must also show that the parties
were on an equal footing when they stipulated on the
interest rate.
Furthermore, where the monetary interest rate is found to be
unconscionable, only the rate is nullified and deemed not written
into the contract; the parties' agreement on the payment of
interest remains. In such instance, "the legal rate of interest
prevailing at the time the agreement was entered into" is applied
by the courts.78 (Emphasis and underscoring supplied, italics in
the original, citations omitted)
The rules in determining permissible compensatory interest rates
as laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals79 and Nacar v. Gallery Frames80 were likewise revised
in Lara's Gifts. The following new guidelines applicable to loans,
forbearances of money, goods or credit, were established, thus:
With regard to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the
accrual thereof: is imposed, as follows:
A. In obligations consisting of loans or forbearances of money,
goods or credit:
1. The compensatory interest due shall be that which is stipulated
by the parties in writing as the penalty or compensatory interest
rate, provided it is not unconscionable. In the absence of a
stipulated penalty or compensatory interest rate, the
compensatory interest due shall be that which is stipulated by the
parties in writing as the conventional interest rate, provided it is
not unconscionable. In the absence of a stipulated penalty or a
stipulated conventional interest rate, or if these rates are
unconscionable, the compensatory interest shall be the prevailing
legal interest rate prescribed by the Bangko Sentral ng Pilipinas.
Compensatory interest, in the absence of a stipulated reckoning
date, shall be computed from default, i.e., from extrajudicial or
judicial demand, until full payment.
2. Interest on conventional/monetary interest and stipulated
compensatory interest shall accrue at the stipulated interest rate
(compounded interest) from the stipulated reckoning point or, in
the absence thereof, from extrajudicial or judicial demand until
full payment, provided it is not unconscionable. In the absence of
a stipulated compounded interest rate or if this rate is
unconscionable, the prevailing legal interest rate prescribed by
the Bangko Sentral ng Pilipinas shall apply from the time of
judicial demand until full payment.81
Applying the foregoing to this case, We hold that the parties'
stipulated rates of interest, penalty charges, liquidated damages,
and attorney's fees were not iniquitous, unconscionable, or illegal
given their particular context. The CA erred in modifying the RTC
Decision and decreasing these rates.
It bears stressing that the new rules on conventional and
compensatory interest rates established in Lara's Gifts will not
apply here considering that Pabalan sufficiently discharged her
burden to prove that she and Sabnani were on equal footing when
they reached their agreement. No greater interest of justice or
equity would be served if the Court intervened.
The determination of whether or not the parties stood on equal
footing is necessarily done on a case-to-case basis after careful
consideration of relevant factors. For one, the Court shall examine
the parties' respective backgrounds and personal circumstances.
It must compare the parties to verify if one of them was possibly
disadvantaged due to moral dependence, mental weakness,
tender age, or other handicap, to warrant protection.82 This may
entail reviewing each parties' educational attainment,
employment or professional history, financial status, and other
relevant experiences. These factors, among others, will have
weight in evaluating whether both parties had the capacity to
fully understand and voluntarily consent to the agreement
entered into.
The history and relationship of the contracting parties could
likewise be significant. The Court can look into how they were
acquainted or if they had previously entered in similar or other
transactions. Does the agreement involve an isolated transaction
or was it part of a bigger series of agreements or a mere
continuation of past agreements?
The Court must review the context and facts surrounding the
transaction. It should consider all significant circumstances such
as if the contract was one of adhesion or one reached through fair
and arm's length negotiations. It should look into how the
agreement was reached. Did the parties have equal bargaining
power during the negotiation stage such that either of them had
the power to accept or deny the proposals of the other? Were the
terms and conditions of the agreement clearly communicated to
both parties? What were the reasons of each party for consenting
to the agreement?
It must also be wary of external factors that could have compelled
either party to enter into the agreement. There should have been
no undue pressure or exigent circumstances that affected the
voluntariness of the parties' decision-making process. The Court
must ultimately satisfy itself that an agreement was reached
which both parties were willing to freely accept and not because
they were compelled to do so by reason of force from another
person or force of circumstances.83
If the Court determines that the agreement was voluntarily
agreed upon by all parties who stood on equal footing, it must
refrain from intervening out of respect for their civil right to
contract. It must be remembered that what may ostensibly seem
iniquitous and unconscionable in one case, may be totally just
and equitable in another.84
This is also in adherence to the fundamental principle that
obligations arising from contracts have the force of law between
the parties and must be complied with in good faith.85 Moreover,
the "[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."86
In this case, the established facts show that Pabalan and Sabnani
stood on equal footing when they finalized the loan and executed
the REM and PNs.
Firstly, it is clear from both parties' personal circumstances that
neither of them was positioned at a disadvantage and required
protection from the court. They were both competent and fully
capable of understanding all the terms and conditions under the
REM and PNs.
Pabalan was a businesswoman based in Manila.87 Similarly,
Sabnani was a British businessman who frequented the
Philippines looking for investment opportunities and even had
several projects here worth millions of pesos.88 He admitted that
Claparols was one of his business partners intending to invest
₱6,000,000.00 in one of his projects.89 He likewise owned a
prime condominium unit in Makati City worth over sixteen million
pesos.1aшphi1
Being an experienced businessman, Sabnani's claim that he was
not fully aware of the terms of the REM and PNs, becomes highly
doubtful. There is also a presumption that a person takes ordinary
care of his/her concerns and would not sign any document
without knowing its contents and consequences.90 The CA
therefore aptly denied his "persistent plea for sympathy that he
was taken advantage of, as a foreigner with limited knowledge of
the laws."91
Secondly, the factual context and background of the parties'
transaction showed that neither Sabnani nor Pabalan was
compelled to enter into it. There was no proof that Sabnani was
under any external or undue pressure to obtain the loan from
Pabalan and execute the REM and PNs in her favor. He did not do
it out of dire necessity, nor was he under any financial distress.
The money loaned was not necessary for his subsistence or to
meet urgent contingencies.
On the contrary, he admitted that it was actually him and
Claparols who first approached Pabalan to ask for the loan. No
one forced him to take out the loan from Pabalan. There was
clearly a free and competitive market for loans available. He could
have easily declined the terms under the REM and PNs and
obtained a loan from somebody else. However, he did not do so
and voluntarily agreed to these.
Thirdly, Sabnani voluntarily agreed to the terms of the loan since
he had legitimate business reasons and benefitted from it. In
reality, he made business on the amount loaned. The loan was
part of a bigger series of transactions which he considered in total
beneficial for him to expand his business. He repeatedly alleged
that he obtained the loan to accommodate Claparols who would
then utilize the proceeds to invest in one of his projects. He did
Claparols a favor by agreeing to the loan and mortgage so that he
could get the investment money sooner while waiting for the
latter's money to be released from New York. He therefore agreed
to the loan terms because if everything worked out smoothly
according to his plan, Claparols would have been the one to pay
off the loan from Pabalan, and he would have received a clean
₱6,000,000.00 from him as an investment.
Fourthly, Sabnani's contemporaneous actions during the
execution of the loan proved that he had full knowledge of all its
terms and conditions when he gave his consent to be bound. He
was an experienced businessman who took deliberate and
strategic measures to address his liability exposure after he knew
and understood the consequences of the rates of interest and
penalties imposed. He agreed to execute the loan not because he
wasn't aware of its provisions, but because he had already
determined the risks involved and believed that he had sufficient
measures to shield him from liability.
He repeatedly emphasized that before agreeing to the loan, he
demanded Claparols to issue in his favor two BPI checks as
securities to protect him from any liabilities that could arise from
the transaction. He pertinently alleged under oath in his Amended
Complaint:92
9. However, plaintiff [Sabnani] wanted to have some form of
assurance that the money will be returned to the lender [Pabalan]
after a few weeks and that his property would not be exposed to
the risk of being acquired by the creditor for a longer period than
is necessary.
10. By way of inducing plaintiff to agree to his scheme,
CLAPAROLS offered to issue his personal checks to plaintiff in such
amounts as may be necessary to cover the loan and to
compensate plaintiff in case the latter (sic) is deprived of
his property as a consequence of the foreclosure of the
real estate mortgage. Thus, CLAPAROLS issued and
delivered to plaintiff two BPI checks for [ ₱]8,282,000.00
and [₱]21,718,000.00.
Photocopies of BPI Check No. 1271400 dated May 28, 1999 for
[₱]8,282,000.00 and BPI Check No. 12271399 dated July 27, 1999
for [₱]21,718,000.00 are hereto attached and marked as Annexes
"B" and "C".93 (Emphasis and underscoring supplied)
The first BPI check was for ₱8,282,000.00 to secure full payment
of the loan. This amount is equal to the principal loan, plus all
interest payments due, minus the ₱416,000.00 deducted upfront.
His demand for this specific security proved that he knew the
interest rates imposed and still agreed to it. He merely made a
mistake in thinking that he was sufficiently secured from any
liability.
Sabnani also demanded for another BPI check for ₱21,718,000.00
which would allegedly cover the value of his mortgaged property
in the event that it would be foreclosed. This was notably much
higher than his own declared value of ₱16,500,000.00 for his
condominium unit.94 The BPI check was therefore a conservative
security after considering the effects of the loan terms and was
more than sufficient to cover the legal extent of his liability which
would be the winning bid price at the foreclosure sale. This also
enabled him to redeem his condominium unit if he chose to and
even gain a profit from it.
Hence, it is evident that Sabnani knew and understood all the
stipulated terms under REM and PNs. He agreed to these terms as
a calculated business risk after receiving what he believed were
sufficient securities to protect him from liability. He knew exactly
what he was getting into and executed the REM and PNs freely
and voluntarily.
Fifthly, Sabnani benefitted from the loan and can no longer be
permitted to assail its validity. He consistently asserted that the
loan proceeds would be used as an investment in one of his
projects in the Philippines.95 It is a general principle in equity that
a party who has validly executed a contract and availed of its
benefits cannot escape their contractual obligations by seeking to
invalidate it.96
Finally, it is significant that the loan in this case was only a short-
term undertaking. Sabnani himself explained that it was merely
intended to be an accommodation for Claparols while the latter
waited for the release of his money from New York.97 The
remittance was expected in a few weeks after which he would
then immediately pay off the loan from Pabalan. The nature of the
loan in this case being short-term and not open-ended or applied
for an indefinite period of time should have been considered in
evaluating the validity and conscionability of the stipulated
interest and penalty rates.98
All told, no intervention from this Court is necessary in this case in
view of its peculiar circumstances. It has been established that
the stipulated rates of interest, penalty charges, liquidated
damages, and attorney's fees were freely and voluntarily agreed
upon by the parties without any indicia of fraud or coercion.
Hence, absent any compelling reasons in the interest of equity or
justice, this Court will not interfere with the parties' freedom to
contract.
Sabnani is bound by all the terms and conditions of the loan, REM,
and PNs. The obligations under these contracts have the force of
law which he must comply with in good faith.99
The stipulated rates of interest, penalty charges, liquidated
damages, and attorney's fees in the REM and PNs were therefore
legal in this case. The ruling of the CA to reduce these rates is
reversed, and the parties are ordered bound to comply with their
express written agreement.
Considering that the stipulated rates were legal, Pabalan's
winning bid at the foreclosure sale was proper. The RTC finding
that her total bid amount correctly applied the imposed rates is
affirmed.100 Necessarily, there is no surplus between Pabalan's
winning bid amount at the foreclosure sale and the mortgage
debt. The order of the CA requiring her to return such surplus is
reversed and set aside.
WHEREFORE, the instant Petition for Review
on Certiorari is GRANTED. The Decision dated November 28,
2012 and the Resolution dated February 12, 2014 of the Court of
Appeals in CA-G.R. CV No. 91169 are REVERSED and SET ASIDE.
The ruling of the Court of Appeals decreasing the interest and
penalty rates, and other damages stipulated between the parties,
as well as its order for petitioner Estrella Pabalan to pay Vasudave
Sabnani the excess of the bid price, with legal interest, and costs
of the sale, are DELETED. The Decision dated March 28, 2005 of
the Regional Trial Court of Makati City, Branch 59, in Civil Case No.
99-1361, is REINSTATED.
SO ORDERED.
Gesmundo, C.J., Leonen, SAJ., Hernando, Lazaro-Javier, Inting,
Zalameda, M. Lopez, Rosario, J. Lopez, Dimaampao, Marquez, Kho,
Jr., and Singh, JJ., concur.
Caguioa, J., see concurring opinion.