STATE INVESTMENT HOUSE INC. vs COURT OF APPEALS, G.R. No.

112590, July
12, 2001
Likewise, in the case at bar, the two courts below found the penalty charge of 3% a
month or 36% per annum inquitious and unconscionable. Petitioner computed the
amount of P4,809,187.12, as the outstanding obligation of the petitioner as of
September 21, 1981 after imposing the 3% penalty charge when petitioner defaulted in
their payments. This amount was no longer questioned and was particularly taken into
consideration when the mortgaged properties were foreclosed and sold at the auction
sale in 1983, obtaining a sum of about P4,223,874.00. These foreclosed properties
located in Makati8 are undoubtedly valuable properties whose market value has greatly
appreciated to substantially satisfy the payment of the outstanding obligation.
Notwithstanding the balance of P575,313.12, petitioner has clearly recouped its
investment and earned more than enough profit in two years (1978-1981) by way of
penalty charges. Although petitioner claims that the penalty charge was well within the
banking and business practice, no proof was adduced thereof. To allow the petitioner to
recover the amount of P6,835,021.21 at the time of the foreclosure sale in 1983, or
P7,651,969.41 at the time of the trial of the case in 1988 which amounts are almost
three times more than the original investment of about P2,558.073.75 is rather
unwarranted. We quote with favor the respondent court's ratiocination:

The lower court did not err in its ruling under its statement that "since plaintiff had
already recovered fully the receivables from the defendants, the court, considering that
the plaintiff or the two properties foreclosed by it bidded the amount of P4,233,874.00,
far and above the amount it had originally given to the defendants which was only over
P2,000,000.00, it is rather most shocking and unconscionable for plaintiff to still collect
from the defendants the alleged collectibles of P2,601,147.62 with 3% penalty charges.
The plaintiff should have stopped imposing the 3% penalty charges and other burdens
when it had consolidated finally the two titles of the properties it had foreclosed"
(Decision, p.. After due consideration and reflection on all the factual circumstances
obtaining in the case at bar, it is Our opinion that the lower court properly exercised its
discretion under Article 1229 of the Civil Code to reduce the penalty charges for being
highly and grossly unconscionable. x x x9

While the Court recognizes the right of the parties to enter into contracts and are
expected to comply with the terms and obligations, this rule is not absolute. The Court
allowed to temper interest rates when necessary. Article 1229 of tile New Civil Code
clearly provides:

ART. 1229. 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.

Likewise, Article 2227 provides:

ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be

equitably reduced if they are iniquitous and unconscionable.
In the case of Rizal Commercial Banking Corporation vs. Court of Appeals,7 we held
that: x x x On the issue of payment of surcharges and penalties, we party agree that
GOYU's pitiful situation must be taken into account. We do not agree, however, that
payment of any amount as surcharges and penalties should altogether be deleted. x x x
Surcharges and penalties agreed to be paid by the debtor in case of default partake of
the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the
Civil Code. Article 2227 thereof provides: ART. 2227. Liquidated damages, whether
intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous
and unconscionable. In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case. It should be
stressed that the Court will not make any sweeping ruling that surcharges and penalties
imposed by banks for non-payment of the loans extended by them are generally
iniquitous and unconscionable. What may be iniquitous and unconscionable in one
case, may be totally just and equitable in another. This provision of law will have to be
applied to the established facts of any given case. Given the circumstances under which
GOYU found itself after the occurrence of the fire, the Court, rules the surcharges rates
ranging, anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely
inquitious and unconscionable. x x x

G.R. No. 168940 November 24, 2009

SPS. ISAGANI CASTRO and DIOSDADA CASTRO,

vs.
ANGELINA DE LEON TAN, SPS. CONCEPCION T. CLEMENTE and ALEXANDER C.
CLEMENTE, SPS. ELIZABETH T. CARPIO and ALVIN CARPIO, SPS. MARIE ROSE
T. SOLIMAN and ARVIN SOLIMAN and JULIUS AMIEL TAN, Respondents.

While we agree with petitioners that parties to a loan agreement have wide latitude to
stipulate on any interest rate in view of the Central Bank Circular No. 905 s. 1982 which
suspended the Usury Law ceiling on interest effective January 1, 1983, it is also worth
stressing that interest rates whenever unconscionable may still be declared illegal.
There is certainly nothing in said circular which grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.17

In several cases, we have ruled that stipulations authorizing iniquitous or

unconscionable interests are contrary to morals, if not against the law. In Medel v. Court
of Appeals,18 we annulled a stipulated 5.5% per month or 66% per annum interest on a
₱500,000.00 loan and a 6% per month or 72% per annum interest on a ₱60,000.00
loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In
Ruiz v. Court of Appeals,19 we declared a 3% monthly interest imposed on four separate
loans to be excessive. In both cases, the interest rates were reduced to 12% per
annum.

In this case, the 5% monthly interest rate, or 60% per annum, compounded monthly,
stipulated in the Kasulatan is even higher than the 3% monthly interest rate imposed in
the Ruiz case. Thus, we similarly hold the 5% monthly interest to be excessive,
iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is therefore
void ab initio for being violative of Article 130620 of the Civil Code. With this, and in
accord with the Medel and Ruiz cases, we hold that the Court of Appeals correctly
imposed the legal interest of 12% per annum in place of the excessive interest
stipulated in the Kasulatan.
G.R. No. 168940 November 24, 2009

SPS. ISAGANI CASTRO and DIOSDADA CASTRO,

vs.
ANGELINA DE LEON TAN, SPS. CONCEPCION T. CLEMENTE and ALEXANDER C.
CLEMENTE, SPS. ELIZABETH T. CARPIO and ALVIN CARPIO, SPS. MARIE ROSE
T. SOLIMAN and ARVIN SOLIMAN and JULIUS AMIEL TAN, Respondents.

The additional 1% per month penalty awarded as liquidated damages does not have
any legal basis.

In its June 11, 2002 Decision,28 the trial court granted an additional 1% per month
penalty as liquidated damages29beginning February 17, 1994 up to June 21,
2000.30 Since respondents did not file their appellees’ brief despite notice, the appellate
court declared this to be not in issue.31

Although the issue of the liquidated damages was not presented squarely in either
Memorandum of the parties, this does not prevent us from ruling on the matter. In the
exercise of our appellate jurisdiction, we are clothed with ample authority to review
findings and rulings of lower courts even if they are not assigned as errors. This is
especially so if we find that their consideration is necessary in arriving at a just decision
of the case. We have consistently held that an unassigned error closely related to an
error properly assigned, or upon which a determination of the question raised by the
error properly assigned is dependent, will be considered notwithstanding the failure to
assign it as an error.32 On this premise, we deem it proper to pass upon the matter of
liquidated damages.

Article 2226 of the Civil Code provides that "[L]iquidated damages are those agreed
upon by the parties to a contract, to be paid in case of breach thereof."

In the instant case, a cursory reading of the Kasulatan would show that it is devoid of
any stipulation with respect to liquidated damages. Neither did any of the parties allege
or prove the existence of any agreement on liquidated damages. Hence, for want of any
stipulation on liquidated damages in the Kasulatan entered into by the parties, we hold
that the liquidated damages awarded by the trial court and affirmed by the Court of
Appeals to be without legal basis and must be deleted.