SECOND DIVISION

[G.R. No. 183360. September 8, 2014.]

ROLANDO C. DE LA PAZ , * petitioner, vs . L & J DEVELOPMENT

COMPANY , respondent.

DECISION

DEL CASTILLO , J : p

"No interest shall be due unless it has been expressly stipulated in writing." 1
This is a Petition for Review on Certiorari 2 assailing the February 27, 2008 Decision
3 of the Court of Appeals (CA) in CA-G.R. SP No. 100094, which reversed and set aside the
Decision 4 dated April 19, 2007 of the Regional Trial Court (RTC), Branch 192, Marikina City
in Civil Case No. 06-1145-MK. The said RTC Decision a rmed in all respects the Decision 5
dated June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75, Marikina City in
Civil Case No. 05-7755, which ordered respondent L & J Development Company (L&J) to
pay petitioner Architect Rolando C. De La Paz (Rolando) its principal obligation of
P350,000.00, plus 12% interest per annum reckoned from the ling of the Complaint until
full payment of the obligation.
Likewise assailed is the CA's June 6, 2008 Resolution 6 which denied Rolando's
Motion for Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent P350,000.00 without any security to L&J, a
property developer with Atty. Esteban Salonga (Atty. Salonga) as its President and General
Manager. The loan, with no speci ed maturity date, carried a 6% monthly interest, i.e.,
P21,000.00. From December 2000 to August 2003, L&J paid Rolando a total of
P576,000.00 7 representing interest charges. AHDaET

As L&J failed to pay despite repeated demands, Rolando led a Complaint 8 for
Collection of Sum of Money with Damages against L&J and Atty. Salonga in his personal
capacity before the MeTC, docketed as Civil Case No. 05-7755. Rolando alleged, among
others, that L&J's debt as of January 2005, inclusive of the monthly interest, stood at
P772,000.00; that the 6% monthly interest was upon Atty. Salonga's suggestion; and, that
the latter tricked him into parting with his money without the loan transaction being
reduced into writing.
In their Answer, 9 L&J and Atty. Salonga denied Rolando's allegations. While they
acknowledged the loan as a corporate debt, they claimed that the failure to pay the same
was due to a fortuitous event, that is, the nancial di culties brought about by the
economic crisis. They further argued that Rolando cannot enforce the 6% monthly interest
for being unconscionable and shocking to the morals. Hence, the payments already made
should be applied to the P350,000.00 principal loan.
During trial, Rolando testi ed that he had no communication with Atty. Salonga prior
to the loan transaction but knew him as a lawyer, a son of a former Senator, and the owner
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 of L&J which developed Brentwood Subdivision in Antipolo where his associate Nilo
Velasco (Nilo) lives. When Nilo told him that Atty. Salonga and L&J needed money to nish
their projects, he agreed to lend them money. He personally met with Atty. Salonga and
their meeting was cordial.
He narrated that when L&J was in the process of borrowing the P350,000.00 from
him, it was Arlene San Juan (Arlene), the secretary/treasurer of L&J, who negotiated the
terms and conditions thereof. She said that the money was to nance L&J's housing
project. Rolando claimed that it was not he who demanded for the 6% monthly interest. It
was L&J and Atty. Salonga, through Arlene, who insisted on paying the said interest as they
asserted that the loan was only a short-term one. ESCcaT

Ruling of the Metropolitan Trial Court

The MeTC, in its Decision 10 of June 30, 2006, upheld the 6% monthly interest. In so
ruling, it ratiocinated that since L&J agreed thereto and voluntarily paid the interest at such
rate from 2000 to 2003, it is already estopped from impugning the same. Nonetheless, for
reasons of equity, the said court reduced the interest rate to 12% per annum on the
remaining principal obligation of P350,000.00. With regard to Rolando's prayer for moral
damages, the MeTC denied the same as it found no malice or bad faith on the part of L&J
in not paying the obligation. It likewise relieved Atty. Salonga of any liability as it found that
he merely acted in his o cial capacity in obtaining the loan. The MeTC disposed of the
case as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of
the plaintiff, Arch. Rolando C. Dela Paz, and against the defendant, L & J
Development Co., Inc., as follows:

a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the
amount of Three Hundred Fifty Thousand Pesos (P350,000.00) representing the
principal obligation, plus interest at the legal rate of 12% per annum to be
computed from January 20, 2005, the date of the ling of the complaint, until the
whole obligation is fully paid;

b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the
amount of Five Thousand Pesos (P5,000.00) as and for attorney's fees; and

c) to pay the costs of this suit.

SO ORDERED. 11

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal memorandum 12 that from
December 2000 to March 2003, it paid monthly interest of P21,000.00 based on the
agreed-upon interest rate of 6% monthly and from April 2003 to August 2003, interest
payments in various amounts. 13 The total of interest payments made amounts to
P576,000.00 — an amount which is even more than the principal obligation of
P350,000.00.
L&J insisted that the 6% monthly interest rate is unconscionable and immoral.
Hence, the 12% per annum legal interest should have been applied from the time of the
constitution of the obligation. At 12% per annum interest rate, it asserted that the amount
of interest it ought to pay from December 2000 to March 2003 and from April 2003 to
August 2003, only amounts to P105,000.00. If this amount is deducted from the total
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 interest payments already made, which is P576,000.00, the amount of P471,000.00
appears to have been paid over and above what is due. Applying the rule on compensation,
the principal loan of P350,000.00 should be set-off against the P471,000.00, resulting in
the complete payment of the principal loan.
Unconvinced, the RTC, in its April 19, 2007 Decision, 14 a rmed the MeTC Decision,
viz.: TEcAHI

WHEREFORE, premises considered, the Decision appealed from is hereby

AFFIRMED in all respects, with costs against the appellant.

SO ORDERED. 15

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its arguments and proposed
computation as proffered before the RTC.
In a Decision 16 dated February 27, 2008, the CA reversed and set aside the RTC
Decision.
The CA stressed that the parties failed to stipulate in writing the imposition of
interest on the loan. Hence, no interest shall be due thereon pursuant to Article 1956 of the
Civil Code. 17 And even if payment of interest has been stipulated in writing, the 6%
monthly interest is still outrightly illegal and unconscionable because it is contrary to
morals, if not against the law. Being void, this cannot be rati ed and may be set up by the
debtor as defense. For these reasons, Rolando cannot collect any interest even if L&J
offered to pay interest. Consequently, he has to return all the interest payments of
P576,000.00 to L&J.
Considering further that Rolando and L&J thereby became creditor and debtor of
each other, the CA applied the principle of legal compensation under Article 1279 of the
Civil Code. 18 Accordingly, it set off the principal loan of P350,000.00 against the
P576,000.00 total interest payments made, leaving an excess of P226,000.00, which the
CA ordered Rolando to pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET
ASIDE.

CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is

ordered to pay to the petitioner the amount of P226,000.00, plus interest of 12%
per annum from the finality of this decision.
Costs of suit to be paid by respondent Dela Paz.

SO ORDERED. 19

In his Motion for Reconsideration, 20 Rolando argued that the circumstances exempt
both the application of Article 1956 and of jurisprudence holding that a 6% monthly
interest is unconscionable, unreasonable, and exorbitant. He alleged that Atty. Salonga, a
lawyer, should have taken it upon himself to have the loan and the stipulated rate of
interest documented but, by way of legal maneuver, Atty. Salonga, whom he fully trusted
and relied upon, tricked him into believing that the undocumented and uncollateralized loan
was within legal bounds. Had Atty. Salonga told him that the stipulated interest should be
in writing, he would have readily assented. ESIcaC

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 Furthermore, Rolando insisted that the 6% monthly interest rate could not be
unconscionable as in the rst place, the interest was not imposed by the creditor but was
in fact offered by the borrower, who also dictated all the terms of the loan. He stressed
that in cases where interest rates were declared unconscionable, those meant to be
protected by such declaration are helpless borrowers which is not the case here.
Still, the CA denied Rolando's motion in its Resolution 21 of June 6, 2008.
Hence, this Petition.
The Parties' Arguments
Rolando argues that the 6% monthly interest rate should not have been invalidated
because Atty. Salonga took advantage of his legal knowledge to hoodwink him into
believing that no document was necessary to re ect the interest rate. Moreover, the cases
anent unconscionable interest rates that the CA relied upon involve lenders who imposed
the excessive rates, which are totally different from the case at bench where it is the
borrower who decided on the high interest rate. This case does not fall under a scenario
that 'enslaves the borrower or that leads to the hemorrhaging of his assets' that the courts
seek to prevent.
L&J, in controverting Rolando's arguments, contends that the interest rate is subject
of negotiation and is agreed upon by both parties, not by the borrower alone. Furthermore,
jurisprudence has nulli ed interest rates on loans of 3% per month and higher as these
rates are contrary to morals and public interest. And while Rolando raises bad faith on
Atty. Salonga's part, L&J avers that such issue is a question of fact, a matter that cannot be
raised under Rule 45.
Issue
The Court's determination of whether to uphold the judgment of the CA that the
principal loan is deemed paid is dependent on the validity of the monthly interest rate
imposed. And in determining such validity, the Court must necessarily delve into matters
regarding a) the form of the agreement of interest under the law and b) the alleged
unconscionability of the interest rate.
Our Ruling
The Petition is devoid of merit. EcICSA

The lack of a written stipulation to pay

interest on the loaned amount disallows
a creditor from charging monetary
interest.
Under Article 1956 of the Civil Code, no interest shall be due unless it has been
expressly stipulated in writing. Jurisprudence on the matter also holds that for interest to
be due and payable, two conditions must concur: a) express stipulation for the payment of
interest; and b) the agreement to pay interest is reduced in writing.
Here, it is undisputed that the parties did not put down in writing their agreement.
Thus, no interest is due. The collection of interest without any stipulation in writing is
prohibited by law. 22
But Rolando asserts that his situation deserves an exception to the application of
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 Article 1956. He blames Atty. Salonga for the lack of a written document, claiming that
said lawyer used his legal knowledge to dupe him. Rolando thus imputes bad faith on the
part of L&J and Atty. Salonga. The Court, however, nds no deception on the part of L&J
and Atty. Salonga. For one, despite the lack of a document stipulating the payment of
interest, L&J nevertheless devotedly paid interests on the loan. It only stopped when it
suffered from nancial di culties that prevented it from continuously paying the 6%
monthly rate. For another, regardless of Atty. Salonga's profession, Rolando who is an
architect and an educated man himself could have been a more reasonably prudent person
under the circumstances. To top it all, he admitted that he had no prior communication
with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he immediately
trusted him and lent his company P350,000.00, a signi cant amount. Moreover, as the
creditor, he could have requested or required that all the terms and conditions of the loan
agreement, which include the payment of interest, be put down in writing to ensure that he
and L&J are on the same page. Rolando had a choice of not acceding and to insist that
their contract be put in written form as this will favor and safeguard him as a lender.
Unfortunately, he did not. It must be stressed 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." 23 AcDHCS

It may be raised that L&J is estopped from questioning the interest rate considering
that it has been paying Rolando interest at such rate for more than two and a half years. In
fact, in its pleadings before the MeTC and the RTC, L&J merely prayed for the reduction of
interest from 6% monthly to 1% monthly or 12% per annum. However, in Ching v. Nicdao, 24
the daily payments of the debtor to the lender were considered as payment of the principal
amount of the loan because Article 1956 was not complied with. This was notwithstanding
the debtor's admission that the payments made were for the interests due. The Court
categorically stated therein that "[e]stoppel cannot give validity to an act that is prohibited
by law or one that is against public policy."
Even if the payment of interest has been
reduced in writing, a 6% monthly
interest rate on a loan is unconscionable,
regardless of who between the parties
proposed the rate.
Indeed at present, usury has been legally non-existent in view of the suspension of
the Usury Law 25 by Central Bank Circular No. 905 s. 1982. 26 Even so, not all interest rates
levied upon loans are permitted by the courts as they have the power to equitably reduce
unreasonable interest rates. In Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction Corporation, 27 we said:
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. . . . 28

Time and again, it has been ruled in a plethora of cases that stipulated interest rates
of 3% per month and higher, are excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against the law. 29 The Court,
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 however, stresses that these rates shall be invalidated and shall be reduced only in cases
where the terms of the loans are open-ended, and where the interest rates are applied for
an inde nite period. Hence, the imposition of a speci c sum of P40,000.00 a month for six
months on a P1,000,000.00 loan is not considered unconscionable. 30 In the case at
bench, there is no speci ed period as to the payment of the loan. Hence, levying 6%
monthly or 72% interest per annum is "definitely outrageous and inordinate." 31
The situation that it was the debtor who insisted on the interest rate will not exempt
Rolando from a ruling that the rate is void. As this Court cited in Asian Cathay Finance and
Leasing Corporation v. Gravador , 32 "[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." 33 Indeed, "voluntariness does not make the stipulation on
[an unconscionable] interest valid." 34 ISCaDH

As exhaustibly discussed, no monetary interest is due Rolando pursuant to Article

1956. The CA thus correctly adjudged that the excess interest payments made by L&J
should be applied to its principal loan. As computed by the CA, Rolando is bound to return
the excess payment of P226,000.00 to L&J following the principle of solutio indebiti. 35
However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on
July 1, 2013, 36 the interest imposed by the CA must be accordingly modi ed. The
P226,000.00 which Rolando is ordered to pay L&J shall earn an interest of 6% per annum
from the finality of this Decision.
WHEREFORE , the Decision dated February 27, 2008 of the Court of Appeals in CA-
G.R. SP No. 100094 is hereby AFFIRMED with modi cation that petitioner Rolando C.
De La Paz is ordered to pay respondent L&J Development Company the amount of
P226,000.00, plus interest of 6% per annum from the nality of this Decision until fully
paid.
SO ORDERED .
Carpio, ** Acting C.J., Brion, Villarama, Jr. *** and Leonen, JJ., concur.

Footnotes

* Also spelled as "Dela Paz" in some parts of the records.

** Per Special Order No. 1770 dated August 28, 2014.
*** Per Special Order No. 1767 dated August 27, 2014.
1. CIVIL CODE, Article 1956.
2. Rollo, pp. 10-18.

3. CA rollo, pp. 82-89; penned by Associate Justice Lucas P. Bersamin (now a member of this
Court) and concurred in by Associate Justices Portia Aliño Hormachuelos and Estela M.
Perlas-Bernabe (now also a member of this Court).
4. Id. at 13-26; penned by Judge Geraldine C. Fiel-Macaraig.

5. Id. at 39-43; penned by Judge Alex E. Ruiz.

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 6. Id. at 106.

7. Id. at 45-46. A total of 30 payments, L & J paid the following:

Date Check No. Amount

12/27/2000 SB 302190 P21,000.00

1/29/2001 MBTC 435175 21,000.00
3/01/2001 SB 302232 21,000.00
4/30/2001 SB 302296 21,000.00
5/29/2001 SB 302341 21,000.00
6/30/2001 SB 302369 21,000.00
7/30/2001 MBTC 3160280305 21,000.00
8/29/2001 MBTC 3160280332 21,000.00
9/27/2001 MBTC 3160280349 21,000.00
10/29/2001 MBTC 3160280387 21,000.00
11/29/2001 MBTC 3160280421 21,000.00
12/18/2001 MBTC 3160280430 21,000.00
1/29/2002 MBTC 3160280474 21,000.00
2/28/2002 MBTC 3160280501 21,000.00
3/25/2002 MBTC 3160280517 21,000.00
4/29/2002 MBTC 3160284552 21,000.00
5/31/2002 MBTC 3160280588 21,000.00
7/02/2002 MBTC 3160280600 21,000.00
8/06/2002 MBTC 3160280627 21,000.00
8/29/2002 MBTC 3160280648 21,000.00
10/02/2002 MBTC 3160280666 21,000.00
11/12/2002 MBTC 3160280683 21,000.00
1/06/03 21,000.00
1/31/03 21,000.00
3/06/2003 ATB 435323 21,000.00
4/15/2003 16,000.00
5/14/2003 5,000.00
7/04/2003 MBTC 435345 5,000.00
8/04/2003 10,000.00
8/14/2003 15,000.00
–––––––––––
Total P576,000.00
==========

8. Id. at 28-34.
9. Id. at 35-38.
10. Id. at 39-43.

11. Id. at 43.

12. Id. at 44-53.
13. See note 7.
14. CA rollo, pp. 18-26.
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 15. Id. at 26.
16. Id. at 82-89.

17. Article 1956. No interest shall be due unless it has been expressly stipulated in writing.
18. Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
19. CA rollo, p. 88.
20. Id. at 93-99.

21. Id. at 106.

22. Siga-an v. Villanueva, 596 Phil. 760, 769 (2009).
23. Vales v. Villa, 35 Phil. 769, 788 (1916).
24. G.R. No. 141181, April 27, 2007, 522 SCRA 316, 361.

25. ACT NO. 2655 as amended by Presidential Decree 116.

26. Section 1 states: The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods, or credits, regardless of maturity
and whether secured or unsecured, that may be charged or collected by any person,
whether natural or juridical, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
27. 523 Phil. 360 (2006).
28. Id. at 366.
29. Macalinao v. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009, 600
SCRA 67, 77, citing Chua v. Timan, G.R. No. 170452, August 13, 2008, 562 SCRA 146,
149-150.
30. Prisma Construction & Development Corporation v. Menchavez, G.R. No. 160545, March 9,
2010, 614 SCRA 590, 599.
31. Spouses Solangon v. Salazar, 412 Phil. 816, 823 (2001).
32. G.R. No. 186550, July 5, 2010, 623 SCRA 517.
33. Id. at 524.

34. Menchavez v. Bermudez, G.R. No. 185368, October 11, 2012, 684 SCRA 168, 178.
35. CIVIL CODE, Article 2154. If something is received when there is no right to demand it, and it
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 was unduly delivered through mistake, the obligation to return it arises.
36. Issued on June 21, 2013; It provides that 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 six percent (6%) per annum.

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