G.R. No.

183360 September 8, 2014

ROLANDO C. DE LA PAZ, * Petitioner, vs. L & J DEVELOPMENT COMPANY, Respondent.
DEL CASTILLO, J.:

FACTS: Out of trust and confidence, Rolando dela Paz lent a sum of money worth Php 350,000
to L & J Development Corporation, a property developer represented by Atty. Esteban
Salonga as its president and general manager.

The loan was executed without any security and no maturity date. It was however
agreed between the parties that the loan will have a 6% monthly interest (amounting to
Php 21,000). So far, L&J paid a total of Php 576,000 already – including interest charges
from December 2000 to August 2003.

L&J later failed to make payments due to financial difficulties in the business. Rolando
then filed a collection case with the MTC and alleged as of January 2005, L&J still owes
him Php 772,000 inclusive of monthly interests.

L&J (represented by Atty. Salonga) did not deny that they did incurred a debt from
Rolando, and admitted that they failed to pay due to a fortuitous event (financial
difficulties). They also contended that the 6% monthly interest is unconscionable and
that their total payment of Php 576,000 should be applied to the principal loan which
only amounts to Php 350,000.

Rolando also contends that Atty. Salonga tricked him to execute the said loan plus
interest without reducing the agreement in writing. He also said that the 6% interest
rate was at the suggestion and insistence of L&J.

The MTC rendered judgment in favor of Rolando and upheld the 6% interest rate as
valid since L&J complied to it as evidenced by the payment they made from December
2000 to August 2003. L&J is now estopped to impugn said interest rate.

The MTC also reduced the legal interest rate to 12% per annum on the remaining loan
for reasons of equity. They did not grant the prayer of moral damages to Rolando since
there was no bad faith on the part of L&J.

L&J appealed the decision to the RTC – contending once again that the 6% interest rate
is unconscionable, and that their previous payment which totaled Php 576,000 should
be used to set off the principal loan of Php 350,000. RTC however affirmed the decision
of the MTC. L&J appealed to the CA.

CA ruled in favor of L&J, noting that the agreed 6% interest rate was not reduced in a
written agreement and hence, it should not be considered due. CA ruled that the loan
was already paid, and that Rolando should return the excess Php 226,000 with interest
of 12% per annum. The case has now reached the Supreme Court.

ISSUE: Whether or not the unwritten 6% interest agreement should be honored.

RULING: No.

The Supreme Court held that, as provided under the Civil Code, an agreement regarding
loan interests should be stipulated in writing.

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 Supreme further said, that the assertion of Rolando that his case deserves an
exception to the application of Article 1956 (lack of written document) since it was the
L&J imposed the interest rate and Atty Salonga deceived him by not putting the
agreement in writing, cannot be availed as a defense.

He, as the credit is also an educated man, he could have been a more reasonably
prudent person under the circumstances. The law is clear, thus the collection of interest
without any stipulation in writing is prohibited by law.

Even if the 6% monthly rate was done in writing, it will still be void for being
unconscionable and contrary to morals and public policy – for at this time, an interest
rate of 3% and higher is considered excessive and exorbitant.

Furthermore, the lack of maturity date puts the total interest to a whopping 72% per
annum which the Supreme Court considered to be “definitely outrageous and
inordinate.” The Supreme Court affirmed CA’s ruling, but as to Rolando’s obligation to
pay the excess Php 226,000, the interest rate was reduced from 12% to 6% per annum.