Case Summary (G.R. No. L-3088)
Key Dates
- December 5, 1969: Execution of the Lease Agreement.
- December 31, 1969: Lessee paid advance rentals for the first eight years and deducted an amount characterized as interest/discount.
- August 20, 1970: Lessee paid an additional sum to correct a computation error.
- October 14, 1974: Plaintiff filed suit for recovery of the deducted amount, plus interest, moral damages and attorney’s fees.
Applicable Law
- Constitution in force at time of decision: 1973 Philippine Constitution.
- Civil Code provisions cited in the decision: Articles 1159, 1306 (freedom to contract), Article 1370 (interpretation of contracts), and Article 1953 (relating to interest/usury context as invoked).
- Controlling legal concept disputed: distinction between a discount/rebate on advance rent and usurious interest (elements of usury as stated in the decision).
Factual Background — Contract Terms and Payments
The parties entered a written Lease Agreement in which the lessee agreed to pay rent for a specified leased area and, as part of the agreement, to pay eight years’ advance rentals “discounted at 12% interest per annum” before registration. The lease stipulated payment of rentals yearly in advance and provided for financial aid payments. On December 31, 1969 the lessee paid the eight-year advance rentals but deducted from the gross amount what it computed as the discount/interest; the lessee initially deducted P101,010.73 from P180,288.47, then later paid an additional P2,182.70 on August 20, 1970, reducing the deducted amount to P98,828.03. The lessor then sued to recover P98,828.03, alleging the deduction was illegal usurious interest.
Procedural Posture
The lower court rendered judgment on the pleadings for the defendant (lessee), following the parties’ agreement on the factual antecedents. The plaintiff appealed, contesting the legality and computation of the deduction and asserting a violation of the Usury Law. The Supreme Court reviewed the case on pure question of law and the agreed facts.
Parties’ Positions
Plaintiff’s position: The contract is a lease, but the deduction applied by the lessee constituted excessive interest in violation of usury laws. Plaintiff computed that total interest should have been only P33,755.90 (or P29,536.42 if excluding the first year because it was already due), and thus sought recovery. Plaintiff also later sought to limit the deduction to seven years on the theory that the first year’s rental was not paid in advance.
Defendant’s position: The deduction was a contractual discount given for paying eight years’ rentals in advance; it was not a loan or forbearance and therefore not usurious. The defendant maintained its deduction of P98,828.03 was correct and lawful.
Legal Issue Presented
Whether the lessee’s deduction from the eight-year advance rental payment constituted usurious interest (an unlawful charge) or a permissible contractual discount/rebate under a lease agreement, and, relatedly, the correct method for computing the allowable deduction.
Court’s Legal Analysis — Lease vs. Loan; Usury Elements
The Court emphasized the character of the contract as a lease, plainly denominated as a “LEASE AGREEMENT,” and found no indication the parties intended to create a loan. The Court reiterated the legal distinction provided in the decision: a discount given for advance payment is not a loan or forbearance and therefore is not governed by the usury rules applicable to money loaned or money forborne. The elements of usury, as stated in the ruling, require (1) a loan, express or implied; (2) an understanding that the money lent shall be returned; (3) an agreement to pay a rate greater than that allowed by law; and (4) corrupt intent. Absent these elements—particularly where no money was lent or forborne—there is no usury. The Court also cited the general principle that parties may stipulate terms and conditions (Articles 1159 and 1306, Civil Code) so long as they do not contravene law or public policy.
Contract Interpretation and Rejection of Complex Compounding Computation
The trial court accepted the defendant’s intricate method of discount computation—effectively treating each year’s rental as prepaid by a differing number of years (so that an eight-year advance created a cumulative effect akin to discounting over twenty-eight year-equivalents) and thereby producing the larger deducted amount asserted by the defendant. The Supreme Court rejected that intricate, compounded interpretation as beyond the plain intendment of the parties and not sufficiently disclosed in the written contract. The Court applied the rule that contracts must be interpreted according to their literal meaning and not extended beyond their obvious intention (Article 1370, Civil Code). The Court found no evidence that the lessor understood or agreed to the complicated compounded formula;
...continue readingCase Syllabus (G.R. No. L-3088)
Nature and Procedural Posture of the Case
- Appeal from a decision rendered by the then Court of First Instance of Rizal, involving a pure question of law.
- Judgment below was rendered on the pleadings after the parties agreed during pre-trial conference on the factual antecedents.
- The appeal is taken by the plaintiff-appellant from a judgment in favor of the defendant-appellee.
- Decision in the record authored by CRUZ, J.
Stipulated Facts and Chronology
- On December 5, 1969, plaintiff-appellant and ESSO Standard Eastern, Inc. (later substituted by Petrophil Corporation) entered into a written “Lease Agreement” for a portion of plaintiff’s property for twenty (20) years from that date.
- On December 31, 1969, pursuant to the contract, defendant paid advance rentals for the first eight years but deducted an amount it computed as interest/discount, initially computed as P101,010.73 from the total sum P180,288.47.
- On August 20, 1970, defendant, stating there had been a mistake in computation, paid an additional P2,182.70, thereby reducing the deducted amount to P98,828.03.
- On October 14, 1974, plaintiff sued defendant for P98,828.03 with interest, alleging the deduction was illegally collected in violation of the Usury Law; plaintiff also prayed for moral damages and attorney’s fees.
- Defendant admitted the factual allegations but pleaded that the deducted amount was a discount for advance payment of rentals, not usurious interest.
- Judgment on the pleadings in the trial court was rendered for the defendant-appellee. Plaintiff appealed.
Relevant Lease Provision (Clause 3) as Stated in the Contract
- Lease clause provided (as quoted in the record) that:
- Lessee shall pay Lessor a rental of P1.40 per sqm per month on 400 sqm (P560 per month) and P1.40 per sqm per month on 1,693 sqm (P2,370.21 per month), totaling P2,930.20 per month for approximately 2,093 sqm, payable yearly in advance within the first twenty days of each year.
- Financial aid of P15,000 to clear leased premises: P10,000 upon execution and P5,000 upon delivery of leased premises free of improvements within 30 days.
- Portion of 365 sqm to be occupied by lessee without rental during lease lifetime.
- Finally, Lessor is to be paid 8 years advance rental based on P2,930.70 per month discounted at 12% interest per annum, producing a total net amount of P130,288.47 before registration of lease.
- Leased premises to be delivered within 30 days after first partial payment of financial aid.
Plaintiff-Appellant’s Position and Computation (Paragraph 6 of Complaint)
- Plaintiff alleged the interest collected by defendant out of rentals for the first eight years was excessive and beyond that allowable by law.
- Plaintiff’s asserted computation:
- Total interest on the amount is only P33,755.90 at P4,219.4880 per yearly rental.
- Considering interest should be computed excluding the first year rental because at time of payment amount was already due under the lease, the total interest should be only P29,536.42 to be deducted from the sum of P281,299.20 (as per plaintiff’s calculation).
- Plaintiff insisted he neither agreed to nor accepted defendant’s computation and that the lower court erred in the computation of interest deducted.
Defendant-Appellee’s Position
- Defendant maintained the correct amount of the discount/deduction is P98,828.03.
- Defendant argued the deducted amount was not usurious interest but a discount/rebate for paying rentals in advance for eight years.
- Defendant asserted the discount was permissible and not governed by the Usury Law because there was no loan or forbearance of money by the defendant to the plaintiff.
Trial Court’s Reasoning and Computation (as Quoted in Decision)
- Trial court interpreted the Lease Agreement as providing that the lessee shall pay eight years in advance rentals based on P2,930.20 per month discounted at 12% per annum.
- Trial court’s working figures (as stated in its declaration):
- Total rental for one year: P35,162.40 (P2,930.20 x 12 months).
- Annual interest therefrom: P4,219.4880 (P35,162.40 x 12%).
- Thus, total interest for