Case Summary (G.R. No. 211363)
Loan Agreement and Securities
On April 30, 1999, Pabalan extended a short-term loan of ₱7,450,000 to Sabnani, secured by:
- Two promissory notes stipulating 8% and 5% monthly interest, with acceleration and default clauses imposing 20% monthly interest, 50% liquidated damages, 25% attorney’s fees, and other costs;
- A Deed of Real Estate Mortgage over Sabnani’s Makati condominium unit.
Default and Extrajudicial Foreclosure
Sabnani failed to pay the May 31, 1999 interest installment. After a demand letter, Pabalan filed for extrajudicial foreclosure. The condominium was sold on August 3, 1999, to Pabalan as sole bidder for ₱17,400,000, reflecting accrued interest, penalties, liquidated damages, and attorney’s fees.
Trial Court Proceedings
Sabnani sought to annul the mortgage and promissory notes, claiming unauthorized deductions, lack of consideration, and usurious rates. The Regional Trial Court dismissed his complaint, upheld the written agreements as binding, rejected his service-fee and usury arguments, and affirmed the foreclosure sale.
Court of Appeals Modification
The Court of Appeals affirmed contract validity but found the stipulated interest (5% and 8% monthly), penalty (20% monthly), liquidated damages (50%), and attorney’s fees (25%) unconscionable. It reduced each to 1% per month (12% per annum) for interest and penalty, and to 10% for liquidated damages and attorney’s fees. It also ordered Pabalan to return any bid-price surplus with legal interest.
Issues on Further Review
- Whether the Court of Appeals erred in reducing the parties’ stipulated interest rates, penalty charges, liquidated damages, and attorney’s fees;
- Whether it erred in ordering return of the foreclosure bid surplus.
Supreme Court’s Legal Framework
Under the 1987 Constitution and Civil Code Articles 1306 and 1308, parties enjoy freedom to contract but may not stipulate terms contrary to law, morals, good customs, public order, or public policy. Courts may equitably reduce penalties, interest, and damages found iniquitous or unconscionable (Civil Code Articles 1229, 2208, 2227). Central Bank Circular No. 905 removed the statutory ceiling but does not permit oppressive rates.
Application of Unconscionability Principles
Precedents (Vitug v. Abuda; Toledo v. Hyden; Family Foods Manufacturing Co.) establish that interest and penalty rates are not inherently conscionable or unconscionable but must be assessed in context, especially market conditions and parties’ bargaining power. The Court in Lara’s Gifts later set a presumption that twice the legal rate (12% per annum) is the maximal conscionable conventional rate unless the creditor proves necessity or equal footing.
Equal Footing of Parties
The Supreme Court found Pabalan and Sabnani were both experienced businesspeople who negotiated the loan on equal footing:
- Neither was under financial duress nor disadvantaged;
- Sabnani initiated the borrowing to accommodate a partner’s investment and protected himself with postdated BPI checks covering principal, interest, and property value;
- The loan was short-term and part of a larger inves
Case Syllabus (G.R. No. 211363)
Antecedent Facts
- On April 30, 1999, Vasudave Sabnani, a British national, borrowed ₱7,450,000 from Estrella Pabalan under two promissory notes (PNs) and secured the obligation by a Deed of Real Estate Mortgage (REM) over his Makati condominium unit.
- First PN: principal ₱1,450,000; 8% monthly interest; three-month term with monthly interest installments of ₱116,000 and principal due at maturity.
- Second PN: principal ₱6,000,000; 5% monthly interest; same three-month structure with monthly ₱300,000 interest and principal at end.
- Both PNs penalized default with 20% monthly interest on unpaid principal and, upon collection, additional 20% penalty interest, 50% liquidated damages, 25% attorney’s fees, and other litigation costs.
- REM reiterated PN terms, contained an acceleration clause, and allowed extrajudicial foreclosure upon default.
- Sabnani defaulted on May 31, 1999; Pabalan demanded ₱8,940,000 by June 21, 1999 (principal plus accrued interest and penalties) and initiated foreclosure.
Procedural History
- Sabnani filed suit for annulment of REM, PNs, and notice of sale, with prayer for temporary restraining order (TRO) and preliminary injunction (WPI).
- RTC Branch 59, Makati City denied injunctive relief (Aug 3, 1999); foreclosure proceeded, Pabalan bid ₱17,400,000 using an updated statement of account including penalties and fees.
- RTC (Mar 28, 2005) dismissed Sabnani’s complaint, upheld validity of agreements and foreclosure, and rejected claims of illegal interest, penalties, and unauthorized deductions.
- RTC denied reconsideration but granted new trial; after retrial it reinstated its original decision (Jan 10, 2008).
- Sabnani appealed to the Court of Appeals (CA) (CA-G.R. CV No. 91169).
- CA (Nov 28, 2012) affirmed validity of PNs and REM but reduced interest to 1% monthly, penalty to 1% monthly, liquidated damages and attorney’s fees to 10% each; ordered return of bid surplus. CA denied Pabalan’s motion for partial reconsideration (Feb 12, 2014).
- Pabalan filed a Petition for Review on Certiorari before the Supreme Court (G.R. No. 211363).
Issues
- Did the CA err in reducing the stipulated interest rates, penalty charges, liquidated damages, and attorney’s fees for being unconscionable?
- Did the CA err in ordering Pabalan to return the surplus of her foreclosure bid to Sabnani?