Cuaton v. Salud
REITERATIONFacts
The Antecedents: Respondent Rebecca Salud instituted a suit for foreclosure of real estate mortgage with damages against petitioner Mansueto Cuaton and his mother, Conchita Cuaton. The mortgage was constituted on October 31, 1991, on a lot titled in Conchita Cuaton's name, securing a One Million Pesos loan. The trial court declared the mortgage void because Mansueto Cuaton executed it without expressly stating he was merely a representative of Conchita Cuaton. The court ordered Mansueto Cuaton to pay Rebecca Salud the loan amount plus P610,000.00 representing interests at 10% and 8% per month for the period February 1992 to August 1992. Procedural History: The Regional Trial Court (RTC) declared the mortgage void but ordered petitioner to pay P1,610,000.00 (P1,000,000.00 loan plus P610,000.00 interest) with legal interest from January 5, 1993. Both parties appealed. The Court of Appeals (CA) affirmed the RTC decision. Petitioner moved for partial reconsideration regarding the interest, arguing it was iniquitous and exorbitant, but the CA denied it. The Petition: Petitioner filed a petition for review on certiorari with the Supreme Court, assailing the CA's affirmation of the 8% and 10% monthly interest rates imposed on the loan.
Issue(s)
Whether the 8% and 10% monthly interest rates imposed on the one-million-peso loan obligation are valid. Whether the issue of excessive interest rates was raised for the first time on appeal.
Ruling
The petition is GRANTED. The Decision of the Court of Appeals is MODIFIED. The interest rates of 10% and 8% per month are reduced to 12% per annum. The 12% per annum interest shall be computed from October 31, 1991, until the finality of the decision. After finality, the total amount due shall earn 12% per annum interest until full satisfaction.
Ratio Decidendi
On the validity of the interest rates: The Court reiterated that while Central Bank Circular No. 905, s. 1982 suspended the Usury Law and allowed parties to agree on any interest rate, this does not grant lenders carte blanche authority to impose unconscionable rates. The stipulated interest rates are illegal if they are unconscionable. Citing Medel v. Court of Appeals and Spouses Solangon v. Salazar, where 5.5% and 6% monthly interest rates were annulled and reduced to 12% per annum, the Court found the 10% and 8% monthly rates in this case to be even higher and thus, unconscionable, iniquitous, and exorbitant. Such stipulations are contrary to morals (contra bonos mores) and render the contract void from the beginning under Article 1409 of the Civil Code. Applying the guidelines from Eastern Shipping Lines, Inc. v. Court of Appeals, the Court held that the 12% per annum interest (as a reduction of the invalidated monthly rates) should be computed from the date of the loan's execution, October 31, 1991, until the finality of the decision. Thereafter, the judgment amount shall earn 12% per annum interest until full satisfaction. On whether the issue was raised for the first time on appeal: The Court ruled that the contention regarding excessive interest rates was not raised for the first time on appeal. The records showed that petitioner raised the validity of the 10% monthly interest in his answer filed with the trial court. To deprive him of his right to assail the imposition of excessive interests would be to sacrifice justice to technicality. Furthermore, an appellate court has the authority to review rulings even if not assigned as errors, especially if necessary for a just decision. The Court also noted that respondents themselves pointed out the matter of interest in their Appellants' Brief before the CA, opening the fairness of the imposition to evaluation.
Main Doctrine
Stipulated interest rates that are unconscionable, iniquitous, or exorbitant are void and may be reduced to the legal rate of 12% per annum. Contracts with such stipulations are considered void from the beginning under Article 1409 of the Civil Code.