Lara's Gifts & Decors v. Midtown Industrial Sales
MODIFICATIONFacts
The Antecedents: From January to December 2007, petitioner Lara's Gifts & Decors, Inc. purchased various industrial and construction materials from respondent Midtown Industrial Sales, Inc. amounting to P1,263,104.22. The purchases were on a 60-day credit term, with a condition in the sales invoices that a 24% interest per annum would be charged on all overdue accounts. Petitioner issued postdated checks for payment, but these were dishonored for being 'Drawn Against Insufficient Funds' and subsequently for 'Account Closed.' Despite a formal demand letter received on January 22, 2008, petitioner failed to settle its account. Procedural History: On February 5, 2008, respondent filed a Complaint for Sum of Money. In its Answer, petitioner admitted the purchases but claimed the materials were substandard and of poor quality, thus the checks were not for value. The Regional Trial Court (RTC) ruled in favor of the respondent, finding that petitioner failed to prove its claims about the quality of the materials. The RTC ordered petitioner to pay the principal amount plus the stipulated 24% interest per annum from the date of judicial demand until fully paid, plus attorney's fees. The Court of Appeals (CA) affirmed the RTC's decision in its entirety, upholding the validity of the 24% interest rate. The Petition: Petitioner filed a petition for review on certiorari before the Supreme Court, raising several issues. It questioned the probative value of the sales invoices, denied being in default, and argued that the 24% per annum interest rate was void and unconscionable. In the alternative, petitioner contended that the 24% interest rate should only be applied until the finality of the judgment, after which the legal rate should apply.
Issue(s)
Whether the sales invoices have probative value considering their genuineness and due execution were not established. Whether the petitioner is in default of its contractual obligations. Whether Articles 1192 and 1283 of the Civil Code on mutual breach and compensation are applicable. Whether the interest rate fixed at 24% per annum is void. Whether the stipulated 24% interest rate shall be applied only until the finality of judgment, and whether interest due on the principal that has accrued as of judicial demand shall itself earn legal interest from the date of judicial demand until full payment.
Ruling
The petition is found to be without merit. The Decision dated 21 April 2016 of the Court of Appeals is AFFIRMED with MODIFICATION as to the computation of interest. Petitioner is ordered to pay respondent: (1) P1,263,104.22 representing the principal amount plus stipulated interest at 24% per annum from January 22, 2008 (date of extrajudicial demand) until full payment; (2) Legal interest on the accrued 24% interest, at 12% per annum from February 5, 2008 to June 30, 2013, and 6% per annum from July 1, 2013 until full payment; (3) P50,000.00 as attorney's fees with 6% legal interest from finality of the Decision until full payment; and (4) Cost of suit.
Ratio Decidendi
On the probative value of the sales invoices: The Supreme Court held that the sales invoices have probative value. Under Rule 8, Section 8 of the Rules of Court, the genuineness and due execution of an actionable document are deemed admitted unless the adverse party specifically denies them under oath. Petitioner's Answer only made a general denial and failed to set forth the facts supporting its contestation. This general denial amounts to an admission of the genuineness and due execution of the sales invoices. On petitioner's default: The Court found the petitioner to be in default. The petitioner's claim that the delivered materials were substandard was a self-serving allegation that it failed to substantiate with any evidence. The burden of proof to show fraud or defect rests on the one alleging it. The sales invoices, which stated that petitioner 'RECEIVED MERCHANDISE IN GOOD ORDER & CONDITION,' and the subsequent issuance of checks for payment, militated against its claim. On the applicability of Articles 1192 and 1283: The Court ruled that these articles are not applicable. Since the petitioner failed to prove that the respondent committed a breach of the obligation (i.e., by delivering substandard goods), there is no basis to temper petitioner's liability under Article 1192 for mutual breach. Consequently, there is also no ground to set off any claim for damages under Article 1283. On the validity of the 24% interest rate: The Court upheld the validity of the 24% per annum interest rate. Citing established jurisprudence, the Court affirmed that a 24% annual interest rate is not considered excessive or unconscionable, especially when freely agreed upon in a commercial transaction. As an established company, petitioner cannot claim to have been misled into agreeing to the rate which was clearly stated in the sales invoices. On the application of the stipulated interest rate: This is the doctrinal core of the case. The Court modified the guidelines in Eastern Shipping Lines and Nacar. It ruled that the stipulated interest is the law between the parties under Article 1159 of the Civil Code and should be applied until the obligation is fully satisfied. The legal interest rate under Article 2209 only applies in the absence of a stipulated interest. Therefore, the 24% interest rate applies from the date of demand until full payment, not merely until the finality of judgment. Furthermore, pursuant to Article 2212, the interest due on the principal (the 24% interest) that has accrued as of judicial demand shall itself earn legal interest from the date of judicial demand until full payment.
Main Doctrine
The Court modifies the guidelines on the imposition of interest rates established in Eastern Shipping Lines and Nacar. The primary rule is that the interest rate stipulated in writing by the parties shall be the law between them and shall apply from the date of demand until the obligation is fully paid. The legal interest rate (currently 6% per annum) is only applicable in the absence of a stipulated interest. Furthermore, interest due on the principal amount (stipulated interest) shall itself earn legal interest from the time it is judicially demanded, pursuant to Article 2212 of the Civil Code.