Government v. Conde
REITERATIONFacts
The Antecedents: The Government of the Philippine Islands filed an action against Mariano Conde to recover the amount of a promissory note and to foreclose a real property mortgage securing the obligation. The promissory note stipulated an interest rate of eight percent (8%) per annum, payable semi-annually, on the capital and any amount due and unpaid. Procedural History: The trial court rendered a judgment ordering the defendant to pay P10,678.75 with interest at eight percent (8%) per annum, computed semi-annually, with costs. The judgment further stipulated that if the defendant failed to pay within three months, the mortgaged property would be sold to satisfy the judgment. The Petition: The defendant appealed the judgment, seeking to modify it specifically regarding the order to pay compound interest, arguing it violated the Usury Law.
Issue(s)
Whether the collection of interest on accrued interest, pursuant to an express agreement, violates the Usury Law if the resulting effective rate exceeds the statutory limit.
Ruling
The Supreme Court affirmed the appealed judgment in all its parts. The Court held that the stipulation for compound interest was valid and binding, and did not violate the Usury Law.
Ratio Decidendi
On Issue 1: The Supreme Court held that the contention lacks merit because it is a well-settled rule in this jurisdiction that an express agreement to charge interest on interest is valid. Applying the precedents of Government of the Philippine Islands v. Schenkel and Gonzales, Villaruel v. Alvayda and Vicencio, and Valdezco v. Francisco, the Court reiterated that such interest on interest should not be taken into account when determining if the stipulated interest exceeds the Usury Law limits. The Court emphasized that under Article 1255 of the Civil Code, contracting parties are free to establish stipulations as they see fit, provided they do not contravene law, morals, or public order. Furthermore, pursuant to Article 1091 of the Civil Code, obligations arising from contracts have the force of law between the contracting parties and must be fulfilled according to their terms. The Court also noted that there is a two-year prescriptive period to claim usurious interest, which the defendant failed to observe in previous similar jurisprudence. Thus, the stipulation for compound interest in the promissory note is perfectly valid and binding.
Main Doctrine
Stipulations for compound interest, where interest on accrued interest is charged, are valid and binding if expressly agreed upon, and such interest on interest should not be considered in determining whether the stipulated interest exceeds the limit prescribed by the Usury Law.