G.R. No. 149004; April 14, 2004
Restituta M. Imperial, petitioner, vs. Alex A. Jaucian, respondent.

FACTS

Respondent Alex Jaucian filed a collection case against petitioner Restituta Imperial for six separate loans totaling ₱320,000.00, obtained between November 1987 and January 1988. The loans were covered by promissory notes stipulating a 16% monthly interest rate, with the face values already including pre-computed interest for four months. The notes also provided for penalties and attorney’s fees. Despite several partial payments from Imperial, the total obligation ballooned to over ₱2.8 million by August 1991 due to the compounding of the stipulated interest and charges.
Imperial argued that the stipulated 16% monthly interest was unconscionable and usurious. The Regional Trial Court (RTC) ruled in favor of Jaucian but declared the stipulated rates as iniquitous, reducing the interest to 28% per annum and attorney’s fees to 10% of the total amount due. The Court of Appeals affirmed the RTC decision in toto.

ISSUE

Whether the Court of Appeals erred in affirming the RTC’s reduction of the interest rate to 28% per annum and attorney’s fees to 10%, and in not declaring the entire obligation null and void for being usurious.

RULING

The Supreme Court denied the petition and affirmed the assailed CA decision. The legal logic is anchored on the court’s equitable power to reduce iniquitous or unconscionable stipulations in contracts. While Central Bank Circular No. 905 lifted interest rate ceilings, it did not authorize parties to stipulate rates that are contrary to morals or public policy. A 16% monthly interest (192% per annum) is grossly excessive and unconscionable. Courts are expressly granted authority under Article 1306 of the Civil Code and jurisprudence to equitably reduce such stipulations. The RTC’s reduction to 28% per annum was a reasonable exercise of this judicial prerogative, which appellate courts will not disturb. Similarly, the reduction of attorney’s fees from 25% to 10% was justified under Article 1229 of the Civil Code, considering Imperial’s good faith in making partial payments. The obligation itself was not rendered void; only the unconscionable stipulations were subject to equitable reduction. The non-inclusion of Imperial’s husband in the suit was a formal, curable defect that did not warrant dismissal.