G.R. No. 211363 , February 21, 2023
ESTRELLA PABALAN, PETITIONER, VS. VASUDAVE SABNANI, RESPONDENT.

FACTS

Petitioner Estrella Pabalan and respondent Vasudave Sabnani entered into a loan agreement on April 30, 1999, for the amount of ₱7,450,000.00, payable in installments within three months. The loan was secured by two promissory notes and a Deed of Real Estate Mortgage over Sabnani’s condominium unit. Sabnani failed to pay, leading to the extrajudicial foreclosure of the mortgaged property. Pabalan emerged as the highest bidder at the foreclosure sale with a bid of ₱17,400,000.00, based on an updated Statement of Account reflecting the stipulated interest (5% and 8% per month), penalty charge (20% per month), liquidated damages (50% of the amount due), and attorney’s fees (25% of the amount due). The validity of the mortgage, promissory notes, and foreclosure sale is not in dispute. The Court of Appeals reduced these stipulated rates, finding them unconscionable, and ordered Pabalan to return the excess bid amount to Sabnani. Pabalan filed a petition arguing the stipulated rates were voluntarily agreed upon and should be upheld.

ISSUE

Whether the stipulated interest rates, penalty charges, liquidated damages, and attorney’s fees in the loan agreement between Pabalan and Sabnani are unconscionable and should be reduced.

RULING

The Court, through the ponencia, granted the petition and reinstated the Regional Trial Court’s decision upholding the stipulated rates. The concurring opinion of Justice Caguioa fully agrees with this ruling. The Court held that the stipulated rates were not unconscionable. The determination of unconscionability depends on the circumstances of each case. The parties were on equal footing: both were businesspersons (Pabalan a businesswoman based in Manila, Sabnani a British businessman seeking investments), Sabnani was not in financial distress, he obtained the loan to accommodate a business partner for an investment in his own project, he had full knowledge of the terms and demanded security from his partner to cover the risks, and he benefited from the loan. The loan was a short-term business accommodation. The principle of autonomy of contracts under Article 1306 of the Civil Code allows parties to establish stipulations provided they are not contrary to law, morals, good customs, public order, or public policy. While courts have the discretionary power to equitably reduce iniquitous or unconscionable stipulated rates for interest, penalties, liquidated damages, and attorney’s fees under Articles 1229, 2208, and 2227 of the Civil Code, such intervention is not warranted here as the parties, with full understanding and from equal bargaining positions, voluntarily assumed the obligations. The law does not relieve parties from the effects of an unwise contract entered into with full awareness.