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

FACTS

On April 30, 1999, respondent Vasudave Sabnani, a British national, obtained a short-term loan of ₱7,450,000.00 from petitioner Estrella Pabalan. As security, he executed two promissory notes (PNs) and a Deed of Real Estate Mortgage (REM) over his condominium unit. The first PN was for ₱1,450,000.00 with 8% monthly interest, and the second was for ₱6,000,000.00 with 5% monthly interest, both payable in three months. The PNs contained provisions imposing a 20% per month penalty interest upon default, and additional charges for liquidated damages (50%) and attorney’s fees (25%) if the case was referred for collection. The REM contained an acceleration clause. Sabnani failed to pay the installment due on May 31, 1999. After demand, Pabalan initiated extrajudicial foreclosure. Sabnani filed a complaint to annul the REM, PNs, and the foreclosure sale, arguing that: (1) Pabalan made unauthorized deductions from the loan principal (including advance interest and service fees), reducing the amount he received; (2) the stipulated interest rates and penalties were unconscionable and illegal; (3) the loan lacked consideration as he obtained it merely as an accommodation for his business partner; and (4) Pabalan, as an American citizen, lacked legal capacity to engage in the lending business. The Regional Trial Court (RTC) upheld the validity of the agreements and the foreclosure sale. The Court of Appeals (CA) affirmed the validity of the loan, REM, and PNs but reduced the stipulated interest rates, penalty charges, liquidated damages, and attorney’s fees for being iniquitous and unconscionable. It also ordered Pabalan to pay Sabnani the excess of the bid price from the foreclosure sale. Pabalan filed a Petition for Review.

ISSUE

Whether the Court of Appeals erred in reducing the stipulated interest rates, penalty charges, liquidated damages, and attorney’s fees in the promissory notes and deed of real estate mortgage.

RULING

The Supreme Court DENIED the petition and AFFIRMED the Decision of the Court of Appeals with MODIFICATION. The Court held that while parties are free to stipulate on interest and other charges under Article 1306 of the Civil Code, such stipulations must not be contrary to law, morals, good customs, public order, or public policy. The stipulated rates in this case—5% and 8% monthly interest, a 20% monthly penalty interest, 50% liquidated damages, and 25% attorney’s fees—were found to be iniquitous, unconscionable, and exorbitant. Citing precedent, the Court ruled that it has the authority to reduce such stipulations if they are contrary to morals or public policy. The Court modified the CA’s reduction, imposing an interest rate of 6% per annum on the total monetary award (the excess bid price) from the time of extrajudicial foreclosure (August 3, 1999) until its full satisfaction. The Court upheld the validity of the loan, REM, PNs, and the foreclosure sale, rejecting Sabnani’s claims of lack of consideration, unauthorized deductions, and Pabalan’s alleged incapacity to contract.