G.R. No. 225433 , August 28, 2019
Concurring and Dissenting Opinion, Leonen, J.

FACTS

This case involves a dispute over interest rates on an unpaid obligation. The ponencia applied the stipulated 24% interest on the principal and further imposed an interest rate of 12% per annum (or 6% per annum, as applicable) on that accrued 24% interest from the date of judicial demand until full payment. Justice Leonen concurs in part and dissents in part from this ruling.
Justice Leonen agrees that the 24% stipulated interest on the principal should be upheld, respecting the binding force of contracts under Article 1308 of the Civil Code. However, he dissents from the imposition of additional interest on the already accrued 24% interest. He argues that compounding interest in this manner, by applying a 12%/6% rate on the 24% interest, would effectively raise the total burden on the debtor beyond the stipulated 24%, leading to a potentially unconscionable result.

ISSUE

Whether the imposition of an additional interest rate (12%/6%) on the accrued stipulated interest (24%) is valid, or if such compounding results in an unconscionable obligation.

RULING

Justice Leonen dissents from the compounding of interest, arguing it produces an unconscionable rate. His legal logic is anchored on the principles of mutuality and equity underlying contract law. While acknowledging the freedom to stipulate interest rates following the suspension of the Usury Law, he emphasizes this freedom assumes parties with relatively equal bargaining power. Citing Vitug v. Abuda, he notes that courts retain the power to equitably reduce interest rates found to be iniquitous or unconscionable, as such rates are void for being against public morals.
He distinguishes between interest as compensation for the forbearance of money (monetary interest) and interest as a penalty. The 24% rate, as stipulated, constitutes monetary interest. Imposing further interest on this accrued amount compounds the obligation. Justice Leonen contends that Article 2212 of the Civil Code, which allows interest to earn interest from judicial demand, must be read in light of the doctrine against unconscionability. When the underlying stipulated rate is already high, applying additional interest on it exacerbates the imbalance. The determination of unconscionability is contextual, examining factors like the parties’ bargaining positions and the circumstances of the loan. Here, layering interest upon interest effectively escalates the debtor’s burden beyond the agreed 24%, violating the principle of mutuality and resulting in an inequitable and unconscionable obligation that the court should not sanction.