GR 87182; (February, 1992) (Digest)
G.R. No. 87182 February 17, 1992
PACIFIC MILLS, INC. and GEORGE U. LIM, petitioners, vs. THE HON. COURT OF APPEALS and PHILIPPINE COTTON CORPORATION, respondents.
FACTS
Petitioner Pacific Mills, Inc. purchased cottonlint from private respondent Philippine Cotton Corporation (Philcotton) on credit. Upon failure to pay within the agreed 60-day period, Pacific Mills and its Executive Vice-President, George U. Lim, jointly and severally executed four promissory notes in favor of Philcotton, with a total principal of P16,598,725.84. The notes stipulated payment terms, a 21% per annum interest rate, additional interest and penalty charges for late payments, and attorney’s fees. Philcotton filed two consolidated collection suits and obtained writs of preliminary attachment. During the proceedings, the parties submitted joint manifestations wherein petitioners delivered postdated checks totaling P2,600,000.00 to Philcotton, to be applied to the principal obligation, reducing it to P13,998,725.84.
The trial court rendered a decision ordering petitioners to pay the reduced principal plus 21% regular interest, 21% additional interest, an 8% penalty charge, and attorney’s fees. The Court of Appeals affirmed the decision with modifications, specifically deleting the award for additional interest. Petitioners appealed to the Supreme Court, arguing that the stipulated interest and penalty charges were excessive and unconscionable.
ISSUE
Whether the stipulated interest and penalty charges in the promissory notes are excessive, iniquitous, and unconscionable, warranting reduction by the court.
RULING
The Supreme Court affirmed the Court of Appeals’ decision with further modifications. The Court held that while parties are free to stipulate interest rates, the stipulated 21% per annum interest was not excessive per se at the time of the agreement. However, the Court found the combined effect of the 21% interest, the 21% additional interest, and the 8% penalty charge to be iniquitous and unconscionable. The Court ruled that penalty charges, being in the nature of liquidated damages, may be equitably reduced under Article 1229 of the Civil Code if they are found to be unconscionable.
Applying this principle, the Supreme Court reduced the total monetary burden on petitioners. It sustained the 21% per annum interest on the principal but eliminated the 21% additional interest entirely. The 8% per annum penalty charge was reduced to 2% per annum. The award of attorney’s fees equivalent to 25% of the total amount due was also deemed excessive and was reduced to 10% of the principal obligation. The Court emphasized that while stipulations are binding, courts possess the equitable power to temper excessive penalties to avoid oppressive results. The case was remanded to the trial court for precise recomputation, considering the P2,600,000.00 partial payments and their proper application to the principal and accrued interest.