Almeda vs Court of Appeals and PNB G.R. No.
113412 April 17, initial 21% to a high of 68% between March of 1984 to September,
1996
On various dates in 1981, the Philippine National Bank granted to
herein petitioners, the spouses Ponciano L. Almeda and Eufemia P.
Almeda several loan/credit accommodations totaling P18.0 Million
pesos payable in a period of six years at an interest rate of
21% per annum. To secure the loan, the spouses Almeda executed
a Real Estate Mortgage Contract covering a 3,500 square meter
parcel of land, together with the building erected thereon (the
Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A
credit agreement embodying the terms and conditions of the loan
was executed between the parties. Pertinent portions of the said
agreement are quoted below:
SPECIAL CONDITIONS
The loan shall be subject to interest at the rate of twenty one per
cent (21%) per annum, payable semi-annually in arrears, the first
interest payment to become due and payable six (6) months from
date of initial release of the loan. The loan shall likewise be subject
to the appropriate service charge and a penalty charge of three per
cent (30%) per annum to be imposed on any amount remaining
unpaid or not rendered when due.
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within
the limits allowed by law at any time depending on whatever policy
it may adopt in the future; provided, that the interest rate on
this/these accommodations shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by
law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease of the maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial
payments on the loan totaling. P7,735,004.66, 2 a substantial
portion of which was applied to accrued interest. 3 On March 31,
1984, respondent bank, over petitioners' protestations, raised the
interest rate to 28%, allegedly pursuant to Section III-c (1) of its
credit agreement. Said interest rate thereupon increased from an
1986. 4
Petitioner protested the increase in interest rates, to no avail.
Before the loan was to mature in March, 1988, the spouses filed on
February 6, 1988 a petition for declaratory relief with prayer for a
writ of preliminary injunction and temporary restraining order with
the Regional Trial Court of Makati, docketed as Civil Case No.
18872. In said petition, which was raffled to Branch 134 presided
by Judge Ignacio Capulong, the spouses sought clarification as to
whether or not the PNB could unilaterally raise interest rates on the
loan, pursuant to the credit agreement's escalation clause, and in
relation to Central Bank Circular No. 905. As a preliminary measure,
the lower court, on March 3, 1988, issued a writ of preliminary
injunction enjoining the Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the credit agreement. By
this time the spouses were already in default of their loan
obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended
and P.D. 385), the PNB countered by ordering the extrajudicial
foreclosure of petitioner's mortgaged properties and scheduled an
auction sale for March 14, 1989. Upon motion by petitioners,
however, the lower court, on April 5, 1989, granted a supplemental
writ of preliminary injunction, staying the public auction of the
mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the
PNB, the trial court dissolved the supplemental writ of preliminary
injunction. Petitioners filed a motion for reconsideration. In the
interim, respondent bank once more set a new date for the
foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to
the scheduled date, however, petitioners tendered to respondent
bank the amount of P40,142,518.00, consisting of the principal
(P18,000,000.00) and accrued interest calculated at the originally
stipulated rate of 21%. The PNB refused to accept the payment. 5
As a result of PNB's refusal of the tender of payment, petitioners,
on March 8, 1990, formally consigned the amount of
P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-
663. They prayed therein for a writ of preliminary injunction with a
temporary restraining order. The case was raffled to Branch 147,
presided by Judge Teofilo Guadiz. On March 15, 1990, respondent
bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an
order granting the writ of preliminary injunction enjoining the
foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On
April 17, 1990 respondent bank filed a motion for reconsideration of
the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to
Branch 66 presided by Judge Eriberto Rosario who issued an order
consolidating said case with Civil Case 18871 presided by Judge
Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary injunction
issued March 30, 1990, respondent bank filed a petition
for Certiorari, Prohibition and Mandamus with respondent Court of
Appeals, assailing the following orders of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of
preliminary injunction restraining the foreclosure sale of Mavin
Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying
respondent bank's motion to lift the writ of injunction issued by
Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent
bank's subsequent motion to lift the writ of preliminary injunction;
and
4. Order of Judge Capulong dated October 20, 1992 denying
respondent bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its decision setting
aside the assailed orders and upholding respondent bank's right to
foreclose the mortgaged property pursuant to Act 3135, as
amended and P.D. 385. Petitioners' Motion for Reconsideration and
Supplemental Motion for Reconsideration, dated September 15,
1993 and October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's decision dated
August 27, 1993 raises two principal issues namely: 1) Whether or
not respondent bank was authorized to raise its interest rates from
21% to as high as 68% under the credit agreement; and 2) Whether
or not respondent bank is granted the authority to foreclose the
Marvin Plaza under the mandatory foreclosure provisions of P.D.
385.
In its comment dated April 19, 1994, respondent bank vigorously
denied that the increases in the interest rates were illegal,
unilateral, excessive and arbitrary, it argues that the escalated
rates of interest it imposed was based on the agreement of the
parties. Respondent bank further contends that it had a right to
foreclose the mortgaged property pursuant to P.D. 385, after
petitioners were unable to pay their loan obligations to the bank
based on the increased rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract
is premised on two settled principles: (1) that any obligation arising
from contract has the force of law between the parties; and (2) that
there must be mutuality between the parties based on their
essential equality. 6 Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity
or compliance of the contract which is left solely to the will of one
of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the
case that respondent bank unilaterally altered the terms of its
contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it
provides, in Article 1956 that "No interest shall be due unless it has
been expressly stipulated in writing." What has been "stipulated in
writing" from a perusal of interest rate provision of the credit
agreement signed between the parties is that petitioners were
bound merely to pay 21% interest, subject to a possible escalation
or de-escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by law; and
3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon
by the parties to the contract in this case was the 21% rate
stipulated in the interest provision. Any doubt about this is in fact
readily resolved by a careful reading of the credit agreement
because the same plainly uses the phrase "interest rate agreed
upon," in reference to the original 21% interest rate. The interest
provision states:
(c) interest and Charges
(1) The Bank reserves the right to increase the interest rate within
the limits allowed by law at any time depending on whatever policy
it may adopt in the future; provided, that the interest rate on
this/these accommodations shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by
law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity
date of the increase or decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court
disauthorized respondent bank from unilaterally raising the interest
rate in the borrower's loan from 18% to 32%, 41% and 48% partly
because the aforestated increases violated the principle of
mutuality of contracts expressed in Article 1308 of the Civil Code.
The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury
Law ceiling on interest rates —
. . . increases in interest rates are not subject to any ceiling
prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter, to
unilaterally and successively increase the agreed interest rates
from 18% to 48% within a span of four (4) months, in violation of
P.D. 116 which limits such changes to once every twelve months.
Besides violating P.D. 116, the unilateral action of the PNB in
increasing the interest rate on the private respondent's loan,
violated the mutuality of contracts ordained in Article 1308 of the
Civil Code:
Art. 308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force
of law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void
(Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming
that the P1.8 million loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of
the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract
of adhesion, where the parties do not bargain on equal footing, the
weaker party's (the debtor) participation being reduced to the
alternative "to take it or lease it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against
abuse and imposition.
PNB's successive increases of the interest rate on the private
respondent's loan, over the latter's protest, were arbitrary as they
violated an express provision of the Credit Agreement (Exh. 1)
Section 9.01 that its terms "may be amended only by an
instrument in writing signed by the party to be bound as burdened
by such amendment." The increases imposed by PNB also
contravene Art. 1956 of the Civil Code which provides that "no
interest shall be due unless it has been expressly stipulated in
writing."
The debtor herein never agreed in writing to pay the interest
increases fixed by the PNB beyond 24%per annum, hence, he is not
bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a
period of four (4) months is excessive, as found by the Court of
Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by
respondent bank on petitioners' loan, over the latter's vehement
protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905,
Series of 1982 did not authorize the bank, or any lending institution
for that matter, to progressively increase interest rates on
borrowings to an extent which would have made it virtually
impossible for debtors to comply with their own obligations. True,
escalation clauses in credit agreements are perfectly valid and do
not contravene public policy. Such clauses, however, (as are
stipulations in other contracts) are nonetheless still subject to laws
and provisions governing agreements between parties, which
agreements — while they may be the law between the contracting
parties — implicitly incorporate provisions of existing law.
Consequently, while the Usury Law ceiling on interest rates was
lifted by C.B. Circular 905, nothing in the said circular could
possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels which would
either enslave its borrowers or lead to a hemorrhaging of their
assets. Borrowing represents a transfusion of capital from lending
institutions to industries and businesses in order to stimulate
growth. This would not, obviously, be the effect of PNB's unilateral
and lopsided policy regarding the interest rates of petitioners'
borrowings in the instant case.
Apart from violating the principle of mutuality of contracts, there is
authority for disallowing the interest rates imposed by respondent
bank, for the credit agreement specifically requires that the
increase be "within the limits allowed by law". In the case of PNB
v. Court of Appeals, cited above, this Court clearly emphasized that
C.B. Circular No. 905 could not be properly invoked to justify the
escalation clauses of such contracts, not being a grant of specific
authority.
Furthermore, the escalation clause of the credit agreement
requires that the same be made "within the limits allowed by law,"
obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase "limits imposed by
law," refers only to the escalation clause. However, the same
agreement allows reduction on the basis of law or the Monetary
Board. Had the parties intended the word "law" to refer to both
legislative enactments and administrative circulars and issuances,
the agreement would not have gone as far as making a distinction
between "law or the Monetary Board Circulars" in referring to
mutually agreed upon reductions in interest rates. This distinction
was the subject of the Court's disquisition in the case of Banco
Filipino Savings and Mortgage Bank v. Navarro 8 where the Court
held that:
What should be resolved is whether BANCO FILIPINO can increase
the interest rate on the LOAN from 12% to 17% per annum under
the Escalation Clause. It is our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase.
the interest rate stipulated in this contract without advance notice
to me/us in the event. a law increasing the lawful rates of interest
that may be charged on this particular kind of loan. (Paragraphing
and emphasis supplied)
It is clear from the stipulation between the parties that the interest
rate may be increased "in the event a law should be enacted
increasing the lawful rate of interest that may be charged on this
particular kind of loan." The Escalation Clause was dependent on an
increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law.
"Although a circular duly issued is not strictly a statute or a law, it
has, however, the force and effect of law." (Emphasis supplied). "An
administrative regulation adopted pursuant to law has the force
and effect of law." "That administrative rules and regulations have
the force of law can no longer be questioned."
The distinction between a law and an administrative regulation is
recognized in the Monetary Board guidelines quoted in the latter to
the BORROWER of Ms. Paderes of September 24, 1976 (supra).
According to the guidelines, for a loan's interest to be subject to the
increases provided in CIRCULAR No. 494, there must be an
Escalation Clause allowing the increase "in the event that any law
or Central Bank regulation is promulgated increasing the maximum
rate for loans." The guidelines thus presuppose that a Central Bank
regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated
on March 17, 1980, adding section 7-a to the Usury Law, providing
that parties to an agreement pertaining to a loan could stipulate
that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased "by law
or by the Monetary Board." To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that the rate
of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by law or by the
Monetary Board:
Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon
shall be reduced in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed
upon shall take effect on or after the effectivity of the increase or
decrease in the maximum rate of interest.' (Paragraphing and
emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be
valid should specifically provide: (1) that there can be an increase
in interest if increased by law or by the Monetary Board; and (2) in
order for such stipulation to be valid, it must include a provision for
reduction of the stipulated interest "in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary
Board."
Petitioners never agreed in writing to pay the increased interest
rates demanded by respondent bank in contravention to the tenor
of their credit agreement. That an increase in interest rates from
18% to as much as 68% is excessive and unconscionable is
indisputable. Between 1981 and 1984, petitioners had paid an
amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time
the spouses tendered the amount of P40,142,518.00 in settlement
of their obligations; respondent bank was demanding
P58,377,487.00 over and above those amounts already previously
paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable
so long as they are not solely potestative but based on reasonable
and valid grounds. 9 Here, as clearly demonstrated above, not only
the increases of the interest rates on the basis of the escalation
clause patently unreasonable and unconscionable, but also there
are no valid and reasonable standards upon which the increases
are anchored.
We go now to respondent bank's claim that the principal issue in
the case at bench involves its right to foreclose petitioners'
properties under P.D. 385. We find respondent's pretense
untenable.
Presidential Decree No. 385 was issued principally to guarantee
that government financial institutions would not be denied
substantial cash inflows necessary to finance the government's
development projects all over the country by large borrowers who
resort to litigation to prevent or delay the government's collection
of their debts or loans.10 In facilitating collection of debts through
its automatic foreclosure provisions, the government is however,
not exempted from observing basic principles of law, and ordinary
fairness and decency under the due process clause of the
Constitution. 11
In the first place, because of the dispute regarding the interest rate
increases, an issue which was never settled on merit in the courts
below, the exact amount of petitioner's obligations could not be
determined. Thus, the foreclosure provisions of P.D. 385 could be
validly invoked by respondent only after settlement of the question
involving the interest rate on the loan, and only after the spouses
refused to meet their obligations following such determination.
In Filipinas Marble Corporation v. Intermediate Appellate
Court, 12 involving P.D. 385's provisions on mandatory foreclosure,
we held that:
We cannot, at this point, conclude that respondent DBP together
with the Bancom people actually misappropriated and misspent the
$5 million loan in whole or in part although the trial court found
that there is "persuasive" evidence that such acts were committed
by the respondent. This matter should rightfully be litigated below
in the main action. Pending the outcome of such litigation, P.D. 385
cannot automatically be applied for if it is really proven that
respondent DBP is responsible for the misappropriation of the loan,
even if only in part, then the foreclosure of the petitioner's
properties under the provisions of P.D. 385 to satisfy the whole
amount of the loan would be a gross mistake. It would unduly
prejudice the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount
of the loan which was applied wisely or not, for the benefit of the
petitioner be determined. Consequently, the extent of the loan
where there was no failure of consideration and which may be
properly satisfied by foreclosure proceedings under P.D. 385 will
have to await the presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court
reiterating the dictum in Filipinas Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the rug' this iceberg
of a scandal in the sugar industry during the Marcos Martial Law
years. This we can not allow to happen. For the benefit of future
generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB
closets have to be exposed in public so that the same may NEVER
be repeated.
It is of paramount national interest, that we allow the trial court to
proceed with dispatch to allow the parties below to present their
evidence.
Furthermore, petitioners made a valid consignation of what they, in
good faith and in compliance with the letter of the Credit
Agreement, honestly believed to be the real amount of their
remaining obligations with the respondent bank. The latter could
not therefore claim that there was no honest-to-goodness attempt
on the part of the spouse to settle their obligations. Respondent's
rush to inequitably invoke the foreclosure provisions of P.D. 385
through its legal machinations in the courts below, in spite of the
unsettled differences in interpretation of the credit agreement was
obviously made in bad faith, to gain the upper hand over
petitioners.
In the face of the unequivocal interest rate provisions in the credit
agreement and in the law requiring the parties to agree to changes
in the interest rate in writing, we hold that the unilateral and
progressive increases imposed by respondent PNB were null and
void. Their effect was to increase the total obligation on an
eighteen million peso loan to an amount way over three times that
which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates
is unconscionable and neutralizes the salutary policies of extending
loans to spur business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of
Appeals dated August 27, 1993, as well as the resolution dated
February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is
remanded to the Regional Trial Court of Makati for further
proceedings. SO ORDERED.
G.R. No. L-25704 April 24, 1968
ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee,
vs.
CHELDA ENTERPRISES and DAVID SYJUECO, defendants-
appellants.
Plaintiff corporation filed suit in the Court of First Instance of Manila
on May 29, 1964 against the partnership Chelda Enterprises and
David Syjueco, its capitalist partner, for recovery of alleged unpaid
loans in the total amount of P20,880.00, with legal interest from
the filing of the complaint, plus attorney's fees of P5,000.00.
Alleging that post dated checks issued by defendants to pay said
account were dishonored, that defendants' industrial partner,
Chellaram I. Mohinani, had left the country, and that defendants
have removed or disposed of their property, or are about to do so,
with intent to defraud their creditors, preliminary attachment was
also sought.
Answering, defendants averred that they obtained four loans from
plaintiff in the total amount of P26,500.00, of which P5,620.00 had
been paid, leaving a balance of P20,880.00; that plaintiff charged
and deducted from the loan usurious interests thereon, at rates of
2% and 2.5% per month, and, consequently, plaintiff has no cause
of action against defendants and should not be permitted to
recover under the law. A counterclaim for P2,000.00 attorney's fees
was interposed.
Plaintiff filed on June 25, 1964 an answer to the counterclaim,
specifically denying under oath the allegations of usury.
After trial, decision was rendered, on November 10, 1965. The
court found that there remained due from defendants an unpaid
principal amount of P20,287.50; that plaintiff charged usurious
interests, of which P1,048.15 had actually been deducted in
advance by plaintiff from the loan; that said amount of P1,048.15
should therefore be deducted from the unpaid principal of
P20,287.50, leaving a balance of P19,247.351 still payable to the
plaintiff. Said court held that notwithstanding the usurious interests
charged, plaintiff is not barred from collecting the principal of the
loan or its balance of P19,247.35. Accordingly, it stated, in the
dispositive portion of the decision, thus:
WHEREFORE, judgment is hereby rendered, ordering the
defendant partnership to pay to the plaintiff the amount of
P19,247.35, with legal interest thereon from May 29, 1964
until paid, plus an additional sum of P2,000.00 as damages
for attorney's fee; and, in case the assets of defendant
partnership be insufficient to satisfy this judgment in full,
ordering the defendant David Syjueco to pay to the plaintiff
one-half (1/2) of the unsatisfied portion of this judgment.
 With costs against the defendants.1äwphï1.ñët
Appealing directly to Us, defendants raise two questions of law: (1)
In a loan with usurious interest, may the creditor recover the
principal of the loan? (2) Should attorney's fees be awarded in
plaintiff's favor?
To refute the lower court's decision which is based on the doctrine
laid down by this Court in Lopez v. El Hogar Filipino, 47 Phil. 249,
holding that a contract of loan with usurious interest is valid as to
the loan but void as to the usurious interest, appellants argue that
in light of the New Civil Code provisions said doctrine no longer
applies. In support thereof, they cite the case decided by the Court
of Appeals in Sebastian v. Bautista, 58 O.G. No. 15, p. 3146.
The Sebastian case was an action for recovery of a parcel of land.
The Court of First Instance therein decided in plaintiff's favor, on
the ground that the so-called sale with pacto de retro of said land
was in fact only an equitable mortgage. In affirming the trial court,
the writer of the opinion of the Court of Appeals went further to
state the view that the loan secured by said mortgage was usurious
in nature, and, thus, totally void. Such reasoning of the writer,
however, was not concurred in by the other members of the Court,
who concurred in the result and voted for affirmance on the
grounds stated by the trial court. Furthermore, the affirmance of
the existence of equitable mortgage necessarily implies the
existence of a valid contract of loan, because the former is an
accessory contract to the latter.
Great reliance is made by appellants on Art. 1411 of the New Civil
Code which states:
Art. 1411. When the nullity proceeds from the illegality of
the cause or object of the contract, and the act constitutes
criminal offense, both parties being in pari delicto, they shall
have no action against each other, and both shall be
prosecuted. Moreover, the provisions of the Penal Code
relative to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is
guilty; but the innocent one may claim what he has given,
and shall not be bound to comply with his promise.
Since, according to the appellants, a usurious loan is void due to
illegality of cause or object, the rule of pari delicto expressed in
Article 1411, supra, applies, so that neither party can bring action
against each other. Said rule, however, appellants add, is modified
as to the borrower, by express provision of the law (Art. 1413, New
Civil Code), allowing the borrower to recover interest paid in excess
of the interest allowed by the Usury Law. As to the lender, no
exception is made to the rule; hence, he cannot recover on the
contract. So — they continue — the New Civil Code provisions must
be upheld as against the Usury Law, under which a loan with
usurious interest is not totally void, because of Article 1961 of the
New Civil Code, that: "Usurious contracts shall be governed by the
Usury Law and other special laws, so far as they are not
inconsistent with this Code." (Emphasis ours.)
We do not agree with such reasoning. Article 1411 of the New Civil
Code is not new; it is the same as Article 1305 of the Old Civil Code.
Therefore, said provision is no warrant for departing from previous
interpretation that, as provided in the Usury Law (Act No. 2655, as
amended), a loan with usurious interest is not totally void only as to
the interest.
True, as stated in Article 1411 of the New Civil Code, the rule
of pari delicto applies where a contract's nullity proceeds from
illegality of the cause or object of said contract.
However, appellants fail to consider that a contract of loan with
usurious interest consists of principal and accessory stipulations;
the principal one is to pay the debt; the accessory stipulation is to
pay interest thereon.2
And said two stipulations are divisible in the sense that the former
can still stand without the latter. Article 1273, Civil Code, attests to
this: "The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the
former in force."
The question therefore to resolve is whether the illegal terms as to
payment of interest likewise renders a nullity the legal terms as to
payments of the principal debt. Article 1420 of the New Civil Code
provides in this regard: "In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter may be
enforced."
In simple loan with stipulation of usurious interest, the prestation of
the debtor to pay the principal debt, which is the cause of the
contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is
the only one that is illegal.
Neither is there a conflict between the New Civil Code and the
Usury Law. Under the latter, in Sec. 6, any person who for a loan
shall have paid a higher rate or greater sum or value than is
allowed in said law, may recover thewhole interest paid. The New
Civil Code, in Article 1413 states: "Interest paid in excess of the
interest allowed by the usury laws may be recovered by the debtor,
with interest thereon from the date of payment." Article 1413, in
speaking of "interest paid in excess of the interest allowed by the
usury laws" means the whole usurious interest; that is, in a loan of
P1,000, with interest of P20% per annum P200 for one year, if the
borrower pays said P200, the whole P200 is the usurious interest,
not just that part thereof in excess of the interest allowed by law. It
is in this case that the law does not allow division. The whole
stipulation as to interest is void, since payment of said interest is
the cause or object and said interest is illegal. The only change
effected, therefore, by Article 1413, New Civil Code, is not to
provide for the recovery of the interest paid in excess of that
allowed by law, which the Usury Law already provided for, but to
add that the same can be recovered "with interest thereon from
the date of payment."
2209, Civil Code). The court a quo therefore, did not err in ordering
defendants to pay the principal debt with interest thereon at the
legal rate, from the date of filing of the complaint.
As regards, however, the attorney's fees, the court a quo stated no
basis for its award, beyond saying that as a result of defendants'
refusal to pay the amount of P19,247.35 notwithstanding repeated
demands, plaintiff was obliged to retain the services of counsel.
The rule as to attorney's fees is that the same are not recoverable,
in the absence of stipulation. Several exceptions to this rule are
provided (Art. 2208, Civil Code). Unless shown to fall under an
exception, the act of plaintiff in engaging counsel's services due to
refusal of defendants to pay his demand, does not justify award of
attorney's fees (Estate of Buan v. Camaganacan, L-21569, Feb. 28,
1966). Defendants, moreover, had reason to resist the claim, since
there was yet no definite ruling of this Court on the point of law
involved herein in light of the New Civil Code. Said award should
therefore be deleted.
WHEREFORE, with the modification that the award of attorney's
fees in plaintiff's favor is deleted therefrom, and the correction of
the clerical error as to the principal still recoverable, from
P19,247.35 to P19,239.35, the appealed judgment is hereby
affirmed. No costs. So ordered

The foregoing interpretation is reached with the philosophy of

usury legislation in mind; to discourage stipulations on usurious
interest, said stipulations are treated as wholly void, so that the
loan becomes one without stipulation as to payment of interest. It
should not, however, be interpreted to mean forfeiture even of the
principal, for this would unjustly enrich the borrower at the expense
of the lender. Furthermore, penal sanctions are available against a
usurious lender, as a further deterrence to usury.

The principal debt remaining without stipulation for payment of

interest can thus be recovered by judicial action. And in case of
such demand, and the debtor incurs in delay, the debt earns
interest from the date of the demand (in this case from the filing of
the complaint). Such interest is not due to stipulation, for there was
none, the same being void. Rather, it is due to the general
provision of law that in obligations to pay money, where the debtor
incurs in delay, he has to pay interest by way of damages (Art.