Unconscionable Interest Rates When Courts Intervene To Protect Borrowers

When a contract imposes interest and penalty charges that effectively reach 60% per annum, Philippine courts have the power—and the duty—to step in. In MCMP Construction Corp. v. Monark Equipment Corp. (G.R. No. 201001, November 10, 2014), the Supreme Court reaffirmed that while parties are free to stipulate rates, courts will equitably reduce those that are iniquitous or unconscionable.

The Dispute

MCMP Construction Corporation leased heavy equipment from Monark Equipment Corporation in 2000. The invoices governing the transaction stated that amounts were payable within 30 days, with interest at 24% per annum, a collection fee of 1% compounded monthly, a 2% monthly penalty charge for late payment, and attorney's fees of 25% of any amount due in case of suit.

When MCMP failed to pay, Monark sued for collection. The Regional Trial Court ruled in favor of Monark, awarding the full amount claimed—including all the accumulated charges. The Court of Appeals affirmed. MCMP elevated the case to the Supreme Court.

The Issue Before the Court

MCMP raised two main arguments. First, it claimed that Monark should not have been allowed to present a photocopy of the Rental Equipment Contract because the original was allegedly lost, invoking the Best Evidence Rule. Second, it denied that the equipment was actually delivered.

On the first point, the Court found no error. Under Section 3, Rule 130 of the Rules of Court, secondary evidence is admissible when the original has been lost without bad faith on the part of the offeror. Sections 5 and 6 of the same Rule allow proof of a lost document's contents by copy or testimony, provided the offeror proves its existence, execution, and loss.

Here, Monark's witness testified to the loss and the diligent efforts to locate the original. More tellingly, MCMP itself failed to produce its own copy of the contract despite the trial court's directive—a failure that gave rise to the presumption that evidence willfully suppressed would be adverse if produced. On the second point, MCMP's own witnesses admitted the equipment was delivered.

The Court's Ruling on Unconscionable Rates

Although the Court denied MCMP's petition, it took motu proprio notice of the staggering charges imposed. The combined effect of the 24% annual interest, the 1% monthly collection fee, and the 2% monthly penalty charge amounted to an effective rate of 60% per annum—on top of a 25% attorney's fees stipulation.

Citing Macalinao v. Bank of the Philippine Islands and Pentacapital Investment Corporation v. Mahinay, the Court held that stipulated interest rates of 3% per month and higher are excessive, iniquitous, and unconscionable. Such stipulations are void for being contrary to morals. When a stipulation is void, it is as if there was no express contract on the matter, and courts may reduce the rate as reason and equity demand.

The Court anchored its power to reduce on Article 1229 of the Civil Code, which allows judges to equitably reduce penalties that are iniquitous or unconscionable, and Article 2227, which permits the reduction of liquidated damages under the same standard.

The Court then reduced the charges as follows:

• Interest from 24% to 12% per annum
• Penalty and collection charges from 3% per month (36% per annum) to 6% per annum
• Attorney's fees from 25% to 5% of the amount recovered

The unpaid principal of PhP765,380.33 remained, with the reduced charges computed from March 1, 2001, thirty days after receipt of the second set of invoices.

Practical Takeaways

• Courts police contractual rates. Even if a borrower or lessee signs an agreement with high interest and penalty terms, courts will not blindly enforce them. Rates that effectively reach 60% per annum are considered unconscionable and void.
• The reduction is equitable, not formulaic. Courts consider the circumstances of each case. What is unconscionable in one situation may be just in another, but rates of 3% per month or higher have consistently been struck down.
• Article 1229 is a powerful tool. Both debtors and creditors should know that judges may reduce stipulated penalties even when there has been no performance, if the penalty is iniquitous or unconscionable.
• Preserve your copies of contracts. MCMP's failure to produce its copy of the agreement worked against it, triggering an adverse presumption. Always retain and safeguard original documents.
• The Best Evidence Rule has exceptions. A lost original does not defeat a claim, provided the offeror proves the document's existence, execution, and loss without bad faith.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.