By: Atty. Gregorio B. Austral, CPA

The Court has the discretion to reduce stipulated interest


The freedom of contract is both a constitutional and statutory right and the
contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.
In the recent case of Konka International Plastic Manufacturing Corp. v.
Metropolitan Bank and Trust Co., G.R. No. 243283, July 10, 2023, the Supreme Court
exercised its discretion to reduce the stipulated interest which the Court found to be
unconscionable.
With regard to the interest rate imposed, We note that the same was never
questioned by Konka International Plastic Manufacturing Corporation (Konka), Spouses
Lin Qing Yuan (A.K.A. Francis Lin) and Emma Concepcion L. Lin (Spouses Lin), and
Spouses Cai Wen Yi (A.K.A. Rudy Chua) and Cai Liu Cai (Spouses Cai) (collectively
petitioners) in its pleadings before the Court. However, We have the discretion to
reduce the stipulated interest rates if found to be unconscionable.
To recall, respondent Metropolitan Bank and Trust Company (Metrobank)
extended a loan to Konka amounting to P11,900,000.00, subject to the interest rate of
11.125% per annum and a penalty charge of 18% per annum in case of default. All
terms and conditions of the loan were embodied in a notarized Promissory Note dated
October 16, 2007 (Promissory Note).
On April 22, 2004, Spouses Lin and Spouses Cai executed a notarized Continuing
Surety Agreement (Continuing Surety Agreement), where they solidarily agreed to pay
for all loans and credit accommodations granted by Metrobank up to the principal
amount of P13,000,000.00 only.
Konka failed to pay its obligation to Metrobank. Likewise, Spouses Lin and
Spouses Cai failed to comply with their promise. Metrobank demanded payment from
petitioners but to no avail, prompting Metrobank to judicially demand the monetary sum
from petitioners. Thus, on August 13, 2010, Metrobank filed a Complaint for Collection
of a Sum of Money with Prayer for Issuance of a Writ of Preliminary Attachment against
petitioners.
Both the trial court and the appellate court ruled in favor of Metrobank. In Our
Resolution 11 dated July 1, 2019, We denied the Petition for Review on Certiorari filed
by petitioners for failure to show any reversible error in the challenged decision and
resolution as to warrant the exercise of the Court’s discretionary appellate jurisdiction.
Undaunted, petitioners sought reconsideration of the assailed Resolution without
questioning the rates of the interest imposed.
Records show that the petitioners voluntarily agreed to a monetary obligation to
Metrobank subject to a fixed annual interest rate of 11.125% per annum. This was
ruled as valid by the CA. While We agree with the appellate court, the conventional
interest rate of 11.125% per annum should be modified in light of recent jurisprudence
and Circular No. 799, series of 2013 of the Bangko Sentral ng Pilipinas (BSP).

In jurisprudence, this Court ruled that “[s]tipulated interest rates, whether
conventional or compensatory, are subject to the “unconscionability” standard. The
concept of unconscionability is a matter of law and equity.” Thus, the factual
circumstances of the case determine the award of interest.
Hence, as pointed out by this Court in Lara’s Gifts & Decors, Inc. v. Midtown
Industrial Sales, Inc., the interest rate of 11.125% per annum should be modified in
view of BSP-MB Circular No. 799, series of 2013, which pegs the interest at 6% per
annum effective July 1, 2013. The Court finds that the principal amount of
P11,900,000.00 shall earn legal interest of 11.125% per annum reckoned from August
13, 2010 (or the date of judicial demand) until June 30, 2013, and 6% per annum from
July 1, 2013 until full payment.
The reduction of interest rate is not limited to monetary interest. When
compensatory interest, such as penalty interest, is found to be unconscionable, it may
also be reduced. In jurisprudence, it was found that the factors applied by the Court
to reduce penalty interest include the following: the type, extent, and purpose of the
penalty, the nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the like. In the
same case, the 24% per annum was upheld for being a valid compensatory interest.
Applying the foregoing to the case at bar, this Court finds that none of the
factors in jurisprudence apply to warrant the reduction of the penalty charge of 18%
per annum. Thus, the penalty charge of 18% per annum applies until full payment.