With the suspension of the effectivity of the Usury Law, there is no strict or fixed benchmark to determine whether an interest rate imposed on a loan is “usurious” or “unconscionable.” Consequently, no single interest rate fits all; each case must be examined on its own facts. For lenders and borrowers alike, the Supreme Court’s ruling in Pabalan v. Sabnani offers useful guidance for future transactions.

In that case, the first promissory note (PN) covered a principal loan of P1.45 million with interest at eight percent per month, while the second PN involved P6 million with interest at five percent per month. Both PNs contained identical default provisions: failure to pay the stipulated interest when due would trigger a higher interest rate of 20 percent per month on the outstanding principal.

When Sabnani defaulted, Pabalan sent a demand letter and initiated the necessary actions to enforce the security under the real estate mortgage and the PNs. In response, Sabnani challenged the validity of the stipulated interest rates, penalties, and other charges, arguing that they were “illegal, excessive, exorbitant, and unconscionable” and should be voided.

At first glance, especially with the prevailing legal interest at six percent per annum, the stipulated rates may appear excessive. However, in this instance, the Supreme Court upheld the validity of the agreed rates.

The Court reiterated its settled doctrine: when a stipulated interest rate exceeds the standard legal rate, the creditor bears the burden of proving that the rate was justified by market conditions or that the parties dealt with each other on equal footing. Whether such equality exists is determined on a case-to-case basis after a careful consideration of relevant factors.

The Court emphasized that it must examine the parties’ respective backgrounds and personal circumstances. It must determine whether one party was disadvantaged by moral dependence, mental weakness, tender age, or any other handicap warranting judicial protection. This inquiry may include reviewing each party’s educational attainment, professional history, financial standing, and other relevant experience. These factors help assess whether both parties fully understood and voluntarily consented to the agreement.

Applying these principles, the Supreme Court found:

(a) Neither party was placed at a disadvantage nor required judicial protection; both were competent and fully capable of understanding the terms of the REM and the PNs;

(b) The factual context showed that neither was compelled to enter into the transaction;

(c) Sabnani voluntarily agreed to the loan terms for legitimate business reasons, benefited from the transaction, and used the proceeds as part of a broader series of dealings he considered advantageous for expanding his business; and

(d) Sabnani’s contemporaneous acts during the execution of the loan demonstrated full knowledge of its terms and consequences. As an experienced businessman, he took deliberate and strategic measures to manage his liability exposure, fully aware of the stipulated interest and penalties. Having benefited from the loan, he could no longer assail its validity.

In the light of these circumstances, the Court held that no intervention was warranted. The stipulated interest rates, penalties, liquidated damages, and attorney’s fees were freely and voluntarily agreed upon, without fraud or coercion. Absent compelling reasons grounded in equity or justice, the Supreme Court will not interfere with the parties’ freedom to contract.

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