In the case of Gobonseng v. Unibancard Corporation, the Supreme Court addressed the enforceability of interest rates and penalties stipulated in credit card agreements. The Court upheld the contractual stipulations, affirming that interest rates and penalties agreed upon by parties are generally enforceable as long as they are not unconscionable or contrary to law and public policy. This decision underscores the principle of freedom of contract while also recognizing the court’s power to moderate excessively high charges.
When Credit Card Contracts Clash with Fair Lending Practices
Edmerito Ang Gobonseng obtained a Unicard credit card with a P10,000 monthly limit, with Eduardo Ang Gobonseng, Sr., as a co-obligor. Edmerito’s purchases ballooned to P179,638.74. Upon default, Unicard demanded payment including principal, interest, and penalties that totaled P401,198.88. When efforts to collect failed, Unicard filed suit. The case eventually reached the Court of Appeals (CA), which affirmed the lower court’s decision with modifications, reducing the penalties and attorney’s fees. The Gobonsengs then appealed to the Supreme Court, questioning the interest rate, penalties, and attorney’s fees. The central legal question was whether the CA erred in upholding the 3% monthly interest, the 5% monthly penalty, and the 10% attorney’s fees.
The Supreme Court emphasized that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. If the terms of the contract clearly express the intention of the parties, the literal meaning of the stipulations would be controlling. The Court acknowledged that it will enforce contractual stipulations as agreed upon as long as they are not unconscionable or contrary to morals and public policy. The contract between the parties stipulated an interest rate of 3% per month on unpaid balances and a penalty of 5% per month for delayed payments. Petitioners argued that the 3% monthly interest was excessive and contrary to jurisprudence setting a 12% per annum rate, and that the penalty should substitute the indemnity for damages and payment of interest.
The Court also relied on Article 1226 of the Civil Code, noting that in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. The Supreme Court also clarified that the 12% interest rate per annum is applied only when the parties fail to fix the rate of interest, or when the stipulated amount is deemed unwarranted. Here, because the interest and penalty rates were stipulated, they were deemed enforceable.
Furthermore, the Court cited previous rulings indicating that unless the stipulated amounts are exorbitant, the court will sustain the amounts agreed upon by the parties. It reasoned that individuals signify their adherence to contractual arrangements when availing of services such as credit cards. Regarding the award of attorney’s fees, the Court found the initial 25% excessive. Ultimately, the Supreme Court held that while the stipulated interest and penalty rates were enforceable, the reduction of attorney’s fees by the Court of Appeals was appropriate. This decision reaffirms the principle of contractual freedom, subject to the court’s power to intervene when contractual terms are unconscionable.
FAQs
| What was the key issue in this case? | The key issue was whether the interest rate and penalties stipulated in the credit card agreement were enforceable, or if they were unconscionable. |
| What was the interest rate stipulated in the credit card agreement? | The agreement stipulated an interest rate of 3% per month on unpaid balances, in addition to a 5% monthly penalty for delayed payments. |
| Did the Supreme Court find the interest rate and penalties to be unconscionable? | The Court did not find the interest rate or the reduced penalties imposed by the Court of Appeals to be unconscionable, upholding the principle of contractual freedom. |
| When does the Court apply the 12% per annum interest rate? | The Court applies the 12% per annum interest rate only when the parties to a contract have failed to fix an interest rate or when the stipulated rate is deemed excessive. |
| What does Article 1226 of the Civil Code state? | Article 1226 states that in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, unless there is a stipulation to the contrary. |
| Why was the attorney’s fee reduced in this case? | The attorney’s fee was reduced because the initial 25% was deemed excessive by the Court of Appeals. |
| What principle did the Supreme Court emphasize in its decision? | The Supreme Court emphasized that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith, subject to certain limitations. |
| What was the final ruling of the Supreme Court in this case? | The Supreme Court affirmed the decision of the Court of Appeals, which upheld the enforceability of the stipulated interest and penalties, but reduced the attorney’s fees. |
The Gobonseng v. Unibancard Corporation decision clarifies the balance between upholding contractual agreements and preventing unconscionable lending practices. While parties are generally bound by their agreements, courts retain the power to moderate excessive charges to ensure fairness and equity.
For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.
Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: EDMERITO ANG GOBONSENG, AND EDUARDO ANG GOBONSENG, SR. VS. UNIBANCARD CORPORATION, G.R. NO. 160026, December 10, 2007
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