Samuel H. Gaerlan, J.
Estrella Pabalan v. Vasudave Sabnani
G.R. No. 211363, February 21, 2023
Clean link (Supreme Court E-Library):
https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/67566
I. Facts
Estrella Pabalan obtained a loan from Vasudave Sabnani. The parties executed a written agreement stipulating a specific rate of interest. Upon default, the lender sought enforcement of the loan agreement, including the stipulated interest.
The borrower challenged the enforceability of the stipulated rate, arguing that the interest imposed was excessive and unconscionable. The case eventually reached the Supreme Court on the issue of whether courts may intervene and reduce a contractually agreed interest rate despite the suspension of the Usury Law.
II. Issue
Whether courts possess the authority to intervene and reduce a contractually stipulated interest rate on the ground that it is unconscionable, iniquitous, or contrary to public policy.
III. Ruling
The Supreme Court affirmed that courts have the discretionary power to reduce stipulated interest rates when they are found to be unconscionable, iniquitous, or illegal.
While the Usury Law ceilings have been suspended, the freedom of parties to stipulate interest rates is not absolute. Article 1306 of the Civil Code allows parties to establish 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.
Thus, the judiciary retains the authority—and indeed the duty—to strike down or equitably reduce interest rates that violate these standards.
IV. Ratio Decidendi (Core Doctrine Explained)
The Court’s reasoning rests on four interlocking propositions:
1. Suspension of the Usury Law did not remove judicial review.
The Central Bank Circular suspending interest ceilings merely lifted statutory caps; it did not grant lenders unbridled authority to impose any rate whatsoever. Judicial power to review contracts for legality and public policy remains intact.
Freedom to stipulate interest does not mean freedom to impose oppression.
2. Article 1306 of the Civil Code limits contractual autonomy.
Contractual freedom operates within normative boundaries. Even voluntarily agreed stipulations may be invalidated if they:
Are unconscionable
Are iniquitous
Offend public policy
Result from unequal bargaining power
Thus, the Civil Code itself supplies the doctrinal basis for judicial intervention.
3. The economic premise of “free bargaining” is often illusory.
The Court made an important economic observation: the freedom to fix interest rates presupposes a competitive loan market and parity between parties.
That premise assumes:
Borrowers have real alternatives;
Parties bargain on equal footing;
Consent is free from coercion or circumstantial compulsion.
However, in reality:
Loan markets may be imperfect;
Borrowers may be financially distressed;
Lenders may enjoy superior bargaining power.
Where inequality distorts consent, courts must ensure that interest rates are not oppressive.
This is a recognition that formal consent is not always substantive fairness.
4. Determination of unconscionability is case-specific.
The Court emphasized that no fixed numerical threshold automatically renders an interest rate illegal. Rather, courts must examine:
The rate itself;
The circumstances of execution;
The parties’ relative positions;
The presence of exploitation or abuse.
Thus, judicial discretion is contextual, not mechanical.
V. Doctrine
Even after the suspension of the Usury Law, courts retain the power to equitably reduce stipulated interest rates that are unconscionable, iniquitous, or contrary to public policy under Article 1306 of the Civil Code.
Freedom of contract does not legitimize economic oppression.
VI. Significance in Philippine Jurisprudence
This decision reinforces a long line of rulings recognizing judicial authority to temper excessive interest rates. It affirms that:
Contractual autonomy is not absolute;
Courts remain guardians against abusive lending practices;
Public policy limits market excesses.
The case is doctrinally important because it explicitly links economic theory (perfect competition) with civil law principles of equity and public policy—thereby grounding judicial intervention in both legal and economic reasoning.
VII. Clean Source Link (Verified)
Supreme Court E-Library:
https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/1/67566
Sources:
– Supreme Court E-Library, Estrella Pabalan v. Vasudave Sabnani, G.R. No. 211363, February 21, 2023.
(Assisted by ChatGPT, February 15, 2026)
