FRANCISCO HERRERA, PLAINTIFF-APPELLANT, VS. PETROPHIL CORPORATION, DEFENDANT-APPELLEE.

Herrera versus Petrophil Corporation

The Case

This is a case about a lease, an advance payment of rent, and a deduction that the lessor mistook for usurious interest. Francisco Herrera, the lessor, sued Petrophil Corporation, the lessee, to recover the amount that the lessee had subtracted from eight years of rentals paid in advance. The action was for the recovery of a sum of money with interest, on the theory that the deduction was excessive interest forbidden by the Usury Law. The case matters because it draws the line between a discount for advance payment and usury, and because it reminds the Bar candidate that a contract is interpreted according to its literal meaning and the obvious intention of the parties, not by an intricate formula invented after the fact.

Procedural History

The complaint was filed by Herrera against Petrophil before the then Court of First Instance of Rizal. The defendant admitted the factual allegations but denied that the deduction was usurious interest, insisting it was a discount for paying eight years of rentals in advance. The trial court rendered judgment on the pleadings in favor of the defendant, upholding the deduction. Herrera appealed, and the case reached the Supreme Court on a pure question of law. The Supreme Court modified the decision of the trial court.

Facts

On December 5, 1969, Herrera and ESSO Standard Eastern, Incorporated, later substituted by Petrophil Corporation, entered into a Lease Agreement. Herrera leased a portion of his property to the corporation for twenty years. The contract provided that the lessee would pay rentals yearly in advance within the first twenty days of each year, and that the lessor would be paid eight years of advance rental based on a stated monthly rate, discounted at twelve percent interest per annum, for a total net amount of 130,288.47 pesos before registration of the lease.

On December 31, 1969, the lessee paid the advance rentals for the first eight years but subtracted 101,010.73 pesos, which it computed as the interest or discount for those eight years. On August 20, 1970, explaining that there had been a mistake in computation, the lessee paid an additional 2,182.70 pesos, reducing the deducted amount to 98,828.03 pesos.

On October 14, 1974, Herrera sued to recover the 98,828.03 pesos with interest, claiming it had been illegally deducted in violation of the Usury Law, and praying for moral damages and attorney's fees. The lessee answered that the amount was not usurious interest but a discount for paying the rentals in advance. Judgment on the pleadings was rendered for the defendant, and Herrera appealed.

Issues

• Whether or not the deduction from the advance rentals constituted usurious interest in violation of the Usury Law.
• Whether or not the trial court correctly computed the deductible discount for the eight years of advance rentals.

Applicable Provisions

The decision rests on the principle that contracts have the force of law between the parties, as stated in the Civil Code:

The contract is the law between the parties and should be complied with in good faith.

This principle sustains the validity of the discount stipulation, which the parties freely agreed upon and which is not contrary to law, morals, good customs, public policy, or public order.

The decision also applies the rule on interpretation of contracts, as stated in the Civil Code:

If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.

This rule governs the computation of the discount, because the Court held that the parties intended a uniform twelve percent deduction for each of the eight years, and not the intricate formula applied by the trial court.

Ruling

On the first issue, the Court held that there was no usury. As its title plainly indicated, the contract was one of lease and not of loan. The provision for payment of rentals in advance could not be construed as repayment of a loan, because there was no grant or forbearance of money that would constitute an indebtedness on the part of the lessor. The lessee was discharging its obligation in advance, and it was for this advance payment that it received a rebate or discount. The Court stressed that to constitute usury there must be a loan or forbearance, the loan must be of money or something circulating as money, it must be repayable absolutely and in all events, and something must be exacted for the use of the money in excess of the interest allowed by law. None of these elements was present. The discount was in effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by any amount, would not contravene the Usury Law. The difference between a discount and a loan or forbearance is that the former does not have to be repaid, while the latter is subject to repayment and is therefore governed by the laws on usury.

On the second issue, the Court rejected the trial court's computation as too much technical mumbo-jumbo that could not have been the intention of the parties. Had that been the intention, it should have been clearly stipulated in the contract. The Court held that contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. The lessor simply understood that for every year of advance payment there would be a deduction of twelve percent, and this amount would be the same for each of the eight years. There was no showing that the intricate computation was explained to him or that he knowingly accepted it. The Court also rejected the lessor's later claim that the interest should be limited to seven years, because the agreement was for a uniform deduction for the advance rentals for each of the eight years, and neither party could deviate from it. Computing the discount uniformly over eight years, the Court found that a balance of 65,114.35 pesos remained due to the lessor.

Doctrine

A contract of lease is not a contract of loan. The payment of rentals in advance is the performance of the lessee's obligation, not a grant or forbearance of money, and the rebate or discount given for such advance payment is not interest. A discount does not have to be repaid, while a loan or forbearance is subject to repayment and is governed by the laws on usury. To constitute usury, there must be a loan, express or implied; an understanding that the money lent shall or may be returned; a greater rate of interest than that allowed by law; and a corrupt intent to take more than the legal rate for the use of money loaned. Unless these four things concur, there is no usury. Finally, contracts are interpreted according to their literal meaning and obvious intention, and a party cannot later impose a computation that was never clearly stipulated nor explained to the other.

Disposition

The Supreme Court modified the decision of the trial court and ordered Petrophil Corporation to pay Herrera 65,114.35 pesos with interest at the legal rate until fully paid, plus 10,000 pesos as attorney's fees, with costs against the defendant.

Remember This

A discount for advance payment of rent is not usurious interest, because a discount does not have to be repaid while a loan or forbearance does. Examiners use this case to test the elements of usury and the rule that contracts are interpreted according to their literal meaning and the obvious intention of the parties.