1) The Philippine National Bank (PNB) granted loans totaling 18 million pesos to the Almeda spouses in 1981 at an interest rate of 21% per annum.
2) In 1984, over the Almedas' protest, PNB unilaterally raised the interest rate to 28% and subsequently increased it to as high as 68%.
3) The Almedas argued in court that PNB did not have the right to unilaterally raise interest rates under the credit agreement. PNB maintained it had the right to increase rates and to foreclose on the Almedas' property when they defaulted on payments.
1) The Philippine National Bank (PNB) granted loans totaling 18 million pesos to the Almeda spouses in 1981 at an interest rate of 21% per annum.
2) In 1984, over the Almedas' protest, PNB unilaterally raised the interest rate to 28% and subsequently increased it to as high as 68%.
3) The Almedas argued in court that PNB did not have the right to unilaterally raise interest rates under the credit agreement. PNB maintained it had the right to increase rates and to foreclose on the Almedas' property when they defaulted on payments.
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1) The Philippine National Bank (PNB) granted loans totaling 18 million pesos to the Almeda spouses in 1981 at an interest rate of 21% per annum.
2) In 1984, over the Almedas' protest, PNB unilaterally raised the interest rate to 28% and subsequently increased it to as high as 68%.
3) The Almedas argued in court that PNB did not have the right to unilaterally raise interest rates under the credit agreement. PNB maintained it had the right to increase rates and to foreclose on the Almedas' property when they defaulted on payments.
Copyright:
Attribution Non-Commercial (BY-NC)
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decreased in the event SUPREME COURT that the applicable Baguio City maximum interest rate FIRST DIVISION is reduced by law or by the Monetary Board. In either case, the G.R. No. 113412 April 17, 1996 adjustment in the Spouses PONCIANO ALMEDA and EUFEMIA P. interest rate agreed ALMEDA, petitioner, upon shall take effect vs. on the effectivity date THE COURT OF APPEALS and PHILIPPINE of the increase or NATIONAL BANK, respondents. decrease of the maximum interest rate. 1
KAPUNAN, J.:p Between 1981 and 1984, petitioners made several
On various dates in 1981, the Philippine National partial payments on the loan totaling. Bank granted to herein petitioners, the spouses P7,735,004.66, 2 a substantial portion of which was Ponciano L. Almeda and Eufemia P. Almeda several applied to accrued interest. 3 On March 31, 1984, loan/credit accommodations totaling P18.0 Million respondent bank, over petitioners' protestations, pesos payable in a period of six years at an interest raised the interest rate to 28%, allegedly pursuant rate of 21% per annum. To secure the loan, the to Section III-c (1) of its credit agreement. Said spouses Almeda executed a Real Estate Mortgage interest rate thereupon increased from an initial Contract covering a 3,500 square meter parcel of 21% to a high of 68% between March of 1984 to land, together with the building erected thereon September, 1986. 4 (the Marvin Plaza) located at Pasong Tamo, Makati, Petitioner protested the increase in interest rates, to Metro Manila. A credit agreement embodying the no avail. Before the loan was to mature in March, terms and conditions of the loan was executed 1988, the spouses filed on February 6, 1988 a between the parties. Pertinent portions of the said petition for declaratory relief with prayer for a writ agreement are quoted below: of preliminary injunction and temporary restraining SPECIAL CONDITIONS order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition, xxx xxx xxx which was raffled to Branch 134 presided by Judge The loan shall be subject to interest at Ignacio Capulong, the spouses sought clarification the rate of twenty one per cent (21%) as to whether or not the PNB could unilaterally raise per annum, payable semi-annually in interest rates on the loan, pursuant to the credit arrears, the first interest payment to agreement's escalation clause, and in relation to become due and payable six (6) Central Bank Circular No. 905. As a preliminary months from date of initial release of measure, the lower court, on March 3, 1988, issued the loan. The loan shall likewise be a writ of preliminary injunction enjoining the subject to the appropriate service Philippine National Bank from enforcing an interest charge and a penalty charge of three rate above the 21% stipulated in the credit per cent (30%) per annum to be agreement. By this time the spouses were already in imposed on any amount remaining default of their loan obligations. unpaid or not rendered when due. Invoking the Law on Mandatory Foreclosure (Act xxx xxx xxx 3135, as amended and P.D. 385), the PNB countered III. OTHER CONDITIONS by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an (c) Interest and Charges auction sale for March 14, 1989. Upon motion by (1) The Bank reserves petitioners, however, the lower court, on April 5, the right to increase the 1989, granted a supplemental writ of preliminary interest rate within the injunction, staying the public auction of the limits allowed by law at mortgaged property. any time depending on On January 15, 1990, upon the posting of a whatever policy it may counterbond by the PNB, the trial court dissolved adopt in the future; the supplemental writ of preliminary injunction. provided, that the Petitioners filed a motion for reconsideration. In the interest rate on interim, respondent bank once more set a new date this/these for the foreclosure sale of Marvin Plaza which was accommodations shall March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank respondent court in its resolution dated January 10, the amount of P40,142,518.00, consisting of the 1994. principal (P18,000,000.00) and accrued interest Hence the instant petition. calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5 This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal As a result of PNB's refusal of the tender of issues namely: 1) Whether or not respondent bank payment, petitioners, on March 8, 1990, formally was authorized to raise its interest rates from 21% consigned the amount of P40,142,518.00 with the to as high as 68% under the credit agreement; and Regional Trial Court in Civil Case No. 90-663. They 2) Whether or not respondent bank is granted the prayed therein for a writ of preliminary injunction authority to foreclose the Marvin Plaza under the with a temporary restraining order. The case was mandatory foreclosure provisions of P.D. 385. raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought In its comment dated April 19, 1994, respondent the dismissal of the case. bank vigorously denied that the increases in the interest rates were illegal, unilateral, excessive and On March 30, 1990 Judge Guadiz in Civil Case No. arbitrary, it argues that the escalated rates of 90-663 issued an order granting the writ of interest it imposed was based on the agreement of preliminary injunction enjoining the foreclosure sale the parties. Respondent bank further contends that of "Marvin Plaza" scheduled on March 12, 1990. On it had a right to foreclose the mortgaged property April 17, 1990 respondent bank filed a motion for pursuant to P.D. 385, after petitioners were unable reconsideration of the said order. to pay their loan obligations to the bank based on On August 16, 1991, Civil Case No. 90-663 we the increased rates upon maturity in 1984. transferred to Branch 66 presided by Judge Eriberto The instant petition is impressed with merit. Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio The binding effect of any agreement between Capulong. parties to a contract is premised on two settled principles: (1) that any obligation arising from For Judge Ignacio's refusal to lift the writ of contract has the force of law between the parties; preliminary injunction issued March 30, 1990, and (2) that there must be mutuality between the respondent bank filed a petition for Certiorari, parties based on their essential equality. 6 Any Prohibition and Mandamus with respondent Court of contract which appears to be heavily weighed in Appeals, assailing the following orders of the favor of one of the parties so as to lead to an Regional Trial Court: unconscionable result is void. Any stipulation 1. Order dated March 30, 1990 of regarding the validity or compliance of the contract Judge Guadiz granting the writ of which is left solely to the will of one of the parties, is preliminary injunction restraining the likewise, invalid. foreclosure sale of Mavin Plaza set on It is plainly obvious, therefore, from the undisputed March 12, 1990; facts of the case that respondent bank unilaterally 2. Order of Judge Ignacio Capulong altered the terms of its contract with petitioners by dated January 10, 1992 denying increasing the interest rates on the loan without the respondent bank's motion to lift the prior assent of the latter. In fact, the manner of writ of injunction issued by Judge agreement is itself explicitly stipulated by the Civil Guadiz as well as its motion to Code when it provides, in Article 1956 that "No dismiss Civil Case No. 90-663; interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in 3. Order of Judge Capulong dated July writing" from a perusal of interest rate provision of 3, 1992 denying respondent bank's the credit agreement signed between the parties is subsequent motion to lift the writ of that petitioners were bound merely to pay 21% preliminary injunction; and interest, subject to a possible escalation or de- 4. Order of Judge Capulong dated escalation, when 1) the circumstances warrant such October 20, 1992 denying respondent escalation or de-escalation; 2) within the limits bank's motion for reconsideration. allowed by law; and 3) upon agreement. On August 27, 1993, respondent court rendered its Indeed, the interest rate which appears to have decision setting aside the assailed orders and been agreed upon by the parties to the contract in upholding respondent bank's right to foreclose the this case was the 21% rate stipulated in the interest mortgaged property pursuant to Act 3135, as provision. Any doubt about this is in fact readily amended and P.D. 385. Petitioners' Motion for resolved by a careful reading of the credit Reconsideration and Supplemental Motion for agreement because the same plainly uses the Reconsideration, dated September 15, 1993 and phrase "interest rate agreed upon," in reference to October 28, 1993, respectively, were denied by the original 21% interest rate. The interest provision on their essential equality. A contract states: containing a condition which makes its fulfillment dependent exclusively (c) interest and Charges upon the uncontrolled will of one of (1) The Bank reserves the right to the contracting parties, is void (Garcia increase the interest rate within the vs. Rita Legarda, Inc., 21 SCRA 555). limits allowed by law at any time Hence, even assuming that the P1.8 depending on whatever policy it may million loan agreement between the adopt in the future; provided, that the PNB and the private respondent gave interest rate on this/these the PNB a license (although in fact accommodations shall be there was none) to increase the correspondingly decreased in the interest rate at will during the term of event that the applicable maximum the loan, that license would have interest rate is reduced by law or by been null and void for being violative the Monetary Board. In either case, of the principle of mutuality essential the adjustment in the interest rate in contracts. It would have invested agreed upon shall take effect on the the loan agreement with the effectivity date of the increase or character of a contract of adhesion, decrease of the maximum interest where the parties do not bargain on rate. equal footing, the weaker party's (the In Philippine National Bank v. Court of Appeals, 7 this debtor) participation being reduced to Court disauthorized respondent bank from the alternative "to take it or lease it" unilaterally raising the interest rate in the (Qua vs. Law Union & Rock Insurance borrower's loan from 18% to 32%, 41% and 48% Co., 95 Phil. 85). Such a contract is a partly because the aforestated increases violated veritable trap for the weaker party the principle of mutuality of contracts expressed in whom the courts of justice must Article 1308 of the Civil Code. The Court held: protect against abuse and imposition.
CB Circular No. 905, PNB's successive increases of the
Series of 1982 (Exh. 11) interest rate on the private removed the Usury Law respondent's loan, over the latter's ceiling on interest rates protest, were arbitrary as they — violated an express provision of the Credit Agreement (Exh. 1) Section . . . increases in interest 9.01 that its terms "may be amended rates are not subject to only by an instrument in writing any ceiling prescribed signed by the party to be bound as by the Usury Law. burdened by such amendment." The but it did not authorize the PNB, or increases imposed by PNB also any bank for that matter, to contravene Art. 1956 of the Civil Code unilaterally and successively increase which provides that "no interest shall the agreed interest rates from 18% to be due unless it has been expressly 48% within a span of four (4) months, stipulated in writing." in violation of P.D. 116 which limits The debtor herein never agreed in such changes to once every twelve writing to pay the interest increases months. fixed by the PNB beyond 24% per Besides violating P.D. 116, the annum, hence, he is not bound to pay unilateral action of the PNB in a higher rate than that. increasing the interest rate on the That an increase in the interest rate private respondent's loan, violated from 18% to 48% within a period of the mutuality of contracts ordained in four (4) months is excessive, as found Article 1308 of the Civil Code: by the Court of Appeals, is Art. 308. The contract must bind both indisputable. contracting parties; its validity or Clearly, the galloping increases in interest rate compliance cannot be left to the will imposed by respondent bank on petitioners' loan, of one of them. over the latter's vehement protests, were arbitrary. In order that obligations arising from Moreover, respondent bank's reliance on C.B. contracts may have the force of law Circular No. 905, Series of 1982 did not authorize between the parties, there must be the bank, or any lending institution for that matter, mutuality between the parties based to progressively increase interest rates on borrowings to an extent which would have made it I/We hereby authorize Banco Filipino virtually impossible for debtors to comply with their to correspondingly increase. own obligations. True, escalation clauses in credit the interest rate stipulated in this agreements are perfectly valid and do not contract without advance notice to contravene public policy. Such clauses, however, (as me/us in the event. are stipulations in other contracts) are nonetheless still subject to laws and provisions governing a law agreements between parties, which agreements — increasing while they may be the law between the contracting parties — implicitly incorporate provisions of the lawful rates of interest that may existing law. Consequently, while the Usury Law be charged ceiling on interest rates was lifted by C.B. Circular on this particular 905, nothing in the said circular could possibly be kind of loan. (Paragraphing and read as granting respondent bank carte blanche authority to raise interest rates to levels which emphasis supplied) would either enslave its borrowers or lead to a It is clear from the stipulation hemorrhaging of their assets. Borrowing represents between the parties that the interest a transfusion of capital from lending institutions to rate may be increased "in the event a industries and businesses in order to stimulate law should be enacted increasing the growth. This would not, obviously, be the effect of lawful rate of interest that may be PNB's unilateral and lopsided policy regarding the charged on this particular kind of interest rates of petitioners' borrowings in the loan." The Escalation Clause was instant case. dependent on an increase of rate made by "law" alone. Apart from violating the principle of mutuality of contracts, there is authority for disallowing the CIRCULAR No. 494, although it has interest rates imposed by respondent bank, for the the effect of law, is not a law. credit agreement specifically requires that the "Although a circular duly issued is not increase be "within the limits allowed by law". In the strictly a statute or a law, it has, case of PNB v. Court of Appeals, cited above, this however, the force and effect of law." Court clearly emphasized that C.B. Circular No. 905 (Emphasis supplied). "An could not be properly invoked to justify the administrative regulation adopted escalation clauses of such contracts, not being a pursuant to law has the force and grant of specific authority. effect of law." "That administrative rules and regulations have the force Furthermore, the escalation clause of the credit agreement requires that the same be made "within of law can no longer be questioned." the limits allowed by law," obviously referring The distinction between a law and an specifically to legislative enactments not administrative regulation is administrative circulars. Note that the phrase "limits recognized in the Monetary Board imposed by law," refers only to the escalation guidelines quoted in the latter to the clause. However, the same agreement allows BORROWER of Ms. Paderes of reduction on the basis of law or the Monetary Board. September 24, 1976 (supra). Had the parties intended the word "law" to refer to According to the guidelines, for a both legislative enactments and administrative loan's interest to be subject to the circulars and issuances, the agreement would not increases provided in CIRCULAR No. have gone as far as making a distinction between 494, there must be an Escalation "law or the Monetary Board Circulars" in referring to Clause allowing the increase "in the mutually agreed upon reductions in interest rates. event that any law or Central Bank This distinction was the subject of the Court's regulation is promulgated increasing disquisition in the case of Banco Filipino Savings the maximum rate for loans." The and Mortgage Bank v. Navarro 8 where the Court guidelines thus presuppose that a held that: Central Bank regulation is not within the term "any law." What should be resolved is whether BANCO FILIPINO can increase the The distinction is again recognized by interest rate on the LOAN from 12% P.D. No. 1684, promulgated on March to 17% per annum under the 17, 1980, adding section 7-a to the Escalation Clause. It is our considered Usury Law, providing that parties to opinion that it may not. an agreement pertaining to a loan could stipulate that the rate of The Escalation Clause reads as follows: interest agreed upon may be increased in the event that the applicable maximum rate of interest which was applied to interest alone. By the time the is increased "by law or by the spouses tendered the amount of P40,142,518.00 in Monetary Board." To quote: settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above Sec. 7-a. Parties to an those amounts already previously paid by the agreement pertaining to a loan or forbearance spouses. of money, goods or Escalation clauses are not basically wrong or legally credits may stipulate objectionable so long as they are not solely that the rate of interest potestative but based on reasonable and valid agreed upon may be grounds. 9 Here, as clearly demonstrated above, not increased in the event only the increases of the interest rates on the basis that the applicable of the escalation clause patently unreasonable and maximum rate of unconscionable, but also there are no valid and interest reasonable standards upon which the increases are anchored. is increased by law or by the Monetary Board: We go now to respondent bank's claim that the principal issue in the case at bench involves its right Provided, That such to foreclose petitioners' properties under P.D. 385. stipulation shall be We find respondent's pretense untenable. valid only if there is also a stipulation in the Presidential Decree No. 385 was issued principally agreement that the to guarantee that government financial institutions rate of interest agreed would not be denied substantial cash inflows upon shall be reduced necessary to finance the government's development in the event that the projects all over the country by large borrowers who applicable maximum resort to litigation to prevent or delay the rate of interest is government's collection of their debts or loans. 10 In reduced by law or by facilitating collection of debts through its automatic the Monetary Board; foreclosure provisions, the government is however, not exempted from observing basic principles of Provided, further, That law, and ordinary fairness and decency under the the adjustment in the due process clause of the Constitution. 11 rate of interest agreed upon shall take effect In the first place, because of the dispute regarding on or after the the interest rate increases, an issue which was effectivity of the never settled on merit in the courts below, the exact increase or decrease in amount of petitioner's obligations could not be the maximum rate of determined. Thus, the foreclosure provisions of P.D. interest.' (Paragraphing 385 could be validly invoked by respondent only and emphasis after settlement of the question involving the supplied). interest rate on the loan, and only after the spouses refused to meet their obligations following such It is now clear that from March 17, determination. In Filipinas Marble Corporation v. 1980, escalation clauses to be valid Intermediate Appellate Court, 12 involving P.D. 385's should specifically provide: (1) that provisions on mandatory foreclosure, we held that: there can be an increase in interest if increased by law or by the Monetary We cannot, at this point, conclude Board; and (2) in order for such that respondent DBP together with stipulation to be valid, it must include the Bancom people actually a provision for reduction of the misappropriated and misspent the $5 stipulated interest "in the event that million loan in whole or in part the applicable maximum rate of although the trial court found that interest is reduced by law or by the there is "persuasive" evidence that Monetary Board." such acts were committed by the respondent. This matter should Petitioners never agreed in writing to pay the rightfully be litigated below in the increased interest rates demanded by respondent main action. Pending the outcome of bank in contravention to the tenor of their credit such litigation, P.D. 385 cannot agreement. That an increase in interest rates from automatically be applied for if it is 18% to as much as 68% is excessive and really proven that respondent DBP is unconscionable is indisputable. Between 1981 and responsible for the misappropriation 1984, petitioners had paid an amount equivalent to of the loan, even if only in part, then virtually half of the entire principal (P7,735,004.66) the foreclosure of the petitioner's interest rates is unconscionable and neutralizes the properties under the provisions of P.D. salutary policies of extending loans to spur business 385 to satisfy the whole amount of cannot be disputed. the loan would be a gross mistake. It WHEREFORE, PREMISES CONSIDERED, the decision would unduly prejudice the petitioner, of the Court of Appeals dated August 27, 1993, as its employees and their families. well as the resolution dated February 10, 1994 is Only after trial on the merits of the hereby REVERSED AND SET ASIDE. The case is main case can the true amount of the remanded to the Regional Trial Court of Makati for loan which was applied wisely or not, further proceedings. for the benefit of the petitioner be SO ORDERED. determined. Consequently, the extent of the loan where there was no failure Bellosillo and Hermosisima, Jr., JJ., concur. of consideration and which may be Padilla and Vitug, JJ., took no part. properly satisfied by foreclosure proceedings under P.D. 385 will have Footnotes to await the presentation of evidence 1 Rollo, pp. 48-55. in a trial on the merits. 2 Id., at ,165. In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble 3 Id. Corporation, held: 4 Id. The enforcement of P.D. 385 will 5 The PNB claimed that as of March 12, sweep under the rug' this iceberg of a 1990, the spouses balance was scandal in the sugar industry during P58,377,487.31, using the increased interest the Marcos Martial Law years. This we rates for computing accrued interest. can not allow to happen. For the 6 Garcia v. Legarda, 21 SCRA 555 (1967). benefit of future generations, all the dirty linen in the 7 196 SCRA 536, 543 (1991). PHILSUCUCOM/NASUTRA/RPB closets 8 152 SCRA 346 (1987). have to be exposed in public so that the same may NEVER be repeated. 9 Vitug's Compedium of Civil Law and Jurisprudence, Revised Edition, 1993, p. 533, It is of paramount national interest, citing PNB v. IAC, 183 SCRA 133; PNB v. that we allow the trial court to Court of Appeals, 196, SCRA 536. proceed with dispatch to allow the parties below to present their 10 Sections 1 and 2 of P.D. 385 provide: evidence. Sec. 1. It shall be mandatory for Furthermore, petitioners made a valid consignation government financial institutions, of what they, in good faith and in compliance with after the lapse of sixty (60) days from the letter of the Credit Agreement, honestly the issuance of this Decree, to believed to be the real amount of their remaining foreclose the collaterals and/or obligations with the respondent bank. The latter securities for any loan, credit could not therefore claim that there was no honest- accommodation, and/or guarantees to-goodness attempt on the part of the spouse to granted by them whenever the settle their obligations. Respondent's rush to arrearages on such account, inequitably invoke the foreclosure provisions of P.D. concluding accrued interest and other 385 through its legal machinations in the courts obligations, including interest and below, in spite of the unsettled differences in other charges, as appearing in the interpretation of the credit agreement was obviously book of accounts and/or related made in bad faith, to gain the upper hand over records of the financial institution petitioners. concerned. This shall be without prejudice to the exercise by the In the face of the unequivocal interest rate government financial institution of provisions in the credit agreement and in the law such rights and/or remedies available requiring the parties to agree to changes in the to them under their respective interest rate in writing, we hold that the unilateral contracts with their debtors, including and progressive increases imposed by respondent the right to foreclose on loans, PNB were null and void. Their effect was to increase credits, accommodations, and/or the total obligation on an eighteen million peso loan guarantees on which the arrearages to an amount way over three times that which was are less than twenty percent (20%). originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the Sec. 2. No restraining order, temporary or permanent injunction shall be issued by the court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties, except after due hearing in which it is established by the borrower, and admitted by the government financial institution concerned that twenty percent (20%) of the outstanding arrearages has been paid after the filing of foreclosure proceedings. 11 Filipinas Marble Corporation v. Intermediate Appellate Court, 142 SCRA 181 (1986). 12 Id. 13 213 SCRA 413 (1992).