G.R. No. 103592 - Llorin, Jr. vs. Court of Appeals

Petitioner Irineo F. Llorin, Jr. obtained a loan on April 11, 1978, from respondent Apex Mortgage and Loan Corporation in favor of its corporation.
The principal amount of the loan was P84,410.00, secured by a real estate mortgage.
The loan was to be repaid in 240 monthly installments at P1,142.08 starting May 11, 1978.
The promissory note accompanying the loan provided for:

An annual interest rate of 12%, a service charge of 3% per annum, and a penalty of 1½% per month for late or unpaid installments.
An escalation clause which authorized Apex to increase the interest rate and/or service charges without notice if a law, a Presidential Decree, or a Central Bank regulation increasing the lawful rate of interest and/or service charges was enacted.

Implementation of the Escalation Clause and Subsequent Interest Rate Adjustments

On February 25, 1980, as per CB Circular No. 721, the interest rate was increased from 12% to 21%, adjusting the monthly amortization to P1,511.91.
On August 1, 1984, there was a further increase from 21% to 25%, raising the monthly amortization to P1,722.68.
On December 1, 1984, the rate increased from 25% to 36%, resulting in a new monthly amortization of P2,482.00.

Despite the lack of a specific de-escalation clause, subsequent reductions were implemented in line with lower prescribed rates:

On February 1, 1986, the interest rate was adjusted from 36% to 28%, with a new monthly amortization of P1,957.00.
On December 1, 1986, a reduction from 28% to 24% took effect, changing the monthly amortization to P1,732.04.
On February 1, 1987, the rate was further reduced from 24% to 21%, resulting in a monthly amortization of P1,580.14.

A written demand on May 11, 1982 for the payment of P123,720.32.
A second written demand on July 7, 1987 for P208,964.88, covering the period from September 1981 to June 1987.

On July 27, 1987, the petitioner made a partial payment of P79,462.27, which Apex applied to satisfy part of the penalty, interest charges, and principal.
A further communication on March 28, 1988 sought payment of P323,523.42, representing both principal and interest as of March 21, 1988, computed according to the applicable Central Bank Circulars.
In response, petitioner requested recomputation of his account, invoking precedents from Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro and Florante Valle and Insular Bank of Asia and America vs. Spouses Salazar.

Apex initiated a complaint on June 17, 1988 with the Regional Trial Court of Manila to collect the amount of P323,523.42, along with interest at 21% per annum and 10% of the total claim as attorney's fees.
Pre-trial conferences were conducted, culminating in:

A second pre-trial order on February 12, 1990, which underscored that the material facts were undisputed and that the primary issue pertained to the validity and application of the escalation clause.
A final pre-trial order set for March 12, 1990, calling for the submission of additional stipulations of facts and respective computations.

The trial court rendered its decision on April 12, 1991, ordering petitioner Llorin to pay P80,561.13 with interest at 21% and a 3% service charge per annum from September 12, 1981 until full payment, along with an additional P10,000.00 for attorney's fees and costs.
The Court of Appeals affirmed the Regional Trial Court's decision in toto, and the issue was subsequently elevated to the Supreme Court on a petition for review on certiorari.

Whether the escalation clause contained in the promissory note, which allows Apex to increase interest and/or service charges based on changes in the law or pertinent regulations, is valid and enforceable.
Whether the absence of an explicit de-escalation clause renders the escalation clause null and void.

Whether the Supreme Court ruling in Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro should apply to the present case.
Whether the computation of the increased interest charges should follow the formula used in the Insular Bank vs. Spouses Salazar decision.

Whether the absence of a de-escalation clause compromises the principle of mutuality in contracts, as required by Presidential Decree No. 1684 and Article 1308 of the Civil Code.
Whether the unilateral actions of increasing and subsequently reducing the interest rates affect the balance between contracting parties.