Case Summary (G.R. No. 153802)
Facts and Contractual Stipulations
• April 7, 1982 – Borrowers obtained a P50,000 loan at 12% annual interest, amortizable over three years, secured by (a) a real estate mortgage on 1.5542 hectares of unregistered agricultural land and (b) a chattel mortgage on a thermo-plastic forming machine.
• February 17, 1983 – An additional P50,000 loan was granted, maturing April 1, 1985, under identical terms and secured by two parcels of registered land in Guadalupe, Cebu City.
• Escalation Clauses – The Credit Agreement, Promissory Notes, and Mortgage Contracts each contained a stipulation allowing the bank to increase interest “within the limits allowed by law” and to decrease it correspondingly if regulatory ceilings were lowered.
• August 1, 1984 – PNB unilaterally raised the rate to 25% per annum plus a 6% penalty on past due amounts; October 15, 1984 to 30%; October 25, 1984 to 42%.
• December 1985 – Outstanding principal remained P62,830.32 after payments; interest and penalties totaled P57,488.89. Borrowers’ requests to restore the 12% rate and condone penalties were refused.
Procedural History
• December 15, 1987 – Borrowers filed a complaint for specific performance and damages in RTC, Branch 7, Cebu City (Civil Case No. CEB-5610).
• February 28, 1990 – Trial court dismissed the complaint.
• October 15, 1992 – The Court of Appeals set aside the dismissal as to PNB and ordered reapplication of the 12% rate, rebate of excess interest and charges, and interest on any remaining balance at 12%.
• November 8, 1994 – The Supreme Court affirmed the appellate ruling and denied PNB’s petition.
Legal Issue
Does an escalation clause that permits a bank to adjust interest rates “within the limits allowed by law” authorize unilateral increases without the borrower’s consent, or must any adjustment be mutually agreed upon?
Applicable Law
• 1987 Philippine Constitution – mandates due process and respects property and contractual rights (Art. III, Sec. 1).
• Civil Code of the Philippines, Article 1308 – “The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.”
• Presidential Decree No. 1684 (as amended Act No. 2655), Sec. 7-a – Parties may stipulate interest adjustments corresponding to changes in maximum legal rates, provided the agreement also stipulates reductions when ceilings are lowered and that adjustments take effect upon regulatory change.
• Central Bank Circular No. 905 (1982), Sec. 5 – Abolishes ceilings on interest and charges for loans, but does not authorize unilateral rate hikes without borrower assent.
Analysis
• Mutuality of Contracts – A valid adjustment clause under P.D. 1684 requires mutual assent; unilateral imposition negates the element of agreement essential to contract law under Article 1308.
• Contract of Adhesion – Allowing one party unchecked power to alter an essen
Case Syllabus (G.R. No. 153802)
Antecedent Facts
- On April 7, 1982, private respondents, owners of a NACIDA-registered enterprise, obtained a ₱50,000 loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from Philippine National Bank (PNB), evidenced by a Credit Agreement and Promissory Note:
- Principal amortizable over three years, maturing March 29, 1985
- Stipulated interest rate of 12% per annum
- Collateral for the first loan:
- Real estate mortgage over 1.5542 ha of unregistered agricultural land in Toledo City (appraised at ₱1,062.52; loan value ₱531.26)
- Chattel mortgage over a thermo-plastic forming machine (appraised at ₱8,800; loan value ₱4,400)
- On February 17, 1983, private respondents secured an additional ₱50,000 NACIDA loan from PNB (maturity April 1, 1985) under similar terms, increasing total loan exposure to ₱100,000:
- New real estate mortgage over two registered parcels (311 sqm) in Guadalupe, Cebu City (appraised at ₱40,000; loan value ₱28,000)
Escalation Clause and Regulatory Framework
- Credit Agreement contained an escalation clause allowing PNB to increase or decrease the agreed interest rate in step with changes in the maximum legal rate, effective upon the Monetary Board’s action
- Promissory Note and Real Estate Mortgage echoed this right “within the limits allowed by law,” without requiring notice to the borrower
- Regulatory backdrop:
- P.D. No. 1684 (amending Act No. 2655, the Usury Law), Section 7-a: Permits stipulation for upward or downward adjustment of interest rates in tandem with changes in the legal ceiling, provided mutual stipulation for both increases and decreases
- Central Bank Circular No. 905 (1982), Section 5: Removed any ceiling on interest, fees, commissions or other charges “prescribed under or pursuant to the Usury Law,” enabling free contracting on subsequent rate adjustments
Unilateral Interest Increases
- PNB notified private respondents by letter, August 1, 1984, that the CIGLF loan interest rate was adjusted to 25% per annum plus 6% penalty on past dues
- Further unilateral increases followed:
- 30
...continue reading