Case Summary (G.R. No. 96227)
Key Dates
• May 7, 1997 – Loan granted and real estate mortgage constituted
• June 16, 2000 – Extrajudicial foreclosure sale; properties sold and awarded to petitioner
• July 3, 2000 – Certificate of sale registered without judicial approval
• July 18, 2001 – Respondents request 60-day extension to redeem; offer to pay ₱3,000,000
• October 1, 2001 – Complaint filed for reformation, nullity of foreclosure, cancellation of annotations, and damages
• July 30, 2005 – RTC decision in favor of respondents, voiding foreclosure and ordering refund and damages
• August 27, 2009 – CA decision modifying RTC ruling
• August 4, 2010 – CA resolution on motion for reconsideration
• May 30, 2011 – Supreme Court final decision
Applicable Law
• 1987 Philippine Constitution (decision post-1990)
• Rule 45, Rules of Court (petition for review on certiorari)
• Civil Code: Article 1308 (mutuality of contracts)
• Precedents on escalation clauses, mutuality, and damages (e.g., Banco Filipino Savings & Mortgage Bank v. Judge Navarro; Eastern Shipping Lines, Inc. v. Court of Appeals)
Facts of the Loan and Adjustable Interest Terms
The respondents obtained a ₱2.5 million loan secured by real estate mortgage. The promissory note stipulated a 17% per annum interest rate, subject to review and adjustment every 90 days, unilaterally at the bank’s discretion, with a 3% monthly penalty on overdue amortizations. From 1997 to 1999, interest rates fluctuated between 15.5% and 29%, pursuant to the note’s terms. Respondents paid regularly until December 1999, then defaulted, accumulating an outstanding balance of approximately ₱2.5 million by February 2000.
Extrajudicial Foreclosure and Redemption Attempt
Petitioner issued demand letters; upon nonpayment, it foreclosed extrajudicially on June 16, 2000, becoming the sole bidder at ₱2,778,611.27. It credited the bid against the debt instead of paying cash. A certificate of sale was registered July 3, 2000, without judicial approval. Respondents failed to redeem within one year but sought a 60-day extension on July 18, 2001, offering ₱3 million. When redemption did not occur, respondents filed suit on October 1, 2001.
RTC Decision and Modifications
The RTC (July 30, 2005) held that:
- Rate increases beyond 17% p.a. were unreasonable and void for violating mutuality; ordered refund of excess interest
- Foreclosure sale was void ab initio; ordered cancellation of annotations
- Awarded ₱50,000 moral damages, ₱50,000 exemplary damages, attorney’s fees, and per-appearance fees
On reconsideration (November 30, 2005), the RTC adjusted the reference rate from 17% to 24% p.a.
Court of Appeals Ruling
The CA (August 27, 2009) affirmed in part and modified:
- Declared rate increases unreasonable; refund ordered on excess over 17% p.a.
- Held foreclosure valid
- Reduced moral damages to ₱25,000; retained ₱50,000 exemplary damages and attorney’s fees awards
Issue on Mutuality and Unilateral Rate Adjustment
Petitioner contended that respondents acquiesced in rate changes (notably via a “conformity letter” on review‐period adjustment) and had on several occasions requested lower rates, implying consent. Respondents argued that no assent was given to rate modifications and that their requests for reduction merely challenged the rates, not ratified them.
Supreme Court Analysis on Contractual Mutuality
The Court reaffirmed that:
- Contracts must bind both parties equally; validity cannot rest solely on one party’s will (Art. 1308, Civil Code)
- A clause granting one party unilateral power to change a vital term—here, interest—renders the stipulation void as a contract of adhesion
- Lack of response to memos does not constitute assent to proposed contractual changes; one receiving a proposal to alter contract terms need not reply to reject it
- Letters requesting rate reductions demonstrate respondents’ challenge, not consent, to the imposed rates
Validity of Escalation and De-Escalation Clauses
While escalation clauses are generally valid, they
Case Syllabus (G.R. No. 96227)
Procedural Posture
- Petition for review on certiorari under Rule 45 filed by petitioner Philippine Savings Bank (PSBank) before the Supreme Court.
- Challenged the Court of Appeals Decision dated August 27, 2009 and Resolution dated August 4, 2010 in CA-G.R. CV No. 86445.
- Respondents sought reformation of instruments, nullity of foreclosure proceedings and certificate of sale, cancellation of title annotations, and damages before the RTC.
Background and Parties
- Spouses Alfredo M. Castillo and Elizabeth C. Castillo owned a lot in Tondo, Manila (TCT No. 233242).
- Spouses Romeo B. Capati and Aquilina M. Lobo owned another lot in Tondo, Manila (TCT No. 227858).
- On May 7, 1997, both couples obtained a P2,500,000 loan from PSBank, secured by real estate mortgages over their respective properties.
Promissory Note Terms
- Principal and interest amortization: ₱43,449.41 monthly for 59 months, with balloon payment on May 7, 2002.
- Interest rate fixed at 17% per annum, subject to review or adjustment every 90 days.
- Penalty for late payment: 3% of amount due per month or fraction thereof.
- Provision allowed PSBank to unilaterally increase or decrease interest and charges within legal limits.
- Default clause accelerated all unpaid installments and added unpaid interest to principal.
Interest Rate Adjustments
- Between May 1997 and December 1999, PSBank adjusted interest rates between 15.5% and 29% per annum.
- Respondents were notified by written memos but did not formally respond or confirm.
- Alfredo Castillo wrote letters requesting reduction of interest rates on April 6, 1998; April 30, 1998; September 3, 1998; and July 23, 1999.
- PSBank denied these requests.
Default and Foreclosure Proceedings
- Respondents paid regularly until December 1999, then defaulted due to financial constraints.
- As of February 11, 2000, PSBank’s accounting showed an outstanding obligation of ₱2,525,910.29.
- PSBank sent demand letters; respondents did not pay.
- Extrajudicial foreclosure sale conducted June 16, 2000; properties sold to PSBank for ₱2,778,611.27, credited against debt.
- Certificate of sale issued same date and registered July 3, 2000 without Executive Judge’s approval.
- One-year redemption period expired without payment.
Redemption and Injunction Proceedings
- On July 18, 2001, Alfredo Castillo requested 60-day extension to redeem, offering ₱3,000,000.00; PSBank accede