Title
Spouses Florendo vs. Court of Appeals
Case
G.R. No. 101771
Decision Date
Dec 17, 1996
Spouses Florendo contested LBP's unilateral interest rate hike on their housing loan post-resignation. SC ruled the increase invalid, citing lack of Central Bank basis and violation of mutuality of contracts, reverting rate to 9%.

Case Summary (G.R. No. 101771)

Key Dates and Procedural Posture

Loan executed and perfected: July 20, 1983. Resignation of borrower (Gilda): August 16, 1984. ManCom Resolution and PF Memorandum Circular effecting escalation: March 19, 1985. Bank’s first notice to petitioners of the increase: June 7, 1985; petitioners protested June 11, 1985. Trial court (Regional Trial Court, Manila, Branch XXII) ruled for the bank; Court of Appeals affirmed with modification (making the 17% effective July 1, 1985); petitioners sought review by the Supreme Court. Applicable constitution for the decision: 1987 Philippine Constitution.

Antecedent Facts (Stipulated)

The parties submitted a joint stipulation of facts. Gilda Florendo was an employee of Land Bank from May 17, 1976 until she voluntarily resigned on August 16, 1984. Prior to resignation, she obtained a Provident Fund housing loan in the principal amount of P148,000.00, payable over twenty-five years, under a Housing Loan Agreement (HLA), a Real Estate Mortgage, and a Promissory Note. The Provident Fund/Bank issued a ManCom Resolution and PF Memorandum Circular on March 19, 1985 that increased interest rates on outstanding housing loans of bank employees who voluntarily “secede” (resign); the bank later sought to apply the escalated rate to petitioners’ loan. Petitioners continued to pay the original monthly installment of P1,248.72 and filed an action for injunction with damages.

Contractual Provisions at Issue

  • Section I-F, Article VI of the Housing Loan Agreement: requires borrower compliance with program rules and Central Bank rules and regulations imposed “in connection with the financing programs for bank officers and employees in the form of fringe benefits.” This provision does not expressly mention interest escalation.
  • Paragraph (f) of the Real Estate Mortgage: provides that the rate of interest “shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors,” and that any increase/decrease “shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining balance of the loan.”
  • ManCom Resolution No. 85-08 and PF Memorandum Circular No. 85-08: administrative instruments of the Bank/Provident Fund escalating interest rates for resigned employees; not Central Bank or Monetary Board issuances.

Issues Presented

At core: whether Land Bank had a valid legal basis to impose and enforce the increased interest rate (from 9% to 17%) on petitioners’ housing loan. Petitioners specifically contended that the increase (1) depended on a bare, unqualified contractual stipulation; (2) had no contractual basis; (3) violated Section 7-A of the Usury Law; and (4) was contrary to morals, public order, and public policy. The Court framed the decisive issue as whether the bank could lawfully impose the increase under the loan instruments and applicable regulatory law.

Court’s Analysis — Validity of the Escalation Clause

The Supreme Court examined the contractual language. It held Section I-F of the HLA did not itself constitute an escalation clause because it dealt with compliance with rules and regulations concerning program administration and insurance, not interest adjustments. Paragraph (f) of the mortgage, however, was a clear and explicit escalation clause: it conditioned interest increases/decreases on “prevailing rules, regulations and circulars of the Central Bank” and the Provident Fund Board’s prescriptions. The Court recognized the general validity of escalation clauses in long-term commercial contracts where they serve to maintain fiscal stability and the value of money, citing earlier jurisprudence that treats escalation stipulations as valid when properly conditioned.

Court’s Analysis — Necessity of Triggering Central Bank Issuance

The Court emphasized that the mortgage clause made the applicability of any increase contingent upon a Central Bank rule, regulation or circular. The mortgage further specified that any increase would take effect only on the date of effectivity of such Central Bank issuance. The Supreme Court found no Central Bank issuance that operated as the required trigger for the escalation in petitioners’ case. Instead, Land Bank relied on its own ManCom Resolution and Provident Fund Memorandum Circular, which are internal instruments of the Bank and not equivalent to Central Bank or Monetary Board enactments. Relying on precedents cited in the record (e.g., Banco Filipino and Philippine National Bank cases), the Court reiterated that an internal bank resolution or circular cannot substitute for the external regulatory issuance expressly required by the contract.

Court’s Analysis — Usury Law Argument

Petitioners’ contention that the escalation violated Section 7-A of the Usury Law (Act No. 2655, as amended) was rejected on the record. The Court noted prior holdings that Central Bank Circular 905 had effectively rendered the Usury Law inoperative; consequently, petitioners’ usury argument lacked force under the regulatory regime applicable at the time.

Court’s Analysis — Principle of Mutuality and Unilateral Escalation

Independently, the Supreme Court addressed the broader constitutional and civil law principle of mutuality in contracts (Article 1308, Civil Code). A stipulation that permits one party to alter essential contractual terms at its uncontrolled will is void for lack of mutuality and constitutes a contract of adhesion that the courts must guard against. The Court concluded that Land Bank could not retroactively impose an escalated interest rate based solely on a Bank internal resolution where the contract did not make employee resignation a contractual trigger and where the

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