FIRST DIVISION
G.R. No. 208336, November 21, 2018
VILLA CRISTA MONTE REALTY & DEVELOPMENT CORPORATION, Petitioner, v. EQUITABLE PCI BANK (NOW KNOWN AS BANCO DE ORO UNIBANK, INC.), AND THE EX-OFFICIO SHERIFF OF QUEZON CITY AND/OR HIS DEPUTY OR AUTHORIZED REPRESENTATIVES, Respondents.
D E C I S I O N
BERSAMIN, J.:
An escalation clause without a concomitant de-escalation clause is void and ineffectual for violating Presidential Decree No. 1684,1 otherwise known as Amending Further Act No. 2655, As Amended, Otherwise Known as "The Usury Law," as well as the principle of mutuality of contracts unless the established facts and circumstances, as well as the admissions of the parties, indicate that the lender at times lowered the interest rates, or, at least, allowed the borrower the discretion to continue with the repriced rates.
Not all contracts of adhesion are invalid. Only a contract of adhesion in which one of the parties is shown to be the weaker as to have been imposed upon may be invalidated and set aside.
Sometime in 1994, plaintiff-appellant Villa Crista Monte Realty Corporation was organized to engage in the business of real estate development. Soon after, it acquired from a certain Alfonso Lim the 80,000 square meters (8 hectares) parcel of land located at Old Balara, Quezon City, which land appellant intended to develop into a residential subdivision. After successfully putting up its clubhouse, known as the "Tivoli Royale Country Clubhouse," appellant Corporation later negotiated and eventually succeeded in purchasing the adjoining 13.5 hectares land, thereby consolidating its ownership over the 21.5 hectares of land[s].On April 7, 2009, the RTC rendered judgment in favor of Equitable PCI Bank (E-PCIB), holding that the loan contracts between the parties were supported by several promissory notes, a fact admitted by no less than the petitioner's own President, Cresencio Tio (Tio);5 that Tio also testified that the documents included a rider dealing with the monthly repricing of the interest rates; that the protest allegedly made against the repricing was not established; that the plaintiff (petitioner herein) paid the adjusted interest rates; and that the evidence on record sustained the validity of the real estate mortgage and its amendment.6
In order to fully develop its subdivision project, appellant applied for and was granted a credit line of P80 Million by then Equitable Philippine Commercial International Bank (E-PCIB), now Banco De Oro. By way of security for the said credit line, appellant executed a Real Estate Mortgage over the 80,000 square meters of its properties (covered by TCT No. T-145652) with all the existing improvements thereon.
On August 5, 1995, appellant subdivided the parcel of land covered by TCT No. T-145652 into 174lots, each with an average area of 340 square meters and each covered by a separate certificate of title.
Appellant subsequently applied for an additional P50 Million credit accommodation from E-PCIB to which the latter readily acceded. It being later established that the 41 lots, out of the 174 subdivided lots, would already be sufficient securities for the credit accommodation, appellant then asked for the release of the remaining 133 titles from the earlier mortgage. E-PCIB granted appellant's request on the condition that the real estate mortgage contract be amended to conform to the changes in the amount of the credit line and in the properties subject of the mortgage, to which condition appellant readily agreed.
Under its approved P130 Million credit line, appellant separately obtained the following amounts on various occasions from March 20, 1997 to August 15, 1997, to wit:
ChanRoblesVirtualawlibraryEach of the aforesaid amount was covered by a promissory note in the prescribed form of the E-PCIB.
Date Amount Rate of Interest Maturity Date March 20, 1997 Php38,200,000.00 13.50% March 13, 1998 March 26, 1997 4,000,000.00 13.50% March 20, 1998 April 3, 1997 6,600,000.00 13.00% March 27, 1998 April 6, 1997 8,500,000.00 13.00% April 1, 1998 April 10, 1997 7,000,000.00 13.00% April 3, 1998 April 14, 1997 12,500,000.00 13.00% April 8, 1998 April 17, 1997 2,900,000.00 15.00% April 10, 1998 June 28, 1997 2,700,000.00 15.00% June 23, 1998 June 30, 1997 20,000,000.00 15.25% June 28, 1998 July 4, 1997 2,000,000.00 15.25% June 25, 1998 July 4, 1997 5,000,000.00 15.50% June 29, 1998 July 5, 1997 7,500,000.00 15.50% June 30, 1998 July 10, 1997 7,000,000.00 15.50% July 8, 1998 July 15, 1997 1,800,000.00 15.50% July 8, 1998 August 15, 1997 4,000,000.00 24.00% August 12, 1998
Eventually, E-PCIB wrote several times to appellant apprising it of the increased rates in the interest to be imposed on its loans covered by the promissory notes. The increased rates ranged from 21% to 36% and were ostensibly anchored on the uniform provision in the promissory notes on monthly repricing.
Appellant reneged on paying its loan obligations amounting to P129,700,00.00, prompting E-PCIB to initiate foreclosure proceedings on the mortgaged properties. Thereafter, the respondent Sheriff scheduled the auction of the subdivision lots which led to appellant's filing of its initial complaint for the nullification of the promissory notes and the mortgage agreements with prayer for injunctive relief. Although the said auction sale was initially enjoined, the injunction was nonetheless lifted; and so, the auction sale proceeded where E-PCIB emerged as the highest bidder. This led to appellant's filing of the Supplemental Complaint with the RTC Quezon City assailing the said auction sale and the amount claimed therein (including the alleged unwarranted assessments and charges), as well as praying for the nullification of the titles that were consolidated in the name of E-PCIB. Appellant cited the following instances as its causes of action:
ChanRoblesVirtualawlibrary1. E-PCIB unilaterally made and imposed the increases in interest rates on appellant's loan without them being discussed and negotiated with, much less agreed upon by, appellant and, thus, invalid;In its Answer to appellant's Complaint, E-PCIB countered that appellant has no cause of action and that its complaint does not state any such cause either. E-PCIB underscored that appellant voluntarily and consciously agreed to the complained monthly re-pricing of interest as shown by appellant's affixing of its signature in all the promissory notes in due course, i.e., with all the pertinent blanks duly filled-up, and its acceptance of the loan proceeds. Accordingly, the said interest rates were then re-priced as agreed upon; and that the said re-pricing even started only on July 1997, although the original promissory notes were executed in 1996, and were only renewed in early 1997. E-PCIB stressed that appellant then not only accepted the stipulation on monthly re-pricing but also the new interest rates, as re-priced, by its payment of the corresponding adjusted interest rates until it later defaulted to pay even the interest rates to keep the loans current. Inasmuch as the dispute lies only on the rates of interests and no longer on the fact that appellant was already in default in its payment, E-PCIB argued that appellant failed to prove its right to an injunction. E-PCIB maintained that it merely complied with the provisions of the Promissory Notes.4
2. Since the Real Estate Mortgage and its amendment are but accessory to the loans evidenced by the Promissory Notes, which bore the unilaterally imposed exorbitant interest rates and, thus, contrary to law and public policy, the same (the accessory contracts) are likewise illegal and against public policy;
3. Despite the substantial payments already made by appellant, E-PCIB still insistently demanded for the payment of the loan obligation inclusive of the higher interest rates and penalty charges which it unilaterally imposed, warranting the issuance of a detailed accounting or Statement of Account. instead of issuing said statement, though, E-PCIB prematurely initiated the foreclosure proceedings; and
4. Appellant claimed for reparation of damages as well as attorney's fees by reason of E-PCIB's alleged palpable violation of the laws and the rights of appellant especially in imposing arbitrary, burdensome and oppressive interests.
WHEREFORE, the appeal is DENIED. The Decision, dated April 7, 2009, of the Regional Trial Court, Branch 216, Quezon City in Civil Case No. Q-01-43677 is AFFIRMED.The petitioner sought reconsideration,12 but the CA denied its motion for that purpose on July 26, 2013.13
SO ORDERED.11
In short, did the CA commit reversible error when it affirmed the judgment of the RTC declaring as valid the promissory notes and the corresponding repricing of interest rates?
- as valid the bank's repricing of the interest rates by citing the ruling in the ease of Solid Bank Corp. vs. Permanent Homes Inc.
- that the promissory notes though contracts of adhesion bound petitioner, absent any proof of domination done by the bank to agree on the monthly repricing
- that the payments made by petitioner in excess of the original rate of interest should be credited to the principal has no basis under the factual circumstances14
with interest thereon:The agreement between the parties on the imposition of increasing interest rates on the loan is commonly known as the escalation clause. Generally, the escalation clause refers to the stipulation allowing increases in the interest rates agreed upon by the contracting parties. There is nothing inherently wrong with the escalation clause because it is validly stipulated in commercial contracts as one of the means adopted to maintain fiscal stability and to retain the value of money in long term contracts. In short, the escalation clause is not void per se.16
ChanRoblesVirtualawlibraryat the rate of ____ percent (____ %) per annum payable ____
at the rate of ____ percent (____ %) per annum for the first ____ days of this Note payable on, after which the interest rllte shall be determined by the Lender without need of pdor notice to the Borrower at the beginning of each succeeding ____ period, payable ____ of each such period, at the rate of ____ percent (____ %) per annum spread over ____ as announced anciJor published by the Bangko Sentral ng Pilipinas ("BSP") on or immediately preceding the commencement of each ____ (____) month period payable ____ of each such period: provided, however, that if, in either of the two above instances, where the rate is subject to periodic adjustment, the Borrower disagrees with the new rate, he shall prepay within five (5) days from the notice of the new rate the outstanding balance of the Loan with interest at the last applicable rate, provided, further, that the Borrower's failure to so prepay shall be deemed acceptance of the new rate.15 (Bold underscoring for emphasis)
SECTION 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:Accordingly, the Court has ruled in Banco Filipino Savings and Mortgage Bank v. Judge Navarro18 that there should be a corresponding de escalation clause that authorizes a reduction in the interest rates corresponding to downward changes made by law or by the Monetary Board. Verily, the escalation clause, to be valid, should specifically provide: (1) that there can be an increase in interest rates if allowed by law or by the Monetary Board; and (2) that there must be a stipulation for the reduction of the stipulated interest rates in the event that the applicable maximum rates of interest are reduced by law or by the Monetary Board. The latter stipulation ensures the mutuality of contracts, and is known as the de-escalation clause.
ChanRoblesVirtualawlibrary
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Bold emphasis supplied)
The purpose of the law in mandating the inclusion of a deescalation clause is to prevent one-sidedness in favor of the lender which is considered repugnant to the principle of mutuality of contracts. As we held in Philippine National Bank vs. Court of Appeals, et al.:Although it would not necessarily prevent the lender from discriminatorily increasing the interest rates, the de-escalation clause's main objective is to prevent the unwanted one-sidedness in favor of the lender, a quality that is repugnant to the principle of mutuality of contracts. The clause proposes to ensure that any unconsented increase in interest rates is ineffective for transgressing the principle of mutuality of contracts.21 Indeed, the clause creates a balance in the contractual relationship between the lender and the borrower, and tempers the power of the stronger player between the two, which is the former.
ChanRoblesVirtualawlibrary
x x x the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
ChanRoblesVirtualawlibraryART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfilment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void .... Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative 'to take it or leave it' ... Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.
The inescapable conclusion is that a de-escalation clause is an indispensable requisite to the validity and enforceability of an escalation clause in the contract. In other words, in the absence of a corresponding de-escalation clause, the escalation clause shall be considered null and void.20 (Bold underscoring for emphasis)
We are fully persuaded, however, to take particular exception from said ruling insofar as the case at bar is concerned, considering the peculiar circumstances obtaining herein. There is no dispute that the escalation clause in the promissory note involved in this case does not contain a correlative de-escalation clause or a provision providing for the reduction of the stipulated interest in the event that the applicable maximum rate of interest.is reduced by law or by the Monetary Board. Notwithstanding the absence of such stipulation. however, it is similarly not controverted but, as a matter of fact, specifically admitted by petitioner that respondent APEX unilaterally and actually decreased the interest charges it imposed on herein petitioner on three occasions. (Bold underscoring supplied)It becomes inescapable for the Court to uphold the validity and enforceability of the escalation clause involved herein despite the absence of the de-escalation clause. The actual grant by the respondent of the decreases in the interest rates imposed on the loans extended to the petitioner rendered inexistent the evil of inequality sought to be thwarted by the enactment and application of Presidential Decree No. 1684. We do not see here a situation in which the petitioner did not stand on equality with the lender bank.
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.The significance of Article 1308 cannot be doubted. It is elementary that there can be no contract in the absence of the mutual assent of the parties. When the assent of either party is wanting, the act of the non-assenting party has no efficacy for his act is as if it was done under duress or by an incapacitated person. Naturally, any modification made in the contract must still be with or upon the consent of the contracting parties. There must still be a meeting of the minds of all the parties on the modification, especially when the modification relates to an important or material aspect of the agreement. In loan contracts, the rate of interest is always important or material because it can make or break the capital ventures.
Significantly, the phrase "without need of prior notice to the borrower" should not be construed to be an absolute lack of notice to the borrower since receipt of said notice, in fact, is the reckoning point for the borrower to convey its objection to the said repricing by due payment of the obligation with the original interest rate or by its consent to the said repricing by the borrower's failure to so prepay.25There is no question, therefore, that the respondent accorded the petitioner the notice of any repricing of the interest rates. Although there have been occasions in which the Court struck down the escalation clauses in loan agreements for violating the mutuality of contracts, this case will not be one of them. This is because the respondent either has given notice to the petitioner whenever it repriced the interest rates in order to give the latter the option to reject the repricing, or has implemented the downward repricing of the interest rates. The respondent thereby served both the letter and the spirit of Presidential Decree No. 1684.
Endnotes:
* In lieu of Justice Noel G. Tijam, who penned the decision of the Court of Appeals, per the raffle of July 5, 2017.
** Additional Member, per Special Order No. 2609 dated October 11, 2018.
1 Effective March 17, 1980.
2Rollo, pp. 44-55; penned by Associate Justice Noel G. Tijam (now a Member of the Court), with the concurrence of Associate Justice Romeo F. Barza (now Presiding Justice) and Associate Justice Ramon A. Cruz.
3 Id. at 70-87; penned by Judge Ofelia Arellano-Marquez.
4 Id. at 45-48.
5 Id. at 49.
6 Id. at 85.
7 Id. at 86.
8 Id. at 50.
9 Id. at 51.
10 Id.
11 Id. at 55.
12 Id. at 56-64.
13 Id. at 66-68.
14 Id. at 24.
15 Id. at 128-129.
16Juico v. China Banking Corporation, G.R. No. 187678, April 10, 2013, 695 SCRA 520, 531.
17 Id.
18 G.R. No. L-46591, July 28, 1987, 152 SCRA 346.
19 G.R. No. 103592, February 4, 1993, 218 SCRA 436, 442.
20 Id. at p. 442-443.
21Philippine National Bank v. Rocamora, G.R. No. 164549, September 18, 2009, 600 SCRA 395, 407.
22Rollo, p. 129.
23 Supra note 19.
24Almeda v. Court of Appeals, G.R. No. 113412, April 17, 1996, 256 SCRA 292, 299-300.
25Rollo, p. 52.
26Encarnacion Construction & Industrial Corp. v. Phoenix Ready Mix Concrete Development & Construction, Inc., G.R. No. 225402, September 4, 2017.
27 G.R. Nos. 158622, 169441, 172958, 173194, 196958, 197120 & 205463, January 27, 2016, 782 SCRA 137.