Insular Bank of Asia and America Vs.

Spouses Salazar (159 SCRA 133)

Facts: Spouses Salazar entered into a loan contract with Insular Bank of Asia and America for Forty Two
Thousand and Fifty Pesos (P42,050.00) payable on or before December 12, 1980, evidenced by a
promissory note. Spouses Salazar bound themselves jointly and severally to pay the amount with
interest at 19% per annum and with the express authority to increase without notice the rate of interest
up to the maximum allowed by law and subject further to penalty charges or liquidated damages upon
default equivalent to 2% per month on any amount due and unpaid. In accordance with the agreement,
the Insular Bank of Asia and America increased the rate of interest to 21% pursuant to Central Bank
Circular No. 705 dated December 1, 1979.

Question: When can an Escalation Clause provision on loan contract be valid?

Banco Filipino vs. HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch
XXXI and FLORANTE DEL VALLE, respondents (152 SCRA 346)

Facts: Florante del Valle obtained a loan secured by a real estate mortgage from petitioner BANCO
FILIPINO in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be
amortized within fifteen (15) years at twelve (12%) per cent interest annually. Stamped on the
promissory note evidencing the loan is an Escalation Clause, reading as follows:

I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event law should be
enacted increasing the lawful rates of interest that may be charged on this particular kind
of loan.

The Central Bank issued Circular No. 494 which increased maximum rate of interest, including
commissions, premiums, fees and other charges on loans with maturity of more than seven hundred
thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial
intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per
annum. CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by
Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) which provides that
the Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan
or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates
whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not
be made oftener than once every twelve months.

Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the
promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with RTC,
praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to
desist from enforcing the increased rate of interest on the BORROWER's real estate loan.
Issue: Whether or not a Circular No 494 prescribing an increase in interest rates applies to all types of
loan.

Ruling: No, absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant
by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans
guaranteed by securities other than mortgage upon registered realty.

PD No. 116 was promulgated amending the Usury Law which gave authority to the Monetary
Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any
money goods or credits, and to change such rate or rates whenever warranted by prevailing economic
and social conditions. In one section, the Monetary Board could prescribe the maximum rate of interest
for loans secured by mortgage upon registered real estate or by any document conveying such real
estate or an interest therein and, in another separate section, the Monetary Board was also granted
authority to fix the maximum interest rate for loans secured by types of security other than registered
real property.

Apparent then is that the separate treatment for the two classes of loans was maintained. Yet,
CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to, hence, in the
absence of any such specific indication and in contravention of the policy behind the Usury Law, Circular
No. 494 only applies to loans guaranteed by securities other than mortgage upon registered realty.

PNB vs. Intermediate Appellate Court (183 SCRA 133)

Facts: Spouses Maglasang obtained a loan with the Philippine National Bank the total amount of which is
P82,682.39 as embodied in the promissory notes that the latter have executed on various dates from
February 5, 1976 to May 18, 1979. The promissory notes bore 12% interest per annum plus 1% interest
as penalty charge in case of default in the payments. The private respondents mortgaged several real
estate properties in favor of the petitioner as security of their loans.

The Monetary Board of Central Bank issued CB Circular No. 705 on December 1, 1979 increasing the
ceiling on the rate of interest on both secured and unsecured loans up to no more than 21% per annum.
In view of this development, the PNB Board of Directors revised its lending interest rates on the medium
and long-term loans. The private respondents defaulted in the payments of their loans which prompted
the petitioner to demand settlement of their outstanding obligation together with payment of the new
increased interest rate of 21% per annum beginning June 1, 1980 per the PNB board resolution. The
private respondent failed to settle their obligation and so the mortgaged was foreclosed by the bank.

ISSUE: Whether or not revised rate of interest imposed on the loans is legal.

Ruling: No, the imposition of the revised rate of interest on the loans of the private respondent is invalid
because the remaining maturity of the loan was less the 730 days.

In Insular Bank of Asia and America v. Spouses Salazar, (159 SCRA 133 [1988]), the Court ruled that the
Escalation Clause is a valid provision in the loan agreement provided that — (1) the increased rate
imposed or charged does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is
made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and
(3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or
regulation authorizing such an increase.

Central Bank Circular No. 705, authorizing the increase from 12% to 21% was issued on December 1,
1979. The promissory notes executed by the private respondents show that they are all payable on
demand but the records do not show when payment was demanded. Even granting that it was
demanded on the effectivity of law, it is obvious that the period of 730 days has not yet elapsed at the
date the mortgaged properties were sold at the public auction on November 27, 1981. Accordingly, as of
December 1, 1979, the remaining maturity days of the loans were less than 730 days. Hence, the
increased rate imposed or charged is not valid.

Llorin vs. Court of Appeals (218 SCRA 436)

Facts: Llorin obtained a loan from APEX MORTGAGE AND LOAN CORPORATION in the amount of Eighty
Four Thousand Four Hundred Ten Pesos (P84,410.00). The loan, secured by a real estate mortgage, is
payable in two hundred forty (240) installments at P1,142.08 monthly commencing May 11, 1978, with
interest of 12% per annum, service charge of three percent (3%) p.a. and 1 1/2% monthly penalty for
unpaid or delayed amortizations, as evidenced by a Promissory Note With Authority to Assign Credit.
The promissory note provides for an escalation clause which reads:

‘I/We hereby authorized (sic) APEX MORTGAGE AND LOAN CORPORATION to accordingly
increase the rate of interest and/or service charges stipulated in this contract without notice to
me/us in the event of a law or any applicable Presidential Decree and/or Central Bank
regulation (which) should be enacted increasing the lawful rate of interest and/or service
charges that may be charged on this particular kind of loan.’

Pursuant to the said clause and on the basis of Central Bank Circular No. 721 (February 25, 1980) and
No. 905 (Series of 1982). On March 28, 1988, APEX wrote defendant for payment of P323,523.42
representing principal and interest as of March 21, 1988 computed in consonant with the foregoing CB
Circulars. Defendant, in his reply, requested for recomputation of his account invoking the decisions of
the Supreme Court in Banco Filipino Savings and Mortgage Bank v. Hon. Miguel Navarro, and Florante
Valle and Insular Bank of Asia and America v. Spouses Salazar.

Issue: Whether or not the escalation clause contained in the contract validly applies.

Ruling: Yes, the escalation clause validly applies to the contract. For a stipulation on an escalation clause
to be valid, it should specifically provide (1) that there can be an increase in interest if increased by law
or by the Monetary Board, and (2) it must include a provision for reduction of the stipulated interest in
the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board.
(Section 2, Presidential Decree No. 1684) 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. The purpose
of the law in mandating the inclusion of a de-escalation clause is to prevent one-sidedness in favor of
the lender which is considered repugnant to the principle of mutuality of contracts.

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 stipulation
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. Consequently, we
hold that with this actuality, the escalation clause involved in this case remains valid and enforceable.
The evil sought to be thwarted with the enactment and by the application of Presidential Decree No.
1684 is inexistent in the present case by reason of the actual grant of a concomitant decrease in the
interest rates on petitioner’s loan. We do not find here a situation where it can be said that the parties
do not stand on equal footing, which is the evil proscribed by said decree. Ergo, cessante ratione legis
cessat ipsa lex.

Almeda v. CA
G.R. No. 113412, April 17, 1996, 256 SCRA 292

FACTS: On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses
Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million
pesos payable in a period of six years at an interest rate of 21% per annum. To secure the loan, the
spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land,
together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro
Manila. Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, a substantial portion of which was applied to accrued interest. On March 31, 1984,
respondent bank, over petitioners’ protestations, raised the interest rate to 28%, allegedly pursuant to
Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a
high of 68% between March of 1984 to September of 1986.

Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March,
1988, the spouses filed on, February 6, 1988 a petition for declaratory relief with prayer for a writ of
preliminary injunction and temporary restraining order. Invoking the Law on Mandatory Foreclosure
(Act 3135, as amended and P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of
petitioner’s mortgaged properties and scheduled an auction sale for March 14, 1989. Upon motion by
petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary
injunction, staying the public auction of the mortgaged property.

ISSUE: Whether or not PNB was authorized to raise its interest rates from 21% to as high as 68% under
the credit agreement.

RULING: No. Any contact which appears to be heavily weighted in favor of one of the parties so as to
lead to an unconscionable result is void. Likewise, any stipulation regarding the validity or compliance of
the contract which is left solely to the will of one of the parties is invalid. The binding effect of any
agreement between parties to a contract is premised on two settled principle: that any obligation arising
from the contact has the force of law between the parties; and that there must be mutuality between
the parties based on their essential equality.

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest
rate.