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SPS Juico Juico vs CHINA BANK
DOCTRINE : the escalation clause is void if it grants respondent the power to impose an increased rate of interest without a written notice to petitioners and their written consent. Concurring doctrine by CJ Sereno these points must be considered b creditors and debtors in the drafting of valid escalation clauses. !irstl" as a matter of e#uit and consistent with $.O. No. %&'(" the escalation clause must be paired with a de)escalation clause. clause.9 *econdl" so as not to violate the principle of mutualit" the escalation must be pegged to the prevailing mar+et rates" and not merel ma+e a generali,ed reference to -an increase or decrease in the interest rate- in the event a law or a Central an+ regulation is passed. Thirdl" consistent with the nature of contracts" the proposed modification must be the result of an agreement between the parties. In this wa" our credit sstem would be facilitated b firm loan provisions that not onl aid fiscal stabilit" but also avoid numerous disputes and litigations between creditors and debtors. FACTS: *pouses Ignacio !. /uico and 0lice $. /uico 1petitioners2 obtained a loan from
China an+ing Corporation 1respondent2 as evidenced b two $romissor Notes both dated October &" %33' and numbered 456)55%54%)74and 456)55%548)5"5 for the sums of 99&"8%&"555 and $(" %73"555" respectivel. The loan was secured b a Real Estate ortgage 1RE2 over petitioners; propert located at (3 ue,on Cit respondent demanded the full pament of the outstanding balance with accrued monthl interests. 0s of !ebruar 87" 855%" the amount due on the two promissor notes totaled $%3"85%"66&. On the same da" the mortgaged propert was sold at public auction" with respondent China ban+ as highest bidder for the amount of $%5"755"555. petitioners received 'a demand letter3 dated a 8" 855% from respondent for the pament of$'"35%"66&.&7" the amount of deficienc after appling the proceeds of the foreclosure sale respondent praed that ?udgment be rendered ordering the petitioners to pa ?ointl and severall: 1%2$'"35%"66&.&7 representing the amount of deficienc" plus interests at the legal rate" from !ebruar 87" 855% until full paid@ 182 an additional amount e#uivalent to %A%5 of %B per da of the total amount" until full paid" as penalt@ 172 an amount e#uivalent to %5B of the foregoing amounts as attorne;s fees@ and 1(2 epenses of litigation and costs of suit. s. 0nnabelle Co+ai u" its *enior oans 0ssistant stated t hat as of now the outstanding balance of petitioners was $%4"%35"3&%.('. u reiterated that the interest rate changes ever month based on the prevailing mar+et rate. rate. she notified petitioners of the prevailing rate b calling them monthl .It was increased unilaterall RTC: ordered *pouses to pa ban+ 3 plus the interest which amounted to %4 .C0 0!!IRED $ETITIONER: The insist that the increase in interest interest rates were unilaterall imposed b the ban+ and thus violate the principle of mutualit of contracts. Issue: whether
the increase in interest rates is void for violating the mutualit of
contracts HELD:es
R0TIO: 0rticle %75'. The contract must bind both contracting parties@ its validit or compliance cannot be left to the will of one of them. 0rticle %34& of the Civil Code li+ewise ordains that -no interest shall be due unless it has been epressl stipulated in writing.The binding effect of an agreement between parties to a contract is premised on 182 that there must be mutualit between the parties based on their essential e#ualit. 0n contract which appears to be heavil weighed in favor of one of the parties so as to lead to an unconscionable result is void. 0n stipulation regarding the validit or compliance of the contract which is left solel to the will of one of the parties" is li+ewise" invalid Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon b the contracting parties. This Court has long recogni,ed that there is nothing inherentl wrong with escalation clauses Nevertheless" an escalation clause -which grants the creditor an unbridled right to ad?ust the interest independentl and upwardl" completel depriving the debtor of the right to assent to an important modification in the agreement- is void. 0 stipulation of such nature violates the principle of mutualit of contracts. In a case"*C said that petitioner;s assent to the modifications in the interest rates cannot be implied from their lac+ of response to the memos sent b respondent It is now settled that an escalation clause is void where the creditor unilaterall determines and imposes an increase in the stipulated rate of interest without the epress conformit of the debtor. *uch unbridled right given to creditors to ad?ust the interest independentl and upwardl would completel ta+e awa from the debtors the right to assent to an important modification in their agreement and would also negate the element of mutualit in their contracts. ore recentl in *olidban+ Corporation v. $ermanent Fomes" Incorporated"39 we upheld as valid an escalation clause which re#uired a written notice to and conformit b the borrower to the increased interest rate In $olotan" *r. v. C0 "On petitioner;s contention that the interest rate was unilaterall imposed and based on the standards and rate formulated solel b respondent credit card compan" we held: Cardholder hereb authori,es *ecurit Diners to
correspondingl increase the rate of such interest in the event of changes in prevailing mar+et rates - is an escalation clause. Fowever" it cannot be said to be dependent solel on the will of private respondent as it is also dependent on the prevailing mar+et rates. Thus" it was valid because it wasnt solel potestative as it was based on the mar+et rates1something outside the control of respondent2 Fere" the interest rates would var as determined b prevailing mar+et rates. Evidentl" the parties intended the interest on petitioners; loan" including an upward or downward ad?ustment" to be determined b the prevailing mar+et rates and not dictated b respondent;s polic. FO=EGER" *C hold that the escalation clause here is still void because it grants respondent the power to impose an increased rate of interest without a written notice to petitioners and their written consent. Respondent;s monthl telephone calls to petitioners advising them of the prevailing interest rates would not suffice. 0 detailed billing statement based on the new imposed interest with corresponding computation of the total debt should have been provided b the respondent to enable petitioners to ma+e an informed decision. 0n appropriate form must also be signed b the petitioners to indicate their conformit to the new rates. Compliance with these re#uisites is essential to preserve the mutualit of contracts. !or indeed" one)sided impositions do not have the force of law between the parties" because such impositions are not based on the parties; essential e#ualit . In the absence of consent on the part of the petitioners to the modifications in the interest rates" the ad?usted rates cannot bind them. Fence" we consider as invalid the interest rates in ecess of %4B" the rate charged for the first ear. ased on the 0ugust 83" 8555 demand letter of China an+" petitioners; total principal obligation under the two promissor notes which the failed to settle is $%5"744"555. Fowever" due to China an+;s unilateral increases in the interest rates from %4B to as high as 8(.45B and penalt charge of %A%5 of %B per da or 7&.4B per annum for the period November (" %333 to !ebruar 87" 855%" petitioners; balance ballooned to $%3"85%"66&.&7. Note that the original amount of principal loan almost doubled in onl %& months. The Court also finds the penalt charges imposed ecessive and arbitrar" hence the same is hereb reduced to %B per month or %8B per annum. Concurring b C/ *ereno: not all escalation clauses in loan agreements are void per se .it is to maintain fiscal stabilit and to retain the value of mone in long term contracts.however" a contract containing a provision that ma+es its fulfillment eclusivel dependent upon the uncontrolled will of one of the contracting parties is void. Fence the provision on the promissor note: IA=e hereb authori,e the CFIN0 0NHIN< COR$OR0TION to increase or decrease as the case ma be" the interest rateAservice charge presentl stipulated in this note without an advance notice to meAus in the event a law or Central an+ regulation is passed or promulgated b the Central an+ of the $hilippines or appropriate government entities" increasing or decreasing such interest rate or service charge. Is void. The floating rate of interest in the trust receipt agreement is also void. It reads: I" =E ?ointl and severall agree to an increase or decrease in the interest rate which ma occur after /ul %" %3'%" when the Central an+ floated the interest rate" and to pa additionall the penalt of IB per month until the amountAs or installmentsAs due and unpaid under the trust receipt on the reverse side hereof isAare full paid. It is o+" for ban+s to stipulate that interest rates on a loan not be fied and instead be made dependent upon prevailing mar+et conditions as as long as there should alwas be a reference rate upon which to peg such variable interest rates. 0n eample of such a valid variable interest rate was found in $olotan" *r. v. Court of 0ppeals.10 In that case" the contractual provision stating that -if there occurs an change in the prevailing mar+et rates" the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the re#uired posting on the monthl statement served to the Cardholder was considered valid. The afore#uoted provision was upheld notwithstanding that it ma parta+e of the nature of an escalation clause" because at the same time it provides for the decrease in the interest rate in case the prevailing mar+et rates dictate its reduction. Fere" the use of the phrase -an increase or decrease decrease in the interest rate- is without reference to the prevailing mar+et rate actuall imposed b the regulations of the Central an+.8 It is thus not enough to state" as a+in to China an+s provision" that the ban+ ma increase or decrease the interest rate in the event a law or a Central an+ regulation is passed. To adopt that stance will necessaril involve a determination of the interest rate b the creditor since the provision spells a vague condition ) it onl re#uires that an change in the imposable interest must conform to the upward or downward movement of borrowing rates. 0nd if that determination is not sub?ected to the mutual agreement of the contracting parties" then the resulting interest rates to be imposed b the creditor would be unilaterall determined. Conse#uentl" the escalation clause violates t he principle of mutualit of contracts. ased on ?urisprudence" therefore" these points must be considered b creditors and debtors in the drafting of valid escalation clauses. !irstl" as a matter of e#uit and consistent with $.O. No. %&'(" the escalation clause must be paired with a de) escalation clause. clause.9 *econdl" so as not to violate t he principle of mutualit" the escalation must be pegged to the prevailing mar+et rates" and not merel ma+e a generali,ed reference to -an increase or decrease in the interest rate- in the event a law or a Central an+ regulation is passed. Thirdl" consistent with the nature of contracts" the proposed modification must be the result of an agreement between the parties. In this wa" our credit sstem would be facilitated b firm loan provisions that not onl aid fiscal stabilit" but also avoid numerous disputes and litigations between creditors and debtors.
