Equitable PCI Bank vs. Ng Sheung Ngor

A petition for relief from the denial of a notice of appeal under Rule 38 and a petition for certiorari under Rule 65 do not share identical causes of action and may be pursued without offending the rule against forum shopping, particularly where the earlier petition is withdrawn on the same day it is discovered to be pending; and a trial court commits grave abuse of discretion amounting to lack or excess of jurisdiction when it denies due course to a notice of appeal despite payment of the appeal fees and then orders immediate execution, thereby foreclosing the aggrieved party's right to appellate review.

Equitable PCI Bank is a banking institution that extended peso- and dollar-denominated credit facilities to Ng Sheung Ngor, doing business under the name and style "Ken Marketing," Ken Appliance Division, Inc., and Benjamin E. Go, who availed of the facilities beginning 1996 on the bank's pre-printed promissory notes. The dispute implicated the statutory framework governing contracts — Article 1308 of the Civil Code on the mutuality of contracts and Article 1250 on extraordinary inflation or deflation — as well as the remedial rules on petitions for relief (Rule 38), petitions for certiorari (Rule 65), modes of appeal (Rule 41), and petitions for review on certiorari (Rule 45). The bank's employees, Aimee Yu and Bejan Lionel Apas, were impleaded as co-defendants in the trial court action.

Equitable PCI Bank extended peso- and dollar-denominated credit facilities to Ng Sheung Ngor, doing business under the name and style "Ken Marketing," Ken Appliance Division, Inc., and Benjamin E. Go. Beginning in 1996, the respondents accepted the bank's proposal, which held out low interest rates — initially 12.75% per annum for dollar-denominated loans — and signed the bank's pre-printed promissory notes on various dates. According to the respondents, they were unaware that the documents contained identical escalation clauses granting Equitable authority to increase interest rates without their consent. Equitable, for its part, asserted that the respondents knowingly accepted all the terms and conditions contained in the promissory notes and that they continuously availed of and benefited from the credit facilities for five years.

On October 7, 2001, respondents filed an action for annulment and/or reformation of documents and contracts against Equitable and its employees Aimee Yu and Bejan Lionel Apas in the Regional Trial Court, Branch 16 of Cebu City, docketed as Civil Case No. CEB-26983. After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable restructured respondents' loans amounting to US$228,200 and P1,000,000. The trial court, however, invalidated the escalation clause contained in the notes because it violated the principle of mutuality of contracts. It took judicial notice of the steep depreciation of the peso during the intervening period and declared the existence of extraordinary deflation, and consequently ordered the use of the 1996 dollar exchange rate of P26.50 per dollar in computing respondents' dollar-denominated loans. Finding that respondents' business reputation had been severely damaged when Equitable froze their accounts, the trial court awarded moral and exemplary damages, attorney's fees, litigation expenses and costs of suit, while directing respondents to pay the unpaid principal obligations and interest on both the peso and dollar loans.

Both Equitable and respondents filed their respective notices of appeal. In its March 1, 2004 order, the RTC denied due course to both notices because the parties "failed to submit proof that they paid their respective appeal fees," and declared the February 5, 2004 decision final and executory insofar as Equitable, Yu and Apas were concerned. Equitable moved for reconsideration on the ground that it had in fact paid the appeal fees, while respondents prayed for the issuance of a writ of execution. On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for reconsideration for lack of merit and ordering the issuance of a writ of execution in favor of respondents, reasoning that because respondents had not moved for reconsideration of the March 1, 2004 order, the February 5, 2004 decision had become final and executory as to both parties. A writ of execution was thereafter issued and three real properties of Equitable were levied upon.

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order, but withdrew that petition on March 30, 2004 and instead filed a petition for certiorari with an application for injunction in the Court of Appeals to enjoin the implementation and execution of the March 24, 2004 omnibus order. On June 16, 2004, the CA granted the application for injunction and a writ of preliminary injunction was correspondingly issued. Notwithstanding the writ, the properties of Equitable previously levied upon were sold at a public auction on July 1, 2004; respondents were the highest bidders and certificates of sale were issued to them. On August 10, 2004, Equitable moved to annul the auction sale and to cite the sheriffs who conducted the sale in contempt for proceeding with the auction despite the injunction order of the CA.

The trial court found that respondents had outstanding dollar- and peso-denominated loans with Equitable but failed to ascertain the total amount due, whether principal, interest or penalties, as of July 9, 2001, and did not explain how it arrived at the amounts of US$228,200 and P1,000,000. The RTC likewise found that respondents did not pay Equitable the interest due on February 9, 2001, or any month thereafter prior to the maturity of the loan, nor the amount due on July 9, 2001, and that Equitable consequently applied respondents' deposits to their loans upon maturity. Equitable and respondents agreed neither as to the amount of the principal nor as to the amount due, each submitting differing schedules of loans.

• Absence of Forum Shopping: Equitable asserted that it was not guilty of forum shopping because the petition for relief was withdrawn on the same day the petition for certiorari was filed, and because the two actions did not share identical causes of action.
• Grave Abuse of Discretion: Equitable averred that its petition for certiorari was meritorious because the RTC committed grave abuse of discretion in issuing the March 24, 2004 omnibus order, which rested on the erroneous assumption that Equitable had not paid the appeal fees when it had in fact paid them.
• Denial of Appellate Review: Equitable argued that the RTC, by issuing its March 24, 2004 omnibus order, effectively prevented it from appealing the patently wrong February 5, 2004 decision, particularly the exorbitant award of damages, which was inconsistent with existing law and jurisprudence.
• Pure Questions of Law: Equitable maintained that it did not assail the factual findings of the trial court and that its arguments focused on the nullity of the February 5, 2004 decision, thereby raising pure questions of law cognizable under Rule 45.

• Forum Shopping: Whether Equitable was guilty of forum shopping in filing a petition for relief in the RTC and a petition for certiorari in the CA.
• Grave Abuse of Discretion: Whether the RTC committed grave abuse of discretion amounting to lack or excess of jurisdiction in issuing its March 1, 2004 and March 24, 2004 orders.
• Availability of Plain, Speedy and Adequate Remedy: Whether Equitable had a plain, speedy and adequate remedy in the ordinary course of law other than a petition for certiorari.
• Nature of Questions Raised: Whether Equitable raised pure questions of law in its petition for review under Rule 45.
• Validity of the Promissory Notes: Whether the promissory notes, being contracts of adhesion, were valid and binding on respondents.
• Escalation Clause: Whether the escalation clause in the promissory notes violated the principle of mutuality of contracts under Article 1308 of the Civil Code.
• Extraordinary Deflation: Whether there existed extraordinary deflation justifying the application of Article 1250 of the Civil Code and the use of the 1996 dollar exchange rate.
• Moral and Exemplary Damages: Whether the award of moral and exemplary damages, attorney's fees and litigation expenses to respondents had legal and factual basis.

• Forum Shopping: No. The petition for relief under Rule 38 and the petition for certiorari under Rule 65 did not have identical causes of action, and Equitable substantially complied with the rule on non-forum shopping when it withdrew the petition for relief on the same day it filed the petition for certiorari.
• Grave Abuse of Discretion: Yes. The March 1, 2004 and March 24, 2004 orders were obviously intended to prevent Equitable from appealing the February 5, 2004 decision, and the execution of the decision was undertaken with indecent haste.
• Availability of Plain, Speedy and Adequate Remedy: None. Because the RTC denied due course to the notice of appeal and affirmed that denial, there was no way Equitable could have appealed the February 5, 2004 decision, and a petition for relief was not a plain, speedy and adequate remedy.
• Nature of Questions Raised: Yes. Equitable did not assail the factual findings of the trial court; its arguments focused on the nullity of the February 5, 2004 decision, thereby raising pure questions of law.
• Validity of the Promissory Notes: Valid. Contracts of adhesion are not invalid per se and are as binding as ordinary contracts, absent a showing that the dominant party took advantage of the weakness of the other party.
• Escalation Clause: Void. The clause granted Equitable an unbridled right to adjust interest rates independently and upwardly, deprived respondents of the right to assent to an important modification of the agreement, and lacked the requisites of a valid escalation clause.
• Extraordinary Deflation: None. There was no official declaration of extraordinary inflation or deflation by the Bangko Sentral ng Pilipinas, and the parties did not agree to recognize the effects of extraordinary inflation or deflation.
• Moral and Exemplary Damages: No basis. Respondents defaulted on their obligation, and whatever damage they sustained was purely the consequence of their failure to pay their loans; moral damages in culpa contractual require fraud, bad faith or wanton disregard of contractual obligations.

• Forum Shopping: Forum shopping exists when two or more actions involving the same transactions, essential facts and circumstances are filed and those actions raise identical issues, subject matter and causes of action; the test is whether there is identity of parties, rights or causes of action and reliefs. Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have identical causes of action: the petition for relief from the denial of its notice of appeal was based on the RTC's judgment or final order preventing it from taking an appeal by fraud, accident, mistake or excusable negligence, whereas the petition for certiorari, a special civil action, sought to correct grave abuse of discretion amounting to lack of jurisdiction committed by the RTC. In a petition for relief, the judgment or final order is rendered by a court with competent jurisdiction; in a petition for certiorari, the order is rendered by a court without or in excess of its jurisdiction. Equitable likewise substantially complied with the rule on non-forum shopping when it moved to withdraw its petition for relief in the RTC on the same day — in fact just four hours and forty minutes after — it filed the petition for certiorari in the CA. Even if Equitable failed to disclose the pending petition for relief, it rectified what was doubtlessly a careless oversight by withdrawing the petition just a few hours after filing the certiorari petition, a clear indication that it had no intention of maintaining the two actions at the same time.

• Grave Abuse of Discretion: Section 1, Rule 65 of the Rules of Court requires that the tribunal, board or officer exercising judicial or quasi-judicial functions acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and that there is no appeal, nor any plain, speedy or adequate remedy in the ordinary course of law. For a petition for certiorari premised on grave abuse of discretion to prosper, the petitioner must show that the public respondent patently and grossly abused its discretion and that the abuse amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in contemplation of law, as where the power was exercised in an arbitrary and despotic manner by reason of passion or hostility. The March 1, 2004 order denied due course to the notices of appeal of both Equitable and respondents but declared the February 5, 2004 decision final and executory only with respect to Equitable; the March 24, 2004 omnibus order then denied Equitable's motion for reconsideration and granted respondents' motion for a writ of execution. These orders were obviously intended to prevent Equitable, Yu and Apas from appealing the February 5, 2004 decision, and the execution of the decision was undertaken with indecent haste, effectively obviating or defeating Equitable's right to avail of possible legal remedies. No matter how the matter was viewed, the RTC committed grave abuse of discretion in rendering those orders.

• Availability of Plain, Speedy and Adequate Remedy: The RTC denied due course to Equitable's notice of appeal in the March 1, 2004 order and affirmed that denial in the March 24, 2004 omnibus order; hence, there was no way Equitable could have possibly appealed the February 5, 2004 decision. Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not a plain, speedy and adequate remedy in the ordinary course of law. A petition for relief under Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no other available or adequate remedy. The petition for certiorari was accordingly granted and Equitable's appeal given due course.

• Nature of Questions Raised: The jurisdiction of the Court in Rule 45 petitions is limited to questions of law. There is a question of law when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts, or when the issue does not call for the probative value of the evidence presented, the truth or falsehood of facts being admitted. Equitable did not assail the factual findings of the trial court; its arguments essentially focused on the nullity of the RTC's February 5, 2004 decision, which it pointed out was patently erroneous, especially as to the exorbitant award of damages, as it was inconsistent with existing law and jurisprudence.

• Validity of the Promissory Notes: A contract of adhesion is one whereby almost all of its provisions are drafted by one party, the participation of the other being limited to affixing his signature or his "adhesion" to the contract; for this reason, such contracts are strictly construed against the party who drafted them. It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on the contrary, as binding as ordinary contracts, a party being in reality free to accept or reject the instrument. A contract of adhesion becomes void only when the dominant party takes advantage of the weakness of the other party, completely depriving the latter of the opportunity to bargain on equal footing. That was not the case here: as the trial court noted, if the terms and conditions offered by Equitable had been truly prejudicial to respondents, they would have walked out and negotiated with another bank at the first available instance, but they did not, and instead continuously availed of Equitable's credit facilities for five long years. While the RTC categorically found that respondents had outstanding dollar- and peso-denominated loans, it failed to ascertain the total amount due — principal, interest and penalties, if any — as of July 9, 2001, and did not explain how it arrived at the amounts of US$228,200 and P1,000,000; consistent with the rule that the Court is not a trier of facts and shall pass upon them only for compelling reasons, the case was ordered partially remanded for the sole purpose of determining the amount of actual damages.

• Escalation Clause: Escalation clauses are not void per se. However, one which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement, is void, such clauses violating the principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind both contracting parties and that its validity or compliance cannot be left to the will of one of them. A valid escalation clause provides that the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the Monetary Board, and that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause). The RTC found that Equitable's promissory notes uniformly stated: "If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as shall be determined by the bank." Equitable thus dictated the interest rates if the term of the loan was extended, and respondents had no choice but to accept them, in violation of Article 1308. The assailed escalation clause likewise contained neither of the necessary provisions for validity: it did not provide that the rate of interest would be increased only if allowed by law or the Monetary Board, nor did it allow de-escalation. The escalation clause was therefore void. As to the proper rate of interest, because the escalation clause was annulled, the principal amount of the loan was subject to the original or stipulated rate of interest, and upon maturity the amount due was subject to legal interest at 12% per annum. Consequently, respondents should pay Equitable interest at 12.66% per annum for their dollar-denominated loans and 20% per annum for their peso-denominated loans from January 10, 2001 to July 9, 2001; thereafter, Equitable was entitled to legal interest of 12% per annum on all amounts due.

• Extraordinary Deflation: Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency, that is, beyond the common fluctuation in the value of currency, and such decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation; extraordinary deflation involves an inverse situation. Article 1250 of the Civil Code provides that in case an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. For extraordinary inflation or deflation to affect an obligation, the following requisites must be proven: (a) that there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas; (b) that the obligation was contractual in nature; and (c) that the parties expressly agreed to consider the effects of the extraordinary inflation or deflation. Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation. Moreover, although the obligation arose out of a contract, the parties did not agree to recognize the effects of extraordinary inflation or deflation, and the RTC never mentioned any such stipulation in either the promissory note or the loan agreement. Respondents should therefore pay their dollar-denominated loans at the exchange rate fixed by the BSP on the date of maturity.

• Moral and Exemplary Damages: Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered, not to impose a penalty on the wrongdoer. To be entitled to moral damages, a claimant must prove: (a) that he or she suffered besmirched reputation, or physical, mental or psychological suffering; (b) that the defendant committed a wrongful act or omission; (c) that the wrongful act or omission was the proximate cause of the damages sustained; and (d) that the case is predicated on any of the instances expressed or envisioned by Articles 2219 and 2220 of the Civil Code. In culpa contractual or breach of contract, moral damages are recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations; the breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. The RTC found that respondents did not pay Equitable the interest due on February 9, 2001, or any month thereafter prior to the maturity of the loan, nor the amount due, principal plus interest, on July 9, 2001; consequently, Equitable applied respondents' deposits to their loans upon maturity. The relationship between a bank and its depositor is that of creditor and debtor, and for this reason a bank has the right to set off the deposits in its hands for the payment of a depositor's indebtedness. Respondents indeed defaulted on their obligation, and Equitable had the option to exercise its legal right to set-off or compensation. The RTC mistakenly — or, as it now appeared, deliberately — concluded that Equitable acted fraudulently or in bad faith or in wanton disregard of its contractual obligations despite the absence of proof. The undeniable fact was that whatever damage respondents sustained was purely the consequence of their failure to pay their loans; there was therefore absolutely no basis for the award of moral damages. Neither was there reason to award exemplary damages, for since respondents were not entitled to moral damages, neither should they be awarded exemplary damages; and if respondents were not entitled to moral and exemplary damages, neither could they be awarded attorney's fees and litigation expenses.

• Forum Shopping — Test and Definition — Forum shopping exists when two or more actions involving the same transactions, essential facts and circumstances are filed and those actions raise identical issues, subject matter and causes of action. The test is whether, in two or more pending cases, there is identity of parties, rights or causes of action and reliefs. The Court applied the test by comparing the causes of action in Equitable's Rule 38 petition for relief and its Rule 65 petition for certiorari and finding no identity between them, since the former presupposes a judgment rendered by a court of competent jurisdiction while the latter assails an order issued without or in excess of jurisdiction.

• Petition for Relief Distinguished from Petition for Certiorari — A petition for relief under Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no other available or adequate remedy; it lies when a judgment or final order is rendered by a court with competent jurisdiction and a party has been prevented from taking an appeal by fraud, accident, mistake or excusable negligence. A petition for certiorari under Rule 65, by contrast, is a special civil action that seeks to correct grave abuse of discretion amounting to lack or excess of jurisdiction committed by a tribunal, board or officer exercising judicial or quasi-judicial functions, where the order is rendered by a court without or in excess of its jurisdiction. Because the two remedies rest on distinct causes of action, the simultaneous filing of both does not necessarily constitute forum shopping, especially where the earlier petition is withdrawn on the same day it is discovered to be pending.

• Grave Abuse of Discretion — For a petition for certiorari premised on grave abuse of discretion to prosper, the petitioner must show that the public respondent patently and grossly abused its discretion and that the abuse amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law or to act at all in contemplation of law, as where the power was exercised in an arbitrary and despotic manner by reason of passion or hostility. The Court found this standard satisfied where the trial court denied due course to a notice of appeal despite payment of the appeal fees and ordered execution with indecent haste, effectively obviating or defeating the aggrieved party's right to avail of possible legal remedies.

• Contract of Adhesion — A contract of adhesion is one whereby almost all of its provisions are drafted by one party, the participation of the other being limited to affixing his signature or his "adhesion" to the contract; for this reason, such contracts are strictly construed against the party who drafted them. Contracts of adhesion are not invalid per se; they are as binding as ordinary contracts, a party being in reality free to accept or reject the instrument. A contract of adhesion becomes void only when the dominant party takes advantage of the weakness of the other party, completely depriving the latter of the opportunity to bargain on equal footing. The Court found no such disadvantage in this case, as respondents continuously availed of the bank's credit facilities for five years.

• Mutuality of Contracts and the Requisites of a Valid Escalation Clause — Article 1308 of the Civil Code provides that a contract must bind both contracting parties and that its validity or compliance cannot be left to the will of one of them. Escalation clauses are not void per se, but one which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement, is void. A valid escalation clause must provide (a) that the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the Monetary Board, and (b) that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause). The Court voided the clause because it allowed the bank to dictate the rate upon extension and contained neither requisite.

• Extraordinary Inflation or Deflation under Article 1250 — Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency, beyond the common fluctuation in the value of currency, and such decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation; extraordinary deflation involves an inverse situation. For extraordinary inflation or deflation to affect an obligation, the following requisites must be proven: (a) that there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas; (b) that the obligation was contractual in nature; and (c) that the parties expressly agreed to consider the effects of the extraordinary inflation or deflation. The Court held Article 1250 inapplicable because the BSP never declared a situation of extraordinary inflation and neither the loan agreement nor the promissory notes contained a stipulation recognizing the effects of extraordinary inflation or deflation.

• Moral Damages in Culpa Contractual — Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered, not to impose a penalty on the wrongdoer. To be entitled to moral damages, a claimant must prove: (a) that he or she suffered besmirched reputation, or physical, mental or psychological suffering sustained by the claimant; (b) that the defendant committed a wrongful act or omission; (c) that the wrongful act or omission was the proximate cause of the damages the claimant sustained; and (d) that the case is predicated on any of the instances expressed or envisioned by Articles 2219 and 2220 of the Civil Code. In culpa contractual or breach of contract, moral damages are recoverable only if the defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations; the breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. The Court found no such proof, as the damage sustained by respondents was purely the consequence of their own failure to pay their loans.

• Bank-Depositor Relationship and Legal Compensation — The relationship between a bank and its depositor is that of creditor and debtor, and for this reason a bank has the right to set off the deposits in its hands for the payment of a depositor's indebtedness. The Court applied this doctrine in holding that Equitable had the option to exercise its legal right to set-off or compensation after respondents defaulted on their obligation, and that the exercise of that right could not be characterized as fraudulent or in bad faith.

• Rule 45 Limited to Questions of Law — The jurisdiction of the Supreme Court in Rule 45 petitions is limited to questions of law. There is a question of law when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts, or when the issue does not call for the probative value of the evidence presented, the truth or falsehood of facts being admitted. The Court found that Equitable raised pure questions of law because it did not assail the factual findings of the trial court and instead focused on the nullity of the February 5, 2004 decision.

• Court Not a Trier of Facts — The Supreme Court is not a trier of facts and shall pass upon them only for compelling reasons. Because the trial court failed to ascertain and explain the total amount due on respondents' loans as of July 9, 2001, the Court ordered a partial remand of the case for the sole purpose of determining the amount of actual damages.

• "Forum shopping exists when two or more actions involving the same transactions, essential facts and circumstances are filed and those actions raise identical issues, subject matter and causes of action." — This passage states the Court's canonical formulation of forum shopping, which supplied the analytical framework for rejecting the CA's finding that Equitable had engaged in the practice by simultaneously filing a Rule 38 petition for relief and a Rule 65 petition for certiorari.

• "A contract of adhesion becomes void only when the dominant party takes advantage of the weakness of the other party, completely depriving the latter of the opportunity to bargain on equal footing." — This passage defines the narrow circumstance in which a contract of adhesion may be struck down, and it is the ratio for the Court's holding that the bank's pre-printed promissory notes remained valid and binding on respondents.

• "Escalation clauses are not void per se. However, one 'which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement' is void." — This passage articulates the controlling standard for testing escalation clauses against the principle of mutuality of contracts under Article 1308 of the Civil Code, and it is the basis for invalidating the clause in Equitable's promissory notes.

• "For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven: that there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas (BSP); that the obligation was contractual in nature; and that the parties expressly agreed to consider the effects of the extraordinary inflation or deflation." — This passage enumerates the three requisites for the application of Article 1250 of the Civil Code, and it is the ground for the Court's rejection of the trial court's use of the 1996 dollar exchange rate.

• New Sampaguita Builders Construction, Inc. vs. Philippine National Bank, G.R. No. 148753, July 30, 2004, 435 SCRA 565 — Followed on the consequence of annulling an escalation clause: the principal amount of the loan is subject to the original or stipulated rate of interest, and upon maturity the amount due is subject to legal interest at 12% per annum.
• Eastern Shipping Lines vs. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 74 — Cited as the controlling ruling on the imposition of legal interest, applied in the dispositive portion to the total amount due as of July 9, 2001.
• Citibank, N.A. vs. Sabeniano, G.R. No. 156132, February 6, 2007 — Cited for the definition and treatment of contracts of adhesion and for the requirement of an official BSP declaration of extraordinary inflation or deflation.
• Perez vs. Development Bank of the Philippines, G.R. No. 148541, November 11, 2004, 442 SCRA 238 — Cited for the rule that a contract of adhesion becomes void only when the dominant party takes advantage of the weakness of the other party, depriving the latter of the opportunity to bargain on equal footing.
• Ligon vs. Court of Appeals, G.R. No. 127683, August 7, 1998, 294 SCRA 73 — Cited for the definition of forum shopping and the identity test governing the same.
• Llorin vs. Court of Appeals, G.R. No. 103592, February 4, 1993, 218 SCRA 438 — Cited for the requisites of a valid escalation clause, namely, that any increase be contingent on a corresponding increase allowed by law or the Monetary Board and that a de-escalation clause be provided.
• Sangrador vs. Valderrama, G.R. No. 58122, December 29, 1989, 168 SCRA 215 — Cited for the definition of extraordinary inflation and the inverse situation of extraordinary deflation.
• Commissioner of Public Highway vs. Burgos, G.R. No. L-36706, March 31, 1980, 96 SCRA 831 — Cited for the requisite that the parties expressly agree to consider the effects of extraordinary inflation or deflation before Article 1250 may apply.
• Bank of the Philippine Islands vs. Leobrera, G.R. Nos. 137147-48, November 18, 2003, 416 SCRA 15 — Cited for the rule that a dollar-denominated obligation is to be paid at the exchange rate fixed by the BSP on the date of maturity.
• Gullas vs. National Bank, 62 Phil. 519 (1935) — Cited for the doctrine that the relationship between a bank and its depositor is that of creditor and debtor, and that the bank has the right to set off the deposits in its hands for the payment of a depositor's indebtedness.
• Philippine National Bank vs. Pike, G.R. No. 157845, September 20, 2005, 470 SCRA 328 — Cited for the requisites of an award of moral damages and for the rule that in culpa contractual moral damages are recoverable only upon proof of fraud or bad faith.
• Supercars Management & Development Corporation vs. Flores, G.R. No. 148173, December 10, 2004, 446 SCRA 34 — Cited for the rule that moral damages are compensatory rather than penal in character, and that the denial of moral damages precludes an award of attorney's fees and litigation expenses.
• Mahinay vs. Velasquez, Jr., G.R. No. 152753, January 13, 2004, 419 SCRA 118 — Cited for the rule that exemplary damages may not be awarded where the claimant is not entitled to moral damages.
• Tuason vs. Court of Appeals, G.R. No. 116607, April 10, 1996, 256 SCRA 158 — Cited for the rule that a petition for relief under Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no other available or adequate remedy.
• Metro Manila Transit Corporation vs. D.M. Consunji, G.R. No. 147594, March 7, 2007 — Cited for the rule that the Supreme Court is not a trier of facts and will pass upon factual questions only for compelling reasons, the basis for the partial remand to determine actual damages.
• Bukidnon Doctor's Hospital vs. Metropolitan Bank and Trust Company, G.R. No. 161882, July 8, 2005, 463 SCRA 222 — Cited for the definition of a question of law as one concerning the correct application of law or jurisprudence to a certain set of facts, or one that does not call for the probative value of the evidence presented.
• Aggabao vs. Commission on Elections, G.R. No. 163756, January 26, 2005, 449 SCRA 400 — Cited for the standard of grave abuse of discretion amounting to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law, or the exercise of power in an arbitrary and despotic manner by reason of passion or hostility.

• Article 1308, Civil Code — Provides that a contract must bind both contracting parties and that its validity or compliance cannot be left to the will of one of them. Applied to void the escalation clause in Equitable's promissory notes, which allowed the bank to dictate interest rates upon extension of the loan without the respondents' assent.
• Article 1250, Civil Code — Provides that in case an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. Held inapplicable because the BSP never declared extraordinary inflation and the parties did not stipulate to recognize its effects; respondents were thus required to pay their dollar-denominated loans at the BSP-fixed exchange rate on the date of maturity.
• Article 1157, Civil Code — Enumerates the sources of obligations, including contracts. Cited to support the requirement that the obligation affected by extraordinary inflation or deflation must be contractual in nature.
• Article 2217, Civil Code — Defines moral damages to include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury, recoverable if they are the proximate result of the defendant's wrongful act or omission. Cited in the discussion of the requisites of moral damages.
• Article 2219, Civil Code — Enumerates the instances in which moral damages may be recovered. Cited as one of the predicates required for an award of moral damages.
• Article 2220, Civil Code — Provides that willful injury to property may be a legal ground for moral damages and that the same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. Cited as the second predicate required for an award of moral damages in contractual breaches.
• Section 1, Rule 65, Rules of Court — Provides that a petition for certiorari lies when a tribunal, board or officer exercising judicial or quasi-judicial functions has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, nor any plain, speedy or adequate remedy in the ordinary course of law. Applied to sustain Equitable's certiorari petition against the RTC's March 1 and March 24, 2004 orders.
• Section 2, Rule 38, Rules of Court — Provides that when a judgment or final order is rendered by any court in a case and a party thereto, by fraud, accident, mistake or excusable negligence, has been prevented from taking an appeal, he may file a petition in such court and in the same case praying that the appeal be given due course. Cited to distinguish the cause of action in Equitable's petition for relief from that in its petition for certiorari.
• Section 2, Rule 41, Rules of Court — Provides the modes of appeal, including ordinary appeal by notice of appeal to the Court of Appeals in cases decided by the RTC in the exercise of original jurisdiction, and appeal by certiorari to the Supreme Court in all cases where only questions of law are raised. Cited to establish that the denial of due course to the notice of appeal left Equitable without a mode of appellate review.
• Rule 45, Rules of Court — Governs petitions for review on certiorari and limits the Supreme Court's jurisdiction to questions of law. Cited as the procedural basis for Equitable's petition and for the finding that it raised pure questions of law.

• Puno, C.J. (Chairperson)
• Sandoval-Gutierrez, J.
• Azcuna, J.
• Leonardo-De Castro, J.