United Coconut Planters Bank vs. Spouses Samuel and Odette Beluso

A stipulation in a promissory note that grants the lender sole discretion to determine the interest rate — whether by leaving the rate to the uncontrolled will of a branch head or by referencing an unspecified margin above or below a benchmark rate — violates the principle of mutuality of contracts under Article 1308 of the Civil Code and is void. The voiding of the stipulated interest rate entitles the creditor only to the legal rate of 12% per annum. A demand for an excessive amount does not nullify the demand itself, and default still commences as to the proper amount owed.

UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement on 16 April 1996, permitting credit of up to ₱1.2 million, later increased to ₱2.35 million. The obligations were secured by promissory notes and a real estate mortgage over two parcels of land in Roxas City. The promissory notes contained a provision stating interest would be at the "rate indicative of DBD retail rate or as determined by the Branch Head" and subjected the rate to review and adjustment by UCPB alone. The spouses Beluso availed themselves of the credit line through several promissory notes carrying interest rates from 18% to 34%.

• The Credit Agreement and Promissory Notes: On 16 April 1996, UCPB extended to the spouses Beluso a Promissory Notes Line under a Credit Agreement allowing credit of up to ₱1.2 million, later amended to ₱2.35 million, with a term ending 28 February 1998. The spouses executed a real estate mortgage over parcels of land in Roxas City (TCT No. T-31539 and T-27828) as additional security. Three promissory notes were executed for ₱700,000, ₱500,000, and ₱800,000 between April and November 1996, later renewed and consolidated. Two additional promissory notes for ₱200,000 and ₱150,000 were executed in December 1997 and January 1998, though the spouses alleged these amounts were never released.

• The Interest Rate Provision: The promissory notes stated interest would be "at the rate indicative of DBD retail rate or as determined by the Branch Head." A further stipulation provided that "the interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all dealings with the BORROWER."

• Interest and Penalty Charges: UCPB applied interest rates ranging from 18% to 34%. After 28 February 1998 until 10 June 1998, UCPB continued to charge interest and penalties from 28% to 36%. The spouses Beluso paid a total of ₱763,692.03 from 1996 to February 1998 but made no further payments thereafter.

• Demand and Foreclosure: On 2 September 1998, UCPB demanded payment of ₱2,932,543.00 plus 25% attorney's fees. The spouses failed to comply. On 28 December 1998, UCPB foreclosed the mortgaged properties, by which time the obligation had reached ₱3,784,603.00. The titles were subsequently consolidated in UCPB's name on 19 February 2001 and 20 March 2001, as the spouses failed to exercise their right of redemption, which expired on 25 March 2000.

• Separate Injunction Case: The spouses Beluso had earlier filed Civil Case No. V-7227 with the RTC of Roxas City for injunction against the foreclosure, but that case was dismissed for improper venue before the Makati City case was filed. A Motion for Reconsideration in the Roxas City case remained unresolved when the Makati case was instituted.

• Validity of Interest Rate: UCPB maintained that the interest rate provision was valid because the rate was "categorically fixed" at the time of execution at the "rate indicative of the DBD retail rate," which was akin to a "prevailing rate" or "prime rate" allowed in Polotan v. Court of Appeals. The reference to the branch head's determination was merely a connecting clause separable under the Credit Agreement's separability clause. The interest rate stipulation, read with the review clause, provided ascertainable reference rates.

• Estoppel: UCPB argued that even if the interest rate provision was defective, such defect was cured by the spouses Beluso's conduct in repeatedly availing themselves of the credit line from April 1996 to February 1998 without protest, placing them in estoppel.

• Error in Computation: UCPB contended that the lower courts erroneously failed to include the 12% legal interest per annum, the contractual penalty charges, compounding of interest, and attorney's fees in computing the spouses' outstanding obligation. The RTC also misapplied the spouses' ₱763,693.00 payment to principal instead of interest, contrary to the parties' stipulation and agreement on facts.

• Validity of Foreclosure: UCPB asserted that none of the recognized grounds for annulment of a foreclosure sale were present. The annulment of certificates of sale was mooted by the issuance of new certificates of title in UCPB's name, and the action constituted an impermissible collateral attack under Section 48 of P.D. No. 1529.

• Truth in Lending Act: The original complaint did not explicitly allege a violation of the Truth in Lending Act, and no formal amendment was admitted. The action to recover the civil penalty had prescribed under the one-year prescriptive period. UCPB claimed substantial compliance by furnishing the spouses copies of the promissory notes after execution.

• Forum Shopping: The spouses Beluso engaged in forum shopping by filing Civil Case No. V-7227 in Roxas City for injunction against the foreclosure simultaneously with Civil Case No. 99-314 in Makati City for annulment of foreclosure, involving the same parties and issues.

• Excessive Demand and Default: The spouses Beluso contended that UCPB's demand was for an excessive amount and therefore void. Without a valid demand, there could be no default, and interest and penalties would not commence to run. Consequently, the foreclosure and the claim for attorney's fees were unwarranted.

• Validity of Interest Provision: The spouses Beluso maintained that the interest rate provision violated the principle of mutuality of contracts because the rate was left solely to UCPB's will.

• Mutuality of Contracts: Whether the interest rate provision — "at the rate indicative of DBD retail rate or as determined by the Branch Head" — is void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code.

• Estoppel: Whether the spouses Beluso were estopped from challenging the interest rate provision by availing themselves of the credit line without protest.

• Computation of Indebtedness: Whether the lower courts erred in failing to include legal interest of 12% per annum, penalty charges, compounded interest, and attorney's fees in computing the spouses' outstanding obligation.

• Validity of Foreclosure: Whether the foreclosure of mortgage should be annulled based on an allegedly incorrect computation of the spouses' indebtedness.

• Truth in Lending Act: Whether UCPB violated the Truth in Lending Act and whether the civil penalty therefor was properly imposed.

• Forum Shopping: Whether the spouses Beluso committed forum shopping by filing two civil actions involving the same parties and issues.

• Mutuality of Contracts: The interest rate provision was void for violating Article 1308 of the Civil Code, which requires that a contract's validity or compliance cannot be left to the will of one party. The provision gave UCPB two choices, both dependent solely on its will: a rate "as determined by the Branch Head" conferred unfettered discretion, and a rate "indicative of the DBD retail rate" did not specify any margin above or below the reference rate, unlike the provision upheld in Polotan which fixed a 3% margin over the prime rate. The review clause similarly allowed UCPB alone to adjust the rate based on considerations it could weigh as it wished, without a fixed margin. The Separability Clause could not salvage either option because both independently violated mutuality.

• Estoppel: Estoppel cannot validate an illegal act. The interest rate provisions were illegal under both the Civil Code and the Truth in Lending Act. Moreover, the offending provisions were in the promissory notes themselves, and UCPB reserved the same unilateral options each time the credit line was renewed.

• Computation of Indebtedness: A demand for an excessive amount does not nullify the demand itself; default commences as to the proper amount owed. The RTC's error in omitting the 12% legal interest was corrected, as the spouses had even prayed for this rate. The compounding of interest was upheld because the contractual stipulation to capitalize unpaid interest was legal and had not been nullified or challenged. The penalty charges, however, ranging from 30.41% to 36% over and above compounded interest, were reduced as iniquitous and unconscionable — a 12% per annum penalty was deemed reasonable. The award of attorney's fees was offset between the parties; instead of awarding fees to either, the deletion of fees to the spouses was affirmed.

• Validity of Foreclosure: The foreclosure was valid. Since a valid demand had been made, the spouses were in default as to the proper amount, and none of the recognized grounds for annulment of a foreclosure sale — fraud, collusion, accident, mutual mistake, breach of trust, misconduct by the purchaser, irregular conduct of the sale, or a shockingly inadequate price — were present. The proceeds of the foreclosure sale should be applied to UCPB's rightful entitlement.

• Truth in Lending Act: The violation of the Truth in Lending Act was properly found. Although the original complaint did not explicitly mention the Act, the allegations that the interest rate was left blank and subject to the bank's unilateral determination sufficiently pleaded non-disclosure of finance charges. The prayer for "such other reliefs" included the civil penalty. The prescriptive period was measured from the date of demand (2 September 1998) or the foreclosure (28 December 1998), not from the execution of the promissory notes, making the 9 February 1999 filing timely. The civil action under Section 6(a) is distinct from the criminal offense under Section 6(c) and could be joined with other causes of action. The express allegation in the spouses' pre-trial brief provided UCPB sufficient notice and satisfied due process. The disclosure statement must be furnished prior to the consummation of the transaction under Section 4, and furnishing copies of the promissory notes after execution did not constitute substantial compliance because the interest rate provision itself did not disclose the true cost of credit.

• Forum Shopping: No forum shopping occurred. The Roxas City case was dismissed for improper venue before the Makati City case was filed. Dismissal on the ground of improper venue does not bar refiling under Rule 16, Section 5. Even if a Motion for Reconsideration in the Roxas City case was pending, Civil Case No. 99-314 was the more appropriate vehicle for litigating the issues, as it included an action for annulment of the foreclosure that had already been accomplished, while the Roxas City case merely sought an injunction.

• Mutuality of Contracts (Art. 1308, Civil Code) — A contract must bind both parties; its validity or compliance cannot be left to the will of one of them. An interest rate provision that grants the lender sole discretion to determine the rate — either by unfettered determination of a branch head or by pegging the rate to a reference rate without a fixed margin — is void. Both options in a disjunctive interest clause must satisfy the requirement of mutuality; if either option vests uncontrolled discretion in one party, the entire provision is void.

• Excessive Demand Does Not Vitiate Default — A demand for an excessive amount does not nullify the demand itself. Default commences upon judicial or extrajudicial demand with respect to the proper amount owed. The validity of demands in commercial transactions cannot depend on the exactness of computations that are frequently contested.

• Reduction of Iniquitous Penalty Charges — Courts may reduce a stipulated penalty if it is iniquitous or unconscionable under Article 1229 of the Civil Code. A penalty ranging from 30.41% to 36% imposed over and above compounded interest is iniquitous and may be reduced to 12% per annum.

• Compounding of Interest — Contracting parties may by stipulation capitalize interest due and unpaid, which as added principal shall earn new interest, an exception to the general rule under Article 2212 that interest due shall not earn interest.

• Truth in Lending Act — Prior Disclosure — Section 4 of the Truth in Lending Act requires the creditor to furnish the borrower a clear written disclosure statement setting forth the finance charge and the percentage rate prior to the consummation of the transaction. Furnishing copies of loan documents after execution, where the interest rate itself is not sufficiently particularized, does not constitute substantial compliance.

• Separability Clause and Illegal Provisions — A separability clause cannot save a provision if the separable parts independently violate the law. Where both disjunctive options in an interest rate clause violate mutuality, the separability clause does not apply.

• Estoppel and Illegal Contracts — Estoppel cannot be predicated on an illegal act. A contract provision that is prohibited by law or contrary to public policy cannot be validated by the parties' subsequent conduct.

• Forum Shopping — Dismissal for Improper Venue — Under Rule 16, Section 5, a dismissal based on improper venue (paragraph c) does not bar the refiling of the same action or claim. The bar against refiling applies only to dismissals based on res judicata (f), extinguishment of the claim (h), or Statute of Frauds unenforceability (i).

• "A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void."

• "Clearly, a rate 'as determined by the Branch Head' gives the latter unfettered discretion on what the rate may be. The Branch Head may choose any rate he or she desires."

• "The excess amount in such a demand does not nullify the demand itself, which is valid with respect to the proper amount. A contrary ruling would put commercial transactions in disarray, as validity of demands would be dependent on the exactness of the computations thereof, which are too often contested."

• "Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public policy."

• "The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like."

• Polotan v. Court of Appeals, 357 Phil. 250 (1998) — Distinguished. The interest rate in Polotan — "3% plus the prime rate" — contained a fixed margin over the reference rate, allowing the parties to determine the rate by simple arithmetic. The provision in the present case lacked any specified margin above or below the DBD retail rate.

• Philippine National Bank v. Court of Appeals, G.R. No. 88880, 30 April 1991, 196 SCRA 536 — Followed. A contract that makes fulfillment dependent exclusively upon the uncontrolled will of one party is void. A license to increase interest rates at will during the loan term is null and void for violating mutuality.

• Tan v. Court of Appeals, 419 Phil. 857 (2001) — Followed. Contracting parties may by stipulation capitalize interest due and unpaid, which as added principal shall earn new interest.

• Ruiz v. Court of Appeals, 449 Phil. 419 (2003) — Cited. A 36% interest rate has been declared unconscionable; a penalty of similar magnitude over and above compounded interest is equally iniquitous.

• Allied Banking Corporation v. Court of Appeals, 328 Phil. 710 (1996) — Followed. In determining which of two pending actions should be dismissed, the more appropriate vehicle for ventilating the issues between the parties should be retained.

• Article 1308, Civil Code — "The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." Applied to void the interest rate provision that left the rate to UCPB's unilateral determination.

• Article 1169, Civil Code — Default or delay commences from the time the obligee judicially or extrajudicially demands fulfillment. Applied to hold that UCPB's demand, though excessive, triggered default as to the proper amount.

• Article 1229, Civil Code — The court may reduce a penalty when it is iniquitous or unconscionable. Applied to reduce the penalty charge from 30.41%-36% to 12% per annum.

• Article 2212, Civil Code — Interest due and unpaid shall not earn interest, but contracting parties may stipulate to capitalize interest. Applied to uphold the compounding of interest provision.

• Section 4, Republic Act No. 3765 (Truth in Lending Act) — Creditors must furnish a clear written disclosure statement prior to the consummation of the transaction. Applied to find UCPB liable for failing to disclose the true cost of credit before the promissory notes were executed.

• Section 6(a), Republic Act No. 3765 — Provides a civil penalty of ₱100 or twice the finance charge (maximum ₱2,000) for failure to disclose required information, with a one-year prescriptive period. Applied to sustain the ₱26,000 fine imposed by the lower courts.

• Section 48, Presidential Decree No. 1529 (Property Registration Decree) — A certificate of title shall not be subject to collateral attack. Cited by UCPB but the Court resolved the foreclosure issue on other grounds.

• Rule 16, Section 5, Rules of Court — An order granting a motion to dismiss based on paragraphs (f), (h), and (i) bars refiling; dismissal on other grounds (including improper venue under paragraph c) does not. Applied to hold that the dismissal of the Roxas City case for improper venue did not bar the Makati City case.

Consuelo Ynares-Santiago (Chairperson), Ma. Alicia Austria-Martinez, Antonio Eduardo B. Nachura, Ruben T. Reyes

N/A — The decision was unanimous.