Villa Crista Monte Realty & Development Corporation vs. Equitable PCI Bank

An escalation clause without a concomitant de-escalation clause is void for violating Presidential Decree No. 1684 and the principle of mutuality of contracts, unless the established facts, circumstances, and admissions show the lender at times lowered interest rates or allowed the borrower discretion to continue with the repriced rates. Applied here, the absence of an express de-escalation clause did not void the repricing because downward adjustments were actually granted and the borrower was given notice and the option to reject increases by prepayment.

Villa Crista Monte Realty & Development Corporation is a real estate developer engaged in developing a residential subdivision in Old Balara, Quezon City. Equitable PCI Bank, now Banco de Oro Unibank, Inc., is the commercial lender that extended its credit accommodations secured by real estate mortgage over subdivision lots. Presidential Decree No. 1684 governs stipulations increasing interest on loans or forbearances by requiring a correlative stipulation for reduction when maximum rates are lowered by law or by the Monetary Board.

Sometime in 1994, Villa Crista Monte Realty Corporation was organized to engage in real estate development. Soon after, it acquired from Alfonso Lim an 80,000-square-meter parcel in Old Balara, Quezon City for development into a residential subdivision, successfully putting up its clubhouse known as the Tivoli Royale Country Clubhouse, and later purchased the adjoining 13.5 hectares, thereby consolidating ownership over 21.5 hectares.

To fully develop the project, petitioner applied for and was granted an P80 million credit line by then Equitable Philippine Commercial International Bank, executing a real estate mortgage over the 80,000 square meters covered by TCT No. T-145652 with existing improvements. On August 5, 1995, petitioner subdivided that parcel into 174 lots of about 340 square meters each, each covered by a separate certificate of title. Petitioner subsequently obtained an additional P50 million accommodation, for an approved P130 million credit line, and, it having been established that 41 of the 174 lots would suffice as security, asked for release of the remaining 133 titles, which E-PCIB granted on condition that the mortgage be amended to conform to the changed credit amount and collateral, to which petitioner agreed.

Under the P130 million line, petitioner separately drew amounts from March 20, 1997 to August 15, 1997, including P38,200,000.00 on March 20, 1997 at 13.50%, P4,000,000.00 on March 26, 1997 at 13.50%, P6,600,000.00 on April 3, 1997 at 13.00%, P8,500,000.00 on April 6, 1997 at 13.00%, P7,000,000.00 on April 10, 1997 at 13.00%, P12,500,000.00 on April 14, 1997 at 13.00%, P2,900,000.00 on April 17, 1997 at 15.00%, P2,700,000.00 on June 28, 1997 at 15.00%, P20,000,000.00 on June 30, 1997 at 15.25%, P2,000,000.00 and P5,000,000.00 on July 4, 1997 at 15.25% and 15.50%, P7,500,000.00 on July 5, 1997 at 15.50%, P7,000,000.00 on July 10, 1997 at 15.50%, P1,800,000.00 on July 15, 1997 at 15.50%, and P4,000,000.00 on August 15, 1997 at 24.00%, each covered by a promissory note in E-PCIB's prescribed form containing a uniform provision on monthly repricing whereby the lender would determine the rate at the beginning of each succeeding period without need of prior notice, with the borrower to prepay within five days from notice of the new rate if disagreeing, failing which acceptance would be deemed.

Thereafter E-PCIB wrote several times apprising petitioner of increased rates ranging from 21% to 36% ostensibly anchored on the monthly repricing provision. According to petitioner, the increases were unilaterally made and imposed without discussion, negotiation, or agreement, were exorbitant and contrary to law and public policy, tainted the accessory mortgage and its amendment, and were demanded with penalty charges without a detailed statement of account before premature foreclosure. E-PCIB, for its part, maintained that petitioner voluntarily signed all notes with blanks duly filled, accepted the proceeds, accepted monthly repricing and the repriced rates by paying adjusted interest until default, with repricing starting only in July 1997 although notes were executed in 1996 and renewed in early 1997.

Because petitioner reneged on obligations amounting to P129,700,00.00 as stated, E-PCIB initiated foreclosure, the sheriff scheduled auction of the subdivision lots, petitioner filed its nullification suit, the initial injunction was lifted, the auction proceeded with E-PCIB as highest bidder, and petitioner filed a supplemental complaint assailing the sale, amounts claimed, assessments and charges, and titles consolidated in E-PCIB's name, also seeking damages and attorney's fees. The trial court found, as material facts, that the loan contracts were supported by several promissory notes as admitted by petitioner's own President Cresencio Tio, that Tio testified the documents included a rider on monthly repricing, that alleged protest against repricing was not established, and that petitioner paid the adjusted interest rates, sustaining the mortgage, its amendment, and foreclosure.

• Validity of Repricing: Petitioner argued that the bank's repricing of interest rates was invalid, and that reliance on Solid Bank Corp. vs. Permanent Homes Inc. to sustain it was erroneous because the increases were unilaterally imposed without discussion, negotiation, or agreement.
• Contract of Adhesion: Petitioner maintained that the promissory notes, though in adhesion form with all terms imposed by the bank and participation limited to signing, should not bind it absent proof that no domination was exercised to secure agreement to monthly repricing, rendering the mortgage as accessory likewise illegal and against public policy.
• Application of Payments: Petitioner argued that payments made in excess of the original rate of interest should have been credited to principal, and that despite substantial payments the bank insisted on higher rates and penalties without detailed accounting before prematurely foreclosing.

• Voluntary Agreement: Respondent countered that petitioner had no cause of action because it voluntarily and consciously agreed to monthly repricing by signing all promissory notes with pertinent blanks duly filled and accepting the loan proceeds.
• Acceptance by Payment: Respondent argued that repricing was implemented as agreed starting only in July 1997 after 1996 execution and early 1997 renewal, and that petitioner accepted both the stipulation and the new rates by paying the corresponding adjusted interest until later defaulting even on interest to keep loans current.
• Default and Foreclosure: Respondent maintained that the dispute concerned only rates, not the fact of default, so no right to injunction was proved and foreclosure merely complied with the promissory notes.

• Validity of Escalation Clause: Whether the monthly repricing provision and the increased interest rates from 21% to 36% unilaterally imposed by the bank are valid.
• Contract of Adhesion: Whether the promissory notes as contracts of adhesion bind petitioner absent coercion or domination by the bank.
• Application of Excess Payments: Whether payments made in excess of the original interest rate should be credited to principal.

• Validity of Escalation Clause: No reversible error. The repricing was sustained because notice with a prepayment option was given and downward adjustments were actually implemented, preserving mutuality.
• Contract of Adhesion: Yes. Adhesion contracts bind once agreed to, and petitioner, through an experienced president with full knowledge of the rider, was not shown to be a disadvantaged party deprived of bargaining.
• Application of Excess Payments: No. With the repriced rates held valid, no basis existed to treat payments at those rates as excess to be credited to principal.

• Validity of Escalation Clause: An escalation clause allowing increases is not void per se as a means to maintain fiscal stability and value of money in long-term contracts, but one granting the creditor an unbridled right to adjust interest independently and upwardly, depriving the debtor of assent to a material modification, violates mutuality and is void. Under Presidential Decree No. 1684, a stipulation for increase when maximum rates are increased by law or by the Monetary Board is valid only with a correlative stipulation for reduction when maximum rates are reduced, the de-escalation clause ensuring mutuality. No express de-escalation clause appeared in the notes, yet repricing notices showed reductions, such as 26% for PN No. 970019HD for P2 million on July 30, 1997 reduced to 22.5% in August 1997 and 26% for PN No. 970044HD for P2.7 million in July 1997 decreased to 22.5% in August 1997. Following Llorin Jr. vs. Court of Appeals, actual decreases rendered inexistent the inequality sought to be thwarted. Moreover, although notes stated determination without need of prior notice, notices were in fact sent each time, and receipt became the reckoning point for the borrower either to reject by paying outstanding obligations with interest at the last applicable rate within five days or to accept by failure to prepay, negating unilateral determination under Article 1308.
• Contract of Adhesion: A contract of adhesion, where one party imposes a ready-made form reducing the other's participation to affixing signature or adhering, is not invalid per se and is as binding as other contracts. Invalidation occurs only when the weaker party is imposed upon by the dominant bargaining party and reduced to taking or leaving it without opportunity to bargain on equal footing, determined by peculiar circumstances and situation of parties. Distinguished from Limso vs. Philippine National Bank, where the lender failed to consult, sent no effective notices, some received only by unauthorized employees or not at all, and borrowers restructuring loans were disadvantaged, here notices were sent and served as the option point, drawdowns were frequent with separate notes affording opportunity to discuss rates, petitioner successfully negotiated release of 133 of 174 lots leaving 41 as security, and President Tio, trained and experienced and acting without duress, knew the rider on monthly repricing and is presumed to have informed himself before signing, a presumption not overturned. Mutuality thus pervaded the relationship.
• Application of Excess Payments: Because the escalation provision and repriced rates were valid and the mortgage and amendment as accessory obligations were likewise valid, the premise for recharacterizing payments at repriced rates as excessive and creditable to principal failed. The foreclosure, founded on default on lawful obligations, the certificate of sale, consolidation of title, and issuance of new titles were valid, and non-inclusion of the exact lawful charges in the notice of sale did not prejudice petitioner.

• Escalation clause — A stipulation allowing increases in agreed interest rates, validly used in commercial contracts to maintain fiscal stability and retain value of money in long-term contracts and not void per se. The decision applied it by holding the monthly repricing provision in the promissory notes was in principle permissible, with invalidity depending on one-sidedness and compliance with mutuality safeguards.
• De-escalation clause under Presidential Decree No. 1684 — To be valid, an escalation stipulation must specifically provide (1) that interest may be increased if allowed by law or by the Monetary Board, and (2) that stipulated interest shall be reduced if applicable maximum rates are reduced by law or by the Monetary Board, with adjustment effective on or after effectivity of the change. The decision applied it by holding absence of an express correlative reduction clause ordinarily voids the escalation clause, but actual downward repricing by the lender eliminated the evil of inequality under Llorin Jr. vs. Court of Appeals.
• Mutuality of contracts — The contract must bind both parties and its validity or compliance cannot be left to the will of one of them, with any modification, especially material terms like interest in loans, requiring meeting of minds. The decision applied it by finding mutuality preserved through notices of each increase and sufficient time and opportunity to reject by prepayment at the last applicable rate or accept by payment, plus actual rate reductions.
• Contracts of adhesion — A contract where one party imposes a ready-made form drafted by it, reducing the other's participation to signing or adhering, which is as binding as other contracts and void only when the weaker party is imposed upon by the dominant party and deprived of equal bargaining, assessed on peculiar circumstances. The decision applied it by enforcing the promissory notes where petitioner was informed, experienced, negotiated collateral release, and was not shown to be disadvantaged.

• "An escalation clause without a concomitant de-escalation clause is void and ineffectual for violating Presidential Decree No. 1684," — States the opening rule on escalation clauses, qualified in the decision by actual downward adjustments and admissions showing mutuality.
• "The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." — Quotes Article 1308 of the Civil Code as the textual basis for mutuality governing interest modifications.
• "A contract containing a condition which makes its fulfilment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void" — Defines the prohibited one-sided condition that renders an unbridled escalation license null, as reiterated from Philippine National Bank vs. Court of Appeals.
• "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." — Articulates the canonical requisite from Llorin Jr. vs. Court of Appeals, before applying its exception for actual rate decreases.

• Llorin Jr. vs. Court of Appeals, G.R. No. 103592, February 4, 1993, 218 SCRA 436 — Controlling precedent followed for the rule that a de-escalation clause is indispensable, and for the exception that actual unilateral decreases by the lender validate the escalation clause despite absence of express reduction stipulation.
• Banco Filipino Savings and Mortgage Bank vs. Judge Navarro, G.R. No. L-46591, July 28, 1987, 152 SCRA 346 — Cited as authority that a corresponding de-escalation clause authorizing reduction corresponding to downward legal or Monetary Board changes is required.
• Juico vs. China Banking Corporation, G.R. No. 187678, April 10, 2013, 695 SCRA 520 — Cited for the propositions that an escalation clause is not void per se but one granting unbridled upward adjustment depriving debtor of assent is void.
• Limso vs. Philippine National Bank, G.R. Nos. 158622, 169441, 172958, 173194, 196958, 197120 & 205463, January 27, 2016, 782 SCRA 137 — Distinguished on facts involving lack of consultation, defective notices, and disadvantaged restructuring borrowers to show mutuality was present here.
• Philippine National Bank vs. Court of Appeals — Quoted through Llorin Jr. for violation of mutuality by unilateral interest increases and for adhesion contracts as traps for weaker parties requiring judicial protection.
• Almeda vs. Court of Appeals, G.R. No. 113412, April 17, 1996, 256 SCRA 292 — Cited for binding effect of agreements premised on force of law between parties and mutuality based on essential equality, voiding heavily one-sided unconscionable results.
• Philippine National Bank vs. Rocamora, G.R. No. 164549, September 18, 2009, 600 SCRA 395 — Cited for the objective of the de-escalation clause to prevent unwanted one-sidedness repugnant to mutuality.
• Encarnacion Construction & Industrial Corp. vs. Phoenix Ready Mix Concrete Development & Construction, Inc., G.R. No. 225402, September 4, 2017 — Cited for the definition and treatment of contracts of adhesion as binding absent imposition on the weaker party.

• Section 7-a, Presidential Decree No. 1684 — Allows stipulated interest to be increased when applicable maximum rate is increased by law or by the Monetary Board only if the agreement also stipulates reduction when maximum rates are reduced, with adjustment effective on or after effectivity of the change; applied to test validity of monthly repricing, excused here by actual downward adjustments.
• Article 1308, Civil Code — Provides the contract must bind both parties and its validity or compliance cannot be left to the will of one of them; applied to require notice and borrower option to prepay or accept repriced rates for mutuality.
• Resolution No. 224 and Central Bank Circular No. 905 — Rendered the Usury Law ineffective and allowed parties to stipulate any interest rate; noted by the CA as permitting agreed rates but not unilateral imposition without agreement.

Peralta, J., Del Castillo, J., Jardeleza, J., Gesmundo, J.