Is a stipulation in a promissory note allowing a bank to increase the interest rate on a loan (otherwise known as escalation clause) valid? Let us take the case of Villa Crista Corp. It applied for and was granted a credit line by a bank. By way of security for the said credit line, Villa Crista executed a Real Estate Mortgage over 80,000 square meters of its properties with all the existing improvements thereon. Under its approved credit line, Villa Crista separately obtained loans on various occasions covering a six-month period, each of which was covered by a promissory note in the prescribed form of the bank.
Eventually, the bank wrote several times to Villa Crista apprising it of the increased rates in the interest to be imposed on its loans covered by the promissory notes. The increased rates ranged from 21 percent to 36 percent and were ostensibly anchored on the uniform provision in the promissory notes on monthly repricing.
Villa Crista reneged on paying its loan obligations prompting the bank to initiate foreclosure proceedings on the mortgaged properties. Thus, Villa Crista filed a complaint for the nullification of the promissory notes and the mortgage agreement on the ground that the bank unilaterally made and imposed the increases in interest rates on the loan without them being discussed and negotiated with, much less agreed upon by, them and, thus, invalid.
In resolving the issue, the Supreme Court (SC) referred to Presidential Decree (PD) 1684 which is intended to prevent or forestall any one-sidedness that an escalation clause in a borrowing instrument may cause in favor of the creditor. This law specifically states, among others, that parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, that such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.
The SC then ruled that the escalation clause, to be valid, should specifically provide: (1) that there can be an increase in interest rates if allowed by law or by the Monetary Board; and (2) that there must be a stipulation for the reduction of the stipulated interest rates in the event that the applicable maximum rates of interest are reduced by law or by the Monetary Board. The latter stipulation ensures the mutuality of contracts.
No express de-escalation clause was stipulated in the promissory notes signed by Villa Crista. Yet, the absence of the clause did not invalidate the repricing of the interest rates. The repricing notices issued to the Villa Crista by the bank indicated that on some occasions, the bank had reduced or adjusted the interest rates downward. Such actual reduction or downward adjustment by the bank eliminated any one-sidedness of its contracts with the borrower. It becomes inescapable for the Court to uphold the validity and enforceability of the escalation clause involved herein despite the absence of the de-escalation clause. The actual grant by the bank of the decreases in the interest rates imposed on the loans extended to Villa Crista rendered inexistent the evil of inequality sought to be thwarted by the enactment and application of PD 1684.
Villa Crista further contends that the provisions of the promissory notes are violative of the principle of mutuality of contracts particularly the provision that “interest rate shall be determined by the Lender without need of prior notice to the Borrower.” To belie this claim of Villa Crista, the Court said that although the promissory notes succinctly stipulated that the loans were subject to interest without need of prior notice to the borrower, the bank sent notices to Villa Crista each and every time it increased the interest rate. Equally of significance was that the bank allowed Villa Crista sufficient time and opportunity either to reject the imposition of the increased interest rates by paying the outstanding obligations or by accepting the same through payment of whatever amounts were due. The sufficient time and opportunity negated Villa Crista’s insistence about the bank having unilaterally determined the interest rates in violation of the principle of mutuality of contracts embodied under the loan agreement.
Just like life’s peaks and valleys, interest has its own ups and downs. May you always be ready to take them one way or the other (Villa Crista Monte Realty & Development Corp. vs Equitable PCI Bank, GR 208336, 21 November 2018).