Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 101771 December 17, 1996 SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. OUR! OF APPEALS and LAND "AN# OF !$E P$ILIPPINES, respondents.

PANGANI"AN, J.:p May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of the borrower? Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June !, !! by respondent "ourt of #ppeals 1 in "#$%.&. "' (o. )*!+,, upholding the validity and enforceability of the escalation by private respondent -and .ank of the /hilippines of the applicable interest rate on the housing loan taken out by petitioner$ spouses. The Antecedent Facts /etitioners filed an action for 0n1unction with Damages docketed as "ivil "ase (o. 2,$32 *, before the &egional 4rial "ourt of Manila, .ranch 5500 against respondent bank. .oth parties, after entering into a 1oint stipulation of facts, submitted the case for decision on the basis of said stipulation and memoranda. 4he stipulation reads in part6 % . 4hat 7/etitioner8 %ilda 9lorendo 7was8 an employee of 7&espondent .ank8 from May :, !:, until #ugust ,, !2* when she voluntarily resigned. ;owever, before her resignation, she applied for a housing loan of / *2,<<<.<<, payable within )+ years from 7respondent bank=s8 /rovident 9und on July )<, !23> ). 4hat 7petitioners8 and 7respondent bank8, through the latter=s duly authori?ed representative, e@ecuted the ;ousing -oan #greement, . . .> 3. 4hat, together with the ;ousing -oan #greement, 7petitioners8 and 7respondent bank8, through the latter=s authori?ed representative, also e@ecuted a &eal Astate Mortgage and

/romissory (ote, . . .> *. 4hat the loan . . . was actually given to 7petitioner8 %ilda 9lorendo, . . ., in her capacity as employee of 7respondent bank8> +. 4hat on March !, !2+, 7respondent bank8 increased the interest rate on 7petitioner=s8 loan from !B per annum to :B, the said increase to take effect on March !, !2+> ,. 4hat the details of the increase are embodied in 7-andbank=s8 Man"om &esolution (o. 2+$ <2 dated March !, !2+, . . . , and in a /9 7/rovident 9und8 Memorandum "ircular 7(o. 2+$ <2, Series of !2+8, . . .> :. 4hat 7respondent bank8 first informed 7petitioners8 of the said increase in a letter dated June :, !2+, . . . . Anclosed with the letter are a copy of the /9 Memo "ircular . . . and a Statement of #ccount as of May 3 , !2+, . . .> 2. 4hat 7petitioners8 protested the increase in a letter dated June , !2+ to which 7respondent bank8 replied through a letter dated July , !2+, . . . Anclosed with the letter is a Memorandum dated June ),, !2+ of 7respondent bank=s8 legal counsel, #... 9. %aviola, Jr., . . .> !. 4hat thereafter, 7respondent bank8 kept on demanding that 7petitioner8 pay the increased interest or the new monthly installments based on the increased interest rate, but /laintiff 1ust as vehemently maintained that the said increase is unlawful and un1ustifiable. .ecause of 7respondent bank=s8 repeated demands, 7petitioners8 were forced to file the instant suit for 0n1unction and Damages> <. 4hat, 1ust the same, despite 7respondent bank=s8 demands that 7petitioners8 pay the increased interest or increased monthly installments, they 7petitioners8 have faithfully paid and discharged their loan obligations, more particularly the monthly payment of the original stipulated installment of / ,)*2.:). Disregarding 7respondent bank=s8 repeated demand for increased interest and monthly installment, 7petitioners8 are presently up$to$date in the payments of their obligations under the original contracts 7;ousing -oan #greement, /romissory (ote and &eal Astate Mortgage8 with 7respondent bank8> @@@ @@@ @@@ 4he clauses or provisions in the ;ousing -oan #greement and the &eal Astate Mortgage referred to above as the basis for the escalation are6 a. Section 0$9 of #rticle '0 of the ;ousing -oan #greement, & which provides that, for as long as the loan or any portion thereof or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall C

f8 "omply with all the rules and regulations of the program imposed by the -A(DA& and to comply with all the rules and regulations that the "entral .ank of the /hilippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe benefits. b. /aragraph 7f8 of the &eal Astate Mortgage ' which states6 4he rate of interest charged on the obligation secured by this mortgage. . ., shall be sub1ect, during the life of this contract, to such an increaseDdecrease in accordance with prevailing rules, regulations and circulars of the "entral .ank of the /hilippines as the /rovident 9und .oard of 4rustees of the Mortgagee may prescribe for its debtors and sub1ect to the condition that the increaseDdecrease shall only take effect on the date of effectivity of said increaseDdecrease and shall only apply to the remaining balance of the loan. c. and Man"om 7Management "ommittee8 &esolution (o. 2+$<2, together with /9 7/rovident 9und8 Memorandum "ircular (o. 2+$<2, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily EsecedeE 7resign8 from the .ank> the range of rates varied depending upon the number of years service rendered by the employees concerned. 4he rates were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future. 4he trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate 7and the corresponding monthly amorti?ations8 pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. 4he dispositive portion of the said decision reads6 ( F;A&A9G&A, 1udgment is hereby rendered denying the instant suit for in1unction and declaring that the rate of interest on the loan agreement in question shall be :B per annum and the monthly amorti?ation on said loan properly raised to /),<,*.:+ a month, upon the finality of this 1udgment. @@@ @@@ @@@ /etitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of the borrower$spouses. &espondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the finality of the 1udgment and not from March !, !2+. 4he respondent "ourt subsequently affirmed with modification the decision of the trial court, holding that6 6 . . . #mong the salient provisions of the mortgage is paragraph 7f8 which provides that the interest rate shall be sub1ect, during the term of the loan, to such increasesDdecreases as may be allowed under the prevailing rules andDor circulars of the "entral .ank and as the /rovident

9und of the .ank may prescribe for its borrowers. 0n other words, the spouses agreed to the escalation of the interest rate on their original loan. Such an agreement is a contractual one and the spouses are bound by it. Ascalation clauses have been ruled to be valid stipulations in contracts in order to maintain fiscal stability and to retain the value of money in long term contracts 70nsular .ank of #sia and #merica vs. Spouses Apifania Sala?ar and &icardo Sala?ar, +! S"&# 338. Gne of the conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also contain a proviso for a decrease when circumstances so warrant it. /aragraph 7f8 referred to above contains such provision. # contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels he should not have agreed to in the first place. and disposed as follows6 7 F;A&A9G&A, the dispositive part of the decision is MGD090AD in the sense that the interest of :B on the balance of the loan of the spouses shall be computed starting July , !2+. Dissatisfied, the petitioners had recourse to this "ourt. The Issues /etitioners ascribe to respondent "ourt Ea grave and patent errorE in not nullifying the respondent bank=s unilateral increase of the interest rate and monthly amorti?ations of the loan C . . . . 7simply because of8 a bare and unqualified stipulation that the interest rate may be increased> ). . . . on the ground that the increase has no basis in the contracts between the parties> 3. . . . on the ground that the increase violates Section :$# of the Hsury -aw> *. . . . on the ground that the increase and the contractual provision that 7respondent bank8 relies upon for the increase are contrary to morals, good customs, public order and public policy. ) 4he key issue may be simply presented as follows6 Did the respondent bank have a valid and legal basis to impose an increased interest rate on the petitioners= housing loan? The Court's Ruling Basis for Increased Interest Rate /etitioners argue that the ;-# provision covers only administrative and other matters, and does not include interest rates per se, since #rticle '0 of the agreement deals with insurance on and

upkeep of the mortgaged property. #s for the stipulation in the mortgage deed, they claim that it is vague because it does not state if the EprevailingE ". rules and regulations referred to therein are those prevailing at the time of the e@ecution of these contracts or at the time of the increase or decrease of the interest rate. 4hey insist that the bank=s authority to escalate interest rates has not been shown to be Ecrystal$clear as a matter of factE and established beyond doubt. 4he contracts being Econtracts of adhesion,E any vagueness in their provisions should be interpreted in favor of petitioners. Fe note that Section $9 of #rticle '0 of the ;-# cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. ;owever, paragraph 7f8 of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that E7t8he rate of interest charged on the obligation secured by this mortgage . . ., shall be sub1ect, during the life of this contract, to such an increaseDdecrease in accordance with prevailing rules, regulations and circulars of the "entral .ank of the /hilippines as the /rovident 9und .oard of 4rustees of the Mortgagee 7respondent bank8 may prescribe for its debtors . . . .E 9 "ontrary to petitioners= allegation, there is no vagueness in the aforequoted proviso> even their own arguments 7below8 indicate that this provision is quite clear to them. 0n Banco Filipino Savings & Mortgage Bank vs. avarro, 10 this "ourt in essence ruled that in general there is nothing inherently wrong with escalation clauses. 0n IBAA vs. Spouses Sala!ar, 11 the "ourt reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. Application of the "scalation to #etitioners /etitioners however insist that while Man"om &esolution (o. 2+$<2 authori?ed a rate increase for resigned employees, it could not apply as to petitioner$employee because nowhere in the loan agreement or mortgage contract is it provided that petitioner$wife=s resignation will be a ground for the ad1ustment of interest rates, which is the very bedrock of and the raison d'etre specified in said Man"om &esolution. 4hey additionally contend that the escalation is violative of Section :$# of the Hsury -aw 7#ct (o. ),++, as amended8 which requires a law or M. act fi@ing an increased ma@imum rate of interest, and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of contracts, per #hilippine ational Bank vs. Court of Appeals. 1% Fhat is actually central to the disposition of this case is not really the validity of the escalation clause but the retroactive enforcement of the Man"om &esolution as against petitioner$employee. 0n the case at bar, petitioners have put forth a telling argument that there is in fact no "entral .ank rule, regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation. 0n Banco Filipino, 1& this "ourt, speaking through Mme. Justice #meurfina M. ;errera, disallowed the bank from increasing the interest rate on the sub1ect loan from )B to :B despite an

escalation clause in the loan agreement authori?ing the bank to Ecorrespondingly increase the interest rate stipulated in this contract without advance notice to meDus in the event a la$ should %e enacted increasing the la$ful rates of interest that may be charged on this particular kind of loanE. 0n said case, the bank had relied upon a "entral .ank circular as authority to up its rates. 4he "ourt ruled that ". "ircular (o. *!*, although it has the effect of law, is not a law, but an administrative regulation. 0n # B vs. Court of Appeals, 1' this "ourt disallowed the increases in interest rate imposed by the petitioner$bank therein, on the ground, among others, that said bank relied merely on its own .oard &esolution 7(o. ,2 8, /(. "ircular (o. *<$:!$2*, and /(. "ircular (o. *<$ )!$2*, which were neither laws nor resolutions of the Monetary .oard. 0n the case at bar, the loan was perfected on July )<, !23. /D (o. , became effective on January )!, !:3. ". "ircular (o. * , was issued on July )!, !:*. ". "irc. +<* was issued 9ebruary ,, !:,. ". "irc. :<, was issued December , !:!. ". "irc. !<+, lifting any interest rate ceiling prescribed under or pursuant to the Hsury -aw, as amended, was promulgated in !2). 4hese and other relevant ". issuances had already come into e@istence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the contracting parties when they first entered into their loan contract. 0n light of the ". issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than !B per annum rate for the housing loans of its employees, but it did not. 0n the sub1ect loan, the respondent bank knowingly agreed that the interest rate on petitioners= loan shall remain at !B p.a. unless a CB issuance is passed authori!ing an increase &or decrease' in the rate on such emplo(ee loans and the #rovident Fund Board of Trustees acts accordingl(. 4hus, as far as the parties were concerned, all other onerous factors, such as employee resignations, which could have been used to trigger an application of the escalation clause were considered barred or waived. 0f the intention were otherwise, they C especially respondent bank C should have included such factors in their loan agreement. Man"om &esolution (o. 2+$<2, which is neither a rule nor a resolution of the Monetary .oard, cannot be used as basis for the escalation in lieu of ". issuances, since paragraph 7f8 of the mortgage contract very categorically specifies that any interest rate increase be in accordance with Eprevailing rules, regulations and circulars of the "entral .ank . . . as the /rovident 9und .oard . . . may prescribe.E 4he Banco Filipino and # B doctrines are applicable four$square in this case. #s a matter of fact, the said escalation clause further provides that the increased interest rate Eshall only take effect on the date of effectivity of 7the8 increaseDdecreaseE authori?ed by the ". rule, regulation or circular. Fithout such ". issuance, any proposed increased rate will never become effective. Fe have already mentioned 7and now reiterate our holding in several cases 1(8 that by virtue of ". "ircular !<+, the Hsury -aw has been rendered ineffective. 4hus, petitioners= contention that the escalation clause is violative of the said law is bereft of any merit.

Gn the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutualit( of contracts ordained in #rticle 3<2 of the "ivil "ode. #s this "ourt held in # B6 16 0n order that obligations arising from contracts may have the force of law between the parties, there must be mutualit( between the parties based on their essential equality. # contract containing a condition which makes its fulfillment dependent e@clusively upon the uncontrolled will of one of the contracting parties, is void 7%arcia vs. &ita -egarda, 0nc., ) S"&# +++8. ;ence, even assuming that the . . . loan agreement between the /(. and the private respondent gave the /(. a license 7although in fact there was none8 to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. 0t would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party=s 7the debtor8 participation being reduced to the alternative Eto take it or leave itE 7Iua vs. -aw Hnion J &ock 0nsurance "o., !+ /hil 2+8. Such a contract is a veritable trap for the weaker party whom the courts of 1ustice must protect against abuse and imposition. 4he respondent bank tried to sidestep this difficulty by averring that petitioner %ilda 9lorendo as a former bank employee was very knowledgeable concerning respondent bank=s lending rates and procedures, and therefore, petitioners were Eon an equal footingE with respondent bank as far as the sub1ect loan contract was concerned. 4hat ma( have been true insofar as entering into the original loan agreement and mortgage contract was concerned. ;owever, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the Man"om &esolution, where she had no voice at all in its preparation and application. 4o allay fears that respondent bank will inordinately be pre1udiced by being stuck with this Esweetheart loanE at patently concessionary interest rates, which according to respondent bank is the Esweetest dealE anyone could obtain and is an act of generosity considering that in !2+ lending rates in the banking industry were peaking well over 3<B p.a., 17 we need only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee$borrower would be a ground for escalation. 4he fact is it did not. ;ence, it must live with such omission. #nd it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. 0t goes without saying that such escalation ground can be included in future contracts C not to agreements already validly entered into. -et it be clear that this "ourt understands respondent bank=s position that the concessional interest rate was really intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. .ut no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners. *$EREFORE, +,e -e+.+.on ./ ,ereb0 GRAN!ED. !,e o1r+ ,ereb0 RE2ERSES and SE!S ASIDE +,e c,a33en4ed Dec./.on o5 +,e o1r+ o5 A--ea3/. !,e .n+ere/+ ra+e on +,e /1b6ec+

,o1/.n4 3oan rema.n/ a+ n.ne 798 -ercen+ per annum and +,e mon+,30 amor+.9a+.on a+ P1,%').7%. SO ORDERED.

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