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 19, 1991 by respondent Court of Appeals 1 in CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation by private respondent Land Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for decision on the basis of said stipulation and memoranda. The stipulation reads in part: 2
"1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years from (respondent bank’s) Provident Fund on July 20, 1983;
2. That (petitioners) and (respondent bank), through the latter’s duly authorized representative, executed the Housing Loan Agreement, . . .;
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter’s authorized representative, also executed a Real Estate Mortgage and Promissory Note, . . .;
4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her capacity as employee of (respondent bank);
5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner’s) loan from 9% per annum to 17%, the said increase to take effect on March 19, 1985;
6. That the details of the increase are embodied in (Landbank’s) ManCom Resolution No. 85-08 dated March 19, 1985, . . ., and in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .;
7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, . . .. Enclosed with the letter are a copy of the PF Memo Circular . . . and a Statement of Account as of May 31, 1985 . . .;
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter dated July 1, 1985, . . .. Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent bank’s) legal counsel, A.B. F. Gaviola, Jr., . . .:chanrob1es virtual 1aw library
9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the said increase is unlawful and unjustifiable. Because of (respondent bank’s) repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages;
10. That, just the same, despite (respondent bank’s) demands that (petitioners) pay the increased interest or increased monthly installments, they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment of the original stipulated installment of P1,248.72. Disregarding (respondent bank’s) repeated demand for increased interest and monthly installment, (petitioners) are presently up-to-date in the payments of their obligations under the original contracts (Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with (respondent bank);
x x x"
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the escalation are:chanrob1es virtual 1aw library
a. Section I-F of Article VI of the Housing Loan Agreement, 3 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 —
"f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe benefits."cralaw virtua1aw library
b. Paragraph (f) of the Real Estate Mortgage 4 which states:jgc:chanrobles.com.ph
"The rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining balance of the loan."cralaw virtua1aw library
c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future.
The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. The dispositive portion of the said decision reads: 5
"WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the loan agreement in question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.75 a month, upon the finality of this judgment.
x x x."cralaw virtua1aw library
Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the finality of the judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the trial court, holding that: 6
". . . Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during the term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the Bank may prescribe for its borrowers. In 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. Escalation 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 (Insular Bank of Asia and America v. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One 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. Paragraph (f) referred to above contains such provision.
A 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."cralaw virtua1aw library
and disposed as follows: 7
"WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan of the spouses shall be computed starting July 1, 1985."cralaw virtua1aw library
Dissatisfied, the petitioners had recourse to this Court.
Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent bank’s unilateral increase of the interest rate and monthly amortizations of the loan -
"1. . . . (simply because of) a bare and unqualified stipulation that the interest rate may be increased;
2. . . . on the ground that the increase has no basis in the contracts between the parties;
3. . . . on the ground that the increase violates Section 7-A of the Usury Law;
4. . . . on the ground that the increase and the contractual provision that (respondent bank) relies upon for the increase are contrary to morals, good customs, public order and public policy." 8
The key issue may be simply presented as follows: 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
Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague because it does not state if the "prevailing" CB rules and regulations referred to therein are those prevailing at the time of the execution of these contracts or at the time of the increase or decrease of the interest rate. They insist that the bank’s authority to escalate interest rates has not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted in favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that" (t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors . . .." 9 Contrary to petitioners’ allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them.
In Banco Filipino Savings & Mortgage Bank v. Navarro, 10 this Court in essence ruled that in general there is nothing inherently wrong with escalation clauses. In IBAA v. Spouses Salazar, 11 the Court 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 Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized 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 adjustment of interest rates, which is the very bedrock of and the raison d’etre specified in said ManCom Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of contracts, per Philippine National Bank v. Court of Appeals. 12
What is actually central to the disposition of this case is not really the validity of the escalation clause but the retroactive enforcement of the ManCom Resolution as against petitioner-employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation.
In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan." In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation.
In PNB v. Court of Appeals, 14 this Court 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 Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary Board.
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence 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. In light of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners’ loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, 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. If the intention were otherwise, they — especially respondent bank — should have included such factors in their loan agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will never become effective.
We have already mentioned (and now reiterate our holding in several cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners’ contention that the escalation clause is violative of the said law is bereft of any merit.
On 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 mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB: 16
"In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) 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. It 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 (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua v. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition."cralaw virtua1aw library
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable concerning respondent bank’s lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation and application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% 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. The fact is it did not. Hence, it must live with such omission. And 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. It goes without saying that such escalation ground can be included in future contracts — not to agreements already validly entered into.
Let it be clear that this Court 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. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72.
, Davide, Jr., Melo and Francisco, JJ.
1. Seventh Division, composed of J. Serafin E. Camilon, ponente, and JJ. Celso L. Magsino and Artemon D. Luna, concurring.
2. Rollo, p. 49.
3. Rollo, p. 35.
4. Rollo, p. 67.
5. Rollo, p. 84.
6. CA Decision, rollo, pp. 128-129.
7. Rollo, p. 129.
8. Rollo, p. 12.
9. Real Estate Mortgage, supra,. rollo, p. 67.
10. 152 SCRA 346, 353, July 28, 1987.
11. 159 SCRA 133, 137, March 25, 1988.
12. 196 SCRA 536, 544-545, April 30, 1991.
13. Supra, p. 355.
14. 196 SCRA 536, 544, April 30, 1991.
15. Liam Law v. Olympic Sawmill Co., 129 SCRA 439, 442, May 28, 1984 and Javier v. De Guzman, 192 SCRA 434, 439, December 19, 1990.
16. Supra, p. 545.
17. Rollo, p. 206.