SPOUSES JUICO vs. CHINA BANKING CORPORATION

SPOUSES JUICO vs.
CHINA BANKING CORPORATION

G.R. No. 187678, April 10, 2013
FACTS:
Spouses Ignacio and Alice Juico, obtained a loan from China Banking Corporation as
evidenced by two Promissory Notes both dated October 6, 1998 for Php6,216,000.00 and
Php4,139,000.00 secured by a Real Estate Mortgage over their White Plains property.
Sps. Juico failed to pay the monthly amortizations due so CBC demanded the full payment of
the outstanding balance with accrued monthly interests varying from 15% to as high as 24.5%
such that the total indebtedness ballooned to Php19,201,776.63.
The mortgaged property was sold at public auction, with CBC as highest bidder for the amount
of Php10,300,000.00.
May 8, 2001, Sps. Juico received a demand letter from CBC for the payment of P8,901,776.63,
the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage
debt. As its demand remained unheeded, respondent filed a collection suit in the trial court.
Sps. Juico admitted the existence of the debt but averred that the complaint states no cause
of action considering that the principal of the loan was already paid when the mortgaged
property was extrajudicially foreclosed.
Annabelle Yu, CBC’s Senior Loans Assistant who handled the account of Sps. Juico, testified
that the interest rate changes every month based on the prevailing market rate and she notified
petitioners of the prevailing rate by calling them monthly before their account becomes past
due.
Ignacio Juico admitted that prior to the release of the loan, he was required to sign a blank
promissory note and was informed that the interest rate on the loan will be based on prevailing
market rates. He further testified that he is a Doctor of Medicine and admitted having read the
promissory notes and that he is aware of his obligation under them before he signed the same.
RTC ruled in favor of CBC. CA affirmed. The CA recognized respondent’s right to claim the
deficiency from the debtor where the proceeds of the sale in an extrajudicial foreclosure of
mortgage are insufficient to cover the amount of the debt. Also, it found as valid the stipulation
in the promissory notes that interest will be based on the prevailing rate. It noted that the
parties agreed on the interest rate which was not unilaterally imposed by the bank but was the
rate offered daily by all commercial banks as approved by the Monetary Board. Having signed
the promissory notes, the CA ruled that petitioners are bound by the stipulations contained
therein.
ISSUE:
Whether or not the interest rates imposed by CBC are valid?
RULING:
The interest rates imposed by CBC are invalid.
The Supreme Court ruled that the binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any obligation arising from contract has
the force of law between the parties; and (2) that there must be mutuality between the parties
based on their essential equality. Any contract which appears to be heavily assessed in favor
of one of the parties so as to lead to an unconscionable result is void.
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon
by the contracting parties. There is nothing inherently wrong with escalation clauses which are
valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of
money in long term contracts. Hence, such stipulations are not void per se.
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the
interest independently and upwardly, completely depriving the debtor of the right to assent to
an important modification in the agreement" is void. A stipulation of such nature violates the
principle of mutuality of contracts.
In this case, the escalation clause is void because it grants respondent the power to impose
an increased rate of interest without a written notice to petitioners and their written consent.
Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest
rates would not suffice. A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the respondent to
enable petitioners to make an informed decision. An appropriate form must also be signed by
the petitioners to indicate their conformity to the new rates. Compliance with these requisites
is essential to preserve the mutuality of contracts.
Modifications in the rate of interest for loans pursuant to an escalation clause must be the
result of an agreement between the parties. Unless such important change in the contract
terms is mutually agreed upon, it has no binding effect. In the absence of consent on the part
of the petitioners to the modifications in the interest rates, the adjusted rates cannot bind them.
Any interest in excess of 15% (the interest rate imposed on the first year) is invalid.
Not all escalation clauses in loan agreements are void per se. It is actually 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." Given the fluctuating economic
conditions, practical reasons allow banks to stipulate that interest rates on a loan will not be
fixed and will instead depend on market conditions. Note that there should always be a
reference rate upon which to peg such variable interest rates.
It is not enough to state, as similar to China Bank's provision, that the bank may increase or
decrease the interest rate in the event a law or a Central Bank regulation is passed, that spells
a vague condition.
These points must be considered by creditors and debtors in the drafting of valid escalation
clauses:
Firstly, as a matter of equity and consistent with P.O. No. 1684, the escalation clause must be
paired with a de-escalation clause.
Secondly, so as not to violate the principle of mutuality, the escalation must be pegged to the
prevailing market rates, and not merely make a generalized reference to "any increase or
decrease in the interest rate" in the event a law or a Central Bank regulation is passed.
Thirdly, consistent with the nature of contracts, the proposed modification must be the result
of an agreement between the parties.
The petition was partly granted. The decision and resolution of the Court of Appeals were
modified. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are ordered to pay China
Banking Corporation the amount of deficiency inclusive of interest, penalty charge and
attorney's fees. Said amount shall bear interest at 12% per annum, reckoned from the time of
the filing of the complaint until its full satisfaction.

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The interest rates imposed by CBC are invalid.

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