1308 - Mutuality of Contracts

JUICO V.
CHINA BANKING 695 SCRA 520

1308 – Mutuality of Contracts
Facts: Spouses Juico obtained a loan from China Banking

Corporation as evidence by two PNs with sums of P6.2M and P4.13M respectively. The loan was secured by a Real Estate Mortgage over
a property in Quezon. When petitioners failed to pay the monthly amortizations due, respondent demanded full payment of the outstanding
balance with accrued monthly interest. On 2001, the total amount due on the two PNs totaled to P19.2M. On February 23, 2001, the
mortgaged property was sold at public auction with China Banking as highest bidder for P10.3M.
On May 8, 2001, Spouses Juico received a demand letter for the payment of P8.9M the amount of deficiency after applying the proceeds of
the foreclosure sale to the mortgage debt. As its demand remained unheeded, there was a collection suit.
CONTENTION OF SPOUSES JUICO: They interpose that the principal loan was already paid when the mortgaged property was
extrajudicially foreclosed and sold for P10.3M. They contended that they should only be held liable for P55K and stated that such deficiency
cannot be enforced by China Banking because it only consists of the penalty and interest.
Ms. Annabelle Yu’s Testimony (China Baking Loans Assistant) She testified that she handled the account of Spouses Juico and assisted
them on loan application. She called them monthly to inform them of the prevailing rates to be used in computing interest due on their loan.
Ms. Yu reiterated that the interest 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
prevailing market rates. Every month, China Banking would inform him by telephone of such rate. Petitioner testified that he is a Doctor of
Medicine and engaged in the business in distribution of medical supplies. He admitted having read the promissory note and that he was aware of
his obligation under them before he signed the same.
RTC ruled in favor of China Banking that there was a balance of P8.9M since before the foreclosure the two PNs aggregated to P19.2M
inclusive of principal interests, penalties and AFees. It ruled that the amount was applied to the interest by Article 1253. It further held that
Ignacio’s claim on signing a blank PN was considered unbelievable.
CA affirmed the RTC decision. The CA recognized China Banking’s right to claim deficiency from the debtor where the proceeds of the sale
in an extrajudicial foreclosure were insufficient and that the interest based on prevailing market rates were considered valid.
ISSUE: WON the interest rates imposed upon Spouses Juico by China Banking are valid.
CONTENTION OF THE SPOUSES JUICO: They are not valid as they were not by virtue of any law or BSP regulation or any regulation.
They insist that the interest rates were unilaterally imposed by the bank thus violates the principle of mutuality of contracts. They argue that the
escalation clause in the promissory notes does not give respondent the unbridled authority to increase the rate unilaterally. Any change must
be mutually agreed upon.
ARGUMENTS OF CHINA BANKING: Spouses Juico failed to show that their case falls under any of the exceptions wherein findings of fact
of CA may be reviewed by SC. It contends that an inquiry whether the interest rates imposed on the loans of petitioners were supported by
regulation requires a reevaluation of evidence which is a factual issue not a legal one.
COURT RULING: The appeal is partly meritorious.
Mutuality of Contracts and Escalation Clauses

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code. Article 1956 of the Civil Code likewise ordains that “no
interest shall be due unless it has been expressly stipulated in writing.”
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 and effect of law between parties (1306).
2. That there must be mutuality of between the parties based on their essential equality. Any contract which appears to be heavily in
favor of one of the parties as to lead to an unconscionable result is void.
Escalation clauses refer to stipulations allowing in an increase in interest rate agreed upon by the contracting parties. There is nothing
inherently wrong with escalations clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contract.
They are not void per se.
WHEN ESCALATION CLAUSE BECOMES VOID: They become void when it 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. A stipulation
of such nature violates the mutuality of contracts. The court nullifies the unilateral determination and imposition by creditor banks of
increases in the interest rate provided in loan contracts.
To reiterate, an escalation clause is void where the creditor unilaterally determines the rate of interest without the express
conformity of the debtor. Such unbridled right given to creditors to adjust independently and upwardly would completely take away from the
debtors the right to assent to an important modification in in their agreement and would negate the element of mutuality in their contracts.
IN THE CASE: The two promissory notes executed by the Spouses Juico and China Bank provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be the rate of interest rate/service
charge presently
stipulated in this note without any advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the
Central Bank of the Philippines or appropriate government entities, increasing or decreasing such interest rate or service charge.
Here, the escalation clause in the promissory notes authorizing the respondent bank to adjust the rate of interest on the basis of a law or
regulation issued by the Central Bank of the Philippines should be read together with the statement after the first paragraph where no rate of
interest was fixed as it would be based on prevailing market rates.
While the latter is not strictly an escalation clause, its clear import was that interest rates would vary as determined by prevailing market rates.
The parties intended the interest any
upward or downward adjustment to be determined by prevailing market rates and not dictated on China Bank’s policy.
NO INDICATION OF COERCION: There is no indication that the Spouses Juice were coerced into agreeing with the provisions of the
PN. In fact, petitioner Ignacio, a physician engaged in the medical supply business, admitted having understood his obligations before signing
them. At no time did the petitioners protest the new rates.
ESCALATION CLAUSE IS STILL VOID: It is still void because it grants respondent the power to impose an interest rate without a
written notice to petitioners and their written consent. The monthly telephone calls advising them will not suffice.
REQUISITES FOR AN ESCALATION CLAUSE TO PRESERVE MUTUALITY:

1. 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.
2. 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. For indeed, one-sided impositions do not have the force of
law between the parties, because such
impositions are not based on the parties’ essential equality.
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 modification in the interest rates, the adjusted rates cannot bind them.
Ruling on the Interest Rate and Penalty

The Court considered as invalid the interest rates in excess of 15%, the rate charged for first year. Based on the August 29,
2000 letter under the PN the obligation was P10.355M. However, due to the unilateral increases from 15% to as high as 24.50%, the
balance ballooned. The original amount almost doubled in only 16 months. The court also finds the penalty charges of 36.5% per annum
excessive and arbitrary reduced to 1% per annum.
Thus, the SOA as of the date of the foreclosure proceedings should be modified stating that the amount to paid to China Banking should be
P15.06M instead of P19.2M and thus the deficiency amount should be P4.76M instead of P8.9M.
HELD: The petition is partly granted and the Spouses Juico are ordered to pay jointly and severally China Banking Corporation of P4.76M
representing the amount of deficiency.
past due.
When she was asked if there was any written authority from
petitioners for respondent to increase the interest rate unilaterally, she answered that petitioners signed a PN indicating that they agreed to pay
interest at the prevailing rate.
Ignacio F. Juico’s Testimony
He testified that prior to the release of loan, he was required to sign a blank PN and was informed that the interest rate on the loan will be
based .

1308 - Mutuality of Contracts

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JUICO V.

CHINA BANKING 695 SCRA 520

Facts: Spouses Juico obtained a loan from China Banking

Ms. Yu reiterated that the interest changes every month based

COURT RULING: The appeal is partly meritorious.

Mutuality of Contracts and Escalation Clauses

They are not void per se.

REQUISITES FOR AN ESCALATION CLAUSE TO PRESERVE MUTUALITY:

Ruling on the Interest Rate and Penalty

Ignacio F. Juico’s Testimony

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