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BANCO FILIPINO SAVINGS & MORTGAGE BANK vs. HON.

MIGUEL NAVARRO (CFI Manila Presiding Judge) and


FLORANTE DEL VALLE
Melencio-Herrera, J.
G.R. No. L-46591
28 July 1987
Doctrine
As a matter of law, the escalation clause is not substantively unconscionable. These are widely used in
commercial contracts in an effort to maintain fiscal stability and to retain the real dollar value to the price
terms of long term contracts.

Summary

Facts

In an Escalation Clause that authorizes an automatic increase in interest rates in the event that a law is
enacted which allows such increases, a Central Bank Circular is not included as law. Although having the
force and effect of law, is not strictly a statute or law. Also, for an escalation clause to be valid, it must
include a de-escalation clause.
Florante del Valle loaned from Banco Filipino P41,300, secured by a real estate mortgage. It contained an
escalation clause that allows the bank to increase the interest rate without advance notice to the borrower,
in the event that a law is passed increasing the lawful interest rate. The Supreme Court ruled that, while an
escalation clause was valid, the enactment of Circular No. 494 issued by the Monetary Board could not
warrant the automatic increase in the interest rate because the said Circular is not the law contemplated
by the parties, nor should said Circular be held to apply to loans secured by real estate mortgage because it
will defeat the policy behind the Usury Law.
On May 20, 1975, private respondent Florante del Valle (Borrower) obtained from Banco Filipino a loan of
P41,300 secured by a real estate mortgage. It is to be amortized within 15 years at 12% interest
annually.
o An escalation clause1 is indicated in the promissory note evidencing the loan.
On January 2, 1976, the Central Bank issued Circular No. 494 2, increasing the maximum rate of interest at
19% per annum. Said circular was issued pursuant to the authority granted to the Monetary Board by
P.D. No. 116 to prescribe the maximum rate or rates for the loan or renewal thereof.
On the strength of said circular, Banco Filipino gave notice to borrower Del Valle of the increase of interest
rate from 12% to 17% per annum, effective March 1, 1976
Also, on September 24, 1976, Ms. Mercedes Paredes of the Central Bank, wrote a letter to Del Valle,
advising the latter of Resolution No. 1155 prescribing the guidelines 3 to govern interest rate adjustments.
CFI Proceedings
Del Valle sued against Banco Filipino for Declaratory Relief before CFI Manila.
He prayed that:
o the escalation clause be declared null and void;
o that Banco Filipino be ordered to desist from enforcing the increased rate of interest on Del Valles
loan
Banco Filipino argued that the escalation clause signed by Del Valle authorized the bank to increase the
interest rate once a law, such as Circular No. 494, was passed increasing the interest rate.
CFI nullified the escalation clause and ordered the bank to desist from enforcing the increased rate. It
reasoned out:
o That P.D. 116 does not expressly grant the Central Bank authority to maximize interest rates

1 I/We hereby authorize Banco Filipino 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.

2 3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than
seven hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries
authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum.x x x
xxx
xxx
7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law,
as amended."

3 l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans
already existing of January 2, 1976, provided that:a. The pertinent loan contracts/documents contain escalation clauses expressly
authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the
contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and
b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976;
and
2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date

retroactively
o The Bank cannot legally impose a higher interest rate before the expiration of the 15-year period.
Banco Filipino filed a certiorari petition before the Supreme Court. The Court impleaded the Central Bank. It
argued:
o that the issuance of its circulars is a valid exercise of its authority to prescribe maximum rates of
interest
o based on the general principles of contract, the Escalation Clause is a valid provision in the loan
agreement, provided that:
the increased rate imposed or charged by the bank does not exceed the ceiling fixed by
law/Monetary Board
the increase is made effective not earlier than the effectivity of the law/regulation authorizing such
an increase
the remaining maturities of the loans are more than 730 days as of the effectivity of the
loan/agreement
Issues/Rati W/N Banco Filipino can increase the interest rate on the loan from 12% to 17% per annum under the
o
escalation clause (NO)
a. An escalation clause is held to be valid. The Court quotes the ff. from the U.S. case Bennett v.
Behring Corp.: It is one in which the contract fixes a base price but contains a provision that in the
event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage
of the base.
i. Attacks on the validity of the escalation clause (which have been unsuccessful):
1. The contract was too indefinite to be enforceable, and did not evidence an actual meeting of
minds of the parties
2. The arrangement left the price to be determined arbitrarily by one party, hence, there is no
mutuality.
ii. The Court is of the opinion that as a matter of law, the cost of living index adjustment, or escalator
clause, is not substantively unconscionable
1. These are widely used in commercial contracts in an effort to maintain fiscal stability and to
retain the real dollar value to the price terms of long term contracts.
b. It is clear from the stipulation that the interest rate may be increased in the event that a law should be
enacted increasing the lawful interest rate that may be charged on this particular kind of loan.
i. Circular No. 494 is strictly not a law or statute, but only has the force and effect of law.
ii. The distinction between a law and an administrative regulation is recognized in the Monetary
Board guidelines indicated in the letter sent by Central Bank to the borrower (see footnote #3)
iii. P.D. 1684 Sec. 7-a4 also provides that the parties could stipulate that the rate of interest agreed
upon may be increased in the event that the applicable max. rate of interest is increased by law or
by the Monetary Board.
iv. Also, beginning March 17, 1980 (enactment of P.D. 1684), the escalation clause, to be valid, must
provide:
1. That an increase in interest is allowed if there is an increase provided by law or by the
Monetary Board;
2. It must include a provision for reduction of the stipulated interest (de-escalation clause) in the
event that the applicable maximum rate of interest is reduced by law or by the Monetary Board.
v. Absence of a de-escalation clause should not be given effect because of its one-sidedness in favor
of the lender.
W/N Circular No. 494 applies to loans secured by registered real estate (NO)
a. The Usury law treats of two different kinds of loan: (1) those secured by registered real estate; and (2)
other loans not secured by mortgage upon registered real estate.
i. It appears that the policy of the law is to make interest rates for loans guaranteed by real estate
lower than those for loans guaranteed by properties other than registered realty.
b. Yet, Circular No. 494 makes no distinction as to the types of loans where it is applicable. In the
absence of any indication in Circular No. 494 as to what type of loan would it be applicable, the more
equitable construction is to limit the circular to loans guaranteed by securities other than mortgage

4 Sec. 7-a 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. (Paragraphing and emphasis supplied).

Held

upon registered realty.


Judgment appealed from is AFFIRMED insofar as it ordered Banco Filipino to desist from enforcing the
increased rate.

Prepared by: Jzev Villanueva [Credit Transactions | Prof. Vasquez]