*

G.R. No. 113412. April 17, 1996.

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA,

petitioners,  vs.  THE COURT OF APPEALS and PHILIPPINE NATIONAL
BANK, respondents.

Contracts;  Principle of Mutuality;  Principles governing the binding effect of any

agreement between parties to a contract; Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result is void.—
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 weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one
of the parties, is likewise, invalid.
Same; Same; Banks and Banking; Loans;  Interests;  Galloping increases in interest
rate unilaterally imposed by a bank on a

______________

* FIRST DIVISION.

293

VOL. 256, APRIL 17, 1996 293

Almeda vs. Court of Appeals

customer’s loan, over the latter’s vehement protests, are arbitrary.—It is plainly
obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest
rates on the loan without the prior assent of the latter. In fact, the manner of agreement
is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that “No
interest shall be due unless it has been expressly stipulated in writing.” What has been
“stipulated in writing” from a perusal of interest rate provision of the credit agreement
signed between the parties is that petitioners were bound merely to pay 21% interest,
subject to a possible escalation or de-escalation, when 1) the circumstances warrant
such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon
agreement. Indeed, the interest rate which appears to have been agreed upon by the
parties to the contract in this case was the 21% rate stipulated in the interest provision.
Any doubt about this is in fact readily resolved by a careful reading of the credit
agreement because the same plainly uses the phrase “interest rate  agreed upon,” in
reference to the original 21% interest rate. Clearly, the galloping increases in interest
rate imposed by respondent bank on petitioners’ loan, over the latter’s vehement
protests, were arbitrary.
Same; Same; Same; Same; Same; Usury Law; Escalation Clauses; While the Usury
Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said
circular could possibly be read as granting carte blanche authority to lenders to raise
interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets.—Moreover, respondent bank’s reliance on C.B. Circular
No. 905, Series of 1982 did not authorize the bank, or any lending institution for that
matter, to progressively increase interest rates on borrowings to an extent which would
have made it virtually impossible for debtors to comply with their own obligations. True,
escalation clauses in credit agreements are perfectly valid and do not contravene public
policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless
still subject to laws and provisions governing agreements between parties, which
agreements—while they may be the law between the contracting parties—implicitly
incorporate provisions of existing law. Consequently, while the Usury Law ceiling on
interest rates was lifted by C.B. Circular No. 905, nothing in the said circular could
possibly be read as granting respondent bank  carte blancheauthority to raise interest
rates to levels which would either enslave its borrowers or

294

294 SUPREME COURT REPORTS

ANNOTATED

Almeda vs. Court of Appeals

lead to a hemorrhaging of their assets. Borrowing represents a transfusion of

capital from lending institutions to industries and businesses in order to stimulate
growth. This would not, obviously, be the effect of PNB’s unilateral and lopsided policy
regarding the interest rates of petitioners’ borrowings in the instant case.
Same; Same; Same; Same; Same; Same; Same; C.B. Circular No. 905 could not be
properly invoked to justify the escalation clauses requiring that the increase be ”within
the limits allowed by law,” such circular not being a grant of specific authority.—Apart
from violating the principle of mutuality of contracts, there is authority for disallowing
the interest rates imposed by respondent bank, for the credit agreement specifically
requires that the increase be “within the limits allowed by law.” In the case of PNB v.
Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No. 905
could not be properly invoked to justify the escalation clauses of such contracts, not
being a grant of specific authority.
Same;  Same;  Same;  Same;  Same;  Same;  Same;  Administrative Law;  Words and
Phrases; Where the escalation clause of the credit agreement in the instant case required
that the same be made ”within the limits allowed by law,” it obviously referred
specifically to legislative enactments not administrative circulars.—Furthermore, the
escalation clause of the credit agreement requires that the same be made “within the
limits allowed by law,” obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase “limits imposed by law,” refers only to the
escalation clause. However, the same agreement allows reduction on the basis of law or
the Monetary Board. Had the parties intended the word “law” to refer to both legislative
enactments and administrative circulars and issuances, the agreement would not have
gone as far as making a distinction between “law or the Monetary Board Circulars” in
referring to mutually agreed upon reductions in interest rates.
 Same; Same; Same; Same; Same; Same; Same; Escalation clauses are not basically
wrong or legally objectionable so long as they are not solely potestative but based on
reasonable and valid grounds; An increase in interest rates from 18% to 68% is excessive
and unconscionable.—Petitioners never agreed in writing to pay the increased interest
rates demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68% is excessive
and uncon-

295

VOL. 256, APRIL 17, 1996 295

Almeda vs. Court of Appeals

scionable is indisputable. Between 1981 and 1984, petitioners had paid an amount
equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to
interest alone. By the time the spouses tendered the amount of P40,142,518.00 in
settlement of their obligations, respondent bank was demanding P58,377,487.00 over
and above those amounts already previously paid by the spouses. Escalation clauses are
not basically wrong or legally objectionable so long as they are not solely potestative but
based on reasonable and valid grounds. Here, as clearly demonstrated above, not only
the increases of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and reasonable standards
upon which the increases are anchored.
Loans; Banks and Banking; Presidential Decree No. 385; Due Process; In facilitating
collection of debts through the automatic foreclosure provisions of P.D. 385, the
government is, however, not exempted from observing basic principles of law, and
ordinary fairness and decency under the due process clause of the Constitution.—
Presidential Decree No. 385 was issued principally to guarantee that government
financial institutions would not be denied substantial cash inflows necessary to finance
the government’s development projects all over the country by large borrowers who
resort to litigation to prevent or delay the government’s collection of their debts or loans.
In facilitating collection of debts through its automatic foreclosure provisions, the
government is however, not exempted from observing basic principles of law, and
ordinary fairness and decency under the due process clause of the Constitution.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

     Cuevas, De la Cuesta & De las Alas for petitioners.
     Cruz, Cruz & Navarro III collaborating counsel for petitioners.

KAPUNAN, J.:

On various dates in 1981, the Philippine National Bank granted to herein

petitioners, the spouses Ponciano L. Almeda
296

296 SUPREME COURT REPORTS ANNOTATED

 Almeda vs. Court of Appeals

and Eufemia P. Almeda several loan/credit accommodations totaling P18.0

Million pesos payable in a period of six years at an interest rate of 21% per
annum. To secure the loan, the spouses Almeda executed a Real Estate
Mortgage Contract covering a 3,500 square meter parcel of land, together with
the building erected thereon (the Marvin Plaza) located at Pasong Tamo,
Makati, Metro Manila. A credit agreement embodying the terms and conditions
of the loan was executed between the parties. Pertinent portions of the said
agreement are quoted below:
SPECIAL CONDITIONS

x x x      x x x      x x x
The loan shall be subject to interest at the rate of twenty one per cent (21%) per
annum, payable semi-annually in arrears, the first interest payment to become due and
payable six (6) months from date of initial release of the loan. The loan shall likewise be
subject to the appropriate service charge and a penalty charge of three per cent (3%) per
annum to be imposed on any amount remaining unpaid or not rendered when due.
xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future; provided,
that the interest rate on this/these accommodations shall be correspondingly decreased
in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon  shall
take 1effect on the effectivity date of the increase or decrease of the maximum interest
rate.

Between 1981 and 1984, 2

petitioners made several partial payments on the loan
totaling 3P7,735,004.66,  a substantial portion of which was applied to accrued
interest.  On March

_______________
1 Rollo, pp. 48-55.
2 Id., at 165.
3 Id.

297

VOL. 256, APRIL 17, 1996 297

Almeda vs. Court of Appeals

31, 1984, respondent bank, over petitioners’ protestations, raised the interest
rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said
interest rate thereupon increased from
4
an initial 21% to a high of 68% between
March of 1984 to September, 1986.
Petitioners protested the increase in interest rates, to no avail. Before the
loan was to mature in March, 1988, the spouses filed on February 6, 1988 a
petition for declaratory relief with prayer for a writ of preliminary injunction
and temporary restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was raffled to Branch
134 presided by Judge Ignacio Capulong, the spouses sought clarification as to
whether or not the PNB could unilaterally raise interest rates on the loan,
pursuant to the credit agreement’s escalation clause, and in relation to Central
Bank Circular No. 905. As a preliminary measure, the lower court, on March 3,
1988, issued a writ of preliminary injunction enjoining the Philippine National
Bank from enforcing an interest rate above the 21% stipulated in the credit
agreement. By this time the spouses were already in default of their loan
obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and
P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of
petitioners’ mortgaged properties and scheduled an auction sale for March 14,
1989. Upon motion by petitioners, however, the lower court, on April 5, 1989,
granted a supplemental writ of preliminary injunction, staying the public
auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the
trial court dissolved the supplemental writ of preliminary injunction.
Petitioners filed a motion for reconsideration. In the interim, respondent bank
once more set a new date for the foreclosure sale of Marvin Plaza which was
March 12, 1990. Prior to the scheduled date, however, petitioners tendered to
respondent bank the amount of P40,142,518.00, consisting of the principal
(P18,000,000.00)

_______________
4 Id.

298

298 SUPREME COURT REPORTS ANNOTATED

Almeda vs. Court of Appeals

and accrued interest calculated at 5the originally stipulated rate of 21%. The
PNB refused to accept the payment.
As a result of PNB’s refusal of the tender of payment, petitioners, on March
8, 1990, formally consigned the amount of P40,142,518.00 with the Regional
Trial Court in  Civil Case No. 90-663. They prayed therein for a writ of
preliminary injunction with a temporary restraining order. The case was
raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990,
respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order
granting the writ of preliminary injunction enjoining the foreclosure sale of
“Marvin Plaza” scheduled on March 12, 1990. On April 17, 1990 respondent
bank filed a motion for reconsideration of the said order.
On August 16, 1991,  Civil Case No. 90-663  we transferred to Branch 66
presided by Judge Eriberto Rosario who issued an order consolidating said case
with Civil Case 18871 presided by Judge Ignacio Capulong.
For Judge Ignacio Capulong’s refusal to lift the writ of preliminary
injunction issued March 30, 1990, respondent bank filed a petition for
Certiorari, Prohibition and Mandamus with respondent Court of Appeals,
assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of
preliminary injunction restraining the foreclosure sale of Marvin Plaza
set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying
respondent bank’s motion to lift the writ of injunction issued by Judge
Guadiz as well as its motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent bank’s
subsequent motion to lift the writ of preliminary

_______________
5 The PNB claimed that as of March 12, 1990, the spouses balance was P58,377,487.31, using
the increased interest rates for computing accrued interest.

299

VOL. 256, APRIL 17, 1996 299

Almeda vs. Court of Appeals

injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent
bank’s motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the
assailed orders and upholding respondent bank’s right to foreclose the
mortgaged property pursuant to Act 3135, as amended and P.D. 385.
Petitioners’ Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993, respectively,
were denied by respondent court in its resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court’s decision dated August
27, 1993 raises two principal issues namely: (1) Whether or not respondent
bank was authorized to raise its interest rates from 21% to as high as 68%
under the credit agreement; and 2) Whether or not respondent bank is granted
the authority to foreclose the Marvin Plaza under the mandatory foreclosure
provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied
that the increases in the interest rates were illegal, unilateral, excessive and
arbitrary, it argues that the escalated rates of interest it imposed was based on
the agreement of the parties. Respondent bank further contends that it had a
right to foreclose the mortgaged property pursuant to P.D. 385, after
petitioners were unable to pay their loan obligations to the bank based on the
increased rates upon maturity in 1984.
The instant petition is impressed with merit.
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) that6 there must be mutuality
between the parties based on their essential equality.  Any contract which

_______________
6 Garcia v. Legarda, 21 SCRA 555 (1967).

300

300 SUPREME COURT REPORTS ANNOTATED

Almeda vs. Court of Appeals

appears to be heavily weighed in favor of one of the parties so as to lead to an

unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties, is
likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with petitioners
by increasing the interest rates on the loan without the prior assent of the
latter. In fact, the manner of agreement is itself explicitly stipulated by the
Civil Code when it provides, in Article 1956 that “No interest shall be due
unless it has been expressly stipulated in writing.” What has been “stipulated
in writing” from a perusal of interest rate provision of the credit agreement
signed between the parties is that petitioners were bound merely to pay 21%
interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits
allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the
parties to the contract in this case was the 21% rate stipulated in the interest
provision. Any doubt about this is in fact readily resolved by a careful reading
of the credit agreement because the same plainly uses the phrase “interest
rate agreed upon,” in reference to the original 21% interest rate. The interest
provision states:
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future; provided,
that the interest rate on this/these accommodations shall be correspondingly decreased
in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in the interest rate agreed upon  shall
take effect on the effectivity date of the increase or decrease of the maximum interest
rate.

301

VOL. 256, APRIL 17, 1996 301

Almeda vs. Court of Appeals
7
In  Philippine National Bank v. Court of Appeals,   this Court disauthorized
respondent bank from unilaterally raising the interest rate in the borrower’s
loan from 18% to 32%, 41% and 48% partly because the aforestated increases
violated the principle of mutuality of contracts expressed in Article 1308 of the
Civil Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
rates—

‘x x x increases in interest rates are not subject to any ceiling prescribed by the Usury Law.’

but it did not authorize the PNB, or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18% to 48% within a span of four (4)
months, in violation of P.D. 116 which limits such changes to ‘once every twelve
months.’
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest
rate on the private respondent’s loan, violated the mutuality of contracts ordained in
Article 1308 of the Civil Code:
ART. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
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
vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million 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 vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party

_______________
7 196 SCRA 536, 543 (1991).

302

302 SUPREME COURT REPORTS ANNOTATED

Almeda vs. Court of Appeals

whom the courts of justice must protect against abuse and imposition.
PNB’s successive increases of the interest rate on the private respondent’s loan, over
the latter’s protest, were arbitrary as they violated an express provision of the Credit
Agreement (Exh. 1) Section 9.01 that its terms ‘may be amended only by an instrument
in writing signed by the party to be bound as burdened by such amendment.’ The
increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides
that ‘no interest shall be due unless it has been expressly stipulated in writing.’
The debtor herein never agreed in writing to pay the interest increases fixed by the
PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4)
months is excessive, as found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on

petitioners’ loan, over the latter’s vehement protests, were arbitrary.
 Moreover, respondent bank’s reliance on C.B. Circular No. 905, Series of
1982 did not authorize the bank, or any lending institution for that matter, to
progressively increase interest rates on borrowings to an extent which would
have made it virtually impossible for debtors to comply with their own
obligations. True, escalation clauses in credit agreements are perfectly valid
and do not contravene public policy. Such clauses, however, (as are stipulations
in other contracts) are nonetheless still subject to laws and provisions
governing agreements between parties, which agreements—while they may be
the law between the contracting parties—implicitly incorporate provisions of
existing law. Consequently, while the Usury Law ceiling on interest rates was
lifted by C.B. Circular No. 905, nothing in the said circular could possibly be
read as granting respondent bank  carte blanche  authority to raise interest
rates to levels which would either enslave its borrowers or lead to a
hemorrhaging of their assets. Borrowing represents a transfusion of capital
from lending institutions to industries and businesses in order to stimulate
303

VOL. 256, APRIL 17, 1996 303

Almeda vs. Court of Appeals

growth. This would not, obviously, be the effect of PNB’s unilateral and
lopsided policy regarding the interest rates of petitioners’ borrowings in the
instant case.
Apart from violating the principle of mutuality of contracts, there is
authority for disallowing the interest rates imposed by respondent bank, for the
credit agreement specifically requires that the increase be “within the limits
allowed by law.” In the case of PNB v. Court of Appeals, cited above, this Court
clearly emphasized that C.B. Circular No. 905 could not be properly invoked to
justify the escalation clauses of such contracts, not being a grant of specific
authority.
Furthermore, the escalation clause of the credit agreement requires that the
same be made “within the limits allowed by law,” obviously referring
specifically to legislative enactments not administrative circulars. Note that
the phrase “limits imposed by law,” refers only to the escalation clause.
However, the same agreement allows reduction on the basis of law or the
Monetary Board. Had the parties intended the word “law” to refer to both
legislative enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction between “law or
the Monetary Board Circulars” in referring to mutually agreed upon reductions
in interest rates. This distinction was the subject of the Court’s disquisition
8
in
the case of Banco Filipino Savings and Mortgage Bank v. Navarro   where the
Court held that:
What should be resolved is whether BANCO FILIPINO can increase the interest rate on
the LOAN from 12% to 17% per annum under the Escalation Clause. It is our
considered opinion that it may not.
The Escalation Clause reads as follows:

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
_______________
8 152 SCRA 346 (1987).

304

304 SUPREME COURT REPORTS ANNOTATED

Almeda vs. Court of Appeals

a law should be enacted

increasing
the lawful rates of interest that may be charged
on this particular
kind of loan.’ (Paragraphing and italics supplied)

It is clear from the stipulation between the parties that the interest rate may be
increased ‘in the event a  law  should be enacted increasing the lawful rate of interest
that may be charged  on this particular kind of loan.’ The Escalation Clause was
dependent on an increase of rate made by ‘law’ alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. “Although a
circular duly issued is not strictly a statute or a law, it has, however, the force and effect
of law.” (Italics supplied). “An administrative regulation adopted pursuant to law has
the force and effect of law.” “That administrative rules and regulations have the force of
law can no longer be questioned.”
The distinction between a law and an administrative regulation is recognized in the
Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of
September 24, 1976 (supra). According to the guidelines, for a loan’s interest to be
subject to the increases provided in CIRCULAR No. 494, there must be an Escalation
Clause allowing the increase ‘in the event that any law or Central Bank regulation  is
promulgated increasing the maximum rate for loans.’ The guidelines thus presuppose
that a Central Bank regulation is not within the term ‘any law.’
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980,
adding section 7-a to the Usury Law, providing that parties to an agreement pertaining
to a loan could 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.’ To quote:

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

305

VOL. 256, APRIL 17, 1996 305

Almeda vs. Court of Appeals

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 italics supplied).
 It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by law or by
the Monetary Board; and (2) in order for such stipulation to be valid, it must include a
provision for reduction of the stipulated interest ‘in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board.’

Petitioners never agreed in writing to pay the increased interest rates

demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as 68% is
excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire
principal (P7,735,004.66) which was applied to interest alone. By the time the
spouses tendered the amount of P40,142,518.00 in settlement of their
obligations, respondent bank was demanding P58,377,487.00 over and above
those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as
they are9 not solely potestative but based on reasonable and valid
grounds.   Here, as clearly demonstrated above, not only the increases of the
interest rates on the basis of the escalation clause patently unreasonable and
unconscionable, but also there are no valid and reasonable standards upon
which the increases are anchored.
We go now to respondent bank’s claim that the principal issue in the case at
bench involves its right to foreclose petitioners’ properties under P.D. 385. We
find respondent’s

_______________
9  Vitug’s  Compendium of Civil Law and Jurisprudence, Revised Edition, 1993, p. 533,
citing PNB v. IAC, 183 SCRA 133; PNB v. Court of Appeals, 196 SCRA 536.

306

306 SUPREME COURT REPORTS ANNOTATED

Almeda vs. Court of Appeals

pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that
government financial institutions would not be denied substantial cash inflows
necessary to finance the government’s development projects all over the
country by large borrowers who resort to litigation
10
to prevent or delay the
government’s collection of their debts or loans.   In facilitating collection of
debts through its automatic foreclosure provisions, the government is however,
not exempted from observing basic principles of law, and11ordinary fairness and
decency under the due process clause of the Constitution.

_______________
10 Sections 1 and 2 of P.D. 385 provide:
Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from
the issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit accommodation,
and/or guarantees granted by them whenever the arrearages on such account, concluding accrued interest and
other obligations, including interest and other charges, as appearing in the book of accounts and/or related
records of the financial institution concerned. This shall be without prejudice to the exercise by the
government financial institution of such rights and/or remedies available to them under their respective
contracts with their debtors, including the right to foreclose on loans, credits, accommodations, and/or
guarantees on which the arrearages are less than twenty percent (20%).
Section 2. No restraining order, temporary or permanent injunction shall be issued by the court against any
government financial institution in any action taken by such institution in compliance with the mandatory
foreclosure provided in Section 1 hereof, whether such restraining order, temporary or permanent injunction is
sought by the borrower(s) or any third party or parties, except after due hearing in which it is established by
the borrower, and admitted by the government financial institution concerned that twenty percent (20%) of
the outstanding arrearages has been paid after the filing of foreclosure proceedings.
11 Filipinas Marble Corporation v. Intermediate Appellate

307

VOL. 256, APRIL 17, 1996 307

Almeda vs. Court of Appeals  

In the first place, because of the dispute regarding the interest rate increases,
an issue which was never settled on merit in the courts below, the exact
amount of petitioner’s obligations could not be determined. Thus, the
foreclosure provisions of P.D. 385 could be validly invoked by respondent bank
only after settlement of the question involving the interest rate on the loan,
and only after the spouses refused to meet their obligations following such
determination.
12
In  Filipinas Marble Corporation v. Intermediate Appellate
Court,  involving P.D. 385’s provisions on mandatory foreclosure, we held that:
We cannot, at this point, conclude that respondent DBP together with the Bancom
people actually misappropriated and misspent the $5 million loan in whole or in part
although the trial court found that there is ‘persuasive’ evidence that such acts were
committed by the respondent. This matter should rightfully be litigated below in the
main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be
applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the petitioner’s
properties under the provisions of P.D. 385 to satisfy the whole amount of the loan
would be a gross mistake. It would unduly prejudice the petitioner, its employees and
their families.
Only after trial on the merits of the main case can the true amount of the loan which
was applied wisely or not, for the benefit of the petitioner be determined. Consequently,
the extent of the loan where there was no failure of consideration and which may be
properly satisfied by foreclosure proceedings under P.D. 385 will have to await the
presentation of evidence in a trial on the merits.
13
In  Republic Planters Bank v. Court of Appeals    the Court reiterating
the dictum in Filipinas Marble Corporation,held:
The enforcement of P.D. 385 will ‘sweep under the rug’ this iceberg of a scandal in the
sugar industry during the Marcos Martial

_______________

Court, 142 SCRA 181 (1986).

12 Ibid.
13 213 SCRA 413 (1992).

308
308 SUPREME COURT REPORTS ANNOTATED
Almeda vs. Court of Appeals

Law years. This we can not allow to happen. For the benefit of future generations, all
the dirty linen in the PHILSUCOM/NASUTRA/RPB closets have to be exposed in public
so that the same may NEVER be repeated.
It is of paramount national interest, that we allow the trial court to proceed with
dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith

and in compliance with the letter of the Credit Agreement, honestly believed to
be the real amount of their remaining obligations with the respondent bank.
The latter could not therefore claim that there was no honest-to-goodness
attempt on the part of the spouses to settle their obligations. Respondent
bank’s rush to inequitably invoke the foreclosure provisions of P.D. 385 through
its legal machinations in the courts below, in spite of the unsettled differences
in interpretation of the credit agreement was obviously made in bad faith, to
gain the upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit
agreement and in the law requiring the parties to agree to changes in the
interest rate in writing, we hold that the unilateral and progressive increases
imposed by respondent PNB were null and void. Their effect was to increase
the total obligation on an eighteen million peso loan to an amount way over
three times that which was originally granted to the borrowers. That these
increases, occasioned by crafty manipulations in the interest rates is
unconscionable and neutralizes the salutary policies of extending loans to spur
business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of
Appeals dated August 27, 1993, as well as the resolution dated February 10,
1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the
Regional Trial Court of Makati for further proceedings.
SO ORDERED.

     Bellosillo and Hermosisima, Jr., JJ., concur.

309

VOL. 256, APRIL 17, 1996 309

Philippine National Bank vs. Court of Appeals

     Padilla (Chairman), J., No part, having handled (while in law practice)

several cases adverse to petitioners.
     Vitug, J., No part; one of the parties used to be a client.

Judgment and resolution reversed and set aside. Case remanded to trial
court for further proceedings.

Notes.—What P.D. 1818 proscribes is the issuance of a writ of injunction to

impede or to stave off implementation of government projects. (Genaro R. Reyes
Construction v. Court of Appeals, 234 SCRA 116 [1994])
 Where the promissory notes signed by the borrowers do not contain any
stipulation on the payment of handling charges, the bank cannot collect the
same. (Consolidated Bank and Trust Company (Solidbank) v. Court of
Appeals, 246 SCRA 193 [1995])
If the debt produces interest, payment of the principal shall not be deemed
to have been made until the interests have been covered. (Gabanseng, Jr. v.
Court of Appeals, 246 SCRA 472 [1995])

——o0o——

© Copyright 2020 Central Book Supply, Inc. All rights reserved.