G.R. No.

L-46591

July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,

vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila,
Branch XXXI and FLORANTE DEL VALLE, respondents.

DOCTRINE: CIRCULAR No. 494, although it has the effect of law, is not a law.

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.

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.

FACTS:

On May 20, 1975, respondent Florante del Valle obtained a loan secured by a
real estate mortgage from petitioner Banco Filipino in the sum of P41,300.00, payable
and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually.
Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date
when CIRCULAR No. 494 was issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause,

which read that Valle authorized Banco Filipino to increase the interest rate stipulated
without advance notice in the event law should be enacted increasing the lawful rates of
interest that may be charged on this particular kind of loan.

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued
on January 2, 1976, the pertinent portion of which reads:

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 xxxxxxxx

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."

On the strength of CIRCULAR No. 494, Banco Filipino gave notice to del Valle
on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per
annum effective on March 1, 1976.

In a reply letter to del Valle, Central Bank Director Mercedes Paredes clarified
that as a rule, should a bank increase the interest rates on loans already existing as of
January 2, 1976, pertinent loan contracts/documents must 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.

Thus, del Valle file a suit against Banco Filipino for “Declaratory Relief”,
contending that Circular No. 494 is NOT THE LAW contemplated in the Escalation
Clause of her promissory note since said Circular is a Central Bank regulation.

In its judgment, respondent Court nullified the Escalation Clause and ordered
BANCO FILIPINO to desist from enforcing the increased rate of interest on the del
Valle’s loan. It reasoned out that P.D. No. 116 does not expressly grant the Central
Bank authority to maximize interest rates with retroactive effect and that BANCO
FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-
year period in which the loan is to be paid other than the 12% per annum in force at the
time of the execution of the loan.

ISSUE:

Whether or not BANCO FILIPINO can increase the interest rate on the LOAN
from 12% to 17% per annum under the Escalation Clause?

RULING:

NO.
 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. However, CIRCULAR No. 494,
although it has the effect of law, is not a law but an Administrative Regulation.

The distinction between a law and an Administrative Regulation is recognized by

P.D. No. 1684 which provides 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) 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." (De-escalation Clause)

While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-
escalation clause in the Escalation Clause in question provides another reason why it
should not be given effect because of its one-sidedness in favor of the lender.

The Escalation Clause specifically stipulated that the increase in interest rate
was to be "on this particular kind of loan, " meaning one secured by registered real
estate mortgage.

Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is
applicable to, unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated
December 1, 1979, which fix the effective rate of interest on loan transactions with
maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586)
and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured
loans as defined by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular

type of loan was meant by the Monetary Board, the more equitable construction is to
limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon
registered realty.