SPS Juico vs CHINA BANK

DOCTRINE : the escalation clause is void if it grants respondent the power to impose an increased
rate of interest without a written notice to petitioners and their written consent.
Concurring doctrine by CJ Sereno
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. 9
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. In this way, our credit system would be facilitated by firm loan
provisions that not only aid fiscal stability, but also avoid numerous disputes and litigations between creditors and
debtors.
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507-001051-3 4and
507-001052-0,5 for the sums of !!6,216,000 and P4, 139,000, respectively. The loan was secured by a Real Estate
Mortgage (REM) over petitioners property located at 49 Greensville St., White Plains, Quezon City
respondent demanded the full payment of the outstanding balance with accrued monthly interests.
As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776. On the same day, the
mortgaged property was sold at public auction, with respondent China bank as highest bidder for the amount of
P10,300,000.
petitioners received 8a demand letter9 dated May 2, 2001 from respondent for the payment ofP8,901,776.63, the
amount of deficiency after applying the proceeds of the foreclosure sale
respondent prayed that judgment be rendered ordering the petitioners to pay jointly and severally: (1)P8,901,776.63
representing the amount of deficiency, plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an
additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3) an amount
equivalent to 10% of the foregoing amounts as attorneys fees; and (4) expenses of litigation and costs of suit.
Ms. Annabelle Cokai Yu, its Senior Loans Assistant stated that as of now the outstanding balance of petitioners was
P15,190,961.48. Yu reiterated that the interest rate changes every month based on the prevailing market rate. she
notified petitioners of the prevailing rate by calling them monthly .It was increased unilaterally
RTC: ordered Spouses to pay bank 9M plus the interest which amounted to 15M.CA AFFIRMED
PETITIONER: They insist that the increase in interest rates were unilaterally imposed by the bank and thus violate
the principle of mutuality of contracts.
Issue: whether the increase in interest rates is void for violating the mutuality of contracts
HELD:Yes
RATIO:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them. 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 xxx (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
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting
parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses
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 a case,SC said that petitioners
assent to the modifications in the interest rates cannot be implied from their lack of response to the memos sent by
respondent
It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase

in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors
to adjust the interest independently and upwardly would completely take away from the debtors the right to assent to
an important modification in their agreement and would also negate the element of mutuality in their contracts.
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid an escalation clause
which required a written notice to and conformity by the borrower to the increased interest rate
In Polotan, Sr. v. CA ,On petitioners contention that the interest rate was unilaterally imposed and based on the
standards and rate formulated solely by respondent credit card company, we held: Cardholder hereby authorizes
Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates
x x x" is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it
is also dependent on the prevailing market rates. Thus, it was valid because it wasnt solely potestative as it was based
on the market rates(something outside the control of respondent)
Here, the interest rates would vary as determined by prevailing market rates. Evidently, the parties intended the
interest on petitioners loan, including any upward or downward adjustment, to be determined by the prevailing
market rates and not dictated by respondents policy.
HOWEVER, SC hold that the escalation clause here is still void because it grants respondent the power to
impose an increased rate of interest without a written notice to petitioners and their written consent.
Respondents 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. 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 equalit y.
In the absence of consent on the part of the petitioners to the modifications in the interest rates, the adjusted rates
cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%, the rate charged for the first year.
Based on the August 29, 2000 demand letter of China Bank, petitioners total principal obligation under the two
promissory notes which they failed to settle is P10,355,000. However, due to China Banks unilateral increases in the
interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the
period November 4, 1999 to February 23, 2001, petitioners balance ballooned to P19,201,776.63. Note that the
original amount of principal loan almost doubled in only 16 months. The Court also finds the penalty charges imposed
excessive and arbitrary, hence the same is hereby reduced to 1% per month or 12% per annum.
Concurring by CJ Sereno:
not all escalation clauses in loan agreements are void per se .it is to maintain fiscal stability and to retain the value of
money in long term contracts.however, a contract containing a provision that makes its fulfillment exclusively
dependent upon the uncontrolled will of one of the contracting parties is void.
Hence the provision on the promissory note:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the
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.
Is void.
The floating rate of interest in the trust receipt agreement is also void. It reads:
I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981,
when the Central Bank floated the interest rate, and to pay additionally the penalty of I% per month until the
amount/s or installments/s due and unpaid under the trust receipt on the reverse side hereof is/are fully paid.
It is ok, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing
market conditions as long as there should always be a reference rate upon which to peg such variable interest rates.
An example of such a valid variable interest rate was found in Polotan, Sr. v. Court of Appeals. 10 In that case, the
contractual provision stating that "if there occurs any change in the prevailing market rates, the new interest rate
shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to
the Cardholder other than the required posting on the monthly statement served to the Cardholder" was considered
valid. The aforequoted provision was upheld notwithstanding that it may partake of the nature of an escalation

clause, because at the same time it provides for the decrease in the interest rate in case the prevailing market rates
dictate its reduction.
Here, the use of the phrase "any increase or decrease in the interest rate" is without reference to the prevailing
market rate actually imposed by the regulations of the Central Bank. 8 It is thus not enough to state, as akin 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. To adopt that stance will necessarily involve a determination of the interest rate by the creditor
since the provision spells a vague condition - it only requires that any change in the imposable interest must conform
to the upward or downward movement of borrowing rates.
And if that determination is not subjected to the mutual agreement of the contracting parties, then the resulting
interest rates to be imposed by the creditor would be unilaterally determined. Consequently, the escalation clause
violates the principle of mutuality of contracts.
Based on jurisprudence, therefore, 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.9 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. In this way, our credit
system would be facilitated by firm loan provisions that not only aid fiscal stability, but also avoid numerous disputes
and litigations between creditors and debtors.

Siga-an v. Villanueva, 576 SCRA 696 (2009) - Em

DOCTRINES:
If the borrower of loan pays interest when there has been no stipulation therefore, the
provisions of the Civil Code concerning Solution indebiti shall be applied.
The principle of solutio indebiti applies where:
(1) a payment is made when there exists no binding relation between the payor,
who has no duty to pay, and the person who received the payment; and
(2) the payment is made through mistake, and not through liberality or some other
cause.
FACTS:
On March 3, 1998, respondent Alicia Villanueva filed a complaint for a sum of money against
petitioner Sebastian Siga-an. Respondent alleged that she was a business woman engaged in
supplying office materials and equipments to the PNO; while petitioner was a military officer
and comptroller of the PNO from 1991-1996.
Sometime in 1992, respondent claimed that the petitioner approached her inside the PNO office
and offered to loan her the amount of P540,000. She accepted the offer since she needed
capital for her business. The loan agreement was not reduced in writing and there was no
stipulation as to the payment of interest for the loan.
On August 31, 1993, respondent issued a check worth P500,000 to petitioner as partial
payment of the loan. Two months later she issued another check in the amount of P200,000 as
payment of the remaining balance. Petitioner told her that she since she paid a total amount of
P700,000 for the P540,000 worth of loan, the excess amount of P160,000 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, the petitioner pestered
her to pay additional interest. He threatened to block her transactions with the PNO if she won't
comply. The respondent conceded since all her transactions with the PNO need the approval of
the petitioner. Thus, she paid additional amounts in cash and checks as interest for the loan.
She asked the petitioner to give her receipts but he told her that there's no need for a receipt
because there's mutual trust and understanding between them.
Thereafter, the respondent consulted a lawyer regarding propriety of paying interest on the

loan despite the absence of agreement to that effect. Her lawyer told her that petitioner could
not validly collect interest on the loan because there was no agreement between her and
petitioner. Upon being advised by her lawyer that she made an over payment, she sent a
demand letter to petitioner asking for the return of the excess amount. But the petitioner just
ignored the demand letter.
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent(1)
P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral damages;
(3) P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as
attorneys fees.
In his answer to the complaint, the petitioner denied that he offered a loan to respondent and
mentioned the mistakes committed by the respondent regarding the payment of the loan and
that there was no overpayment.
After the trial, the RTC rendered a decision holding that respondent made an over payment of
her loan obligation to petitioner and that the latter should refund the excess amount to the
former. The alleged interest should not be included because there was no agreement between
them regarding the payment of interest. It concluded that since respondent made an excess
payment to petitioner in the amount of P660,000.00 through mistake, petitioner should return
the said amount to respondent pursuant to the principle of solution indebiti.
Petitioner appealed to the CA but the CA affirmed the ruling of the RTC. Petitioner filed a motion
for reconsideration to the appellate court, hence this petition.
ISSUES:
(1) Whether or not no interest was due to petitioner.
(2) Whether or not applying the principle of solution indebiti is proper.
HELD:
(1) No interest was due to the petitioner.
In this case, the parties did not agree for the payment of interest. As explained by Villanueva, the
presented promissory note was in her hand writing because Sigaan told her to copy it and she did
because she feared the threats of Sigaan to block her deals with the Philippine Navy.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that no
interest shall be due unless it has been expressly stipulated in writing.
As can be gleaned from the foregoing provision, payment of monetary interest is allowed only
if:
(1)there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary interest. Thus,
we have held that collection of interest without any stipulation therefore in writing is prohibited
by law.
Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no
stipulation therefore, the provisions of the Civil Code concerning Solution indebiti shall be
applied.
Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision provides
that if something is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.
(2) YES.
The principle of solutio indebiti applies where:
(1) a payment is made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment; and

(2) the payment is made through mistake, and not through liberality or some other cause.
In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti
and not from a loan or forbearance of money. Thus, an interest of 6% per annum should be
imposed on the amount to be refunded as well as on the damages awarded and on the
attorneys fees, to be computed from the time of the extra-judicial demand on 3 March1998, up
to the finality of this Decision. In addition, the interest shall become 12% per annum from the
finality of this Decision up to its satisfaction

Estores v. Spouses Supangan , 670 SCRA 95 (2012) - Jez

Doctrine: Interest may be imposed even in the absence of stipulation in the contract.
Petitioners unwarranted withholding of the money which rightfully pertains to
respondent-spouses amounts to forbearance of money which can be
considered
as an involuntary loan.

Facts: Petitioner Estores entered into a Conditional Deed of sale with the respondents Arturo
and Laura Supangan where petitioner offered to sell and respondents to buy a parcel of land
located in Naic Cavite for the price of 4.7 million pesos.
4.
Vendee shall be informed as to the status of DAR clearance within 10 days upon signing of
the documents.
xxxx
6.
Regarding the house located within the perimeter of the subject [lot] owned by spouses
[Magbago], said house shall be moved outside the perimeter of this subject property to the 300
sq. m. area allocated for [it]. Vendor hereby accepts the responsibility of seeing to it that such
agreement is carried out before full payment of the sale is made by vendee.
7.
If and after the vendor has completed all necessary documents for registration of the title
and the vendee fails to complete payment as per agreement, a forfeiture fee of 25% or
downpayment, shall be applied. However, if the vendor fails to complete necessary documents
within thirty days without any sufficient reason, or without informing the vendee of its status,
vendee has the right to demand return of full amount of down payment.
xxxx
9.
As to the boundaries and partition of the lots (15,018 sq. m. and 300 sq. m.) Vendee shall
be informed immediately of its approval by the LRC.
10. The vendor assures the vendee of a peaceful transfer of ownership.

After almost seven years from the contracts execution including the 3.5 million down payment
made by the respondents, petitioner still failed to to comply with her obligation as expressly
provided in the above paragraphs 4, 6, 7, 9 and 10. Hence respondent-spouses in a letter,

demanded the down payment to be returned within 15 days from receipt. Petitioner promised
to return said amount within 120 days. Petitioner still failed to do so despite demand which
prompted respondents to file a complaint for sum of money before the RTC praying that
petitioner be ordered to pay the principal amount of 3.5 million plus interest starting from
October 1, 1993 estimated to be 8.5 million plus damages.
Petitioners answered with counterclaim that they are willing to pay the principal amount but
without the interest as the same was not agreed upon arguing that since the Conditional Deed
of Sale provided only for the return of the downpayment in case of breach, they cannot be held
liable to pay legal interest as well.
RTC ruled in favor of respondent granting them 6% interest instead of the 12% they prayed for.
The CA affirmed the RTC's decision of imposing the 6% interest but shall start to run only from
September 27, 2000 when respondent-spouses formally demanded the return of their money
and not from October 1993 when the contract was executed as held by the RTC.
Hence the case
Issue: Whether petitioner is not bound to pay interest because though there is no stipulation of
such in the conditional deed of sale
Whether the 6% interest is proper
Held:
First issue: No, Petition lacks merit
Interest may be imposed even in the absence of stipulation in the contract. Decision of CA to
impose interest is sustained.
Article 2210 of the Civil Code expressly provides that Interest may, in the discretion of the
court, be allowed upon damages awarded for breach of contract.
There is no question that petitioner is legally obligated to return the P3.5 million because of her
failure to fulfill the obligation under the Conditional Deed of Sale, despite demand. She even
admitted that the conditions were not fulfilled and that she was willing to return the full amount
of P3.5 million but has not done so. Petitioner enjoyed the use of the money from the time it
was given to her until now. Thus, she is already in default of her obligation from the date of
demand, i.e., on September 27, 2000.
Second Issue: No, the 12% interest prayed for by the respondents are deemed proper for this
case. Anent the interest rate, the general rule is that the applicable rate of interest shall be
computed in accordance with the stipulation of the parties.Absent any stipulation, the
applicable rate of interest shall be 12% per annum when the obligation arises out of a loan or
a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).
There is no stipulation and admittedly the contract involved is not a loan but a conditional deed
of sale. However, the contract provides that the seller (petitioner) must return the payment
made by the buyer (respondent-spouses) if the conditions are not fulfilled. The conditions were

not fulfilled and the money was not returned notwithstanding demand. Petitioners unwarranted
withholding of the money which rightfully pertains to respondent-spouses amounts to
forbearance of money which can be considered as an involuntary loan. As such it is the 12%
interest reserved for loans that shall apply. Since the date of demand which is September 27,
2000 was satisfactorily established during trial, then the interest rate of 12% should be
reckoned from said date of demand until the principal amount and the interest thereon is fully
satisfied.
Dispositive: Petition Denied

Nacar v. Gallery Frames and/or Bordey, G. R. No. 189871, August 13,

2013 - DJ
Doctrine BOLD
Facts:
in brief:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Nicar is an employee of Gallery frames

Nicar was illegally dismissed
Labor arbiter to SC - granted ang 95K na backwages
Gallery Appealed - Dismissed and reverted back to NLRC for execution
NLRC recompute - naging 471K
Gallery Frames Appealed pagka recompute 147K
147K paid and accepted by Nicar
Appealed for recomputation
Granted ng NLRC pero hanggang interest na lang daw
Issue:
Magkano interest. Kasi dati 12% kaso nagrelease ang bangko Sentral na 6% na lang daw.
Ruling:
Interest; legal rate beginning July 1, 2013. The guidelines laid down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be computed from default , i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit. And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall
not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.