PNB VS CA

G.R. No. 109563. July 9, 1996

Topic: Escalation and De-escalation Clauses

Presented by: Deogracias B. Paradiang

Facts:
• June 4, 1979: Spouses Bascos obtained a P 15,000 loan from PNB
• Promissory note: pay interest at 12% per annum; PNB may raise interest within the
limits allowed by law (escalation clause)
• Real Estate Mortgage contract: (par. k) Increase of interest rate – within the rate
allowed by law (escalation clause)
• Dec. 12, 1980: PNB extended payment of loan to June 5, 1981
• PNB increased the rate of interest per annum (C.B. Circular No. 705)
- Dec. 1, 1979: increased to 14%
- Feb. 21, 1983: increased to 22%
- Jun. 20, 1983: increased to 22.5%
- Nov. 2, 1983: increased to 23%
- Mar. 2, 1984: increased to 25%
- Apr. 10, 1984: increased to 28%
Facts:
• Sps. Bascos defaulted on payment; extrajudicial foreclosure of mortgage was scheduled
• PNB said Sps. Bascos’ debt: from P 15,000 to P 35,125.84 plus 28% annual interest
• Sps. Bascos sued PNB, its Branch Manager & Provincial Sheriff
- declaration of nullity of C.B. Monetary Board Resolution No. 2126 (C.B. Circular No. 705)
- declaration that the interest rate increases were contrary to Art. 1959 of the Civil Code
• PNB alleged that Sps. Bascos had no cause of action: Usury Law, as amended by
P.D. No. 1684 did not limit the number of times interest could be increased
• RTC ruled in favor of private respondents
• PNB appealed, but CA affirmed RTC’s decision
• PNB argued that the CA erred in applying P.D. No. 1684 and that it is not applicable
since the promissory note and real estate mortgage were executed before its effectivity
Issues:

• Whether or not the CA erred in nullifying the interest rate increases because the
promissory note did not provide for a de-escalation clause as required in P.D.
No. 1684

• Whether or not PNB is correct that P.D. No. 1684 is not applicable since the
promissory note and real estate mortgage were executed before its effectivity
RTC Ruling:

• Declared PNB’s interest increases based on the escalation clauses in the

promissory note and real estate mortgage null and void
Grounds:
- No de-escalation clause (as required in P.D. No. 1684)
- P.D. No. 116 (12% interest p.a. ceiling rate) prevails over Circular No. 705
• Plaintiff’s (Sps. Bascos) can settle their unpaid obligation at the interest rate of
12% per annum computed from the inception of the loan until fully paid
CA Ruling:

• Affirmed the RTC’s decision

• Escalation clause in the promissory note could not be given effect because
de-escalation clause is absent
• Escalation clause: within the limits allowed by law, but C.B. circulars could not
be considered laws
SC Ruling:
As to the 1st issue:

• No. The CA did not err in nullifying the interest rate increases because the
promissory note did not provide for a de-escalation clause as required in P.D.
No. 1684.
• The Court of Appeals nullified the interest rate increases not because the
promissory note did not comply with P.D. No. 1684 by providing for a de-
escalation, but because the absence of such provision made the clause so one-
sided as to make it unreasonable. PNB’s contention that the escalation clause
gives it unbridled right to unilaterally upwardly adjust the interest on private
respondents’ loan cannot be allowed. That would completely take away from
private respondents the right to assent to an important modification in their
agreement, and would negate the element of mutuality in contracts.
SC Ruling:
As to the 2nd issue:

• PNB is incorrect that P.D. No. 1684 is not applicable since the promissory & real
estate mortgage were executed before its effectivity.
• In Banco Filipino Savings & Mortgage Bank vs. Navarro, the SC held that
although P.D. No. 1684 is not to be retroactively applied to loans granted before
its effectivity, there must nevertheless be a de-escalation clause to mitigate the
one-sidedness of the escalation clause. Any increase in the rate of interest
made pursuant to an escalation clause must be result of agreement between
the parties.
• In this case, private respondents’ approval to the increases cannot be implied
from their lack of response to the letters (informing them of the increases) sent
by PNB.
THANK YOU!