Irineo F. Llorin, Jr. vs. Court of Appeals and APEX Mortgage and Loans Corporation
### Facts:
On April 11, 1978, Irineo F. Llorin, Jr. (Llorin), the defendant, secured a loan of P84,410 from APEX Mortgage and Loans Corporation (APEX) through a promissory note with an escalation clause. The loan was secured by a real estate mortgage and payable in 240 monthly installments of P1,142.08 with interest and service charges.
The escalation clause authorized APEX to increase interest rates based on laws, Presidential Decrees, or Central Bank regulations. Accordingly, APEX invoked this clause and increased the interest rates several times between 1980 and 1984, following various Central Bank Circulars.
– **February 25, 1980**: Interest from 12% to 21% (Monthly Payment: P1,511.91)
– **August 1, 1984**: Interest from 21% to 25% (Monthly Payment: P1,722.68)
– **December 1, 1984**: Interest from 25% to 36% (Monthly Payment: P2,482)
Despite an absence of a de-escalation clause, APEX reduced interest rates following later Central Bank directives:
– **February 1, 1986**: Interest from 36% to 28% (Monthly Payment: P1,957)
– **December 1, 1986**: Interest from 28% to 24% (Monthly Payment: P1,732.04)
– **February 1, 1987**: Interest from 24% to 21% (Monthly Payment: P1,580.14)
By 1987, Llorin had paid P79,462.27 towards the loan but was still in arrears. Demands were made for amounts due, culminating in a complaint on June 17, 1988, by APEX in the Regional Trial Court (RTC) of Manila for P323,523.42 in principal and interest, with additional claims for attorney’s fees and costs.
In litigation, the legal validity of the escalation clause under Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro, et al. was contested. The RTC ordered Llorin to pay P80,561.13 plus 21% interest, additional service charges, and legal fees. On appeal, the Court of Appeals upheld the RTC decision.
### Issues:
1. Is the escalation clause in the promissory note valid given its one-sidedness and absence of a de-escalation clause?
2. Should the Supreme Court’s ruling in Banco Filipino Savings and Mortgage Bank vs. Hon. Miguel Navarro be applied to invalidate the escalation clause?
### Court’s Decision:
The Supreme Court affirmed the appellate court’s decision, thereby sustaining the RTC’s judgement.
#### Issue 1: Validity of the Escalation Clause
The Court found that the escalation clause contained in the promissory note, even without a de-escalation provision, did not breach the principles of mutuality required in contracts. APEX had unilaterally reduced the interest rates three times, demonstrating fairness contrary to what Presidential Decree No. 1684 sought to prevent.
#### Issue 2: Applicability of Banco Filipino Ruling
The escalation clause in the present case differed from that in the Banco Filipino case. Specifically:
– **The Banco Filipino clause**: Permitted interest rate adjustments only if increased by “law.”
– **The APEX clause**: Permitted adjustments based on “any law, Presidential Decree, or Central Bank regulation.”
The APEX clause’s broader scope, including Central Bank Circulars, aligned with the adjustment types contemplated in loan agreements post-Usury Law amendments. Thus, the increased interest rates applied by APEX were lawful and justified under Central Bank Circulars Nos. 721 and 905.
### Doctrine:
The decision underscores that for an escalation clause to be considered valid, it must include provisions for both upward and downward adjustments of interest rates in response to changes in applicable laws or regulations. Even in the absence of a de-escalation clause, actual reductions in interest rates can satisfy the mutuality principle of contracts.
### Class Notes:
1. **Escalation Clause**: Provisions allowing for interest rate adjustments in response to legal or regulatory changes.
– Must include the possibility for both increases and decreases in interest rates, reflecting mutuality of contracts (PD 1684).
2. **De-escalation Clause**: Ensures that stipulated interest rates provide for reductions if the applicable maximum rate of interest is lowered by law or Monetary Board directive.
3. **Mutuality of Contracts**: Article 1308 of the Civil Code requires that contracts must bind both parties reciprocally and equitably.
4. **Central Bank Circulars Nos. 721 and 905**: Authorized adjustments in interest rates for both secured and unsecured loans.
#### Relevant Statutes:
– **Civil Code, Article 1308**: Mutuality of contracts principle.
– **Presidential Decree No. 1684, Section 2**: Stipulated that escalation clauses in contracts must allow for both increases and decreases in interest rates.
### Historical Background:
This case reflects the transition in Philippine financial jurisprudence post-Usury Law and highlights the evolution of legal standards governing loan agreements and interest rate adjustments. The need for equitable contract terms is emphasized, balancing lender and borrower interests.
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