### Facts:
In 1981, the Philippine National Bank (PNB) granted Spouses Almeda a series of loan accommodations amounting to P18.0 Million, payable within six years at an initial interest rate of 21% annually. This was backed by a real estate mortgage of a property known as Marvin Plaza. The credit agreement included a clause allowing PNB to adjust the interest rate.
From 1981 to 1984, the Almedas made partial payments totaling P7,735,004.66, mostly towards the interest. In 1984, against the Almedas’ objections, PNB increased the interest rate to 28%, later reaching up to 68% from March 1984 to September 1986.
Attempting to challenge PNB’s unilateral rate adjustments, the Almedas filed a petition for declaratory relief with a Regional Trial Court (RTC) in Makati in February 1988, seeking to prevent the enforcement of the new rates. The court issued an injunction, forestalling the interest rate above 21% and subsequent foreclosure attempts by PNB.
Following various legal manoeuvres including PNB’s foreclosure attempts and a series of court injunctions, the dispute escalated to the Court of Appeals. The appellate court decided in favor of PNB, allowing the foreclosure. The Almedas then elevated the case to the Supreme Court.
### Issues:
1. Whether PNB was authorized to unilaterally increase the interest rates from 21% to as much as 68% under the credit agreement.
2. Whether PNB has the authority to foreclose Marvin Plaza under P.D. 385.
### Court’s Decision:
The Supreme Court found merit in the Almedas’ petition, emphasizing the principle of mutuality in contracts and the necessity of written agreement for changes in interest rates as per Article 1956 of the Civil Code. It ruled that PNB’s unilateral interest rate adjustments were invalid, highlighting that escalation clauses must be based on reasonable grounds and within legally set limits. The decision also addressed PNB’s right to foreclosure under P.D. 385, indicating it could only proceed after resolving the dispute over interest rates and following an honest attempt by the Almedas to settle their obligations. Ultimately, the case was remanded to the RTC of Makati for further proceedings.
### Doctrine:
This case reiterates the doctrines on the mutuality of contracts and the requirement of written consent for interest rate modifications, emphasizing the balance of fairness in contractual agreements. Escalation clauses are valid only when they adhere to the principles of reasonability and consensuality.
### Class Notes:
– **Mutuality in Contracts**: Contracts must bind both parties equally; obligations cannot be left to the discretion of one party alone.
– **Escalation Clauses**: Legal and valid if based on clear criteria, subject to legal limits, and upon written agreement of all parties.
– **Article 1956, Civil Code**: No interest shall be due unless expressly stipulated in writing.
– **P.D. 385 Foreclosure**: Government financial institutions can initiate foreclosure proceedings for loan recoveries, but basic legal principles and due process must still be honored.
### Historical Background:
The backdrop of this case includes the economic dynamics of the early ’80s in the Philippines, characterized by volatile interest rates and regulatory changes impacting loan agreements. The Supreme Court’s decision reflects an attempt to balance the interests of financial institutions with the protection of borrowers under changing economic conditions, also considering the broader context of fairness and equity in financial transactions.
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