JUICO v. BSPRuling: The escalation clause is void because it granted China Banking the power to impose an increased rate of interest without a written notice to the Juico couple and their written consent. Definition: Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties.Doctrine: There is nothing inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. But 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. New Sampaguita Builders Construction, Inc. v. Philippine National Bank(July 30, 2004) Note: The Supreme Court rulings on escalation clauses also apply to credit card agreements. Polotan, Sr. v. CA (Eleventh Div.), 357 Phil. 250 (1998)Facts: Spouses Ignacio and Alice Juico got a loan from China Banking Corporation as evidenced by 2 promissory notes. The loan was secured by a Real Estate Mortgage over the Juico couples property located at White Plains, Quezon City. The notes contained the following escalation clause stating that the interest rate would change every month based on the prevailing market rate: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.The Juicos failed to pay the monthly amortizations due. As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63 representing the principal, interests, penalties and attorneys fees. The mortgaged property was sold at public auction, with China Bank as the highest bidder for the amount of Php 10,300,000. After the auction, China Bank filed a collection case with the Regional Trial Court (RTC) of Makati City for Php 8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage debt. In their Answer, the Juicos admitted their debt but claimed that the principal of the loan was already paid when the mortgaged property was extrajudicially foreclosed and sold for Php 10,300,000. They contended that should they be held liable for any deficiency, it should be only for Php 55,000 representing the difference between the total outstanding obligation of Php 10,355,000 and the bid price of Php 10,300,000. At the trial, China Bank presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She testified that she handled the account of the Juicos and assisted them in processing their loan application. She called them monthly to inform them of the prevailing rates to be used in computing interest due on their loan. On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the prevailing market rate and she notified the Juicos of the prevailing rate by calling them monthly before their account becomes past due. When asked if there was any written authority from the Juicos to increase the interest rate unilaterally, Ms. Yu answered that they signed a promissory note indicating that they agreed to pay interest at the prevailing rate. In defense, Ignacio Juico testified that before the loans release, he was required to sign a blank promissory note and was informed that the interest rate on the loan will be based on prevailing market rates. On cross-examination, Ignacio testified that he is a Doctor of Medicine and also engaged in the business of distributing medical supplies. Ignacio admitted having read the promissory notes and that he is aware of his obligation under them before he signed them.Supreme Court rules partly for the Juicos and partly for China BankThe Juico couple appealed to the Supreme Court. According to the Juicos, the issues are: (1) The interest rates imposed by China Bank are not valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas regulation or any regulation that was passed by an appropriate government entity. They insist that the interest rates were unilaterally imposed by the bank and thus violate the principle of mutuality of contracts. (2) The escalation clause in the promissory notes does not give China Bank the unbridled authority to increase the interest rate unilaterally. Any change must be mutually agreed upon. The Courts ruling in favor of the Juicos: (1) Escalation clauses are not necessarily void. These clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. (2) The Juicos were not coerced into signing the promissory notes and they did not protest the new rates imposed on their loan. Nevertheless, an escalation clause granting 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 this nature violates the principle of mutuality of contracts under Article 1308 of the New Civil Code. (3) 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. (4) Changes in the rate of interest for loans under an escalation clause must be the result of an agreement between the parties. (5) China Bank should have given a detailed billing statementbased on the new imposed interest with corresponding computation of the total debt. The statement would have enabled the Juicos to make an informed decision. China Bank should also have provided an appropriate form to be signed by the Juicos to indicate their conformity to the new rates. The Courts ruling in favor of China Bank: The Court ordered the Juicos to pay China Bank Php 4,761 ,865. 79 (instead of Php 8,901,776.63, the amount originally claimed) representing the amount of deficiency inclusive of interest, penalty charge and attorneys fees.

Sps. Mamaril vs. Boy Scout of the Philippines | G.R. No. 179382 | January 14, 2013Facts: PUJ operators Sps. Mamaril would park their 6 passenger jeepneys every night at BSPs compound in Malate, Manila for a fee of P300.00 per month for each unit. One day, one of the vehicles was missing and was never recovered. According to the security guards Pea and Gaddi of AIB Security Agency with whom BSP had contracted for its security and protection, a male person who looked familiar to them took the subject vehicle out of the compound. Sps. Mamaril prayed that Pea and Gaddi, together with AIB and BSP, be held liable for: (a) the value of the subject vehicle; (b) amount representing daily loss of income/boundary reckoned from the day the vehicle was lost; (c) exemplary damages; (d) moral damages; (e) attorney's fees; and (f) cost of suit.BSP denied any liability contending that not only did Sps. Mamaril directly deal with AIB with respect to the manner by which the parked vehicles would be handled, but the parking ticket itself expressly stated that the "Management shall not be responsible for loss of vehicle or any of its accessories or article left therein." It also claimed that Sps. Mamaril erroneously relied on the Guard Service Contract. Apart from not being parties thereto, its provisions cover only the protection of BSP's properties, its officers, and employees.Issue: Whether or not BSP may be held liable for the loss of the vehicle caused by the negligence of its security guards.Held:BSP in not liable.The proximate cause of the loss of Sps. Mamaril's vehicle was the negligent act of security guards Pea and Gaddi in allowing an unidentified person to drive out the subject vehicle. The records are bereft of any finding of negligence on the part of BSP. Neither will the vicarious liability of an employer under Article 2180 of the Civil Code apply in this case. Pea and Gaddi were assigned as security guards by AIB to BSP pursuant to the Guard Service Contract. No employer-employee relationship existed between BSP and the security guards assigned in its premises. Sps. Mamaril are not parties to the Guard Service Contract. Guard Service Contract between defendant-appellant BSP and defendant AIB Security Agency is purely between the parties therein.Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or byprovision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.Thus, in order that a third person benefited by the second paragraph of Article 1311, referred to as a stipulation pour autrui, may demand its fulfillment, the following requisites must concur: (1) There is a stipulation in favor of a third person; (2) The stipulation is a part, not the whole, of the contract; (3) The contracting parties clearly and deliberately conferred a favor to the third person - the favor is not merely incidental; (4) The favor is unconditional and uncompensated; (5) The third person communicated his or her acceptance of the favor before its revocation; and (6) The contracting parties do not represent, or are not authorized, by the third party. However, none of the foregoing elements obtains in this case.There is absolutely nothing in the said contract that would indicate any obligation and/or liability on the part of the parties therein in favor of third persons such as herein plaintiffs-appellees.Moreover, the Court concurs with the finding of the CA that the contract between the parties herein was one of lease as defined under Article 1643 of the Civil Code. It has been held that the act of parking a vehicle in a garage, upon payment of a fixed amount, is a lease. The agreement with respect to the ingress and egress of Sps. Mamaril's vehicles were coordinated only with AIB and its security guards, without the knowledge and consent of BSP. Accordingly, the mishandling of the parked vehicles that resulted in herein complained loss should be recovered only from the tort feasors (Pea and Gaddi) and their employer, AIB; and not against the lessor, BSP.Notes: Why is BSP not being held liable in culpa-contractual? The reason is because the lease agreement rate was too low that it cannot be inferred that the lessor is the insurer of the cars parked in its premises.Why is BSP not liable in quasi-contract? BSP is not the tortfeasor; the guards are the torfeasors.

Development Bank of the Philippines v. CA

FACTS: On March 1968, Development Bank of the Philippines (DBP) granted to respondents Philippine United Foundry and Machineries Corporation and Philippine Iron Manufacturing Company, Inc. an industrial loan in the amount of P2,500,000 consisting of P500,000 in cash and P2,000,000 in DBP Progress Bonds. The loan was evidenced by a promissory note dated June 26, 1968 and secured by a mortgage executed by respondents over their present and future properties such as buildings, permanent improvements, various machineries and equipment for manufacture.

Subsequently, DBP granted to respondents another loan in the form of a five-year revolving guarantee amounting to P1,700,000 which was reflected in the amended mortgage contract dated November 20, 1968. According to respondents, the loan guarantee was extended to them when they encountered difficulty in negotiating the DBP Progress Bonds. Respondents were only able to sell the bonds in 1972 or about five years from its issuance for an amount that was 25% less than its face value.On September 10, 1975, the outstanding accounts of respondents with DBP were restructured in view of their failure to pay. Thus, the outstanding principal balance of the loans and advances amounting to P4,655,992.35 were consolidated into a single account. The restructured loan was evidenced by a new promissory note6 dated November 12, 1975 payable within seven years, with partial payments on the principal to be made beginning on the third year plus a 12% interest per annum payable every month.On the other hand, all accrued interest and charges due amounting to P3,074,672.21 were denominated as"Notes Taken for Interests" and evidenced by a separate promissory note dated November 12, 1975. The following annotation appears at the bottom portion of the note:This promissory note represents all accrued interests and charges which are taken up as "NOTES TAKEN FOR INTEREST" due on the accounts of PHILIMCO and PHUMACO approved under Bd. Res. No. 3577, s. of 1975. This note is secured by (a) mortgage on the existing assets of the firm.Both notes provided additional charges.Notwithstanding the restructuring, respondents were still unable to comply with the terms and conditions of the new promissory notes. As a result, respondents requested DBP to refinance the matured obligation. The request was granted by DBP, pursuant to which three foreign currency denominated loans sourced from DBPs own foreign borrowings were extended to respondents on various dates between 1980 and 1981. These loans were secured by mortgages on the properties of respondents and were evidenced by the following promissory notes:Face Value Maturity Date Interest Rate Per Annum(1) Promissory Note dated December 11, 1980 $661,330 December 15, 1990 3% over DBPs borrowing rate16(2) Promissory Note dated June 5, 1981 $666,666 June 23, 1991 3% over DBPs borrowing rate18(3) Promissory Note dated Decembr 16, 1981 $486,472.37 December 31, 1982 4% over DBPs borrowing costApart from the interest, the promissory notes imposed additional charges and penalties if respondents defaulted on their payments. The notes dated December 11, 1980 and June 5, 1981 specifically provided for a 2% annual service fee computed on the outstanding principal balance of the loans as well as additional interest and penalty charges on the loan amortizations or portions in arrears. Under these two notes, respondents also bound themselves to pay bank advances for insurance premiums, taxes, litigation and acquired assets expenses and other out-of-pocket expenses not covered by inspection and processing fees.The note dated December 16, 1981, on the other hand, provided for the interest and penalty charges on loan amortizations or portions of it in arrears. Respondents were likewise bound to pay bank advances for insurance premiums, taxes, litigation and acquired assets expenses and other out-of-pocket expenses not covered by inspection and processing fees. In October 1985, DBP initiated foreclosure proceedings upon its computation that respondents loans were in arrears by P62,954,473.68. According to DBP, thisfigure already took into account the intermittent payments made by respondents between 1968 and 1981 in the aggregate amount of P5,150,827.71.

ISSUE: 1. Whether or not there was vitiation of consent on the part of the respondents.2. Whether the CA violated the principle of law that contracts take effect only between the parties as it linked respondents contracts with the AFP with respondents loans with DBP.

HELD: 1. NO. Respondents allegation that they had no "choice" but to sign is tantamount to saying that DBP exerted undue influence upon them. The Court is mindful that the law grants an aggrieved party the right to obtain the annulment of a contract on account of factors such as mistake, violence, intimidation, undue influence and fraud which vitiate consent.42 However, the fact that the representatives were "forced" to sign the promissory notes and mortgage contracts in order to have respondents original loans restructured and to prevent the foreclosure of their properties does not amount to vitiated consent.The financial condition of respondents may have motivated them to contract with DBP, but undue influence cannot be attributed to DBP simply because the latter had lent money. The concept of undue influence is defined as follows:

There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.

While respondents were purportedly financially distressed, there is no clear showing that those acting on their behalf had been deprived of their free agency when they executed the promissory notes representing respondents refinanced obligations to DBP. For undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to destroy the latters free agency, making such party express the will of another rather than its own. The alleged lingering financial woes of a debtor per secannot be equated with the presence of undue influence.44Corollarily, the threat to foreclose the mortgage would not in itself vitiate consent as it is a threat to enforce a just or legal claim through competent authority.45 It bears emphasis that the foreclosure of mortgaged properties in case of default in payment of a debtor is a legal remedy given by law to a creditor.46 In the event of default by the mortgage debtor in the performance of the principal obligation, the mortgagee undeniably has the right to cause the sale at public auction of the mortgaged property for payment of the proceeds to the mortgagee.

2. YES. It must be emphasized that a party to a contract cannot deny its validity after enjoying its benefits without outrage to ones sense of justice and fairness. Where parties have entered into a well-defined contractual relationship, it is imperative that they should honor and adhere to their rights and obligations as stated in their contracts because obligations arising from it have the force of law between the contracting parties and should be complied with in good faith.51As a rule, a court in such a case has no alternative but to enforce the contractual stipulations in the manner they have been agreed upon and written. Courts, whether trial or appellate, generally have no power to relieve parties from obligations voluntarily assumed simply because their contract turned out to be disastrous or unwise investments.

Thus, respondents cannot be absolved from their loan obligations on the basis of the failure of the AFP to fulfill its commitment under the manufacturing agreement53 entered by them allegedly upon the prompting of certain AFP and DBP officials. While it is true that the DBP representatives appear to have been aware that the proceeds from the sale to the AFP were supposed to be applied to the loan, the records are bereft of any proof that would show that DBP was a party to the contract itself or that DBP would condone respondents credit if the contract did not materialize. Even assuming that the AFP defaulted in its obligations under the manufacturing agreement, respondents cause of action lies with the AFP, and not with DBP or PMO. The loan contract of respondents is separate and distinct from their manufacturing agreement with the AFP.

Incidentally, the CA sustained the validity of a loan obligation but annulled the mortgage securing it on the ground of failure of consideration. This is erroneous. A mortgage is a mere accessory contract and its validity would depend on the validity of the loan secured by it.54 Hence, the consideration of the mortgage contract is the same as that of the principal contract from which it receives life, and without which it cannot exist as an independent contract. 55 The debtor cannot escape the consequences of the mortgage contract once the validity of the loan is upheld.AYALA INC VS. RAY BURTON CORPGR No. 163075January 23, 2006

FACTS:On December 22, 1995, Ayala Inc. and Ray Burton Corp. entered into a contract denominated as a Contract to Sell, with a Side Agreement of even date. In these contracts, petitioner agreed to sell to respondent a parcel of land situated at Muntinlupa City. The purchase price of the land is payable as follows:

On contract date: 26%, inclusive of option moneyNot later than 1-6-96: 4%

In consecutive quarterly installments for a period of 5 years: 70%

Respondent paid thirty (30%) down payment and the quarterly amortization. However in 1998, respondent notified petitioner in writing that it will no longer continue to pay due to the adverse effects of the economic crisis to its business. Respondent then asked for the immediate cancellation of the contract and for a refund of its previous payments as provided in the contract.

Petitioner refused to cancel the contract to sell. Instead, it filed with the RTC Makati City, a complaint for specific performance against respondent, demanding from the latter the payment of the remaining unpaid quarterly installments inclusive of interest and penalties.Respondent, in its answer, denied any further obligation to petitioner, asserting that it (respondent) notified the latter of its inability to pay the remaining installments. Respondent invoked the provisions of paragraphs 3 and 3.1 of the contract to sell providing for the refund to it of the amounts paid, less interest and the sum of 25% of all sums paid as liquidated damages.

The trial court rendered a Decision in favor of Ayala and holding that respondent transgressed the law in obvious bad faith. It ordered the defendant ordered to pay Ayala the unpaid balance, interest agreed upon, and penalties. Defendant is further ordered to pay plaintiff for attorneys fees and the costs of suit. Upon full payment of the aforementioned amounts by defendant, plaintiff shall, as it is hereby ordered, execute the appropriate deed of absolute sale conveying and transferring full title and ownership of the parcel of land subject of the sale to and in favor of defendant.

On appeal, the CA rendered a Decision reversing the trial courts Decision. Hence, the instant petition for review on certiorari.

ISSUE:1. WON respondents non-payment of the balance of the purchase price gave rise to a cause of action on the part of petitioner to demand full payment of the purchase price; and

2. WON Ayala should refund respondent the amount the latter paid under the contract to sell.

HELD:The petition is denied. The CA decision is affirmed.

At the outset, it is significant to note that petitioner does not dispute that its December 22, 1995 transaction with respondent is acontract to sell. Also, the questioned agreement clearly indicates that it is a contract to sell, not a contract of sale. Paragraph 4 of the contract provides:

4. TITLE AND OWNERSHIP OF THE PROPERTY. The title to the property shall transfer to the PURCHASER upon payment of the balance of the Purchase Price and all expenses, penalties and other costs which shall be due and payable hereunder or which may have accrued thereto. Thereupon, the SELLER shall execute a Deed of Absolute Sale in favor of the PURCHASER conveying all the SELLERS rights, title and interest in and to the Property to the PURCHASER

1. NO. Considering that the parties transaction is a contract to sell, can petitioner, as seller, demand specific performance from respondent, as buyer?

Blacks Law Dictionary defined specific performance as (t)he remedy of requiring exact performance of a contract in the specific form in which it was made, or according to the precise terms agreed upon. The actual accomplishment of a contract by a party bound to fulfill it.

Evidently, before the remedy of specific performance may be availed of, there must be abreachof the contract.

Under a contract to sell, the title of the thing to be sold is retained by the selleruntil the purchaser makes full paymentof the agreed purchase price. The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the obligation of the petitioners to sell and deliver the title to the property, rendered the contract to sell ineffective and without force and effect; failure of which is not really a breach, serious or otherwise, but an event that prevents the obligation of the petitioners to convey title from arising, in accordance with Article 1184 of the Civil Code .The parties stand as if the conditional obligation had never existed. Article 1191 of the New Civil Code will not apply because it presupposes an obligation already extant. There can be no rescission of an obligation that is still non-existing, the suspensive condition not having happened Thus, a cause of action for specific performance does not arise.

Here, the provisions of the contract to sell categorically indicate that respondents default in the payment of the purchase price is considered merely as an event, the happening of which gives rise to the respective obligations of the parties mentioned therein, thus:

3. EVENT OF DEFAULT. The followingeventshall constitute an Event of Default under this contract: the PURCHASER fails to pay any installment on the balance, for any reason not attributable to the SELLER, on the date it is due, provided, however, that the SELLER shall have the right to charge the PURCHASER a late penalty interest on the said unpaid interest at the rate of 2% per month computed from the date the amount became due and payable until full payment thereof.

3.1. If the Event of Default shall have occurred, then at any time thereafter, if any such event shall then be continuing for a period of six (6) months, the SELLER shall have the right tocancelthis Contract without need of court declaration to that effect by giving the PURCHASER a written notice of cancellation sent to the address of the PURCHASER as specified herein by registered mail or personal delivery. Thereafter, the SELLER shallreturnto the PURCHASER the aggregate amount that the SELLER shall have received as of the cancellation of this Contract, less: (i) penalties accrued as of the date of such cancellation, (ii) an amount equivalent to twenty five percent(25%)of the total amount paid as liquidated damages, and (iii) any unpaid charges and dues on the Property. Any amount to be refunded to the PURCHASER shall be collected by the PURCHASER at the office of the SELLER. Upon notice to the PURCHASER of such cancellation, the SELLER shall be free to dispose of the Property covered hereby as if this Contract had not been executed. Notice to the PURCHASER sent by registered mail or by personal delivery to its address stated in this Contract shall be considered as sufficient compliance with all requirements of notice for purposes of this Contract.14Therefore, in the event of respondents default in payment, petitioner, under the above provisions of the contract, has the right to retain an amount equivalent to 25% of the total payments. As stated by the CA, petitioner having been informed in writing by respondent of its intention not to proceed with the contract prior to incurring delay in payment of succeeding installments, the provisions in the contract relative to penalties and interest find no application.

2. YES. The CA is correct that with respect to the award of interest, petitioner is liable to pay interest of 12%per annumupon the net refundable amount due from the time respondent made the extrajudicial demand upon it to refund payment under the Contract to Sell, pursuant to our ruling inEastern Shipping Lines, Inc. v. Court of Appeals.

NOTES:1. The real nature of a contract may be determined from the express terms of the written agreement and from the contemporaneous and subsequent acts of the contracting parties. In the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued.5If the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.6If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.7The denomination or title given by the parties in their contract is not conclusive of the nature of its contents.

2.Lim v. Court of Appeals(182 SCRA 564 [1990])is most illuminating. In the said case, a contract to sell and a contract of sale were clearly and thoroughly distinguished from each other.CONTRACT TO SELL the ownership is reserved in the seller and is not to pass until the full payment of the purchase price is made full payment is a positive suspensive condition. the title remains in the vendor if the vendee does not comply with the condition precedent of making payment at the time specified in the contractCONTRACT OF SALE the title passes to the buyer upon the delivery of the thing sold non-payment of the price is a negative resolutory conditionvendor has lost and cannot recover the ownership of the property until and unless the contract of sale is itself resolved and set aside