What is a valid escalation clause?
Escalation clauses are not void per se. However, one 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. Clauses of that nature violate the principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
For this reason, we have consistently held that a valid escalation clause provides:
[1] that the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the Monetary Board; and
[2] that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause).
The RTC found that Equitable's promissory notes uniformly stated: If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as shall be determined by the bank.
Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is, it neither provided that the rate of interest would be increased only if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank we held that, because the escalation clause was annulled, the principal amount of the loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due was subject to legal interest at the rate of 12% per annum.
[1] that the rate of interest will only be increased if the applicable maximum rate of interest is increased by law or by the Monetary Board; and
[2] that the stipulated rate of interest will be reduced if the applicable maximum rate of interest is reduced by law or by the Monetary Board (de-escalation clause).
The RTC found that Equitable's promissory notes uniformly stated: If subject promissory note is extended, the interest for subsequent extensions shall be at such rate as shall be determined by the bank.Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is, it neither provided that the rate of interest would be increased only if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National Bank we held that, because the escalation clause was annulled, the principal amount of the loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due was subject to legal interest at the rate of 12% per annum.
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due. (G.R. No. 171545; December 19, 2007)
