## FACTS:

Petitioner-spouses filed an action for Injunction with Damages against respondent Land Bank of the Philippines before the Regional Trial Court (RTC) of Manila, alleging that the bank unilaterally raised the interest rate on their housing loan by reason of the voluntary resignation of the borrower. Both parties submitted the case for decision based on a joint stipulation of facts. The stipulation stated that before Gilda Florendo, petitioner, voluntarily resigned from the bank, she applied for a housing loan of P148,000. The loan was granted and a Housing Loan Agreement, Real Estate Mortgage, and Promissory Note were executed. Subsequently, the bank increased the interest rate on the loan from 9% per annum to 17%, effective from March 19, 1985. The bank notified the borrowers of the increase in a letter dated June 7, 1985, to which the borrowers protested. Despite the increase, the petitioners continued to pay the original monthly installment. The trial court ruled in favor of the bank, upholding the validity of the interest rate increase. The Court of Appeals affirmed with modification the decision of the trial court, and the petitioners appealed to the Supreme Court. The key issue in the case is whether the bank had a valid and legal basis to impose an increased interest rate on the petitioners' housing loan.

ISSUES

The primary issue in the case is whether the respondent bank had a valid and legal basis to impose an increased interest rate on the petitioners' housing loan based on the following grounds:

1. Validity of the escalation clause in the contracts.

2. Retroactive enforcement of management committee (ManCom) resolution against an employee who resigned.

3. Compliance with Central Bank regulations and the Usury Law regarding escalation clauses.

4. Observance of contractual mutuality and fairness.

RULING

The Supreme Court held that:

• The escalation clause cited in the case did specifically allow for the adjustment of interest rates in line with the prevailing rules and regulations of the Central Bank, granting the bank legal ground to modify the interest rate.

• ManCom Resolution No. 85-08, which adjusted interest rates based on employee resignation, was not a valid trigger for an increase in interest under the existing clauses because it was neither a Central Bank issuance nor included as a condition in the loan agreement.

• Past Central Bank issuances, which were already effective at the time of the loan agreement, did not support the application of the escalation clause under the conditions cited by the respondent bank.

• Unilateral determination of interest rates based on ManCom resolutions without the inclusion of a Central Bank-approved increase or a valid contractual provision for such adjustment violates the principle of mutuality essential in contracts.

The Court reversed and set aside the decision of the Court of Appeals, maintaining the interest rate at 9% per annum and the monthly amortization at P1,248.72.

PRINCIPLES

1. Escalation Clauses: These are valid stipulations in commercial contracts aimed at maintaining fiscal stability and safeguarding the value of money in long-term contracts.

2. Principle of Mutuality in Contracts: Contracts must be mutual and consensual, with obligations and conditions agreed upon by both parties. Any clause that allows one party to unilaterally alter terms is inherently void.

3. Central Bank Regulations on Interest Rates: Escalation clauses must be clearly supported by specific and valid Central Bank regulations or laws effective at the time of their application.

4. Ineffectiveness of the Usury Law (post CB Circular 905): The Usury Law does not apply to interest rates following the issuance of CB Circular 905, which deregulated interest caps.

5. Contract of Adhesion and Interpretation Against Drafter: In contracts of adhesion, any ambiguity in the contractual terms is generally interpreted against the party who drafted the contract.