Villa Crista Monte Realty & Development Corporation v. Equitable PCI Bank, G.R. No. 208336, 21 November 2018

 

The agreement between the parties on the imposition of increasing interest rates on the loan is commonly known as the escalation clause. Generally, the escalation clause refers to the stipulation allowing increases in the interest rates agreed upon by the contracting parties. There is nothing inherently wrong with the escalation clause because it is validly stipulated in commercial contracts as one of the means adopted to maintain fiscal stability and to retain the value of money in long term contracts. In short, the escalation clause is not void per se.

Yet, the escalation clause that "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. Such escalation clause violates the principle of mutuality of contracts and should be annulled. To prevent or forestall any one-sidedness that the escalation clause may cause in favor of the creditor, therefore, Presidential Decree No. 1684

Accordingly, the Court has ruled in Banco Filipino Savings and Mortgage Bank v. Judge Navarro that there should be a corresponding de­ escalation clause that authorizes a reduction in the interest rates corresponding to downward changes made by law or by the Monetary Board. Verily, the escalation clause, to be valid, should specifically provide: (1) that there can be an increase in interest rates if allowed by law or by the Monetary Board; and (2) that there must be a stipulation for the reduction of the stipulated interest rates in the event that the applicable maximum rates of interest are reduced by law or by the Monetary Board. The latter stipulation ensures the mutuality of contracts, and is known as the de-escalation clause.