TL;DR

The Supreme Court ruled that banks cannot unilaterally increase interest rates on loans without the borrower’s explicit consent, upholding the principle of mutuality of contracts. In this case, Solidbank improperly raised interest rates on Momarco Import Co.’s loans, leading to an invalid foreclosure. The Court ordered Solidbank to recalculate the loan based on the original agreed interest rate and refund the excess from the foreclosure sale to the borrowers. This decision underscores that loan agreements require mutual consent for changes, especially in critical terms like interest rates, protecting borrowers from arbitrary rate hikes and ensuring fairness in lending practices.

Mortgage Mayhem: When Banks Change the Deal Mid-Loan

Spouses Florante and Luzviminda Jonsay, along with their company Momarco Import Co., Inc., found themselves in a financial bind after taking out loans from Solidbank. Momarco, an animal feed business, secured loans in 1995 and 1997, totaling P60 million, using their land in Calamba as collateral. The initial interest rate was 18.75% per year, but the loan agreement included an escalation clause allowing Solidbank to adjust rates based on Central Bank changes. Without prior notice, Solidbank hiked the interest to as high as 30%. When Momarco faced financial difficulties and defaulted, Solidbank foreclosed on their property. The Jonsays contested the foreclosure, arguing that the interest rate hikes were illegal and the foreclosure process flawed. This case highlights the critical issue of fairness and mutuality in loan contracts, particularly concerning interest rate adjustments.

The Regional Trial Court (RTC) initially sided with the Jonsays, declaring the foreclosure void, reducing the interest rate to 12%, and awarding damages. The RTC found the mortgage contracts to be contracts of adhesion, noting the excessive interest rates and procedural defects in the foreclosure. However, the Court of Appeals (CA) initially affirmed the RTC but then reversed course in an Amended Decision, validating the foreclosure. The CA’s turnaround hinged on a re-evaluation of the publication of the foreclosure notice and the presumption of regularity in foreclosure proceedings. This flip-flop in the CA underscored the complexities of foreclosure law and the importance of procedural and contractual fairness.

The Supreme Court, in its final review, sided with the original RTC ruling in part, albeit with modifications. The Court emphasized that while foreclosure proceedings carry a presumption of regularity, this presumption can be overturned by evidence of irregularity, which the Jonsays failed to sufficiently provide regarding publication. However, the Court firmly addressed the issue of unilateral interest rate increases. It cited Article 1308 of the Civil Code, which embodies the principle of mutuality of contracts, stating that a contract must bind both parties, and its validity or compliance cannot be left to the will of one party. The Court reiterated established jurisprudence that escalation clauses granting banks the power to unilaterally increase interest rates without the borrower’s express consent are void.

The Supreme Court referenced numerous precedents, including Philippine National Bank v. CA and New Sampaguita Builders Construction, Inc. (NSBCI) v. PNB, to reinforce the principle that interest rate changes must be mutually agreed upon. The Court quoted New Sampaguita, condemning as the “zenith of farcicality” contracts allowing unilateral rate hikes, emphasizing that such clauses negate mutuality and unfairly disadvantage borrowers. While acknowledging the validity of escalation clauses in general to maintain economic stability, the Court stressed that these clauses cannot grant lenders unchecked power to arbitrarily raise rates.

In applying these principles to the Jonsays’ case, the Supreme Court upheld the validity of the foreclosure proceedings regarding publication, overturning the CA’s initial decision on this point. However, it agreed with the RTC and the CA’s initial decision that the unilateral interest rate increases were invalid. The Court recalculated the loan based on the originally stipulated interest rate of 18.75% per annum, rejecting both Solidbank’s inflated rates and the RTC’s reduction to 12%. The Court reasoned that the initially agreed rate of 18.75% was not inherently unconscionable, especially considering prevailing market rates at the time of the loan.

Furthermore, the Supreme Court adjusted the attorney’s fees charged by Solidbank, reducing them from P3,600,000 to 1% of the loan obligation, or P675,512.17, based on quantum meruit. After recalculating the total amount due, including the original interest rate and reduced attorney’s fees, the Court determined that Solidbank’s winning bid at the foreclosure sale exceeded the actual debt. Consequently, Solidbank was ordered to refund the excess amount of P14,100,271.05 to the Jonsays, plus interest. This ruling demonstrates the Court’s commitment to ensuring fairness in foreclosure proceedings and protecting borrowers from abusive lending practices, even while upholding the lender’s right to foreclose when justified.

FAQs

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Spouses Jonsay v. Solidbank, G.R. No. 206459, April 06, 2016