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RepublicofthePhilippines
SUPREMECOURT
Manila

THIRDDIVISION

G.R.No.82082March25,1988

INSULARBANKOFASIAANDAMERICA,plaintiffappellant,
vs.
SPOUSESEPIFANIASALAZARandRICARDOSALAZAR,defendantsappellees.

GUTIERREZ,JR.,J.:

ThisisanappealbytheInsularBankofAsiaandAmerica(IBAA)fromthejudgmentoftheRegionalTrialCourtof
Leyte in Civil Case No. 6932 for collection of a sum of money with preliminary attachment. The appeal was
originallybroughttotheCourtofAppealsbutwascertifiedtousbythattribunalbecauseitraisesonlyaquestion
oflaw.

Thefactsarenotdisputed.

On November 22, 1978, defendantsappellees Epifania Salazar and Ricardo Salazar obtained a loan from the
plaintiffappellant in the amount of Forty Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before
December12,1980.Thisloantransactionwasevidencedbyapromissorynotewherethedefendantsappellees
boundthemselvesjointlyandseverallytopaytheamountwithinterestat19%perannumandwiththeexpress
authoritytoincreasewithoutnoticetherateofinterestuptothemaximumallowedbylawandsubjectfurtherto
penaltychargesorliquidateddamagesupondefaultequivalentto2%permonthonanyamountdueandunpaid.
Intheeventtheaccountwasreferredtoanattorneyforcollection,thedefendantsappelleeswerealsoboundto
pay25%ofanyamountdueasattorney'sfeesplusexpensesoflitigationandcosts.

Inaccordancewiththeagreement,theplaintiffappellantincreasedtherateofinterestto21%pursuanttoCentral
BankCircularNo.705datedDecember1,1979.

Thepromissorynotematuredbutthedefendantsappelleesfailedtopaytheiraccount.Itwasonlyafterseveral
demandsthatthedefendantsappelleeswereabletomakepartialpayment.AsofNovember25,1983,theywere
able to pay a total of P68,676.75 which payments were applied to partially satisfy the penalty and interest
charges.

On September 12, 1984, the plaintiffappellant filed a complaint with the Regional Trial Court alleging that the
defendantsappellees were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984. including
interestat21%perannumpenaltycharges,andattorney'sfees.

AtthepretrialonOctober31,1984,thepartiesandtheircounselsappeared.Thedefendantspousesadmitted
the execution of the promissory note in consideration of P48,050.00. The trial court then rendered a summary
judgmentthedispositiveportionofwhichreads:

WHEREFORE, judgment is hereby ordered in favor of the plaintiff ordering the defendant spouses
Ricardo Salazar and Epifania Salazar to pay Insular Bank of Asia and America (IBAA) the sum of
Eleven Thousand Two Hundred Fifty Three Pesos and Twenty Five Centavos ( P11,253.25 ), with
interestthereonattherateof19%perannumfromthefilingofthecomplaintonSeptember12,1984
untilfullypaid.Thedefendantsarefurtherorderedtopaytheplaintiffattorney'sfeesintheamountof
oneThousandPesos(P1,000.00)andtopaythecosts.(p.4,PlaintiffAppellant'sBrief).

Plaintiffappellantnowraisesthefollowingassignederrors:

I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFFAPPELLANT PENALTY CHARGES OR

LIQUIDATEDDAMAGESINTHEAMOUNTOF2%PERMONTHONALLAMOUNTSDUEANDUNPAID
IITHELOWERCOURTERREDINNOTAWARDINGINTERESTONTHELOANAT21%PERANNUM.

III THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF OBLIGATION DUE FROM
DEFENDANTSAPPELLEESAPPELLEESINFAVOROFPLAINTIFFAPPELLANT

III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF APPELLANT ATTORNEY'S FEES
EQUIVALENTTO25%OFTHEAMOUNTDUEANDEXPENSESOFLITIGATIONand

IVTHELOWERCOURTERREDINNOTORDERINGDEFENDANTSAPELLEESTOJOINTLYANDSEVERALLY
PAYTHEOBLIGATION.(pp.45,PlaintiffAppellant'sBrief)

TheEscalationClauseprovidedinthepromissorynotereads:

Theinteresthereinchargedshallbesubjecttoin,withoutnotice,dependingonwhateverpolicyIBAA
may in the future adopt conformable to law, especially to compensate for any in Central Bank
interestsorrediscountingrates.

Findingstrengthintheargumentthatthepromissorynoteisthecontractbetweenthepartiesand,underthelaw,
obligationsarisingfromcontractshavetheforceoflawbetweentheparties,theplaintiffappellantincreasedthe
interestrateto21%perannumeffectiveDecember1,1979pursuanttoCentralBankCircularNo.705.

In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L46591, July 28,1987), the
interestratemaynotbeincreasedbytheplaintiffappellantintheinstantcase.Itisthenilethatescalationclauses
arevalidstipulationsincommercialcontractstomaintainfiscalstabilityandtoretainthevalueofmoneyinlong
termcontracts.However,theenforceabilityofsuchstipulationsaresubjecttocertainconditions.

IntheBancoFilipinocase,theborrowerquestionedtheadditionalinterestchargesontheloanofP41,300.00she
obtainedwhentheinterestrateswereincreasedfrom12%to17%perCentralBankCircularNo.494,issuedon
January2,1976.InaletterwrittenbytheCentralBanktotheborrower,someclarificationsweremade.Pertinent
portionsoftheletterread:

Inthisconnection,pleasebeadvisedthattheMonetaryBoard,initsResolutionNo.1155datedJune
11, 1976 adopted the following guidelines to govern interest rate adjustments by banks and non
banks performing quasi banking functions on loans already existing as of January 3, 1976, in the
lightofCentralRankCircularsNos.492498:

1Onlybanksandnonbankfinancialintermediariesperformingquasibankingfunctionsmayinterest
ratesonIalreadyexistingasofJanuary2,1976,providedthat:

a. The pertinent loan contracts/documents contain escalation clauses expressly

authorizing lending bank or nonbank performing quasibanking functions to increase
therateofintereststipulatedinthecontract,intheeventthatanylaworCentralBank
regulationispromulgatedincreasingthemaximuminterestrateforloansand

b. Said loans were directly granted by them and the remaining maturities thereof were
morethan730daysasofJanuary2,1976,and

2.TheincreaseintherateofinterestcanbeeffectiveonlyasofJanuary2,1976oronalaterdate.
(Emphasissupplied)

Moreover, in its comment and supplemental comment submit, ted upon orders of this Court, the Central Bank
tookthepositionthattheissuanceofitscircularsisavalidexerciseofitsauthoritytoprescribemaximumratesof
interest and based on the general principles of contract, the Escalation Clause is a valid provision in the loan
agreement provided that 41) the increased rate imposed or charged by petitioner does not exceed the ceiling
fixedbylawortheMonetaryBoard(2)theincreaseismadeeffectivenotearlierthantheeffectivityofthelawor
regulationauthorizingsuchanincreaseand(3)theremainingmaturitiesoftheloansaremorethan730daysas
oftheeffectivityofthelaworregulationauthorizingsuchanincrease.(Emphasissupplied)

Inthecaseatbar,theloanwasobtainedonNovember21,1978andwaspayableonorbeforeNovember12,
1980. Central Bank Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1,
1979.Obviously,asofthisdate,December1,1979,theremainingmaturityoftheloanwaslessthan730days.
Hence,theplaintiffappellant'ssecondassignmentoferroriswithoutmerit.

Withrespecttothepenaltyclause,wehaveupheldthevalidityofsuchagreementsinseveralcases.AstheCourt
statedinthecaseofGovernmentServiceInsuranceSystemv.Courtofappeals(145SCRA311,321):

In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement
upon a penalty apart from the interest. Should there be such an agreement, the penalty does not
 include the interest, and as such the two are different and distinct things which may be demanded
separately.ReiteratingthesameprincipleinthelatercaseofEquitableBankingCorp.(supra),where
thisCourtheldthatthestipulationaboutpaymentofsuchadditionalratepartakesofthenatureofa
penaltyclause,winchissanctionedbylaw.

InthecaseofEquitableBankingCorporationv.Liwanag(32SCRA293,297),theCourtexplained:

xxxxxxxxx

... We have not overlooked the 14% interest that appellant has been sentenced to pay. This may
appeartobeusurious,butitisnotso.Theratestipulatedwas9%,subject,however,toanadditional
rateof5%,intheeventofdefault.Thestipulationaboutpaymentofsuchadditionalratepartakesof
thenatureofapenaltyclause,whichissanctionedbylaw,(Art.1226,CivilCodeofthePhilippines),
although, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Art
1229,CivilCodeofthePhilippines)....

Admittedly, the defendantsappellees in the instant case failed to pay the loan on the due date. However, with
earnestefforts,theytriedtopaytheloanlittlebylittlesothatasofNovember25,1983,atotalofP68,676.75had
been paid. The plaintiffappellant, on the other hand, merely applied this amount to satisfy the penalty and
interest charges which it additionally imposed. We do not find any evidence of bad faith on the part of the
defendantsappellees in their failure to pay the loan on time. Efforts were indeed made to make good their
promise.Wenotethetrialcourt'sobservationthattheplaintiffappellantdidnotevenstateinthecomplaintthat
thedefendantsappelleeshadmadepartialpayments,makingitappearthatthespousesSalazarsrefusedtopay
the loan. In their answer with counterclaim, the defendantsappellees alleged that the bank neglected to credit
saidpaymentsinthedefendant'saccountfolioandsubjecteditasitdidtotheadditionalcharges.Furthermore,
weagreewiththetrialcourtthatthebankhasalreadyprofitedconsiderablyfromtheloan.Inaspanofaboutsix
(6) years, the bank was enriched by P 26,626.75 (p. 17, Records). The penalty charges of 2% a month are,
therefore,outofproportiontothedamageincurredbythebank.InaccordancewithArticle1229oftheCivilCode,
theCourtisconstrainedtoreducethepenaltyforbeinghighlyiniquitous

Withrespecttotheattorney'sfees,thecourtislikewiseempoweredtoreducethesameiftheyareunreasonable
or unconscionable notwithstanding the express contract for attorney's fees. The award of one thousand (
P1,000.00)pesosbythetrialcourtappearstobeenough.

ThepromissorynotesignedbythedefendantsappellantsstatesthattheloanofP42,050.00shallbearinterestat
the rate of 19% per annum. This would yield interest of P7,989.50 per annum or a total of P 46,339.10 from
November 22, 1978 to September 12, 1984, the date of filing the complaint. Penalty interest of 1% a month or
12% per annum is reasonable so that from December 12, 1980 up to September 12, 1984, penalty charges
should be P19,202.83. Considering that the defendantsappellees have paid the amount of P68,676.75, they,
therefore,owedthebanktheamountofP38,915.18whenthecomplaintwasfiled.Thereisnoindicationinthe
recordsastothefluctuationofactualinterestratesfrom1984and,therefore,weorderinterestatthelegalrateof
12%perannumontheunpaidamount.

WHEREFORE, the decision of the lower court is MODIFIED. The defendantsappellants Ricardo Salazar and
Epifania Salazar are ordered to pay Insular Bank of Asia and America (IBAA) the sum of THIRTYEIGHT
THOUSANDNINEHUNDREDPESOSandEIGHTEENCENTAVOS(P38,915.18)withinterestthereonattherate
ofTwelvePercent(12%)perannumfromthefilingofthecomplaintuntilfullypaid.

SOORDERED.

Fernan(Chairman),FelicianoandCortesJJ.,concur.

Bidin,J.,tooknopart.

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