I
QUESTION:
Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure payment, Lito executed a chattel mortgage on a Toyota Avanza and a real estate mortgage on a 200-square meter piece of property.
- Would it be legally significant – from the point of view of validity and enforceability – if the loan and the mortgages were in public or private instruments? (6%)
SUGGESTED ANSWER:
As regards the loan, it is valid and enforceable whether it is in a public or a private instrument, but the same is not true if the contract involves mortgages.
The laws do not require a contract of loan to be executed in a public instrument for its validity and enforceability. A contract of loan, once constituted, is binding between the parties.
However, a mortgage on a personal property (in this case, the car) is required to be in a public instrument to bind third persons, not for it to be valid and enforceable. On the other hand, a real estate mortgage (in this case, the land) must be in a public instrument for its validity and enforceability by virtue of Article 1358 of the New Civil Code. Under the law, if the contract involves creation, transmission, modification or extinguishment of real rights over immovables, it must appear in a public instrument. Thus, a chattel mortgage is still valid and enforceable even if it is in a private instrument, but a real estate mortgage is validly constituted only if it is in a public instrument. Article 2125 of the New Civil Code provides that it is indispensable, that the document in which the mortgage appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties. The article further provides that the persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized.
Thus, unlike a simple loan or mutuum or a chattel mortgage, a contract of real estate mortgage, to be valid and enforceable, must be executed in a public instrument and must be recorded in the Registry of Property.
II
B Bank, a large universal bank, regularly extends revolving credit lines to business establishments under what it terms as socially responsible banking and private business partnership relations. All loans that are extended to clients have a common “Escalation Clause,” to wit: “B Bank hereby reserves its right to make successive increases in interest rates in accordance with the bank’s adopted policies as approved by the Monetary Board; Provided that each successive increase shall be with the written assent of the depositor.”
[a] X, a regular client of the bank, contends that the “Escalation Clause” is unfair, unconscionable and contrary to law, morals, public policy and customs. Rule on the issue and explain. (2.5%)
[b] Suppose that the “Escalation Clause” instead reads: “B Bank hereby reserves the right to make reasonable increases in interest rates in accordance with bank policies as approved by the Monetary Board; Provided, there shall be corresponding reasonable decreases in interest rates as approved by the Monetary Board.” Would this be valid? Explain. (2.5%)
SUGGESTED ANSWER:
[a] The “escalation clause” is valid because each successive increase shall be with the written assent of the depositor. This stipulation does not violate the principle of mutuality of contracts and it would only have been void if the supposed consent is given prior to the increase in interest rate.
[b] An escalation clause with a de-escalation clause is valid provided that the client’s consent is still secured prior to any increase in interest rate; otherwise, the escalation clause is void.