This Supreme Court case clarifies that a waiver of demand in a promissory note is valid and enforceable, meaning borrowers can be held in default even without prior notice if they fail to meet payment obligations. However, the Court also reiterates its power to reduce excessively high interest rates to equitable levels, protecting borrowers from unconscionable loan terms. This ruling underscores the importance of carefully reviewing loan agreements and understanding the implications of waiving legal rights, while also highlighting the judiciary’s role in ensuring fairness in lending practices.

Borrower Beware: How a Loan Agreement’s Fine Print Can Cost You

Spouses Deo and Maricon Agner took out a loan from Citimotors, Inc., secured by a chattel mortgage on their Mitsubishi Adventure. The loan was later assigned to BPI Family Savings Bank. When the Agners defaulted on their payments, BPI Family Savings Bank filed a case to collect the debt. A key point of contention was the waiver of demand clause in their promissory note and the excessively high interest rate imposed. This case explores the enforceability of such waivers and the extent to which courts can intervene to protect borrowers from unfair loan terms.

The central issue revolved around the validity of the waiver of demand and the reasonableness of the interest rate. The petitioners argued that they did not receive a demand letter, and thus, could not be considered in default. However, the court pointed to the express waiver of demand in the promissory note, stating:

In case of my/our failure to pay when due and payable, any sum which I/We are obliged to pay under this note and/or any other obligation which I/We or any of us may now or in the future owe to the holder of this note or to any other party whether as principal or guarantor x x x then the entire sum outstanding under this note shall, without prior notice or demand, immediately become due and payable.

The Supreme Court has consistently upheld the validity of such waivers, referencing Article 1169 of the Civil Code, which stipulates that demand is not necessary when expressly waived by the parties. This principle was affirmed in Bank of the Philippine Islands v. Court of Appeals:

The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor demands the fulfillment of the obligation from the obligee. However, the law expressly provides that demand is not necessary under certain circumstances, and one of these circumstances is when the parties expressly waive demand. Hence, since the co-signors expressly waived demand in the promissory notes, demand was unnecessary for them to be in default.

Furthermore, the court emphasized that even the act of sending a demand letter is sufficient notice, regardless of whether the borrower actually receives it, as stipulated in the Promissory Note with Chattel Mortgage:

All correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or notifications of any judicial or extrajudicial action shall be sent to the MORTGAGOR at the address indicated on this promissory note with chattel mortgage or at the address that may hereafter be given in writing by the MORTGAGOR to the MORTGAGEE or his/its assignee. The mere act of sending any correspondence by mail or by personal delivery to the said address shall be valid and effective notice to the mortgagor for all legal purposes and the fact that any communication is not actually received by the MORTGAGOR or that it has been returned unclaimed to the MORTGAGEE or that no person was found at the address given, or that the address is fictitious or cannot be located shall not excuse or relieve the MORTGAGOR from the effects of such notice.

Regarding the high interest rate of 6% per month (72% per annum), the Court deemed it excessive and unconscionable. It referenced numerous cases establishing that stipulated interest rates of 3% per month or higher are considered iniquitous and exorbitant. While Central Bank Circular No. 905-82 removed the ceiling on interest rates, it did not grant lenders the unbridled authority to impose rates that would financially enslave borrowers. Therefore, the Court exercised its power to reduce the interest rate to a more reasonable 1% per month (12% per annum).

The Supreme Court’s decision also addressed the issue of whether the respondent violated Article 1484 of the Civil Code by pursuing both replevin and collection of a sum of money. Article 1484 provides alternative remedies to a vendor in a sale of personal property payable in installments:

ART. 1484. In a contract of sale of personal property, the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee’s failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

In this case, the Court distinguished it from Elisco Tool Manufacturing Corporation v. Court of Appeals, where the creditor simultaneously sought replevin and collection of the debt. Since the vehicle in the Agner case was never actually seized through the writ of replevin, the Court ruled that the respondent was entitled to pursue the alternative remedy of exacting fulfillment of the obligation, without violating Article 1484. There was no double recovery or unjust enrichment, given that the petitioners retained possession of the vehicle.

Ultimately, the Supreme Court affirmed the Court of Appeals’ decision with a modification, reducing the interest rate. This case underscores the importance of carefully reviewing loan agreements, understanding the implications of waiving rights, and recognizing the court’s power to intervene in cases of unconscionable interest rates. It also highlights the nuanced application of Article 1484 in cases involving chattel mortgages and replevin.

FAQs

What was the key issue in this case?	The key issues were the enforceability of a waiver of demand clause in a promissory note and the reasonableness of a 72% per annum interest rate.
What is a waiver of demand?	A waiver of demand is a contractual provision where a borrower agrees to forgo the right to receive a formal demand for payment before being considered in default.
Is a waiver of demand clause enforceable in the Philippines?	Yes, the Supreme Court has consistently held that waiver of demand clauses are valid and enforceable, as long as they are clearly stipulated in the loan agreement.
What happens if a borrower defaults on a loan with a waiver of demand clause?	The borrower can be considered in default immediately upon failing to meet payment obligations, without the lender needing to send a demand letter.
Can courts reduce interest rates on loans?	Yes, Philippine courts have the power to reduce excessively high or unconscionable interest rates to more equitable levels.
What interest rates are considered excessive?	While there is no fixed legal ceiling, the Supreme Court has often considered interest rates of 3% per month (36% per annum) or higher as excessive, iniquitous, and unconscionable.
What is replevin?	Replevin is a legal action to recover possession of personal property wrongfully taken or detained.
What is Article 1484 of the Civil Code about?	Article 1484 outlines the remedies available to a vendor in a sale of personal property payable in installments, including exacting fulfillment, canceling the sale, or foreclosing the chattel mortgage.
Can a lender pursue both replevin and collection of debt simultaneously?	No, Article 1484 provides alternative remedies, not cumulative ones. However, if replevin is unsuccessful, the lender may pursue the alternative remedy of exacting fulfillment of the obligation.

This case serves as a crucial reminder for both lenders and borrowers. Lenders must ensure that interest rates are fair and reasonable, while borrowers must carefully review and understand the terms of their loan agreements, especially clauses related to waivers of rights. The judiciary stands as a safeguard against abusive lending practices, ensuring that equity and fairness prevail in financial transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.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 Deo Agner and Maricon Agner v. BPI Family Savings Bank, Inc., G.R. No. 182963, June 3, 2013