Waiver of Demand in Promissory Notes: Upholding Contractual Obligations

The Supreme Court's ruling in Cabanting v. BPI Family Savings Bank, Inc. (G.R. No. 201927, February 17, 2016) clarifies a crucial point in Philippine lending law: a borrower who signs a promissory note containing a waiver of demand clause cannot later claim that the lender failed to make a demand before filing suit. This decision provides important guidance for both lenders and borrowers regarding the enforceability of contractual stipulations in loan agreements.

The Facts of the Case

In January 2003, Vicente and Lalaine Cabanting purchased a Mitsubishi Adventure vehicle on installment from Diamond Motors Corporation. They executed a Promissory Note with Chattel Mortgage, obligating themselves to pay P836,032.00 in monthly installments. Diamond Motors assigned its rights under the note to BPI Family Savings Bank.

After the petitioners defaulted on three consecutive payments, BPI Family filed a complaint for replevin and damages. The bank sought payment of the unpaid balance, accrued interest at 36% per annum, attorney's fees, and liquidated damages as stipulated in the note.

The petitioners argued that BPI Family should have sued the person to whom they sold the vehicle, who allegedly assumed the obligation to pay. They also claimed that the bank failed to make a proper demand before filing the case.

The Issue: Was Prior Demand Required?

The central question was whether the petitioners' obligation became due and payable without prior demand, given that the promissory note contained a clause waiving notice and demand. The petitioners argued that this stipulation should be invalid because the document was a contract of adhesion.

The Ruling: Waiver of Demand is Valid and Binding

The Supreme Court denied the petition and upheld the validity of the waiver of demand clause. The Court ruled that no prior demand was necessary to make the petitioners' obligation due and payable, citing the clear stipulation in the note that the entire sum would become due "without the necessity of notice or demand which I/We hereby waive."

The Court emphasized that contracts of adhesion are not invalid per se. While courts may strike down such contracts when a weaker party is imposed upon by a dominant bargaining party, the petitioners failed to prove that they were disadvantaged, uneducated, or inexperienced in dealing with financial institutions.

Legal Basis: Article 1169 of the Civil Code

The Court anchored its ruling on Article 1169 of the Civil Code, which provides that one incurs delay from the time the obligor demands fulfillment of the obligation. However, the law expressly states that demand is not necessary when the parties expressly waive it.

The Court also cited Agner v. BPI Family Savings Bank, Inc., a closely similar case where the Court ruled that a waiver of notice or demand in a promissory note is legal and valid. Prior demand is not a condition precedent to filing an action for replevin, as nothing in the Rules of Court requires such demand.

Interest Rate Modification

While the Court upheld the bank's right to collect, it found the interest rate of 36% per annum unreasonable and iniquitous. Citing New Sampaguita Builders Construction, Inc. v. Philippine National Bank, the Court noted that interest rates ranging from 26% to 35% are "iniquitous, unconscionable and exorbitant" and void.

Pursuant to Nacar v. Gallery Frames and Bangko Sentral ng Pilipinas Monetary Board Circular No. 799, the Court modified the interest rate to 12% per annum from the filing of the complaint until June 30, 2013, and 6% per annum from July 1, 2013 until full satisfaction.

Practical Takeaways

• Waiver clauses are enforceable. Borrowers who sign promissory notes with waiver of demand provisions are bound by them. Lenders need not send a demand letter before filing suit when such a clause exists.
• Contracts of adhesion are not automatically void. A party challenging such contracts must prove that they were at a disadvantage due to ignorance, indigence, or other handicaps.
• Due process requires opportunity, not actual participation. The Court found no due process violation where petitioners were given several chances to present evidence but failed to do so.
• Excessive interest rates will be reduced. Courts will equitably reduce interest rates found to be unconscionable, even if stipulated in the contract.
• Legal interest rates changed in 2013. Interest is computed at 12% per annum before July 1, 2013, and 6% per annum thereafter, per BSP Circular No. 799.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.