Dear PAO,

I obtained a loan from my friend. He agreed to lend me a total amount of P400,000. But, he insisted that we should execute a contract of loan. We agreed that the total amount of the loan would be payable for 20 months or P20,000 per month, plus P2,000 interest per month. He insisted that we should also stipulate that default in payment would render the entire amount of the loan due and demandable. I want to know whether this kind of stipulation is valid.

Johnny

Dear Johnny,

According to Article 1305 of the New Civil Code, the contracting parties may establish stipulations, clauses, terms and conditions as they may deem convenient, provided that such stipulations are not contrary to law, morals, good customs, public order, or public policy. In other words, the contracting parties are allowed to include terms and conditions in their contract, as long as such stipulations are voluntarily agreed upon by the parties and not contrary to law, morals, good customs, public order, or public policy.

We should next discuss the concept of acceleration clause. In the case of Gotesco Properties vs. International Exchange Bank, G.R. No. 212262, 26 August 2020, the Supreme Court, through Senior Associate Justice Mario Victor F. Leonen, defined acceleration clause as:

“An acceleration clause is a provision in a contract wherein, should the debtor default, the entire obligation shall become due and demandable.”

Therefore, if a contract of loan includes an acceleration clause, once the debtor fails to pay a scheduled installment, which results in default on the part of the debtor, the creditor may demand the payment or satisfaction of the entire obligation, even if the loan was originally payable in installments.

Are acceleration clauses valid? In the same case, the Supreme Court ruled that:

“This Court has held that acceleration clauses are valid and produce legal effect.”

Hence, if the parties agree to include an acceleration clause, such clause may be valid and can produce legal effect between the parties. Further, if the contract has an acceleration clause, the Supreme Court ruled that:

“Acceleration clauses in loans for a fixed term give creditors a choice to: (1) defer collection of any unpaid amounts until the period ends; or (2) invoke the clause and collect the entire demandable amount immediately. This right to choose is rendered meaningless if the loan is made demandable only when the term expires.”

In your case, you stated that your friend insisted that both of you should stipulate that in case of default in payment, the entire obligation may be due and demandable. This kind of stipulation may be considered as an acceleration clause. If both contracting parties agreed to this clause in the contract, this may be valid and may produce legal effect.

We hope that we were able to answer your queries. This advice was based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.

Thank you for your continued trust and support.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]