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Acceleration Clauses in Loan Agreements: The Case of KT Construction Supply, Inc. vs. Philippine Savings Bank

In credit agreements, acceleration clauses allow creditors to demand full payment upon default, ensuring timely collection. The Supreme Court case of KT Construction Supply, Inc. vs. Philippine Savings Bank (G.R. No. 228435) clarifies the validity and enforcement of acceleration clauses in financial contracts.

Understanding Acceleration Clauses in Loan Contracts

📌 Definition ✔ An acceleration clause requires the borrower to pay the full balance of a loan before its original due date upon default or other specified conditions.

📌 When It Applies ✔ Non-payment of principal or interest ✔ Failure to apply insurance premiums ✔ Violation of loan terms

📌 Legal Recognition ✔ Courts have long upheld the validity of acceleration clauses, stating they produce enforceable legal effects. ✔ Relevant Case: General Motors Acceptance Corp v. Shuey (243 Ky. 74)

Case Summary: KT Construction Supply, Inc. vs. Philippine Savings Bank

Facts:

  • On October 12, 2006, KT Construction obtained a ₱2.5 million loan from Philippine Savings Bank (PSBank).

  • The loan was payable over 60 months, with an acceleration clause stating that default on any installment would make the entire obligation due and demandable without notice or demand.

  • On January 3, 2011, PSBank issued a demand letter for the remaining balance of ₱725,438.81 due to non-payment.

  • When payment was not made, PSBank filed a complaint for sum of money.

Procedural History:

  • RTC Decision (June 11, 2014): Ruled in favor of PSBank, holding KT Construction, Go, and Go-Tan solidarily liable for the outstanding amount plus 12% interest per annum and ₱50,000 in attorney's fees.

  • Court of Appeals Decision (April 22, 2016): Affirmed the RTC ruling but adjusted the interest rate to 6% per annum.

  • Motion for Reconsideration: Denied by the CA on November 23, 2016.

Supreme Court Ruling

📌 Acceleration Clause Validity ✔ The SC upheld the enforcement of the acceleration clause, ruling that upon default, the loan became due and demandable without notice or demand. ✔ Relevant Case: Radiowealth Finance Co. v. Del Rosario (335 SCRA 288, 2000)

📌 Demand Letter Sufficiency ✔ Even if KT Construction did not receive the demand letter, the promissory note waived the necessity of demand, making the loan automatically due upon default.

📌 Contract of Adhesion Challenge ✔ The SC ruled that the promissory note was not void, as KT Construction voluntarily signed it, confirming its binding nature.

📌 Attorney's Fees Validity ✔ The award for attorney’s fees was upheld, as it was stipulated in the promissory note as a valid penalty clause.

📌 Jurisdiction Over Go and Go-Tan ✔ The SC reversed the ruling that held Go and Go-Tan solidarily liable, stating they were neither impleaded nor served with summons, thus the trial court never acquired jurisdiction over them.

Legal Takeaways for Borrowers and Lenders

✅ Acceleration clauses are enforceable – Upon default, lenders can demand full repayment, even without notice or demand.

✅ Demand letters help but aren’t always necessary – If the contract waives notice requirements, default automatically triggers acceleration.

✅ Contracts of adhesion aren’t automatically void – As long as terms are voluntarily accepted, courts uphold enforceability.

✅ Attorney’s fees may be imposed – If specified in loan agreements, courts recognize them as valid penalties for default.

✅ Proper jurisdiction is required in legal actions – A party must be properly impleaded and served for a court to hold them liable.

Conclusion

The Supreme Court ruling in KT Construction vs. PSBank reinforces the legal validity of acceleration clauses, ensuring clear financial agreements and effective debt recovery mechanisms. Lenders must carefully draft loan terms, while borrowers must understand repayment obligations to avoid costly penalties.

📌 For the full Supreme Court decision, check .

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