142. Spouses Silos Vs Pnb.docx

G. R. No. 181045 SPOUSES EDUARDO and LYDIA SILOS, Petitioners, vs. PHILIPPINE NATIONAL BANK, Respondent. Art. 1308. Mutuality of Contracts FACTS: Spouses Eduardo and Lydia Silos engaged in operating a department store. They secured a revolving credit line with PNB through a real estate mortgage as a security. In July 1988, the credit line was increased. Sps. Silos then signed a Credit Agreement which was also amended two years later, and issued Promissory Notes (PNs) as regards to their Credit Agreement. The said loan was initially subjected to a 19.5% interest rate per annum. In the Credit Agreements, Sps. Silos bound themselves to the power of PNB to modify the rate depending on whatever policy that PNB may adopt in the future, without the need of notice upon them. Thus, the said interest rates played from 16% to as high as 32% per annum. They acceded to the policy by pre-signing a total of twenty-six (26) PNs leaving the individual applicable interest rates at hand blank since it would be subject to modification by PNB. Sps. Silos regularly renewed and made good on their PNs, religiously paid the interests without objection or fail. However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the interest rates soared and their 26 th PN became past due. Despite repeated demands by PNB, they failed to make good on the note. Thus, PNB foreclosed and auctioned the involved security for the mortgage. Sps. Silos instituted an action to annul the foreclosure sale on the ground that the succeeding interest rates used in their loan agreements was left to the sole will of PNB, the same fixed by the latter without their prior consent and thus, void. The RTC ruled that such stipulation authorizing both the increase and decrease of interest rates as may be applicable is valid and this was affirmed by the CA. ISSUE: May the bank, on its own, modify the interest rate in a loan agreement without violating the mutuality of contracts? RULING: No.

Any modification in the contract, such as the interest rates, must be

made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan agreements, the rate of interest is a principal condition, if not the most important component.