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P.L. UY REALTY CORPORATION vs. ALS MANAGEMENT & DEVELOPMENT CORPORATION and ANTONIO S. LITONJUA Art. 1306 PRINCIPLE OF AUTONOMY sets forth the 1st of the characteristics of contracts. Manresa refers to this as the very essence of contracts and an attribute of human freedom. JUSTICE VELASCO FACTS: On September 3, 1980, PLU, as vendor, and ALS, as vendee, executed a Deed of Absolute Sale with Mortgage covering a registered parcel of land located at F. Blumentritt Street, Mandaluyong, Metro Manila. The parties also stipulated on the eviction of informal settlers/ existing occupants/squatters, the removal of which shall be for the sole expenses & responsibilities of the VENDOR & that the VENDEE is authorized to withhold the payment of the 1 st installment unless the above-undertaking is done and completed to the satisfaction of the VENDEE; Thereafter, the parties entered into an Agreement dated December 23, 1980 that all accruals of interest as provided for in the Deed of Sale with Mortgage will be deferred (withheld for) and the subsequent payments of installments will correspondingly be extended to the date the squatters will vacate the subject property. In the event the informal settlers do not leave the property, PLU would reimburse ALS the following amount: All payments made and improvements introduced by the SECOND PARTY in the subject property, plus All damages suffered by the SECOND PARTY due to the refusal of the squatters to vacate the premises. ALS, however, failed to pay the 2nd installment payment despite demands. Thus, on August 25, 1982, PLU filed a Complaint against ALS for Foreclosure of Mortgage and Annulment of Documents before the CFI of Rizal but eventually re-reraffled to the RTC of Makati. In the complaint, PLU alleged having had entered into an oral agreement with ALS whereby the latter "agreed to take over the task of ejecting the squatters from the property issued in its name," adding that, through the efforts of ALS, the property was already 90% clear of informal settlers. On May 9, 1986, the Makati RTC rendered a Decision ruling that the obligation of PLU to clear the property of informal settlers was superseded by an oral agreement between the parties whereby ALS assumed the responsibility of ejecting said informal settlers. The Makati RTC, however, declared that the removal of the informal settlers on the property is still a subsisting and valid condition. The trial court further ruled that because informal settlers still occupied 28% of the property, the condition, as to their eviction, had not yet been complied with. For this reason, the Makati RTC found the obligation of ALS to pay the balance of the purchase price has not yet fallen due and demandable; thus, it dismissed the case for being premature. Therefrom, both parties appealed to the CA which eventually affirmed the ruling of the RTC Makati. Thereafter, ALS went to the SC primarily questioning the finding of the Makati RTC that it had assumed the responsibility of ejecting the informal settlers on the property. The SC issued a Resolution affirming the rulings of the CA and the Makati RTC. The resolution became final and executory on February 7, 1990. Sometime thereafter, PLU again filed a Complaint against ALS for Judicial Foreclosure of Real Estate Mortgage under Rule 68, before the Pasig RTC. In the complaint, PLU claimed that ALS had not yet completed the agreed 1st payment obligation despite numerous demands. In defense, ALS claims that the installment payments for the balance of the purchase price of the property are not yet due and demandable, as the removal of the informal settlers, a condition precedent for such payments to be demandable, is still to be completed. By way of counterclaim, ALS alleged that because there were still informal settlers on the property, PLU should be directed to reimburse ALS the payments that it already made, the cost of improvements introduced by ALS on the property and for other damages. The Pasig RTC dismissed the case for being premature. Furthermore, the trial court, citing Art. 1167 of the Civil Code, ruled that the foreclosure of the mortgage is not the proper remedy, and that PLU should have caused the ejectment of the informal settlers. PLU appealed to the CA which affirmed the decision of Pasig RTC. Hence this petition. ISSUE: Whether the parties should still be bound by their agreements in the contract being a valid one. HELD: Yes. First, the SC ruled that the elements of res judicata, as a "bar by prior judgment," are present in the instant case. The 2 cases involve the very same parties, the same property and the same cause of action arising from the violation of terms of one and the same deed of absolute sale with mortgage. The previous complaint for foreclosure of mortgage was dismissed by the trial court for being premature. The dismissal action, when eventually elevated to the SC and was affirmed and the affirmatory resolution of the Court becoming final and executory. Clearly, the instant complaint must be dismissed. Second, would relevant to note that according to Art. 1306 of the Civil Code that “The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.” Thus, when the provisions od a contract are valid, the parties are bound by such terms under the principle that a contract is the law between the parties. Here, both parties knew for a fact that the property subject of their contract was occupied by informal settlers, whose eviction would entail court actions that in turn, would require some amount of time. They also knew that the length of time that would take to conclude such court actions was not within their power to determine. Despite such knowledge, both parties still agreed to the stipulation that the payment of the balance of the purchase price would be deferred until the informal settlers are ejected. There was never any allegation that PLU was coerced into signing the Deed of Sale with Mortgage or that its consent was in any way vitiated. PLU was free to accept or decline such contracted provision. Thus, PLU should not be allowed to renege on its agreement.

Government Service Insurance System vs. Court of Appeals and private respondent Esperanza Leuterio 1308 – 1311 Mutuality; Contracts; Seller cannot unilaterally increase the purchase price previously agreed upon. Need to adjust price of sale due to increased construction costs not enough justification for unilateral price increase. JUSTICE PUNO FACTS: GSIS conducted a lottery draw for the allocation of lots and housing units in Project 8-c of GSIS Village. Private respondent Esperanza Leuiterio won and was issued a Certificate of Acknowledgement to purchase the subject house and lot. Thereafter, the parties entered into a Deed of Conditional Sale evidencing the conveyance of the subject property to Leuterio spuses for the purchase price of P19,740.00 payable for over a 15 year period, in 180 equal monthly installments of P168.53 each. After the land development and housing construction were completed, petitioner’s Board of Trustees increased the purchase price indicated in the Deeds of Conditional Sale. The new price was based on the alleged final cost of construction of the GSIS Village. It is noted that, on the face of the Lueterio’s Conditional Deed of Sale is the marginal notation “subject to the adjustment pending approval of the Board of Trustees.” Private respondent alleged that ht enotation was not in the Deed when they signed the same. Resolving the factual issues, the trial court found that the appended words were inserted into the document without the knowledge or consent of private respondents. Subsequently, a group of conditional vendees of houses and lots in GSIS Village brought suit against petitioner, questioning the increase in purchase price. They like wrote a “A Plea For Justice” to then President Marcos, requesting for a directive to petitioner’s management to “accept payments of amortization installments on the original amounts stated in the Deed(s) of Conditional Sale.” As a result, an ad hoc committee created by the office of the President, composed of the rep. of the office of President, petitioner System and GSIS Village Assoc. Based on the findings of the said committee, the final cost of the Village justified a higher price range for the houses and lots in the project. However, then Pres. Exec. Assistant Jacobo C. Calve, through a memorandum, advised GSIS that then Pres. Marcos has approved the “Plea” and wanted its “immediate implementation.” Thereafter, Spouses Leuterio informed GSIS that the payments for the property had been completed, hence, the execution of an Absolute Deed of Sale in their favor. However, no action on the matter was taken by GSIS. Spouses Leuterio with the filing of a Complaint for Specific Performance with Damages to compel GSIS to execute the final Deed of Sale over the subject property. The RTC of Manila ruled in favor of the Leuterios. On appeal, the CA upheld the RTC’s Decicision on the bases of estoppel. Hence this petition. ISSUE: Whether the Spouses Leuterio agreed to the notation “subject to adjustment pending approval of the Board of Trustees” appearing on the margin of the parties Conditional Deed of Sale. HELD: No. The spouses did not agree to the said notation. The pleadings before the SC do not demonstrate that the RTC grossly erred when it found the the purchase price agreed upon by the parties was P19,740 and this agreement was not made subj. to any posterior event or condition. Likewise, the Answer of GSIS admitted the non-existence of this notation at the time the Deed of Conditional Sale was signed, although, it called the omission on honest mistake. This was also confirmed by the GSIS in the instant petition for review on certiorari where it is alleged that the respondents-spouses Lueterio were not required to sign a new contract as proved in the Resolution No. 996, but instead, the words subject to adjustment pending approval of the Board of Trustees were inserted in the Deed of Conditional Sale. Petitioner is bound by these judicial admission. SC also reject GSIS contention that the private respondents are bound by the recommendation of the ad hoc committee as this was set aside by the President Marcos. SC also stated that if GSIS failed to facor this incrase in the cost of construction in the purchase price of the subj. house and lot, it has nobody to blame but itself and it alone should suffer the loss. To be sure, given the expertise of its technical people, it has no reason o be shortsighted. Cleary, therefore, the purchase proce mutually agreed pon by the parties was P19,740. The spouses Leuterio did not give their consent for the GSIS to make a unilateral upward adjustment depending on the final cost of the construction of subj. houses and lot.

Philippine Saving Bank vs. Spouses Alfredo Castillo & Elizabeth Castillo, and Spouses Romeo Capati and Aquilina Lobo 1308-1311; Any stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is invalid. Contract changes must be made with the consent of the contacting parties. JUSTICE NACHURA FACTS Respondent sps. Alfredo & Elizabeth Castillo were the registered owners of a lot located in Tondo, Manila. Also, respondent spouses Romeo Capati & Aquilina Lobo were registered owners of another lot, located also in Tondo, Manila. Respondents obtained a loan, with real estate mortgage over the said properties, from the petitioner PSB, as evidence by a PN. The pertinent provision of the PN reads: the rate of interest x x x may be increased, decreased or otherwise changed from time to time within the rate of interest and charges allowed under present or future laws and gov’t regulations as the PSB may prescribe for its debtors. Upon default of payment of any installment and interest when due, all other installments and interest remaining unpaid shall immediately become due and payable. From the release of the loan, petitioner had increased and decreased the rate of interest, the highest of which was 29% and the lowest was 15.5% per annum. Respondents were notified in writing of these changes in the interest rate. They neither give their confirmation thereto nor did they formally question the changes. However, Alfredo Castillo sent several letters to PSB requesting for the reduction of the interests rates. Petitioner denied these requests. Resps. Regularly paid their amortizations until Dec. 1999, when they defaulted due to financial constraints. PSC initiated an extrajudicial foreclosure sale of the mortgaged properties and awarded the auction sale to PSB as the only bidder. Respondents failed to redeem the property within the 1 year redemption period. However, in 2001, Alfredo Castillo sent a letter to PSB requesting for an extension of 60 days before consolidation of its title so that they could redeem the properties. Petitioner conceded to request, but Castillo still failed to redeem the properties. Respondents filed a case against with a plea of TRO against PSB before RTC of Mla. RTC rendered decision declairing the questioned increase of interest as unreasonable, excessive and arbitrary and ordering PSB to refund to the respondents the amount of interest collected in excess of 17 per cent per annum. Extrajudicical foreclosure void ab initio. PSB filed motion, motion partially granted modifying the interest rate from 17 to 24 per cent. PSB appealed to the CA. CA modified the decision of the RTC. From 24 per cent it brings back to 17 per cent interest rate. Extrajudicial foreclosure to be valid. Hence, this petition pertinently anchored on the contention that the CA erred in declaring that the modifications in the interests rates are unreasonable. ISSUE: Whether respondents consented in the increase of the interests rates. HELD: No. The unilateral determination and the imposition of the increased rates is violative of the principle of mutuality of contracts under Art. 1308 which provides that the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. A perusal of the PN will show that the increase or decrease of interest rates left solely on the discretion of PSB. PSB contends that respondents acquiesced to the imposition of the modified interests rates and that the resps. requested several times for the reduction of the interests rates, thus, manifesting their recognition of the legality of the said rates. SC stated that respondents assent to the moditfications in the interest rates cannot be implied form their lack of response to the memos sent by PSB, informing them of the amendments. The said memo were in the nature of a proposal of change the contract with respect to one of its significant components, interest rates. SC ssaid that non one reciving a proposal to change a contract is obliged to ansert the proposal. SC also disagree with PSB’s assertion that the respondents recognized the legality of the imposed interests rates through the letter letters requesting for the reduction of the rates. The request for the reduction of the interest does not translate to consent thereto. Letters of Alfredo Castillo in fact, questioning the interests rates imposed on their loan. “I understand that the present interest rate is lower than the last month’s 27. However, it does not give our Company any break from coping without receivables… In connection with this, may I request for a reduction of interest rate. …Such reduction of interest rate is an effect of our currency’s development. But based on our inquiries and research to different financial institutions, the rate your bank is imposing to us is still higher compared to the 18th and a half percent others are asking… In view of this, I am requesting for a transfer of our loan from PSBank HO to PSBank Mabini Branch. This transfer is purposely intended for an appeal for a lower interest rate… In this connection once more, I am requesting for a reduction of the interest rate applied to my loan maintain our business relationship. Basic is the rule that there can be no contract in its true sense without the mutual assent of the parties. Similarly, contract changes must be made with the consent of the contracting parties. The minds of the contracting parties must meet as to the proposed modification, especially when it affects and important aspect of the agreement. In the case of loan contracts, the interest rate is undeniably always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it produces no binding effect. The validity of the escalation clause did not give PSB the unbridled right to unilaterally adjust interest rates. On the matter of damages, SC agree with PSB, they can be recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The refund to respondents of their interest payments in excess of 17 per cent per annum, the same should include legal interest.

Sps. Ignacio Juico and Alice Juico vs. China Banking Corporation 1308-1311: Any contract which appears to be heavily in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. JUSTICE VILLARAMA FACTS Sps. Ignacio and Alice Juico obtained a loan from China Banking Corporation as evidenced by 2 promissory notes. The loan is secured by a real estate mortgage over sps. Property located at White Plains QC. However, petitioners failed to pay the mo. Amortizations due. The amount due on the 2 promissory notes totaled P19,776.63 representing the principal interests, penalties and atty. Fees. Also the mortgaged property was sold at public auction, with respondent as highest bidder for the amount of P10,300.00. Thereafter, petitioners received a demand letter for the payment of P8,901.776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded, China Bank filed a collection suit in the trial court. In their answer, petitioners contended that should they be held liable for any deficiency, it should be only for P55,000 representing the difference between the total outstanding obligation of P10,355,000 and the bid price of P10,300,000. At the trial CBC presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. Yu handled the account of the petitioners. Yu called them monthly to inform them of the prevailing rates to be used in computing the interest due on their loan. Petitioners thereafter received a demand letter dated May 2, 2001 from respondent’s counsel for the deficiency amount of P8,901,776.63. Ms. Yu further testified that based on SOA dated March 15, 2002, the outstanding balance of the petitioner was P15,190, 961.48. On crossed examination, Ms. Yu stated that interest rate was based on the prevailing market rate and calling the petitioners monthly before their account becomes past due. When asked if there was any written authority from petitioners for respondent to increase the interest rate unilaterally, she answered that petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing rate. Petitioner, Ignacio Juico testified that prior to the release of the loan, he was required to sign a blank promissory note and was informed that the interest rate on the loan will be based on prevailing market rates. In cross examination Ignacio Juico testified that he is a Doctor of Medicine. He admitted having read the promissory notes and that he is aware of his obligation to CBC before he signed the same. RTC ruled in favor of the CBC. The trial court held that the mortgaged property was sold at public auction for P10,300.00 there remained a balance of P8,901,776.63 since before foreclosure, the total amount due on the 2 promissory notes aggregated to P19,201,776.63 inclusive of principal, interest, penalties and attys. Fees. RTC further held that Ignacio’s claim that he signed the promissory notes in the blank cannot negate or mitigate his liability since he admitted reading the promissory noted before signing them. What appears left in blank were the promissory note number, date of instrument, due date, amount of loan and the condition that interest rate will be at the prevailing rates. On appeal, CA affirmed the RTC’s decision, also it found as valid the stipulation in the promissory notes that interest will be based on the prevailing rate. It noted that the parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate offered daily by all commercial banks as approved by the Monetary Board. Hence, this petition. ISSUE: Whether the interest rates imposed upon petitioners by CBC are valid HELD: No. The binding effect of any agreement bet. Parties to a contract is premised on 2 settled principles: (1) that any obligation arising from a contract has the force of law bet. Parties; and (2) that there must be mutuality bet. Parties based on their essential equality. SC stated that the escalation escalation clause in void citing numerous jurisprudence when the escalation clause has no provision for reduction of the stipulated interest, where the creditor unilaterally determines and imposes an increase in the stipulated rate of interest without the express conformity of the debtor. SC also stated the escalation clauses are valid stipulations however their enforceability are subj. to certain conditions. In Solidbank vs. Permanent Homes, SC upheld as valid an escalation clause which required a written notice to and conformity by the borrower to the increased interest rate. In this case, the RTC and CA, in upholding the validity of the escalation clause, underscored the fact that there was actually no fixed rate of interest stipulated in the promissory notes as this was made dependent on prevailing rates in the market. However SC hold that the escalation clause is still void bec. It grants respondent the power to impose an increases rate of interest without a written notice to petitioners and written consent. CBC monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. An appropriate form must also be signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts. SC also stated that the modifications in the rate of interest for loan pursuant to an escalation clause must be the result an agreement bet. The parties. Hence, SC consider as invalid the interest rates in excess of 15 per cent, the rate charged for the 1 st year. Wherefore, the petition for review on certiorari is partly granted. Petitioners sps. Juico are hereby ordered to pay jointly and severally respondent China Banking Corporation P4,761,865.79 representing the amount of deficiency inclusive of interest, penalty charge and attorney’s fees. Said amount shall bear interest at 12 per cent per annum, reckoned form the time of the filing of the complaint until its full satisfaction.

Sps. Silos vs PNB (1308-1310 Mutuality).Dona Adela Export vs TIDCOR (Art. 1311 Contracts Assigned to Heirs).Manila Bay Club vs CA (Art. 1306 Freedom to Contract).Filipinas Compani vs. Mandanas (Art. 1306 Contrary to Public Policy).Contantino vs. Espiritu (Art. 1311 par. 2 Stipulations in Favor of Third Persons [stipulations pour autrui]).Daywalt vs La Corporacion de los Padres Agustinos (Art. 1314 Interference by Third Persons).Korean Air vs. Yuson (Art. 1319 Must be manifested by the concurrence of the offer and acceptance) SUMMARY: Sps. Silos obtained a revolving credit line from PNB, secured by a mortgage. The interest rate was initially agreed upon at 19.5% but a Supplement to the Credit Agreement provided that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa. The spouses were able to pay the interests on the loan up until their last promissory note which covered the principal amount. Because of this their properties were foreclosed and sold by auction to PNB. The spouses filed a petition to annul the foreclosure sale and for the accounting of PNB’s credit. The RTC dismissed their petition. The CA affirmed. The SC annulled and set aside the CA decision. Sps. Silos vs PNB July 02, 2014| Del Castillo | Petition for Review on Certiorari| Mutuum DOCTRINE: Any modification in the contract, such as the interest rates, must be made with the consent of the contracting parties. It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. Similarly, contract changes 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 contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

FACTS: Spouses Eduardo and Lydia Silos, petitioners, have been in business for about 2 decades of operating a department store and buying and selling of ready-to-wear apparel. Respondent, PNB is a banking corporation organized and existing under Philippine Laws. To secure a one-year revolving credit line of P150,000.00 obtained from PNB, Spouses Silos constituted in August 1987 a Real Estate Mortgage over a 370sqm lot in Kalibo, Aklan. In July 1988, the credit line was increased to P1.8 million and the mortgage was correspondingly increased to P1.8 million. In July 1989, a Supplement to the Existing Real Estate Mortgage was executed to cover the same credit line, which was increased to P2.5 million, and additional security was given in the form of a 134sqm lot. In addition, petitioners issued 8 Promissory Notes and signed Credit Agreement which contained a stipulation on interest which provides: 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum [x][x][x] (b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future, [x][x][x] the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time depending on whatever policy it may adopt in the future.

Subsequently, petitioners religiously paid interest on the 1st to the 8th notes ranging from 19.5% to 32% In August 1991, an Amendment to Credit Agreement was executed by the parties, with the following stipulation regarding interest: 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment at the rate per annum which is determined by the Bank to be prime rate plus applicable spread.

Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes, which petitioners settled – except the last (PN 9707237, the note covering the principal) at interest rates ranging from 17.5% to 26% The 9th to 17th (9 total)promissory notes provide for the payment of interest at the “rate the Bank may at any time without notice, raise within the limits allowed by law x x x.” On the other hand, the 18th up to the 26th (9 total) promissory notes – carried the following provision: ** Note that there were already 8PN [1st to 8th] + 18PN [9th to 17th (9) & 18th to 26th (9)] = 26 PN For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest Setting Date.

Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes, religiously paying the interests without objection or fail. However, in 1997, petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners’ sole outstanding promissory note for P2.5 million – PN 9707237 executed in July 1997 and due 120 days later or on October 28, 1997 – became past due, and despite repeated demands, petitioner failed to make good on the note. Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows: Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute default and in such cases or in case of garnishment, receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the outstanding principal of this note, at the option of the Bank and without prior notice of demand, shall immediately become due and payable and shall be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted principal amount.

PNB prepared a Statement of Account as of October 12, 1998, detailing the amount due and demandable from petitioners in the total amount of P3,620,541.60. Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on January 14, 1999, the properties were sold to it at auction for the amount of P4,324,172.96.21 The sheriff’s certificate of sale was registered on March 11, 1999.

More than a year later, or on March 24, 2000, petitioners filed Civil Case seeking annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners theorized that after the first promissory note where they agreed to pay 19.5% interest, the succeeding stipulations for the payment of interest in their loan agreements with PNB – which allegedly left to the latter the sole will to determine the interest rate – became null and void. Petitioners added that because the interest rates were fixed by respondent without their prior consent or agreement, these rates are void, and as a result, petitioners should only be made liable for interest at the legal rate of 12%. They claimed further that they overpaid interests on the credit, and concluded that due to this overpayment of steep interest charges, their debt should now be deemed paid, and the foreclosure and sale of the lots became unnecessary and wrongful. During Trial, petitioner Lydia Silos testified that the Credit Agreement, the Amendment to Credit Agreement were all prepared by PNB and were presented to her and her husband Eduardo only for signature; that she was told by PNB that the latter alone would determine the interest rate; that as to the Amendment to Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that the interest rate portion of all the promissory notes were always left in blank when they executed them. On the other hand, PNB Kalibo Branch Manager Diosdado Aspa, Jr. the sole witness for PNB, stated on the cross examination that interest rates were fixed solely by its Treasury Department in Manila. The RTC dismissed the complaint, while credit agreement slows PNB to unilaterally increase its spread over the floating interest rate at any time depending on whatever policy it may adopt in the future, it likewise allows for the decrease at any time for the same. The RTC also cited the case of SOLIDBANK v CA where the Court held that such stipulation authorizing both the increase and decrease of interest rates as may be applicable is valid. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made dependent on prevailing rates upon which to peg such interest rates. RTC ruled also that the promissory note, as the principal contract evidencing petitioners’ loan, prevails over the Credit Agreement and the Real Estate Mortgage. On appeal, The CA affirmed the decision of RTC and noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total of P3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over and above the P2.5 million principal obligation. And this is exclusive of payments for insurance premiums, documentary stamp taxes, and penalty. All the while, petitioners did not complain nor object to the imposition of interest; they in fact paid the same religiously and without fail for seven years. The appellate court ruled that petitioners are thus estopped from questioning the same. Hence this petition. ISSUE(S): 1.

Whether the interest rate provision in the credit agreement and the amendment to the same is null and void for leaving the interest at the sole and unilateral determination of the bank. YES

2.

What interest rate should be applied to the loan? 19.5% as to the 1 ST promissory note and 12% as to all the other notes.

RULING: The Court grants the Petition. RATIO: SC citing numerous jurisprudence including the present one, involve identical or similar provisions found in respondent’s credit agremeents and promissory notes, thus pertinent provisions in the Credit of Agreement contained the following: the Bank may modify the interest rate in the loan depending on whatever policy the Bank may adopt in the future . . . The borrower hereby agrees that the Bank may, without need of notice to the Borrower, increases or decreases its spread over the floating interest rate at any time depending whatever policy it may adopt in the future. The common denominator in these cases is the lack of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the petitioners has been made obvious by the fact that they signed the promissory notes in the blank for the respondent to fill. SC also highlighted the admission of Kalibo Branch Manager Aspa that the interest rates were fixed solely by its Treasury Department in Manila. If this were the case, then this would explain why petitioners had to sign the promissory notes in blank, since the imposable interest rates have yet to be determined and fixed by respondent’s Treasury Department in Manila. Clearly, respondent’s method of fixing interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for there is no fixed standard or margin above or below these considerations. Sc also highlighted that the wording in the stipulation, in such a way that the borrower shall agree to whatever interest rate the respondent fixes. Whereas, in the present agreements, it stated that: the borrower agree . . . on whatever policy it may adopt in the future. While in the amendment to credit agreement stated that The Borrower agree to pay interest . . . which is to be determined by the Bank to be the prime rate. Plainly the present credit agreement, the element of consent or agreement by the borrower is no completely lacking, which makes PNB’s claim unlawful act all the more reprehensible. SC highlighted that estoppel cannot be predicated on an illegal act. Also the PNB violated the Truth in Lending Act, by requiring the petitioners to sign the credit documents and the promissory notes in blank, and then unilaterally filling them up later on, PNB violated the Truth in Lending Act, and was remiss in its disclosure obligations.

Besides, that petitioners are given the right to question the interest rates imposed is irrelevant; we have a situation where the petitioners do not stand on equal footing with the respondent. It is doubtful that any borrower who finds himself in petitioners’ position would dare question respondent’s power to arbitrarily modify interest rates at any time. 1. 1 The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code: Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. 1.2. Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative “to take it or leave it” x x x Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. 1.3. Article 1956 also provides that “No interest shall be due unless it has been expressly stipulated in writing.” What has been “stipulated in writing” from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 2. With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at the rate of 12% per annum. This is the uniform ruling adopted in previous cases. Thus, the parties’ original agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first promissory note which expired on November 21, 1989 and was paid by petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher interest rates have been declared illegal; but because only the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting July 1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799