G.R. No.

187678 April 10, 2013 On May 8, 2001, petitioners received8 a demand letter9 dated May 2,
2001 from respondent for the payment of ₱8,901,776.63, the amount of
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners, deficiency after applying the proceeds of the foreclosure sale to the
vs. mortgage debt. As its demand remained unheeded, respondent filed a
CHINA BANKING CORPORATION, Respondent. collection suit in the trial court. In its Complaint,10 respondent prayed that
judgment be rendered ordering the petitioners to pay jointly and
DECISION severally: (1) ₱8,901,776.63 representing the amount of deficiency, plus
interests at the legal rate, from February 23, 2001 until fully paid; (2) an
additional amount equivalent to 1/10 of 1% per day of the total amount,
VILLARAMA, JR., J.:
until fully paid, as penalty; (3) an amount equivalent to 10% of the
foregoing amounts as attorney’s fees; and (4) expenses of litigation and
Before us is a petition for review on certiorari under Rule 45 of the 1997 costs of suit.
Rules of Civil Procedure, as amended, assailing the February 20, 2009
Decision1 and April 27, 2009 Resolution2 of the Court of Appeals (CA) in
In their Answer,11 petitioners admitted the existence of the debt but
CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision3 of
interposed, by way of special and affirmative defense, that the complaint
the Regional Trial Court (RTC) of Makati City, Branch 147.
states no cause of action considering that the principal of the loan was
already paid when the mortgaged property was extrajudicially foreclosed
The factual antecedents: and sold for ₱10,300,000. Petitioners contended that should they be
held liable for any deficiency, it should be only for ₱55,000 representing
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan the difference between the total outstanding obligation of ₱10,355,000
from China Banking Corporation (respondent) as evidenced by two and the bid price of ₱10,300,000. Petitioners also argued that even
Promissory Notes both dated October 6, 1998 and numbered 507- assuming there is a cause of action, such deficiency cannot be enforced
001051-34 and 507-001052-0,5 for the sums of !!6,216,000 and ₱4, by respondent because it consists only of the penalty and/or
139,000, respectively. The loan was secured by a Real Estate Mortgage compounded interest on the accrued interest which is generally not
(REM) over petitioners’ property located at 49 Greensville St., White favored under the Civil Code. By way of counterclaim, petitioners prayed
Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. that respondent be ordered to pay ₱100,000 in attorney’s fees and costs
RT-103568 (167394) PR-412086 of the Register of Deeds of Quezon of suit.
City.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior
When petitioners failed to pay the monthly amortizations due, Loans Assistant, as witness. She testified that she handled the account
respondent demanded the full payment of the outstanding balance with of petitioners and assisted them in processing their loan application. She
accrued monthly interests. On September 5, 2000, petitioners received called them monthly to inform them of the prevailing rates to be used in
respondent’s last demand letter7 dated August 29, 2000. computing interest due on their loan. As of the date of the public auction,
petitioners’ outstanding balance was ₱19,201,776.6312 based on the
As of February 23, 2001, the amount due on the two promissory notes following statement of account which she prepared:
totaled ₱19,201,776.63 representing the principal, interests, penalties
and attorney’s fees. On the same day, the mortgaged property was sold STATEMENT OF ACCOUNT
at public auction, with respondent as highest bidder for the amount of As of FEBRUARY 23, 2001
₱10,300,000. IGNACIO F. JUICO

PN# 507-0010520 due on 04-07-2004

1âwphi1

Principal balance of PN# 5070010520. . . . 4,139,000.00 Interest on ₱6,216,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . 102,947.18
Interest on ₱4,139,000.00 fr. 04-Nov-99
Interest on ₱6,216,000.00 fr. 04-Feb-2001
04-Nov-2000 366 days @ 15.00%. . . . . . . . . 622,550.96 23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . 58,243.07

Interest on ₱4,139,000.00 fr. 04-Nov-2000 Penalty charge @ 1/10 of 1% of the total

amount due
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . 83,346.99 (₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . . . . 3,145,296.00
Interest on ₱4,139,000.00 fr. 04-Dec-2000
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . 75,579.27
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96
Interest on ₱4,139,000.00 fr. 04-Jan-2001
Less: A/P applied to balance of principal (55,000.00)
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . 68,548.64
Less: Accounts payable L & D (261,149.39) 17,456,160.57
Interest on ₱4,139,000.00 fr. 04-Feb-2001
Add: 10% Attorney’s Fee 1,745,616.06
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . 38,781.86
Total amount due 19,201,776.63
Penalty charge @ 1/10 of 1% of the total
amount due Less: Bid Price 10,300,000.00
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00 TOTAL DEFICIENCY AMOUNT AS OF
13
FEB. 23, 2001 8,901,776.63
Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73

PN# 507-0010513 due on 04-07-2004 Petitioners thereafter received a demand letter14 dated May 2, 2001 from
Principal balance of PN# 5070010513. . . . . . . 6,216,000.00 respondent’s counsel for the deficiency amount of ₱8,901,776.63. Ms.
Yu further testified that based on the Statement of Account15 dated
Interest on ₱6,216,000.00 fr. 06-Oct-99 March 15, 2002 which she prepared, the outstanding balance of
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . 1,009,035.62 petitioners was ₱15,190,961.48.16

Interest on ₱6,216,000.00 fr. 04-Nov-2000 On cross-examination, Ms. Yu reiterated that the interest rate changes
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . 125,171.51 every month based on the prevailing market rate and she notified
petitioners of the prevailing rate by calling them monthly before their
Interest on ₱6,216,000.00 fr. 04-Dec-2000 account becomes past due. When asked if there was any written
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . 113,505.86 authority from petitioners for respondent to increase the interest rate
unilaterally, she answered that petitioners signed a promissory note amount due on the two promissory notes aggregated to ₱19,201,776.63
indicating that they agreed to pay interest at the prevailing rate.17 inclusive of principal, interests, penalties and attorney’s fees. It ruled that
the amount realized at the auction sale was applied to the interest,
Petitioner Ignacio F. Juico testified that prior to the release of the loan, conformably with Article 1253 of the Civil Code which provides that if the
he was required to sign a blank promissory note and was informed that debt produces interest, payment of the principal shall not be deemed to
the interest rate on the loan will be based on prevailing market rates. have been made until the interests have been covered. This being the
Every month, respondent informs him by telephone of the prevailing case, petitioners’ principal obligation subsists but at a reduced amount
interest rate. At first, he was able to pay his monthly amortizations but of ₱8,901,776.63.
when he started to incur delay in his payments due to the financial crisis,
respondent pressured him to pay in full, including charges and interests The trial court further held that Ignacio’s claim that he signed the
for the delay. His property was eventually foreclosed and was sold at promissory notes in blank cannot negate or mitigate his liability since he
public auction.18 admitted reading the promissory notes before signing them. It also ruled
that considering the substantial amount involved, it is unbelievable that
On cross-examination, petitioner testified that he is a Doctor of Medicine petitioners threw all caution to the wind and simply signed the
and also engaged in the business of distributing medical supplies. He documents without reading and understanding the contents thereof. It
admitted having read the promissory notes and that he is aware of his noted that the promissory notes, including the terms and conditions, are
obligation under them before he signed the same.19 pro forma and what appears to have been left in blank were the
promissory note number, date of the instrument, due date, amount of
In its decision, the RTC ruled in favor of respondent. The fallo of the RTC loan, and condition that interest will be at the prevailing rates. All of these
decision reads: details, the trial court added, were within the knowledge of the
petitioners.
WHEREFORE, premises considered, the Complaint is hereby
sustained, and Judgment is rendered ordering herein defendants to pay When the case was elevated to the CA, the latter affirmed the trial court’s
jointly and severally to plaintiff, the following: decision. The CA recognized respondent’s right to claim the deficiency
from the debtor where the proceeds of the sale in an extrajudicial
foreclosure of mortgage are insufficient to cover the amount of the debt.
1. ₱8,901,776.63 representing the amount of the deficiency
Also, it found as valid the stipulation in the promissory notes that interest
owing to the plaintiff, plus interest thereon at the legal rate after
will be based on the prevailing rate. It noted that the parties agreed on
February 23, 2001;
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
2. An amount equivalent to 10% of the total amount due as and Monetary Board. Having signed the promissory notes, the CA ruled that
for attorney’s fees, there being stipulation therefor in the petitioners are bound by the stipulations contained therein.
promissory notes;
Petitioners are now before this Court raising the sole issue of whether
3. Costs of suit. the interest rates imposed upon them by respondent are valid.
Petitioners contend that the interest rates imposed by respondent are
SO ORDERED.20 not valid as they were not by virtue of any law or Bangko Sentral ng
Pilipinas (BSP) regulation or any regulation that was passed by an
The trial court agreed with respondent that when the mortgaged property appropriate government entity. They insist that the interest rates were
was sold at public auction on February 23, 2001 for ₱10,300,000 there unilaterally imposed by the bank and thus violate the principle of
remained a balance of ₱8,901,776.63 since before foreclosure, the total mutuality of contracts. They argue that the escalation clause in the
promissory notes does not give respondent the unbridled authority to Nevertheless, an escalation clause "which grants the creditor an
increase the interest rate unilaterally. Any change must be mutually unbridled right to adjust the interest independently and upwardly,
agreed upon. completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. A stipulation of such nature
Respondent, for its part, points out that petitioners failed to show that violates the principle of mutuality of contracts.24 Thus, this Court has
their case falls under any of the exceptions wherein findings of fact of previously nullified the unilateral determination and imposition by
the CA may be reviewed by this Court. It contends that an inquiry as to creditor banks of increases in the rate of interest provided in loan
whether the interest rates imposed on the loans of petitioners were contracts.25
supported by appropriate regulations from a government agency or the
Central Bank requires a reevaluation of the evidence on records. Thus, In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation
the Court would in effect, be confronted with a factual and not a legal clause stated: "I/We hereby authorize Banco Filipino to correspondingly
issue. increase the interest rate stipulated in this contract without advance
notice to me/us in the event a law should be enacted increasing the
The appeal is partly meritorious. lawful rates of interest that may be charged on this particular kind of
loan." While escalation clauses in general are considered valid, we ruled
The principle of mutuality of contracts is expressed in Article 1308 of the that Banco Filipino may not increase the interest on respondent
Civil Code, which provides: borrower’s loan, pursuant to Circular No. 494 issued by the Monetary
Board on January 2, 1976, because said circular is not a law although it
has the force and effect of law and the escalation clause has no
Article 1308. The contract must bind both contracting parties; its validity
provision for reduction of the stipulated interest "in the event that the
or compliance cannot be left to the will of one of them. Article 1956 of
applicable maximum rate of interest is reduced by law or by the
the Civil Code likewise ordains that "no interest shall be due unless it
Monetary Board" (de-escalation clause).
has been expressly stipulated in writing."
Subsequently, in Insular Bank of Asia and America v. Spouses
The binding effect of any agreement between parties to a contract is
Salazar27 we reiterated that escalation clauses are valid stipulations but
premised on two settled principles: (1) that any obligation arising from
their enforceability are subject to certain conditions. The increase of
contract has the force of law between the parties; and (2) that there must
interest rate from 19% to 21% per annum made by petitioner bank was
be mutuality between the parties based on their essential equality. Any
disallowed because it did not comply with the guidelines adopted by the
contract which appears to be heavily weighed in favor of one of the
Monetary Board to govern interest rate adjustments by banks and non-
parties so as to lead to an unconscionable result is void. Any stipulation
banks performing quasi-banking functions.
regarding the validity or compliance of the contract which is left solely to
the will of one of the parties, is likewise, invalid.21
In the 1991 case of Philippine National Bank v. Court of Appeals,28 the
promissory notes authorized PNB to increase the stipulated interest per
Escalation clauses refer to stipulations allowing an increase in the
annum "within the limits allowed by law at any time depending on
interest rate agreed upon by the contracting parties. This Court has long
whatever policy PNB may adopt in the future; Provided, that, the interest
recognized that there is nothing inherently wrong with escalation clauses
rate on this note shall be correspondingly decreased in the event that
which are valid stipulations in commercial contracts to maintain fiscal
the applicable maximum interest rate is reduced by law or by the
stability and to retain the value of money in long term contracts.22 Hence,
Monetary Board." This Court declared the increases (from 18% to 32%,
such stipulations are not void per se.23
then to 41% and then to 48%) unilaterally imposed by PNB to be in
violation of the principle of mutuality essential in contracts.29
A similar ruling was made in a 1994 case30 also involving PNB where the It is now settled that an escalation clause is void where the creditor
credit agreement provided that "PNB reserves the right to increase the unilaterally determines and imposes an increase in the stipulated rate of
interest rate within the limits allowed by law at any time depending on interest without the express conformity of the debtor. Such unbridled
whatever policy it may adopt in the future: Provided, that the interest rate right given to creditors to adjust the interest independently and upwardly
on this accommodation shall be correspondingly decreased in the event would completely take away from the debtors the right to assent to an
that the applicable maximum interest is reduced by law or by the important modification in their agreement and would also negate the
Monetary Board x x x". element of mutuality in their contracts.34While a ceiling on interest rates
under the Usury Law was already lifted under Central Bank Circular No.
Again, in 1996, the Court invalidated escalation clauses authorizing PNB 905, nothing therein "grants lenders carte blanche authority to raise
to raise the stipulated interest rate at any time without notice, within the interest rates to levels which will either enslave their borrowers or lead
limits allowed by law. The Court observed that there was no attempt to a hemorrhaging of their assets."35
made by PNB to secure the conformity of respondent borrower to the
successive increases in the interest rate. The borrower’s assent to the The two promissory notes signed by petitioners provide:
increases cannot be implied from their lack of response to the letters
sent by PNB, informing them of the increases.31 I/We hereby authorize the CHINA BANKING CORPORATION to
increase or decrease as the case may be, the interest rate/service
In the more recent case of Philippine Savings Bank v. Castillo,32 we charge presently stipulated in this note without any advance notice to
sustained the CA in declaring as unreasonable the following escalation me/us in the event a law or Central Bank regulation is passed or
clause: "The rate of interest and/or bank charges herein stipulated, promulgated by the Central Bank of the Philippines or appropriate
during the terms of this promissory note, its extensions, renewals or government entities, increasing or decreasing such interest rate or
other modifications, may be increased, decreased or otherwise changed service charge.36
from time to time within the rate of interest and charges allowed under
present or future law(s) and/or government regulation(s) as the PSBank Such escalation clause is similar to that involved in the case of Floirendo,
may prescribe for its debtors." Clearly, the increase or decrease of Jr. v. Metropolitan Bank and Trust Company37 where this Court ruled:
interest rates under such clause hinges solely on the discretion of
petitioner as it does not require the conformity of the maker before a new The provision in the promissory note authorizing respondent bank to
interest rate could be enforced. We also said that respondents’ assent increase, decrease or otherwise change from time to time the rate of
to the modifications in the interest rates cannot be implied from their lack interest and/or bank charges "without advance notice" to petitioner, "in
of response to the memos sent by petitioner, informing them of the the event of change in the interest rate prescribed by law or the Monetary
amendments, nor from the letters requesting for reduction of the rates. Board of the Central Bank of the Philippines," does not give respondent
Thus: bank unrestrained freedom to charge any rate other than that which was
agreed upon. Here, the monthly upward/downward adjustment of
… the validity of the escalation clause did not give petitioner the interest rate is left to the will of respondent bank alone. It violates the
unbridled right to unilaterally adjust interest rates. The adjustment essence of mutuality of the contract.38
should have still been subjected to the mutual agreement of the
contracting parties. In light of the absence of consent on the part of More recently in Solidbank Corporation v. Permanent Homes,
respondents to the modifications in the interest rates, the adjusted rates Incorporated,39 we upheld as valid an escalation clause which required
cannot bind them notwithstanding the inclusion of a de-escalation clause a written notice to and conformity by the borrower to the increased
in the loan agreement.33 interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. Solidbank as a condition for the adjustment of the interest rates.
224 dated 3 December 1982 of the Monetary Board of the Central Bank, (Emphasis supplied.)
and later by Central Bank Circular No. 905 which took effect on 1
January 1983. These circulars removed the ceiling on interest rates for In this case, the trial and appellate courts, in upholding the validity of the
secured and unsecured loans regardless of maturity. The effect of these escalation clause, underscored the fact that there was actually no fixed
circulars is to allow the parties to agree on any interest that may be rate of interest stipulated in the promissory notes as this was made
charged on a loan. The virtual repeal of the Usury Law is within the range dependent on prevailing rates in the market. The subject promissory
of judicial notice which courts are bound to take into account. Although notes contained the following condition written after the first paragraph:
interest rates are no longer subject to a ceiling, the lender still does not
have an unbridled license to impose increased interest rates. The lender With one year grace period on principal and thereafter payable in 54
and the borrower should agree on the imposed rate, and such imposed equal monthly instalments to start on the second year. Interest at the
rate should be in writing. prevailing rates payable quarterly in arrears.40

The three promissory notes between Solidbank and Permanent all In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the
contain the following provisions: trial and appellate courts in ruling for the validity of the escalation clause
in the Cardholder’s Agreement. On petitioner’s contention that the
"5. We/I irrevocably authorize Solidbank to increase or decrease at any interest rate was unilaterally imposed and based on the standards and
time the interest rate agreed in this Note or Loan on the basis of, among rate formulated solely by respondent credit card company, we held:
others, prevailing rates in the local or international capital markets. For
this purpose, We/I authorize Solidbank to debit any deposit or placement The contractual provision in question states that "if there occurs any
account with Solidbank belonging to any one of us. The adjustment of change in the prevailing market rates, the new interest rate shall be the
the interest rate shall be effective from the date indicated in the written guiding rate in computing the interest due on the outstanding obligation
notice sent to us by the bank, or if no date is indicated, from the time the without need of serving notice to the Cardholder other than the required
notice was sent. posting on the monthly statement served to the Cardholder." This could
not be considered an escalation clause for the reason that it neither
6. Should We/I disagree to the interest rate adjustment, We/I shall states an increase nor a decrease in interest rate. Said clause simply
prepay all amounts due under this Note or Loan within thirty (30) days states that the interest rate should be based on the prevailing market
from the receipt by anyone of us of the written notice. Otherwise, We/I rate.
shall be deemed to have given our consent to the interest rate
adjustment." Interpreting it differently, while said clause does not expressly stipulate
a reduction in interest rate, it nevertheless provides a leeway for the
The stipulations on interest rate repricing are valid because (1) the interest rate to be reduced in case the prevailing market rates dictate its
parties mutually agreed on said stipulations; (2) repricing takes effect reduction.
only upon Solidbank’s written notice to Permanent of the new interest
rate; and (3) Permanent has the option to prepay its loan if Permanent Admittedly, the second paragraph of the questioned proviso which
and Solidbank do not agree on the new interest rate. The phrases provides that "the Cardholder hereby authorizes Security Diners to
"irrevocably authorize," "at any time" and "adjustment of the interest rate correspondingly increase the rate of such interest in the event of
shall be effective from the date indicated in the written notice sent to us changes in prevailing market rates x x x" is an escalation clause.
by the bank, or if no date is indicated, from the time the notice was sent," However, it cannot be said to be dependent solely on the will of private
emphasize that Permanent should receive a written notice from respondent as it is also dependent on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as Compliance with these requisites is essential to preserve the mutuality
long as they are not solely potestative but based on reasonable and valid of contracts. For indeed, one-sided impositions do not have the force of
grounds. Obviously, the fluctuation in the market rates is beyond the law between the parties, because such impositions are not based on the
control of private respondent.42 (Emphasis supplied.) parties’ essential equality.45

In interpreting a contract, its provisions should not be read in isolation Modifications in the rate of interest for loans pursuant to an escalation
but in relation to each other and in their entirety so as to render them clause must be the result of an agreement between the parties. Unless
effective, having in mind the intention of the parties and the purpose to such important change in the contract terms is mutually agreed upon, it
be achieved. The various stipulations of a contract shall be interpreted has no binding effect.46 In the absence of consent on the part of the
together, attributing to the doubtful ones that sense which may result petitioners to the modifications in the interest rates, the adjusted rates
from all of them taken jointly.43 cannot bind them. Hence, we consider as invalid the interest rates in
excess of 15%, the rate charged for the first year.
Here, the escalation clause in the promissory notes authorizing the
respondent to adjust the rate of interest on the basis of a law or Based on the August 29, 2000 demand letter of China Bank, petitioners’
regulation issued by the Central Bank of the Philippines, should be read total principal obligation under the two promissory notes which they
together with the statement after the first paragraph where no rate of failed to settle is ₱10,355,000. However, due to China Bank’s unilateral
interest was fixed as it would be based on prevailing market rates. While increases in the interest rates from 15% to as high as 24.50% and
the latter is not strictly an escalation clause, its clear import was that penalty charge of 1/10 of 1% per day or 36.5% per annum for the period
interest rates would vary as determined by prevailing market rates. November 4, 1999 to February 23, 2001, petitioners’ balance ballooned
Evidently, the parties intended the interest on petitioners’ loan, including to ₱19,201,776.63. Note that the original amount of principal loan almost
any upward or downward adjustment, to be determined by the prevailing doubled in only 16 months. The Court also finds the penalty charges
market rates and not dictated by respondent’s policy. It may also be imposed excessive and arbitrary, hence the same is hereby reduced to
mentioned that since the deregulation of bank rates in 1983, the Central 1% per month or 12% per annum. 1âwphi1

Bank has shifted to a market-oriented interest rate policy.44

Petitioners’ Statement of Account, as of February 23, 2001, the date of
There is no indication that petitioners were coerced into agreeing with the foreclosure proceedings, should thus be modified as follows:
the foregoing provisions of the promissory notes. In fact, petitioner
Ignacio, a physician engaged in the medical supply business, admitted
having understood his obligations before signing them. At no time did Principal ₱10,355,000.00
petitioners protest the new rates imposed on their loan even when their
property was foreclosed by respondent. Interest at 15% per annum
₱10,355,000 x .15 x 477 days/365 days 2,029,863.70
This notwithstanding, we hold that the escalation clause is still void
Penalty at 12% per annum 1,623 ,890. 96
because it grants respondent the power to impose an increased rate of
interest without a written notice to petitioners and their written consent. ₱10,355,000 x .12 x 477days/365 days
Respondent’s monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing statement Sub-Total 14,008,754.66
based on the new imposed interest with corresponding computation of
the total debt should have been provided by the respondent to enable Less: A/P applied to balance of principal (55,000.00)
petitioners to make an informed decision. An appropriate form must also
be signed by the petitioners to indicate their conformity to the new rates.
 In loan agreements, it cannot be denied that the rate of interest is a
Less: Accounts payable L & D (261,149.39)
principal condition, if not the most important component. Thus, any
modification thereof must be mutually agreed upon; otherwise, it has no
13,692,605.27
binding effect. Moreover, the Court cannot consider a stipulation
Add: Attorney's Fees 1,369,260.53 granting a party the option to prepay the loan if said party is not
agreeable to the arbitrary interest rates imposed. Premium may not be
Total Amount Due 15,061,865.79 placed upon a stipulation in a contract which grants one party the right
to choose whether to continue with or withdraw from the agreement if it
Less: Bid Price 10,300,000.00 discovers that what the other party has been doing all along is improper
or illegal.

TOTAL DEFICIENCY AMOUNT 4,761,865.79 This Petition for Review on Certiorari1 questions the May 8, 2007
Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which
affirmed with modifications the February 28, 2003 Decision3 and the
June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of
WHEREFORE, the petition for review on certiorari is PARTLY Kalibo, Aklan in Civil Case No. 5975.
GRANTED. The February 20, 2009 · Decision and April 27, 2009
Resolution of the Court of Appeals in CA G.R. CV No. 80338 are hereby Factual Antecedents
MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are
hereby ORDERED to pay jointly and severally respondent China
Spouses Eduardo and Lydia Silos (petitioners) have been in business
Banking Corporation ₱4, 7 61 ,865. 79 representing the amount of
for about two decades of operating a department store and buying and
deficiency inclusive of interest, penalty charge and attorney's fees. Said
selling of ready-to-wear apparel. Respondent Philippine National Bank
amount shall bear interest at 12% per annum, reckoned from the time of
(PNB) is a banking corporation organized and existing under Philippine
the filing of the complaint until its full satisfaction.
laws.
No pronouncement as to costs.
To secure a one-year revolving credit line of ₱150,000.00 obtained from
PNB, petitioners constituted in August 1987 a Real Estate
SO ORDERED. Mortgage5 over a 370-square meter lot in Kalibo, Aklan covered by
Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit
line was increased to ₱1.8 million and the mortgage was
correspondingly increased to ₱1.8 million.6
G.R. No. 181045 July 2, 2014
And in July 1989, a Supplement to the Existing Real Estate
SPOUSES EDUARDO and LYDIA SILOS, Petitioners, Mortgage7 was executed to cover the same credit line, which was
vs. increased to ₱2.5 million, and additional security was given in the form
PHILIPPINE NATIONAL BANK, Respondent. of a 134-square meter lot covered by TCT T-16208. In addition,
petitioners issued eight Promissory Notes8 and signed a Credit
DECISION Agreement.9 This July 1989 Credit Agreement contained a stipulation on
interest which provides as follows:
DEL CASTILLO, J.:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 8. 8th Promissory Note dated July 11, 1991 – 24%.13
19.5% per annum. Interest shall be payable in advance every one
hundred twenty days at the rate prevailing at the time of the renewal. In August 1991, an Amendment to Credit Agreement14 was executed by
the parties, with the following stipulation regarding interest:
(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 1.03. Interest on Line Availments. (a) The Borrowers agree to pay
future, including without limitation, the shifting from the floating interest interest on each Availment from date of each Availment up to but not
rate system to the fixed interest rate system, or vice versa. Where the including the date of full payment thereof at the rate per annum which is
Bank has imposed on the Loan interest at a rate per annum, which is determined by the Bank to be prime rate plus applicable spread in effect
equal to the Bank’s spread over the current floating interest rate, the as of the date of each Availment.15 (Emphases supplied)
Borrower hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate Under this Amendment to Credit Agreement, petitioners issued in favor
at any time depending on whatever policy it may adopt in the of PNB the following 18 Promissory Notes, which petitioners settled –
future.10 (Emphases supplied) except the last (the note covering the principal) – at the following interest
rates:
The eight Promissory Notes, on the other hand, contained a stipulation
granting PNB the right to increase or reduce interest rates "within the 1. 9th Promissory Note dated November 8, 1991 – 26%;
limits allowed by law or by the Monetary Board."11
2. 10th Promissory Note dated March 19, 1992 – 25%;
The Real Estate Mortgage agreement provided the same right to
increase or reduce interest rates "at any time depending on whatever
3. 11th Promissory Note dated July 11, 1992 – 23%;
policy PNB may adopt in the future."12
4. 12th Promissory Note dated November 10, 1992 – 21%;
Petitioners religiously paid interest on the notes at the following rates:
5. 13th Promissory Note dated March 15, 1993 – 21%;
1. 1st Promissory Note dated July 24, 1989 – 19.5%;
6. 14th Promissory Note dated July 12, 1993 – 17.5%;
2. 2nd Promissory Note dated November 22, 1989 – 23%;
7. 15th Promissory Note dated November 17, 1993 – 21%;
3. 3rd Promissory Note dated March 21, 1990 – 22%;
8. 16th Promissory Note dated March 28, 1994 – 21%;
4. 4th Promissory Note dated July 19, 1990 – 24%;
9. 17th Promissory Note dated July 13, 1994 – 21%;
5. 5th Promissory Note dated December 17, 1990 – 28%;
10. 18th Promissory Note dated November 16, 1994 – 16%;
6. 6th Promissory Note dated February 14, 1991 – 32%;
11. 19th Promissory Note dated April 10, 1995 – 21%;
7. 7th Promissory Note dated March 1, 1991 – 30%; and
12. 20th Promissory Note dated July 19, 1995 – 18.5%;
 13. 21st Promissory Note dated December 18, 1995 – 18.75%; Incidentally, PN 9707237 provided for the penalty equivalent to 24% per
annum in case of default, as follows:
14. 22nd Promissory Note dated April 22, 1996 – 18.5%;
Without need for notice or demand, failure to pay this note or any
15. 23rd Promissory Note dated July 22, 1996 – 18.5%; installment thereon, when due, shall constitute default and in such cases
or in case of garnishment, receivership or bankruptcy or suit of any kind
16. 24th Promissory Note dated November 25, 1996 – 18%; 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
17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
charge of twenty four percent (24%) per annum based on the defaulted
principal amount. x x x19 (Emphasis supplied)
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 –
25%.16
PNB prepared a Statement of Account20 as of October 12, 1998, detailing
the amount due and demandable from petitioners in the total amount of
The 9th up to the 17th promissory notes provide for the payment of ₱3,620,541.60, broken down as follows:
interest at the "rate the Bank may at any time without notice, raise within
the limits allowed by law x x x."17
Principal P 2,500,000.00
On the other hand, the 18th up to the 26th promissory notes – including
PN 9707237, which is the 26th promissory note – carried the following Interest 538,874.94
provision:
Penalties 581,666.66
x x x 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 Total P 3,620,541.60
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 Despite demand, petitioners failed to pay the foregoing amount. Thus,
hereby agree that in the event I/we are not agreeable to the interest rate PNB foreclosed on the mortgage, and on January 14, 1999, TCTs T-
fixed for any Interest Period, I/we shall have the option top repay the 14250 and T-16208 were sold to it at auction for the amount of
loan or credit facility without penalty within ten (10) calendar days from ₱4,324,172.96.21 The sheriff’s certificate of sale was registered on March
the Interest Setting Date.18 (Emphasis supplied) 11, 1999.

Respondent regularly renewed the line from 1990 up to 1997, and More than a year later, or on March 24, 2000, petitioners filed Civil Case
petitioners made good on the promissory notes, religiously paying the No. 5975, seeking annulment of the foreclosure sale and an accounting
interests without objection or fail. But in 1997, petitioners faltered when of the PNB credit. Petitioners theorized that after the first promissory
the interest rates soared due to the Asian financial crisis. Petitioners’ note where they agreed to pay 19.5% interest, the succeeding
sole outstanding promissory note for ₱2.5 million – PN 9707237 stipulations for the payment of interest in their loan agreements with PNB
executed in July 1997 and due 120 days later or on October 28, 1997 – – which allegedly left to the latter the sole will to determine the interest
became past due, and despite repeated demands, petitioners failed to rate – became null and void. Petitioners added that because the interest
make good on the note. rates were fixed by respondent without their prior consent or agreement,
these rates are void, and as a result, petitioners should only be made and the Supplement thereto were all prepared by respondent PNB and
liable for interest at the legal rate of 12%. They claimed further that they were presented to her and her husband Eduardo only for signature; that
overpaid interests on the credit, and concluded that due to this she was told by PNB that the latter alone would determine the interest
overpayment of steep interest charges, their debt should now be rate; that as to the Amendment to Credit Agreement, she was told that
deemed paid, and the foreclosure and sale of TCTs T-14250 and T- PNB would fill up the interest rate portion thereof; that at the time the
16208 became unnecessary and wrongful. As for the imposed penalty parties executed the said Credit Agreement, she was not informed about
of ₱581,666.66, petitioners alleged that since the Real Estate Mortgage the applicable spread that PNB would impose on her account; that the
and the Supplement thereto did not include penalties as part of the interest rate portion of all Promissory Notes she and Eduardo issued
secured amount, the same should be excluded from the foreclosure were always left in blank when they executed them, with respondent’s
amount or bid price, even if such penalties are provided for in the final mere assurance that it would be the one to enter or indicate thereon the
Promissory Note, or PN 9707237.22 prevailing interest rate at the time of availment; and that they agreed to
such arrangement. She further testified that the two Real Estate
In addition, petitioners sought to be reimbursed an alleged overpayment Mortgage agreements she signed did not stipulate the payment of
of ₱848,285.00 made during the period August 21, 1991 to March 5, penalties; that she and Eduardo consulted with a lawyer, and were told
1998,resulting from respondent’s imposition of the alleged illegal and that PNB’s actions were improper, and so on March 20, 2000, they wrote
steep interest rates. They also prayed to be awarded ₱200,000.00 by to the latter seeking a recomputation of their outstanding obligation; and
way of attorney’s fees.23 when PNB did not oblige, they instituted Civil Case No. 5975.27

In its Answer,24 PNB denied that it unilaterally imposed or fixed interest On cross-examination, Lydia testified that she has been in business for
rates; that petitioners agreed that without prior notice, PNB may modify 20 years; that she also borrowed from other individuals and another
interest rates depending on future policy adopted by it; and that the bank; that it was only with banks that she was asked to sign loan
imposition of penalties was agreed upon in the Credit Agreement. It documents with no indicated interest rate; that she did not bother to read
added that the imposition of penalties is supported by the all-inclusive the terms of the loan documents which she signed; and that she received
clause in the Real Estate Mortgage agreement which provides that the several PNB statements of account detailing their outstanding
mortgage shall stand as security for any and all other obligations of obligations, but she did not complain; that she assumed instead that
whatever kind and nature owing to respondent, which thus includes what was written therein is correct.28
penalties imposed upon default or non-payment of the principal and
interest on due date. For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa),
the sole witness for respondent, stated on cross-examination that as a
On pre-trial, the parties mutually agreed to the following material facts, practice, the determination of the prime rates of interest was the
among others: responsibility solely of PNB’s Treasury Department which is based in
Manila; that these prime rates were simply communicated to all PNB
a) That since 1991 up to 1998, petitioners had paid PNB the total branches for implementation; that there are a multitude of considerations
amount of ₱3,484,287.00;25 and which determine the interest rate, such as the cost of money, foreign
currency values, PNB’s spread, bank administrative costs, profitability,
and the practice in the banking industry; that in every repricing of each
b) That PNB sent, and petitioners received, a March 10, 2000
loan availment, the borrower has the right to question the rates, but that
demand letter.26
this was not done by the petitioners; and that anything that is not found
in the Promissory Note may be supplemented by the Credit Agreement.29
During trial, petitioner Lydia Silos (Lydia) testified that the Credit
Agreement, the Amendment to Credit Agreement, Real Estate Mortgage
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor
Case No. 5975.30 of the respondent and against the petitioners by DISMISSING the latter’s
petition.
It ruled that:
Costs against the petitioners.
1. While the Credit Agreement allows PNB to unilaterally
increase its spread over the floating interest rate at any time SO ORDERED.38
depending on whatever policy it may adopt in the future, it
likewise allows for the decrease at any time of the same. Thus, Petitioners moved for reconsideration. In an Order39 dated June 4, 2003,
such stipulation authorizing both the increase and decrease of the trial court granted only a modification in the award of attorney’s fees,
interest rates as may be applicable is valid,31 as was held in reducing the same from 10% to 1%. Thus, PNB was ordered to refund
Consolidated Bank and Trust Corporation (SOLIDBANK) v. to petitioner the excess in attorney’s fees in the amount of ₱356,589.90,
Court of Appeals;32 viz:

2. Banks are allowed to stipulate that interest rates on loans WHEREFORE, judgment is hereby rendered upholding the validity of
need not be fixed and instead be made dependent on prevailing the interest rate charged by the respondent as well as the extra-judicial
rates upon which to peg such variable interest rates;33 foreclosure proceedings and the Certificate of Sale. However,
respondent is directed to refund to the petitioner the amount of
3. The Promissory Note, as the principal contract evidencing ₱356,589.90 representing the excess interest charged against the latter.
petitioners’ loan, prevails over the Credit Agreement and the
Real Estate Mortgage. No pronouncement as to costs.

As such, the rate of interest, penalties and attorney’s fees SO ORDERED.40

stipulated in the Promissory Note prevail over those mentioned
in the Credit Agreement and the Real Estate Mortgage
agreements;34

4. Roughly, PNB’s computation of the total amount of petitioners’

obligation is correct;35
Ruling of the Court of Appeals
5. Because the loan was admittedly due and demandable, the
Petitioners appealed to the CA, which issued the questioned Decision
foreclosure was regularly made;36
with the following decretal portion:
6. By the admission of petitioners during pre-trial, all payments
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY
made to PNB were properly applied to the principal, interest and
GRANTED. The modified Decision of the Regional Trial Court per Order
penalties.37
dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
The dispositive portion of the trial court’s Decision reads:
 1. [T]hat the interest rate to be applied after the expiration of the agreed 25%; thus it overcharged petitioners, and the latter paid, an
first 30-day interest period for PN. No. 9707237 should be 12% excess of ₱736.56 in interest.
per annum;
On the issue of penalties, the CA ruled that the express tenor of the Real
2. [T]hat the attorney’s fees of10% is valid and binding; and Estate Mortgage agreements contemplated the inclusion of the PN
9707237-stipulated 24% penalty in the amount to be secured by the
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the mortgaged property, thus –
excess in the bid price of ₱377,505.99 which is the difference
between the total amount due [PNB] and the amount of its bid For and in consideration of certain loans, overdrafts and other credit
price. accommodations obtained from the MORTGAGEE and to secure the
payment of the same and those others that the MORTGAGEE may
SO ORDERED.41 extend to the MORTGAGOR, including interest and expenses, and other
obligations owing by the MORTGAGOR to the MORTGAGEE, whether
On the other hand, respondent did not appeal the June 4,2003 Order of direct or indirect, principal or secondary, as appearing in the accounts,
the trial court which reduced its award of attorney’s fees. It simply raised books and records of the MORTGAGEE, the MORTGAGOR does
the issue in its appellee’s brief in the CA, and included a prayer for the hereby transfer and convey by way of mortgage unto the MORTGAGEE
reversal of said Order. x x x43 (Emphasis supplied)

In effect, the CA limited petitioners’ appeal to the following issues: The CA believes that the 24% penalty is covered by the phrase "and
other obligations owing by the mortgagor to the mortgagee" and should
thus be added to the amount secured by the mortgages.44
1) Whether x x x the interest rates on petitioners’ outstanding
obligation were unilaterally and arbitrarily imposed by PNB;
The CA then proceeded to declare valid the foreclosure and sale of
properties covered by TCTs T-14250 and T-16208, which came as a
2) Whether x x x the penalty charges were secured by the real
necessary result of petitioners’ failure to pay the outstanding obligation
estate mortgage; and
upon demand.45The CA saw fit to increase the trial court’s award of 1%
to 10%, finding the latter rate to be reasonable and citing the Real Estate
3) Whether x x x the extrajudicial foreclosure and sale are valid.42 Mortgage agreement which authorized the collection of the higher rate.46

The CA noted that, based on receipts presented by petitioners during Finally, the CA ruled that petitioners are entitled to ₱377,505.09 surplus,
trial, the latter dutifully paid a total of ₱3,027,324.60 in interest for the which is the difference between PNB’s bid price of ₱4,324,172.96 and
period August 7, 1991 to August 6, 1997, over and above the ₱2.5 petitioners’ total computed obligation as of January 14, 1999, or the date
million principal obligation. And this is exclusive of payments for of the auction sale, in the amount of ₱3,946,667.87.47
insurance premiums, documentary stamp taxes, and penalty. All the
while, petitioners did not complain nor object to the imposition of interest;
Hence, the present Petition.
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. Issues

The CA nevertheless noted that for the period July 30, 1997 to August The following issues are raised in this Petition:
14, 1997, PNB wrongly applied an interest rate of 25.72% instead of the
I MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE
AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM
A. THE COURT OF APPEALS AS WELL AS THE [THE] FORECLOSURE AMOUNT.
LOWER COURT ERRED IN NOT NULLIFYING THE
INTEREST RATE PROVISION IN THE CREDIT III
AGREEMENT DATED JULY 24, 1989 X X X AND IN
THE AMENDMENT TO CREDIT AGREEMENT THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF
DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE THE LOWER COURT, WHICH REDUCED THE ATTORNEY’S FEES
SOLE UNILATERAL DETERMINATION OF THE OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X
RESPONDENT PNB THE ORIGINAL FIXING OF EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING]
INTEREST RATE AND ITS INCREASE, WHICH 10% ATTORNEY’S FEES.48
AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF
THE [NEW CIVIL CODE], AS ENUNCIATED IN Petitioners’ Arguments
PONCIANO ALMEIDA V. COURT OF APPEALS,G.R.
[NO.] 113412, APRIL 17, 1996, AND CONTRARY TO
Petitioners insist that the interest rate provision in the Credit Agreement
PUBLIC POLICY AND PUBLIC INTEREST, AND IN
and the Amendment to Credit Agreement should be declared null and
APPLYING THE PRINCIPLE OF ESTOPPEL ARISING
void, for they relegated to PNB the sole power to fix interest rates based
FROM THE ALLEGED DELAYED COMPLAINT OF
on arbitrary criteria or factors such as bank policy, profitability, cost of
PETITIONER[S], AND [THEIR] PAYMENT OF THE
money, foreign currency values, and bank administrative costs; spaces
INTEREST CHARGED.
for interest rates in the two Credit Agreements and the promissory notes
were left blank for PNB to unilaterally fill, and their consent or agreement
B. CONSEQUENTLY, THE COURT OF APPEALS AND to the interest rates imposed thereafter was not obtained; the interest
THE LOWER COURT ERRED IN NOT DECLARING rate, which consists of the prime rate plus the bank spread, is
THAT PNB IS NOT AT ALL ENTITLED TO ANY determined not by agreement of the parties but by PNB’s Treasury
INTEREST EXCEPT THE LEGAL RATE FROM DATE Department in Manila. Petitioners conclude that by this method of fixing
OF DEMAND, AND IN NOT APPLYING THE EXCESS the interest rates, the principle of mutuality of contracts is violated, and
OVER THE LEGAL RATE OF THE ADMITTED public policy as well as Circular 90549 of the then Central Bank had been
PAYMENTS MADE BY PETITIONER[S] FROM 1991- breached.
1998 IN THE ADMITTED TOTAL AMOUNT OF
₱3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF
Petitioners question the CA’s application of the principle of estoppel,
₱2,500,000.[00] LEAVING AN OVERPAYMENT
saying that no estoppel can proceed from an illegal act. Though they
OF₱984,287.00 REFUNDABLE BY RESPONDENT TO
failed to timely question the imposition of the alleged illegal interest rates
PETITIONER[S] WITH INTEREST OF 12% PER
and continued to pay the loan on the basis of these rates, they cannot
ANNUM.
be deemed to have acquiesced, and hence could recover what they
erroneously paid.50
II
Petitioners argue that if the interest rates were nullified, then their
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN obligation to PNB is deemed extinguished as of July 1997; moreover, it
HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED would appear that they even made an over payment to the bank in the
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES amount of ₱984,287.00.
ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE
Next, petitioners suggest that since the Real Estate Mortgage is not a proper subject for review by the Court because the issue was
agreements did not include nor specify, as part of the secured amount, never raised in the lower court.
the penalty of 24% authorized in PN 9707237, such amount of
₱581,666.66 could not be made answerable by or collected from the As for petitioners’ claim that interest rates imposed by it are null and void
mortgages covering TCTs T-14250 and T-16208. Claiming support from for the reasons that 1) the Credit Agreements and the promissory notes
Philippine Bank of Communications [PBCom] v. Court of were signed in blank; 2) interest rates were at short periods; 3) no
Appeals,51 petitioners insist that the phrase "and other obligations owing interest rates could be charged where no agreement on interest rates
by the mortgagor to the mortgagee"52 in the mortgage agreements was made in writing; 4) PNB fixed interest rates on the basis of arbitrary
cannot embrace the ₱581,666.66 penalty, because, as held in the policies and standards left to its choosing; and 5) interest rates based
PBCom case, "[a] penalty charge does not belong to the species of on prime rate plus applicable spread are indeterminate and arbitrary –
obligations enumerated in the mortgage, hence, the said contract cannot PNB counters:
be understood to secure the penalty";53while the mortgages are the
accessory contracts, what items are secured may only be determined a. That Credit Agreements and promissory notes were signed by
from the provisions of the mortgage contracts, and not from the Credit petitioner[s] in blank – Respondent claims that this issue was
Agreement or the promissory notes. never raised in the lower court. Besides, documentary evidence
prevails over testimonial evidence; Lydia Silos’ testimony in this
Finally, petitioners submit that the trial court’s award of 1% attorney’s regard is self-serving, unsupported and uncorroborated, and for
fees should be maintained, given that in foreclosures, a lawyer’s work being the lone evidence on this issue. The fact remains that
consists merely in the preparation and filing of the petition, and involves these documents are in proper form, presumed regular, and
minimal study.54 To allow the imposition of a staggering ₱396,211.00 for endure, against arbitrary claims by Silos – who is an experienced
such work would be contrary to equity. Petitioners state that the purpose business person – that she signed questionable loan documents
of attorney’s fees in cases of this nature "is not to give respondent a whose provisions for interest rates were left blank, and yet she
larger compensation for the loan than the law already allows, but to continued to pay the interests without protest for a number of
protect it against any future loss or damage by being compelled to retain years.56
counsel x x x to institute judicial proceedings for the collection of its
credit."55 And because the instant case involves a simple extrajudicial b. That interest rates were at short periods – Respondent argues
foreclosure, attorney’s fees may be equitably tempered. that the law which governs and prohibits changes in interest
rates made more than once every twelve months has been
Respondent’s Arguments removed57 with the issuance of Presidential Decree No. 858.58

For its part, respondent disputes petitioners’ claim that interest rates c. That no interest rates could be charged where no agreement
were unilaterally fixed by it, taking relief in the CA pronouncement that on interest rates was made in writing in violation of Article 1956
petitioners are deemed estopped by their failure to question the imposed of the Civil Code, which provides that no interest shall be due
rates and their continued payment thereof without opposition. It adds unless it has been expressly stipulated in writing – Respondent
that because the Credit Agreement and promissory notes contained insists that the stipulated 25% per annum as embodied in PN
both an escalation clause and a de-escalation clause, it may not be said 9707237 should be imposed during the interim, or the period
that the bank violated the principle of mutuality. Besides, the increase or after the loan became due and while it remains unpaid, and not
decrease in interest rates have been mutually agreed upon by the the legal interest of 12% as claimed by petitioners.59
parties, as shown by petitioners’ continuous payment without protest.
Respondent adds that the alleged unilateral imposition of interest rates
 d. That PNB fixed interest rates on the basis of arbitrary policies 1. That the interest rate to be applied after the expiration of the
and standards left to its choosing – According to respondent, first 30-day interest period for PN 9707237 should be 12% per
interest rates were fixed taking into consideration increases or annum; and
decreases as provided by law or by the Monetary Board, the
bank’s overall costs of funds, and upon agreement of the 2. That PNB should reimburse petitioners the excess in the bid
parties.60 price of ₱377,505.99 which is the difference between the total
amount due to PNB and the amount of its bid price.
e. That interest rates based on prime rate plus applicable spread
are indeterminate and arbitrary – On this score, respondent Our Ruling
submits there are various factors that influence interest rates,
from political events to economic developments, etc.; the cost of The Court grants the Petition.
money, profitability and foreign currency transactions may not
be discounted.61
Before anything else, it must be said that it is not the function of the Court
to re-examine or re-evaluate evidence adduced by the parties in the
On the issue of penalties, respondent reiterates the trial court’s finding proceedings below. The rule admits of certain well-recognized
that during pre-trial, petitioners admitted that the Statement of Account exceptions, though, as when the lower courts’ findings are not supported
as of October 12, 1998 – which detailed and included penalty charges by the evidence on record or are based on a misapprehension of facts,
as part of the total outstanding obligation owing to the bank – was or when certain relevant and undisputed facts were manifestly
correct. Respondent justifies the imposition and collection of a penalty overlooked that, if properly considered, would justify a different
as a normal banking practice, and the standard rate per annum for all conclusion. This case falls within such exceptions.
commercial banks, at the time, was 24%.
The Court notes that on March 5, 2008, a Resolution was issued by the
Respondent adds that the purpose of the penalty or a penal clause for Court’s First Division denying respondent’s petition in G.R. No. 181046,
that matter is to ensure the performance of the obligation and substitute due to late filing, failure to attach the required affidavit of service of the
for damages and the payment of interest in the event of non- petition on the trial court and the petitioners, and submission of a
compliance.62 And the promissory note – being the principal agreement defective verification and certification of non-forum shopping. On June
as opposed to the mortgage, which is a mere accessory – should prevail. 25, 2008, the Court issued another Resolution denying with finality
This being the case, its inclusion as part of the secured amount in the respondent’s motion for reconsideration of the March 5, 2008
mortgage agreements is valid and necessary. Resolution. And on August 15, 2008, entry of judgment was made. This
thus settles the issues, as above-stated, covering a) the interest rate –
Regarding the foreclosure of the mortgages, respondent accuses or 12% per annum– that applies upon expiration of the first 30 days
petitioners of pre-empting consolidation of its ownership over TCTs T- interest period provided under PN 9707237, and b)the CA’s decree that
14250 and T-16208; that petitioners filed Civil Case No. 5975 ostensibly PNB should reimburse petitioner the excess in the bid price of
to question the foreclosure and sale of properties covered by TCTs T- ₱377,505.09.
14250 and T-16208 in a desperate move to retain ownership over these
properties, because they failed to timely redeem them. It appears that respondent’s practice, more than once proscribed by the
Court, has been carried over once more to the petitioners. In a number
Respondent directs the attention of the Court to its petition in G.R. No. of decided cases, the Court struck down provisions in credit documents
181046,63 where the propriety of the CA’s ruling on the following issues issued by PNB to, or required of, its borrowers which allow the bank to
is squarely raised: increase or decrease interest rates "within the limits allowed by law at
any time depending on whatever policy it may adopt in the future." Thus, in the future and provided, that, the interest rate on this accommodation
in Philippine National Bank v. Court of Appeals,64 such stipulation and shall be correspondingly decreased in the event that the applicable
similar ones were declared in violation of Article 130865 of the Civil Code. maximum interest rate is reduced by law or by the Monetary Board. In
In a second case, Philippine National Bank v. Court of Appeals,66 the either case, the adjustment in the interest rate agreed upon shall take
very same stipulations found in the credit agreement and the promissory effect on the effectivity date of the increase or decrease in maximum
notes prepared and issued by the respondent were again invalidated. interest rate.
The Court therein said:
This clause is authorized by Section 2 of Presidential Decree (P.D.) No.
The Credit Agreement provided inter alia, that — 1684 which further amended Act No. 2655 ("The Usury Law"), as
amended, thus:
(a) The BANK reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may Section 2. The same Act is hereby amended by adding a new section
adopt in the future; Provided, that the interest rate on this after Section 7, to read as follows:
accommodation shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the Monetary Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of
Board. In either case, the adjustment in the interest rate agreed upon money, goods or credits may stipulate that the rate of interest agreed
shall take effect on the effectivity date of the increase or decrease in the upon may be increased in the event that the applicable maximum rate
maximum interest rate. of interest is increased bylaw or by the Monetary Board; Provided, That
such stipulation shall be valid only if there is also a stipulation in the
The Promissory Note, in turn, authorized the PNB to raise the rate of agreement that the rate of interest agreed upon shall be reduced in the
interest, at any time without notice, beyond the stipulated rate of 12% event that the applicable maximum rate of interest is reduced by law or
but only "within the limits allowed by law." by the Monetary Board; Provided further, That the adjustment in the rate
of interest agreed upon shall take effect on or after the effectivity of the
The Real Estate Mortgage contract likewise provided that — increase or decrease in the maximum rate of interest.

(k) INCREASE OF INTEREST RATE: The rate of interest charged on Section 1 of P.D. No. 1684 also empowered the Central Bank’s
the obligation secured by this mortgage as well as the interest on the Monetary Board to prescribe the maximum rates of interest for loans and
amount which may have been advanced by the MORTGAGEE, in certain forbearances. Pursuant to such authority, the Monetary Board
accordance with the provision hereof, shall be subject during the life of issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5
this contract to such an increase within the rate allowed by law, as the of which provides:
Board of Directors of the MORTGAGEE may prescribe for its debtors.
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other
xxxx Financial Intermediaries) is hereby amended to read as follows:

In making the unilateral increases in interest rates, petitioner bank relied Sec. 1303. Interest and Other Charges.
on the escalation clause contained in their credit agreement which
provides, as follows: — The rate of interest, including commissions, premiums, fees and other
charges, on any loan, or forbearance of any money, goods or credits,
The Bank reserves the right to increase the interest rate within the limits regardless of maturity and whether secured or unsecured, shall not be
allowed by law at any time depending on whatever policy it may adopt
subject to any ceiling prescribed under or pursuant to the Usury Law, as In order that obligations arising from contracts may have the force of law
amended. between the parties, there must be mutuality between the parties based
on their essential equality. A contract containing a condition which
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting makes its fulfillment dependent exclusively upon the uncontrolled will of
parties to stipulate freely regarding any subsequent adjustment in the one of the contracting parties, is void . . . . Hence, even assuming that
interest rate that shall accrue on a loan or forbearance of money, goods the . . . loan agreement between the PNB and the private respondent
or credits. In fine, they can agree to adjust, upward or downward, the gave the PNB a license (although in fact there was none) to increase the
interest previously stipulated. However, contrary to the stubborn interest rate at will during the term of the loan, that license would have
insistence of petitioner bank, the said law and circular did not authorize been null and void for being violative of the principle of mutuality
either party to unilaterally raise the interest rate without the other’s essential in contracts. It would have invested the loan agreement with
consent. the character of a contract of adhesion, where the parties do not bargain
on equal footing, the weaker party’s (the debtor) participation being
It is basic that there can be no contract in the true sense in the absence reduced to the alternative "to take it or leave it" . . . . Such a contract is
of the element of agreement, or of mutual assent of the parties. If this a veritable trap for the weaker party whom the courts of justice must
assent is wanting on the part of the one who contracts, his act has no protect against abuse and imposition.67 (Emphases supplied)
more efficacy than if it had been done under duress or by a person of
unsound mind. Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the
Court invalidated the very same provisions in the respondent’s prepared
Similarly, contract changes must be made with the consent of the Credit Agreement, declaring thus:
contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of The binding effect of any agreement between parties to a contract is
the agreement. In the case of loan contracts, it cannot be gainsaid that premised on two settled principles: (1) that any obligation arising from
the rate of interest is always a vital component, for it can make or break contract has the force of law between the parties; and (2) that there must
a capital venture. Thus, any change must be mutually agreed upon, be mutuality between the parties based on their essential equality. Any
otherwise, it is bereft of any binding effect. contract which appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result is void. Any stipulation
We cannot countenance petitioner bank’s posturing that the escalation regarding the validity or compliance of the contract which is left solely to
clause at bench gives it unbridled right to unilaterally upwardly adjust the the will of one of the parties, is likewise, invalid.
interest on private respondents’ loan. That would completely take away
from private respondents the right to assent to an important modification It is plainly obvious, therefore, from the undisputed facts of the case that
in their agreement, and would negate the element of mutuality in respondent bank unilaterally altered the terms of its contract with
contracts. In Philippine National Bank v. Court of Appeals, et al., 196 petitioners by increasing the interest rates on the loan without the prior
SCRA 536, 544-545 (1991) we held — assent of the latter. In fact, the manner of agreement is itself explicitly
stipulated by the Civil Code when it provides, in Article 1956 that "No
x x x The unilateral action of the PNB in increasing the interest rate on interest shall be due unless it has been expressly stipulated in writing."
the private respondent’s loan violated the mutuality of contracts ordained What has been "stipulated in writing" from a perusal of interest rate
in Article 1308 of the Civil Code: 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
Art. 1308. The contract must bind both contracting parties; its validity or
escalation or de-escalation; 2) within the limits allowed by law; and 3)
compliance cannot be left to the will of one of them.
upon agreement.
Indeed, the interest rate which appears to have been agreed upon by Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the
the parties to the contract in this case was the 21% rate stipulated in the above doctrine was reiterated:
interest provision. Any doubt about this is in fact readily resolved by a
careful reading of the credit agreement because the same plainly uses The promissory note contained the following stipulation:
the phrase "interest rate agreed upon," in reference to the original 21%
interest rate. x x x For value received, I/we, [private respondents] jointly and severally
promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at
xxxx its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND
ONLY (₱15,000.00), Philippine Currency, together with interest thereon
Petitioners never agreed in writing to pay the increased interest rates at the rate of 12% per annum until paid, which interest rate the Bank may
demanded by respondent bank in contravention to the tenor of their at any time without notice, raise within the limits allowed by law, and I/we
credit agreement. That an increase in interest rates from 18% to as much also agree to pay jointly and severally ____% per annum penalty charge,
as 68% is excessive and unconscionable is indisputable. Between 1981 by way of liquidated damages should this note be unpaid or is not
and 1984, petitioners had paid an amount equivalent to virtually half of renewed on due dated.
the entire principal (₱7,735,004.66) which was applied to interest alone.
By the time the spouses tendered the amount of ₱40,142,518.00 in Payment of this note shall be as follows:
settlement of their obligations; respondent bank was demanding
₱58,377,487.00 over and above those amounts already previously paid *THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
by the spouses.
On the reverse side of the note the following condition was stamped:
Escalation clauses are not basically wrong or legally objectionable so
long as they are not solely potestative but based on reasonable and valid
All short-term loans to be granted starting January 1, 1978 shall be made
grounds. Here, as clearly demonstrated above, not only [are] the
subject to the condition that any and/or all extensions hereof that will
increases of the interest rates on the basis of the escalation clause
leave any portion of the amount still unpaid after 730 days shall
patently unreasonable and unconscionable, but also there are no valid
automatically convert the outstanding balance into a medium or long-
and reasonable standards upon which the increases are anchored.
term obligation as the case may be and give the Bank the right to charge
the interest rates prescribed under its policies from the date the account
xxxx was originally granted.

In the face of the unequivocal interest rate provisions in the credit To secure payment of the loan the parties executed a real estate
agreement and in the law requiring the parties to agree to changes in mortgage contract which provided:
the interest rate in writing, we hold that the unilateral and progressive
increases imposed by respondent PNB were null and void. Their effect
(k) INCREASE OF INTEREST RATE:
was to increase the total obligation on an eighteen million peso loan to
an amount way over three times that which was originally granted to the
borrowers. That these increases, occasioned by crafty manipulations in The rate of interest charged on the obligation secured by this mortgage
the interest rates is unconscionable and neutralizes the salutary policies as well as the interest on the amount which may have been advanced
of extending loans to spur business cannot be disputed.69 (Emphases by the MORTGAGEE, in accordance with the provision hereof, shall be
supplied) subject during the life of this contract to such an increase within the rate
allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors.
xxxx compliance cannot be left to the will of one of them." As the Court
explained:
To begin with, PNB’s argument rests on a misapprehension of the import
of the appellate court’s ruling. The Court of Appeals nullified the interest In order that obligations arising from contracts may have the force of law
rate increases not because the promissory note did not comply with P.D. between the parties, there must be mutuality between the parties based
No. 1684 by providing for a de-escalation, but because the absence of on their essential equality. A contract containing a condition which
such provision made the clause so one-sided as to make it makes its fulfillment dependent exclusively upon the uncontrolled will of
unreasonable. one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21
SCRA 555). Hence, even assuming that the ₱1.8 million loan agreement
That ruling is correct. It is in line with our decision in Banco Filipino between the PNB and the private respondent gave the PNB a license
Savings & Mortgage Bank v. Navarro that although P.D. No. 1684 is not (although in fact there was none) to increase the interest rate at will
to be retroactively applied to loans granted before its effectivity, there during the term of the loan, that license would have been null and void
must nevertheless be a de-escalation clause to mitigate the one- for being violative of the principle of mutuality essential in contracts. It
sidedness of the escalation clause. Indeed because of concern for the would have invested the loan agreement with the character of a contract
unequal status of borrowers vis-à-vis the banks, our cases after Banco of adhesion, where the parties do not bargain on equal footing, the
Filipino have fashioned the rule that any increase in the rate of interest weaker party’s (the debtor) participation being reduced to the alternative
made pursuant to an escalation clause must be the result of agreement "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil.
between the parties. 85). Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.
Thus in Philippine National Bank v. Court of Appeals, two promissory
notes authorized PNB to increase the stipulated interest per annum" A similar ruling was made in Philippine National Bank v. Court of
within the limits allowed by law at any time depending on whatever policy Appeals. The credit agreement in that case provided:
[PNB] may adopt in the future; Provided, that the interest rate on this
note shall be correspondingly decreased in the event that the applicable The BANK reserves the right to increase the interest rate within the limits
maximum interest rate is reduced by law or by the Monetary Board." The allowed by law at any time depending on whatever policy it may adopt
real estate mortgage likewise provided: in the future: Provided, that the interest rate on this accommodation shall
be correspondingly decreased in the event that the applicable maximum
The rate of interest charged on the obligation secured by this mortgage interest is reduced by law or by the Monetary Board. . . .
as well as the interest on the amount which may have been advanced
by the MORTGAGEE, in accordance with the provisions hereof, shall be As in the first case, PNB successively increased the stipulated interest
subject during the life of this contract to such an increase within the rate so that what was originally 12% per annum became, after only two years,
allowed by law, as the Board of Directors of the MORTGAGEE may 42%. In declaring the increases invalid, we held:
prescribe for its debtors.
We cannot countenance petitioner bank’s posturing that the escalation
Pursuant to these clauses, PNB successively increased the interest from clause at bench gives it unbridled right to unilaterally upwardly adjust the
18% to 32%, then to 41% and then to 48%. This Court declared the interest on private respondents’ loan. That would completely take away
increases unilaterally imposed by [PNB] to be in violation of the principle from private respondents the right to assent to an important modification
of mutuality as embodied in Art.1308 of the Civil Code, which provides in their agreement, and would negate the element of mutuality in
that "[t]he contract must bind both contracting parties; its validity or contracts.
Only recently we invalidated another round of interest increases decreed case to justify the increased interest rates is no different from the
by PNB pursuant to a similar agreement it had with other borrowers: escalation clause assailed in the 1996 PNB case; in both, the interest
rates were increased from the agreed 12% per annum rate to 42%. x x
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular x
905, nothing in the said circular could possibly be read as granting
respondent bank carte blanche authority to raise interest rates to levels xxxx
which would either enslave its borrowers or lead to a hemorrhaging of
their assets. On the strength of this ruling, PNB’s argument – that the spouses
Rocamora’s failure to contest the increased interest rates that were
In this case no attempt was made by PNB to secure the conformity of purportedly reflected in the statements of account and the demand
private respondents to the successive increases in the interest rate. letters sent by the bank amounted to their implied acceptance of the
Private respondents’ assent to the increases can not be implied from increase – should likewise fail.
their lack of response to the letters sent by PNB, informing them of the
increases. For as stated in one case, no one receiving a proposal to Evidently, PNB’s failure to secure the spouses Rocamora’s consent to
change a contract is obliged to answer the proposal.71 (Emphasis the increased interest rates prompted the lower courts to declare
supplied) excessive and illegal the interest rates imposed. Togo around this lower
court finding, PNB alleges that the ₱206,297.47 deficiency claim was
We made the same pronouncement in a fifth case, New Sampaguita computed using only the original 12% per annum interest rate. We find
Builders Construction, Inc. v. Philippine National Bank,72 thus – this unlikely. Our examination of PNB’s own ledgers, included in the
records of the case, clearly indicates that PNB imposed interest rates
Courts have the authority to strike down or to modify provisions in higher than the agreed 12% per annum rate. This confirmatory finding,
promissory notes that grant the lenders unrestrained power to increase albeit based solely on ledgers found in the records, reinforces the
interest rates, penalties and other charges at the latter’s sole discretion application in this case of the rule that findings of the RTC, when affirmed
and without giving prior notice to and securing the consent of the by the CA, are binding upon this Court.75 (Emphases supplied)
borrowers. This unilateral authority is anathema to the mutuality of
contracts and enable lenders to take undue advantage of borrowers. Verily, all these cases, including the present one, involve identical or
Although the Usury Law has been effectively repealed, courts may still similar provisions found in respondent’s credit agreements and
reduce iniquitous or unconscionable rates charged for the use of money. promissory notes. Thus, the July 1989 Credit Agreement executed by
Furthermore, excessive interests, penalties and other charges not petitioners and respondent contained the following stipulation on
revealed in disclosure statements issued by banks, even if stipulated in interest:
the promissory notes, cannot be given effect under the Truth in Lending
Act.73 (Emphasis supplied) 1.03. Interest. (a) The Loan shall be subject to interest at the rate of
19.5% [per annum]. Interest shall be payable in advance every one
Yet again, in a sixth disposition, Philippine National Bank v. Spouses hundred twenty days at the rate prevailing at the time of the renewal.
Rocamora,74 the above pronouncements were reiterated to debunk
PNB’s repeated reliance on its invalidated contract stipulations: (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
We repeated this rule in the 1994 case of PNB v. CA and Jayme future, including without limitation, the shifting from the floating interest
Fernandez and the 1996 case of PNB v. CA and Spouses Basco. Taking rate system to the fixed interest rate system, or vice versa. Where the
no heed of these rulings, the escalation clause PNB used in the present Bank has imposed on the Loan interest at a rate per annum which is
equal to the Bank’s spread over the current floating interest rate, the determined by the Bank to be prime rate plus applicable spread in effect
Borrower hereby agrees that the Bank may, without need of notice to the as of the date of each Availment.80 (Emphases supplied)
Borrower, increase or decrease its spread over the floating interest rate
at any time depending on whatever policy it may adopt in the and under this Amendment to Credit Agreement, petitioners again
future.76 (Emphases supplied) executed and signed the following promissory notes in blank, for the
respondent to later on enter the corresponding interest rates, which it
while the eight promissory notes issued pursuant thereto granted PNB did, as follows:
the right to increase or reduce interest rates "within the limits allowed by
law or the Monetary Board"77 and the Real Estate Mortgage agreement 9th Promissory Note dated November 8, 1991 – 26%;
included the same right to increase or reduce interest rates "at any time
depending on whatever policy PNB may adopt in the future."78 10th Promissory Note dated March 19, 1992 – 25%;

On the basis of the Credit Agreement, petitioners issued promissory 11th Promissory Note dated July 11, 1992 – 23%;
notes which they signed in blank, and respondent later on entered their
corresponding interest rates, as follows:
12th Promissory Note dated November 10, 1992 – 21%;
1st Promissory Note dated July 24, 1989 – 19.5%;
13th Promissory Note dated March 15, 1993 – 21%;
2nd Promissory Note dated November 22, 1989 – 23%;
14th Promissory Note dated July 12, 1993 – 17.5%;
3rd Promissory Note dated March 21, 1990 – 22%;
15th Promissory Note dated November 17, 1993 – 21%;
4th Promissory Note dated July 19, 1990 – 24%;
16th Promissory Note dated March 28, 1994 – 21%;
5th Promissory Note dated December 17, 1990 – 28%;
17th Promissory Note dated July 13, 1994 – 21%;
6th Promissory Note dated February 14, 1991 – 32%;
18th Promissory Note dated November 16, 1994 – 16%;
7th Promissory Note dated March 1, 1991 – 30%; and
19th Promissory Note dated April 10, 1995 – 21%;
8th Promissory Note dated July 11, 1991 – 24%.79
20th Promissory Note dated July 19, 1995 – 18.5%;
On the other hand, the August 1991 Amendment to Credit Agreement
21st Promissory Note dated December 18, 1995 – 18.75%;
contains the following stipulation regarding interest:
22nd Promissory Note dated April 22, 1996 – 18.5%;
1.03. Interest on Line Availments. (a) The Borrowers agree to pay
interest on each Availment from date of each Availment up to but not
including the date of full payment thereof at the rate per annum which is 23rd Promissory Note dated July 22, 1996 – 18.5%;

24th Promissory Note dated November 25, 1996 – 18%;

 25th Promissory Note dated May 30, 1997 – 17.5%; and his feedback or opinions, the nature and purpose of his borrowings, the
effect of foreign currency values or fluctuations on his business or
26th Promissory Note (PN 9707237) dated July 30, 1997 – borrowing, etc. – these are not factors which influence the fixing of
25%.81 interest rates to be imposed on him. Clearly, respondent’s method of
fixing interest rates based on one-sided, indeterminate, and subjective
The 9th up to the 17th promissory notes provide for the payment of criteria such as profitability, cost of money, bank costs, etc. is arbitrary
interest at the "rate the Bank may at any time without notice, raise within for there is no fixed standard or margin above or below these
the limits allowed by law x x x."82 On the other hand, the 18th up to the considerations.
26th promissory notes – which includes PN 9707237 – carried the
following provision: The stipulation in the promissory notes subjecting the interest rate to
review does not render the imposition by UCPB of interest rates on the
x x x For this purpose, I/We agree that the rate of interest herein obligations of the spouses Beluso valid. According to said stipulation:
stipulated may be increased or decreased for the subsequent Interest
Periods, with prior notice to the Borrower in the event of changes in The interest rate shall be subject to review and may be increased or
interest rate prescribed by law or the Monetary Board of the Central decreased by the LENDER considering among others the prevailing
Bank of the Philippines, or in the Bank’s overall cost of funds. I/We financial and monetary conditions; or the rate of interest and charges
hereby agree that in the event I/we are not agreeable to the interest rate which other banks or financial institutions charge or offer to charge for
fixed for any Interest Period, I/we shall have the option to prepay the similar accommodations; and/or the resulting profitability to the LENDER
loan or credit facility without penalty within ten (10) calendar days from after due consideration of all dealings with the BORROWER.
the Interest Setting Date.83 (Emphasis supplied)
It should be pointed out that the authority to review the interest rate was
These stipulations must be once more invalidated, as was done in given [to] UCPB alone as the lender. Moreover, UCPB may apply the
previous cases. The common denominator in these cases is the lack of considerations enumerated in this provision as it wishes. As worded in
agreement of the parties to the imposed interest rates. For this case, this the above provision, UCPB may give as much weight as it desires to
lack of consent by the petitioners has been made obvious by the fact each of the following considerations: (1) the prevailing financial and
that they signed the promissory notes in blank for the respondent to fill. monetary condition;(2) the rate of interest and charges which other
We find credible the testimony of Lydia in this respect. Respondent failed banks or financial institutions charge or offer to charge for similar
to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa accommodations; and/or(3) the resulting profitability to the LENDER
admitted that interest rates were fixed solely by its Treasury Department (UCPB) after due consideration of all dealings with the BORROWER
in Manila, which were then simply communicated to all PNB branches (the spouses Beluso). Again, as in the case of the interest rate provision,
for implementation. If this were the case, then this would explain why there is no fixed margin above or below these considerations.
petitioners had to sign the promissory notes in blank, since the
imposable interest rates have yet to be determined and fixed by In view of the foregoing, the Separability Clause cannot save either of
respondent’s Treasury Department in Manila. the two options of UCPB as to the interest to be imposed, as both options
violate the principle of mutuality of contracts.84 (Emphases supplied)
Moreover, in Aspa’s enumeration of the factors that determine the
interest rates PNB fixes – such as cost of money, foreign currency To repeat what has been said in the above-cited cases, any modification
values, bank administrative costs, profitability, and considerations which in the contract, such as the interest rates, must be made with the consent
affect the banking industry – it can be seen that considerations which of the contracting parties. The minds of all the parties must meet as to
1âwphi1

affect PNB’s borrowers are ignored. A borrower’s current financial state, the proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan agreements, the rate of interest is including the date of full payment thereof at the rate per annum which is
a principal condition, if not the most important component. Thus, any determined by the Bank to be prime rate plus applicable spread in effect
modification thereof must be mutually agreed upon; otherwise, it has no as of the date of each Availment.87 (Emphasis supplied)
binding effect.
Plainly, with the present credit agreement, the element of consent or
What is even more glaring in the present case is that, the stipulations in agreement by the borrower is now completely lacking, which makes
question no longer provide that the parties shall agree upon the interest respondent’s unlawful act all the more reprehensible.
rate to be fixed; -instead, they are worded in such a way that the
borrower shall agree to whatever interest rate respondent fixes. In credit Accordingly, petitioners are correct in arguing that estoppel should not
agreements covered by the above-cited cases, it is provided that: apply to them, for "[e]stoppel cannot be predicated on an illegal act. As
between the parties to a contract, validity cannot be given to it by
The Bank reserves the right to increase the interest rate within the limits estoppel if it is prohibited by law or is against public policy."88
allowed by law at any time depending on whatever policy it may adopt
in the future: Provided, that, the interest rate on this accommodation It appears that by its acts, respondent violated the Truth in Lending Act,
shall be correspondingly decreased in the event that the applicable or Republic Act No. 3765, which was enacted "to protect x x x citizens
maximum interest rate is reduced by law or by the Monetary Board. In from a lack of awareness of the true cost of credit to the user by using a
either case, the adjustment in the interest rate agreed upon shall take full disclosure of such cost with a view of preventing the uninformed use
effect on the effectivity date of the increase or decrease in maximum of credit to the detriment of the national economy."89 The law "gives a
interest rate.85 (Emphasis supplied) detailed enumeration of the specific information required to be disclosed,
among which are the interest and other charges incident to the extension
Whereas, in the present credit agreements under scrutiny, it is stated of credit."90 Section 4 thereof provides that a disclosure statement must
that: be furnished prior to the consummation of the transaction, thus:

IN THE JULY 1989 CREDIT AGREEMENT SEC. 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear
(b) The Borrower agrees that the Bank may modify the interest rate on statement in writing setting forth, to the extent applicable and in
the Loan depending on whatever policy the Bank may adopt in the accordance with rules and regulations prescribed by the Board, the
future, including without limitation, the shifting from the floating interest following information:
rate system to the fixed interest rate system, or vice versa. Where the
Bank has imposed on the Loan interest at a rate per annum, which is (1) the cash price or delivered price of the property or service to
equal to the Bank’s spread over the current floating interest rate, the be acquired;
Borrower hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating interest rate (2) the amounts, if any, to be credited as down payment and/or
at any time depending on whatever policy it may adopt in the trade-in;
future.86 (Emphases supplied)
(3) the difference between the amounts set forth under clauses
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT (1) and (2);

1.03. Interest on Line Availments. (a) The Borrowers agree to pay

interest on each Availment from date of each Availment up to but not
 (4) the charges, individually itemized, which are paid or to be accordance with rules and regulations prescribed by the Board, the
paid by such person in connection with the transaction but which following information:
are not incident to the extension of credit;
(1) the cash price or delivered price of the property or service to
(5) the total amount to be financed; be acquired;

(6) the finance charge expressed in terms of pesos and (2) the amounts, if any, to be credited as down payment and/or
centavos; and trade-in;

(7) the percentage that the finance bears to the total amount to (3) the difference between the amounts set forth under clauses
be financed expressed as a simple annual rate on the (1) and (2);
outstanding unpaid balance of the obligation.
(4) the charges, individually itemized, which are paid or to be
Under Section 4(6), "finance charge" represents the amount to be paid paid by such person in connection with the transaction but which
by the debtor incident to the extension of credit such as interest or are not incident to the extension of credit;
discounts, collection fees, credit investigation fees, attorney’s fees, and
other service charges. The total finance charge represents the (5) the total amount to be financed;
difference between (1) the aggregate consideration (down payment plus
installments) on the part of the debtor, and (2) the sum of the cash price (6) the finance charge expressed in terms of pesos and
and non-finance charges.91 centavos; and

By requiring the petitioners to sign the credit documents and the (7) the percentage that the finance bears to the total amount to
promissory notes in blank, and then unilaterally filling them up later on, be financed expressed as a simple annual rate on the
respondent violated the Truth in Lending Act, and was remiss in its outstanding unpaid balance of the obligation.
disclosure obligations. In one case, which the Court finds applicable
here, it was held:
The rationale of this provision is to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the experience that
UCPB further argues that since the spouses Beluso were duly given banks are able to conceal such true cost by hidden charges, uncertainty
copies of the subject promissory notes after their execution, then they of interest rates, deduction of interests from the loaned amount, and the
were duly notified of the terms thereof, in substantial compliance with like. The law thereby seeks to protect debtors by permitting them to fully
the Truth in Lending Act. appreciate the true cost of their loan, to enable them to give full consent
to the contract, and to properly evaluate their options in arriving at
Once more, we disagree. Section 4 of the Truth in Lending Act clearly business decisions. Upholding UCPB’s claim of substantial compliance
provides that the disclosure statement must be furnished prior to the would defeat these purposes of the Truth in Lending Act. The belated
consummation of the transaction: discovery of the true cost of credit will too often not be able to reverse
the ill effects of an already consummated business decision.
SEC. 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear In addition, the promissory notes, the copies of which were presented to
statement in writing setting forth, to the extent applicable and in the spouses Beluso after execution, are not sufficient notification from
UCPB. As earlier discussed, the interest rate provision therein does not
sufficiently indicate with particularity the interest rate to be applied to the lone complaining borrower will enjoy the benefit of review or re-
loan covered by said promissory notes.92 (Emphases supplied) negotiation; as to the 99 others, the questionable practice will continue
unchecked, and respondent will continue to reap the profits from such
However, the one-year period within which an action for violation of the unscrupulous practice. The Court can no more condone a view so
Truth in Lending Act may be filed evidently prescribed long ago, or perverse. This is exactly what the Court meant in the immediately
sometime in 2001, one year after petitioners received the March 2000 preceding cited case when it said that "the belated discovery of the true
demand letter which contained the illegal charges. cost of credit does not reverse the ill effects of an already consummated
business decision;"95 as to the 99 borrowers who did not or could not
The fact that petitioners later received several statements of account complain, the illegal act shall have become a fait accompli– to their
detailing its outstanding obligations does not cure respondent’s breach. detriment, they have already suffered the oppressive rates.
To repeat, the belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated business decision.93 Besides, that petitioners are given the right to question the interest rates
imposed is, under the circumstances, irrelevant; we have a situation
Neither may the statements be considered proposals sent to secure the where the petitioners do not stand on equal footing with the respondent.
petitioners’ conformity; they were sent after the imposition and It is doubtful that any borrower who finds himself in petitioners’ position
application of the interest rate, and not before. And even if it were to be would dare question respondent’s power to arbitrarily modify interest
presumed that these are proposals or offers, there was no acceptance rates at any time. In the second place, on what basis could any borrower
by petitioners. "No one receiving a proposal to modify a loan contract, question such power, when the criteria or standards – which are really
especially regarding interest, is obliged to answer the proposal."94 one-sided, arbitrary and subjective – for the exercise of such power are
precisely lost on him?
Loan and credit arrangements may be made enticing by, or "sweetened"
with, offers of low initial interest rates, but actually accompanied by For the same reasons, the Court cannot validly consider that, as
provisions written in fine print that allow lenders to later on increase or stipulated in the 18th up to the 26th promissory notes, petitioners are
decrease interest rates unilaterally, without the consent of the borrower, granted the option to prepay the loan or credit facility without penalty
and depending on complex and subjective factors. Because they have within 10 calendar days from the Interest Setting Date if they are not
been lured into these contracts by initially low interest rates, borrowers agreeable to the interest rate fixed. It has been shown that the
get caught and stuck in the web of subsequent steep rates and penalties, promissory notes are executed and signed in blank, meaning that by the
surcharges and the like. Being ordinary individuals or entities, they time petitioners learn of the interest rate, they are already bound to pay
naturally dread legal complications and cannot afford court litigation; it because they have already pre-signed the note where the rate is
they succumb to whatever charges the lenders impose. At the very least, subsequently entered.
borrowers should be charged rightly; but then again this is not possible
in a one-sided credit system where the temptation to abuse is strong and Besides, premium may not be placed upon a stipulation in a contract
the willingness to rectify is made weak by the eternal desire for profit. which grants one party the right to choose whether to continue with or
withdraw from the agreement if it discovers that what the other party has
Given the above supposition, the Court cannot subscribe to been doing all along is improper or illegal.
respondent’s argument that in every repricing of petitioners’ loan
availment, they are given the right to question the interest rates imposed. Thus said, respondent’s arguments relative to the credit documents –
The import of respondent’s line of reasoning cannot be other than that if that documentary evidence prevails over testimonial evidence; that the
one out of every hundred borrowers questions respondent’s practice of credit documents are in proper form, presumed regular, and endure,
unilaterally fixing interest rates, then only the loan arrangement with that against arbitrary claims by petitioners, experienced business persons
that they are, they signed questionable loan documents whose
provisions for interest rates were left blank, and yet they continued to The Court sustains petitioners’ view that the penalty may not be included
pay the interests without protest for a number of years – deserve no as part of the secured amount. Having found the credit agreements and
consideration. promissory notes to be tainted, we must accord the same treatment to
the mortgages. After all, "[a] mortgage and a note secured by it are
With regard to interest, the Court finds that since the escalation clause deemed parts of one transaction and are construed together."101 Being
is annulled, the principal amount of the loan is subject to the original or so tainted and having the attributes of a contract of adhesion as the
stipulated rate of interest, and upon maturity, the amount due shall be principal credit documents, we must construe the mortgage contracts
subject to legal interest at the rate of 12% per annum. This is the uniform strictly, and against the party who drafted it. An examination of the
ruling adopted in previous cases, including those cited here.96 The mortgage agreements reveals that nowhere is it stated that penalties are
interests paid by petitioners should be applied first to the payment of the to be included in the secured amount. Construing this silence strictly
stipulated or legal and unpaid interest, as the case may be, and later, to against the respondent, the Court can only conclude that the parties did
the capital or principal.97 Respondent should then refund the excess not intend to include the penalty allowed under PN 9707237 as part of
amount of interest that it has illegally imposed upon petitioners; "[t]he the secured amount. Given its resources, respondent could have – if it
amount to be refunded refers to that paid by petitioners when they had truly wanted to – conveniently prepared and executed an amended
no obligation to do so."98 Thus, the parties’ original agreement stipulated mortgage agreement with the petitioners, thereby including penalties in
the payment of 19.5% interest; however, this rate was intended to apply the amount to be secured by the encumbered properties. Yet it did not.
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 With regard to attorney’s fees, it was plain error for the CA to have
duration of the loan. Subsequent higher interest rates have been passed upon the issue since it was not raised by the petitioners in their
declared illegal; but because only the rates are found to be improper, the appeal; it was the respondent that improperly brought it up in its
obligation to pay interest subsists, the same to be fixed at the legal rate appellee’s brief, when it should have interposed an appeal, since the trial
of 12% per annum. However, the 12% interest shall apply only until June court’s Decision on this issue is adverse to it. It is an elementary principle
30, 2013. Starting July1, 2013, the prevailing rate of interest shall be 6% in the subject of appeals that an appellee who does not himself appeal
per annum pursuant to our ruling in Nacar v. Gallery Frames99 and cannot obtain from the appellate court any affirmative relief other than
Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799. those granted in the decision of the court below.

Now to the issue of penalty. PN 9707237 provides that failure to pay it x x x [A]n appellee, who is at the same time not an appellant, may on
or any installment thereon, when due, shall constitute default, and a appeal be permitted to make counter assignments of error in ordinary
penalty charge of 24% per annum based on the defaulted principal actions, when the purpose is merely to defend himself against an appeal
amount shall be imposed. Petitioners claim that this penalty should be in which errors are alleged to have been committed by the trial court both
excluded from the foreclosure amount or bid price because the Real in the appreciation of facts and in the interpretation of the law, in order
Estate Mortgage and the Supplement thereto did not specifically include to sustain the judgment in his favor but not when his purpose is to seek
it as part of the secured amount. Respondent justifies its inclusion in the modification or reversal of the judgment, in which case it is necessary
secured amount, saying that the purpose of the penalty or a penal clause for him to have excepted to and appealed from the judgment.102
is to ensure the performance of the obligation and substitute for
damages and the payment of interest in the event of non- Since petitioners did not raise the issue of reduction of attorney’s fees,
compliance.100 Respondent adds that the imposition and collection of a the CA possessed no authority to pass upon it at the instance of
penalty is a normal banking practice, and the standard rate per annum respondent. The ruling of the trial court in this respect should remain
for all commercial banks, at the time, was 24%. Its inclusion as part of undisturbed.
the secured amount in the mortgage agreements is thus valid and
necessary.
For the fixing of the proper amounts due and owing to the parties – to 6. To this outstanding balance (3.), the interest (4.), penalties
the respondent as creditor and to the petitioners who are entitled to a (5.), and the final and executory award of 1% attorney’s fees
refund as a consequence of overpayment considering that they paid shall be ADDED;
more by way of interest charges than the 12% per annum103 herein
allowed – the case should be remanded to the lower court for proper 7. The sum total of the outstanding balance (3.), interest (4.) and
accounting and computation, applying the following procedure: 1% attorney’s fees (6.) shall be DEDUCTED from the bid price
of ₱4,324,172.96. The penalties (5.) are not included because
1. The 1st Promissory Note with the 19.5% interest rate is they are not included in the secured amount;
deemed proper and paid;
8. The difference in (7.) [₱4,324,172.96 LESS sum total of the
2. All subsequent promissory notes (from the 2nd to the 26th outstanding balance (3.), interest (4.), and 1% attorney’s fees
promissory notes) shall carry an interest rate of only 12% per (6.)] shall be DELIVERED TO THE PETITIONERS;
annum.104 Thus, interest payment made in excess of 12% on the
2nd promissory note shall immediately be applied to the 9. Respondent may then proceed to consolidate its title to TCTs
principal, and the principal shall be accordingly reduced. The T-14250 and T-16208;
reduced principal shall then be subjected to the 12%105 interest
on the 3rd promissory note, and the excess over 12% interest 10. ON THE OTHER HAND, if after performing the procedure in
payment on the 3rd promissory note shall again be applied to (2.), it turns out that petitioners made an OVERPAYMENT, the
the principal, which shall again be reduced accordingly. The interest (4.), penalties (5.), and the award of 1% attorney’s fees
reduced principal shall then be subjected to the 12% interest on (6.) shall be DEDUCTED from the overpayment. There is no
the 4th promissory note, and the excess over12% interest outstanding balance/obligation precisely because petitioners
payment on the 4th promissory note shall again be applied to the have paid beyond the amount of the principal and interest;
principal, which shall again be reduced accordingly. And so on
and so forth;
11. If the overpayment exceeds the sum total of the interest (4.),
penalties (5.), and award of 1% attorney’s fees (6.), the excess
3. After the above procedure is carried out, the trial court shall shall be RETURNED to the petitioners, with legal interest, under
be able to conclude if petitioners a) still have an OUTSTANDING the principle of solutio indebiti;107
BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND
ABOVE THEIR TOTAL OBLIGATION (principal and interest);
12. Likewise, if the overpayment exceeds the total amount of
interest (4.) and award of 1% attorney’s fees (6.), the trial court
4. Such outstanding balance/obligation, if there be any, shall shall INVALIDATE THE EXTRAJUDICIAL FORECLOSURE
then be subjected to a 12% per annum interest from October 28, AND SALE;
1997 until January 14, 1999, which is the date of the auction
sale;
13. HOWEVER, if the total amount of interest (4.) and award of
1% attorney’s fees (6.) exceed petitioners’ overpayment, then
5. Such outstanding balance/obligation shall also be charged a the excess shall be DEDUCTED from the bid price of
24% per annum penalty from August 14, 1997 until January 14, ₱4,324,172.96;
1999. But from this total penalty, the petitioners’ previous
payment of penalties in the amount of ₱202,000.00made on
January 27, 1998106 shall be DEDUCTED;
 14. The difference in (13.) [₱4,324,172.96 LESS sum total of the 3. The trial court’s award of one per cent (1%) attorney’s fees is
interest (4.) and 1% attorney’s fees (6.)] shall be DELIVERED REINSTATED;
TO THE PETITIONERS;
4. The case is ordered REMANDED to the Regional Trial Court,
15. Respondent may then proceed to consolidate its title to TCTs Branch 6 of Kalibo, Aklan for the computation of overpayments
T-14250 and T-16208. The outstanding penalties, if any, shall made by petitioners spouses Eduardo and Lydia Silos to
be collected by other means. respondent Philippine National Bank, taking into consideration
the foregoing dispositions, and applying the procedure
From the above, it will be seen that if, after proper accounting, it hereinabove set forth;
turns out that the petitioners made payments exceeding what
they actually owe by way of principal, interest, and attorney’s 5. Thereafter, the trial court is ORDERED to make a
fees, then the mortgaged properties need not answer for any determination as to the validity of the extrajudicial foreclosure
outstanding secured amount, because there is not any; quite the and sale, declaring the same null and void in case of
contrary, respondent must refund the excess to petitioners. In 1âwphi1 overpayment and ordering the release and return of Transfer
such case, the extrajudicial foreclosure and sale of the Certificates of Title Nos. T-14250 and TCT T-16208 to
properties shall be declared null and void for obvious lack of petitioners, or ordering the delivery to the petitioners of the
basis, the case being one of solutio indebiti instead. If, on the difference between the bid price and the total remaining
other hand, it turns out that petitioners’ overpayments in interests obligation of petitioners, if any;
do not exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period 6. In the meantime, the respondent Philippine National Bank is
for redemption has expired. Its only obligation will be to return ENJOINED from consolidating title to Transfer Certificates of
the difference between its bid price (₱4,324,172.96) and Title Nos. T-14250 and T-16208 until all the steps in the
petitioners’ total obligation outstanding – except penalties – after procedure above set forth have been taken and applied;
applying the latter’s overpayments.
7. The reimbursement of the excess in the bid price of
WHEREFORE, premises considered, the Petition is GRANTED. The ₱377,505.99, which respondent Philippine National Bank is
May 8, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 79650 ordered to reimburse petitioners, should be HELD IN
is ANNULLED and SET ASIDE. Judgment is hereby rendered as ABEYANCE until the true amount owing to or owed by the
follows: parties as against each other is determined;

1. The interest rates imposed and indicated in the 2nd up to the 8. Considering that this case has been pending for such a long
26th Promissory Notes are DECLARED NULL AND VOID, and time and that further proceedings, albeit uncomplicated, are
such notes shall instead be subject to interest at the rate of required, the trial court is ORDERED to proceed with dispatch.
twelve percent (12%) per annum up to June 30, 2013, and SO ORDERED.
starting July 1, 2013, six percent (6%) per annum until full
satisfaction;

2. The penalty charge imposed in Promissory Note No. 9707237

shall be EXCLUDED from the amounts secured by the real
estate mortgages;