UY TAM and UY YET, plaintiffs-appellants,

vs.
THOMAS LEONARD, ET AL., defendants-appellees.
O'Brien and de Witt for appellants.
City Attorney Nesmith for appellees.
TRENT, J.:
An appeal from a judgment of the Court of First Instances of the city of Manila sustained the defendants' demurrer upon the
ground that the complaint does not state facts sufficient to constitutes a cause of action, and dismissing the complaint with costs.
This is an action by a third person upon a bond executed between the individual defendants as obligors and the city of Manila as
obligee. The bond was executed in connection with and to secure the performance of a contract entered into by Hosty and Brown,
the principals of the bond, for furnishing crushed rock to the city of Manila for one year. The plaintiffs furnished the contractors
with certain materials for use in the performance of said contract, having previously notified the defendants of the acceptance of
the conditions of the bond relating to laborers and material men. The city of Manila was joined as a party defendant for the reason
that it refused to joint as a party plaintiff in collecting the amount claimed by the plaintiffs. No damages are claimed against the
city, and the city is merely a party pro forma.
The bond reads as follows: "Know all men by these presents, that we, R.C. Hosty and W. W. Brown, of the city of Manila,
Province of Manila, Island of Luzon, Philippine Islands, as principals, and George C. Sellner. Geo E. Brown, Walter E. Olsen,
Harold M. Pitt, and Thomas Leonard, all of the city of Manila, P.I., as sureties are held and bond unto the city of Manila in the
penal sum of twenty-eight thousand five hundred pesos, Philippine currency, to the payment of which sum well and truly to be
made, we bind ourselves, our heirs, executors, and administrators, in the amount for which each has severally qualified as shown
in the several affidavits hereto attached.
The condition of this obligation is such that whereas the above-bounden R.C. Hosty and W.W. Brown have on the 12th
day of January, 1911, entered into a contract with the city of Manila, represented by the president of its Municipal Board,
for furnishing crushed rock for a period of one year:
Now, therefore, if the above-bounden R.C. Hosty and W.W. Brown, their heirs, executors, and administrators, shall and
will, in all respects, duly and fully observe and perform all and singular the covenants, conditions, and agreements in and
by the said contract agreed and covenanted by said R.C. Hosty and W.W. Brown to be observed and performed
according to the true intent and meaning of the said contract, and as well during any period of extension of said contract
that may be granted on the part of the city of Manila as during the original term of the same, and shall promptly make all
payments to all persons supplying them labor or materials in the prosecution of the work provided for in said contract,
then the above obligation shall be void and of no effect; otherwise, to remain in full force and virtue.
It is hereby stipulated that suit on this bond may be brought in the courts of the Philippine Islands for the district in
which the said contract is executed; and if at the time of the suit any of the obligor is found therein, service of process as
to such obligors may be made by delivering a copy of the same to the clerk of said court, who is hereby appointed agent
of the obligors for this purpose.
Article 1257 of the Civil Code reads: "Contracts shall only be valid between the parties who execute them and their heirs, except,
with regard to the latter, the case in which the rights and obligations arising from the contract are not transmissible, either by their
nature, or by agreement, or by provision of law.
Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided he has
given notice of his acceptance to the persons bound before it may have been revoked.
The second paragraph of this article creates an apparent exception to the first. (20 Scaevola, 552.) Under the first paragraph, the
cardinal rule of contract is laid that only parties thereto and their privies acquire rights and assume obligations thereunder; while
the second paragraph permits a third person to avail himself of a benefit extended to him by its term. Manresa says that the second
paragraph of this article corresponds almost always to the jurisdiction conception of a gift, it being necessary in such case to apply
the rules relating to gifts in so far as the form of acceptance is concerned. This is true where the stipulation is for the sole benefit
of the third person. But where, for instance, a transfer of property is coupled with the purchaser's promise to pay a debt owing
from the seller to a third persons, it can scarcely be said that the stipulation is in the nature of a gift, and yet such a stipulation is in
favor of a third person. So, stipulations in favor of a third persons may be divided into two classes: those where the stipulation is
intended for the sole benefit of such person, and those where an obligation is due from the promise to the third person which the
former seeks to discharged by means of such stipulation.
The civil-law origin and history of the second paragraph of article 1257 is a matter upon which the authorities are in some
conflict. Perhaps the first unequivocal authority in the civil-law countries recognizing without reservation such a stipulation is the
Code of Napoleon of 1804, which provided as follows: "A person may likewise stipulate for the benefit of a third party when such
is the condition of the stipulation that the persons makes for himself to of the donation which he makes to another person. The
persons who has made the stipulation cannot revoke it if the third party has declared that he wished to take advantage of it." (Art.
1121.)
Contracts only produce effects between contracting parties. They do not affect third parties and do not benefit them
except in the case provided by article 1121. (Art. 1165.)
The Partidas, which were in force in Spain until the adoption of the present Civil Code, contained a general rule invalidating such
stipulations, followed by some exceptions whereby representative or attorney in fact of third persons were allowed to recover on
such stipulation. We find in the Fifth Partida, title XI, law 7, as follows: "One man cannot receive from another a promise in the
name of a third person under whose power he is not. As if one should say to the other, "Do you promise be that you will give to
such a one, such a thing? and the other answer, "I promise." Such a promise would not be obligatory on him who made it; and the
third person in whose name it was made neither can nor ought to compel him to its performance."
But is seems clear that the supreme court of Spain recognized a contrary doctrine without reservation as early as 1868. Its
judgement of June 24 of that years, as well as the one dated October 17, 1874, are quoted by Scaevola as bearing out the principle
as it is found in the Civil Code.
Pothier, of a much later date than the Partidas, treats of the subject as follows: "Reasons for the principle that a person cannot
stipulate or promise for another. When I stipulate with you for a third person, the agreement is void: for by this agreement you
do not contract any obligation in favor either of such third persons or myself. It is evidence that you do not contract any in favor
of the third person: for it is a principle that agreements can have no effect except between the contracting parties, and
consequently that they cannot secure any right to a third person who is not a party to them, as we shall see hereafter. By this
agreement you do not contract any civil obligation in my favor: for what I have stipulated in favor of the third person, not being
anything in which I have an interest capable of pecuniary appreciation, no damage can result to me from a failure in the
performance of your promise, and therefore you may be guilty of such failure with impunity." (Obligations, No. 54.)
This first part of the principle that nothing but what one of the parties stipulates on his own behalf can be the object of an
obligation only prevails when considered as a matter of law, (dans le for exterieur) and which regard to civil obligations:
but in point of conscience, if I agree with you that you shall something to, or do something for a third person, the
agreement is binding: although the interest which I have in the subject is not capable of precuniary appreciation, still it is
real interest: hominis enim interest alterum hominem beneficio affici, and this interest arising from mere affection for a
third persons gives me a sufficient rights in point of conscience to require the performance of your promise, and is
sufficient to render you culpable in refusing to accomplish it, provided you have it in your power, and the other person is
willing to accept of what was promised to be given. (Id., 55.)
For the rest, according to the principles of this ancient law, the third person who was no party to this contract of
donation, subject to the charge of your giving him something, had not any action against you for the recovery of it; and
this was founded upon the principle that contracts have no except between the contracting parties: hence it follows, that
no right can arise from a contract to a person who was not party to it: but according to the constitution of the Emperors,
the third persons in whose favor the donor imposed a charge on his donation has an action against the donatory to
compel him to execute it. (Id., 71.)
In Louisiana, the Civil Code provides: "A person may also, in his own name make some advantage for a third person the
condition or consideration of a commutative contract; and if such a third person consents to avail himself of the advantage
stipulated in his favor, the contract cannot be revoked." (Art. 1890.)
But a contract in which anything is stipulated for the benefit of a third person who has signified his assent to accept it
cannot be revoked as to the advantage stipulated in his favor, without his consent. (Art. 1902.)
In discussing the history of these provision the supreme court of that State said Duchamp vs. Nicholson (2 Mart. N.S., 672):
"According to the ancient Roman law, no person could stipulated for another, but an indirect mode was resorted to, of receiving
promises or engagements for the benefits of third party. The person receiving the engagement, made a donation to the obligor, and
imposed a condition that he should give a certain sum to a third party. If the person thus promising failed to comply with his
engagement, he who stipulated had an action to recover back the amount given as a donation, but the party for whose benefit the
stipulation was made could not bring an action of any kind to enforce it.
In the latter days of the Roman jurisprudence, a change was introduced which, with more regard to equity, extended to
him for whose benefit the stipulation was made an action to carry it into effect. (Code, liv. 8, tit. 55, 1. 3.)
Hence, according to Merlin, even before the massage of the Napoleon code, it was not doubted in France, that a third
party might sue to enforce an obligation in which he had an interest. (Merlin, Questions de Droit, vol. 5, verbo,
stipulation pour autrui, 3 Pothier, Traite des Obligations, No. 71.)
Since the enactment of the Napoleon code, the 1121st article of which expressly provides that "stipulations may be made
to the profit (or benefit) of a third party," there seems not to be any doubt entertained on the question. Toulier states,
"The third party to whose profit the burden has been imposed in a contract in which he took no part may act directly to
force the promisor to fulfill his promise." (Toullier, Droit Civil Francais, liv. 3, tit. 3, chap. 2, No. 150.)
The author of the Curia Philippica seems to have thought such a right was not conferred by the Roman law, but that it
was given by the positive law of Spain. (Curia Phil., lib. 2, cap. 6, no. 4, verbo, cesion; Novisima Recopilacion, lib. 10,
tit. 1, ley 1.) It is a matter of title importance from what source that right sprang, so that it existed. And even if it was not
found in that jurisprudence, the provision in our code which is, verbatim, that of the Napoleon just referred to, we are
satisfied, introduces it. (C. Code, 263, art. 20.)
Again in Gravier vs. Gravier's heirs (3 Mart. N.S., 206), it is said: "A law of the recopilacion permits in express terms a contract
to be made for the benefit of a thirds party. It is the opinion of the Spanish commentators, that according to this law, the person in
whose favor the stipulation is made, may maintain an action to enforce it. In this they seem to think a material different exists
between the laws of Spain and those of Rome. But according to other writers on the civil law, this is a mistakes. Merlin, who has
examined the subject fully, and who cites a vast number of authorities in support of his opinion, shows, we think, satisfactorily,
that the early established doctrine in the Roman jurisprudence, that no one could stipulate for another, was subsequently altered
and modified by different edicts of the emperors: and in the late and more improved state of their laws, such contracts were
authorized, and might be enforced by the third person, in whose favor they were made."
It appears certain that the Roman law did not at first recognize stipulations in favor of third person at all. If there as a gradual
relaxation of the rule, it is still clear from what Pothier and the Partidas say that the civil law was still against the enforcement of
such stipulations, although many exceptions to the rule had crept into the law. With the enactment of the French Code and of the
Spanish Civil Code, whatever vestige of the ancient Roman law remained was swept away, and it is with this modern law we
have to deal.
If we turn now to Anglo-American law, we find the same opposition against permitting the enforcement of stipulations of a
contract in favor of a third person as was encountered in the civil law. In fact, the English courts to this day decline to recognize
stipulation pour autrui. "As a general rule a contract affects only the parties to it, and cannot be enforced by or against a person
who is not a party, even if the contract is made for his benefit and purports to give him the right to sue or to make him liable upon
it." (Halsbury's Laws of England, vol. 7, p. 342.)
This has been denominated the English doctrine, and American commentators frequently suggest that it has been evaded in same
cases by a strained application of the law of trust (15 Harvard Law review, 775; Page on Contracts, sec. 1318); and the doctrine
was found so inconvenient in the administration of the modern insurance law that the Married Woman's Property Act (45 and 46
Vict., c. 75, sec. 11) gave to a wife, husband, or children named as beneficiary in a policy the right to its proceeds, although they
were not allowed to sue directly for the them. (15 Harv. Law Rev., 775.) The English rule has been followed in some of the states
of the American Union, but possibly with still less rigor. The case law indicating the jurisdiction in which the English rule has
found favor, as well, indeed, as a general survey of the whole field of American case law on stipulations pour autrui has been
collected in the excellent monographic notes to Baxter vs. Camp (71 Am. St. rep., 169), and Jefferson vs. Asch (25 L.R.A., 257).
The provisions of our Civil Code make futile an examination of the authorities supporting the English rule.
But in the greater number of the American states, stipulations pour autrui are enforced with more or less liberality. And where the
law is in such condition, it is referred to as the American rule in contradistinction to the English rule above referred to. A case
often cited as the real starting point of the American doctrine is Lawrence vs. Fox (20 N.Y., 268). In that case, one Holly gave the
defendant $300 to be delivered by him to the plaintiff the next day in payment of a debt owing from Holly to the plaintiff. The
court held that the plaintiff had a right of action to recover the money. In a few states, where condification of substantive law has
done its work, legislative recognition of stipulations pour autrui may be found. Thus, in California (Civil Code, sec. 1559), it
provided that: "A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties
thereto rescind it."
Exactly the same provision is found in Idaho (Rev. Codes, se. 3317); North Codes, sec. 2103.). The Georgia Code (sec. 2747)
provides that "if there be valid consideration for the promise, it matters not from whom it is moved, the promise may sustain his
action though a stranger to the consideration."
As stated above, the enforcement of stipulations pour autrui under the American rule is hedged in with various restrictions, not at
all uniform in the various states where the principle is recognized. The doctrine was limited in Vrooman vs. Turner (69 N.Y.,
280), as follows: "To give a third party who may derive a benefit from the performance of the promise, an action, there must be,
first, an intent by the promise to secure some benefit to the third party, and second, some privity between the two, the promise and
the party to be benefited, and some obligation or duty owing from the former to the latter which would give him a legal or
equitable claim to the benefit of the promise or an equivalent from him personally."
This New York limitation of the rule is approved in Nevada (Ferris vs. Carson Water Co., 16 Nev., 440); and Kansas
(Burton vs. Larkin, 36 Kan 246); an possibly in some other state. In Illinois no obligation need be due from the promise to the
third person (Dean vs. Walker, 107 III., 540). This is also true in Ohio (Brewer vs. Maurer, 38 Ohio, 543; 43 Am. Rep., 436) Am.
Dec., 262.) Compromises between the two extremes of various shades may be found many other jurisdictions. it would not be
profitable to pursue this branch of the injury to its ultimate end for we do not think that limitations on the rule of this nature are
applicable in this jurisdiction. Article 1257 makes no such restriction. The reason for it in the United States is possibly due to
some extent to the aversion in that country against enforcing an executory gift.
Another limitation to the doctrine, however, which has been extremely developed by the American courts, is worthy of more
attention, and is, we believed, equally applicable in this country. It is no artificial limitation but one arising from necessity, and
without which the rule itself would not be workable, and indeed, the freedom of contract be considerably impaired. it is that a
mere incidental interest of the third person is not within the doctrine. A statement of this limitation which has received approval
on more than one occasion is the following from Simson vs. Brown (68 N.Y., 355); "It is not yet promise made by one to another,
from the performance of which a benefit may ensue to a third, which gives a right of action to such third person, he being neither
privy to the contract nor to the consideration. The contract must be made for his benefit as an object, and he must be the party
intended to be benefited."
In Crandall vs. Paine (154 ill., 627), it is said: "It would be going too far to hold that a mere stranger to the contract, who was to
derive only an incidental benefit therefrom, might recover for a breach of such contract."
In 2 Page on Contracts, sections 1312 and 1313, many cases are collected as illustrations of what has been held to be an incidental
benefit. A contract between the United States and a state for the maintenance of a canal cannot be enforced by one who has made
of water furnished from such canal. (Walsh vs. C.H.V. & Athens R. Co., 176 U. S. 469.) A contract between an employer and
employee, whereby the former agreed to furnish the latter s physician if the employee was injured in the course of his
employment, could not be enforced by a physician whom the employee engaged. (Thomas Mfg. Co. vs. Prather, 65 Ark., 27.) A
very numerous group of such cases involves contracts with a city to furnish water for fire protection, the weight of authority
holding that inhabitants of the city have only an accidental benefit therein, and, hence, no action against the contractor for non-
observance of the contract. These cases are collected and the rule affirmed in Allen & Currey Mfg. Co. vs. Shreveport Waterworks
Co. (113 La., 1091). A number of French cases are reviewed in the last cited in which an alleged stipulation pour autrui was held
to be only an incidental interest.
A contract by an employer with a physician to attend to all his sick and injured employees held not a stipulation pour
autrui, and the employee had no right of action against the physician for breach of contract. Montastier c. A , Pau,
1st May, 1900, Sirey, 1900, vol. 2, p. 301, J.P. 1900, part 2, p. 301. A corporation bought a boatload of coal, and, before
having paid for it, it was put in the hands of a receiver. Held, that a contract by which a person agreed with the receiver
to pay this debt was not a stipulation pour autrui, and the seller of the coal had no action upon it. Watts-Ward c. Cels,
20th Dec., 1898, Sirey, 1901, vol. 1, p. 270, J.P. 1901, part 1, p. 270.
In this last case, the court said: "If article 1121 of the Civil Code (Code Napoleon) permits a stipulation to be made in favor of
third person when such is the condition of the stipulation made for one's self, we must not conclude therefrom that any clause in a
contract susceptible of procuring advantages to a third person brings into existence in favor of the latter a right of action directly
against the contractor, when it has not been the intention of the parties to confer it upon him."
Just above we have said that, with the enactment of the second paragraph of article 1257 of the Civil Code, the law invalidating
stipulations pour autrui was swept away. What was that prohibition? It was not a prohibition against indirect benefit to third
persons arising from a contract between parties. The prohibition was a limitation upon the freedom of the parties to insert what
they pleased in a contract. The law of the Partidas which we have quoted above illustrate this quite accurately. It states the rule
against stipulations pour autrui and then gives the following concrete example: "Do you promise me that you will give to such a
one such a thing?" and the other answers, "I promise." And it says that such a promise cannot be enforced. In other words, the
actual intent and desire of the parties to confer a favor upon a third person was what the law prohibited. It took no cognizance of
the indirect benefits the third person which might arise through the due performance of the contract. These were allowed to fall
where they might. And, indeed, any principle of law which would endeavor to take notice of such incidental benefits accruing to
strangers by the performance of a contract would be too unwieldy and complicated and too restrictive upon the freedom to
contract to be practicable. The prohibition is directed to what the parties may voluntarily agree to perform. The word
used, stipulation (estipulacion), is defined by Escriche in his Diccionario de Legislacion y Jurisprudencia, as follows:
A promise made juridically, according to the solemnities and forms prescribed by law; or an unilateral contract by which
a person, in suitable response to a question addressed him by another, cedes the thing or authorizes the doing of the act
requested, thereby becoming obliged to fulfill the said contract.
The Latin equivalent, stipulatio, is defined in Black's Law Dictionary as follows: "In the Roman law, stipulatio was the verbal
contract (verbis obligatio), and was the most solemn and formal of all the contracts in that system of jurisprudence. It was entered
into by question and corresponding answer thereto, by the parties, both being present at the same time, and usually by such words
as 'spondes?' 'spondeo,' 'promittis?' 'promitto,' and the like."
A stipulation is one of the intended feature or effects of a contract. The parties set their minds upon it and agree to its
consummation. Each party to the contract may or may not speculate upon probable consequence performance thereof will have
upon the fortunes of third persons. But what they stipulate they desire to accomplish. Their minds met upon the point. Now, the
law prohibited a stipulation in favor of third person. In other words, the law prohibited the parties agreeing to the performance of
an act which would directly and materially benefit one not a party to the contract. A meeting of their minds upon such a matter
was, by law, deprived of contractual effect. This was the prohibition which was swept away by the second paragraph of article
1257. The exact words of the latter are, any stipulation in favor of a third person. Bearing in mind the meaning of the
word stipulation as it is used in the Partidas and defined in the dictionaries, it will be at once seen that contracting parties may
now do what was prohibited to them under the former law. Their minds may unite upon an act to be performed in favor of third
person and the law will now enforce performance. The word any clears up all doubts as to the entire removal of restrictions upon
the right of contracting parties to stipulate in favor of a third person. So, we believe the fairest test, in this jurisdiction at least,
whereby to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental
interest, is to rely upon the intention of the parties as disclosed by their contract.
If a third person claims an enforcible interest in the contract, that question must be settled by determining whether the contracting
parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of
conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and
interpretation of writings must be observed.
The very next article of the code seems to furnish additional evidence that this must be the true test of a stipulation pour autrui.
Article 1258 reads: "Contracts are perfected by mere consent, and from that time they are binding, not only with regard to the
fulfillment of what has been expressly stipulated, but also with regard to all the consequences which, according to their character,
are in accordance with good faith, use, and law."
It is elementary that parties do not attempt to stipulation all that their contract legally binds them to. They have in mind the salient
points of the contract, the particular acts they desire to be performed, the sine quo non of the agreement, and usually specify these,
that is, expressly stipulate them. But they leave to the law such matters as the statutes of fraud, prescription, exemption, etc., and
they leave not a little sometimes to custom or usage. So, this article recognizes a distinction between the obligation of a contract,
those which are expressly stipulated and all others. Since the rights of a third person under the second paragraph of the preceding
article are limited to the stipulations of the contract, it is clear that the cannot base his claims upon any other ground than that the
parties intended to benefits him.
In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature of a gift or whether there is
an obligation owing from the promise to the third person. That no such obligation exists may in some degree assist in determining
whether the parties intended to benefit a third person, whether the stipulated for him. Thus in a purely commercial contract, as is
the one we have under consideration in the case at bar, it is not likely that the promise would go out of his way to favor a third
person without exacting a "pount of flesh." On the contrary, where the third person is a close relative of the promise, we may
often expect an expression of generosity and find some reason for believing that the promise did exact a promise in benefit of his
relative. But these are at best mere aids in arriving at the intention of the parties. We close this part of the discussion by quoting
from Elliott on Contracts, section 1413, as follows:
It is a rule of practically universal application that there must exist on the part of the original parties to the contract a
clear intent to benefit the third party, although a majority of the courts do not go so far as to hold with Connecticut that
the contract must be for the sole and exclusive benefits of the third party.
We now come to a consideration of the bond which is the basis of this action. It being a contractor's bond does not in any degree
distinguish it from other contracts in applying the test we have outlined above for determining whether it contains a
stipulation pour autrui. On the contrary, the rule requiring a clear intent on the part of the parties to benefit a third person should
be reenforced by a due regard for article 1827 of the Civil Code, which provides: "Security is not presumed; it must be express
and cannot be extended further than that specified therein."
Did the parties to the bond intend to secure the claims of materialmen? Did the city of Manila so demand, and did the sureties so
promise? Or did the city only demand and the sureties only promise to secure the city Manila in damages against such claims?
These are the controlling question upon which depend the plaintiffs' claim that the clause referring to the materialmen, etc., is a
stipulation pour autrui.
In the first place, we are informed by the pleadings that the alleged promise refused to join as plaintiff in this action as we find on
this appeal its brief opposing the pretensions of the plaintiffs. We have, thus, the parties signatory to the bond all denying that
they intended to confer a benefit upon the materialman by the terms of the bond. If, us urged by the appellants, the city is not
liable for their claims, any intention on its part to secure their payment must have been an act of generosity. If so, why this change
of front? Why was the favor withdrawn?
Again, legal precision would require that the materialmen and other mentioned in the controverted clause of the bond should have
been included as obligees on the bond had it been desired to protect their claims thereby. if the contention of the appellants be true
that the city had no interest to subserve in inserting the clause in question and if that were the view taken by the city officials, the
city must be considered by all hands as a mere nominal obligee as to this clause. Why, then, did they not make the bond read ad
hoc "unto all materialmen," etc.?
Again, the closing stipulation is that 'suit on this bond may be brought . . . in the district in which the said contract is executed."
Here was another neglected opportunity, if, indeed, it were the intention of the parties to confer an interest in the upon the
materialmen, to show to whom the bondsmen were obligated. Having named the obligee in the bond, the parties concluded by
providing for it enforcement. By whom? By the city of Manila or by any person interested therein or benefited thereby? No,
indeed. There is no more effort to name the materialmen as entitled to a right to bring action on the bond in the judicial district of
Manila than there is to name them obligees in the bond. Undoubtedly the city required the insertion of the disputed clause in the
bond. If it were inserted for the purpose of protecting materialmen, why were not apt words used to that end? The attention of the
sureties being called to possible litigation by the last paragraph of the bond, it might also be asked whether, assuming that they
understood the bond to be for the benefit of materialmen, etc., they desired to make themselves liable to suits by an indefinite
number of undetermined persons for claims as yet unknown? They might well agree to answer in damages to the city of Manila
by reason of such claims and yet hesitate upon the proposition that they answer directly and for the full amount of such claims.
As illustrative of the apt words used in a bond securing unnamed persons, we call attention to Act No. 1901, which specifies the
contents of a sheriff's bond. The Act provides that it shall read "for the benefit of whom it may concern" and that it shall be
available "for the benefit of the Government and of any person in interest."
It seems to us that to hold that the parties intended to make the materialmen obligees in the bond involves a disregard for its actual
language which is not becoming in a court of law. To reach such a conclusion it is necessary to surmount two rules of
construction peculiarly applicable to the instrument: first, that a stipulation pour autrui must be clearly expressed; and second,
that a contract of surety is not to be presumed but must be express. if these be disposed of, it then becomes necessary to insert
actual words in the bond, naming the materialmen, etc., as obligees, and giving them the right to sue thereon in the judicial district
of Manila; and the conclusion must finally be reached that the sureties and the city officials are now acting in collusion in denying
that there was an intention to confer the benefit of the bond upon the materialmen.
But if the clause in question was not inserted for the benefit of the materialmen and the city is not any way liable for their claims
against the contractor, for what purpose was it inserted in the bond? The first answer which suggests itself to this question,
assuming that the hypothesis is correct, is that it was inserted ex abundanti cautela. And this does not appear so specious when we
consider such article of the Civil Code as article 1111, which gives to creditors the rights and actions of their insolvent debtors
and article 1597, which gives to materialmen and laborers a right of action against the owner for any sum remaining in his hands
due the contractor. At the present time we refrain from determining whether the city had legal reason for protecting itself in the
bond from the claims of materialmen for the reason that the question appears to us too difficult for an offhand decision. But we do
think that these articles of the code show some considerable reason for inserting in the bond protection against such claims.
Litigation has occurred with some frequency in the United States on contractors' bonds which contain clauses similar to the one
under consideration. We have made some study of these cases, and they seem to call for some comment. In some of them the
bond read directly to the materialmen, etc. With these cases we are incomplete accord, and had the bond in the instant case read
there could be no doubt as to the liability of the bondsmen to the plaintiffs. We cite, as instances of this class of cases, St. Louis
vs. Von Martin Lumber and Mfg. Co. vs. Peterson and Sampson (124 Iowa, 599); Philadelphia vs. Harry C. Nichols Co. (214 Pa.,
265).
In those cases which may be said to run directly counter to the view we have taken of the bond under consideration, the
materialmen, etc., were not named or referred to in any way as obligees in the bond. yet, the sureties were held liable. From both
Nebraska and Indiana come a number of cases which have so construed bonds given by contractors and reading only to the owner
as oblige. The indiana cases are collected in the late case of Knight and Jillson Co. vs. Castle (172 Ind., 97); while the Nebraska
cases are collected in Korsmeyer Plumbing and Heating Co. vs. McClay (43 Neb., court of Missouri, in Devers vs. Howard (144
Mo., 671), apparently allowed recovery upon such a bond, although the decision hardly gives a sufficient outline of the bond to so
state positively. In all these case, the language of the bonds declared upon was disregarded, and by what we deem a forced and
unwarranted construction of the instruments, it was held that the parties had expressly stipulated in favor of the materialmen, etc.
The last class of cases to which we find it necessary to refer supports the stand taken by us. The decision in Electric Appliance
Co. vs. United States Fidelity and Guaranty Co. (110 Wis., 434), concludes as follows: "We have arrived at the conclusion that
the contract and bond in suit do not disclose an intent to secure third parties. We deem it clear, under the circumstances, that the
bond was taken for the city's benefits, and this conclusion is amply confirmed by the practical construction given it by the
parties."
Brower Lumber Co. vs. Miller (28 Ore., 565), and Weller vs. Goble (66 Iowa, 113), are also in accord with us. The only decision
from Louisiana, which should be regarded with special interest coming as it does from a civil law jurisdiction, is also wholly in
our favor. (Salem Brick and Lumber Co. vs. Le Sassier, 106 La., 398.) Counsel has made strenuous efforts to distinguish that case
from the one at bar. It is asserted that the clause in that bond was inserted by way of preamble to a condition in the bond and was
not a condition, properly speaking, of the bond, while in the bond at bar the clause constitute an express stipulation. We doubt if
so fine a distinction may fairly be drawn. But we think the opinion of the supreme court of Louisiana as to whether it be a case in
point is decisive for us. The case is thus reviewed in Allen and Currey Mfg. Co. vs. Shreveport Waterworks Co. (113 La., 1091),
under the following introductory was very strong, yet not strong enough to induce the courts to recognize a stipulation pour
autrui, the following cases may be cited."
For a lengthy review of the American case law upon this particular phase of stipulations pour autrui, see the monographic not of
Jefferson vs. Asch (27 L.R.A. [N.S.], 573).
For the foregoing reasons the judgment of the lower court, sustaining the demurrer to the complaint, is affirmed, with costs
against the appellants. So ordered.
Arellano C.J., Torres, Carson and Araullo, JJ., concur.
GEORGE A. KAUFFMAN, plaintiff-appellee,
vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Roman J. Lacson for appellant.
Ross and Lawrence for appellee.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman, was the president of a domestic
corporation engaged chiefly in the exportation of hemp from the Philippine Islands and known as the Philippine Fiber and
Produce Company, of which company the plaintiff apparently held in his own right nearly the entire issue of capital stock. On
February 5, 1918, the board of directors of said company, declared a dividend of P100,000 from its surplus earnings for the year
1917, of which the plaintiff was entitled to the sum of P98,000. This amount was accordingly placed to his credit on the books of
the company, and so remained until in October of the same year when an unsuccessful effort was made to transmit the whole, or a
greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce Company,
presented himself in the exchange department of the Philippine National Bank in Manila and requested that a telegraphic transfer
of $45,000 should be made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce Company. He
was informed that the total cost of said transfer, including exchange and cost of message, would be P90,355.50. Accordingly,
Wicks, as treasurer of the Philippine Fiber and Produce Company, thereupon drew and delivered a check for that amount on the
Philippine National Bank; and the same was accepted by the officer selling the exchange in payment of the transfer in question.
As evidence of this transaction a document was made out and delivered to Wicks, which is referred to by the bank's assistant
cashier as its official receipt. This memorandum receipt is in the following language:
October 9th, 1918.

CABLE TRANSFER BOUGHT FROM

PHILIPPINE NATIONAL BANK,
Manila, P.I. Stamp P18
Foreign Amount Rate
$45,000. 3/8 % P90,337.50
Payable through Philippine National Bank, New York. To G. A. Kauffman, New York. Total P90,355.50. Account of Philippine
Fiber and Produce Company. Sold to Messrs. Philippine Fiber and Produce Company, Manila.
(Sgd.) Y LERMA,
Manager, Foreign Department.
On the same day the Philippine National Bank dispatched to its New York agency a cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL
BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New York sent a cable message in reply suggesting the
advisability of withholding this money from Kauffman, in view of his reluctance to accept certain bills of the Philippine Fiber and
Produce Company. The Philippine National Bank acquiesced in this and on October 11 dispatched to its New York agency
another message to withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to Kauffman in New York, advising him
that $45,000 had been placed to his credit in the New York agency of the Philippine National Bank; and in response to this advice
Kauffman presented himself at the office of the Philippine National Bank in New York City on October 15, 1918, and demanded
the money. By this time, however, the message from the Philippine National Bank of October 11, directing the withholding of
payment had been received in New York, and payment was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First Instance of the city of Manila to
recover said sum, with interest and costs; and judgment having been there entered favorably to the plaintiff, the defendant
appealed.
Among additional facts pertinent to the case we note the circumstance that at the time of the transaction above-mentioned, the
Philippines Fiber and Produce Company did not have on deposit in the Philippine National Bank money adequate to pay the
check for P90,355.50, which was delivered in payment of the telegraphic order; but the company did have credit to that extent, or
more, for overdraft in current account, and the check in question was charged as an overdraft against the Philippine Fiber and
Produce Company and has remained on the books of the bank as an interest-bearing item in the account of said company.
It is furthermore noteworthy that no evidence has been introduced tending to show failure of consideration with respect to the
amount paid for said telegraphic order. It is true that in the defendant's answer it is suggested that the failure of the bank to pay
over the amount of this remittance to the plaintiff in New York City, pursuant to its agreement, was due to a desire to protect the
bank in its relations with the Philippine Fiber and Produce Company, whose credit was secured at the bank by warehouse receipts
on Philippine products; and it is alleged that after the exchange in question was sold the bank found that it did not have sufficient
to warrant payment of the remittance. In view, however, of the failure of the bank to substantiate these allegations, or to offer any
other proof showing failure of consideration, it must be assumed that the obligation of the bank was supported by adequate
consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch as the plaintiff Kauffman was not
a party to the contract with the bank for the transmission of this credit, no right of action can be vested in him for the breach
thereof. "In this situation," we here quote the words of the appellant's brief, "if there exists a cause of action against the
defendant, it would not be in favor of the plaintiff who had taken no part at all in the transaction nor had entered into any contract
with the plaintiff, but in favor of the Philippine Fiber and Produce Company, the party which contracted in its own name with the
defendant."
The question thus placed before us is one purely of law; and at the very threshold of the discussion it can be stated that the
provisions of the Negotiable Instruments Law can come into operation there must be a document in existence of the character
described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In the
case before us there was an order, it is true, transmitted by the defendant bank to its New York branch, for the payment of a
specified sum of money to George A. Kauffman. But this order was not made payable "to order or "to bearer," as required in
subsection (d) of that Act; and inasmuch as it never left the possession of the bank, or its representative in New York City, there
was no delivery in the sense intended in section 16 of the same Law. In this connection it is unnecessary to point out that the
official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed
in the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a valuable consideration paid by the Philippine Fiber
and Produce Company agreed on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York City; and the
question is whether the plaintiff can maintain an action against the bank for the nonperformance of said undertaking. In other
words, is the lack of privity with the contract on the part of the plaintiff fatal to the maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on this question is the second paragraph of article 1257
of the Civil Code; and unless the present action can be maintained under the provision, the plaintiff admittedly has no case. This
provision states an exception to the more general rule expressed in the first paragraph of the same article to the effect that
contracts are productive of effects only between the parties who execute them; and in harmony with this general rule are
numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibaez de Aldecoa vs. Hongkong and Shanghai
Banking Corporation, 22 Phil., 572, 584; Manila Railroad Co. vs. Compaia Trasatlantica and Atlantic, Gulf and Pacific Co., 38
Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in these words:
Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided he has given notice
of his acceptance to the person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the history and
interpretation of the paragraph above quoted and so complete is the discussion contained in that opinion that it would be idle for
us here to go over the same matter. Suffice it to say that Justice Trent, speaking for the court in that case, sums up its conclusions
upon the conditions governing the right of the person for whose benefit a contract is made to maintain an action for the breach
thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third person in a contract
is a stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their
contract.
If a third person claims an enforcible interest in the contract, the question must be settled by determining whether the contracting
parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of
conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and
interpretation of writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters not whether the stipulation is
in the nature of a gift or whether there is an obligation owing from the promise to the third person. That no such obligation exists
may in some degree assist in determining whether the parties intended to benefit a third person, whether they stipulated for him."
(Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is
undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in
his favor within the meaning of the paragraph above quoted; and the circumstances under which that promise was given disclose
an evident intention on the part of the contracting parties that the plaintiff should have the money upon demand in New York
City. The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to
maintain an action to recover it; and indeed if the provision in question were not applicable to the facts now before us, it would be
difficult to conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must
signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by
demanding payment; and although the Philippine National Bank had already directed its New York agency to withhold payment
when this demand was made, the rights of the plaintiff cannot be considered to as there used, must be understood to imply
revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing he exchange.
In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided
by the Court of Appeals of the State of New York on March 1, 1921, wherein it is held that, by selling a cable transfer of funds on
a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as holding the
money which was paid for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers, therefore, mean a
method of transmitting money by cable wherein the seller engages that he has the balance at the point on which the payment is
ordered and that on receipt of the cable directing the transfer his correspondent at such point will make payment to the beneficiary
described in the cable. All these transaction are matters of purchase and sale create no trust relationship."
As we view it there is nothing in the decision referred to decisive of the question now before us, wish is merely that of the right of
the beneficiary to maintain an action against the bank selling the transfer.
Upon the considerations already stated, we are of the opinion that the right of action exists, and the judgment must be affirmed. It
is so ordered, with costs against the appellant. Interest will be computed as prescribed in section 510 of the Code of Civil
Procedure.
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul the Court of Appeals
Decision[1] dated 21 January 2003 and its Resolution[2] dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of
Appeals Decision and Resolution affirmed in turn the Decision[3] dated 23 March 2000 and Order[4] dated 8 May 2000 of the
Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in the
promissory notes executed by the respondents Spouses Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United
Coconut Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement whereby the latter could
avail from the former credit of up to a maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses
Beluso constituted, other than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by
Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the obligation. The Credit Agreement was
subsequently amended to increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and to extend
the term thereof to 28 February 1998.

The spouses Beluso availed themselves of the credit line under the following Promissory Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 P 700,000
8314-96-00085-0 2 May 1996 30 August 1996 P 500,000
8314-96-000292-2 20 November 1996 20 March 1997 P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment of the principal and interest of the latter
two promissory notes were debited from the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was
again released to the spouses Beluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the spouses Beluso executed two
more promissory notes for a total of P350,000.00:

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 P 200,000
98-00002-4 2 January 1998 28 February 1998 P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissory notes were never released or credited
to their account and, thus, claimed that the principal indebtedness was only P2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to 34%. From 1996 to February
1998 the spouses Beluso were able to pay the total sum of P763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the obligations of the spouses Beluso,
as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 P 200,000 31% 36% P 225,313.24
97-00366-6 P 700,000 30.17% 32.786% P 795,294.72
(7 days) (102 days)
97-00368-2 P 1,300,000 28% 30.41% (102 P 1,462,124.54
(2 days) days)
98-00002-4 P 150,000 33% 36% P 170,034.71
(102 days)

The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of P2,932,543.00 plus 25% attorneys
fees, but the spouses Beluso failed to comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by the
spouses Beluso to secure their credit line, which, by that time, already ballooned to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages against UCPB with the RTC of
Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by [UCPB] void and the foreclosure and
Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso] the properties subject of the
foreclosure; to pay [the spouses Beluso] the amount of P50,000.00 by way of attorneys fees; and to pay the costs of suit.[The
spouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.[5]

On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, [6] prompting UCPB to appeal the RTC Decision with the
Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit:

WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial Court, Branch 65, Makati City in
Civil Case No. 99-314 is hereby AFFIRMED subject to the modification that defendant-appellant UCPB is not liable for attorneys
fees or the costs of suit.[7]

On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack of merit. UCPB thus filed the
present petition, submitting the following issues for our resolution:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON
INTEREST RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS INDEBTEDNESS AND
ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY
THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)

III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY
PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED INCORRECT COMPUTATION OF
RESPONDENTS INDEBTEDNESS

IV

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR
VIOLATION OF THE TRUTH IN LENDING ACT

V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR
WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING[8]

Validity of the Interest Rates

The Court of Appeals held that the imposition of interest in the following provision found in the promissory notes of the spouses
Beluso is void, as the interest rates and the bases therefor were determined solely by petitioner UCPB:

FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO (BORROWER),
jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati
Avenue, Makati City, Philippines, the sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at
the rate indicative of DBD retail rate or as determined by the Branch Head. [9]

UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically quantified in the face of the
promissory notes, it was nonetheless categorically fixed, at the time of execution thereof, at the rate indicative of the DBD retail
rate. UCPB contends that said provision must be read with another stipulation in the promissory notes subjecting to review the
interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the
prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge
or offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.[10]

In this regard, UCPB avers that these are valid reference rates akin to a prevailing rate or prime rate allowed by this Court
in Polotan v. Court of Appeals.[11] Furthermore, UCPB argues that even if the proviso as determined by the branch head is
considered void, such a declaration would not ipso facto render the connecting clause indicative of DBD retail rate void in view
of the separability clause of the Credit Agreement, which reads:

Section 9.08 Separability Clause. If any one or more of the provisions contained in this AGREEMENT, or documents executed in
connection herewith shall be declared invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions hereof shall not in any way be affected or impaired. [12]

According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of mutuality of contracts,
because the spouses Beluso had the liberty to choose whether or not to renew their credit line at the new interest rates pegged by
petitioner.[13] UCPB also claims that assuming there was any defect in the mutuality of the contract at the time of its inception,
such defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the credit line from April 1996
to February 1998 without airing any protest with respect to the interest rates imposed by UCPB. According to UCPB, therefore,
the spouses Beluso are in estoppel.[14]

We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

We applied this provision in Philippine National Bank v. Court of Appeals,[15] where we held:

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between
the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in
fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of
a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

The provision stating that the interest shall be at the rate indicative of DBD retail rate or as determined by the Branch Head is
indeed dependent solely on the will of petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the
interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is
given this choice, the rate should be categorically determinable in both choices. If either of these two choices presents an
opportunity for UCPB to fix the rate at will, the bank can easily choose such an option, thus making the entire interest rate
provision violative of the principle of mutuality of contracts.

Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate as determined by the
Branch Head gives the latter unfettered discretion on what the rate may be. The Branch Head may choose any rate he or she
desires. As regards the rate indicative of the DBD retail rate, the same cannot be considered as valid for being akin to a prevailing
rate or prime rate allowed by this Court in Polotan. The interest rate in Polotan reads:

The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. x x x.[16]

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily determine the interest
rate by applying simple arithmetic. On the other hand, the provision in the case at bar does not specify any margin above or below
the DBD retail rate. UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered
discretion in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest
rates on the obligations of the spouses Beluso valid. According to said stipulation:

The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the
prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge
or offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.[17]

It should be pointed out that the authority to review the interest rate was given UCPB alone as the lender. Moreover, UCPB may
apply the considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as much
weight as it desires to each of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate of
interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or (3)
the resulting profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses
Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest to be imposed,
as both options violate the principle of mutuality of contracts.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppel if it
is prohibited by law or is against public policy. [18]

The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil Code on mutuality of
contracts, but also, as shall be discussed later, because they violate the Truth in Lending Act. Not disclosing the true finance
charges in connection with the extensions of credit is, furthermore, a form of deception which we cannot countenance. It is
against the policy of the State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of
the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit
to the detriment of the national economy.[19]

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are found in the promissory
notes themselves, not in the credit line. In fixing the interest rates in the promissory notes to cover the renewed credit line, UCPB
still reserved to itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch
Head.

Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed by UCPB, both failed to
include in their computation of the outstanding obligation of the spouses Beluso the legal rate of interest of 12% per
annum. Furthermore, the penalty charges were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04,
Article II on Interest and other Bank Charges of the subject Credit Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this ARTICLE, any principal obligation
of the CLIENT hereunder which is not paid when due shall be subject to a penalty charge of one percent (1%) of the amount of
such obligation per month computed from due date until the obligation is paid in full. If the bank accelerates teh (sic) payment of
availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used on the total principal amount
outstanding and unpaid computed from the date of acceleration until the obligation is paid in full. [20]

Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally, agree to pay an additional sum
equivalent to twenty-five percent (25%) of the total due on the Note as attorneys fee, aside from the expenses and costs of
collection whether actually incurred or not, and a penalty charge of one percent (1%) per month on the total amount due and
unpaid from date of default until fully paid.[21]

Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of the Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement of its rights under this AGREEMENT, the Note(s), the
collaterals and other related documents, the BANK shall be entitled to recover attorneys fees equivalent to not less than twenty-
five percent (25%) of the total amounts due and outstanding exclusive of costs and other expenses.[22]

Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest agreed upon by the parties
under Section 2.02 of the Credit Agreement:

Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and shall be subject to the same
interest rate as herein stipulated.[23]

and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and become part of the principal and shall likewise bear interest at the same rate.[24]
UCPB lastly avers that the application of the spouses Belusos payments in the disputed computation does not reflect the parties
agreement. The RTC deducted the payment made by the spouses Beluso amounting to P763,693.00 from the principal
of P2,350,000.00. This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties as to
the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and Motion on Proposed Stipulation of Facts and
Issues vis--vis UCPBs Manifestation, the parties agreed that the amount of P763,693.00 was applied to the interest and not to the
principal, in accord with Section 3.03, Article II of the Credit Agreement on Order of the Application of Payments, which
provides:

Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in accordance with the following order of
preference:

1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any. [25]

Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been erroneously excluded by the RTC
and the Court of Appeals from the computation of the total amount due and demandable from spouses Beluso.

The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a considerably bigger amount and,
therefore, the demand should be considered void. There being no valid demand, according to the spouses Beluso, there would be
no default, and therefore the interests and penalties would not commence to run. As it was likewise improper to foreclose the
mortgaged properties or file a case against the spouses Beluso, attorneys fees were not warranted.

We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand.[26] The excess amount in such a
demand does not nullify the demand itself, which is valid with respect to the proper amount. A contrary ruling would put
commercial transactions in disarray, as validity of demands would be dependent on the exactness of the computations thereof,
which are too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in default with respect to
the proper amount and, therefore, the interests and the penalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said legal interest should be
imposed, thus: There being no valid stipulation as to interest, the legal rate of interest shall be charged. [27] It seems that the RTC
inadvertently overlooked its non-inclusion in its computation.

The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in both the body and the prayer of
its petition with the RTC:

12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is null and void, only the legal
rate of interest which is 12% per annum can be legally charged and imposed by the bank, which would amount to only about
P599,000.00 since 1996 up to August 31, 1998.

xxxx

WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:

xxxx
2. By way of example for the public good against the Banks taking unfair advantage of the weaker party to their contract,
declaring the legal rate of 12% per annum, as the imposable rate of interest up to February 28, 1999 on the loan of 2.350
million.[28]

All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a 12% legal interest on their
loans. When the RTC failed to include the 12% legal interest in its computation, however, the spouses Beluso merely defended in
the appellate courts this non-inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12%
legal interest in favor of petitioner in the case at bar, as what we have voided is merely the stipulated rate of interest and not the
stipulation that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the compounding of interest. The provisions in the Credit Agreement
and in the promissory notes providing for the compounding of interest were neither nullified by the RTC or the Court of Appeals,
nor assailed by the spouses Beluso in their petition with the RTC. The compounding of interests has furthermore been declared by
this Court to be legal. We have held in Tan v. Court of Appeals,[29] that:

Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

As regards the imposition of penalties, however, although we are likewise upholding the imposition thereof in the contract, we
find the rate iniquitous. Like in the case of grossly excessive interests, the penalty stipulated in the contract may also be reduced
by the courts if it is iniquitous or unconscionable. [30]

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering the fact that this penalty is
already over and above the compounded interest likewise imposed in the contract. If a 36% interest in itself has been declared
unconscionable by this Court,[31] what more a 30.41% to 36% penalty, over and above the payment of compounded
interest? UCPB itself must have realized this, as it gave us a sample computation of the spouses Belusos obligation if both the
interest and the penalty charge are reduced to 12%.

As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there had been no demand. Filing a case in
court is the judicial demand referred to in Article 1169[32] of the Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso were forced to litigate the issue
on the illegality of the interest rate provision of the promissory notes. The award of attorneys fees, it must be recalled, falls under
the sound discretion of the court.[33] Since both parties were forced to litigate to protect their respective rights, and both are
entitled to the award of attorneys fees from the other, practical reasons dictate that we set off or compensate both parties liabilities
for attorneys fees. Therefore, instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the
award of attorneys fees to the spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of 12% per annum and a penalty
charge of 12% per annum. We also hold that, instead of awarding attorneys fees in favor of petitioner, we shall merely affirm the
deletion of the award of attorneys fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated on 19 February 2001 and 20
March 2001 in the name of UCPB, as the spouses Beluso failed to exercise their right of redemption which expired on 25 March
2000. The RTC, however, annulled the foreclosure of mortgage based on an alleged incorrect computation of the spouses Belusos
indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at bar. Furthermore, the
annulment of the foreclosure proceedings and the certificates of sale were mooted by the subsequent issuance of new certificates
of title in the name of said bank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a
collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise known as
the Property Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to collateral attack. It cannot be
altered, modified or cancelled except in a direct proceeding in accordance with law.

The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on their account, they cannot be
said to be in default for refusing to pay the same. Consequently, according to the spouses Beluso, the enforcement of such illegal
and overcharged demand through foreclosure of mortgage should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found that a valid demand was
made by UCPB upon the spouses Beluso, despite being excessive, the spouses Beluso are considered in default with respect to the
proper amount of their obligation to UCPB and, thus, the property they mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent of the amounts to which UCPB is
rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this case. The grounds for the
proper annulment of the foreclosure sale are the following: (1) that there was fraud, collusion, accident, mutual mistake, breach of
trust or misconduct by the purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was
inadequate and the inadequacy was so great as to shock the conscience of the court. [34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged violation of Republic Act No.
3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act which mandates the filing of an
action to recover such penalty must be made under the following circumstances:

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount
equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that
such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. x x
x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that [a]dmittedly the original complaint did not explicitly allege a violation
of the Truth in Lending Act and no action to formally admit the amended petition [which expressly alleges violation of the Truth
in Lending Act] was made either by [respondents] spouses Beluso and the lower court. x x x.[35]

UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending Act had been barred by the
one-year prescriptive period provided for in the Act. UCPB asserts that per the records of the case, the latest of the subject
promissory notes had been executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the RTC
on 9 February 1999, which was after the expiration of the period to file the same on 2 January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit
the amended petition was made either by [respondents] spouses Beluso and the lower court. In such transactions, the debtor and
the lending institutions do not deal on an equal footing and this law was intended to protect the public from hidden or undisclosed
charges on their loan obligations, requiring a full disclosure thereof by the lender. We find that its infringement may be inferred or
implied from allegations that when [respondents] spouses Beluso executed the promissory notes, the interest rate chargeable
thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to [respondents] Spouses Beluso
the charges applicable on their loans.[36]

We agree with the Court of Appeals. The allegations in the complaint, much more than the title thereof, are controlling. Other
than that stated by the Court of Appeals, we find that the allegation of violation of the Truth in Lending Act can also be inferred
from the same allegation in the complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the provision of their promissory note
granting respondent bank the power to unilaterally fix the interest rates, which rate was not determined in the promissory note but
was left solely to the will of the Branch Head of the respondent Bank, x x x. [37]

The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates certainly also means that the
promissory notes do not contain a clear statement in writing of (6) the finance charge expressed in terms of pesos and centavos;
and (7) the percentage that the finance charge bears to the amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.[38] Furthermore, the spouses Belusos prayer for such other reliefs just and equitable
in the premises should be deemed to include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.

UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending Act has already prescribed is
likewise without merit. The penalty for the violation of the act is P100 or an amount equal to twice the finance charge required by
such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on
any credit transaction.[39] As this penalty depends on the finance charge required of the borrower, the borrowers cause of action
would only accrue when such finance charge is required. In the case at bar, the date of the demand for payment of the finance
charge is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is
therefore within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor implied from the
allegations made in the complaint.[40]Pertinent provisions of the Act read:

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation
of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice
the finance charge required by such creditor in connection with such transaction, whichever is the greater, except that such
liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within
one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this
subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees and court costs as
determined by the court.

xxxx

(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not
less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to both criminal
and civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the penalty therefor of fine,
imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty therefor is an amount of P100 or in an
amount equal to twice the finance charge required by the creditor in connection with such transaction, whichever is greater,
except that the liability shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be instituted
by the aggrieved private person separately and independently from the criminal case for the same offense.

In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in Lending Act had been jointly
instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure
void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court, which provides:

SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or otherwise, as many causes of action
as he may have against an opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be
allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue
lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the aggregate amount claimed shall be the
test of jurisdiction.

In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was not alleged in the complaint,
UCPB is actually asserting a violation of due process. Indeed, due process mandates that a defendant should be sufficiently
apprised of the matters he or she would be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed
by the spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in Lending Act was expressly
alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing the borrower in writing before
the execution of the Promissory Notes of the interest rate expressed as a percentage of the total loan, the respondent bank instead
is liable to pay petitioners double the amount the bank is charging petitioners by way of sanction for its violation. [41]

In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act provision to express the interest
rate as a simple annual percentage of the loan? [42]

These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the assertion of this issue in this
case as to prevent it from putting up a defense thereto is plainly hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate the alleged violation of
the Truth in Lending Act, considering that the present action allegedly involved a single credit transaction as there was only one
Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the Truth in Lending Act had been
jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the
foreclosure void. There had been no question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the
above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be
allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue
lies therein.

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a preparatory
contract to the contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the considerations specified
therefor, to lend to the other party amounts not exceeding the limit provided. The credit transaction thus occurred not when the
credit line was opened, but rather when the credit line was availed of. In the case at bar, the violation of the Truth in Lending Act
allegedly occurred not when the parties executed the Credit Agreement, where no interest rate was mentioned, but when the
parties executed the promissory notes, where the allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their execution,
then they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished
prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a
clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the
Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2)

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which
are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
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 banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests
from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully 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 business
decisions.Upholding UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The
belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already consummated business
decision.

In addition, the promissory notes, the copies of which were presented to 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 loan covered by said promissory notes.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on the ground that the spouses
Beluso instituted another case (Civil Case No. V-7227) before the RTC of Roxas City, involving the same parties and issues.
UCPB claims that while Civil Case No. V-7227 initially appears to be a different action, as it prayed for the issuance of a
temporary restraining order and/or injunction to stop foreclosure of spouses Belusos properties, it poses issues which are similar
to those of the present case.[43] To prove its point, UCPB cited the spouses Belusos Amended Petition in Civil Case No. V-7227,
which contains similar allegations as those in the present case.The RTC of Makati denied UCPBs Motion to Dismiss Case No.
99-314 for lack of merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same issue with us
now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a Petition for Injunction Against
Foreclosure, is the propriety of the foreclosure before the true account of spouses Beluso is determined. On the other hand, the
issue in Case No. 99-314 before the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim
that Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the restraining order, UCPB
proceeded with the foreclosure and auction sale. As the act sought to be restrained by Civil Case No. V-7227 has already been
accomplished, the spouses Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with
the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved in the two civil actions, namely,
the violation of the right of the spouses Beluso not to have their property foreclosed for an amount they do not owe, the Rules of
Court nevertheless allows the filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before
the filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as provided for in the Credit Agreement
is in Makati City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following instances:

SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss based on paragraphs (f), (h) and (i)
of section 1 hereof shall bar the refiling of the same action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not in paragraphs (f), (h) and (i):

SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to
dismiss may be made on any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending party;

(b) That the court has no jurisdiction over the subject matter of the claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same cause;

(f) That the cause of action is barred by a prior judgment or by the statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived, abandoned, or otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable under the provisions of the statute of frauds; and

(j) That a condition precedent for filing the claim has not been complied with. [44] (Emphases supplied.)

When an action is dismissed on the motion of the other party, it is only when the ground for the dismissal of an action is found in
paragraphs (f), (h) and (i) that the action cannot be refiled. As regards all the other grounds, the complainant is allowed to file
same action, but should take care that, this time, it is filed with the proper court or after the accomplishment of the erstwhile
absent condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the spouses Beluso on 15 January
1999 with the RTC of Roxas City, which Motion had not yet been ruled upon when the spouses Beluso filed Civil Case No. 99-
314 with the RTC of Makati. Hence, there were allegedly two pending actions between the same parties on the same issue at the
time of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will still not change our findings. It
is indeed the general rule that in cases where there are two pending actions between the same parties on the same issue, it should
be the later case that should be dismissed. However, this rule is not absolute. According to this Court in Allied Banking
Corporation v. Court of Appeals[45]:

In these cases, it is evident that the first action was filed in anticipation of the filing of the later action and the purpose is to
preempt the later suit or provide a basis for seeking the dismissal of the second action.

Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if the later action is the
more appropriate vehicle for the ventilation of the issues between the parties. Thus, in Ramos v. Peralta, it was held:

[T]he rule on litis pendentia does not require that the later case should yield to the earlier case. What is required merely is that
there be another pending action, not a prior pending action. Considering the broader scope of inquiry involved in Civil Case No.
4102 and the location of the property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant considerations in determining which action should be
dismissed: (1) the date of filing, with preference generally given to the first action filed to be retained; (2) whether the action
sought to be dismissed was filed merely to preempt the later action or to anticipate its filing and lay the basis for its dismissal; and
(3) whether the action is the appropriate vehicle for litigating the issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction against a foreclosure sale
that has already been held, while Civil Case No. 99-314 before the RTC of Makati City includes an action for the annulment of
said foreclosure, an action certainly more proper in view of the execution of the foreclosure sale. The former case was improperly
filed in Roxas City, while the latter was filed in Makati City, the proper venue of the action as mandated by the Credit
Agreement. It is evident, therefore, that Civil Case No. 99-314 is the more appropriate vehicle for litigating the issues between the
parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil
Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following MODIFICATIONS:

1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent spouses Samuel and Odette
Beluso are also liable for the following amounts:
a. Penalty of 12% per annum on the amount due[46] from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due[47] from date of demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These payments shall be applied to the date of actual
payment of the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be deducted from the liability of the
spouses Samuel and Odette Beluso on 9 February 1999 to the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the Regional Trial Court
and the Court of Appeals ordered respondents to pay, as modified in this Decision, shall be deducted from the proceeds of the
foreclosure sale.

Philippine Savings Bank vs. Castillo, G.R. No. 193178. May 30, 2011
This is a petition for review on certiorari[1] under Rule 45 of the Rules of Court, seeking to partially reconsider and modify the
Decision[2] dated August 27, 2009 and the Resolution[3] dated August 4, 2010 of the Court of Appeals (CA) in CA-G.R. CV No.
86445.

Respondent spouses Alfredo M. Castillo and Elizabeth Capati-Castillo were the registered owners of a lot located in
Tondo, Manila, covered by Transfer Certificate of Title (TCT) No. 233242. Respondent spouses Romeo B. Capati and Aquilina
M. Lobo were the registered owners of another lot, covered by TCT No. 227858, also located in Tondo, Manila.

On May 7, 1997, respondents obtained a loan, with real estate mortgage over the said properties, from petitioner Philippine
Savings Bank, as evidenced by a Promissory Note with a face value of P2,500,000.00. The Promissory Note, in part, reads:

FOR VALUE RECEIVED, I/We, solidarily, jointly and severally, promise to pay to the order of
PHILIPPINE SAVINGS BANK, at its head office or at the above stated Branch the sum of TWO MILLION
FIVE HUNDRED THOUSAND PESOS ONLY (P2,500,000.00), Philippine currency, with interest at the rate
of seventeen per centum (17%) per annum, from date until paid, as follows:

P43,449.41 (principal and interest) monthly for fifty nine (59) months starting June 07, 1997 and every
7th day of the month thereafter with balloon payment on May 07, 2002.

Also, the rate of interest herein provided shall be subject to review and/or adjustment every ninety (90)
days.

All amortizations which are not paid on due date shall bear a penalty equivalent to three percent (3%)
of the amount due for every month or fraction of a months delay.

The rate of interest and/or bank charges herein stipulated, during the terms of this promissory note, its
extensions, renewals or other modifications, may be increased, decreased or otherwise changed 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 PHILIPPINE SAVINGS BANK may prescribe for its debtors.

Upon default of payment of any installment and/or interest when due, all other installments and interest
remaining unpaid shall immediately become due and payable. Also, said interest not paid when due shall be
added to, and become part of the principal and shall likewise bear interest at the same rate herein provided. [4]

From the release of the loan in May 1997 until December 1999, petitioner had increased and decreased the rate of interest, the
highest of which was 29% and the lowest was 15.5% per annum, per the Promissory Note.

Respondents were notified in writing of these changes in the interest rate. They neither gave their confirmation thereto nor did
they formally question the changes. However, respondent Alfredo Castillo sent several letters to petitioner requesting for the
reduction of the interest rates.[5] Petitioner denied these requests.

Respondents regularly paid their amortizations until December 1999, when they defaulted due to financial constraints. Per
petitioners table of application of payment, respondents outstanding balance was P2,231,798.11.[6] Petitioner claimed that as of
February 11, 2000, respondents had a total outstanding obligation of P2,525,910.29.[7] Petitioner sent them demand
letters. Respondents failed to pay.
Thus, petitioner initiated an extrajudicial foreclosure sale of the mortgaged properties. The auction sale was conducted on June
16, 2000, with the properties sold for P2,778,611.27 and awarded to petitioner as the only bidder. Being the mortgagee, petitioner
no longer paid the said amount but rather credited it to the loan amortizations and arrears, past due interest, penalty charges,
attorneys fees, all legal fees and expenses incidental to the foreclosure and sale, and partial payment of the mortgaged debt. On
even date, a certificate of sale was issued and submitted to the Clerk of Court and to the Ex-Officio Sheriff of Manila.

On July 3, 2000, the certificate of sale, sans the approval of the Executive Judge of the Regional Trial Court (RTC), was
registered with the Registry of Deeds of Manila.

Respondents failed to redeem the property within the one-year redemption period. However, on July 18, 2001, Alfredo Castillo
sent a letter to petitioner requesting for an extension of 60 days before consolidation of its title so that they could redeem the
properties, offering P3,000,000.00 as redemption price. Petitioner conceded to Alfredo Castillos request, but respondents still
failed to redeem the properties.

On October 1, 2001, respondents filed a case for Reformation of Instruments, Declaration of Nullity of Notarial Foreclosure
Proceedings and Certificate of Sale, Cancellation of Annotations on TCT Nos. 233242 and 227858, and Damages, with a plea for
the issuance of a temporary restraining order (TRO) and/or writ of preliminary prohibitory injunction, with the RTC, Branch
14, Manila.

On October 5, 2001, the RTC issued a TRO. Eventually, on October 25, 2001, it issued a writ of preliminary injunction.

After trial, the RTC rendered its decision dated July 30, 2005, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs, and against the defendants in
the following manner:

1. Declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering the
defendant Philippine Savings Bank to refund to the plaintiffs, the amount of interest collected in excess of
seventeen percent (17%) per annum;

2. Declaring the Extrajudicial Foreclosure conducted by the defendants on June 16, 2000 and the
subsequent proceedings taken thereafter to be void ab initio. In this connection, defendant Register of
Deeds is hereby ordered to cause the cancellation of the corresponding annotations at the back of Transfer
Certificates of Title No. 227858 and 233242 in the name of Spouses Alfredo and Elizabeth Castillo and
Spouses Romeo Capati and Aquilina M. Lobo;

3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the amount of Php50,000.00 as moral
damages; Php50,000.00 as exemplary damages; and attorneys fees in the amount of Php30,000.00 and
Php3,000.00 per appearance.

4. Defendants counterclaims are hereby DISMISSED for lack of merit.

With costs against the defendant Philippine Savings Bank, Inc.

SO ORDERED.[8]
Petitioner filed a motion for reconsideration. The RTC partially granted the motion in its November 30, 2005 Order, modifying
the interest rate from 17% to 24% per annum.[9]

Petitioner appealed to the CA. The CA modified the decision of the RTC, thus

WHEREFORE, in view of the foregoing, the Decision of the Regional Trial Court is
hereby AFFIRMED WITH MODIFICATIONS. The fallo shall now read:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against

the defendants in the following manner:

1. Declaring the questioned increases of interest as unreasonable, excessive and

arbitrary and ordering the defendant Philippine Savings Bank to refund to the
plaintiffs, the amount of interest collected in excess of seventeen percent (17%)
per annum;

2. Declaring the Extrajudicial Foreclosure conducted by the defendants on June

16, 2000 and the subsequent proceedings taken thereafter to be valid[;]

3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the amount of

Php 25,000.00 as moral damages; Php 50,000.00 as exemplary damages; and
attorneys fees in the amount of Php 30,000.00 and Php 3,000.00 per appearance;

4. Defendants counterclaims are hereby DISMISSED for lack of merit.

With costs against the defendant Philippine Savings Bank, Inc.

SO ORDERED.[10]

Hence, this petition anchored on the contention that the CA erred in: (1) declaring that the modifications in the interest rates are
unreasonable; and (2) sustaining the award of damages and attorneys fees.

The petition should be partially granted.

The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of contracts under
Article 1308 of the Civil Code, which provides that [t]he contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.[11] A perusal of the Promissory Note will readily show that the increase or decrease of
interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker before a new interest
rate could be enforced.Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or
compliance of the contract left solely to the will of one of the parties is likewise invalid.
Petitioner contends that respondents acquiesced to the imposition of the modified interest rates; thus, there was no
violation of the principle of mutuality of contracts. To buttress its position, petitioner points out that the exhibits presented by
respondents during trial contained a uniform provision, which states:

The interest rate adjustment is in accordance with the Conformity Letter you have signed amending
your accounts interest rate review period from ninety (90) to thirty days.[12]
It further claims that respondents requested several times for the reduction of the interest rates, thus, manifesting their recognition
of the legality of the said rates. It also asserts that the contractual provision on the interest rates cannot be said to be lopsided in its
favor, considering that it had, on several occasions, lowered the interest rates.

We disagree. The above-quoted provision of respondents exhibits readily shows that the conformity letter signed by
them does not pertain to the modification of the interest rates, but rather only to the amendment of the interest rate review period
from 90 days to 30 days. Verily, the conformity of respondents with respect to the shortening of the interest rate review period
from 90 days to 30 days is separate and distinct from and cannot substitute for the required conformity of respondents with
respect to the modification of the interest rate itself.

Moreover, respondents assent to the modifications in the interest rates cannot be implied from their lack of response to
the memos sent by petitioner, informing them of the amendments. The said memos were in the nature of a proposal to change the
contract with respect to one of its significant components, i.e., the interest rates. As we have held, no one receiving a proposal to
change a contract is obliged to answer the proposal. [13] Therefore, respondents could neither be faulted, nor could they be deemed
to have assented to the modified interest rates, for not replying to the said memos from petitioner.

We likewise disagree with petitioners assertion that respondents recognized the legality of the imposed interest rates
through the letters requesting for the reduction of the rates. The request for reduction of the interest does not translate to consent
thereto. To be sure, a cursory reading of the said letters would clearly show that Alfredo Castillo was, in fact, questioning the
propriety of the interest rates imposed on their loan, viz.:

The undersigned is a mortgagor of Philippine Savings Bank with an outstanding balance of TWO
MILLION FOUR HUNDRED THIRTY EIGHT THOUSAND SIX HUNDRED SIX and 63/100
(P2,438,606.63) at an interest rate of 26% per annum (as per April 6, 1997 inquiry to Leo of the Accounting
Dept.) and with a monthly amortization of FIFTY EIGHT THOUSAND THREE HUNDRED FIFTY EIGHT
AND 38/100 (P58,358.38).

I understand that the present interest rate is lower than the last months 27%. However, it does not give
our company any break from coping with our receivables. Our clients, Mercure Philippine Village Hotel, Puerto
Azul Beach Hotel, Grand Air Caterer, to name a few, did not settle their obligation to us inspite of what was
agreed upon during our meeting held last February 1998. Their pledge of paying us at least ONE MILLION
PESOS PER AFFILIATION, which we allocate to pay our balance to your bank, was not a reliable deal to
foresee because, as of this very day, not even half of the amount assured to us was settled. This situation puts
the company in critical condition since we will again shoulder all the interests imposed on our loans, while, we
ourselves, did not impose any surcharge with our receivables.

In connection with this, may I request for a reduction of interest rate, in my favor, i.e., from 26% to
21% per annum. If such appeal is granted to us, we are assuring you of our prompt payment and keen
observance to your rules and regulations.[14]

The undersigned is a mortgagor of Philippine Savings Bank with an outstanding balance of TWO
MILLION FOUR HUNDRED THIRTY THREE THOUSAND EIGHTY FOUR and 73/100 (P2,433,084.73) at
an interest rate of 22.5% per annum (as per April 24, 1998 memo faxed to us) and with a monthly amortization
of FIFTY TWO THOUSAND FIVE HUNDRED FIFTY EIGHT AND 01/100 (P52,55[8].01).
 Such reduction of interest rate is an effect of our currencys development. But based on our inquiries
and research to different financial institutions, the rate your bank is imposing to us is still higher compared to
the eighteen and a half percent (18.5%) others are asking. With this situation, we are again requesting for a
decrease on the interest rate, that is, from 22.5% to 18.5%.This figure stated is not fictitious since other banks
advertising are published to leading newspapers. The difference between your rate is visibly greater and has an
immense effect on our financial obligations.[15]

The undersigned is a mortgagor at Philippine Savings Bank with an outstanding balance of TWO
MILLION FOUR HUNDRED THOUSAND EIGHT HUNDRED ELEVEN and 03/100 (Php 2,40[0],811.03) at
an interest rate of 21% per annum.

Letters of reconsideration were constantly sent to you to grant us lower interest rate. However, no
assistance with regard to that request has been extended to us. In view of this, I am requesting for a transfer of
our loan from PSBank Head Office to PSBank Mabini Branch. This transfer is purposely intended for an
appeal [for] a lower interest rate.[16]

Being a mortgagor of PSBank, I have [been] repeatedly asking for a reduction of your interest
rate. However, my request has been denied since the term I started. Many banks offer a much lower interest rate
and fair business transactions (e.g. Development Bank of Singapore [which] offers 13% p.a. interest rate).

In this connection, once more, I am requesting for a reduction of the interest rate applied to my loan to
maintain our business relationship.[17]

Basic is the rule that there can be no contract in its true sense without the mutual assent of the parties. If this consent is absent on
the part of one who contracts, the act has no more efficacy than if it had been done under duress or by a person of unsound
mind. Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet
as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, the
interest rate is undeniably always a vital component, for it can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it produces no binding effect. [18]

Escalation clauses are generally valid and do not contravene public policy. They are common in credit agreements as means of
maintaining fiscal stability and retaining the value of money on long-term contracts. To prevent any one-sidedness that these
clauses may cause, we have held in Banco Filipino Savings and Mortgage Bank v. Judge Navarro [19]that there should be a
corresponding de-escalation clause that would authorize a reduction in the interest rates corresponding to downward changes
made by law or by the Monetary Board. As can be gleaned from the parties loan agreement, a de-escalation clause is provided, by
virtue of which, petitioner had lowered its interest rates.

Nevertheless, the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest
rates. The adjustment should have still been subjected to the mutual agreement of the contracting parties. In light of the absence of
consent on the part of respondents to the modifications in the interest rates, the adjusted rates cannot bind them notwithstanding
the inclusion of a de-escalation clause in the loan agreement.

The order of refund was based on the fact that the increases in the interest rate were null and void for being violative of
the principle of mutuality of contracts. The amount to be refunded refers to that paid by respondents when they had no obligation
to do so. Simply put, petitioner should refund the amount of interest that it has illegally imposed upon respondents. Any
deficiency in the payment of the obligation can be collected by petitioner in a foreclosure proceeding, which it already did.

On the matter of damages, we agree with petitioner. Moral damages are not recoverable simply because a contract has been
breached. They are recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard
of his contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or
abusive. Likewise, a breach of contract may give rise to exemplary damages only if the guilty party acted in a fraudulent or
malevolent manner.[20]

In this case, we are not sufficiently convinced that fraud, bad faith, or wanton disregard of contractual obligations can be imputed
to petitioner simply because it unilaterally imposed the changes in interest rates, which can be attributed merely to bad business
judgment or attendant negligence. Bad faith pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of
a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud. Respondents
failed to sufficiently establish this requirement. Thus, the award of moral and exemplary damages is unwarranted. In the same
vein, respondents cannot recover attorneys fees and litigation expenses. Accordingly, these awards should be deleted.[21]

However, as regards the above mentioned award for refund to respondents of their interest payments in excess of 17% per annum,
the same should include legal interest. In Eastern Shipping Lines, Inc. v. Court of Appeals,[22] we have held that when an
obligation is breached, and it consists in the payment of a sum of money, the interest on the amount of damages shall be at the rate
of 12% per annum, reckoned from the time of the filing of the complaint. [23]

WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Decision dated August 27, 2009 and the Resolution
dated August 4, 2010 of the Court of Appeals in CA-G.R. CV No. 86445 are AFFIRMED WITH MODIFICATIONS, such that
the award for moral damages, exemplary damages, attorneys fees, and litigation expenses is DELETED, and the order of refund
in favor of respondents of interest payments made in excess of 17% per annum shall bear interest of 12% per annum from the
time of the filing of the complaint until its full satisfaction.

ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, HON. JOSE C. DE GUZMAN, OSCAR D.
TANQUECO, LUCIA D. TANQUECO-MATIAS, RUBEN D. TANQUECO and NESTOR D.
TANQUECO, respondents
There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a contract of lease to the effect
that the contract "may be renewed for a like term at the option of the lessee" is void for being potestative or violative of the
principle of mutuality of contracts under Art. 1308 of the Civil Code and, corollarily, what is the meaning of the clause"may be
renewed for a like term at the option of the lessee;" and, (b) whether a lessee has the legal personality to assail the validity of a
deed of donation executed by the lessor over the leased premises.
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located at No. 2 Sarmiento Street
corner Quirino Highway, Novaliches, Quezon City, covered by TCT No. 136779 in their name. On 30 June 1978 they leased the
property to petitioner Allied Banking Corporation (ALLIED) for a monthly rental of P1,000.00 for the first three (3) years,
adjustable by 25% every three (3) years thereafter. [1] The lease contract specifically states in its Provision No. 1 that "the term of
this lease shall be fourteen (14) years commencing from April 1, 1978 and may be renewed for a like term at the option of the
lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting of a concrete building
with a floor area of 340-square meters which it used as a branch office. As stipulated, the ownership of the building would be
transferred to the lessors upon the expiration of the original term of the lease.
 Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject property in favor of their
four (4) children, namely, private respondents herein Oscar D. Tanqueco, Lucia Tanqueco-Matias, Ruben D. Tanqueco and
Nestor D. Tanqueco, who accepted the donation in the same public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified petitioner ALLIED that
they were no longer interested in renewing the lease.[2] ALLIEDreplied that it was exercising its option to renew their lease under
the same terms with additional proposals.[3] Respondent Ruben D. Tanqueco, acting in behalf of all the donee-lessors, made a
counter-proposal.[4] ALLIED however rejected the counter-proposal and insisted on Provision No. 1 of their lease contract.
When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the premises. But the latter
asserted its sole option to renew the lease and enclosed in its reply letter a cashiers check in the amount of P68,400.00
representing the advance rental payments for six (6) months taking into account the escalation clause. Private respondents
however returned the check to ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After trial, the MeTC-Br.
33 declared Provision No. 1 of the lease contract void for being violative of Art. 1308 of the Civil Code thus -

x x x but such provision [in the lease contract], to the mind of the Court, does not add luster to defendants cause nor constitutes as
an unbridled or unlimited license or sanctuary of the defendant to perpetuate its occupancy on the subject property. The basic
intention of the law in any contract is mutuality and equality. In other words, the validity of a contract cannot be left at (sic) the
will of one of the contracting parties. Otherwise, it infringes (upon) Article 1308 of the New Civil Code, which provides: The
contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them x x x x Using the
principle laid down in the case of Garcia v. Legarda as cornerstone, it is evident that the renewal of the lease in this case cannot
be left at the sole option or will of the defendant notwithstanding provision no. 1 of their expired contract. For that would amount
to a situation where the continuance andeffectivity of a contract will depend only upon the sole will or power of the lessee, which
is repugnant to the very spirit envisioned under Article 1308 of the New Civil Code x x x x the theory adopted by this Court in the
case at bar finds ample affirmation from the principle echoed by the Supreme Court in the case of Lao Lim v. CA, 191 SCRA 150,
154, 155.

On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision was affirmed. [5]
On 20 February 1993, while the case was pending in the Court of Appeals, ALLIED vacated the leased premises by reason
of the controversy.[6]
ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon hence valid and binding on
both parties, and the exercise by petitioner of its option to renew the contract was part of their agreement and in pursuance
thereof.
We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of
contracts. It provides that "the contract must bind both the contracting parties; its validity or compliance cannot be left to the will
of one of them." This binding effect of a contract on both parties is based on the principle that the obligations arising from
contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on
their equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. The
ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the
uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory
restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of
the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of
the lessor to act conditioned on the performance by the lessee. It is a purely executory contract and at most confers a right to
obtain a renewal if there is compliance with the conditions on which the right is made to depend. The right of renewal constitutes
a part of the lessees interest in the land and forms a substantial and integral part of the agreement.
The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack
of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect
whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are
thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to
retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The
lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such
a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to
fulfillment.[7]
The case of Lao Lim v. Court of Appeals[8] relied upon by the trial court is not applicable here. In that case, the stipulation in
the disputed compromise agreement was to the effect that the lessee would be allowed to stay in the premises "as long as he needs
it and can pay the rents." In the present case, the questioned provision states that the lease "may be renewed for a like term at the
option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound only
when he exercises his option and the lessor cannot thereafter be excused from performing his part of the agreement.
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc.,[9] is misplaced. In that case, what was
involved was a contract to sell involving residential lots, which gave the vendor the right to declare the contract cancelled and of
no effect upon the failure of the vendee to fulfill any of the conditions therein set forth. In the instant case, we are dealing with a
contract of lease which gives the lessee the right to renew the same.
With respect to the meaning of the clause "may be renewed for a like term at the option of the lessee," we sustain petitioner's
contention that its exercise of the option resulted in the automatic extension of the contract of lease under the same terms and
conditions. The subject contract simply provides that "the term of this lease shall be fourteen (14) years and may be renewed for a
like term at the option of the lessee." As we see it, the only term on which there has been a clear agreement is the period of the
new contract, i.e., fourteen (14) years, which is evident from the clause "may be renewed for a like term at the option of the
lessee," the phrase "for a like term" referring to the period. It is silent as to what the specific terms and conditions of the renewed
lease shall be. Shall it be the same terms and conditions as in the original contract, or shall it be under the terms and conditions as
may be mutually agreed upon by the parties after the expiration of the existing lease?
In Ledesma v. Javellana[10] this Court was confronted with a similar problem. In that case the lessee was given the sole
option to renew the lease, but the contract failed to specify the terms and conditions that would govern the new contract. When
the lease expired, the lessee demanded an extension under the same terms and conditions. The lessor expressed conformity to the
renewal of the contract but refused to accede to the claim of the lessee that the renewal should be under the same terms and
conditions as the original contract. In sustaining the lessee, this Court made the following pronouncement:

x x x in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It was held that 'such a clause
relates to the very contract in which it is placed, and does not permit the defendant upon the renewal of the contract in which the
clause is found, to insist upon different terms than those embraced in the contract to be renewed;' and that 'a stipulation to renew
always relates to the contract in which it is found and the rights granted thereunder, unless it expressly provides for variations in
the terms of the contract to be renewed.'

The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we
find the following citations: 'The rule is well-established that a general covenant to renew or extend a lease which makes no
provision as to the terms of a renewal or extension implies a renewal or extension upon the same terms as provided in the original
lease.'

In the lease contract under consideration, there is no provision to indicate that the renewal will be subject to new terms and
conditions that the parties may yet agree upon. It is to renewal provisions of lease contracts of the kind presently considered that
the principles stated above squarely apply. We do not agree with the contention of the appellants that if it was intended by the
parties to renew the contract under the same terms and conditions stipulated in the contract of lease, such should have expressly
so stated in the contract itself. The same argument could easily be interposed by the appellee who could likewise contend that if
the intention was to renew the contract of lease under such new terms and conditions that the parties may agree upon, the contract
should have so specified. Between the two assertions, there is more logic in the latter.

The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a contract of lease,
the tenant is the one favored and not the landlord. 'As a general rule, in construing provisions relating to renewals or extensions,
where there is any uncertainty, the tenant is favored, and not the landlord, because the latter, having the power of stipulating in
his own favor, has neglected to do so; and also upon the principle that every man's grant is to be taken most strongly against
himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'

Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in the renewed contract were
still subject to mutual agreement by and between the parties, then the option - which is an integral part of the consideration for the
contract - would be rendered worthless. For then, the lessor could easily defeat the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a statute no
word, clause, sentence, provision or part of a contract shall be considered surplusage or superfluous, meaningless, void,
insignificant or nugatory, if that can be reasonably avoided. To this end, a construction which will render every word operative is
to be preferred over that which would make some words idle and nugatory. [11]
Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating its abandonment of
whatever rights it had under the renewal clause. Consequently, what remains to be done is for ALLIED to pay rentals for the
continued use of the premises until it vacated the same, computed from the expiration of the original term of the contract on 31
March 1992 to the time it actually left the premises on 20 February 1993, deducting therefrom the amount
of P68,400.00 consigned in court by ALLIED and any other amount which it may have deposited or advanced in conection with
the lease. Since the old lease contract was deemed renewed under the same terms and conditions upon the exercise by ALLIED of
its option, the basis of the computation of rentals should be the rental rate provided for in the existing contract.
Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A person who is not
principally or subsidiarily bound has no legal capacity to challenge the validity of the contract.[12] He must first have an interest in
it. "Interest" within the meaning of the term means material interest, an interest to be affected by the deed, as distinguished from a
mere incidental interest. Hence, a person who is not a party to a contract and for whose benefit it was not expressly made cannot
maintain an action on it, even if the contract, if performed by the parties thereto would incidentally affect him, [13] except when he
is prejudiced in his rights with respect to one of the contracting parties and can show the detriment which couldpositively result to
him from the contract in which he had no intervention. [14] We find none in the instant case.
WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering that petitioner
ALLIED BANKING CORPORATION already vacated the leased premises as of 20 February 1993, the renewed lease contract is
deemed terminated as of that date. However, petitioner is required to pay rentals to respondent lessors at the rate provided in their
existing contract, subject to computation in view of the consignment in court of P68,400.00 by petitioner, and of such other
amounts it may have deposited or advanced in connection with the lease.
SO ORDERED.
Villanueva vs. PNB G.R. No. 154493. December 6, 2006

REYNALDO VILLANUEVA, G.R. NO. 154493

Petitioner,
Present:

PANGANIBAN, C.J.
(Chairperson)
YNARES-SANTIAGO,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

PHILIPPINE NATIONAL BANK

(PNB),
Respondent. Promulgated:
December 6, 2006
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DECISION

AUSTRIA-MARTINEZ, J.:

The Petition for Review on Certiorari under Rule 45 before this Court assails the January 29, 2002 Decision[1] and June 27, 2002
Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 52008[3] which reversed and set aside the September 14, 1995
Decision[4] of the Regional Trial Court, Branch 22, General Santos City (RTC) in Civil Case No. 4553.

As culled from the records, the facts are as follows:

The Special Assets Management Department (SAMD) of the Philippine National Bank (PNB) issued an advertisement for the sale
thru bidding of certain PNB properties in Calumpang, General Santos City, including Lot No. 17, covered by TCT No. T-15042,
consisting of 22,780 square meters, with an advertised floor price of P1,409,000.00, and Lot No. 19, covered by TCT No. T-
15036, consisting of 41,190 square meters, with an advertised floor price of P2,268,000.00.[5] Bidding was subject to the
following conditions: 1) that cash bids be submitted not later than April 27, 1989; 2) that said bids be accompanied by a 10%
deposit in managers or cashiers check; and 3) that all acceptable bids be subject to approval by PNB authorities.
In a June 28, 1990 letter[6] to the Manager, PNB-General Santos Branch, Reynaldo Villanueva (Villanueva) offered to purchase
Lot Nos. 17 and 19 for P3,677,000.00. He also manifested that he was depositing P400,000.00 to show his good faith but with the
understanding that said amount may be treated as part of the payment of the purchase price only when his offer is accepted by
PNB. At the bottom of said letter there appears an unsigned marginal note stating that P400,000.00 was deposited into
Villanuevas account (Savings Account No. 43612) with PNB-General Santos Branch. [7]

PNB-General Santos Branch forwarded the June 28, 1990 letter of Villanueva to Ramon Guevara (Guevara), Vice President,
SAMD.[8] On July 6, 1990, Guevara informed Villanueva that only Lot No. 19 is available and that the asking
price therefor is P2,883,300.00.[9] Guevara further wrote:

If our quoted price is acceptable to you, please submit a revised offer to purchase. Sale shall be subject to our Board of Directors
approval and to other terms and conditions imposed by the Bank on sale of acquired assets. [10] (Emphasis ours)

Instead of submitting a revised offer, Villanueva merely inserted at the bottom of Guevaras letter a July 11, 1990 marginal note,
which reads:

C O N F O R M E:

PRICE OF P2,883,300.00 (downpayment of P600,000.00 and the balance payable in two (2) years at quarterly
amortizations.) [11]

Villanueva paid P200,000.00 to PNB which issued O.R. No. 16997 to acknowledge receipt of the partial payment deposit on offer
to purchase.[12] On the dorsal portion of Official Receipt No. 16997, Villanueva signed a typewritten note, stating:

This is a deposit made to show the sincerity of my purchase offer with the understanding that it shall be returned without interest
if my offer is not favorably considered or be forfeited if my offer is approved but I fail/refuse to push through the purchase.[13]

Also, on July 24, 1990, P380,000.00 was debited from Villanuevas Savings Account No. 43612 and credited to SAMD.[14]

On October 11, 1990, however, Guevara wrote Villanueva that, upon orders of the PNB Board of Directors to conduct another
appraisal and public bidding of Lot No. 19,SAMD is deferring negotiations with him over said property and returning his deposit
of P580,000.00.[15] Undaunted, Villanueva attempted to deliver postdated checks covering the balance of the purchase price but
PNB refused the same.

Hence, Villanueva filed with the RTC a Complaint[16] for specific performance and damages against PNB. In its September 14,
1995 Decision, the RTC granted the Complaint, thus:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant directing it to do the following:

1. To execute a deed of sale in favor of the plaintiff over Lot 19 comprising 41,190 square meters situated
at Calumpang, General Santos City covered by TCT No. T-15036 after payment of the balance in cash in the amount
of P2,303,300.00;

2. To pay the plaintiff P1,000,000.00 as moral damages; P500,000.00 as attorneys fees, plus litigation expenses and costs of the
suit.
SO ORDERED.[17]

The RTC anchored its judgment on the finding that there existed a perfected contract of sale between PNB and Villanueva. It
found:
The following facts are either admitted or undisputed:

xxx

The defendant through Vice-President Guevara negotiated with the plaintiff in connection with the offer of the plaintiff to buy
Lots 17 & 19. The offer of plaintiff to buy, however, was accepted by the defendant only insofar as Lot 19 is concerned as
exemplified by its letter dated July 6, 1990 where the plaintiff signified his concurrence after conferring with the defendants vice-
president. The conformity of the plaintiff was typewritten by the defendants own people where the plaintiff accepted the price
of P2,883,300.00. The defendant also issued a receipt to the plaintiff on the same day when the plaintiff paid the amount
of P200,000.00 to complete the downpayment of P600,000.00 (Exhibit F & Exhibit I). With this development, the plaintiff was
also given the go signal by the defendant to improve Lot 19 because it was already in effect sold to him and because of that the
defendant fenced the lot and completed his two houses on the property. [18]

The RTC also pointed out that Villanuevas P580,000.00 downpayment was actually in the nature of earnest money acceptance of
which by PNB signified that there was already a sale.[19] The RTC further cited contemporaneous acts of PNB purportedly
indicating that, as early as July 25, 1990, it considered Lot 19 already sold, as shown by Guevaras July 25, 1990 letter (Exh.
H)[20] to another interested buyer.

PNB appealed to the CA which reversed and set aside the September 14, 1995 RTC Decision, thus:
WHEREFORE, the appealed decision is REVERSED and SET ASIDE and another rendered DISMISSING the complaint.

SO ORDERED.[21]

According to the CA, there was no perfected contract of sale because the July 6, 1990 letter of Guevara constituted a qualified
acceptance of the June 28, 1990 offer of Villanueva, and to which Villanueva replied on July 11, 1990 with a modified offer. The
CA held:

In the case at bench, consent, in respect to the price and manner of its payment, is lacking. The record shows that appellant, thru
Guevaras July 6, 1990 letter, made a qualified acceptance of appellees letter-offer dated June 28, 1990 by imposing an asking
price of P2,883,300.00 in cash for Lot 19. The letter dated July 6, 1990 constituted a counter-offer (Art. 1319, Civil Code), to
which appellee made a new proposal, i.e., to pay the amount of P2,883,300.00 in staggered amounts, that is, P600,000.00
as downpayment and the balance within two years in quarterly amortizations.

A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and a rejection of the original offer (Art.
1319, id.). Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer (Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Philippines, 6th ed., 1996, p. 450, cited in ABS-CBN Broadcasting
Corporation v. Court of Appeals, et al., 301 SCRA 572).

Appellees new proposal, which constitutes a counter-offer, was not accepted by appellant, its board having decided to have Lot 19
reappraised and sold thru public bidding.

Moreover, it was clearly stated in Guevaras July 6, 1990 letter that the sale shall be subject to our Board of Directors approval and
to other terms and conditions imposed by the Bank on sale of acquired assets. [22]

Villanuevas Motion for Reconsideration[23] was denied by the CA in its Resolution of June 27, 2002.
Petitioner Villanueva now assails before this Court the January 29, 2002 Decision and June 27, 2002 Resolution of the CA. He
assigns five issues which may be condensed into two: first, whether a perfected contract of sale exists between petitioner and
respondent PNB; and second, whether the conduct and actuation of respondent constitutes bad faith as to entitle petitioner to
moral and exemplary damages and attorneys fees.

The Court sustains the CA on both issues.

Contracts of sale are perfected by mutual consent whereby the seller obligates himself, for a price certain, to deliver and transfer
ownership of a specified thing or right to the buyer over which the latter agrees. [24] Mutual consent being a state of mind, its
existence may only be inferred from the confluence of two acts of the parties: an offer certain as to the object of the contract and
its consideration, and an acceptance of the offer which is absolute in that it refers to the exact object and consideration embodied
in said offer.[25]While it is impossible to expect the acceptance to echo every nuance of the offer, it is imperative that it assents to
those points in the offer which, under the operative facts of each contract, are not only material but motivating as well. Anything
short of that level of mutuality produces not a contract but a mere counter-offer awaiting acceptance.[26] More particularly on the
matter of the consideration of the contract, the offer and its acceptance must be unanimous both on the rate of the payment and on
its term. An acceptance of an offer which agrees to the rate but varies the term is ineffective. [27]

To determine whether there was mutual consent between the parties herein, it is necessary to retrace each offer and acceptance
they made.

Respondent began with an invitation to bid issued in April 1989 covering several of its acquired assets in Calumpang, General
Santos City, including Lot No. 19 for which the floor price was P2,268,000.00. The offer was subject to the condition that sealed
bids, accompanied by a 10% deposit in managers or cashiers check, be submitted not later than 10 oclock in the morning of April
27, 1989.

On June 28, 1990, petitioner made an offer to buy Lot No. 17 and Lot No. 19 for an aggregate price of P3,677,000.00. It is noted
that this offer exactly corresponded to the April 1989 invitation to bid issued by respondent in that the proposed aggregate
purchase price for Lot Nos. 17 and 19 matched the advertised floor prices for the same properties. However, it cannot be said that
the June 28, 1990 letter of petitioner was an effective acceptance of the April 1989 invitation to bid for, by its express terms, said
invitation lapsed on April 27, 1989.[28] More than that, the April 1989 invitation was subject to the condition that all sealed bids
submitted and accepted be approved by respondents higher authorities.

Thus, the June 28, 1990 letter of petitioner was an offer to buy independent of the April 1989 invitation to bid. It was a definite
offer as it identified with certainty the properties sought to be purchased and fixed the contract price.

However, respondent replied to the June 28, 1990 offer with a July 6, 1990 letter that only Lot No. 19 is available and that the
price therefor is now P2,883,300.00. As the CA pointed out, this reply was certainly not an acceptance of the June 28, 1990 offer
but a mere counter-offer. It deviated from the original offer on three material points: first, the object of the proposed sale is now
only Lot No. 19 rather than Lot Nos. 17 and 19; second, the area of the property to be sold is still 41,190 sq. m but an 8,797-sq. m
portion is now part of a public road; and third, the consideration is P2,883,300 for one lot rather than P3,677,000.00 for two
lots. More important, this July 6, 1990 counter-offer imposed two conditions: one, that petitioner submit a revised offer to
purchase based on the quoted price; and two, that the sale of the property be approved by the Board of Directors and subjected to
other terms and conditions imposed by the Bank on the sale of acquired assets.

In reply to the July 6, 1990 counter-offer, petitioner signed his July 11, 1990 conformity to the quoted price of P2,883,300.00 but
inserted the term downpayment of P600,000.00 and the balance payable in two years at quarterly amortization. The CA viewed
this July 11, 1990 conformity not as an acceptance of the July 6, 1990 counter-offer but a further counter-offer for, while
petitioner accepted the P2,883,300.00 price for Lot No. 19, he qualified his acceptance by proposing a two-year payment term.

Petitioner does not directly impugn such reasoning of the CA. He merely questions it for taking up the issue of whether his July
11, 1990 conformity modified the July 6, 1990 counter-offer as this was allegedly never raised during the trial nor on appeal.[29]
Such argument is not well taken. From beginning to end, respondent denied that a contract of sale with petitioner was ever
perfected.[30] Its defense was broad enough to encompass every issue relating to the concurrence of the elements of contract,
specifically on whether it consented to the object of the sale and its consideration. There was nothing to prevent the CA from
inquiring into the offers and counter-offers of the parties to determine whether there was indeed a perfected contract between
them.

Moreover, there is merit in the ruling of the CA that the July 11, 1990 marginal note was a further counter-offer which did not
lead to the perfection of a contract of sale between the parties. Petitioners own June 28, 1990 offer quoted the price
of P3,677,000.00 for two lots but was silent on the term of payment. Respondents July 6, 1990 counter-offer quoted the price
of P2,833,300.00 and was also silent on the term of payment. Up to that point, the term or schedule of payment was not on the
negotiation table. Thus,when petitioner suddenly introduced a term of payment in his July 11, 1990 counter-offer, he interjected
into the negotiations a new substantial matter on which the parties had no prior discussion and over which they must yet
agree.[31] Petitioners July 11, 1990 counter-offer, therefore, did not usher the parties beyond the negotiation stage of contract
making towards its perfection. He made a counter-offer that required acceptance by respondent.

As it were, respondent, through its Board of Directors, did not accept this last counter-offer. As stated in its October 11,
1990 letter to petitioner, respondent ordered the reappraisal of the property, in clear repudiation not only of the proposed price but
also the term of payment thereof.

Petitioner insists, however, that the October 11, 1990 repudiation was belated as respondent had already agreed to his July 11,
1990 counter-offer when it accepted his downpayment or earnest money of P580,000.00.[32] He cites Article 1482 of the Civil
Code where it says that acceptance of downpayment or earnest money presupposes the perfection of a contract.

Not so. Acceptance of petitioners payments did not amount to an implied acceptance of his last counter-offer.

To begin with, PNB-General Santos Branch, which accepted petitioners P380,000.00 payment, and PNB-SAMD, which accepted
his P200,000.00 payment, had no authority to bind respondent to a contract of sale with petitioner. [33] Petitioner is well aware of
this. To recall, petitioner sent his June 28, 1990 offer to PNB-General Santos Branch. Said branch did not act on his offer except
to endorse it to Guevarra. Thereafter, petitioner transacted directly with Guevarra. Petitioner then cannot pretend that PNB-
General Santos Branch had authority to accept his July 11, 1990 counter-offer by merely accepting his P380,000.00 payment.

Neither did SAMD have authority to bind PNB. In its April 1989 invitation to bid, as well as its July 6, 1990 counter-offer,
SAMD was always careful to emphasize that whatever offer is made and entertained will be subject to the approval
of respondents higher authorities. This is a reasonable disclaimer considering the corporate nature of respondent. [34]
Moreover, petitioners payment of P200,000.00 was with the clear understanding that his July 11, 1990 counter-offer was still
subject to approval by respondent. This is borne out by respondents Exhibits 2-a and 2-b, which
petitioner never controverted, where it appears on the dorsal portion of O.R. No. 16997 that petitioner acceded that the amount he
paid was a mere x x x deposit made to show the sincerity of [his] purchase offer with the understanding that it shall be returned
without interest if [his] offer is not favorably considered x x x.[35] This was a clear acknowledgment on his part that there was yet
no perfected contract with respondent and that even with the payments he had advanced, his July 11, 1990 counter-offer was still
subject to consideration by respondent.

Not only that, in the same Exh. 2-a as well as in his June 28, 1990 offer, petitioner referred to his payments as mere
deposits. Even O.R. No. 16997 refers to petitioners payment as mere deposit. It is only in the debit notice issued by PNB-General
Santos Branch where petitioners payment is referred to as downpayment. But then, as we said, PNB-General Santos Branch has
no authority to bind respondent by its interpretation of the nature of the payment made by petitioner.

In sum, the amounts paid by petitioner were not in the nature of downpayment or earnest money but were mere deposits or proof
of his interest in the purchase of Lot No. 19. Acceptance of said amounts by respondent does not presuppose perfection of any
contract.[36]

It must be noted that petitioner has expressly admitted that he had withdrawn the entire amount of P580,000.00 deposit from
PNB-General Santos Branch.[37]
With the foregoing disquisition, the Court foregoes resolution of the second issue as it is evident that respondent acted well within
its rights when it rejected the last counter-offer of petitioner.
In fine, petitioners petition lacks merit.

WHEREFORE, the petition is DENIED. The Decision dated January 29, 2002 and Resolution dated June 27, 2002 of the Court
of Appeals are AFFIRMED.

SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and LAND BANK OF THE
PHILIPPINES, respondents.
DECISION
PANGANIBAN, J.:
May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of
the borrower?
Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June
19, 1991 by respondent Court of Appeals[1] in CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation
by private respondent Land Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-
spouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of
Manila, Branch XXII against respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for
decision on the basis of said stipulation and memoranda. The stipulation reads in part:[2]
1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she
voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years
from (respondent banks) Provident Fund on July 20, 1983;
2. That (petitioners) and (respondent bank), through the latters duly authorized representative, executed the Housing Loan
Agreement, x x x ;
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latters authorized
representative, also executed a Real Estate Mortgage and Promissory Note, x x x;
4. That the loan x x x was actually given to (petitioner) Gilda Florendo, x x x, in her capacity as employee of (respondent bank);
5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioners) loan from 9% per annum to 17%, the
said increase to take effect on March 19, 1985;
6. That the details of the increase are embodied in (Landbanks) ManCom Resolution No. 85-08 dated March 19, 1985, x x x, and
in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), x x x;
7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, x x x. Enclosed with the
letter are a copy of the PF Memo Circular x x x and a Statement of Account as of May 31, 1985, x x x;
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter
dated July 1, 1985, x x x. Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent banks) legal counsel,
A.B.F. Gaviola, Jr., x x x;
9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly
installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the said increase is unlawful and
unjustifiable. Because of (respondent banks) repeated demands, (petitioners) were forced to file the instant suit for Injunction and
Damages;
10. That, just the same, despite (respondent banks) demands that (petitioners) pay the increased interest or increased monthly
installments, they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment
of the original stipulated installment of P1,248.72. Disregarding (respondent banks) repeated demand for increased interest and
monthly installment, (petitioners) are presently up-to-date in the payments of their obligations under the original contracts
(Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with (respondent bank);
xxxxxxxxx
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the
escalation are:
a. Section I-F of Article VI of the Housing Loan Agreement,[3] which provides that, for as long as the loan or any portion thereof
or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall --
f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and
regulations that the Central Bank of the Philippines has imposed or will impose in connection with the financing programs for
bank officers and employees in the form of fringe benefits.
b. Paragraph (f) of the Real Estate Mortgage[4] which states:
The rate of interest charged on the obligation secured by this mortgage x x x, shall be Subject, during the life of this contract, to
such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as
the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the
increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining
balance of the loan.
c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No.
85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily secede (resign) from
the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates
were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future.
The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and
the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage
contract. The dispositive portion of the said decision reads:[5]
WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the
loan agreement in question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.75 a
month, upon the finality of this judgment.
x x x x x x x x x.
Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally,
without the consent of the borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the
increased interest rate apply only upon the finality of the judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the trial court, holding that:[6]
x x x Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during
the term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank
and as the Provident Fund of the Bank may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the
interest rate on their original loan. Such an agreement is a contractual one and the spouses are bound by it. Escalation clauses
have been ruled to be valid stipulations in contracts in order to maintain fiscal stability and to retain the value of money in long
term contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the
conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also
contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision.
A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels
he should not have agreed to in the first place.
and disposed as follows:[7]
WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan
of the spouses shall be computed starting July 1, 1985.
Dissatisfied, the petitioners had recourse to this Court.
The Issues
Petitioners ascribe to respondent Court a grave and patent error in not nullifying the respondent banks unilateral increase of the
interest rate and monthly amortizations of the loan --
1. x x x (simply because of) a bare and unqualified stipulation that the interest rate may be increased;
2. x x x on the ground that the increase has no basis in the contracts between the parties;
3. x x x on the ground that the increase violates Section 7-A of the Usury Law;
4. x x x on the ground that the increase and the contractual provision that (respondent bank) relies upon for the increase are
contrary to morals, good customs, public order and public policy. [8]
The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an increased
interest rate on the petitioners housing loan?
The Courts Ruling
Basis for Increased Interest Rate
Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se,
since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the
mortgage deed, they claim that it is vague because it does not state if the prevailing CB rules and regulations referred to therein
are those prevailing at the time of the execution of these contracts or at the time of the increase or decrease of the interest
rate. They insist that the banks authority to escalate interest rates has not been shown to be crystal-clear as a matter of fact and
established beyond doubt. The contracts being contracts of adhesion, any vagueness in their provisions should be interpreted in
favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to
increases or decreases in the interest rate on loans.However, paragraph (f) of the mortgage contract is clearly and indubitably an
escalation provision, and therefore, the parties were and are bound by the said stipulation that (t)he rate of interest charged on the
obligation secured by this mortgage x x x, shall be subject, during the life of this contract, to such an increase/decrease in
accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of
Trustees of the Mortgagee (respondent bank) may prescribe for its debtors x x x. [9] Contrary to petitioners allegation, there is no
vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them.
In Banco Filipino Savings & Mortgage Bank vs. Navarro,[10] this Court in essence ruled that in general there is nothing inherently
wrong with escalation clauses. In IBAA vs. Spouses Salazar,[11] the Court reiterated the rule that escalation clauses are valid
stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.
Application of the Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for resigned employees, it could
not apply as to petitioner-employee because nowhere in the loan agreement or mortgage contract is it provided that petitioner-
wifes resignation will be a ground for the adjustment of interest rates, which is the very bedrock of and the raison detre specified
in said ManCom Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which
requires a law or MB act fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is
contrary to the principle of mutuality of contracts, per Philippine National Bank vs. Court of Appeals.[12]
What is actually central to the disposition of this case is not really the validity of the escalation clause but
the retroactive enforcement of the ManCom Resolution as against petitioner-employee. In the case at bar, petitioners have put
forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would have triggered an
application of the escalation clause as to her factual situation.
In Banco Filipino,[13] this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the
interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to
correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be
enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. In said case, the bank had relied
upon a Central Bank circular as authority to up its rates. The Court ruled that CB Circular No. 494, although it has the effect of
law, is not a law, but an administrative regulation.
In PNB vs. Court of Appeals,[14] this Court disallowed the increases in interest rate imposed by the petitioner-bank therein, on the
ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB
Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary Board.
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No.
416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB
Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in
1982. These and other relevant CB issuances had already come into existence prior to the perfection of the housing loan
agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the
contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent
bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its
employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners loan shall
remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the
Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as
employee resignations, which could have been used to trigger an application of the escalation clause were considered barred or
waived. If the intention were otherwise, they -- especially respondent bank -- should have included such factors in their loan
agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the
escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate
increase be in accordance with prevailing rules, regulations and circulars of the Central Bank x x x as the Provident Fund Board x
x x may prescribe. The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said
escalation clause further provides that the increased interest rate shall only take effect on the date of effectivity of (the)
increase/decrease authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will
never become effective.
We have already mentioned (and now reiterate our holding in several cases [15]) that by virtue of CB Circular 905, the Usury Law
has been rendered ineffective. Thus, petitioners contention that the escalation clause is violative of the said law is bereft of any
merit.
On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by
the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil
Code. As this Court held in PNB:[16]
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between
the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the x x x loan agreement between the PNB and the private respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of
a contract of adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being
reduced to the alternative to take it or leave it (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was
very knowledgeable concerning respondent banks lending rates and procedures, and therefore, petitioners were on an equal
footing with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into
the original loan agreement and mortgage contract was concerned. However, that does not hold true when it comes to the
determination and imposition of escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no
voice at all in its preparation and application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this sweetheart loan at patently
concessionary interest rates, which according to respondent bank is the sweetest deal anyone could obtain and is an act of
generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% p.a., [17] we need only point
out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-borrower would be a
ground for escalation. The fact is it did not. Hence, it must live with such omission. And it would be totally unfair to now impose
said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes without saying that
such escalation ground can be included in future contracts -- not to agreements already validly entered into.
Let it be clear that this Court understands respondent banks position that the concessional interest rate was really intended as a
means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. But no such
stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein
petitioners.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of
the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly
amortization at P1,248.72.
SO ORDERED.
Narvasa, C.J., (Chairman), Davide, Jr., Melo, and Francisco, JJ., concur.

Silos vs. Philippine National Bank,

G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component.
Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot
consider a stipulation 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 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 discovers that what the other party has been doing all along is improper or
illegal.
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 Decision 3 and the June 4, 2003 Order4 of the Regional Trial
Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a department store and
buying and selling of ready-to-wear apparel. Respondent Philippine National Bank (PNB) is a banking corporation organized and
existing under Philippine laws.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners constituted in August 1987 a Real
Estate 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 P1.8 million and the mortgage was correspondingly increased to P1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate Mortgage 7 was executed to cover the same credit line, which was
increased to P2.5 million, and additional security was given in the form of a 134-square meter lot covered by TCT T-16208. In
addition, petitioners issued eight Promissory Notes8 and signed a Credit Agreement.9This July 1989 Credit Agreement contained a
stipulation on interest which provides as follows:
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 hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may
adopt in the future, including without limitation, the shifting from the floating interest 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 equal to the Banks spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or
decrease its spread over the floating interest rate at any time depending on whatever policy it may adopt in the
future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce interest rates
"within the limits allowed by law or by the Monetary Board." 11
The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at any time depending on
whatever policy PNB may adopt in the future." 12
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 19.5%;
2. 2nd Promissory Note dated November 22, 1989 23%;
3. 3rd Promissory Note dated March 21, 1990 22%;
4. 4th Promissory Note dated July 19, 1990 24%;
5. 5th Promissory Note dated December 17, 1990 28%;
6. 6th Promissory Note dated February 14, 1991 32%;
7. 7th Promissory Note dated March 1, 1991 30%; and
8. 8th Promissory Note dated July 11, 1991 24%.13
In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the following stipulation regarding
interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to
but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment. 15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes, which
petitioners settled except the last (the note covering the principal) at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 26%;
2. 10th Promissory Note dated March 19, 1992 25%;
3. 11th Promissory Note dated July 11, 1992 23%;
4. 12th Promissory Note dated November 10, 1992 21%;
5. 13th Promissory Note dated March 15, 1993 21%;
6. 14th Promissory Note dated July 12, 1993 17.5%;
7. 15th Promissory Note dated November 17, 1993 21%;
8. 16th Promissory Note dated March 28, 1994 21%;
9. 17th Promissory Note dated July 13, 1994 21%;
10. 18th Promissory Note dated November 16, 1994 16%;
11. 19th Promissory Note dated April 10, 1995 21%;
12. 20th Promissory Note dated July 19, 1995 18.5%;
13. 21st Promissory Note dated December 18, 1995 18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;
15. 23rd Promissory Note dated July 22, 1996 18.5%;
16. 24th Promissory Note dated November 25, 1996 18%;
17. 25th Promissory Note dated May 30, 1997 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 25%.16
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without notice,
raise within the limits allowed by law x x x."17
On the other hand, the 18th up to the 26th promissory notes including PN 9707237, which is the 26th promissory note carried
the following provision:
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 interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, or in the Banks overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option top repay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting Date. 18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes, religiously
paying the interests without objection or fail. But in 1997, petitioners faltered when the interest rates soared due to the Asian
financial crisis. Petitioners sole outstanding promissory note for P2.5 million PN 9707237 executed in July 1997 and due 120
days later or on October 28, 1997 became past due, and despite repeated demands, petitioners failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows:
Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute default and in
such cases or in case of garnishment, receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the
outstanding principal of this note, at the option of the Bank and without prior notice of demand, shall immediately become due
and payable and shall be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted principal
amount. x x x19 (Emphasis supplied)
PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and demandable from petitioners in the
total amount of P3,620,541.60, broken down as follows:
Principal P 2,500,000.00

Interest 538,874.94

Penalties 581,666.66

Total P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the mortgage, and on January 14, 1999,
TCTs T-14250 and T-16208 were sold to it at auction for the amount of P4,324,172.96.21 The sheriffs certificate of sale was
registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking annulment of the foreclosure sale and
an accounting of the PNB credit. Petitioners theorized that after the first promissory note where they agreed to pay 19.5% interest,
the succeeding stipulations for the payment of interest in their loan agreements with PNB which allegedly left to the latter the
sole will to determine the interest rate became null and void. Petitioners added that because the interest rates were fixed by
respondent without their prior consent or agreement, these rates are void, and as a result, petitioners should only be made liable
for interest at the legal rate of 12%. They claimed further that they overpaid interests on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should now be deemed paid, and the foreclosure and sale of TCTs T-14250 and
T-16208 became unnecessary and wrongful. As for the imposed penalty of P581,666.66, petitioners alleged that since the Real
Estate Mortgage and the Supplement thereto did not include penalties as part of the secured amount, the same should be excluded
from the foreclosure amount or bid price, even if such penalties are provided for in the final Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged overpayment of P848,285.00 made during the period August 21, 1991
to March 5, 1998,resulting from respondents imposition of the alleged illegal and steep interest rates. They also prayed to be
awarded P200,000.00 by way of attorneys fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that without prior notice,
PNB may modify interest rates depending on future policy adopted by it; and that the imposition of penalties was agreed upon in
the Credit Agreement. It added that the imposition of penalties is supported by the all-inclusive clause in the Real Estate
Mortgage agreement which provides that the mortgage shall stand as security for any and all other obligations of whatever kind
and nature owing to respondent, which thus includes penalties imposed upon default or non-payment of the principal and interest
on due date.
On pre-trial, the parties mutually agreed to the following material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB the total amount of P3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to Credit Agreement, Real Estate
Mortgage and the Supplement thereto were all prepared by respondent PNB and were presented to her and her husband Eduardo
only for signature; that she was told by PNB that the latter alone would determine the interest rate; that as to the Amendment to
Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that at the time the parties executed the
said Credit Agreement, she was not informed about the applicable spread that PNB would impose on her account; that the interest
rate portion of all Promissory Notes she and Eduardo issued were always left in blank when they executed them, with
respondents mere assurance that it would be the one to enter or indicate thereon the prevailing interest rate at the time of
availment; and that they agreed to such arrangement. She further testified that the two Real Estate Mortgage agreements she
signed did not stipulate the payment of penalties; that she and Eduardo consulted with a lawyer, and were told that PNBs actions
were improper, and so on March 20, 2000, they wrote to the latter seeking a recomputation of their outstanding obligation; and
when PNB did not oblige, they instituted Civil Case No. 5975. 27
On cross-examination, Lydia testified that she has been in business for 20 years; that she also borrowed from other individuals
and another bank; that it was only with banks that she was asked to sign loan documents with no indicated interest rate; that she
did not bother to read the terms of the loan documents which she signed; and that she received several PNB statements of account
detailing their outstanding obligations, but she did not complain; that she assumed instead that what was written therein is
correct.28
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent, stated on cross-
examination that as a practice, the determination of the prime rates of interest was the responsibility solely of PNBs Treasury
Department which is based in Manila; that these prime rates were simply communicated to all PNB branches for implementation;
that there are a multitude of considerations which determine the interest rate, such as the cost of money, foreign currency values,
PNBs spread, bank administrative costs, profitability, and the practice in the banking industry; that in every repricing of each
loan availment, the borrower has the right to question the rates, but that 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
Ruling of the Regional Trial Court
On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975. 30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future, it likewise allows for the decrease at any time of the same. Thus, such stipulation
authorizing both the increase and decrease of interest rates as may be applicable is valid, 31 as was held in Consolidated Bank and
Trust Corporation (SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made dependent on prevailing rates
upon which to peg such variable interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners loan, prevails over the Credit Agreement and the Real
Estate Mortgage.
As such, the rate of interest, penalties and attorneys fees stipulated in the Promissory Note prevail over those mentioned in the
Credit Agreement and the Real Estate Mortgage agreements; 34
4. Roughly, PNBs computation of the total amount of petitioners obligation is correct; 35
5. Because the loan was admittedly due and demandable, the foreclosure was regularly made; 36
6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied to the principal, interest and
penalties.37
The dispositive portion of the trial courts Decision reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and against the petitioners by
DISMISSING the latters petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order 39 dated June 4, 2003, the trial court granted only a modification in the award of
attorneys fees, reducing the same from 10% to 1%. Thus, PNB was ordered to refund to petitioner the excess in attorneys fees in
the amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by the respondent as well as the
extra-judicial foreclosure proceedings and the Certificate of Sale. However, respondent is directed to refund to the petitioner the
amount of P356,589.90 representing the excess interest charged against the latter.
No pronouncement as to costs.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal portion:
WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified Decision of the Regional Trial
Court per Order dated June 4, 2003 is hereby AFFIRMED with MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN. No. 9707237 should be 12%
per annum;
2. [T]hat the attorneys fees of10% is valid and binding; and
3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price of P377,505.99 which is the difference
between the total amount due [PNB] and the amount of its bid price.
SO ORDERED.41
On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which reduced its award of attorneys fees. It
simply raised the issue in its appellees brief in the CA, and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners appeal to the following issues:
1) Whether x x x the interest rates on petitioners outstanding obligation were unilaterally and arbitrarily imposed by PNB;
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a total of P3,027,324.60 in
interest for the period August 7, 1991 to August 6, 1997, over and above the P2.5 million principal obligation. And this is
exclusive of payments for insurance premiums, documentary stamp taxes, and penalty. All the while, petitioners did not complain
nor object to the imposition of interest; they in fact paid the same religiously and without fail for seven years. The appellate court
ruled that petitioners are thus estopped from questioning the same.
The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly applied an interest rate of 25.72%
instead of the agreed 25%; thus it overcharged petitioners, and the latter paid, an excess of P736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements contemplated the inclusion
of the PN 9707237-stipulated 24% penalty in the amount to be secured by the mortgaged property, thus
For and in consideration of certain loans, overdrafts and other credit accommodations obtained from the MORTGAGEE and to
secure the payment of the same and those others that the MORTGAGEE may extend to the MORTGAGOR, including interest
and expenses, and other obligations owing by the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal or
secondary, as appearing in the accounts, books and records of the MORTGAGEE, the MORTGAGOR does hereby transfer and
convey by way of mortgage unto the MORTGAGEE x x x43 (Emphasis supplied)
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
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 necessary result of petitioners failure to pay the outstanding obligation upon demand.45The CA saw fit to increase the
trial courts award of 1% to 10%, finding the latter rate to be reasonable and citing the Real Estate Mortgage agreement which
authorized the collection of the higher rate.46
Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the difference between PNBs bid price
of P4,324,172.96 and petitioners total computed obligation as of January 14, 1999, or the date of the auction sale, in the amount
of P3,946,667.87.47
Hence, the present Petition.
Issues
The following issues are raised in this Petition:
I
A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT NULLIFYING THE INTEREST RATE
PROVISION IN THE CREDIT AGREEMENT DATED JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT
AGREEMENT DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL DETERMINATION OF THE
RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST RATE AND ITS INCREASE, WHICH AGREEMENT IS
CONTRARY TO LAW, ART. 1308 OF THE [NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V.
COURT OF APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC POLICY AND PUBLIC
INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM THE ALLEGED DELAYED
COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF THE INTEREST CHARGED.
B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN NOT DECLARING THAT PNB
IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT
APPLYING THE EXCESS OVER THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY PETITIONER[S]
FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT OF THE PRINCIPAL
OF P2,500,000.[00] LEAVING AN OVERPAYMENT OFP984,287.00 REFUNDABLE BY RESPONDENT TO
PETITIONER[S] WITH INTEREST OF 12% PER ANNUM.
II
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT PENALTIES ARE INCLUDEDIN
THE SECURED AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE MENTIONED [NOR]
PROVIDED FOR IN THE REAL ESTATE MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE AMOUNT
OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM [THE] FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT, WHICH REDUCED THE
ATTORNEYS FEES OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X EXTRAJUDICIAL
FORECLOSURE TOONLY 1%, AND [AWARDING] 10% ATTORNEYS FEES. 48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to Credit Agreement should be
declared null and void, for they relegated to PNB the sole power to fix interest rates based on arbitrary criteria or factors such as
bank policy, profitability, cost of money, foreign currency values, and bank administrative costs; spaces 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 to the
interest rates imposed thereafter was not obtained; the interest rate, which consists of the prime rate plus the bank spread, is
determined not by agreement of the parties but by PNBs Treasury Department in Manila. Petitioners conclude that by this
method of fixing the interest rates, the principle of mutuality of contracts is violated, and public policy as well as Circular 905 49 of
the then Central Bank had been breached.
Petitioners question the CAs application of the principle of estoppel, saying that no estoppel can proceed from an illegal act.
Though they failed to timely question the imposition of the alleged illegal interest rates and continued to pay the loan on the basis
of these rates, they cannot be deemed to have acquiesced, and hence could recover what they erroneously paid. 50
Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed extinguished as of July 1997;
moreover, it would appear that they even made an over payment to the bank in the amount of P984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor specify, as part of the secured
amount, the penalty of 24% authorized in PN 9707237, such amount of P581,666.66 could not be made answerable by or
collected from the mortgages covering TCTs T-14250 and T-16208. Claiming support from Philippine Bank of Communications
[PBCom] v. Court of Appeals,51 petitioners insist that the phrase "and other obligations owing by the mortgagor to the
mortgagee"52 in the mortgage agreements cannot embrace the P581,666.66 penalty, because, as held in the PBCom case, "[a]
penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be
understood to secure the penalty";53while the mortgages are the accessory contracts, what items are secured may only be
determined from the provisions of the mortgage contracts, and not from the Credit Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1% attorneys fees should be maintained, given that in foreclosures, a
lawyers work consists merely in the preparation and filing of the petition, and involves minimal study. 54 To allow the imposition
of a staggering P396,211.00 for such work would be contrary to equity. Petitioners state that the purpose of attorneys fees in
cases of this nature "is not to give respondent a larger compensation for the loan than the law already allows, but to protect it
against any future loss or damage by being compelled to retain counsel x x x to institute judicial proceedings for the collection of
its credit."55 And because the instant case involves a simple extrajudicial foreclosure, attorneys fees may be equitably tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest rates were unilaterally fixed by it, taking relief in the CA
pronouncement that petitioners are deemed estopped by their failure to question the imposed rates and their continued payment
thereof without opposition. It adds that because the Credit Agreement and promissory notes contained both an escalation clause
and a de-escalation clause, it may not be said that the bank violated the principle of mutuality. Besides, the increase or decrease in
interest rates have been mutually agreed upon by the parties, as shown by petitioners continuous payment without protest.
Respondent adds that the alleged unilateral imposition of interest rates is not a proper subject for review by the Court because the
issue was never raised in the lower court.
As for petitioners claim that interest rates imposed by it are null and void for the reasons that 1) the Credit Agreements and the
promissory notes were signed in blank; 2) interest rates were at short periods; 3) no interest rates could be charged where no
agreement on interest rates was made in writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards left to
its choosing; and 5) interest rates based on prime rate plus applicable spread are indeterminate and arbitrary PNB counters:
a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank Respondent claims that this issue was
never raised in the lower court. Besides, documentary evidence prevails over testimonial evidence; Lydia Silos testimony in this
regard is self-serving, unsupported and uncorroborated, and for being the lone evidence on this issue. The fact remains that these
documents are in proper form, presumed regular, and endure, against arbitrary claims by Silos who is an experienced business
person that she signed questionable loan documents whose provisions for interest rates were left blank, and yet she continued to
pay the interests without protest for a number of years. 56
b. That interest rates were at short periods Respondent argues that the law which governs and prohibits changes in interest rates
made more than once every twelve months has been removed 57 with the issuance of Presidential Decree No. 858.58
c. That no interest rates could be charged where no agreement on interest rates was made in writing in violation of Article 1956 of
the Civil Code, which provides that no interest shall be due unless it has been expressly stipulated in writing Respondent insists
that the stipulated 25% per annum as embodied in PN 9707237 should be imposed during the interim, or the period after the loan
became due and while it remains unpaid, and not the legal interest of 12% as claimed by petitioners. 59
d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing According to respondent,
interest rates were fixed taking into consideration increases or decreases as provided by law or by the Monetary Board, the banks
overall costs of funds, and upon agreement of the parties.60
e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary On this score, respondent
submits there are various factors that influence interest rates, from political events to economic developments, etc.; the cost of
money, profitability and foreign currency transactions may not be discounted. 61
On the issue of penalties, respondent reiterates the trial courts finding that during pre-trial, petitioners admitted that the Statement
of Account as of October 12, 1998 which detailed and included penalty charges as part of the total outstanding obligation owing
to the bank was correct. Respondent justifies the imposition and collection of a penalty as a normal banking practice, and the
standard rate per annum for all commercial banks, at the time, was 24%.
Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the performance of the obligation
and substitute for damages and the payment of interest in the event of non-compliance.62 And the promissory note being the
principal agreement as opposed to the mortgage, which is a mere accessory should prevail. This being the case, its inclusion as
part of the secured amount in the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting consolidation of its ownership over
TCTs T-14250 and T-16208; that petitioners filed Civil Case No. 5975 ostensibly to question the foreclosure and sale of
properties covered by TCTs T-14250 and T-16208 in a desperate move to retain ownership over these properties, because they
failed to timely redeem them.
Respondent directs the attention of the Court to its petition in G.R. No. 181046, 63 where the propriety of the CAs ruling on the
following issues is squarely raised:
1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN 9707237 should be 12% per
annum; and
2. That PNB should reimburse petitioners the excess in the bid price of P377,505.99 which is the difference between the total
amount due to PNB and the amount of its bid price.
Our Ruling
The Court grants the Petition.
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 proceedings below. The rule admits of certain well-recognized exceptions, though, as when the lower courts
findings are not supported by the evidence on record or are based on a misapprehension of facts, or when certain relevant and
undisputed facts were manifestly overlooked that, if properly considered, would justify a different conclusion. This case falls
within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued by the Courts First Division denying respondents petition in
G.R. No. 181046, due to late filing, failure to attach the required affidavit of service of the petition on the trial court and the
petitioners, and submission of a defective verification and certification of non-forum shopping. On June 25, 2008, the Court
issued another Resolution denying with finality respondents motion for reconsideration of the March 5, 2008 Resolution. And on
August 15, 2008, entry of judgment was made. This thus settles the issues, as above-stated, covering a) the interest rate or 12%
per annum that applies upon expiration of the first 30 days interest period provided under PN 9707237, and b)the CAs decree
that PNB should reimburse petitioner the excess in the bid price of P377,505.09.
It appears that respondents practice, more than once proscribed by the Court, has been carried over once more to the petitioners.
In a number of decided cases, the Court struck down provisions in credit documents issued by PNB to, or required of, its
borrowers which allow the bank to 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 Philippine National Bank v. Court of Appeals, 64 such stipulation and similar
ones were declared in violation of Article 130865 of the Civil Code. In a second case, Philippine National Bank v. Court of
Appeals,66 the very same stipulations found in the credit agreement and the promissory notes prepared and issued by the
respondent were again invalidated. The Court therein said:
The Credit Agreement provided inter alia, that
(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 adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated
rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be
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
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit
agreement which provides, as follows:
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 adopt in the future and provided, that, the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655 ("The Usury
Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of
interest agreed upon may be increased in the event that the applicable maximum 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 agreement that the rate of
interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or 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 increase or decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Banks Monetary Board to prescribe the maximum rates of interest for
loans and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905,
series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as
follows:
Sec. 1303. Interest and Other Charges.
The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money,
goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank,
the said law and circular did not authorize either party to unilaterally raise the interest rate without the others consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under
duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot
be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner banks posturing that the escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents loan. That would completely take away from private respondents the right to
assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine
National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
x x x The unilateral action of the PNB in increasing the interest rate on the private respondents loan violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between
the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement
between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate
at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do
not bargain on equal footing, the weaker partys (the debtor) participation being reduced to the alternative "to take it or leave it" . .
. . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.67 (Emphases supplied)
Then again, in a third case, Spouses Almeda v. Court of Appeals, 68 the Court invalidated the very same provisions in the
respondents prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation
arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on
their essential equality. Any 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 regarding the validity or compliance of the contract which is left solely to the will
of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its
contract with petitioners by increasing the interest rates on the loan without the prior 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 interest shall be due unless it
has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the
credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible
escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by
law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate
stipulated in the 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 phrase "interest rate agreed upon," in reference to the original 21% interest rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor
of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is
indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00 in
settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already previously
paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on
reasonable and valid grounds. Here, as clearly demonstrated above, not only [are] the increases of the interest rates on the basis of
the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which
the increases are anchored.
xxxx
In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to
changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null
and void. Their effect 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 interest rates is
unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be disputed.69 (Emphases
supplied)
Still, in a fourth case, Philippine National Bank v. Court of Appeals, 70 the above doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE
NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (P15,000.00),
Philippine Currency, together with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may at
any time without notice, raise within the limits allowed by law, and I/we also agree to pay jointly and severally ____% per annum
penalty charge, by way of liquidated damages should this note be unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
On the reverse side of the note the following condition was stamped:
All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any and/or all extensions
hereof that will leave any portion of the amount still unpaid after 730 days shall automatically convert the outstanding balance
into a medium or long-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 was originally granted.
To secure payment of the loan the parties executed a real estate mortgage contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the provision hereof, shall be 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
To begin with, PNBs argument rests on a misapprehension of the import of the appellate courts ruling. The Court of Appeals
nullified the interest rate increases not because the promissory note did not comply with P.D. No. 1684 by providing for a de-
escalation, but because the absence of such provision made the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro that although P.D.
No. 1684 is not to be retroactively applied to loans granted before its effectivity, there must nevertheless be a de-escalation clause
to mitigate the one-sidedness of the escalation clause. Indeed because of concern for the unequal status of borrowers vis--vis the
banks, our cases after Banco Filipino have fashioned the rule that any increase in the rate of interest made pursuant to an
escalation clause must be the result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to increase the stipulated interest
per annum" within the limits allowed by law at any time depending on whatever policy [PNB] may adopt in the future; Provided,
that the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be 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.
Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41% and then to 48%. This Court
declared the increases unilaterally imposed by [PNB] to be in violation of the principle of mutuality as embodied in Art.1308 of
the Civil Code, which provides that "[t]he contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them." As the Court explained:
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between
the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in
fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of
a contract of adhesion, where the parties do not bargain on equal footing, the weaker partys (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement in that case provided:
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 adopt in the future: Provided, that the interest rate on this accommodation shall be correspondingly decreased in the
event that the applicable maximum interest is reduced by law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per annum became, after
only two years, 42%. In declaring the increases invalid, we held:
We cannot countenance petitioner banks posturing that the escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents loan. That would completely take away from private respondents the right to
assent to an important modification in their agreement, and would negate the element of mutuality in contracts.
Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar agreement it had with other
borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read
as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or
lead to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the
interest rate. Private respondents assent to the increases can not be implied from 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 change a contract is obliged to answer
the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v. Philippine National
Bank,72 thus
Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders unrestrained power to
increase interest rates, penalties and other charges at the latters sole discretion and without giving prior notice to and securing the
consent of the borrowers. This unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue
advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or
unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in
Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, 74 the above pronouncements were reiterated to
debunk PNBs repeated reliance on its invalidated contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of PNB v. CA and Spouses Basco.
Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the increased interest rates is no
different from the 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 x
xxxx
On the strength of this ruling, PNBs argument that the spouses Rocamoras failure to contest the increased interest rates that
were purportedly reflected in the statements of account and the demand letters sent by the bank amounted to their implied
acceptance of the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the increased interest rates prompted the lower courts to
declare excessive and illegal the interest rates imposed. Togo around this lower court finding, PNB alleges that the P206,297.47
deficiency claim was computed using only the original 12% per annum interest rate. We find this unlikely. Our examination of
PNBs own ledgers, included in the records of the case, clearly indicates that PNB imposed interest rates higher than the agreed
12% per annum rate. This confirmatory finding, albeit based solely on ledgers found in the records, reinforces the application in
this case of the rule that findings of the RTC, when affirmed by the CA, are binding upon this Court. 75 (Emphases supplied)
Verily, all these cases, including the present one, involve identical or similar provisions found in respondents credit agreements
and promissory notes. Thus, the July 1989 Credit Agreement executed by petitioners and respondent contained the following
stipulation on interest:
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 hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may
adopt in the future, including without limitation, the shifting from the floating interest 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 equal to the Banks spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or
decrease its spread over the floating interest rate at any time depending on whatever policy it may adopt in the
future.76 (Emphases supplied)
while the eight promissory notes issued pursuant thereto granted PNB 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 included the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB may adopt in the future." 78
On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in blank, and respondent later on
entered their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 19.5%;
2nd Promissory Note dated November 22, 1989 23%;
3rd Promissory Note dated March 21, 1990 22%;
4th Promissory Note dated July 19, 1990 24%;
5th Promissory Note dated December 17, 1990 28%;
6th Promissory Note dated February 14, 1991 32%;
7th Promissory Note dated March 1, 1991 30%; and
8th Promissory Note dated July 11, 1991 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following stipulation regarding interest:
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 determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment. 80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners again executed and signed the following promissory notes in blank,
for the respondent to later on enter the corresponding interest rates, which it did, as follows:
9th Promissory Note dated November 8, 1991 26%;
10th Promissory Note dated March 19, 1992 25%;
11th Promissory Note dated July 11, 1992 23%;
12th Promissory Note dated November 10, 1992 21%;
13th Promissory Note dated March 15, 1993 21%;
14th Promissory Note dated July 12, 1993 17.5%;
15th Promissory Note dated November 17, 1993 21%;
16th Promissory Note dated March 28, 1994 21%;
17th Promissory Note dated July 13, 1994 21%;
18th Promissory Note dated November 16, 1994 16%;
19th Promissory Note dated April 10, 1995 21%;
20th Promissory Note dated July 19, 1995 18.5%;
21st Promissory Note dated December 18, 1995 18.75%;
22nd Promissory Note dated April 22, 1996 18.5%;
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
26th Promissory Note (PN 9707237) dated July 30, 1997 25%.81
The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without notice,
raise within the limits allowed by law x x x." 82 On the other hand, the 18th up to the 26th promissory notes which includes PN
9707237 carried the following provision:
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 interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines, or in the Banks overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to prepay the loan or credit facility without
penalty within ten (10) calendar days from the Interest Setting Date. 83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done in previous cases. The common denominator in these cases is the
lack of agreement of the parties to the imposed interest rates. For this case, this lack of consent by the petitioners has been made
obvious by the fact that they signed the promissory notes in blank for the respondent to fill. We find credible the testimony of
Lydia in this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch Manager Aspa admitted that
interest rates were fixed solely by its Treasury Department in Manila, which were then simply communicated to all PNB branches
for implementation. If this were the case, then this would explain why petitioners had to sign the promissory notes in blank, since
the imposable interest rates have yet to be determined and fixed by respondents Treasury Department in Manila.
Moreover, in Aspas enumeration of the factors that determine the interest rates PNB fixes such as cost of money, foreign
currency values, bank administrative costs, profitability, and considerations which affect the banking industry it can be seen that
considerations which affect PNBs borrowers are ignored. A borrowers current financial state, his feedback or opinions, the
nature and purpose of his borrowings, the effect of foreign currency values or fluctuations on his business or borrowing, etc.
these are not factors which influence the fixing of interest rates to be imposed on him. Clearly, respondents method of fixing
interest rates based on one-sided, indeterminate, and subjective criteria such as profitability, cost of money, bank costs, etc. is
arbitrary for there is no fixed standard or margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest
rates on the obligations of the spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the
prevailing financial and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge
or offer to charge for similar accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.
It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as the lender. Moreover, UCPB
may apply the considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as
much weight as it desires to each of the following considerations: (1) the prevailing financial and monetary condition;(2) the rate
of interest and charges which other banks or financial institutions charge or offer to charge for similar accommodations; and/or(3)
the resulting profitability to the LENDER (UCPB) after due consideration of all dealings with the BORROWER (the spouses
Beluso). Again, as in the case of the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of 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)
To repeat what has been said in the above-cited cases, any modification in the contract, such as the interest rates, must be made
with the consent of the contracting parties.1wphi1 The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has
no binding effect.
What is even more glaring in the present case is that, the stipulations in question no longer provide that the parties shall agree
upon the interest 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 agreements covered by the above-cited cases, it is provided that:
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 adopt in the future: Provided, that, the interest rate on this accommodation shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate.85 (Emphasis
supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on whatever policy the Bank may
adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate system,
or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the Banks spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or
decrease its spread over the floating interest rate at any time depending on whatever policy it may adopt in the
future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
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 determined by the Bank to be prime rate plus
applicable spread in effect as of the date of each Availment. 87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement by the borrower is now completely lacking, which
makes respondents unlawful act all the more reprehensible.
Accordingly, petitioners are correct in arguing that estoppel should not 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 estoppel if it is prohibited by law or is against
public policy."88
It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765, which was enacted "to protect
x x x citizens from a lack of awareness of the true cost of credit to the user by using a full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national economy." 89 The law "gives a detailed enumeration of the
specific information required to be disclosed, among which are the interest and other charges incident to the extension of
credit."90 Section 4 thereof provides that a disclosure statement must be furnished prior to the consummation of the transaction,
thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board,
the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which
are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the extension of credit such as
interest or discounts, collection fees, credit investigation fees, attorneys fees, and other service charges. The total finance charge
represents the difference between (1) the aggregate consideration (down payment plus installments) on the part of the debtor, and
(2) the sum of the cash price and non-finance charges.91
By requiring the petitioners to sign the credit documents and the promissory notes in blank, and then unilaterally filling them up
later on, respondent violated the Truth in Lending Act, and was remiss in its disclosure obligations. In one case, which the Court
finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their execution,
then they were duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished
prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board,
the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which
are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
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 banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests
from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully 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 business
decisions. Upholding UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending Act. The
belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already consummated business
decision.
In addition, the promissory notes, the copies of which were presented to 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 loan covered by said promissory notes. 92(Emphases supplied)
However, the one-year period within which an action for violation of the Truth in Lending Act may be filed evidently prescribed
long ago, or sometime in 2001, one year after petitioners received the March 2000 demand letter which contained the illegal
charges.
The fact that petitioners later received several statements of account detailing its outstanding obligations does not cure
respondents breach. To repeat, the belated discovery of the true cost of credit does not reverse the ill effects of an already
consummated business decision.93
Neither may the statements be considered proposals sent to secure the petitioners conformity; they were sent after the imposition
and application of the interest rate, and not before. And even if it were to be presumed that these are proposals or offers, there was
no acceptance by petitioners. "No one receiving a proposal to modify a loan contract, especially regarding interest, is obliged to
answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial interest rates, but actually
accompanied by provisions written in fine print that allow lenders to later on increase or decrease interest rates unilaterally,
without the consent of the borrower, and depending on complex and subjective factors. Because they have been lured into these
contracts by initially low interest rates, borrowers get caught and stuck in the web of subsequent steep rates and penalties,
surcharges and the like. Being ordinary individuals or entities, they naturally dread legal complications and cannot afford court
litigation; they succumb to whatever charges the lenders impose. At the very least, 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 the willingness to rectify is
made weak by the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to respondents argument that in every repricing of petitioners loan
availment, they are given the right to question the interest rates imposed. The import of respondents line of reasoning cannot be
other than that if one out of every hundred borrowers questions respondents practice of unilaterally fixing interest rates, then only
the loan arrangement with that lone complaining borrower will enjoy the benefit of review or re-negotiation; as to the 99 others,
the questionable practice will continue unchecked, and respondent will continue to reap the profits from such unscrupulous
practice. The Court can no more condone a view so perverse. This is exactly what the Court meant in the immediately preceding
cited case when it said that "the belated discovery of the true 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 complain, the illegal act shall have become a
fait accompli to their detriment, they have already suffered the oppressive rates.
Besides, that petitioners are given the right to question the interest rates imposed is, under the circumstances, irrelevant; we have a
situation where the petitioners do not stand on equal footing with the respondent. It is doubtful that any borrower who finds
himself in petitioners position would dare question respondents power to arbitrarily modify interest rates at any time. In the
second place, on what basis could any borrower question such power, when the criteria or standards which are really one-sided,
arbitrary and subjective for the exercise of such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th promissory notes, petitioners
are granted the option to prepay the loan or credit facility without penalty within 10 calendar days from the Interest Setting Date if
they are not agreeable to the interest rate fixed. It has been shown that the promissory notes are executed and signed in blank,
meaning that by the time petitioners learn of the interest rate, they are already bound to pay it because they have already pre-
signed the note where the rate is subsequently entered.
Besides, premium may not be 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 discovers that what the other party has been doing all along is improper or
illegal.
Thus said, respondents arguments relative to the credit documents that documentary evidence prevails over testimonial
evidence; that the credit documents are in proper form, presumed regular, and endure, 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 pay the interests without protest for a number of years deserve no consideration.
With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan is subject to
the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at the rate of 12% per
annum. This is the uniform ruling adopted in previous cases, including those cited here. 96 The interests paid by petitioners should
be applied first to the payment of the stipulated or legal and unpaid interest, as the case may be, and later, to the capital or
principal.97 Respondent should then refund the excess amount of interest that it has illegally imposed upon petitioners; "[t]he
amount to be refunded refers to that paid by petitioners when they had no obligation to do so." 98 Thus, the parties original
agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first promissory note
which expired on November 21, 1989 and was paid by petitioners; it was not intended to apply to the whole duration of the loan.
Subsequent higher interest rates have been declared illegal; but because only the rates are found to be improper, the obligation to
pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall apply only until
June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our ruling in Nacar v.
Gallery Frames99 and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon, when due, shall constitute
default, and a penalty charge of 24% per annum based on the defaulted principal amount shall be imposed. Petitioners claim that
this penalty should be excluded from the foreclosure amount or bid price because the Real Estate Mortgage and the Supplement
thereto did not specifically include it as part of the secured amount. Respondent justifies its inclusion in the secured amount,
saying that the purpose of the penalty or a penal clause is to ensure the performance of the obligation and substitute for damages
and the payment of interest in the event of non-compliance.100 Respondent adds that the imposition and collection of a penalty is a
normal banking practice, and the standard rate per annum for all commercial banks, at the time, was 24%. Its inclusion as part of
the secured amount in the mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be included as part of the secured amount. Having found the credit
agreements and 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 deemed parts of one transaction and are construed together." 101 Being so tainted and having the attributes
of a contract of adhesion as the principal credit documents, we must construe the mortgage contracts strictly, and against the party
who drafted it. An examination of the mortgage agreements reveals that nowhere is it stated that penalties are to be included in the
secured amount. Construing this silence strictly against the respondent, the Court can only conclude that the parties did not intend
to include the penalty allowed under PN 9707237 as part of the secured amount. Given its resources, respondent could have if it
truly wanted to conveniently prepared and executed an amended mortgage agreement with the petitioners, thereby including
penalties in the amount to be secured by the encumbered properties. Yet it did not.
With regard to attorneys fees, it was plain error for the CA to have passed upon the issue since it was not raised by the petitioners
in their appeal; it was the respondent that improperly brought it up in its appellees brief, when it should have interposed an
appeal, since the trial courts Decision on this issue is adverse to it. It is an elementary principle in the subject of appeals that an
appellee who does not himself appeal cannot obtain from the appellate court any affirmative relief other than those granted in the
decision of the court below.
x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make counter assignments of error in
ordinary actions, when the purpose is merely to defend himself against an appeal in which errors are alleged to have been
committed by the trial court both in the appreciation of facts and in the interpretation of the law, in order to sustain the judgment
in his favor but not when his purpose is to seek modification or reversal of the judgment, in which case it is necessary for him to
have excepted to and appealed from the judgment.102
Since petitioners did not raise the issue of reduction of attorneys fees, the CA possessed no authority to pass upon it at the
instance of respondent. The ruling of the trial court in this respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the parties to the respondent as creditor and to the petitioners who are
entitled to a refund as a consequence of overpayment considering that they paid more by way of interest charges than the 12% per
annum103 herein allowed the case should be remanded to the lower court for proper accounting and computation, applying the
following procedure:
1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;
2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an interest rate of only 12% per
annum.104 Thus, interest payment made in excess of 12% on the 2nd promissory note shall immediately be applied to the
principal, and the principal shall be accordingly reduced. The reduced principal shall then be subjected to the 12% 105 interest on
the 3rd promissory note, and the excess over 12% interest payment on the 3rd promissory note shall again be applied to the
principal, which shall again be reduced accordingly. The reduced principal shall then be subjected to the 12% interest on the 4th
promissory note, and the excess over12% interest payment on the 4th promissory note shall again be applied to the principal,
which shall again be reduced accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners a) still have an OUTSTANDING
BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION (principal and
interest);
4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per annum interest from October 28,
1997 until January 14, 1999, which is the date of the auction sale;
5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from August 14, 1997 until January 14,
1999. But from this total penalty, the petitioners previous payment of penalties in the amount of P202,000.00made on January
27, 1998106 shall be DEDUCTED;
6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award of 1% attorneys fees shall be
ADDED;
7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorneys fees (6.) shall be DEDUCTED from the bid price
of P4,324,172.96. The penalties (5.) are not included because they are not included in the secured amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding balance (3.), interest (4.), and 1% attorneys fees (6.)]
shall be DELIVERED TO THE PETITIONERS;
9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners made an OVERPAYMENT,
the interest (4.), penalties (5.), and the award of 1% attorneys fees (6.) shall be DEDUCTED from the overpayment. There is no
outstanding balance/obligation precisely because petitioners have paid beyond the amount of the principal and interest;
11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1% attorneys fees (6.), the excess
shall be RETURNED to the petitioners, with legal interest, under the principle of solutio indebiti; 107
12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1% attorneys fees (6.), the trial court shall
INVALIDATE THE EXTRAJUDICIAL FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and award of 1% attorneys fees (6.) exceed petitioners overpayment, then the
excess shall be DEDUCTED from the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.) and 1% attorneys fees (6.)] shall be DELIVERED
TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The outstanding penalties, if any, shall
be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made payments exceeding what
they actually owe by way of principal, interest, and attorneys fees, then the mortgaged properties need not answer for any
outstanding secured amount, because there is not any; quite the contrary, respondent must refund the excess to
petitioners.1wphi1 In such case, the extrajudicial foreclosure and sale of the properties shall be declared null and void for
obvious lack of basis, the case being one of solutio indebiti instead. If, on the other hand, it turns out that petitioners
overpayments in interests do not exceed their total obligation, then the respondent may consolidate its ownership over the
properties, since the period for redemption has expired. Its only obligation will be to return the difference between its bid price
(P4,324,172.96) and petitioners total obligation outstanding except penalties after applying the latters overpayments.
WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the Court of Appeals in CA-G.R.
CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby rendered as follows:
1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are DECLARED NULL AND VOID, and
such notes shall instead be subject to interest at the rate of twelve percent (12%) per annum up to June 30, 2013, and 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;
3. The trial courts award of one per cent (1%) attorneys fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the computation of overpayments
made by petitioners spouses Eduardo and Lydia Silos to respondent Philippine National Bank, taking into consideration the
foregoing dispositions, and applying the procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the extrajudicial foreclosure and sale,
declaring the same null and void in case of overpayment and ordering the release and return of Transfer Certificates of Title Nos.
T-14250 and TCT T-16208 to petitioners, or ordering the delivery to the petitioners of the difference between the bid price and
the total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title to Transfer Certificates of
Title Nos. T-14250 and T-16208 until all the steps in the procedure above set forth have been taken and applied;
7. The reimbursement of the excess in the bid price of P377,505.99, which respondent Philippine National Bank is ordered to
reimburse petitioners, should be HELD IN ABEYANCE until the true amount owing to or owed by the parties as against each
other is determined;
8. Considering that this case has been pending for such a long time and that further proceedings, albeit uncomplicated, are
required, the trial court is ORDERED to proceed with dispatch.