Part 3 Case Digest

ELADlA DE LIMA vs. LAGUNA TAYABAS CO.

FACTS:
On June 3, 1958, an accident between a Laguna Tayabas Co. (LTB) bus and
Seven-up Bottlers Co. delivery truck resulted to the death of an LTB passenger named
Petra dela Cruz. Two other LTB passengers namely Eladia de Lima and Nemesio
Flores also incurred physical injuries. De Lima, Flores and the heir of dela Cruz filed
suits to the bus company.

In December 29, 1971, the petitioners requested to expedite the decision of the
case with the hope that the legal interest is to be given immediately from the date of
the decision. By January 31, 1972, the decision was given. Again, the petitioners
reiterated their request for the modification of the decision in such a way that the
effectivity is to be rolled back to December 27, 1963. Furthermore, the heir of dela
Cruz filed a reconsideration for the increase of indemnity from P3,000 to P12,000.
With this pending motion for reconsideration, LTB filed an appeal for the case. The
appellate court turned down the motion for reconsideration of the plaintiffs indicating
that an appeal should have been filed for the awarding of the legal interest. The
petition was reviewed in 1988, thirty years after the actual incident.

ISSUES:
a. Whether the effectivity of the decision is to be rolled back as requested by
the plaintiffs.
b. Whether the lower court was erroneous in the delay of the decision for the
increase in the claim of the heir of Petra dela Cruz.

HELD:
The court granted the petition noting that the plaintiffs were unable to make an
appeal in the lower court due to the fact that the petitioners are seeking judicial
remedy as impoverished individuals. They were hopeful that the adjudged amount
will be provided to them by the transportation company. With the case pending for
thirty years, the court aptly found this as a sufficient justification to grant the legal
interest as well as the increase in indemnity.

It was found that the rolling back of the effectivity date was necessary to
compensate for the monetary loss the plaintiffs incurred from the accident, death and
court proceedings. Moreover, the claim for Petra dela Cruz was increased from
P3,000.00 to P30,000.00. The decision was immediately executory in response to the
identified urgent need of the plaintiffs.
TAN VS. LADEHUEZA

FACTS: 
A parcel of land was the subject matter of the public auction sale held on May
6, 1955 at the Capitol Building in Oroquieta, Misamis Occidental, wherein the
plaintiff was the highest bidder and as such a Certificate of Sale was executed by MR.
VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff in favor of
LUCIA TAN the herein plaintiff. Due to the failure of defendant Arador Valdehueza
to redeem the said land within the period of one year as being provided by law, MR.
VICENTE D. ROA who was then the Ex-Officio Provincial Sheriff executed an
ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN.  

DECISION OF LOWER COURTS: 

* Trial court: declared tan as the absolute owner. appeal was certified to SC by
the Court of Appeals as involving questions purely of law.  

ISSUES & RULING: 

WON the subject land subject of pacto de retro is actually an equitable
mortgage  

Yes, it is an equitable mortgage.  

The Valdehuezas having remained in possession of the land and the realty
taxes having been paid by them, the contracts which purported to be pacto de retro
transactions are presumed to be equitable mortgages, whether registered or not, there
being no third parties involved.  

Under article 1875 of the Civil Code of 1889, registration was a necessary
requisite for the validity of a mortgage even as between the parties, but under article
2125 of the new Civil Code (in effect since August 30,1950), this is no longer so.  

If the instrument is not recorded, the mortgage is nonetheless binding between

the parties. (Article 2125, 2nd sentence).  

2. WON the imposition of legal interest on the amounts subject of the

equitable mortgages, P1,200 and P300, respectively  

It is without legal basis, for, "No interest shall be due unless it has been
expressly stipulated in writing." (Article 1956, new Civil Code) Furthermore, the
plaintiff did not pray for such interest; her thesis was a consolidation of ownership,
which was properly rejected, the contracts being equitable mortgages. 

PRIMA CONSTRUCTION AND DEVELOPMENT CORP. VS MECHAVEZ

Facts:

December 8, 1993, Pantaleon, President and Chairman of the Board of

PRISMA, obtained a P1M loan from the respondent, with monthly interest of
P40,000.00 payable for 6 months, or a total obligation of P1,240,000.00 payable
within 6 mos. To secure the payment of the loan, Pantaleon issued a promissory.
Pantaleon signed the promissory note in his personal capacity and as duly authorized
by the Board of Directors of PRISMA. The petitioners failed to completely pay the
loan within the 6-month period.

As of January 4, 1997, respondent found that the petitioners still had an

outstanding balance of P1,364,151.00, to which respondent applied a 4% monthly
interest.

On August 28, 1997, respondent filed a complaint for sum of money to

enforce the unpaid balance, plus 4% monthly interest. In their Answer, the petitioners
admitted the loan of P1, 240,000.00, but denied the stipulation on the 4% monthly
interest, arguing that the interest was not provided in the promissory note. Pantaleon
also denied that he made himself personally liable and that he made representations
that the loan would be repaid within six (6) months.

RTC found that the respondent issued a check for P1M in favor of the
petitioners for a loan that would earn an interest of 4% or P40, 000.00 per month, or a
total of P240,000.00 for a 6-month period. RTC ordered the petitioners to jointly and
severally pay the respondent the amount of P3, 526,117.00 plus 4% per month interest
from February 11, 1999 until fully paid.

Petitioners appealed to CA insisting that there was no express stipulation on

the 4% monthly interest. CA favored respondent but noted that the interest of 4% per
month, or 48% per annum, was unreasonable and should be reduced to 12% per
annum. MR denied hence this petition.

ISSUE:

Whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate
of interest apply to the 6-month payment period only or until full payment of the
loan?

RULING:

Petition is meritorious. Interest due should be stipulated in writing; otherwise, 12%

per annum.Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. When the terms of a
contract are clear and leave no doubt as to the intention of the contracting parties, the
literal meaning of its stipulations governs. Courts have no authority to alter the
contract by construction or to make a new contract for the parties; a court’s duty is
confined to the interpretation of the contract the parties made for themselves without
regard to its wisdom or folly, as the court cannot supply material stipulations or read
into the contract words the contract does not contain. It is only when the contract is
vague and ambiguous that courts are permitted to resort to the interpretation of its
terms to determine the parties’ intent.
In the present case, the respondent issued a check for P1M. In turn, Pantaleon, in his
personal capacity and as authorized by the Board, executed the promissory note.
Thus, the P1M loan shall be payable within 6 months. The loan shall earn an interest
of P40,000.00 per month, for a total obligation of P1,240,000.00 for the six-month
period. We note that this agreed sum can be computed at 4% interest per month, but
no such rate of interest was stipulated in the promissory note; rather a fixed sum
equivalent to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that “no interest shall be due
unless it has been expressly stipulated in writing.” The payment of interest in loans or
forbearance of money is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of interest
at a stipulated rate. The collection of interest without any stipulation in writing is
prohibited by law.

The interest of P40,000.00 per month corresponds only to the six-month period of the
loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the
promissory note. Thereafter, the interest on the loan should be at the legal interest rate
of 12% per annum.

When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code. 

The facts show that the parties agreed to the payment of a specific sum of money of
P40,000.00 per month for six months, not to a 4% rate of interest payable within a 6-
month period.

No issue on the excessiveness of the stipulated amount of P40,000.00 per month was
ever put in issue by the petitioners; they only assailed the application of a 4% interest
rate, since it was not agreed upon.

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law
between them, the only limitation being that these stipulations, clauses, terms and
conditions are not contrary to law, morals, public order or public policy. The payment
of the specific sum of money of P40,000.00 per month was voluntarily agreed upon
by the petitioners and the respondent. There is nothing from the records and, in fact,
there is no allegation showing that petitioners were victims of fraud when they
entered into the agreement with the respondent.

Therefore, as agreed by the parties, the loan of P1M shall earn P40,000.00 per month
for a period of 6 months, for a total principal and interest amount of P1,240,000.00.
Thereafter, interest at the rate of 12% per annum shall apply. The amounts already
paid by the petitioners during the pendency of the suit, amounting toP1,228,772.00 as
of February 12, 1999, should be deducted from the total amount due, computed as
indicated above. We remand the case to the trial court for the actual computation of
the total amount due.

Philippine Phosphate Fertilizer Corp. Vs. Kamalig Resources

FACTS:

Kamalig purchased fertilizer products from Philphos for eventual sale to its
customers. The agreement governing the business transaction consisted of advance
payment to Philphos for Kamalig's purchases of fertilizer products, followed by
Philphos's issuance of a Sales Official Receipt and an Authority to Withdraw,
indicating the kind of fertilizer product purchased and the location of the warehouse
where the merchandise would be picked up. Kamalig would subsequently resell the
fertilizer products and issue to its customers the corresponding Delivery Orders
signed only by its authorized officers. The customers would then present the Delivery
Orders to the proper Philphos warehouse for the release of the fertilizer products.

Kamalig purchased from and made advance payments for fertilizer products of
various grades to Philphos in the total sum of P4, 548,152.53. Prior to the release of
fertilizer products at the said supply points, however, Kamalig requested for a
readjustment of the various fertilizer grades and a modification of the locations from
which the fertilizer stocks would be picked up. In a subsequent letter Kamalig
requested another adjustment, this time a conversion of its stocks in Davao to be
delivered and picked up in Manila. All these requests were approved by Philphos.

Later on, Philphos informed Kamalig of overwithdrawals of various fertilizer

stocks in the supply depots in Manila and Iloilo. According to Philphos, the cost of
these overwithdrawals by Kamalig amounted to P1, 016,994.21. But since Philphos
also had an obligation to Kamalig in the amount of P470,348.91 representing the
Capital Recovery Component, partial compensation took place by operation of law
thereby reducing Kamalig's obligation to P546,645.30. Thus, Philphos demanded that
this sum be settled on or before 31 July 1986, otherwise Kamalig would be charged
34% interest per annum. Kamalig, however, denied that it had exceeded its
withdrawals of fertilizer and thus contended that it should not be made liable for any
amount.

Philphos filed the case for collection of a sum of money against Kamalig
before the RTC of Makati City. During pre-trial, the parties agreed to confine the
issue to whether or not Kamalig overwithdrew various grades of fertilizer products
amounting to P441, 738.50 from Philphos's warehouse in Iloilo and P575, 255.71
from Philphos's warehouse in Manila.

RTC RULING:
 After trial, giving more credence to the evidence presented by Philphos, the
RTC ruled in their favor. The RTC noted that Kamalig did not categorically deny that
there were overwithdrawals of fertilizer products in its stock, and that if there were
overwithdrawals, Kamalig merely claimed that it should not be at fault because some
of the delivery receipts were signed by Kamalig officers who were not authorized to
make such withdrawals. However, the RTC held that the alleged unauthorized
withdrawals did not relieve Kamalig from liability.

CA RULING:

The Court of Appeals disagreed with the RTC's finding that Kamalig failed to
categorically deny Philphos's claim of overwithdrawal of fertilizer stocks. It pointed
out that there were specific denials in Kamalig's Answer that it had not
overwithdrawn its stocks, and in its Pre-Trial Brief that it had withdrawn fertilizer
stocks only in such grade and quantity equivalent to the payment it had previously
made. A categorical denial having been made by Kamalig, the CA declared that the
burden of proof had shifted to Philphos to prove such overwithdrawals. The CA
found, however, that Philphos did not overcome the burden of proof as it failed to
prove the alleged overwithdrawal of fertilizer products by Kamalig which is the core
of its cause of action. The CA also found that Philphos's computations not only
included improperly documented withdrawals but also violated Kamalig's policy of
authorizing withdrawals based only on pre-printed and numbered forms duly issued to
its customers. The CA likewise found that it was also Philphos's company policy to
disallow withdrawals not using the pre-numbered and pre-printed delivery receipts.
By adopting the same policy, Philphos should have been forewarned that allowing
withdrawals without the proper documentation would be abetting unauthorized
withdrawals to its prejudice. Thus, such unauthorized withdrawals should also be
deducted from the value of the fertilizer products withdrawn by Kamalig. Thus, it is
Philphos that owes Kamalig a total of P645, 190.25.

The CA likewise held that there was no basis for the imposition of the 34%
interest per annum on the principal claim of Philphos, the same being merely a
unilateral act on the part of Philphos and no evidence was presented to show that the
parties stipulated on the payment of interest. Besides, such interest cannot be awarded
since there were no overwithdrawals in the first place.

ISSUE:

Whether or not the CA erred in holding Philphos liable to Kamalig.

RULING:

The pre-printed delivery orders are a vital security measure to prevent

unauthorized withdrawals of fertilizer, and benefits not only Kamalig but Philphos as
well. The pre-printed and pre-numbered forms were so designed in such a way that
the person dealing with it will be informed that the delivery order is duly issued by
Kamalig and can be relied upon; corollarily, if the customer presents a delivery order
that is not in the prescribed pre-printed form, the person dealing with it should be
alerted that it was not issued according to standard company practice and anyone
acting upon it acts at his own risk. The practice of using these pre-printed delivery
orders is obviously the modality in the ordinary course of business between Kamalig
and Philphos. Philphos's failure to strictly observe and implement this practice
precludes it from complaining of the adverse effects of such failure.

In the case at bar, withdrawals of fertilizer in quantities more than what was
paid for was made possible by Philphos's failure to comply with the policy to use the
prescribed forms. The danger sought to be prevented by the policy came to pass
because of Philphos's non-compliance with its policy. It is of no moment that
Kamalig's own authorized signatory, accomplished the handwritten delivery orders,
since the withdrawals thereon would not have been made had Philphos strictly
implemented the policy and did not honor said delivery orders. As Philphos could
have prevented the loss, it is but fair that it should suffer the loss. Thus, the value of
the unauthorized withdrawals should be for the account of Philphos and not shifted to
Kamalig.

The decision of the CA was modified. Petitioner Philippine Phosphate

Fertilizer Corporation is ordered to pay respondent Kamalig Resources, Inc. the
amount of P411,144.84, plus legal interest, and costs of the suit. The award of
attorney's fees by the Court of Appeals in favor of respondent is deleted.

De la Paz vs L and J Development Company

FACTS:

Out of trust and confidence, Rolando dela Paz lent a sum of money worth Php
350,000 to L & J Development Corporation, a property developer represented by
Atty. Esteban Salonga as its president and general manager.
The loan was executed without any security and no maturity date. It was however
agreed between the parties that the loan will have a 6% monthly interest (amounting
to Php 21,000). So far, L&J paid a total of Php 576,000 already – including interest
charges from December 2000 to August 2003.

L&J later failed to make payments due to financial difficulties in the business.
Rolando then filed a collection case with the MTC and alleged as of January 2005,
L&J still owes him Php 772,000 inclusive of monthly interests.

L&J (represented by Atty. Salonga) did not deny that they did incurred a debt
from Rolando, and admitted that they failed to pay due to a fortuitous event (financial
difficulties). They also contended that the 6% monthly interest is unconscionable and
that their total payment of Php 576,000 should be applied to the principal loan which
only amounts to Php 350,000.
 Rolando also contends that Atty. Salonga tricked him to execute the said loan
plus interest without reducing the agreement in writing. He also said that the 6%
interest rate was at the suggestion and insistence of L&J.

The MTC rendered judgment in favor of Rolando and upheld the 6% interest
rate as valid since L&J complied to it as evidenced by the payment they made from
December 2000 to August 2003. L&J is now estopped to impugn said interest rate.

The MTC also reduced the legal interest rate to 12% per annum on the
remaining loan for reasons of equity. They did not grant the prayer of moral damages
to Rolando since there was no bad faith on the part of L&J.

L&J appealed the decision to the RTC – contending once again that the 6%
interest rate is unconscionable, and that their previous payment which totaled Php
576,000 should be used to set off the principal loan of Php 350,000. RTC however
affirmed the decision of the MTC. L&J appealed to the CA.

CA ruled in favor of L&J, noting that the agreed 6% interest rate was not
reduced in a written agreement and hence, it should not be considered due. CA ruled
that the loan was already paid, and that Rolando should return the excess Php 226,000
with interest of 12% per annum. The case has now reached the Supreme Court.

ISSUE:

Whether or not the unwritten 6% interest agreement should be honored.

HELD:

No. The Supreme Court held that, as provided under the Civil Code, an
agreement regarding loan interests should be stipulated in writing. Even if the 6%
monthly rate was done in writing, it will still be void for being unconscionable and
contrary to morals and public policy – for at this time, an interest rate of 3% and
higher is considered excessive and exorbitant.

Furthermore, the lack of maturity date puts the total interest to a whooping
72% per annum which the Supreme Court considered to be “definitely outrageous and
inordinate.” The Supreme Court affirmed CA’s ruling, but as to Rolando’s obligation
to pay the excess Php 226,000, the interest rate was reduced from 12% to 6% per
annum.

Joven De cortes vs Venturazan

FACTS:
 House No. 65 Calle Rosario, the property of the plaintiff’s wife, has a certain
window through which it receives light and air, said windows opening on the adjacent
house, No. 63 of the same street. These windows have been in existence since the year
1843. The defendant, the tenant of the said house No. 63, has commenced certain
work with the view to raising the roof of the house in such a manner that one-half of
the windows in said house No. 65 has been covered, thus depriving the building of a
large part of the air and light formerly received through the window.

The contention of the plaintiff is that by the constant and uninterrupted use of
the windows during a period of fifty-nine years he acquired by prescription an
easement of light in favor of the house No. 65, and as a servitude upon house No. 63,
and, consequently, has acquired the right to restrain the making of any improvements
in the latter house which might in any manner be prejudicial to the enjoyment of the
said easement. He contends that the easement of light is positive; and that therefore
the period of possession for the purposes of the acquisition of a prescriptive title is to
begin from the date on which the enjoyment of the same commenced, or from the
time that said windows were opened with the knowledge of the owner of the house
No. 63, and without opposition on this part.

The defendant, on the contrary, contends that the easement is negative, and
that therefore the time for the prescriptive acquisition thereof must begin from the
date on which the owner of the dominant estate may have prohibited, by a formal act,
the owner of the servient estate from doing something which would be lawful but for
the existence of the easement.

ISSUE:

Whether or not the easement of light is a negative easement; and (2) whether
or not the plaintiffs have acquired right to such easement by prescription.

DECISION:

The easement of light in this case is a negative easement since the window
from which the light and air were received was opened on the plaintiff’s own property
as an exercise of dominion, as such, it does not establish in itself any easement. The
mere toleration of such an act does not imply on the part of the abutting owner a
waiver of his right to freely build upon his land as high as he may see fit. It being a
negative easement, it cannot be acquired by prescription under article 538 of the Civil
Code, except by counting the time of possession from the date on which the owner of
the dominant estate may, by a formal act have prohibited the owner of the servient
estate from doing something which it would be lawful from him to do were it not for
the easement. Since no formal prohibition has been executed by the plaintiff in this
case, it has not acquired right over the easement of light by prescription since the
prescriptive acquisition of the title thereto must be counted, not from the time of the
opening of the windows, but from the time at which the owner thereof has executed
some act of opposition tending to deprive the owner of the servient tenement of his
right to build upon it to such height as he might see fit in the legitimate use of his
rights of ownership.
Security Bank vs. Sps. Rodrigo

FACTS:

Security Bank granted spouses Mercado a revolving credit line in the amount
of P1, 000,000.00. The terms and conditions of the revolving credit line agreement
included the following stipulations:

7. Interest on Availments – I hereby agree to pay Security Bank interest on

outstanding Availments at a per annum rate determined from time to time, by Security
Bank and advised through my Statement of Account every month. I hereby agree that
the basis for the determination of the interest rate by Security Bank on my outstanding
Availments will be Security Bank’s prevailing lending rate at the date of availment. I
understand that the interest on each availment will be computed daily from date of
availment until paid.

xxxx

17. Late Payment Charges – If my account is delinquent, I agree to pay

Security Bank the payment penalty of 2% per month computed on the amount due and
unpaid or in excess of my Credit Limit.

On the other hand, the addendum to the revolving credit line agreement further
provided that:

I hereby agree to pay Security Bank Corporation (SBC) interest on

outstanding availments based on annual rate computed and billed monthly by SBC on
the basis of its prevailing monthly rate. It is understood that the annual rate shall in no
case exceed the total monthly prevailing rate as computed by SBC. I hereby give my
continuing consent without need of additional confirmation to the interests stipulated
as computed by SBC. The interests shall be due on the first day of every month after
date of availment.

ISSUE:

Whether or not the provisions on interest rate in the revolving credit line
agreement and its addendum are void for being violative of the principle of mutuality
of contracts.

RULING:

Yes. The principle of mutuality of contracts is found in Article 1308 of the

New Civil Code, which states that contracts must bind both contracting parties, and its
validity or compliance cannot be left to the will of one of them. 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.
As such, any contract which appears to be heavily weighted in favor of one of the
parties so as to lead to an unconscionable result is void. Likewise, any stipulation
regarding the validity or compliance of the contract that is potestative or is left solely
to the will of one of the parties is invalid. This holds true not only as to the original
terms of the contract but also to its modifications. Consequently, any change in a
contract must be made with the consent of the contracting parties and must be
mutually agreed upon. Otherwise, it has no binding effect. Stipulations as to the
payment of interest are subject to the principle of mutuality of contracts. As a
principal condition and an important component in contracts of loan, interest rates are
only allowed if agreed upon by express stipulation of the parties, and only when
reduced into writing.

First, the authority to change the interest rate was given to Security Bank alone
as the lender, without need of the written assent of the spouses Mercado. This
unbridled discretion given to Security Bank is evidenced by the clause “I hereby give
my continuing consent without need of additional confirmation to the interests
stipulated as computed by [Security Bank].” Second, the interest rate to be imposed is
determined solely by Security Bank for lack of a stated, valid reference rate. The
reference rate of “Security Bank’s prevailing lending rate” is not pegged on a market-
based reference rate as required by the BSP.

Spouses Silos v PNB

FACTS

Spouses Eduardo and Lydia Silos (petitioners) have been in business for about
two decades of operating a departmentstore 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 Mortgage. The credit line was
increased to P1.8 million and the mortgage was correspondingly increased to

P1.8 million. A supplemtn to the existing real estate mortgage was executed to cover
the same credit line, which was increased to P2.5 million, aqnd additional security
was given in the form of a lot. The petitioners issued eight PN and signed a credit
agreement. 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.” 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.” 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). 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. Petitioner's’ sole outstanding promissory note for P2.5 million became past
due, and despite repeated demands, petitioners failed to make good on the note.
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.
Petitioners filed a case seeking annulment of the foreclosure sale and an accounting of
the PNB credit.

ISSUE

Whether the interest rates on petitioners’ outstanding obligation were

unilaterally and arbitrarily imposed by PNB

HELD

It appears that respondent’s practice, more than once proscribed by the Court,
has been carried over once more to the petitioners. In a number 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 lawat any time depending on whatever policy it may adopt in the
future.” Thus, in Philippine National Bank v. Court of Appeals, 196 SCRA 536
(1991), such stipulation and similar ones were declared in violation of Article 1308 of
the Civil Code. In a second case, Philippine National Bank v. Court of Appeals, 238
SCRA 20 (1994), the very same stipulations found in the credit agreement and the
promissory notes prepared and issued by the respondent were again invalidated.

These are not factors which influence the fixing of interest rates to be imposed
on him.—In Aspa’s 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 PNB’s borrowers are ignored. A borrower’s 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, respondent’s method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost of money, bank costs,
etc. is arbitrary for there is no fixed standard or margin above or below these
considerations.

Any modification in the contract, such as the interest rates, must be made with
the consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan agreements, the rate of interest is a principal condition,
if not the most important component. Thus, any modification thereof must be
mutually agreed upon; otherwise, it has no binding effect.