Credit Transaction Case: Spouses Silos v. PNB (GR No. 181045, 02 July 2014)


SPOUSES EDUARDO AND LYDIA SILOS, PETITIONERS, VS. PHILIPPINE NATIONAL BANK, RESPONDENT.
G.R. No. 181045, July 02, 2014

CREDIT TRANSACTION CASE > ESCALATION CLAUSE
DOCTRINE:
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.

FACTS:

  • Spouses Silos have been in business for about two decades of operating a department store and buying and selling ready-to-wear apparel.
  • Spouses Silos then secured a revolving credit line with Philippine National Bank (PNB) through a real estate mortgage as a security. After two years, their credit line increased. They then signed a Credit Agreement, which was also amended 2 years later, and several Promissory Notes (PN) as regards their Credit Agreements with PNB. The said loan was initially subjected to a 19.5% interest rate per annum. 
  • In the Credit Agreements, Spouses Silos bound themselves to the power of PNB to modify the interest rate depending on whatever policy that PNB may adopt in the future without need of notice upon them. Thus, the said interest rates played from 16% to as high as 32% per annum. 
  • Spouses Silos acceded to the policy by pre-signing a total of 26 PNs leaving the individual applicable interest rates at hand blank since it would be subject to modification by PNB.
  • Spouses Silos regularly renewed and made good on their PNs, religiously paid the interests without objection or fail. However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the interest rates soared. The 26th PN became past due and despite repeated demands by PNB, they failed to make good on the note. Thus, PNB foreclosed and auctioned the involved security for the mortgage. 
  • Spouses Silos instituted an action to annul the foreclosure sale on the ground that the succeeding interest rates used in their loan agreements was left to the sole will of PNB, the same fixed by the latter without their prior consent and thus, void. 
  • The RTC ruled that such stipulation authorizing both the increase and decrease of interest rates as may be applicable is valid. 
  • The CA affirmed the RTC decision.

    ISSUE:
    Whether or not PNB, on its own, modify the interest rate in a loan agreement without violating the mutuality of contracts.

    HELD:
    NO. PNB cannot modify the interest rate in a loan agreement on its own.

    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 other's 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 bank's 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. 

    RATIO:
    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.