SPS. EDUARDO AND LYDIA SILOS v. PHILIPPINE NATIONAL BANK, GR No.

181045,
2014-07-02

Facts:

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.

To secure a one-year revolving credit line of P150,000.00 obtained from PNB,

petitioners constituted in August 1987 a Real Estate Mortgage[5] over a 370-
square meter lot in Kalibo, Aklan... the credit line was increased to P1.8 million
and the mortgage was correspondingly increased to P1.8 million.

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... petitioners issued eight Promissory
Notes[8] and signed a Credit Agreement.

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 Bank's 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.

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.

an Amendment to Credit Agreement[14] was executed by the parties, with the following
stipulation regarding interest:
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

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:

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:... the
rate of interest herein stipulated may be increased or decreased for the subsequent
Interest Periods, with prior notice to the Borrower in the event of changes in interest
rate prescribed by law or the Monetary Board of... the Central Bank of the Philippines,
or in the Bank's overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to
prepay the loan or credit facility without penalty within ten

(10) calendar days from the Interest Setting Date.

Respondent regularly renewed the line from 1990 up to 1997, and

petitioners made good on the promissory notes, religiously paying the
interests without objection or fail. But in 1997, petitioners faltered when the
interest rates soared due to the Asian financial crisis.

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...
provided for the penalty equivalent to 24% per annum in case of default

PNB prepared a Statement of Account[20] as of October 12, 1998, detailing

the amount due and demandable from petitioners in the total amount of
P3,620,541.60... 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.

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.

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%

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 respondent's 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.

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 PNB's Treasury Department which is based in

Manila; that these prime rates were simply communicated to all PNB branches for
implementation;... the trial court rendered judgment dismissing Civil Case No. 5975

Petitioners appealed to the CA... the instant appeal is PARTLY GRANTED... 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;

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.

the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the difference
between PNB's 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.

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.
Issues:

WON THE INTEREST RATE PROVISION IN THE CREDIT AGREEMENT WHICH LEFT TO
THE SOLE UNILATERAL DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL
FIXING OF INTEREST RATE AND ITS INCREASE, IS CONTRARY TO LAW

Ruling:

YES. 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.
In making the unilateral increases in interest rates, petitioner bank relied on the
escalation clause contained in their credit agreement This clause is authorized by
Section 2 of Presidential Decree (P.D.) No. 1684 which further amended Act No. 2655
("The Usury Law") 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 Bank's Monetary Board to
prescribe the maximum rates of interest for loans and certain forbearances.

rate of interest... shall not be subject to any... ceiling prescribed under or pursuant to
the Usury Law,... 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 other's consent.

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.

contract changes must be made with the consent of the contracting parties

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.

The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil
Code:

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.

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 respondent's Treasury Department in
Manila.

Clearly, respondent's method of fixing interest rates based on one-sided, indeterminate,

and subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary
for there is no fixed standard or margin above or below... these considerations.

any modification in the contract, such as the interest rates, must be made with the
consent of the contracting parties.

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.

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.
Plainly, with the present credit agreement, the element of consent or agreement by the
borrower is now completely lacking

Accordingly, petitioners are correct in arguing that estoppel should not apply to them,
for "[e]stoppel cannot be predicated on an illegal act.

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

The fact that petitioners later received several statements of account detailing its
outstanding obligations does not cure respondent's breach. To repeat, the belated
discovery of the true cost of credit does not reverse the ill effects of an already
consummated business... decision

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.

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 respondent's 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?...
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.

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.

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... it was not
intended to apply to the whole... duration of the loan. Subsequent higher interest rates
have been declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per
annum. However, the 12% interest shall apply... only until June 30, 2013. Starting July
1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our ruling in
Nacar v. Gallery Frames[99] and Bangko Sentral ng Pilipinas-Monetary Board Circular
No. 799.

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.

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... the
case should be remanded to the lower court for proper accounting and computation

1st Promissory Note with the 19.5% interest rate is deemed proper and paid

All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall
carry an interest rate of only 12% per annum.

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%

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