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1308 - Mutuality of Contracts

This case involved a loan obtained by Fernandez from PNB with interest rates of 12% annually. The loan agreements contained escalation clauses allowing PNB to increase interest rates without notice up to the legal limit. PNB subsequently increased the interest rates to 25%, 30%, and 42% without Fernandez's consent. The Supreme Court ruled the escalation clauses were invalid and that contract changes require mutual consent, as one party cannot unilaterally modify important terms like interest rates. Silence does not imply acceptance of proposed modifications. PNB increasing the rates without Fernandez's agreement negated the mutuality required for a valid contract.

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68 views1 page

1308 - Mutuality of Contracts

This case involved a loan obtained by Fernandez from PNB with interest rates of 12% annually. The loan agreements contained escalation clauses allowing PNB to increase interest rates without notice up to the legal limit. PNB subsequently increased the interest rates to 25%, 30%, and 42% without Fernandez's consent. The Supreme Court ruled the escalation clauses were invalid and that contract changes require mutual consent, as one party cannot unilaterally modify important terms like interest rates. Silence does not imply acceptance of proposed modifications. PNB increasing the rates without Fernandez's agreement negated the mutuality required for a valid contract.

Uploaded by

Sarah Jane Usop
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PNB V.

CA 238 SCRA 20
1308 – Mutuality of Contracts

FACTS: On April 7, 1982, Fernandez as owners of a NACIDA registered enterprise, obtained a loan from CIGLF from the PNB in the
amount of P50K as evidence by a Credit Agreement, under the PN the loan was to be amortized over a period of three years at 12%
interest annually.

To secure the loan Fernandez executed a REM over a 1.5- hectare parcel of unregistered agricultural land at Toledo City which was
appraised by PNB at P1,062 and given a loan value of P531. In addition, there was a Chattel Mortgage over a thermo plastic-forming
machine which had an appraised value of P8,800 and a loan value of P4,400.

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.

In 1983, they had additional loan of P50K which contained similar provisions and terms, but they executed a new credit agreement
changing the amount of the loan from P50K to P100K but otherwise preserving the stipulation, they constituted another Real Estate
Mortgage of 311 sq.m. which had a value of P40K with a loan value of P28K.

In a letter dated August 1, 1984, the PNB informed Fernandez that the interest rate of CIGLF loan account with us is now 25% per annum
plus a penalty of 6% per annum on past dues. The PNB further increased this interest rate to 30% on October 15, 1984; and to 42% on
October 25, 1984.

The records show that as of December 1985, (private respondents) had an outstanding principal account of P81,000.00 of which
P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and other charges.

Thus, as of said date, the unpaid principal obligation of (private respondents) amounted to P62,830.32

ISSUE: WON, the escalation clause imposed by PNB is valid.

RULING: No. The petition is bereft of merit.


Unilateral Increase by Escalation Clause

In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause in their credit agreement:

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.

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 other’s consent.

Contract Changes, Consent Required

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 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 ofb 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.

IN THIS CASE: 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. His silence per se cannot be construed as an acceptance; there is even no implicit
agreement to the proposed increases in interest rate.

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