The Supreme Court ruled that Philippine National Bank (PNB) violated the principle of mutuality of contracts by unilaterally increasing interest rates on Spouses Silos’ loan. The Court invalidated the interest rate provisions in the credit agreements and promissory notes, emphasizing that any modification in a contract, especially concerning interest rates, requires mutual consent from all parties involved. This decision safeguards borrowers from arbitrary rate hikes imposed by banks, ensuring fairness and transparency in lending agreements. The ruling underscores the importance of adhering to the Truth in Lending Act, protecting borrowers from hidden costs and enabling them to make informed financial decisions.

Unilateral Rate Hikes: Can Banks Change the Rules Mid-Loan?

Spouses Eduardo and Lydia Silos, seasoned entrepreneurs, secured a revolving credit line from PNB, initially backed by a real estate mortgage. Over time, the credit line expanded, accompanied by supplemental mortgages and a series of promissory notes. The crux of the issue arose from clauses within the credit agreements and promissory notes that seemingly granted PNB the authority to adjust interest rates based on internal policies. These clauses became a battleground when, during the Asian financial crisis, interest rates soared, leading the Siloses to default on their obligations.

PNB foreclosed on the mortgage, prompting the Siloses to contest the foreclosure sale, arguing that the interest rates were unilaterally imposed without their consent, violating the principle of mutuality of contracts enshrined in Article 1308 of the Civil Code. They claimed that the bank had complete control over setting the interest rates which made the agreement invalid. The Siloses sought an accounting of their credit and argued that they had overpaid interests due to the allegedly illegal rate hikes.

The case hinged on whether PNB had the right to unilaterally modify interest rates based on the stipulations in the credit agreements and promissory notes. The Siloses contended that these stipulations violated the principle of mutuality of contracts, while PNB argued that the clauses were valid and that the Siloses were estopped from questioning the rates due to their continuous payments. The Regional Trial Court initially sided with PNB, but the Court of Appeals partially reversed this decision, leading to the Supreme Court review.

The Supreme Court emphasized that any modification in a contract, particularly concerning interest rates, must be mutually agreed upon by all parties involved. It found that the stipulations in the credit agreements and promissory notes, which allowed PNB to unilaterally adjust interest rates based on its internal policies, violated this principle of mutuality. The Court pointed to the fact that the Siloses signed promissory notes in blank, which PNB later filled in with interest rates determined solely by the bank’s Treasury Department. This practice highlighted the lack of genuine consent from the borrowers.

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

Building on this principle, the Court reiterated its stance from previous cases, highlighting that escalation clauses granting lenders unrestrained power to increase interest rates without prior notice or consent from the borrowers are invalid. The Court also found that PNB’s method of fixing interest rates based on factors like cost of money, foreign currency values, and bank administrative costs, without considering the borrower’s circumstances, was arbitrary and one-sided. The Court further stated that the considerations used to determine interest rates must not be at the sole discretion of the lender.

The Supreme Court also addressed the issue of estoppel, rejecting PNB’s argument that the Siloses were prevented from questioning the interest rates because they had been paying them without protest for several years. The Court held that estoppel cannot validate an illegal act and that the Siloses’ continued payments did not imply consent to the unilateral rate hikes. This is consistent with established jurisprudence, maintaining that continuous payment of an obligation will not validate an otherwise illegal agreement.

Furthermore, the Court found that PNB had violated the Truth in Lending Act by requiring the Siloses to sign credit documents and promissory notes in blank, which it then unilaterally filled in with the applicable interest rates. The Truth in Lending Act mandates that creditors must provide borrowers with a clear statement of all charges and fees associated with a loan prior to the consummation of the transaction. Failure to disclose such information makes the agreement null and void. The Court noted that this practice was a violation of Section 4 of the Act.

Turning to the issue of penalties, the Court agreed with the Siloses that the penalty charge in Promissory Note No. 9707237 should be excluded from the amounts secured by the real estate mortgages because the mortgage agreements did not specifically include it as part of the secured amount. The Court also noted that the silence in the mortgage documents about whether or not to include penalties should be strictly construed against the bank which drafted the contract. The Court reinstated the trial court’s original award of 1% attorney’s fees, finding that the Court of Appeals had erred in increasing the amount because PNB had not appealed the trial court’s decision on this issue.

In light of its findings, the Supreme Court ordered a remand of the case to the Regional Trial Court for proper accounting and computation of overpayments made by the Siloses, as well as a determination of the validity of the extrajudicial foreclosure and sale. This decision protects borrowers from lenders who try to take advantage of them by making them pay more than what is due. If the trial court finds that the spouses made payments exceeding their actual obligation, then the foreclosure and sale of their properties will be nullified, and they will be entitled to a refund.

FAQs

What was the key issue in this case?	The key issue was whether PNB could unilaterally increase interest rates on the Siloses’ loan based on clauses in their credit agreements and promissory notes. The Supreme Court ruled that such unilateral increases violated the principle of mutuality of contracts.
What is the principle of mutuality of contracts?	The principle of mutuality of contracts, as stated in Article 1308 of the Civil Code, requires that a contract must bind both contracting parties and that its validity or compliance cannot be left to the will of one of them. It means that the parties must be on equal footing when it comes to the obligations under the agreement.
Did the Supreme Court invalidate all interest rate increases imposed by PNB?	Yes, the Supreme Court invalidated the interest rate increases imposed by PNB because they were unilaterally determined by the bank without the Siloses’ consent. The Court ordered that only the original interest rate should be applied.
What is the Truth in Lending Act, and how did PNB violate it?	The Truth in Lending Act requires creditors to provide borrowers with a clear statement of all charges and fees associated with a loan prior to its consummation. PNB violated the Act by requiring the Siloses to sign credit documents and promissory notes in blank, which the bank then unilaterally filled in later.
What was the legal rate of interest applied in this case?	The Supreme Court ruled that from the second to the 26th promissory notes, a 12% interest rate per annum should be applied up to June 30, 2013. After that date, it should be 6% per annum until the full satisfaction of the obligation.
Why was the penalty charge excluded from the secured amount?	The penalty charge was excluded because the real estate mortgage agreements did not specifically include it as part of the secured amount. The Court construed the silence in the mortgage documents against PNB, as the drafter of the contract.
What was the outcome of the case regarding attorney’s fees?	The Supreme Court reinstated the trial court’s original award of 1% attorney’s fees. It held that the Court of Appeals had erred in increasing the amount because PNB had not appealed the trial court’s decision on this issue.
What happens next in this case?	The case was remanded to the Regional Trial Court for proper accounting and computation of overpayments made by the Siloses, as well as a determination of the validity of the extrajudicial foreclosure and sale. The trial court must comply with the formula outlined in the body of the decision.

This landmark ruling reinforces the necessity of mutual consent in contractual agreements, particularly in loan arrangements. Banks must ensure transparency and fairness in their dealings with borrowers, and borrowers should be aware of their rights to challenge unfair or unilateral changes to the terms of their loans. By preventing lenders from unilaterally changing important elements of a contract, the Supreme Court protects potentially vulnerable parties and ensures a more equitable financial landscape.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Spouses Eduardo and Lydia Silos vs. Philippine National Bank, G.R. No. 181045, July 02, 2014