Unilateral Interest Rate Hikes in Loan Agreements are Unenforceable

G.R. No. 240495 & 240513, September 15, 2021

Imagine taking out a loan, only to find the bank arbitrarily increasing the interest rate without your consent. This scenario, unfortunately, happens more often than it should. The Supreme Court case of Metro Alliance Holdings and Equities Corporation vs. Philippine Veterans Bank tackles this very issue, reminding banks that they can’t unilaterally change the terms of a loan agreement. The case highlights the importance of mutuality in contracts and protects borrowers from unfair lending practices.

The Principle of Mutuality in Contracts

At the heart of this case lies a fundamental principle of contract law: mutuality. This means that a contract must bind both parties equally, and its validity or compliance cannot be left to the will of one party. Article 1308 of the Civil Code of the Philippines explicitly states this: “The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.”

Think of it like a seesaw. If one side can unilaterally change the fulcrum point, the balance is disrupted, and the other side is at a disadvantage. In loan agreements, this translates to banks not being able to arbitrarily increase interest rates without the borrower’s consent. The contract should be a fair agreement, not a tool for one party to exploit the other.

The Civil Code also addresses the requirement for interest to be stipulated in writing:

Article 1956. No interest shall be due unless it has been expressly stipulated in writing.

This reinforces the necessity for clear, written agreement on interest rates to protect borrowers from hidden or unexpected charges.

Background of the Case

The story begins with Philippine Veterans Bank (PVB) granting a P550 million loan to Metro Alliance Holdings and Equities Corporation (MAHEC) and Polymax Worldwide Limited. The loan agreement underwent several amendments, but eventually, a dispute arose over the interest rates being charged.

Here’s a breakdown of the key events:

• 2004: PVB grants a P550 million loan to MAHEC and Polymax.
• Later Years: PVB unilaterally increases interest rates without MAHEC and Polymax’s explicit consent.
• 2009: PVB initiates extrajudicial foreclosure of a real estate mortgage due to alleged unpaid debt.
• Legal Action: MAHEC, Polymax, and Wellex (who provided the real estate mortgage) file a complaint to nullify the foreclosure and question the interest rates.

The case then made its way through the courts, with the central question being whether PVB had the right to unilaterally increase the interest rates on the loan.

The Court’s Decision

The Supreme Court sided with the borrowers, ruling that PVB’s unilateral increases in interest rates were indeed invalid. The Court emphasized the importance of mutuality in contracts, stating that:

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality.

The Court further explained that allowing one party to unilaterally change the terms of a contract turns it into a contract of adhesion, where the weaker party has no real bargaining power.

However, the Court also clarified that while the unilaterally imposed interest rates were nullified, the borrowers were still obligated to pay interest on the loan. The Court applied the legal interest rate prevailing at the time the agreement was entered into, which was 12% per annum until June 30, 2013, and 6% per annum thereafter, as per BSP Circular 799-13.

As a result of the improper interest rate imposition, the foreclosure proceedings were also declared null and void. The Court cited previous cases, stating:

The registration of such foreclosure sale has been held to be invalid and cannot vest title over the mortgaged property.

The Court ordered the cancellation of the Transfer Certificate of Title issued in PVB’s name and the reconstitution of the original title.

Practical Implications and Key Lessons

This case serves as a strong reminder to banks and other lending institutions that they cannot arbitrarily change the terms of a loan agreement. Borrowers have the right to expect that the agreed-upon terms will be honored throughout the life of the loan.

Key Lessons:

• Mutuality is Key: Loan agreements must be mutually agreed upon and cannot be unilaterally altered by one party.
• Transparency Matters: Interest rates and other charges must be clearly stated in writing.
• Foreclosure Risks: Improperly imposed interest rates can invalidate foreclosure proceedings.

Hypothetical Example: Imagine a small business owner taking out a loan to expand their operations. The bank includes a clause in the agreement allowing them to increase the interest rate if market conditions change. If the bank later increases the rate significantly, making it difficult for the business to repay the loan, this case suggests the business owner could challenge the increase in court based on the principle of mutuality.

Frequently Asked Questions (FAQs)

Q: What happens if a loan agreement allows the bank to unilaterally change interest rates?

A: Such a clause is likely unenforceable, as it violates the principle of mutuality in contracts. The borrower can challenge the increase in court.

Q: What interest rate applies if the agreed-upon rate is deemed invalid?

A: The legal interest rate prevailing at the time the agreement was entered into will apply.

Q: Can a bank foreclose on a property if the borrower fails to pay due to improperly imposed interest rates?

A: No, the foreclosure proceedings can be declared null and void if the interest rates were improperly imposed.

Q: What should I do if I believe my bank is charging me excessive or unilaterally increased interest rates?

A: Consult with a lawyer to review your loan agreement and assess your legal options.

Q: Does this ruling apply to all types of loans?

A: Yes, the principle of mutuality applies to all types of contracts, including loan agreements.

Q: What is the effect of BSP Circular 799?

A: BSP Circular 799 reduced the legal rate of interest from 12% to 6% per annum, effective July 1, 2013. This rate applies in the absence of a stipulated interest rate, or when the stipulated rate is deemed invalid.

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