MUTUALITY OF CONTRACTS

UCPB vs Spouses Beluso

Facts:
1. Petition for Review on Certiorari declaring void the interest rate
provided in the promissory notes executed by the respondents Spouses
Samuel and Odette Beluso (spouses Beluso) in favor of petitioner
United Coconut Planters Bank (UCPB)
2. UCPB granted the spouses Beluso a Promissory Notes Line under a
Credit Agreement whereby the latter could avail from the former credit
of up to a maximum amount of P1.2 Million pesos for a term ending
on 30 April 1997. The spouses Beluso constituted, other than their
promissory notes, a real estate mortgage over parcels of land
in Roxas City, covered by Transfer Certificates of Title No. T-31539 and
T-27828, as additional security for the obligation. The Credit
Agreement was subsequently amended to increase the amount of the
Promissory Notes Line to a maximum of P2.35 Million pesos and to
extend the term thereof to 28 February 1998.
3. On 30 April 1997, the payment of the principal and interest of the
latter two promissory notes were debited from the spouses Belusos
account with UCPB; yet, a consolidated loan for P1.3 Million was again
released to the spouses Beluso under one promissory note with a due
date of 28 February 1998. To completely avail themselves of the P2.35
Million credit line extended to them by UCPB, the spouses Beluso
executed two more promissory notes for a total of P350,000.00.
However, the spouses Beluso alleged that the amounts covered by
these last two promissory notes were never released or credited to
their account and, thus, claimed that the principal indebtedness was
only P2 Million.
4. The spouses Beluso, however, failed to make any payment of the
foregoing amounts.
5. On 2 September 1998, UCPB demanded that the spouses Beluso pay
their total obligation of P2,932,543.00 plus 25% attorneys fees, but
the spouses Beluso failed to comply therewith. On 28 December 1998,
UCPB foreclosed the properties mortgaged by the spouses Beluso to
secure their credit line, which, by that time, already ballooned
to P3,784,603.00.
6. On 9 February 1999, the spouses Beluso filed a Petition for Annulment,
Accounting and Damages against UCPB with the RTC of Makati City.
7. Trial court declared in its judgment that:
a. the interest rate used by [UCPB] void
b. the foreclosure and Sheriffs Certificate of Sale void
c. UCPB is ordered to return to [the spouses Beluso] the properties
subject of the foreclosure
d. UCPB to pay [the spouses Beluso] the amount of P50,000.00 by
way of attorneys fees
e. UCPB to pay the costs of suit.
f. Spouses Beluso] are hereby ordered to pay [UCPB] the sum
of P1,560,308.00.
8. Court of Appeals affirmed Trial court's decision subject to the
modification that defendant-appellant UCPB is not liable for attorneys fees
or the costs of suit.
ISSUES:
1. Whether or not interest rate stipulated was void
Yes, stipulated interest rate is void because it contravenes on the principle of
mutuality of contracts and it violates the Truth in lending Act.
The provision stating that the interest shall be at the rate indicative of DBD retail
rate or as determined by the Branch Head is indeed dependent solely on the will
of petitioner UCPB. Under such provision, petitioner UCPB has two choices on
what the interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a
rate as determined by the Branch Head. As UCPB is given this choice, the rate
should be categorically determinable in both choices. If either of these two
choices presents an opportunity for UCPB to fix the rate at will, the bank can
easily choose such an option, thus making the entire interest rate provision
violative of the principle of mutuality of contracts.
In addition, the promissory notes, the copies of which were presented to the

spouses Beluso after execution, are not sufficient notification from UCPB. As
earlier discussed, the interest rate provision therein does not sufficiently indicate
with particularity the interest rate to be applied to the loan covered by said
promissory notes which is required in TRuth in Lending Act
2. Whether or not Spouses Beluso are subject to 12% interest and
compounding interest stipulations even if declared amount by UCPB was
excessive.
Yes. Default commences upon judicial or extrajudicial demand. [26] The excess
amount in such a demand does not nullify the demand itself, which is valid with
respect to the proper amount. There being a valid demand on the part of UCPB,
albeit excessive, the spouses Beluso are considered in default with respect to the
proper amount and, therefore, the interests and the penalties began to run at that
point. As regards the award of 12% legal interest in favor of petitioner, the RTC
actually recognized that said legal interest should be imposed, thus: There being
no valid stipulation as to interest, the legal rate of interest shall be charged. [27] It
seems that the RTC inadvertently overlooked its non-inclusion in its
computation. It must likewise uphold the contract stipulation providing the
compounding of interest. The provisions in the Credit Agreement and in the
promissory notes providing for the compounding of interest were neither nullified
by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in their
petition with the RTC. The compounding of interests has furthermore been
declared by this Court to be legal.
3. Whether or not foreclosure was void
No. The foreclosure proceedings are valid since there was a valid demand made
by UCPB upon the spouses Beluso. Despite being excessive, the spouses Beluso
are considered in default with respect to the proper amount of their obligation to
UCPB and, thus, the property they mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure sale should be applied to
the extent of the amounts to which UCPB is rightfully entitled.
Allied Banking Corp. V. CA (Jan - Dec 2006)
FACTS:

January 6, 1981: Allied Bank (Allied) purchased Export Bill of $20,085 from G.G.
Sportswear Mfg. Corporation (GGS)

The bill, drawn under a letter of credit covered Men's Valvoline Training Suit that
was in transit to West Germany

The export bill was issued by Chekiang First Bank Ltd., Hongkong.

With the purchase of the bill, ALLIED credited GGS the peso equivalent of the bill
amounting to P151,474.52

Nari Gidwani and Alcron International Ltd. (Alcron) executed their respective
Letters of Guaranty, holding themselves liable on the export bill if it should be dishonored or
retired by the drawee for any reason.

spouses Leon and Leticia de Villa and Nari Gidwani also executed a Continuing
Guaranty/Comprehensive Surety (surety), guaranteeing payment of any and all such credit
accommodations which ALLIED may extend to GGS

When ALLIED negotiated the export bill to Chekiang, payment was refused due to some
material discrepancies in the documents submitted by GGS relative to the exportation
covered by the letter of credit.

ALLIED demanded payment

GGS and Nari Gidwani: signed blank forms of the Letters of Guaranty and the
Surety, and the blanks were only filled up by ALLIED after they had affixed their signatures.
They also added that the documents did not cover the transaction involving the subject
export bill.

spouses de Villa: not aware of the existence of the export bill; they signed blank
forms of the surety; and averred that the guaranty was not meant to secure the export bill

Alcron: foreign corporation doing business in the Philippines, its branch in the

Philippines is merely a liaison office; neither its liaison office in the Philippines nor its then
representative, Hans-Joachim Schloer, had the authority to issue Letters of Guaranty for and
in behalf of local entities and persons

RTC: in favor of Allied

CA: modified holding GGS liable to reimburse Allied, but it exonerated the guarantors
from their liabilities under the Letters of Guaranty

ISSUE: W/N Gidwani, Alcron and Spouses Villa can be held jointly and severally liable becuase
of their capacity as guarantors and surety in the absence of protest on the bill in accordance with
Section 152 of the Negotiable Instruments Law?

HELD: YES. CA modified. Nari Gidwani, and Spouses Leon and Leticia de Villa are jointly and
severally liable together with G.G. Sportswear

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.

Section 152 of the Negotiable Instruments Law pertaining to indorsers, relied on by

respondents, is not pertinent to this case.

There are well-defined distinctions between the contract of an indorser and that
of a guarantor/surety of a commercial paper, which is what is involved in this case.

The contract of indorsement is primarily that of transfer, while the contract of

guaranty is that of personal security

The liability of a guarantor/surety is broader than that of an indorser.

Unless the bill is promptly presented for payment at maturity and due notice of
dishonor given to the indorser within a reasonable time, he will be discharged from liability
thereon. On the other hand, except where required by the provisions of the contract of
suretyship, a demand or notice of default is not required to fix the surety's liability.

Therefore, no protest on the export bill is necessary to charge all the

respondents jointly and severally liable

having affixed their consenting signatures in several documents executed at different

times, it is safe to presume that they had full knowledge of its terms and conditions, hence,
they are precluded from asserting ignorance of the legal effects of the undertaking they
assumed thereunder.

Sps. SILOS v. PNB

PETITIONER: Sps. Eduardo and Lydia Silos
RESPONDENT: Philippine National Bank
SUMMARY: Sps. Silos obtained a revolving credit line from PNB, secured by a mortgage.
The interest rate was initially agreed upon at 19.5% but a Supplement to the Credit
Agreement provided 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. The
spouses were able to pay the interests on the loan up until their last promissory note which
covered the principal amount. Because of this their properties were foreclosed and sold by
auction to PNB. The spouses filed a petition to annul the foreclosure sale and for the
accounting of PNBs credit. The RTC dismissed their petition. The CA affirmed. The SC
annulled and set aside the CA decision.

DOCTRINE: 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.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 101771 December 17, 1996
SPOUSES MARIANO and GILDA FLORENDO, petitioners,
vs.
COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.
PANGANIBAN, J.:p
May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason
of the voluntary resignation of the borrower?
Such is the query raised in the petition for review on certiorari now before us, which assails the
Decision promulgated on June 19, 1991 by respondent Court of Appeals 1 in CA-G.R. CV No.
24956, upholding the validity and enforceability of the escalation by private respondent Land
Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitionerspouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146
before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties,
after entering into a joint stipulation of facts, submitted the case for decision on the basis of said
stipulation and memoranda. The stipulation reads in part: 2
1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank)
from May 17, 1976 until August 16, 1984 when she voluntarily resigned.
However, before her resignation, she applied for a housing loan of P148,000.00,
payable within 25 years from (respondent bank's) Provident Fund on July 20,
1983;
2. That (petitioners) and (respondent bank), through the latter's duly authorized
representative, executed the Housing Loan Agreement, . . .;
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent
bank), through the latter's authorized representative, also executed a Real Estate
Mortgage and Promissory
Note, . . .;
4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her
capacity as employee of (respondent bank);

5. That on March 19, 1985, (respondent bank) increased the interest rate on
(petitioner's) loan from 9% per annum to 17%, the said increase to take effect on
March 19, 1985;
6. That the details of the increase are embodied in (Landbank's) ManCom
Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident Fund)
Memorandum Circular (No. 85-08, Series of 1985), . . .;
7. That (respondent bank) first informed (petitioners) of the said increase in a
letter dated June 7, 1985, . . . . Enclosed with the letter are a copy of the PF
Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .;
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to
which (respondent bank) replied through a letter dated July 1, 1985, . . .
Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent
bank's) legal counsel, A.B. F. Gaviola, Jr., . . .;
9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the
increased interest or the new monthly installments based on the increased
interest rate, but Plaintiff just as vehemently maintained that the said increase is
unlawful and unjustifiable. Because of (respondent bank's) repeated demands,
(petitioners) were forced to file the instant suit for Injunction and Damages;
10. That, just the same, despite (respondent bank's) demands that (petitioners)
pay the increased interest or increased monthly installments, they (petitioners)
have faithfully paid and discharged their loan obligations, more particularly the
monthly payment of the original stipulated installment of P1,248.72. Disregarding
(respondent bank's) repeated demand for increased interest and monthly
installment, (petitioners) are presently up-to-date in the payments of their
obligations under the original contracts (Housing Loan Agreement, Promissory
Note and Real Estate Mortgage) with (respondent bank);
xxx xxx xxx
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred
to above as the basis for the escalation are:
a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that,
for as long as the loan or any portion thereof or any sum that may be due and
payable under the said loan agreement remains outstanding, the borrower shall

f) Comply with all the rules and regulations of the program

imposed by the LENDER and to comply with all the rules and
regulations that the Central Bank of the Philippines has imposed
or will impose in connection with the financing programs for bank
officers and employees in the form of fringe benefits.
b. Paragraph (f) of the Real Estate Mortgage 4 which states:
The rate of interest charged on the obligation secured by this
mortgage. . ., shall be subject, during the life of this contract, to
such an increase/decrease in accordance with prevailing rules,
regulations and circulars of the Central Bank of the Philippines
as the Provident Fund Board of Trustees of the Mortgagee may
prescribe for its debtors and subject to the condition that the
increase/decrease shall only take effect on the date of effectivity
of said increase/decrease and shall only apply to the remaining
balance of the loan.
c. and ManCom (Management Committee) Resolution No. 85-08, together with
PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the

interest rates on outstanding housing loans of bank employees who voluntarily

"secede" (resign) from the Bank; the range of rates varied depending upon the
number of years service rendered by the employees concerned. The rates were
made applicable to those who had previously resigned from the bank as well as
those who would be resigning in the future.
The trial court ruled in favor of respondent bank, and held that the bank was vested with authority
to increase the interest rate (and the corresponding monthly amortizations) pursuant to said
escalation provisions in the housing loan agreement and the mortgage contract. The dispositive
portion of the said decision reads: 5
WHEREFORE, judgment is hereby rendered denying the instant suit for
injunction and declaring that the rate of interest on the loan agreement in
question shall be 17% per annum and the monthly amortization on said loan
properly raised to P2,064.75 a month, upon the finality of this judgment.
xxx xxx xxx
Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous
and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank
likewise appealed and contested the propriety of having the increased interest rate apply only
upon the finality of the judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the trial court,
holding that: 6
. . . Among the salient provisions of the mortgage is paragraph (f) which provides
that the interest rate shall be subject, during the term of the loan, to such
increases/decreases as may be allowed under the prevailing rules and/or
circulars of the Central Bank and as the Provident Fund of the Bank may
prescribe for its borrowers. In other words, the spouses agreed to the escalation
of the interest rate on their original loan. Such an agreement is a contractual one
and the spouses are bound by it. Escalation clauses have been ruled to be valid
stipulations in contracts in order to maintain fiscal stability and to retain the value
of money in long term contracts (Insular Bank of Asia and America vs. Spouses
Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the conditions for
the validity of an escalation clause such as the one which refers to an increase
rate is that the contract should also contain a proviso for a decrease when
circumstances so warrant it. Paragraph (f) referred to above contains such
provision.
A contract is binding on the parties no matter that a provision thereof later proves
onerous and which on hindsight, a party feels he should not have agreed to in
the first place.
and disposed as follows: 7
WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that
the interest of 17% on the balance of the loan of the spouses shall be computed
starting July 1, 1985.
Dissatisfied, the petitioners had recourse to this Court.
The Issues
Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent
bank's unilateral increase of the interest rate and monthly amortizations of the loan
1. . . . (simply because of) a bare and unqualified stipulation that the interest rate
may be increased;
2. . . . on the ground that the increase has no basis in the contracts between the

parties;
3. . . . on the ground that the increase violates Section 7-A of the Usury Law;
4. . . . on the ground that the increase and the contractual provision that
(respondent bank) relies upon for the increase are contrary to morals, good
customs, public order and public policy. 8
The key issue may be simply presented as follows: Did the respondent bank have a valid and
legal basis to impose an increased interest rate on the petitioners' housing loan?
The Court's Ruling
Basis for Increased Interest Rate
Petitioners argue that the HLA provision covers only administrative and other matters, and does
not include interest rates per se, since Article VI of the agreement deals with insurance on and
upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is
vague because it does not state if the "prevailing" CB rules and regulations referred to therein are
those prevailing at the time of the execution of these contracts or at the time of the increase or
decrease of the interest rate. They insist that the bank's authority to escalate interest rates has
not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The
contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted
in favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it
does not make any reference to increases or decreases in the interest rate on loans. However,
paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and
therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest
charged on the obligation secured by this mortgage . . ., shall be subject, during the life of this
contract, to such an increase/decrease in accordance with prevailing rules, regulations and
circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the
Mortgagee (respondent bank) may prescribe for its debtors . . . ." 9 Contrary to petitioners'
allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below)
indicate that this provision is quite clear to them.
In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence ruled that in
general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses
Salazar, 11 the Court reiterated the rule that escalation clauses are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in long term
contracts.
Application of the Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for
resigned employees, it could not apply as to petitioner-employee because nowhere in the loan
agreement or mortgage contract is it provided that petitioner-wife's resignation will be a ground for
the adjustment of interest rates, which is the very bedrock of and the raison d'etre specified in
said ManCom Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No.
2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest,
and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of
contracts, per Philippine National Bank vs. Court of Appeals. 12
What is actually central to the disposition of this case is not really the validity of the escalation
clause but theretroactive enforcement of the ManCom Resolution as against petitioner-employee.
In the case at bar, petitioners have put forth a telling argument that there is in fact no Central
Bank rule, regulation or other issuance which would have triggered an application of the
escalation clause as to her factual situation.
In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed

the bank from increasing the interest rate on the subject loan from 12% to 17% despite an
escalation clause in the loan agreement authorizing the bank to "correspondingly increase the
interest rate stipulated in this contract without advance notice to me/us in the event a law should
be enacted increasing the lawful rates of interest that may be charged on this particular kind of
loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates.
The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an
administrative regulation.
In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate imposed by the
petitioner-bank therein, on the ground, among others, that said bank relied merely on its own
Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which
were neither laws nor resolutions of the Monetary Board.
In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on
January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued
February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest
rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in
1982. These and other relevant CB issuances had already come into existence prior to the
perfection of the housing loan agreement and mortgage contract, and thus it may be said that
these regulations had been taken into consideration by the contracting parties when they first
entered into their loan contract. In light of the CB issuances in force at that time, respondent bank
was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the
housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly
agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is
passed authorizing an increase (or decrease) in the rate on such employee loans and the
Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were concerned,
all other onerous factors, such as employee resignations, which could have been used to trigger
an application of the escalation clause were considered barred or waived. If the intention were
otherwise, they especially respondent bank should have included such factors in their loan
agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board,
cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate increase be in accordance
with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund
Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in
this case. As a matter of fact, the said escalation clause further provides that the increased
interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized
by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will
never become effective.
We have already mentioned (and now reiterate our holding in several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus,
petitioners' contention that the escalation clause is violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and imposition
of increased interest rates by the herein respondent bank is obviously violative of the principle of
mutuality of contractsordained in Article 1308 of the Civil Code. As this Court held in PNB: 16
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. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties,
is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the
PNB a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where
the parties do not bargain on equal footing, the weaker party's (the debtor)
participation being reduced to the alternative "to take it or leave it" (Qua vs. Law
Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for

the weaker party whom the courts of justice must protect against abuse and
imposition.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a
former bank employee was very knowledgeable concerning respondent bank's lending rates and
procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as
the subject loan contract was concerned. That may have been true insofar as entering into the
original loan agreement and mortgage contract was concerned. However, that does not hold true
when it comes to the determination and imposition of escalated rates of interest as unilaterally
provided in the ManCom Resolution, where she had no voice at all in its preparation and
application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this
"sweetheart loan" at patently concessionary interest rates, which according to respondent bank is
the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985
lending rates in the banking industry were peaking well over 30% p.a., 17 we need only point out
that the bank had the option to impose in its loan contracts the condition that resignation of an
employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live
with such omission. And it would be totally unfair to now impose said condition, not to mention
that it would violate the principle of mutuality of consent in contracts. It goes without saying that
such escalation ground can be included in future contracts not to agreements already validly
entered into.
Let it be clear that this Court understands respondent bank's position that the concessional
interest rate was really intended as a means to remunerate its employees and thus an escalation
due to resignation would have been a valid stipulation. But no such stipulation was in fact made,
and thus the escalation provision could not be legally applied and enforced as against herein
petitioners.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS
ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing
loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
FIRST DIVISION
REYNALDO VILLANUEVA, G.R. NO. 154493
Petitioner,
Present:
PANGANIBAN, C.J.
(Chairperson)
YNARES-SANTIAGO,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.
PHILIPPINE NATIONAL BANK
(PNB),
Respondent. Promulgated:
December 6, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
AUSTRIA-MARTINEZ, J.:
The Petition for Review on Certiorari under Rule 45 before this Court assails the January 29,
2002 Decision[1] and June 27, 2002 Resolution [2] of the Court of Appeals (CA) in CA-G.R. CV No.

52008[3] which reversed and set aside the September 14, 1995 Decision [4] of the Regional Trial
Court, Branch 22, General Santos City (RTC) in Civil Case No. 4553.
As culled from the records, the facts are as follows:
The Special Assets Management Department (SAMD) of the Philippine National Bank (PNB)
issued an advertisement for the sale thru bidding of certain PNB properties
inCalumpang, General Santos City, including Lot No. 17, covered by TCT No. T-15042, consisting
of 22,780 square meters, with an advertised floor price of P1,409,000.00, and Lot No. 19,
covered by TCT No. T-15036, consisting of 41,190 square meters, with an advertised floor price
of P2,268,000.00.[5] Bidding was subject to the following conditions: 1) that cash bids be
submitted not later than April 27, 1989; 2) that said bids be accompanied by a 10% deposit in
managers or cashiers check; and 3) that all acceptable bids be subject to approval by PNB
authorities.
In a June 28, 1990 letter[6] to the Manager, PNB-General Santos Branch, Reynaldo
Villanueva (Villanueva) offered to purchase Lot Nos. 17 and 19 for P3,677,000.00. He also
manifested that he was depositing P400,000.00 to show his good faith but with the understanding
that said amount may be treated as part of the payment of the purchase price only when his offer
is accepted by PNB. At the bottom of said letter there appears an unsigned marginal note stating
that P400,000.00 was deposited into Villanuevas account (Savings Account No. 43612) with
PNB-General Santos Branch. [7]
PNB-General Santos Branch forwarded the June 28, 1990 letter of Villanueva to Ramon Guevara
(Guevara), Vice President, SAMD.[8] On July 6, 1990, Guevara informed Villanueva that only Lot
No. 19 is available and that the asking price therefor is P2,883,300.00.[9] Guevara further wrote:

If our quoted price is acceptable to you, please submit a revised offer to

purchase. Sale shall be subject to our Board of Directors approval and to
other terms and conditions imposed by the Bank on sale of acquired
assets. [10] (Emphasis ours)
Instead of submitting a revised offer, Villanueva merely inserted at the bottom of
Guevaras letter a July 11, 1990 marginal note, which reads:
C O N F O R M E:
PRICE OF P2,883,300.00 (downpayment of P600,000.00 and the balance
payable in two (2) years at quarterly amortizations.) [11]
Villanueva paid P200,000.00 to PNB which issued O.R. No. 16997 to acknowledge receipt of the
partial payment deposit on offer to purchase. [12] On the dorsal portion of Official Receipt No.
16997, Villanueva signed a typewritten note, stating:
This is a deposit made to show the sincerity of my purchase offer with the
understanding that it shall be returned without interest if my offer is not favorably
considered or be forfeited if my offer is approved but I fail/refuse to push through
the purchase.[13]
Also, on July 24, 1990, P380,000.00 was debited from Villanuevas Savings Account No.
43612 and credited to SAMD.[14]
On October 11, 1990, however, Guevara wrote Villanueva that, upon orders of the PNB
Board of Directors to conduct another appraisal and public bidding of Lot No. 19,SAMD is
deferring negotiations with him over said property and returning his deposit of P580,000.00.
[15]
Undaunted, Villanueva attempted to deliver postdated checks covering the balance of the
purchase price but PNB refused the same.
Hence, Villanueva filed with the RTC a Complaint [16] for specific performance and
damages against PNB. In its September 14, 1995 Decision, the RTC granted the Complaint, thus:
WHEREFORE, judgment is rendered in favor of the plaintiff and against the
defendant directing it to do the following:
1. To execute a deed of sale in favor of the plaintiff over Lot 19 comprising 41,190

square meters situated at Calumpang, General Santos City covered by TCT No.
T-15036 after payment of the balance in cash in the amount of P2,303,300.00;
2. To pay the plaintiff P1,000,000.00 as moral damages; P500,000.00 as
attorneys fees, plus litigation expenses and costs of the suit.
SO ORDERED.[17]
The RTC anchored its judgment on the finding that there existed a perfected contract of sale
between PNB and Villanueva. It found:
The following facts are either admitted or undisputed:
xxx
The defendant through Vice-President Guevara negotiated with the plaintiff in
connection with the offer of the plaintiff to buy Lots 17 & 19. The offer of plaintiff
to buy, however, was accepted by the defendant only insofar as Lot 19 is
concerned as exemplified by its letter dated July 6, 1990 where the plaintiff
signified his concurrence after conferring with the defendants vice-president. The
conformity of the plaintiff was typewritten by the defendants own people where
the plaintiff accepted the price of P2,883,300.00. The defendant also issued a
receipt to the plaintiff on the same day when the plaintiff paid the amount
of P200,000.00 to complete the downpayment of P600,000.00 (Exhibit F &
Exhibit I). With this development, the plaintiff was also given the go signal by the
defendant to improve Lot 19 because it was already in effect sold to him and
because of that the defendant fenced the lot and completed his two houses on
the property.[18]
The RTC also pointed out that Villanuevas P580,000.00 downpayment was actually in the nature
of earnest money acceptance of which by PNB signified that there was already a sale. [19] The
RTC further cited contemporaneous acts of PNB purportedly indicating that, as early as July 25,
1990, it considered Lot 19 already sold, as shown by Guevaras July 25, 1990 letter (Exh. H)[20] to
another interested buyer.
PNB appealed to the CA which reversed and set aside the September 14, 1995 RTC Decision,
thus:
WHEREFORE, the appealed decision is REVERSED and SET ASIDE and
another rendered DISMISSING the complaint.
SO ORDERED.[21]
According to the CA, there was no perfected contract of sale because the July 6,
1990 letter of Guevara constituted a qualified acceptance of the June 28, 1990 offer of
Villanueva, and to which Villanueva replied on July 11, 1990 with a modified offer. The CA held:
In the case at bench, consent, in respect to the price and manner of its payment,
is lacking. The record shows that appellant, thru Guevaras July 6, 1990 letter,
made a qualified acceptance ofappellees letter-offer dated June 28, 1990 by
imposing an asking price of P2,883,300.00 in cash for Lot 19. The letter dated
July 6, 1990 constituted a counter-offer (Art. 1319, Civil Code), to
which appellee made a new proposal, i.e., to pay the amount of P2,883,300.00 in
staggered amounts, that is, P600,000.00 as downpayment and the balance
within two years in quarterly amortizations.
A qualified acceptance, or one that involves a new proposal, constitutes a
counter-offer and a rejection of the original offer (Art. 1319, id.). Consequently,
when something is desired which is not exactly what is proposed in the offer,
such acceptance is not sufficient to generate consent because any modification
or variation from the terms of the offer annuls the offer (Tolentino, Commentaries
and Jurisprudence on the Civil Code of the Philippines, 6th ed., 1996, p. 450,
cited in ABS-CBN Broadcasting Corporation v. Court of Appeals, et al., 301
SCRA 572).
Appellees new proposal, which constitutes a counter-offer, was not accepted by
appellant, its board having decided to have Lot 19 reappraised and sold thru
public bidding.
Moreover, it was clearly stated in Guevaras July 6, 1990 letter that the sale shall
be subject to our Board of Directors approval and to other terms and conditions
imposed by the Bank on sale of acquired assets.[22]

Villanuevas Motion for Reconsideration[23] was denied by the CA in its Resolution of June 27,
2002.
Petitioner Villanueva now assails before this Court the January 29, 2002 Decision and June 27,
2002 Resolution of the CA. He assigns five issues which may be condensed into two: first,
whether a perfected contract of sale exists between petitioner and respondent PNB; and second,
whether the conduct and actuation of respondent constitutes bad faith as to entitle petitioner to
moral and exemplary damages and attorneys fees.
The Court sustains the CA on both issues.
Contracts of sale are perfected by mutual consent whereby the seller obligates himself, for a price
certain, to deliver and transfer ownership of a specified thing or right to the buyer over which the
latter agrees.[24] Mutual consent being a state of mind, its existence may only be inferred from the
confluence of two acts of the parties: an offer certain as to the object of the contract and its
consideration, and an acceptance of the offer which is absolute in that it refers to the exact object
and consideration embodied in said offer.[25]While it is impossible to expect the acceptance
to echo every nuance of the offer, it is imperative that it assents to those points in the offer which,
under the operative facts of each contract, are not only material but motivating as well. Anything
short of that level of mutuality produces not a contract but a mere counter-offer awaiting
acceptance.[26] More particularly on the matter of the consideration of the contract, the offer and
its acceptance must be unanimous both on the rate of the payment and on its term. An
acceptance of an offer which agrees to the rate but varies the term is ineffective. [27]
To determine whether there was mutual consent between the parties herein, it is necessary to
retrace each offer and acceptance they made.
Respondent began with an invitation to bid issued in April 1989 covering several of its
acquired assets in Calumpang, General Santos City, including Lot No. 19 for which the floor price
was P2,268,000.00. The offer was subject to the condition that sealed bids, accompanied by a
10% deposit in managers or cashiers check, be submitted not later than 10 oclock in the morning
of April 27, 1989.
On June 28, 1990, petitioner made an offer to buy Lot No. 17 and Lot No. 19 for an
aggregate price of P3,677,000.00. It is noted that this offer exactly corresponded to the April 1989
invitation to bid issued by respondent in that the proposed aggregate purchase price for Lot Nos.
17 and 19 matched the advertised floor prices for the same properties. However, it cannot be said
that the June 28, 1990 letter of petitioner was an effective acceptance of the April 1989 invitation
to bid for, by its express terms, said invitation lapsed on April 27, 1989.[28] More than that, the April
1989 invitation was subject to the condition that all sealed bids submitted and accepted be
approved by respondents higher authorities.
Thus, the June 28, 1990 letter of petitioner was an offer to buy independent of the April
1989 invitation to bid. It was a definite offer as it identified with certainty the properties sought to
be purchased and fixed the contract price.
However, respondent replied to the June 28, 1990 offer with a July 6, 1990 letter that only
Lot No. 19 is available and that the price therefor is now P2,883,300.00. As the CA pointed out,
this reply was certainly not an acceptance of the June 28, 1990 offer but a mere counter-offer. It
deviated from the original offer on three material points: first, the object of the proposed sale is
now only Lot No. 19 rather than Lot Nos. 17 and 19; second, the area of the property to be sold is
still 41,190 sq. m but an 8,797-sq. m portion is now part of a public road; and third, the
consideration is P2,883,300 for one lot rather than P3,677,000.00 for two lots. More important,
this July 6, 1990 counter-offer imposed two conditions: one, that petitioner submit a revised offer
to purchase based on the quoted price; and two, that the sale of the property be approved by the
Board of Directors and subjected to other terms and conditions imposed by the Bank on the sale
of acquired assets.
In reply to the July 6, 1990 counter-offer, petitioner signed his July 11, 1990 conformity to the
quoted price of P2,883,300.00 but inserted the term downpayment of P600,000.00 and the
balance payable in two years at quarterly amortization. The CA viewed this July 11, 1990
conformity not as an acceptance of the July 6, 1990 counter-offer but a further counter-offer for,
while petitioner accepted the P2,883,300.00 price for Lot No. 19, he qualified his acceptance by
proposing a two-year payment term.
Petitioner does not directly impugn such reasoning of the CA. He merely questions it for
taking up the issue of whether his July 11, 1990 conformity modified the July 6, 1990 counter-offer
as this was allegedly never raised during the trial nor on appeal.[29]
Such argument is not well taken. From beginning to end, respondent denied that a
contract of sale with petitioner was ever perfected. [30] Its defense was broad enough to

encompass every issue relating to the concurrence of the elements of contract, specifically on
whether it consented to the object of the sale and its consideration. There was nothing to prevent
the CA from inquiring into the offers and counter-offers of the parties to determine whether there
was indeed a perfected contract between them.
Moreover, there is merit in the ruling of the CA that the July 11, 1990 marginal note was a
further counter-offer which did not lead to the perfection of a contract of sale between the
parties. Petitioners own June 28, 1990 offer quoted the price of P3,677,000.00 for two lots but
was silent on the term of payment. Respondents July 6, 1990 counter-offer quoted the price
of P2,833,300.00 and was also silent on the term of payment. Up to that point, the term or
schedule of payment was not on the negotiation table. Thus,when petitioner suddenly introduced
a term of payment in his July 11, 1990 counter-offer, he interjected into the negotiations a new
substantial matter on which the parties had no prior discussion and over which they must yet
agree.[31] Petitioners July 11, 1990 counter-offer, therefore, did not usher the parties beyond the
negotiation stage of contract making towards its perfection. He made a counter-offer that required
acceptance by respondent.
As it were, respondent, through its Board of Directors, did not accept this last counteroffer. As stated in its October 11, 1990 letter to petitioner, respondent ordered the reappraisal of
the property, in clear repudiation not only of the proposed price but also the term of payment
thereof.
Petitioner insists, however, that the October 11, 1990 repudiation was belated as
respondent had already agreed to his July 11, 1990 counter-offer when it accepted
hisdownpayment or earnest money of P580,000.00.[32] He cites Article 1482 of the Civil Code
where it says that acceptance of downpayment or earnest money presupposes the perfection of a
contract.
Not so. Acceptance of petitioners payments did not amount to an implied acceptance of
his last counter-offer.
To begin with, PNB-General Santos Branch, which accepted petitioners P380,000.00
payment, and PNB-SAMD, which accepted his P200,000.00 payment, had no authority to bind
respondent to a contract of sale with petitioner.[33] Petitioner is well aware of this. To recall,
petitioner sent his June 28, 1990 offer to PNB-General Santos Branch. Said branch did not act on
his offer except to endorse it to Guevarra. Thereafter, petitioner transacted directly with Guevarra.
Petitioner then cannot pretend that PNB-General Santos Branch had authority to accept his July
11, 1990 counter-offer by merely accepting his P380,000.00 payment.
Neither did SAMD have authority to bind PNB. In its April 1989 invitation to bid, as well as
its July 6, 1990 counter-offer, SAMD was always careful to emphasize that whatever offer is made
and entertained will be subject to the approval of respondents higher authorities. This is a
reasonable disclaimer considering the corporate nature of respondent. [34]
Moreover, petitioners payment of P200,000.00 was with the clear understanding that his July 11,
1990 counter-offer was still subject to approval by respondent. This is borne out by
respondents Exhibits 2-a and 2-b, which petitioner never controverted, where it appears on the
dorsal portion of O.R. No. 16997 that petitioner acceded that the amount he paid was a mere
x x x deposit made to show the sincerity of [his] purchase offer with the understanding that it shall
be returned without interest if [his] offer is not favorably considered x x x.[35] This was a clear
acknowledgment on his part that there was yet no perfected contract with respondent and that
even with the payments he had advanced, his July 11, 1990 counter-offer was still subject to
consideration by respondent.
Not only that, in the same Exh. 2-a as well as in his June 28, 1990 offer, petitioner referred to his
payments as mere deposits. Even O.R. No. 16997 refers to petitioners payment as mere deposit.
It is only in the debit notice issued by PNB-General Santos Branch where petitioners payment is
referred to as downpayment. But then, as we said, PNB-General Santos Branch has no authority
to bind respondent by its interpretation of the nature of the payment made by petitioner.
In sum, the amounts paid by petitioner were not in the nature of downpayment or earnest money
but were mere deposits or proof of his interest in the purchase of Lot No. 19. Acceptance of said
amounts by respondent does not presuppose perfection of any contract. [36]
It must be noted that petitioner has expressly admitted that he had withdrawn the entire amount
of P580,000.00 deposit from PNB-General Santos Branch. [37]
With the foregoing disquisition, the Court foregoes resolution of the second issue as it is evident
that respondent acted well within its rights when it rejected the last counter-offer of petitioner.
In fine, petitioners petition lacks merit.
WHEREFORE, the petition is DENIED. The Decision dated January
Resolution dated June 27, 2002 of the Court of Appeals are AFFIRMED.

29,

2002 and

No costs.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 193178

May 30, 2011

PHILIPPINE SAVINGS BANK, Petitioner,

vs.
SPOUSES ALFREDO M. CASTILLO AND ELIZABETH C. CASTILLO, and SPOUSES
ROMEO B. CAPATI and AQUILINA M. LOBO, Respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari 1 under Rule 45 of the Rules of Court, seeking to
partially reconsider and modify the Decision2 dated August 27, 2009 and the
Resolution3 dated August 4, 2010 of the Court of Appeals (CA) in CA-G.R. CV No. 86445.
Respondent spouses Alfredo M. Castillo and Elizabeth Capati-Castillo were the registered
owners of a lot located in Tondo, Manila, covered by Transfer Certificate of Title (TCT) No.
233242. Respondent spouses Romeo B. Capati and Aquilina M. Lobo were the registered
owners of another lot, covered by TCT No. 227858, also located in Tondo, Manila.
On May 7, 1997, respondents obtained a loan, with real estate mortgage over the said
properties, from petitioner Philippine Savings Bank, as evidenced by a Promissory Note with
a face value of P2,500,000.00. The Promissory Note, in part, reads:
FOR VALUE RECEIVED, I/We, solidarily, jointly and severally, promise to pay to the order of
PHILIPPINE SAVINGS BANK, at its head office or at the above stated Branch the sum of
TWO MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P2,500,000.00), Philippine
currency, with interest at the rate of seventeen per centum (17%) per annum, from date until
paid, as follows:
P43,449.41 (principal and interest) monthly for fifty nine (59) months starting June 07, 1997
and every 7th day of the month thereafter with balloon payment on May 07, 2002.
Also, the rate of interest herein provided shall be subject to review and/or adjustment every
ninety (90) days.
All amortizations which are not paid on due date shall bear a penalty equivalent to three
percent (3%) of the amount due for every month or fraction of a months delay.
The rate of interest and/or bank charges herein stipulated, during the terms of this
promissory note, its extensions, renewals or other modifications, may be increased,
decreased or otherwise changed from time to time within the rate of interest and charges
allowed under present or future law(s) and/or government regulation(s) as the PHILIPPINE
SAVINGS BANK may prescribe for its debtors.
Upon default of payment of any installment and/or interest when due, all other installments
and interest remaining unpaid shall immediately become due and payable. Also, said interest
not paid when due shall be added to, and become part of the principal and shall likewise
bear interest at the same rate herein provided.4
From the release of the loan in May 1997 until December 1999, petitioner had increased and

decreased the rate of interest, the highest of which was 29% and the lowest was 15.5% per
annum, per the Promissory Note.
Respondents were notified in writing of these changes in the interest rate. They neither gave
their confirmation thereto nor did they formally question the changes. However, respondent
Alfredo Castillo sent several letters to petitioner requesting for the reduction of the interest
rates.5 Petitioner denied these requests.
Respondents regularly paid their amortizations until December 1999, when they defaulted
due to financial constraints. Per petitioners table of application of payment, respondents
outstanding balance wasP2,231,798.11.6 Petitioner claimed that as of February 11, 2000,
respondents had a total outstanding obligation of P2,525,910.29.7 Petitioner sent them
demand letters. Respondents failed to pay.
Thus, petitioner initiated an extrajudicial foreclosure sale of the mortgaged properties. The
auction sale was conducted on June 16, 2000, with the properties sold for P2,778,611.27
and awarded to petitioner as the only bidder. Being the mortgagee, petitioner no longer paid
the said amount but rather credited it to the loan amortizations and arrears, past due interest,
penalty charges, attorneys fees, all legal fees and expenses incidental to the foreclosure
and sale, and partial payment of the mortgaged debt. On even date, a certificate of sale was
issued and submitted to the Clerk of Court and to the Ex-Officio Sheriff of Manila.
On July 3, 2000, the certificate of sale, sans the approval of the Executive Judge of the
Regional Trial Court (RTC), was registered with the Registry of Deeds of Manila.
Respondents failed to redeem the property within the one-year redemption period. However,
on July 18, 2001, Alfredo Castillo sent a letter to petitioner requesting for an extension of 60
days before consolidation of its title so that they could redeem the properties,
offering P3,000,000.00 as redemption price. Petitioner conceded to Alfredo Castillos
request, but respondents still failed to redeem the properties.
On October 1, 2001, respondents filed a case for Reformation of Instruments, Declaration of
Nullity of Notarial Foreclosure Proceedings and Certificate of Sale, Cancellation of
Annotations on TCT Nos. 233242 and 227858, and Damages, with a plea for the issuance of
a temporary restraining order (TRO) and/or writ of preliminary prohibitory injunction, with the
RTC, Branch 14, Manila.
On October 5, 2001, the RTC issued a TRO. Eventually, on October 25, 2001, it issued a writ
of preliminary injunction.
After trial, the RTC rendered its decision dated July 30, 2005, the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs, and against the
defendants in the following manner:
1. Declaring the questioned increases of interest as unreasonable, excessive and
arbitrary and ordering the defendant Philippine Savings Bank to refund to the
plaintiffs, the amount of interest collected in excess of seventeen percent (17%) per
annum;
2. Declaring the Extrajudicial Foreclosure conducted by the defendants on June 16,
2000 and the subsequent proceedings taken thereafter to be void ab initio. In this
connection, defendant Register of Deeds is hereby ordered to cause the cancellation
of the corresponding annotations at the back of Transfer Certificates of Title No.
227858 and 233242 in the name of Spouses Alfredo and Elizabeth Castillo and
Spouses Romeo Capati and Aquilina M. Lobo;
3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the amount of

Php50,000.00 as moral damages; Php50,000.00 as exemplary damages; and

attorneys fees in the amount of Php30,000.00 and Php3,000.00 per appearance.
4. Defendants counterclaims are hereby DISMISSED for lack of merit.
With costs against the defendant Philippine Savings Bank, Inc.
SO ORDERED.8
Petitioner filed a motion for reconsideration. The RTC partially granted the motion in its
November 30, 2005 Order, modifying the interest rate from 17% to 24% per annum. 9
Petitioner appealed to the CA. The CA modified the decision of the RTC, thus
WHEREFORE, in view of the foregoing, the Decision of the Regional Trial Court is hereby
AFFIRMED WITH MODIFICATIONS. The fallo shall now read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendants in the following manner:
1. Declaring the questioned increases of interest as unreasonable, excessive and
arbitrary and ordering the defendant Philippine Savings Bank to refund to the
plaintiffs, the amount of interest collected in excess of seventeen percent (17%) per
annum;
2. Declaring the Extrajudicial Foreclosure conducted by the defendants on June 16,
2000 and the subsequent proceedings taken thereafter to be valid[;]
3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the amount of Php
25,000.00 as moral damages; Php 50,000.00 as exemplary damages; and attorneys
fees in the amount of Php 30,000.00 and Php 3,000.00 per appearance;
4. Defendants counterclaims are hereby DISMISSED for lack of merit.
With costs against the defendant Philippine Savings Bank, Inc.
SO ORDERED.10
Hence, this petition anchored on the contention that the CA erred in: (1) declaring that the
modifications in the interest rates are unreasonable; and (2) sustaining the award of
damages and attorneys fees.
The petition should be partially granted.
The unilateral determination and imposition of the increased rates is violative of the principle
of mutuality of contracts under Article 1308 of the Civil Code, which provides that "[t]he
contract must bind both contracting parties; its validity or compliance cannot be left to the will
of one of them."11 A perusal of the Promissory Note will readily show that the increase or
decrease of interest rates hinges solely on the discretion of petitioner. It does not require the
conformity of the maker before a new interest rate could be enforced. Any contract which
appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any
stipulation regarding the validity or compliance of the contract left solely to the will of one of
the parties is likewise invalid.
Petitioner contends that respondents acquiesced to the imposition of the modified interest
rates; thus, there was no violation of the principle of mutuality of contracts. To buttress its
position, petitioner points out that the exhibits presented by respondents during trial
contained a uniform provision, which states:

The interest rate adjustment is in accordance with the Conformity Letter you have signed
amending your accounts interest rate review period from ninety (90) to thirty days. 12
It further claims that respondents requested several times for the reduction of the interest
rates, thus, manifesting their recognition of the legality of the said rates. It also asserts that
the contractual provision on the interest rates cannot be said to be lopsided in its favor,
considering that it had, on several occasions, lowered the interest rates.
We disagree. The above-quoted provision of respondents exhibits readily shows that the
conformity letter signed by them does not pertain to the modification of the interest rates, but
rather only to the amendment of the interest rate review period from 90 days to 30 days.
Verily, the conformity of respondents with respect to the shortening of the interest rate review
period from 90 days to 30 days is separate and distinct from and cannot substitute for the
required conformity of respondents with respect to the modification of the interest rate itself.
Moreover, respondents assent to the modifications in the interest rates cannot be implied
from their lack of response to the memos sent by petitioner, informing them of the
amendments. The said memos were in the nature of a proposal to change the contract with
respect to one of its significant components, i.e., the interest rates. As we have held, no one
receiving a proposal to change a contract is obliged to answer the proposal. 13Therefore,
respondents could neither be faulted, nor could they be deemed to have assented to the
modified interest rates, for not replying to the said memos from petitioner.
We likewise disagree with petitioners assertion that respondents recognized the legality of
the imposed interest rates through the letters requesting for the reduction of the rates. The
request for reduction of the interest does not translate to consent thereto. To be sure, a
cursory reading of the said letters would clearly show that Alfredo Castillo was, in fact,
questioning the propriety of the interest rates imposed on their loan, viz.:
The undersigned is a mortgagor of Philippine Savings Bank with an outstanding balance of
TWO MILLION FOUR HUNDRED THIRTY EIGHT THOUSAND SIX HUNDRED SIX and
63/100 (P2,438,606.63) at an interest rate of 26% per annum (as per April 6, 1997 inquiry to
Leo of the Accounting Dept.) and with a monthly amortization of FIFTY EIGHT THOUSAND
THREE HUNDRED FIFTY EIGHT AND 38/100 (P58,358.38).
I understand that the present interest rate is lower than the last months 27%. However, it
does not give our company any break from coping with our receivables. Our clients, Mercure
Philippine Village Hotel, Puerto Azul Beach Hotel, Grand Air Caterer, to name a few, did not
settle their obligation to us inspite of what was agreed upon during our meeting held last
February 1998. Their pledge of paying us at least ONE MILLION PESOS PER AFFILIATION,
which we allocate to pay our balance to your bank, was not a reliable deal to foresee
because, as of this very day, not even half of the amount assured to us was settled. This
situation puts the company in critical condition since we will again shoulder all the interests
imposed on our loans, while, we ourselves, did not impose any surcharge with our
receivables.
In connection with this, may I request for a reduction of interest rate, in my favor, i.e., from
26% to 21% per annum. If such appeal is granted to us, we are assuring you of our prompt
payment and keen observance to your rules and regulations. 14
The undersigned is a mortgagor of Philippine Savings Bank with an outstanding balance of
TWO MILLION FOUR HUNDRED THIRTY THREE THOUSAND EIGHTY FOUR and 73/100
(P2,433,084.73) at an interest rate of 22.5% per annum (as per April 24, 1998 memo faxed
to us) and with a monthly amortization of FIFTY TWO THOUSAND FIVE HUNDRED FIFTY
EIGHT AND 01/100 (P52,55[8].01).
Such reduction of interest rate is an effect of our currencys development. But based on our
inquiries and research to different financial institutions, the rate your bank is imposing to us is
still higher compared to the eighteen and a half percent (18.5%) others are asking. With this

situation, we are again requesting for a decrease on the interest rate, that is, from 22.5% to
18.5%. This figure stated is not fictitious since other banks advertising are published to
leading newspapers. The difference between your rate is visibly greater and has an immense
effect on our financial obligations.15
The undersigned is a mortgagor at Philippine Savings Bank with an outstanding balance of
TWO MILLION FOUR HUNDRED THOUSAND EIGHT HUNDRED ELEVEN and 03/100
(Php 2,40[0],811.03) at an interest rate of 21% per annum.
Letters of reconsideration were constantly sent to you to grant us lower interest rate.
However, no assistance with regard to that request has been extended to us. In view of this, I
am requesting for a transfer of our loan from PSBank Head Office to PSBank Mabini Branch.
This transfer is purposely intended for an appeal [for] a lower interest rate. 16
Being a mortgagor of PSBank, I have [been] repeatedly asking for a reduction of your
interest rate. However, my request has been denied since the term I started. Many banks
offer a much lower interest rate and fair business transactions (e.g. Development Bank of
Singapore [which] offers 13% p.a. interest rate).
In this connection, once more, I am requesting for a reduction of the interest rate applied to
my loan to maintain our business relationship.17
Basic is the rule that there can be no contract in its true sense without the mutual assent of
the parties. If this consent is absent on the part of one who contracts, the 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, the interest rate is
undeniably always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it produces no binding effect. 18
Escalation clauses are generally valid and do not contravene public policy. They are
common in credit agreements as means of maintaining fiscal stability and retaining the value
of money on long-term contracts. To prevent any one-sidedness that these clauses may
cause, we have held in Banco Filipino Savings and Mortgage Bank v. Judge Navarro 19 that
there should be a corresponding de-escalation clause that would authorize a reduction in the
interest rates corresponding to downward changes made by law or by the Monetary Board.
As can be gleaned from the parties loan agreement, a de-escalation clause is provided, by
virtue of which, petitioner had lowered its interest rates.
1avvphi1

Nevertheless, the validity of the escalation clause did not give petitioner the unbridled right to
unilaterally adjust interest rates. The adjustment should have still been subjected to the
mutual agreement of the contracting parties. In light of the absence of consent on the part of
respondents to the modifications in the interest rates, the adjusted rates cannot bind them
notwithstanding the inclusion of a de-escalation clause in the loan agreement.
The order of refund was based on the fact that the increases in the interest rate were null
and void for being violative of the principle of mutuality of contracts. The amount to be
refunded refers to that paid by respondents when they had no obligation to do so. Simply
put, petitioner should refund the amount of interest that it has illegally imposed upon
respondents. Any deficiency in the payment of the obligation can be collected by petitioner in
a foreclosure proceeding, which it already did.
On the matter of damages, we agree with petitioner. Moral damages are not recoverable
simply because a contract has been breached. They are recoverable only if the party from
whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive
or abusive. Likewise, a breach of contract may give rise to exemplary damages only if the
guilty party acted in a fraudulent or malevolent manner.20

In this case, we are not sufficiently convinced that fraud, bad faith, or wanton disregard of
contractual obligations can be imputed to petitioner simply because it unilaterally imposed
the changes in interest rates, which can be attributed merely to bad business judgment or
attendant negligence. Bad faith pertains to a dishonest purpose, to some moral obliquity, or
to the conscious doing of a wrong, a breach of a known duty attributable to a motive, interest
or ill will that partakes of the nature of fraud. Respondents failed to sufficiently establish this
requirement. Thus, the award of moral and exemplary damages is unwarranted. In the same
vein, respondents cannot recover attorneys fees and litigation expenses. Accordingly, these
awards should be deleted.21
However, as regards the above mentioned award for refund to respondents of their interest
payments in excess of 17% per annum, the same should include legal interest. In Eastern
Shipping Lines, Inc. v. Court of Appeals,22we have held that when an obligation is breached,
and it consists in the payment of a sum of money, the interest on the amount of damages
shall be at the rate of 12% per annum, reckoned from the time of the filing of the complaint. 23
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Decision dated August
27, 2009 and the Resolution dated August 4, 2010 of the Court of Appeals in CA-G.R. CV
No. 86445 are AFFIRMED WITH MODIFICATIONS, such that the award for moral damages,
exemplary damages, attorneys fees, and litigation expenses is DELETED, and the order of
refund in favor of respondents of interest payments made in excess of 17% per annum shall
bear interest of 12% per annum from the time of the filing of the complaint until its full
satisfaction.
SO ORDERED.