THIRD DIVISION

[G.R. No. 131622. November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO

FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES
VERONICA R. GONZALES and DANILO G. GONZALES, JR., doing
lending business under the trade name and style "GONZALES
CREDIT ENTERPRISES", respondents.

DECISION
PARDO, J.:

The case before the Court is a petition for review on certiorari, under Rule 45 of the
Revised Rules of Court, seeking to set aside the decision of the Court of Appeals, [1] and its
resolution denying reconsideration,[2] the dispositive portion of which decision reads as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED
such that defendants are hereby ordered to pay the plaintiff: the sum
of P500,000.00, plus 5.5% per month interest and 2% service charge
per annum effective July 23, 1986, plus 1% per month of the total
amount due and demandable as penalty charges effective August 23,
1986, until the entire amount is fully paid.
"The award to the plaintiff of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the defendants.

SO ORDERED."[3]

The Court required the respondents to comment on the petition,[4] which was filed on April 3,
1998,[5] and the petitioners to reply thereto, which was filed on May 29, 1998. [6] We now resolve
to give due course to the petition and decide the case.
The facts of the case, as found by the Court of Appeals in its decision, which are considered
binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as
follows:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the
amount of P90,000.00, payable in two months, at 6% interest per month. They executed a
promissory note to evidence the loan, maturing on January 19, 1986. They received
only P84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the
amount of P300,000.00, maturing in one month, secured by a real estate mortgage over a
property belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in
favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July
11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds of the
loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica
another loan in the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00,
payable on August 23, 1986. The executed a promissory note, reading as follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"P500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the
order of VERONICA R. GONZALES doing business in the business style of
GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to
Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE
HUNDRED THOUSAND ..... (P500,000.00) Philippine
Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2
% service charge per annum from date hereof until fully paid according to the
amortization schedule contained herein.(Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the
other installments together with all interest accrued shall immediately be due
and payable and I/WE hereby agree to pay
an additional amount equivalent to one per cent (1%) per month of the amount
dueand demandable as penalty charges in the form of liquidated damages until
fully paid; and the
further sum of TWENTY FIVE PER CENT (25%) thereon in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total
 amount due and demandable, exclusive of costs and judicial or extra judicial
expenses. (Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is
increased by law or the Central Bank of the Philippines, the holder shall have
the option to apply and collect the increased interest charges without notice
although the original interest have already been collected wholly or partially
unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that
the amount of peso-obligation under this agreement is based on the present
value of peso, and if there be any change in the value thereof, due to
extraordinary inflation or deflation, or any other cause or reason, then the
peso-obligation herein contracted shall be adjusted in accordance with the
value of the peso then prevailing at the time of the complete fulfillment of
obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments
and grant renewals of this note or extension of payments, reserving rights
against each and all indorsers and all parties to this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the
debtors waive all his/their rights under the provisions of Section 12, Rule 39,
of the Revised Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus
interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales,
filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for
collection of the full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received
the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed
in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a
witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged
that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the
plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is
excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge
of 1% per month; that the stipulation for attorney's fees of 25% ofthe amount due is
unconscionable, illegal and excessive, and that substantial payments made were applied to
interest, penalties and other charges.
 After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to
the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the
"legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum."[7]
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion
of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally,
to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from
November 7, 1985 and 1% per month as penalty, until the entire amount is paid in
full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs,
jointly and severally the amount of P84,000.00 with 12% interest per annum and 1%
per cent per month as penalty from November 19,1985 until the whole amount is fully
paid;

"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount
of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July
11, 1986, until the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount
of P50,000.00 as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants." [8]

In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all
the unpaid loans of the defendants, is the law that governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of
money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest
rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury
Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of
Circular No. 905, the lender and borrower could agree on any interest that may be charged on the
loan".[9] The Court of Appeals further held that "the imposition of 'an additional amount
equivalent to 1% per month of the amount due and demandable as penalty charges in the form of
liquidated damages until fully paid' was allowed by law".[10]
 Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing
that of the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED
such that defendants are hereby ordered to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month interest and 2% service charge
per annum effective July 23, 1986, plus 1% per month of the total
amount due and demandable as penalty charges effective August 24,
1986, until the entire amount is fully paid.
"The award to the plaintiffs of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the defendants.
"SO OREDERED."[11]
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said
decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion.[12]
Hence, defendants interposed the present recourse via petition for review on certiorari.[13]
We find the petition meritorious.
Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the
question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan
in the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words,
is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905,
adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D.
No. 1684?
We agree with petitioners that the stipulated rate of interest at 5.5% per month on
the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant.13 However, we can
not consider the rate "usurious" because this Court has consistently held that Circulr No. 905 of
the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Law[14] and that the Usury Law is now "legally inexistent".[15]
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61[16] the
Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular can
not repeal a law. Only a law can repeal another law."[17] In the recent case of Florendo vs. Court of
Appeals[18], the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has
been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest can
now be charged as lender and borrower may agree upon."[19]
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by
the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals
("contra bonos mores"), if not against the law.[20] The stipulation is void.[21] The courts shall
reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable.[22]
 Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather,
we agree with the trial court that, under the circumstances, interest at 12% per annum, and an
additional 1% a month penalty charge as liquidated damages may be more reasonable.
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court
of Appeals promulgated on March 21, 1997, and its resolution dated November 25,
1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated December
9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No.
134-M-90, involving the same parties.
No pronouncement as to costs in this instance
SO ORDERED.
Narvasa, C.J. (Chairman), Romero, Kapunan, and Purisima, JJ., concur.

THIRD DIVISION

[G.R. No. 146942. April 22, 2003]

CORAZON G. RUIZ, petitioner, vs. COURT OF APPEALS and

CONSUELO TORRES, respondents.

DECISION
PUNO, J.:

On appeal is the decision of the Court of Appeals in CA-G.R. CV No.

[1]

56621 dated 25 August 2000, setting aside the decision of the trial court[2]

dated 19 May 1997 and lifting the permanent injunction on the foreclosure
sale of the subject lot covered by TCT No. RT-96686, as well as its
subsequent Resolution dated 26 January 2001, denying petitioners Motion
[3]

for Reconsideration.
The facts of the case are as follows:
Petitioner Corazon G. Ruiz is engaged in the business of buying and
selling jewelry. She obtained loans from private respondent Consuelo Torres
[4]

on different occasions, in the following

amounts: P100,000.00; P200,000.00; P300,000.00; and P150,000.00. Prior to [5]
their maturity, the loans were consolidated under one (1) promissory note
dated March 22, 1995, which reads as follows: [6]

P750,000.00 Quezon City, March 22, 1995

PROMISSORYNOTE

For value received, I, CORAZON RUIZ, as principal and ROGELIO RUIZ as surety
in solidum, jointly and severally promise to pay to the order of CONSUELO P.
TORRES the sum of SEVEN HUNDRED FIFTY THOUSAND PESOS
(P750,000.00) Philippine Currency, to earn an interest at the rate of three per cent
(3%) a month, for thirteen months, payable every _____ of the month, and to start
on April 1995 and to mature on April 1996, subject to renewal.

If the amount due is not paid on date due, a SURCHARGE of ONE PERCENT of the
principal loan, for every month default, shall be collected.

Remaining balance as of the maturity date shall earn an interest at the rate of ten
percent a month, compounded monthly.

It is finally agreed that the principal and surety in solidum, shall pay attorneys fees at
the rate of twenty-five percent (25%) of the entire amount to be collected, in case this
note is not paid according to the terms and conditions set forth, and same is referred to
a lawyer for collection.

In computing the interest and surcharge, a fraction of the month shall be considered
one full month.

In the event of an amicable settlement, the principal and surety in solidum shall
reimburse the expenses of the plaintiff.

(Sgd.) Corazon Ruiz __________________

Principal Surety

The consolidated loan of P750,000.00 was secured by a real estate

mortgage on a 240-square meter lot in New Haven Village, Novaliches,
Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-96686, and
registered in the name of petitioner. The mortgage was signed by Corazon
[7]

Ruiz for herself and as attorney-in-fact of her husband Rogelio. It was

executed on 20 March 1995, or two (2) days before the execution of the
subject promissory note. [8]
 Thereafter, petitioner obtained three (3) more loans from private
respondent, under the following promissory notes: (1) promissory note dated
21 April 1995, in the amount of P100,000.00; (2) promissory note dated May
[9]

23, 1995, in the amount of P100,000.00; and (3) promissory note dated
[10]

December 21, 1995, in the amount of P100,000.00. These combined loans [11]

of P300,000.00 were secured by P571,000.00 worth of jewelry pledged by

petitioner to private respondent. [12]

From April 1995 to March 1996, petitioner paid the stipulated 3% monthly
interest on the P750,000.00 loan, amounting to P270,000.00. After March
[13] [14]

1996, petitioner was unable to make interest payments as she had difficulties
collecting from her clients in her jewelry business. [15]

Due to petitioners failure to pay the principal loan of P750,000.00, as well

as the interest payment for April 1996, private respondent demanded payment
not only of the P750,000.00 loan, but also of the P300,000.00 loan. When [16]

petitioner failed to pay, private respondent sought the extra-judicial foreclosure

of the aforementioned real estate mortgage. [17]

On September 5, 1996, Acting Clerk of Court and Ex-Officio Sheriff Perlita

V. Ele, Deputy Sheriff In-Charge Rolando G. Acal and Supervising Sheriff
Silverio P. Bernas issued a Notice of Sheriffs Sale of subject lot. The public
auction was scheduled on October 8, 1996. [18]

On October 7, 1996, one (1) day before the scheduled auction sale,
petitioner filed a complaint with the RTC of Quezon City docketed as Civil
Case No. Q-96-29024, with a prayer for the issuance of a Temporary
Restraining Order to enjoin the sheriff from proceeding with the foreclosure
sale and to fix her indebtedness to private respondent to P706,000.00. The
computed amount of P706,000.00 was based on the aggregate loan
of P750,000.00, covered by the March 22, 1995 promissory note, plus the
other loans of P300,000.00, covered by separate promissory notes, plus
interest, minus P571,000.00 representing the amount of jewelry pledged in
favor of private respondent.[19]

The trial court granted the prayer for the issuance of a Temporary
Restraining Order, and on 29 October 1996, issued a writ of preliminary
[20]

injunction. In its Decision dated May 19, 1997, it ordered the Clerk of Court
[21]

and Ex-Officio Sheriff to desist with the foreclosure sale of the subject
property, and it made permanent the writ of preliminary injunction. It held that
the real estate mortgage is unenforceable because of the lack of the
participation and signature of petitioners husband. It noted that although the
subject real estate mortgage stated that petitioner was attorney-in-fact for
herself and her husband, the Special Power of Attorney was never presented
in court during the trial. [22]

The trial court further held that the promissory note in question is a
unilateral contract of adhesion drafted by private respondent. It struck down
the contract as repugnant to public policy because it was imposed by a
dominant bargaining party (private respondent) on a weaker party (petitioner).
Nevertheless, it held that petitioner still has an obligation to pay the private
[23]

respondent. Private respondent was further barred from imposing on

petitioner the obligation to pay the surcharge of one percent (1%) per month
from March 1996 onwards, and interest of ten percent (10%) a month,
compounded monthly from September 1996 to January 1997. Petitioner was
thus ordered to pay the amount of P750,000.00 plus three percent (3%)
interest per month, or a total of P885,000.00, plus legal interest from date of
[receipt of] the decision until the total amount of P885,000.00 is paid.
[24]

Aside from the foregoing, the trial court took into account petitioners
proposal to pay her other obligations to private respondent in the amount
of P392,000.00. [25]

The trial court also recognized the expenses borne by private respondent
with regard the foreclosure sale and attorneys fees. As the notice of the
foreclosure sale has already been published, it ordered the petitioner to
reimburse private respondent the amount of P15,000.00 plus attorneys fees of
the same amount. [26]

Thus, the trial court computed petitioners obligation to private respondent,

as follows:

Principal Loan . P 750,000.00

Interest.. 135,000.00

Other Loans..392,000.00

Publication Fees.15,000.00

Attorneys Fees 15,000.00

TOTAL P1,307,000.00

with legal interest from date of receipt of decision until payment of total
amount of P1,307,000.00 has been made. [27]
 Private respondents motion for reconsideration was denied in an Order
dated July 21, 1997.
Private respondent appealed to the Court of Appeals. The appellate court
set aside the decision of the trial court. It ruled that the real estate mortgage is
valid despite the non-participation of petitioners husband in its execution
because the land on which it was constituted is paraphernal property of
petitioner-wife. Consequently, she may encumber the lot without the consent
of her husband. It allowed its foreclosure since the loan it secured was not
[28]

paid.
Nonetheless, the appellate court declared as invalid the 10% compounded
monthly interest and the 10% surcharge per month stipulated in the
[29]

promissory notes dated May 23, 1995 and December 1, 1995, and so too the
[30]

1% compounded monthly interest stipulated in the promissory note dated 21

April 1995, for being excessive, iniquitous, unconscionable, and contrary to
[31]

morals. It held that the legal rate of interest of 12% per annum shall apply
after the maturity dates of the notes until full payment of the entire amount
due, and that the only permissible rate of surcharge is 1% per month, without
compounding. The appellate court also granted attorneys fees in the amount
[32]

of P50,000.00, and not the stipulated 25% of the amount due, following the
ruling in the case of Medel v. Court of Appeals. [33]

Now, before this Court, petitioner assigns the following errors:

(1) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

RULING THAT THE PROMISSORY NOTE OF P750,000.00 IS NOT A
CONTRACT OF ADHESION DESPITE THE CLEAR SHOWING THAT THE
SAME IS A READY-MADE CONTRACT PREPARED BY (THE) RESPONDENT
CONSUELO TORRES AND DID NOT REFLECT THEIR TRUE INTENTIONS AS
IT WEIGHED HEAVILY IN FAVOR OF RESPONDENT AND AGAINST
PETITIONER.

(2) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

DECLARING THAT THE PROPERTY COVERED BY THE SUBJECT DEED OF
MORTGAGE OF MARCH 20, 1995 IS A PARAPHERNAL PROPERTY OF THE
PETITIONER AND NOT CONJUGAL EVEN THOUGH THE ISSUE OF
WHETHER OR NOT THE MORTGAGED PROPERTY IS PARAPHERNAL WAS
NEVER RAISED, NOR DISCUSSED AND ARGUED BEFORE THE TRIAL
COURT.

(3) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

DISREGARDING THE TRIAL COURTS COMPUTATION OF THE ACTUAL
OBLIGATIONS OF THE PETITIONER WITH (THE) RESPONDENT TORRES
EVEN THOUGH THE SAME IS BASED ON EVIDENCE SUBMITTED BEFORE
IT.

The pertinent issues to be resolved are:

(1) Whether the promissory note of P750,000.00 is a contract of adhesion;
(2) Whether the real property covered by the subject deed of mortgage
dated March 20, 1995 is paraphernal property of petitioner; and
(3) Whether the rates of interests and surcharges on the obligation of
petitioner to private respondent are valid.
I

We hold that the promissory note in the case at bar is not a contract of
adhesion. In Sweet Lines, Inc. vs. Teves, this Court discussed the nature of
[34]

a contract of adhesion as follows:

. . . there are certain contracts almost all the provisions of which have been drafted
only by one party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the other party is the signing of his
signature or his adhesion thereto. Insurance contracts, bills of lading, contracts of sale
of lots on the installment plan fall into this category.[35]

. . . it is drafted only by one party, usually the corporation, and is sought to be

accepted or adhered to by the other party . . . who cannot change the same and who
are thus made to adhere hereto on the take it or leave it basis . . .
[36]

In said case of Sweet Lines, the conditions of the contract on the 4 x 6

[37]

inches passenger ticket are in fine print. Thus we held:

. . . it is hardly just and proper to expect the passengers to examine their tickets
received from crowded/congested counters, more often than not during rush hours, for
conditions that may be printed thereon, much less charge them with having consented
to the conditions, so printed, especially if there are a number of such conditions in fine
print, as in this case.
[38]

We further stressed in the said case that the questioned Condition No. 14
was prepared solely by one party which was the corporation, and the other
party who was then a passenger had no say in its preparation. The
passengers have no opportunity to examine and consider the terms and
conditions of the contract prior to the purchase of their tickets. [39]
 In the case at bar, the promissory note in question did not contain any fine
print provision which could not have been examined by the
petitioner. Petitioner had all the time to go over and study the stipulations
embodied in the promissory note. Aside from the March 22, 1995 promissory
note for P750,000.00, three other promissory notes of different dates and
amounts were executed by petitioner in favor of private respondent. These
promissory notes contain similar terms and conditions, with a little variance in
the terms of interests and surcharges. The fact that petitioner and private
respondent had entered into not only one but several loan transactions shows
that petitioner was not in any way compelled to accept the terms allegedly
imposed by private respondent. Moreover, petitioner, in her complaint dated [40]

October 7, 1996 filed with the trial court, never claimed that she was forced to
sign the subject note. Paragraph five of her complaint states:

That on or about March 22, 1995 plaintiff was required by the defendant Torres to
execute a promissory note consolidating her unpaid principal loan and interests which
said defendant computed to be in the sum of P750,000.00 . . .

To be required is certainly different from being compelled. She could have

rejected the conditions made by private respondent. As an experienced
business- woman, she ought to understand all the conditions set forth in the
subject promissory note. As held by this Court in Lee, et al. vs. Court of
Appeals, et al., it is presumed that a person takes ordinary care of his
[41]

concerns. Hence, the natural presumption is that one does not sign a
[42]

document without first informing himself of its contents and

consequences. This presumption acquires greater force in the case at bar
where not only one but several documents were executed at different times by
petitioner in favor of private respondent.
II

We also affirm the ruling of the appellate court that the real property
covered by the subject deed of mortgage is paraphernal property. The
property subject of the mortgage is registered in the name of Corazon G.
Ruiz, of legal age, married to Rogelio Ruiz, Filipinos. Thus, title is registered in
the name of Corazon alone because the phrase married to Rogelio Ruiz is
merely descriptive of the civil status of Corazon and should not be construed
to mean that her husband is also a registered owner. Furthermore, registration
of the property in the name of Corazon G. Ruiz, of legal age, married to
Rogelio Ruiz is not proof that such property was acquired during the marriage,
and thus, is presumed to be conjugal. The property could have been acquired
by Corazon while she was still single, and registered only after her marriage to
Rogelio Ruiz. Acquisition of title and registration thereof are two different acts.
 The presumption under Article 116 of the Family Code that properties
[43]

acquired during the marriage are presumed to be conjugal cannot apply in the
instant case. Before such presumption can apply, it must first be established
that the property was in fact acquired during the marriage. In other words,
proof of acquisition during the marriage is a condition sine qua non for the
operation of the presumption in favor of conjugal ownership. No such proof
[44]

was offered nor presented in the case at bar. Thus, on the basis alone of the
certificate of title, it cannot be presumed that said property was acquired
during the marriage and that it is conjugal property. Since there is no showing
as to when the property in question was acquired, the fact that the title is in
the name of the wife alone is determinative of its nature as paraphernal, i.e.,
belonging exclusively to said spouse. The only import of the title is that
[45]

Corazon is the owner of said property, the same having been registered in her
name alone, and that she is married to Rogelio Ruiz. [46]

III

We now resolve the issue of whether the rates of interests and surcharges
on the obligation of petitioner to private respondent are legal.
The four (4) unpaid promissory notes executed by petitioner in favor of
private respondent are in the following amounts and maturity dates:
(1) P750,000.00, dated March 22, 1995 matured on April 21, 1996;
(2) P100,000.00, dated April 21, 1995 matured on August 21, 1995;
(3) P100,000.00, dated May 23, 1995 matured on November 23, 1995;
and
(4) P100,000.00, dated December 21, 1995 matured on March 1, 1996.
The P750,000.00 promissory note dated March 22, 1995 has the following
provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at
maturity date;
(3) 1% surcharge on the principal loan for every month of default; and
(4) 25% attorneys fees.
The P100,000.00 promissory note dated April 21, 1995 has the following
provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
 (2) 10% monthly interest on the remaining balance at maturity date;
(3) 1% compounded monthly surcharge on the principal loan for every
month of default; and
(4) 10% attorneys fees.
The two (2) other P100,000.00 promissory notes dated May 23, 1995 and
December 1, 1995 have the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at
maturity date;
(3) 10% surcharge on the principal loan for every month of default; and
(4) 10% attorneys fees.
We affirm the ruling of the appellate court, striking down as invalid the 10%
compounded monthly interest, the 10% surcharge per month stipulated in the
promissory notes dated May 23, 1995 and December 1, 1995, and the 1%
compounded monthly interest stipulated in the promissory note dated April 21,
1995. The legal rate of interest of 12% per annum shall apply after the
maturity dates of the notes until full payment of the entire amount due. Also,
the only permissible rate of surcharge is 1% per month, without
compounding. We also uphold the award of the appellate court of attorneys
fees, the amount of which having been reasonably reduced from the
stipulated 25% (in the March 22, 1995 promissory note) and 10% (in the other
three promissory notes) of the entire amount due, to a fixed amount
of P50,000.00. However, we equitably reduce the 3% per month or 36% per
annum interest present in all four (4) promissory notes to 1% per month or
12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel
vs. Court of Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar
[47] [48]

Development Corporation, and the recent case of Spouses Solangon vs.

[49]

Salazar. This Court invalidated a stipulated 5.5% per month or 66% per
[50]

annum interest on a P500,000.00 loan in Medel and a 6% per month or 72%

[51]

per annum interest on a P60,000.00 loan in Solangon for being excessive,

[52]

iniquitous, unconscionable and exorbitant. In both cases,we reduced the

interest rate to 12% per annum. We held that while the Usury Law has been
suspended by Central Bank Circular No. 905, s. 1982, effective on January 1,
1983, and parties to a loan agreement have been given wide latitude to agree
on any interest rate, still stipulated interest rates are illegal if they are
unconscionable. Nothing in the said circular grants lenders carte blanche
authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets. On the other hand,
[53]

in Bautista vs. Pilar Development Corp., this Court upheld the validity of a
[54]

21% per annum interest on a P142,326.43 loan, and in Garcia vs. Court of
Appeals, sustained the agreement of the parties to a 24% per annum interest
on an P8,649,250.00 loan.It is on the basis of these cases that we reduce the
36% per annum interest to 12%. An interest of 12% per annum is deemed fair
and reasonable. While it is true that this Court invalidated a much higher
interest rate of 66% per annum in Medel and 72% in Solangon it has
[55] [56]

sustained the validity of a much lower interest rate of 21% in Bautista and [57]

24% in Garcia. We still find the 36% per annum interest rate in the case at
[58]

bar to be substantially greater than those upheld by this Court in the two (2)
aforecited cases.
The 1% surcharge on the principal loan for every month of default is
valid. This surcharge or penalty stipulated in a loan agreement in case of
default partakes of the nature of liquidated damages under Art. 2227 of the
New Civil Code, and is separate and distinct from interest payment. Also [59]

referred to as a penalty clause, it is expressly recognized by law. It is an

accessory undertaking to assume greater liability on the part of an obligor in
case of breach of an obligation. The obligor would then be bound to pay the
[60]

stipulated amount of indemnity without the necessity of proof on the existence

and on the measure of damages caused by the breach. Although the courts
[61]

may not at liberty ignore the freedom of the parties to agree on such terms
and conditions as they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty, nevertheless, may
be equitably reduced if it is iniquitous or unconscionable. In the instant case,
[62]

the 10% surcharge per month stipulated in the promissory notes dated May
23, 1995 and December 1, 1995 was properly reduced by the appellate court.
In sum, petitioner shall pay private respondent the following:

1. Principal of loan under promissory note dated

March 22, 1995 ... P750,000.00

a. 1% interest per month on principal from March 22, 1995 until fully
paid, less P270,000.00 paid by petitioner as interest from April 1995
to March 1996

b. 1% surcharge per month on principal from May 1996 until fully

paid
2. Principal of loan under promissory note dated

April 21, 1995 .. P100,000.00

a. 1% interest per month on principal from April 21, 1995 until fully
paid

b. 1% surcharge per month on principal from September 1995 until

fully paid

3. Principal of loan under promissory note dated

May 23, 1995 .... P100,000.00

a. 1% interest per month on principal from May 23, 1995 until fully paid

b. 1% surcharge per month on principal from December 1995 until fully

paid

4. Principal of loan under promissory note dated

December 1, 1995 ... P100,000.00

a. 1% interest per month on principal from December 1, 1995 until

fully paid

b. 1% surcharge per month on principal from April 1996 until fully

paid

5. Attorneys fees...P 50,000.00

Hence, since the mortgage is valid and the loan it secures remains unpaid,
the foreclosure proceedings may now proceed.
IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is
AFFIRMED, subject to the MODIFICATION that the interest rate of 36% per
annum is ordered reduced to 12 % per annum.
SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales,
JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 187678 April 10, 2013

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the February 20, 2009 Decision 1 and April 27, 2009
Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision 3 of the Regional Trial Court (RTC) of Makati City, Branch 147.

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation (respondent) as evidenced by two Promissory Notes both dated
October 6, 1998 and numbered 507-001051-34 and 507-001052-0,5 for the sums of !!6,216,000 and ₱4, 139,000, respectively. The loan was secured by a Real Estate Mortgage
(REM) over petitioners’ property located at 49 Greensville St., White Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-41208 6 of
the Register of Deeds of Quezon City.

When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of the outstanding balance with accrued monthly interests. On September
5, 2000, petitioners received respondent’s last demand letter7 dated August 29, 2000.

As of February 23, 2001, the amount due on the two promissory notes totaled ₱19,201,776.63 representing the principal, interests, penalties and attorney’s fees. On the same
day, the mortgaged property was sold at public auction, with respondent as highest bidder for the amount of ₱10,300,000.

On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for the payment of ₱8,901,776.63, the amount of deficiency after applying the
proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent filed a collection suit in the trial court. In its Complaint, 10 respondent
prayed that judgment be rendered ordering the petitioners to pay jointly and severally: (1) ₱8,901,776.63 representing the amount of deficiency, plus interests at the legal rate,
from February 23, 2001 until fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3) an amount equivalent to 10%
of the foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of suit.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and affirmative defense, that the complaint states no cause of action
considering that the principal of the loan was already paid when the mortgaged property was extrajudicially foreclosed and sold for ₱10,300,000. Petitioners contended that
should they be held liable for any deficiency, it should be only for ₱55,000 representing the difference between the total outstanding obligation of ₱10,355,000 and the bid price
of ₱10,300,000. Petitioners also argued that even assuming there is a cause of action, such deficiency cannot be enforced by respondent because it consists only of the penalty
and/or compounded interest on the accrued interest which is generally not favored under the Civil Code. By way of counterclaim, petitioners prayed that respondent be ordered
to pay ₱100,000 in attorney’s fees and costs of suit.

At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She testified that she handled the account of petitioners and assisted them in
processing their loan application. She called them monthly to inform them of the prevailing rates to be used in computing interest due on their loan. As of the date of the public
auction, petitioners’ outstanding balance was ₱19,201,776.6312 based on the following statement of account which she prepared:

STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO

PN# 507-0010520 due on 04-07-2004

1âwphi1

Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00

Interest on ₱4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96

Interest on ₱4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99

Interest on ₱4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27

Interest on ₱4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64

 Interest on ₱4,139,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86

Penalty charge @ 1/10 of 1% of the total amount due

(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73

PN# 507-0010513 due on 04-07-2004

Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00

Interest on ₱6,216,000.00 fr. 06-Oct-99

04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62

Interest on ₱6,216,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51

Interest on ₱6,216,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86

Interest on ₱6,216,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18

Interest on ₱6,216,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07

Penalty charge @ 1/10 of 1% of the total amount due

(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39) 17,456,160.57

Add: 10% Attorney’s Fee 1,745,616.06

Total amount due 19,201,776.63

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT AS OF

FEB. 23, 2001 8,901,776.63 13

Petitioners thereafter received a demand letter 14 dated May 2, 2001 from respondent’s counsel for the deficiency amount of ₱8,901,776.63. Ms. Yu further testified that based on
the Statement of Account15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners was ₱15,190,961.48. 16

On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the prevailing market rate and she notified petitioners of the prevailing rate by
calling them monthly before their account becomes past due. When asked if there was any written authority from petitioners for respondent to increase the interest rate
unilaterally, she answered that petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing rate. 17

Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank promissory note and was informed that the interest rate on the loan will be
based on prevailing market rates. Every month, respondent informs him by telephone of the prevailing interest rate. At first, he was able to pay his monthly amortizations but
when he started to incur delay in his payments due to the financial crisis, respondent pressured him to pay in full, including charges and interests for the delay. His property was
eventually foreclosed and was sold at public auction.18

On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the business of distributing medical supplies. He admitted having read the
promissory notes and that he is aware of his obligation under them before he signed the same. 19

In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered ordering herein defendants to pay jointly and severally to plaintiff, the
following:

1. ₱8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus interest thereon at the legal rate after February 23, 2001;

2. An amount equivalent to 10% of the total amount due as and for attorney’s fees, there being stipulation therefor in the promissory notes;

3. Costs of suit.

SO ORDERED.20

The trial court agreed with respondent that when the mortgaged property was sold at public auction on February 23, 2001 for ₱10,300,000 there remained a balance of
₱8,901,776.63 since before foreclosure, the total amount due on the two promissory notes aggregated to ₱19,201,776.63 inclusive of principal, interests, penalties and
attorney’s fees. It ruled that the amount realized at the auction sale was applied to the interest, conformably with Article 1253 of the Civil Code which provides that if the debt
produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. This being the case, petitioners’ principal obligation
subsists but at a reduced amount of ₱8,901,776.63.

The trial court further held that Ignacio’s claim that he signed the promissory notes in blank cannot negate or mitigate his liability since he admitted reading the promissory notes
before signing them. It also ruled that considering the substantial amount involved, it is unbelievable that petitioners threw all caution to the wind and simply signed the
documents without reading and understanding the contents thereof. It noted that the promissory notes, including the terms and conditions, are pro forma and what appears to
have been left in blank were the promissory note number, date of the instrument, due date, amount of loan, and condition that interest will be at the prevailing rates. All of these
details, the trial court added, were within the knowledge of the petitioners.

When the case was elevated to the CA, the latter affirmed the trial court’s decision. The CA recognized respondent’s right to claim the deficiency from the debtor where the
proceeds of the sale in an extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt. Also, it found as valid the stipulation in the promissory notes that
interest will be based on the prevailing rate. It noted that the parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate offered daily by
all commercial banks as approved by the Monetary Board. Having signed the promissory notes, the CA ruled that petitioners are bound by the stipulations contained therein.

Petitioners are now before this Court raising the sole issue of whether the interest rates imposed upon them by respondent are valid. Petitioners contend that the interest rates
imposed by respondent are not valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation that was passed by an appropriate
government entity. They insist that the interest rates were unilaterally imposed by the bank and thus violate the principle of mutuality of contracts. They argue that the escalation
clause in the promissory notes does not give respondent the unbridled authority to increase the interest rate unilaterally. Any change must be mutually agreed upon.

Respondent, for its part, points out that petitioners failed to show that their case falls under any of the exceptions wherein findings of fact of the CA may be reviewed by this
Court. It contends that an inquiry as to whether the interest rates imposed on the loans of petitioners were supported by appropriate regulations from a government agency or
the Central Bank requires a reevaluation of the evidence on records. Thus, the Court would in effect, be confronted with a factual and not a legal issue.

The appeal is partly meritorious.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. Article 1956 of the Civil Code likewise ordains
that "no interest shall be due unless it has been expressly stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is
likewise, invalid.21

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. This Court has long recognized that there is nothing
inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term
contracts.22 Hence, such stipulations are not void per se.23

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to
assent to an important modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts. 24 Thus, this Court has previously nullified
the unilateral determination and imposition by creditor banks of increases in the rate of interest provided in loan contracts. 25

In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation clause stated: "I/We hereby authorize Banco Filipino 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." While escalation clauses in general are considered valid, we ruled that Banco Filipino may not increase the interest on respondent borrower’s loan, pursuant to Circular
No. 494 issued by the Monetary Board on January 2, 1976, because said circular is not a law although it has the force and effect of law and the escalation clause has no
provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board" (de-escalation clause).

Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that escalation clauses are valid stipulations but their enforceability are subject to certain
conditions. The increase of interest rate from 19% to 21% per annum made by petitioner bank was disallowed because it did not comply with the guidelines adopted by the
Monetary Board to govern interest rate adjustments by banks and non-banks performing quasi-banking functions.

In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes authorized PNB to increase the stipulated interest per annum "within the limits allowed
by law at any time depending on whatever policy PNB may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that
the applicable maximum interest rate is reduced by law or by the Monetary Board." This Court declared the increases (from 18% to 32%, then to 41% and then to 48%)
unilaterally imposed by PNB to be in violation of the principle of mutuality essential in contracts. 29

A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement provided that "PNB 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: Provided, that the interest rate on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest is reduced by law or by the Monetary Board x x x".

Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest rate at any time without notice, within the limits allowed by law. The Court
observed that there was no attempt made by PNB to secure the conformity of respondent borrower to the successive increases in the interest rate. The borrower’s assent to the
increases cannot be implied from their lack of response to the letters sent by PNB, informing them of the increases. 31

In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA in declaring as unreasonable the following escalation clause: "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 PSBank may prescribe for its debtors."
Clearly, the increase or decrease of interest rates under such clause hinges solely on the discretion of petitioner as it does not require the conformity of the maker before a new
interest rate could be enforced. We also said that 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, nor from the letters requesting for reduction of the rates. Thus:
… 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. 33

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in the stipulated rate of interest without the express
conformity of the debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly would completely take away from the debtors the right to
assent to an important modification in their agreement and would also negate the element of mutuality in their contracts. 34While a ceiling on interest rates under the Usury Law
was already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets."35

The two promissory notes signed by petitioners provide:

I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest rate/service charge presently stipulated in this note
without any advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate government
entities, increasing or decreasing such interest rate or service charge.36

Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and Trust Company 37 where this Court ruled:

The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest and/or bank charges "without
advance notice" to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give
respondent bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the
will of respondent bank alone. It violates the essence of mutuality of the contract. 38

More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid an escalation clause which required a written notice to and conformity by the
borrower to the increased interest rate. Thus:

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank
Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of
these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which
courts are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the following provisions:

"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the
local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the
written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment."

The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to
Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases
"irrevocably authorize," "at any time" and "adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent," emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates.
(Emphasis supplied.)

In this case, the trial and appellate courts, in upholding the validity of the escalation clause, underscored the fact that there was actually no fixed rate of interest stipulated in the
promissory notes as this was made dependent on prevailing rates in the market. The subject promissory notes contained the following condition written after the first paragraph:

With one year grace period on principal and thereafter payable in 54 equal monthly instalments to start on the second year. Interest at the prevailing rates payable quarterly in
arrears.40

In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts in ruling for the validity of the escalation clause in the Cardholder’s Agreement.
On petitioner’s contention that the interest rate was unilaterally imposed and based on the standards and rate formulated solely by respondent credit card company, we held:

The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the
interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder."
This could not be considered an escalation clause for the reason that it neither states an increase nor a decrease in interest rate. Said clause simply states that the interest rate
should be based on the prevailing market rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case
the prevailing market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such
interest in the event of changes in prevailing market rates x x x" is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it
is also dependent on the prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds. Obviously, the
fluctuation in the market rates is beyond the control of private respondent. 42 (Emphasis supplied.)

In interpreting a contract, its provisions should not be read in isolation but in relation to each other and in their entirety so as to render them effective, having in mind the intention
of the parties and the purpose to be achieved. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.43
Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of interest on the basis of a law or regulation issued by the Central Bank of the
Philippines, should be read together with the statement after the first paragraph where no rate of interest was fixed as it would be based on prevailing market rates. While the
latter is not strictly an escalation clause, its clear import was that interest rates would vary as determined by prevailing market rates. Evidently, the parties intended the interest
on petitioners’ loan, including any upward or downward adjustment, to be determined by the prevailing market rates and not dictated by respondent’s policy. It may also be
mentioned that since the deregulation of bank rates in 1983, the Central Bank has shifted to a market-oriented interest rate policy. 44

There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the promissory notes. In fact, petitioner Ignacio, a physician engaged in the
medical supply business, admitted having understood his obligations before signing them. At no time did petitioners protest the new rates imposed on their loan even when their
property was foreclosed by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent the power to impose an increased rate of interest without a written notice to
petitioners and their written consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A detailed billing
statement based on the new imposed interest with corresponding computation of the total debt should have been provided by the respondent to enable petitioners to make an
informed decision. An appropriate form must also be signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to
preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’
essential equality.45

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement between the parties. Unless such important change in the
contract terms is mutually agreed upon, it has no binding effect. 46 In the absence of consent on the part of the petitioners to the modifications in the interest rates, the adjusted
rates cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%, the rate charged for the first year.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal obligation under the two promissory notes which they failed to settle is ₱10,355,000.
However, due to China Bank’s unilateral increases in the interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the
period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to ₱19,201,776.63. Note that the original amount of principal loan almost doubled in only 16
months. The Court also finds the penalty charges imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or 12% per annum. 1âwphi1

Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings, should thus be modified as follows:

Principal ₱10,355,000.00

Interest at 15% per annum

₱10,355,000 x .15 x 477 days/365 days 2,029,863.70

Penalty at 12% per annum 1,623 ,890. 96

₱10,355,000 x .12 x 477days/365 days

Sub-Total 14,008,754.66

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39)

13,692,605.27

Add: Attorney's Fees 1,369,260.53

Total Amount Due 15,061,865.79

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT 4,761,865.79

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009 · Decision and April 27, 2009 Resolution of the Court of Appeals in CA G.R.
CV No. 80338 are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay jointly and severally respondent China Banking
Corporation ₱4, 7 61 ,865. 79 representing the amount of deficiency inclusive of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12% per annum,
reckoned from the time of the filing of the complaint until its full satisfaction.

No pronouncement as to costs.

SO ORDERED.

SECOND DIVISION
SOLIDBANK CORPORATION, G.R. No. 171925
(now Metropolitan Bank and Trust Company),
Petitioner,
Present:
CARPIO, J., Chairperson,
NACHURA,
- versus - PERALTA,
DEL CASTILLO,* and
ABAD, JJ.

PERMANENT HOMES, Promulgated:

INCORPORATED,
Respondent. July 23, 2010

x--------------------------------------------------x

DECISION

CARPIO, J.:

G.R. No. 171925 is a petition for review [1] assailing the Decision[2] promulgated on
29 June 2005 by the Court of Appeals (appellate court) as well as the
Resolution[3] promulgated on 14 March 2006 in CA-G.R. CV No. 75926. The
appellate court granted the petition filed by Permanent Homes, Incorporated
(Permanent) and reversed the decision of the Regional Trial Court of Makati City,
Branch 58 (trial court) dated 5 July 2002 in Civil Case No. 98-654. The appellate
court ordered Solidbank Corporation (Solidbank) and Permanent to enter into an
express agreement about the applicable interest rates on Permanents
loan. Solidbank was also ordered to render an accounting of Permanents payments,
not to impose interest on interest upon Permanents loans, and to release the
remaining amount available under Permanents omnibus credit line.

The Facts

The appellate court narrated the facts as follows:

The records disclose that PERMANENT HOMES is a real estate
development company, and to finance its housing project known as the
Buena Vida Townhomes located within Merville Subdivision, Paraaque
City, it applied and was subsequently granted by SOLIDBANK with an
Omnibus Line credit facility in the total amount of SIXTY MILLION
PESOS. Of the entire loan, FIFTY NINE MILLION as [sic] time loan
for a term of up to three hundred sixty (360) days, with interest thereon
at prevailing market rates, and subject to monthly repricing.The
remaining ONE MILLION was available for domestic bills purchase.

To secure the aforesaid loan, PERMANENT HOMES initially

mortgaged three (3) townhouse units within the Buena Vida project in
Paraaque. At the time, however, the instant complaint was filed against
SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged
with said bank.

Of the 60 million available to PERMANENT HOMES, it availed of a

total of 41.5 million pesos, covered by three (3) promissory notes, which
contain the following provisions, thus:

xxx

5. We/I irrevocably authorize Solidbank to increase or

decrease at any time the interest rate agreed in this Note or
Loan on the basis of, among others, prevailing rates in the
local or international capital markets. For this purpose, We/I
authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The
adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I

shall prepay all amounts due under this Note or Loan within
thirty (30) days from the receipt by anyone of us of the
written notice. Otherwise, We/I shall be deemed to have
given our consent to the interest rate adjustment.

Contrary, however, to the specific provisions as afore-quoted, there was

a standing agreement by the parties that any increase or decrease in
interest rates shall be subject to the mutual agreement of the parties.
For the first loan availment of PERMANENT HOMES on March 20,
1997, in the amount of 19.6 MILLION, from the initial interest rate
of 14.25% per annum (p.a.), the same was increased 15% p.a. effective
May 19, 1997; it was again increased to 26% p.a. effective July 18,
1997. It was thereafter reduced to 20% p.a. effective August 18, 1997,
and then increased to 24% p.a. effective September 17, 1997. The rate
was increased further to 30% p.a. effective October 17, 1997, then
decreased to 27% p.a. on November 17, 1997, and again increased
to 34% p.a. effective December 17, 1997. The rate then decreased
to 30% p.a. on January 16, 1998.

For the second loan availment in the amount of 18 million, the rate was
initially pegged at 15.75% p.a. on June 24, 1997. A month later, the rate
increased to 23.5% p.a. It thereafter decreased to 20% p.a. effective
August 24, 1997, but again increased to 22.5% p.a. effective September
24, 1997. For the next month, the rate surged to 30% p.a., and decreased
to 27% p.a. for the month of November. The rate again surged to 34%
p.a. for the month of December, and was decreased to 30% p.a. from
January 22, 1998 to February 20, 1998.

For the third loan availment on July 15, 1997, in the amount of 3.9
million, the interest rate was initially pegged at 35% p.a., but this was
decreased to 21% p.a. from August 14 until September 11, 1997. The
rate increased slightly to 23% p.a. on September 12, 1997, and surged
to 27% p.a. on October 13, 1997. The rate went down slightly to 27%
p.a. for the month of November, and to 26% p.a. for the month of
December. The rate, however, again surged to 30% p.a. on January 12,
1998 before settling at 29% p.a. for the month of February.

It is [Permanents] stand that SOLIDBANK unilaterally and arbitrarily

accelerated the interest rates without any declared basis of such
increases, of which PERMANENT HOMES had not agreed to, or at the
very least, been informed of. This is contrary to their earlier agreement
that any interest rate changes will be subject to mutual agreement of the
parties. PERMANENT HOMES further admits that it was not able to
protest such arbitrary increases at the time they were imposed by
SOLIDBANK, for fear that SOLIDBANK might cut off the credit
facility it extended to PERMANENT HOMES. Permanent was then in
the midst of the construction of its project in Merville, Paraaque City,
and SOLIDBANK knew that it was relying substantially on the credit
facility the latter extended to it.
[Permanent] thus filed a case before the trial court seeking the
following: (1) the annulment of the increases in interest rates on the
loans it obtained from SOLIDBANK, on the ground that it was violative
of the principle of mutuality of agreement of the parties, as enunciated in
Article 1409 of the New Civil Code, (2) the fixing of the interest rates at
the applicable interest rate, and (3) for the trial court to order
SOLIDBANK to make an accounting of the payments it made, so as to
determine the amount of refund PERMANENT is entitled to, as well as
to order SOLIDBANK to release the remaining available balance of the
loan it extended to PERMANENT. In addition, [Permanent] prays for the
payment of compensatory, moral and exemplary damages.

SOLIDBANK, on the other hand, avers that PERMANENT HOMES has

no cause of action against it, in view of the pertinent provisions of the
Omnibus Credit Line and the promissory notes agreed to and signed by
PERMANENT HOMES. Thus, in accordance with said provisions,
SOLIDBANK was authorized to, upon due notice, periodically adjust
the interest rates on PERMANENT HOMES loan availments during the
monthly interest repricing dates, depending on the changes in prevailing
interest rates in the local and international capital markets. In fact,
SOLIDBANK avers that four (4) days before July 15, 1997, the Bangko
Sentral ng Pilipinas (BSP) declared that it could no longer support the
Philippine currency from external speculative forces, hence, the local
currency was allowed to seek its own exchange rate level. As a result of
the volatile exchange rate ratio, banks were then hesitant to extend loans,
and in some instances that it granted loans, they had to ensure that they
will not be at the losing end of the deal, so to speak, by the repricing of
the interest rates every month.SOLIDBANK insists that PERMANENT
HOMES should not be allowed to renege on its contractual obligations,
as it freely and voluntarily bound itself to the provisions of the Omnibus
Credit Line and the promissory notes.

PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its

Vice President and Chief Financial Officer, Engr. Rey A. Romasanta, its
Executive Vice President and Chief Operating Officer, and Martha Julia
Flores, its Treasury Officer.

On March 24, 1998, the trial court issued a temporary restraining order
(TRO), after a summary hearing, which enjoined SOLIDBANK from
implementing and collecting the increases in interest rates and from
initiating any action, including the foreclosure of the mortgaged
properties.

Ms. Lims testimony centered on PERMANENT HOMES allegations

that the repricing of the interest rates was done by SOLIDBANK without
any written agreement entered into between the parties. In fact, Ms. Lim
accounted that SOLIDBANK will merely advise them of the interest rate
for the period, after said period had already commenced, and at times
very late in the period, by fax messages. When PERMANENT HOMES
called SOLIDBANKs attention to the seemingly surging rates it imposed
on its loan, SOLIDBANK will merely answer that it was the banks
policy, without offering any basis for such increase. Furthermore, Ms.
Lim also mentioned SOLIDBANKs alleged practice of imposing interest
on unpaid interest, at the highest rate of 30% p.a.. Ms. Lim also
presented a tabulation, which presents the number of days their billing
statements were sent late, from the time the interest period started. It is
PERMANENT HOMES stand that since the purpose of the billing
statements was to inform them beforehand of the applicable interest rate
for the period, the late billings will clearly show SOLIDBANKs
arbitrary imposition of the repriced interest rates, as well as its
indifference to PERMANENT HOMES plight.

To illustrate, for the first loan availment in the amount of P19.6 million,
the billing statements which should have notified PERMANENT
HOMES of the repriced interest rates were faxed to PERMANENT
HOMES between eighteen (18) to thirty-three (33) days late. For the
second loan availment in the amount of P18 million, the faxed billings
were late between six (6) to twenty-one (21) days, and one instance
where PERMANENT HOMES received no billing at all. For the third
loan availment in the amount of P3.9 million, the faxed billings were late
between seven (7) to twenty-nine (29) days, and also an instance where
PERMANENT HOMES received no billing at all.

This practice, according to Ms. Lim, clearly affected its operations, as

the completion of its construction project was unnecessarily delayed, to
its prejudice and its buyers. This was the import of the testimony of
PERMANENT HOMES second witness, Engr. Rey A. Romasanta.
According to Engr. Rey, the target date of completion was August 1997,
but in view of the shortage of funds by reason of SOLIDBANKs refusal
 for PERMANENT HOMES to make further availments on its omnibus
credit line, the project was completed only on February 1998.

PERMANENT HOMES third and final witness was Martha Julia Flores,
its Treasury Officer, who explained that as such, it was her who received
the late billings from SOLIDBANK. She would also call up
SOLIDBANK to ask what the repriced interest rate for the coming
interest period, to no avail, as SOLIDBANK will merely fax its billings
almost always, as abovementioned, late in the period. Ms. Flores
admitted that she prepared the tabulation presented before the court,
which showed how late SOLIDBANKs billings were sent to
PERMANENT HOMES, as well as the computation of interest rates that
SOLIDBANK had allegedly overcharged on its loan, vis-a-vis the
average of the high and the low published lending rates of
SOLIDBANK.

SOLIDBANK, to establish its defense, presented its lone witness, Mr.

Cesar Lugtu, who testified to the effect that, contrary to PERMANENT
HOMES assertions that it was not promptly informed of the repriced
interest rates, SOLIDBANKs officers verbally advised PERMANENT
HOMES of the repriced rates at the start of the period, and even added
that their transaction[s] were based on trust. Aside from these
allegations, however, no written memorandum or note was presented by
SOLIDBANK to support their assertion that PERMANENT HOMES
was timely advised of the repriced interests. [4]

The Trial Courts Ruling

On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank. The
trial court ratiocinated and ruled thus:
It becomes crystal clear that there is sufficient proof to show that the
instant case was instituted by [Permanent] as an after-thought and as an
obvious subterfuge intended to completely lay on the defendant the
blame for the debacle of its Buena Vida project. An afterthought because
the records of the case show that the complaint was filed in March 16,
1998, already after it was having difficulty making the amortization
payments, the last of which being in February 1998. A subterfuge
because plaintiff, instead of blaming itself and its own business judgment
that went sour, would rather put the blame on [Solidbank], taking
advantage of every conceivable gray area of its contract with [Solidbank]
 to avoid its own liabilities. In fact, this complaint was made the very
basis for [Permanent] to altogether stop the payment of its loan from
[Solidbank] including the interest payment (TSN, May 07, 1998, p. 60).

xxxx

WHEREFORE, finding the complaint not impressed with merit,

judgment is hereby rendered dismissing the said complaint. The
Counterclaim is likewise dismissed for lack of evidence to support the
same.

SO ORDERED.[5]

Permanent filed an appeal before the appellate court.

The Appellate Courts Ruling

The appellate court granted Permanents appeal, and set aside the trial courts
ruling. The appellate court not only recognized the validity of escalation clauses,
but also underscored the necessity of a basis for the increase in interest rates and of
the principle of mutuality of contracts.
The dispositive portion of the appellate courts decision reads, thus:

THE FOREGOING CONSIDERED, the instant appeal is hereby

GRANTED, the assailed decision dated July 5, 2002 is REVERSED and
SET ASIDE, and a new one is hereby entered as follows:

(1) Unless the parties herein subsequently enter into

an express agreement regarding the applicable interest rates on
PERMANENT HOMES loan availments subsequent to the initial thirty-
day (30) period, the legal rate of twelve percent (12%) per annum is
hereby FIXED, to be applied on the outstanding balance of the loan;

(2) SOLIDBANK is ordered to render an accounting of all the payments

made by PERMANENT HOMES, and in case there is excess payment
by reason of the wrongful imposition of the repriced interest rates, to
apply such amount to the interest payment at the legal rate, and
thereafter to the outstanding principal amount;
 (3) SOLIDBANK is directed not to impose penalties, particularly
interest on interest, upon PERMANENT HOMES loan, there being no
evidence that the latter was in default on its payments;

(4) SOLIDBANK is hereby ordered to release the remaining amount

available under the omnibus credit line, subject, however, to availability
of funds on the part of SOLIDBANK.

No pronouncement as to costs.

SO ORDERED.[6]

The appellate court resolved to deny Solidbanks Motion for Reconsideration

for lack of merit.[7]

The Issues

Solidbank raised the following issues in their petition:

(A) Whether the Honorable Court of Appeals was correct in ruling that
the increases in the interest rates on [Permanents] loans are void
for having been unilaterally imposed without basis.

(B) Whether the Honorable Court of Appeals was correct in ordering the
parties to enter into an express agreement regarding the applicable
interest rates on Permanents loan availments subsequent to the
initial thirty-day (30) period.

(C) Whether the Honorable Court of Appeals was correct in ruling that
[Permanent] is entitled to attorneys fees notwithstanding the
absence of bad faith or malice on the part of [Solidbank]. [8]

The Courts Ruling

The petition has merit.

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated
3 December 1982 of the Monetary Board of the Central Bank, and later by Central
Bank Circular No. 905 which took effect on 1 January 1983. These circulars
removed the ceiling on interest rates for secured and unsecured loans regardless of
maturity. The effect of these circulars is to allow the parties to agree on any interest
that may be charged on a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take into account. [9] Although
interest rates are no longer subject to a ceiling, the lender still does not have an
unbridled license to impose increased interest rates. The lender and the borrower
should agree on the imposed rate, and such imposed rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the
following provisions:
5. We/I irrevocably authorize Solidbank to increase or decrease at any
time the interest rate agreed in this Note or Loan on the basis of, among
others, prevailing rates in the local or international capital markets. For
this purpose, We/I authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The adjustment of
the interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time the
notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay
all amounts due under this Note or Loan within thirty (30) days from the
receipt by anyone of us of the written notice. Otherwise, We/I shall be
deemed to have given our consent to the interest rate adjustment.

The stipulations on interest rate repricing are valid because (1) the parties mutually
agreed on said stipulations; (2) repricing takes effect only upon Solidbanks written
notice to Permanent of the new interest rate; and (3) Permanent has the option to
prepay its loan if Permanent and Solidbank do not agree on the new interest
rate. The phrases irrevocably authorize, at any time and adjustment of the interest
rate shall be effective from the date indicated in the written notice sent to us by the
bank, or if no date is indicated, from the time the notice was sent, emphasize
that Permanent should receive a written notice from Solidbank as a condition for
the adjustment of the interest rates.

In order that obligations arising from contracts may have the force of law between
the parties, there must be a mutuality between the parties based on their essential
equality.[10] A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties
is void.[11] There was no showing that either Solidbank or Permanent coerced each
other to enter into the loan agreements. The terms of the Omnibus Line Agreement
and the promissory notes were mutually and freely agreed upon by the parties.

Moreover, Solidbanks range of lending rates were consistent with prevailing rates
in the local or international capital markets. Permanent presented a tabulation [12] of
the range of Solidbanks lending rates, as reported to Bangko Sentral ng Pilipinas
and compared the lending rates with the interest rates charged by Solidbank on
Permanents loans, thus:

Solidbanks range of lending rates

as per BSP records
High Low Interest rates Excess Interest
charged by Rate Over the
Solidbank on Average of High
Permanents and Low Rates
loans
Sept. 12, 1997 25.0% 22.0% 23.0%
Sept. 17, 1997 27.0% 24.0% 24.0%
Sept. 22, 1997 26.0% 23.0% 22.5%
Oct. 13, 1997 29.0% 26.0% 28.0%
Oct. 17, 1997 30.0% 27.0% 30.0%
Oct. 22, 1997 32.0% 29.0% 30.0%
Nov. 12, 1997 28.0% 25.0% 27.0%
Nov. 17, 1997 28.0% 25.0% 27.0%
Nov. 21, 1997 27.0% 24.0% 27.0%
Dec. 12, 1997 25.0% 23.0% 26.0% 2.0%
Dec. 17, 1997 25.0% 23.0% 34.0% 10.0%
Dec. 22, 1997 25.0% 23.0% 32.0% 8.0%
Jan. 12, 1998 26.0% 24.0% 30.0% 5.0%
Jan. 16, 1998 28.0% 25.0% 30.0% 3.5%
Jan. 22, 1998 28.0% 25.0% 30.0% 3.5%
Feb. 9, 1998 27.0% 24.0% 30.0% 3.5%
Feb. 11, 1998 27.0% 24.0% 29.0% 4.5%
Feb. 12, 1998 27.0% 24.0% 30.0% 4.5%

The repriced interest rates from 12 September to 21 November 1997 conformed to

the range of Solidbanks lending rates to other borrowers. The 12 December 1997
to 12 February 1998 repriced interest rates were not unconscionably out of line
with the upper range of lending rates to other borrowers. The interest rate repricing
happened at the height of the Asian financial crises in late 1997, when banks
clamped down on lendings because of higher credit risks across industries,
particularly the real estate industry.

We also recognize that Solidbank admitted that it did not promptly send Permanent
written repriced rates, but rather verbally advised Permanents officers over the
phone at the start of the period. Solidbank did not present any written
memorandum to support its allegation that it promptly advised Permanent of the
change in interest rates.[13] Solidbank advised Permanent on the repriced interest
rate applicable for the 30-day interest period only after the period had
begun. Permanent presented a tabulation which showed that Solidbank either did
not send a billing statement, or sent a billing statement 6 to 33 days late. [14] We
reproduce the tabulation below:

PN #435 P19.6MM
Reference Interest Period Date Billing Statements Number of days Billing
No. were faxed to Permanent Statement was Late
1 03/20/97 04/18/97 04/17/97 28
2 04/18/97 05/19/97 05/16/97 28
05/19/97 06/19/97 no statement received
3 06/19/97 07/18/97 07/12/97 23
4 07/18/97 08/18/97 08/05/97 18
5 08/18/97 09/17/97 09/10/97 23
6 09/17/97 10/17/97 10/06/97 19
7 10/17/97 11/17/97 11/11/97 25
8 11/17/97 12/17/97 12/12/97 25
9 12/17/97 01/16/98 01/09/98 23
14 01/16/98 02/20/98 02/18/98 33

PN #969 P18MM
 Reference Interest Period Date Billing Statements Number of days Billing
No. were faxed to Permanent Statement was Late
3 06/24/97 07/24/97 07/12/97 18
4 07/24/97 08/22/97 08/05/97 12
5 08/22/97 09/22/97 09/10/97 19
6 09/22/97 10/22/97 10/06/97 14
7 10/22/97 11/21/97 11/11/97 20
8 11/21/97 12/22/97 12/12/97 21
9 12/22/97 01/22/98 01/09/98 18
01/22/98 02/12/97 no statement received
14 02/12/98 02/20/98 02/18/98 6

PN #1077 P3.9MM
Reference Interest Period Date Billing Statements Number of days Billing
No. were faxed to Permanent Statement was Late
10 07/15/97 08/14/97 08/14/97 30
11 08/14/97 08/26/97 08/26/97 12
5 08/26/97 09/12/97 09/10/97 15
6 09/12/97 10/13/97 10/06/97 24
7 10/13/97 11/12/97 11/11/97 29
12 11/12/97 12/12/97 12/10/97 28
9 12/12/97 01/12/98 01/09/98 28
13 01/12/98 02/09/98 02/09/98 28
02/09/98 02/11/98 no statement received
14 02/11/98 03/13/98 02/18/98 7

We rule that Solidbanks computation of the interest due from Permanent should be
adjusted to take effect only upon Permanents receipt of the written notice from
Solidbank.

WHEREFORE, we GRANT the petition in part. We SET ASIDE the Decision of

the Court of Appeals promulgated on 29 June 2005 as well as the Resolution
promulgated on 14 March 2006 in CA-G.R. CV No. 75926 and AFFIRM the
decision of the Regional Trial Court of Makati City, Branch 58 dated 5 July 2002
in Civil Case No. 98-654 with the MODIFICATION that the repricing of the
interest rates should take effect only upon Permanent Homes, Incorporateds receipt
of the written notice from Solidbank Corporation of the adjustment in interest
rate. The records of this case are therefore remanded to the trial court for the
computation of the proper interest payments based on the dates of receipt of
written notice.

SO ORDERED.

THIRD DIVISION

G.R. No. 133877 November 14, 2001

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
ALFA RTW MANUFACTURING CORPORATION, BA FINANCE CORPORATION, NORTH AMERICAN GARMENTS CORPORATION, JOHNNY TENG, RAMON LEE,
ANTONIO LACDAO, RAMON LUY and ALFA INTEGRATED TEXTILE MILLS, respondents.

SANDOVAL-GUTIERREZ, J.:

Petitioner for review on certiorari assailing the decision of the Court of Appeals in CA-G.R. C.V. no. 42293.

On March 12, 1982, Rizal Banking Corporation (RCBC) filed with the Regional Trial Court of Makati, Branch 145, Civil Case No. 2624 for a sum of money against Alfa RTW
Manufacturing Corporation, Johnny Teng, Ramon Lee, Antonio Lacdao, Ramon Luy and Alfa Integrated Textile Mills. Asserting a superior right over the property involved in the
suit, North Atlantic Garments Corporation filed a complaint in intervention. BA Finance Corporation, claiming as mortgagee of the same property, filed an answer in intervention.
After hearing, the trial court rendered judgment on August 19, 1991, the dispositive portion1 of which reads:

"WHEREFORE, judgment is rendered in favor of plaintiff as follows:

1. Ordering all defendants to pay, jointly and severally, to plaintiff the amount of Eighteen Million Nine Hundred Sixty-one Thousand Three Hundred Seventy-two
Pesos and Forty-three Centavos (P18,961,372.43), Philippine Currency, (inclusive of interest, service charges, litigation expenses and attorney’s fees), with
interest thereon at the legal rate from February 15, 1988 until fully paid. The proceeds from the sale of defendant Alfa’s ready to wear apparel, in the sum of
P73,133.70, should be deducted from the principal obligation of P18,961,372.43;

2. Declaring that the respective liens of intervenors BA Finance Corporation and North American Garments Corporation over the properties attached by the sheriff
are inferior to that of plaintiff.

3. Ordering defendants and intervenors to pay the proportionate costs.

"SO ORDERED."

On appeal, the Court of Appeals affirmed with modification 2 the RTC decision, thus:

"WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED, with the modification that instead of P18,961,372.43, all the defendants
are hereby ordered to pay, jointly and severally to plaintiff the amount of P3,060,406.25, Philippine Currency, inclusive of stipulated interest, service charges,
litigation expenses and attorney’s fees, with interest thereon at the legal rate from February 15, 1988, until fully paid.

"All other disquisitions of the trial court are hereby AFFIRMED.

 "SO ORDERED."

In this petition, RCBC questions the Court of Appeals decision insofar as it modified the RTC decision by decreasing the award in its favor from P18,961.372.43 to
P3,060,406.25. In assailing the Court of Appeals decision, petitioner RCBC raises a question of law, that is, whether or not the Court of Appeals can deviate from the provisions
of the contract between the parties, which contract is the law between them.

The facts as summarized by the Court of Appeals are:

"From the records of the case, it appears that defendant Alfa RTW Manufacturing Corporation (Alfa RTW), on separate instances, had applied for and was granted
by the plaintiff Rizal Commercial Banking Corporation (RCBC) four Letters of Credit (RO-80/2487, RO-80/2789, RO-80/D-1795 and RO-81/D-1800 marked as
Exhibits "A", "D", "G", and "J", respectively) to facilitate its purchase of raw materials for its garments business. Upon such letters of credit, corresponding bills of
exchange (Exhibits "B", "E", "H", and "K") of various amounts were drawn, and charged to the account of said defendants.

The defendant Alfa RTW, in turn, had executed four Trust Receipts (Exhibits "C", "F", "I" and "L"), stipulating that it had received in trust for the plaintiff bank the
goods and merchandise described therein, and which were purchased with the drawings upon the letters of credit.

When the obligations upon the said commercial documents became due, the plaintiff demanded payment of the defendants’ undertakings, citing two documents
allegedly executed by the individual defendants Johnny Teng, Ramon Lee, Antonio D. Lacdao and Ramon Uy and Alfa Integrated Textile Mills Inc. (Alfa ITM),
labeled Comprehensive Surety Agreements (Exhibits "N" and "M") dated September 8, 1978 and October 10, 1979.

Under such Comprehensive Surety Agreements, it was essentially agreed that for and in consideration of any existing indebtedness to plaintiff bank of defendant
Alfa RTW and/or in order to induce the plaintiff bank at any time thereafter to make loans or advances or increases thereof or to extend credit in any other manner
to or for the account of defendant, Alfa ITM and the signatory officers agreed to guarantee in joint and several capacity the punctual payment at maturity to plaintiff
bank of any and all such indebtedness and/or other obligations and also any and all indebtedness of every kind which was then or may thereafter become due or
owing to plaintiff bank by the defendant Alfa RTW, together with any and all expenses of collection, etc., provided, however, that the liability of individual
defendants and defendant Alfa Integrated Textile Mills, Inc. thereunder shall not exceed the sum of P4,000,000.00 and P7,500,000.00 and such interest as may
accrue thereon and expenses as may be incurred by plaintiff bank. (p. 4, Complaint)"

Petitioner RCBC contends that the Court of Appeals erred in awarding to it the minimal sum of P3,060,406.25 instead of P18,961,372.43 granted by the trial court.

The rule is well settled that the jurisdiction of this Court in cases brought before it from the Court of Appeals via Rule 45 of the 1997 Rules of Civil Procedure, as amended, is
limited to reviewing errors of law. Findings of fact of the latter court are conclusive, except in a number of instances. In Siguan vs. Lim3 this Court enumerated those instances
when the factual findings of the Court of Appeals are not deemed conclusive, to wit: (1) when the conclusion is a finding grounded entirely on speculations, surmises or
conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is
contrary to the admissions of both the appellant and appellee; (7) when the findings are contrary to those of the trial court; (8) when the findings are conclusions without citation
of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not disputed by the respondent;
and (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record.

In the case at bar, exception No. 6 is present. Here, the Court of Appeals made findings "contrary to the admissions" of the parties. We refer to the terms and conditions agreed
upon by petitioner RCBC and respondent borrowers in the Trust Receipts 4 and the Comprehensive Surety Agreements.5

Significantly, the validity of those contracts is not being questioned. It follows that the very terms and conditions of the same contracts become the law between the parties.

Herein lies the reversible error on the part of the Court of Appeals. When it ruled that only P3,060,406.25 should be awarded to petitioner RCBC, the Appellate Court
disregarded the parties’ stipulations in their contracts of loan, more specifically, those pertaining to the agreed (1) interest rates, (2) service charges and (3) penalties in case of
any breach thereof.6 Indeed, the Court of Appeals failed to apply this time-honored doctrine:

"That which is agreed to in a contract is the law between the parties. Thus, obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith."7

"The Court cannot vary the terms and conditions therein stipulated unless such stipulation is contrary to law, morals, good customs, public order or public policy." 8

In relation to the determination and computation of interest payments, this Court, in Eastern Shipping Lines, Inc. vs. Court of Appeals,9 through Mr. Justice Jose C. Vitug, held:

"The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested
with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to
suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest, in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should
be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
 established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.." (Emphasis supplied).

The case now before us involves an obligation arising from a letter of credit-trust receipt transaction. Under this arrangement, a bank extends to a borrower a loan covered by
the letter of credit, with the trust receipt as security of the loan. 10 A trust receipt is "a security transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except thru utilization, as collateral, of the
merchandise imported or purchased."11

In contracts contained in trust receipts, the contracting parties may establish agreements, terms and conditions they may deem advisable, provided they are not contrary to law,
morals or public order.12 In the case at bar, there are specific amounts of interest, service charges and penalties agreed upon by the parties. Pertinent provisions in the four (4)
trust receipts (TR. No. 1909, TR. No. 1932, TR. No. 1732, and TR No. 2065) 13 read:

"All obligations of the undersigned under this Trust Receipt shall bear interest at the rate of sixteen per centum (16%) per annum plus service charge of two per
centum (2%) per annum from the date of the execution of this Trust Receipt until paid. It is expressly agreed and understood that regardless of the maturity date
hereof, I/we hereby authorize the said Bank to correspondingly increase the interest of this Trust Receipt to the extent allowed by law without notice to me/us
whenever the Central Bank of the Philippines raises the interest on borrowings of Banks or the interest provided for in the Usury Law, or whenever, in the sole
judgment of the holder of this Trust Receipt is warranted by the increase in money market rates or by similar events.

Without prejudice to the criminal action that may be brought by the Bank against the entrustee by reason of default or breach of this Trust Receipt, I/we agree to
pay a penalty and/or liquidated damages equivalent to six per centum (6%) per annum of the amount due and unpaid.

In the event of the bringing of any action or suit by you or any default of the undersigned hereunder: I/we shall on demand pay you reasonable attorney’s and other
fees and cost of collection, which shall in no case be less than ten per centum (10%) of the value of the property and the amount involved by the action or suit.

If there are two or more signatories on this Trust Receipt, our obligations hereunder shall in all cases be joint and several."

Applying the above-quoted rules of thumb in the computation of interest, as enunciated by this Court in Eastern Shipping Lines, Inc., 14 the principal amount of loans
corresponding to each trust receipt must earn an interest at the rate of sixteen percent (16%) per annum 15 with the stipulated service charge of two percent (2%) per annum on
the loan principal or the outstanding balance thereof,16 from the date of execution until finality of this Decision.17 A penalty of six percent (6%) per annum of the amount due and
unpaid must also be imposed computed from the date of demand (in this case on March 9, 1982), 18 until finality of Judgment.19 The interest of 16% percent per annum, as long
as unpaid, also earns interest, computed from the date of the filing of the complaint (March 12, 1982) until finality of this Court’s Decision. 20 From such date of finality, the total
unpaid amount (principal + interest + service charge + penalty + interest on the interest) computed shall earn interest of 12% per annum until satisfied. 1âwphi1.nêt

The Court of Appeals awarded only the sum of P3,060,406.25 as it was the amount prayed for in the complaint. The Appellate Court, however, failed to consider that the
complaint was filed on March 12, 1982, or just a year after the execution of the trust receipts. The computed interests then, the service charge, the penalty and the attorney’s
fees corresponded only to one year. The interest on the interest could not have been computed then since the finality of judgment could not yet be ascertained. Significantly,
from the filing of the complaint on March 12, 1982 up to the time the Appellate Court’s decision was promulgated, on May 14, 1998, there had been a lapse of sixteen years. The
computed interest in 1982 would no longer be true in 1998. What the Appellate Court should have done then was to compute the total amount due in accordance with the rules
of thumb laid down by this Court in Eastern Shipping Lines, Inc.,21 the resulting formula of which is as follows:

TOTAL AMOUNT DUE = principal + interest + service charge + penalty + interest on interest

Interest = principal x 16 % per annum x no. of years from date of execution until finality of judgment

Service charge = principal x 2% per annum x no. of years from date of execution until finality of judgment

Penalty = principal x 6% per annum x no. of years from demand (March 9, 1982) until finality of judgment

Interest on interest = Interest computed as of the filing of the complaint (March 12, 1982) x 12% x no. of years until finality of judgment

Attorney’s fees is 10% of the total amount computed as of finality of judgment

Total amount due as of the date of finality of judgment will earn an interest of 12% per annum until fully paid.

The total amount due corresponding to each of the four (4) contracts of loan may be easily determined by the trial court through a simple mathematical computation based on
the formula specified above. Mathematics is an exact science, the application of which needs no further proof from the parties.

WHEREFORE, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is MODIFIED in the sense that the award to petitioner RCBC of P3,060,406.25
is SET ASIDE and substituted with an amount to be computed by the trial court, upon finality of this Decision, in accordance with the formula indicated above.

SO ORDERED.

Melo, Vitug, Panganiban, and Carpio, JJ., concur.