G.R. No.

181045

July 2, 2014

SPOUSES EDUARDO and LYDIA

vs.
PHILIPPINE NATIONAL BANK, R.

or reduce interest rates "within the limits allowed by law

or by the Monetary Board."
SILOS, Ps,

DEL CASTILLO, J.:

Doctrine: In loan agreements, it cannot be denied that
the rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no
binding effect. Moreover, the Court cannot consider a
stipulation granting a party the option to prepay the loan
if said party is not agreeable to the arbitrary interest
rates imposed. Premium may not be placed upon a
stipulation in a contract which grants one party the right
to choose whether to continue with or withdraw from the
agreement if it discovers that what the other party has
been doing all along is improper or illegal.
Facts:
Ps have been in business for about two decades of
operating a department store and buying and selling of
ready-to-wear apparel.
To secure a one-year revolving credit line
of P150,000.00 obtained from PNB, Ps constituted in
August 1987 a Real Estate Mortgage over a lot in Kalibo,
Aklan. In July 1988,the credit line was increased to P1.8
million and the mortgage was correspondingly increased
to P1.8 million.
And in July 1989, a Supplement to the Existing Real
Estate Mortgage was executed to cover the same credit
line, which was increased to P2.5 million, and additional
security was given in the form of a 134-square meter lot.
In addition, Ps issued eight Promissory Notes and
signed a Credit Agreement. This July 1989 Credit
Agreement contained a stipulation on interest which
provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of
19.5% per annum. Interest shall be payable in advance every one
hundred twenty days at the rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in
the Loan depending on whatever policy the Bank may adopt in the
future, including without limitation, the shifting from the floating interest
rate system to the fixed interest rate system, or vice versa. Where the
Bank has imposed on the Loan interest at a rate per annum, which is
equal to the Banks spread over the current floating interest rate, the
Borrower hereby agrees that the Bank may, without need of notice to
the Borrower, increase or decrease its spread over the floating interest
rate at any time depending on whatever policy it may adopt in the
future.

The eight Promissory Notes, on the other hand,

contained a stipulation granting PNB the right to increase

The Real Estate Mortgage agreement provided the same

right to increase or reduce interest rates "at any time
depending on whatever policy PNB may adopt in the
future."
In August 1991, an Amendment to Credit Agreement was
executed by the parties, with the following stipulation
regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers
agree to pay interest on each Availment from date of
each Availment up to but not including the date of full
payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus applicable
spread in effect as of the date of each Availment.
The 9th up to the 17th promissory notes provide for the
payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law x x
x.
On the other hand, the 18th up to the 26th promissory
notes including PN 9707237, which is the 26th
promissory note carried the following provision:
x x x For this purpose, I/We agree that the rate of
interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior
notice to the Borrower in the event of changes in interest
rate prescribed by law or the Monetary Board of the
Central Bank of the Philippines, or in the Banks overall
cost of funds. I/We hereby agree that in the event I/we
are not agreeable to the interest rate fixed for any
Interest Period, I/we shall have the option top repay the
loan or credit facility without penalty within ten (10)
calendar days from the Interest Setting Date.
R regularly renewed the line from 1990 up to 1997, and
Ps made good on the promissory notes, religiously
paying the interests without objection or fail. But in
1997, Ps faltered when the interest rates soared due
to the Asian financial crisis. Ps sole outstanding
promissory note for P2.5 million PN 9707237
executed in July 1997 and due 120 days later or on
October 28, 1997 became past due, and despite
repeated demands, Ps failed to make good on the
note.
Incidentally, PN 9707237 provided for the penalty
equivalent to 24% per annum in case of default.
PNB prepared a Statement of Account as of October 12,
1998, detailing the amount due and demandable from Ps
in the total amount of P3,620,541.60.

Despite demand, Ps failed to pay the foregoing amount.

Thus, PNB foreclosed on the mortgage, and on January
14, 1999, the lots were sold at the auction. The sheriffs
certificate of sale was registered on March 11, 1999.

WoN P is estopped from questioning the interest rates

because of their continuous payment thereof w/o
opposition- NO
Ratio:

More than a year later, or on March 24, 2000, Ps filed

Civil Case No. 5975, seeking annulment of the
foreclosure sale and an accounting of the PNB credit. Ps
theorized that after the first promissory note where they
agreed to pay 19.5% interest, the succeeding
stipulations for the payment of interest in their loan
agreements with PNB which allegedly left to the
latter the sole will to determine the interest rate
became null and void. Ps added that because the
interest rates were fixed by R without their prior consent
or agreement, these rates are void, and as a result, Ps
should only be made liable for interest at the legal rate of
12%. They claimed further that they overpaid interests
on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should
now be deemed paid, and the foreclosure and sale of
TCTs T-14250 and T-16208 became unnecessary and
wrongful. As for the imposed penalty of P581,666.66, Ps
alleged that since the Real Estate Mortgage and the
Supplement thereto did not include penalties as part of
the secured amount, the same should be excluded from
the foreclosure amount or bid price, even if such
penalties are provided for in the final Promissory Note.
In addition, Ps sought to be reimbursed an alleged
overpayment of P848,285.00 made during the period
August 21, 1991 to March 5, 1998, resulting from Rs
imposition of the alleged illegal and steep interest rates.
They also prayed to be awarded P200,000.00 by way of
attorneys fees.
In its Answer, PNB denied that it unilaterally imposed or
fixed interest rates; that Ps agreed that without prior
notice, PNB may modify interest rates depending on
future policy adopted by it; and that the imposition of
penalties was agreed upon in the Credit Agreement. It
added that the imposition of penalties is supported by
the all-inclusive clause in the Real Estate Mortgage
agreement which provides that the mortgage shall stand
as security for any and all other obligations of whatever
kind and nature owing to R, which thus includes
penalties imposed upon default or non-payment of the
principal and interest on due date.
RTC: Ruled in favor of R
CA: Ruled in favor of R
Issue/Held:
WoN the interest rates imposed by R are null and voidYES

SC cited and discussed numerous cases but the main

point of all the cases is the doctrine stated above.
Any modification in the contract, such as the interest
rates, must be made with the consent of the
contracting parties. The minds of all the parties must
meet as to the proposed modification, especially
when it affects an important aspect of the
agreement. In the case of loan agreements, the rate
of interest is a principal condition, if not the most
important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it
has no binding effect.
In the present case, the stipulations in question no
longer provide that the parties shall agree upon the
interest rate to be fixed; -instead, they are worded in
such a way that the borrower shall agree to whatever
interest rate R fixes. In credit agreements covered by
the cited cases, it is provided that:
The Bank reserves the right to increase the interest rate
within the limits allowed by law at any time depending on
whatever policy it may adopt in the future: Provided, that,
the interest rate on this accommodation shall be
correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by
the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in maximum
interest rate.
Whereas, in the present credit agreements under
scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the
interest rate on the Loan depending on whatever policy
the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate
system to the fixed interest rate system, or vice versa.
Where the Bank has imposed on the Loan interest at a
rate per annum, which is equal to the Banks spread over
the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the
floating interest rate at any time depending on whatever
policy it may adopt in the future.86 (Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT
AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers

agree to pay interest on each Availment from date of
each Availment up to but not including the date of full
payment thereof at the rate per annum which is
determined by the Bank to be prime rate plus applicable
spread in effect as of the date of each
Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the
element of consent or agreement by the borrower is
now completely lacking, which makes Rs unlawful
act all the more reprehensible.
Re estoppel:
Accordingly, Ps are correct in arguing that estoppel
should not apply to them, for "[e]stoppel cannot be
predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is
prohibited by law or is against public policy."
It appears that by its acts, R violated the Truth in
Lending Act, or Republic Act No. 3765, which was
enacted "to protect x x x citizens from a lack of
awareness of the true cost of credit to the user by
using a full disclosure of such cost with a view of
preventing the uninformed use of credit to the
detriment of the national economy."89 The law "gives a
detailed enumeration of the specific information required
to be disclosed, among which are the interest and other
charges incident to the extension of credit." 90 Section 4
thereof provides that a disclosure statement must be
furnished prior to the consummation of the transaction,
thus:
SEC. 4. Any creditor shall furnish to each person to
whom credit is extended, prior to the consummation of
the transaction, a clear statement in writing setting forth,
to the extent applicable and in accordance with rules and

regulations prescribed by the Board, the following

information:
(1) the cash price or delivered price of the
property or service to be acquired;
(2) the amounts, if any, to be credited as down
payment and/or trade-in;
(3) the difference between the amounts set forth
under clauses (1) and (2);
(4) the charges, individually itemized, which are
paid or to be paid by such person in connection
with the transaction but which are not incident to
the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of
pesos and centavos; and
(7) the percentage that the finance bears to the
total amount to be financed expressed as a
simple annual rate on the outstanding unpaid
balance of the obligation.
Under Section 4(6), "finance charge" represents the
amount to be paid by the debtor incident to the extension
of credit such as interest or discounts, collection fees,
credit investigation fees, attorneys fees, and other
service charges. The total finance charge represents the
difference between (1) the aggregate consideration
(down payment plus installments) on the part of the
debtor, and (2) the sum of the cash price and nonfinance charges.
By requiring the Ps to sign the credit documents and
the promissory notes in blank, and then unilaterally
filling them up later on, R violated the Truth in
Lending Act, and was remiss in its disclosure
obligations.