Spouses Silos vs. PNB

7/26/2019 Spouses Silos vs. PNB

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Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LD!A S!LOS, Petitioners,vs.P"!L!PP!NE NAT!ONAL #AN$, Respondent.

D E C I S I O N

DEL CAST!LLO, J.:

In loan aree!ents, it cannot be denied that the rate of interest is a principal condition, if notthe !ost i!portant co!ponent. "hus, an# !odification thereof !ust be !utuall# areedupon$ other%ise, it has no bindin effect. Moreover, the Court cannot consider a stipulationrantin a part# the option to prepa# the loan if said part# is not areeable to the arbitrar#interest rates i!posed. Pre!iu! !a# not be placed upon a stipulation in a contract %hichrants one part# the riht to choose %hether to continue %ith or %ithdra% fro! thearee!ent if it discovers that %hat the other part# has been doin all alon is i!proper orilleal.

"his Petition for Revie% on Certiorari& 'uestions the Ma# (, )**+ Decision ) of the Court of ppeals -C in C/0.R. CV No. +123*, %hich affir!ed %ith !odifications the 4ebruar# )(,

)**5 Decision5

and the 6une 7, )**5 Order 7

of the Reional "rial Court -R"C, 8ranch 2 of9alibo, :lan in Civil Case No. 31+3.

4actual ntecedents

Spouses Eduardo and ;#dia Silos -petitioners have been in business for about t%odecades of operatin a depart!ent store and bu#in and sellin of read#/to/%ear apparel.Respondent Philippine National 8an: -PN8 is a ban:in corporation orani<ed and e=istinunder Philippine la%s.

"o secure a one/#ear revolvin credit line of P&3*,***.** obtained fro! PN8, petitionersconstituted in uust &1(+ a Real Estate Mortae3 over a 5+*/s'uare !eter lot in 9alibo,

:lan covered b# "ransfer Certificate of "itle No. -"C" "/&7)3*. In 6ul# &1((,the credit line%as increased to P&.( !illion and the !ortae %as correspondinl# increased to P&.(!illion.2

nd in 6ul# &1(1, a Supple!ent to the E=istin Real Estate Mortae+ %as e=ecuted tocover the sa!e credit line, %hich %as increased to P).3 !illion, and additional securit# %asiven in the for! of a &57/s'uare !eter lot covered b# "C" "/&2)*(. In addition, petitioners

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issued eiht Pro!issor# Notes( and sined a Credit ree!ent.1"his 6ul# &1(1 Credit ree!ent contained a stipulation on interest %hich provides as follo%s>

&.*5. Interest. -a "he ;oan shall be sub?ect to interest at the rate of &1.3@ per annu!.Interest shall be pa#able in advance ever# one hundred t%ent# da#s at the rate prevailin atthe ti!e of the rene%al.

-b "he 8orro%er arees that the 8an: !a# !odif# the interest rate in the ;oan dependinon %hatever polic# the 8an: !a# adopt in the future, includin %ithout li!itation, the shiftinfro! the floatin interest rate s#ste! to the fi=ed interest rate s#ste!, or vice versa. Aherethe 8an: has i!posed on the ;oan interest at a rate per annu!, %hich is e'ual to the8an:Bs spread over the current floatin interest rate, the 8orro%er hereb# arees that the8an: !a#, %ithout need of notice to the 8orro%er, increase or decrease its spread over thefloatin interest rate at an# ti!e dependin on %hatever polic# it !a# adopt in thefuture.&* -E!phases supplied

"he eiht Pro!issor# Notes, on the other hand, contained a stipulation rantin PN8 the

riht to increase or reduce interest rates %ithin the li!its allo%ed b# la% or b# the Monetar#8oard.&&

"he Real Estate Mortae aree!ent provided the sa!e riht to increase or reduce interestrates at an# ti!e dependin on %hatever polic# PN8 !a# adopt in the future. &)

Petitioners reliiousl# paid interest on the notes at the follo%in rates>

&. &st Pro!issor# Note dated 6ul# )7, &1(1 &1.3@$

). )nd Pro!issor# Note dated Nove!ber )), &1(1 )5@$

5. 5rd Pro!issor# Note dated March )&, &11* ))@$

7. 7th Pro!issor# Note dated 6ul# &1, &11* )7@$

3. 3th Pro!issor# Note dated Dece!ber &+, &11* )(@$

2. 2th Pro!issor# Note dated 4ebruar# &7, &11& 5)@$

+. +th Pro!issor# Note dated March &, &11& 5*@$ and

(. (th Pro!issor# Note dated 6ul# &&, &11& )7@.&5

In uust &11&, an !end!ent to Credit ree!ent&7 %as e=ecuted b# the parties, %ith thefollo%in stipulation reardin interest>

&.*5. Interest on ;ine vail!ents. -a "he 8orro%ers aree to pa# interest on each vail!ent fro! date of each vail!ent up to but not includin the date of full pa#!entthereof at the rate per annu! %hich is deter!ined b# the 8an: to be pri!e rate plusapplicable spread in effect as of the date of each vail!ent.&3 -E!phases supplied




















nder this !end!ent to Credit ree!ent, petitioners issued in favor of PN8 the follo%in&( Pro!issor# Notes, %hich petitioners settled e=cept the last -the note coverin theprincipal at the follo%in interest rates>

&. 1th Pro!issor# Note dated Nove!ber (, &11& )2@$

). &*th Pro!issor# Note dated March &1, &11) )3@$

5. &&th Pro!issor# Note dated 6ul# &&, &11) )5@$

7. &)th Pro!issor# Note dated Nove!ber &*, &11) )&@$

3. &5th Pro!issor# Note dated March &3, &115 )&@$

2. &7th Pro!issor# Note dated 6ul# &), &115 &+.3@$

+. &3th Pro!issor# Note dated Nove!ber &+, &115 )&@$

(. &2th Pro!issor# Note dated March )(, &117 )&@$

1. &+th Pro!issor# Note dated 6ul# &5, &117 )&@$

&*. &(th Pro!issor# Note dated Nove!ber &2, &117 &2@$

&&. &1th Pro!issor# Note dated pril &*, &113 )&@$

&). )*th Pro!issor# Note dated 6ul# &1, &113 &(.3@$

&5. )&st Pro!issor# Note dated Dece!ber &(, &113 &(.+3@$

&7. ))nd Pro!issor# Note dated pril )), &112 &(.3@$

&3. )5rd Pro!issor# Note dated 6ul# )), &112 &(.3@$

&2. )7th Pro!issor# Note dated Nove!ber )3, &112 &(@$

&+. )3th Pro!issor# Note dated Ma# 5*, &11+ &+.3@$ and

&(. )2th Pro!issor# Note -PN 1+*+)5+ dated 6ul# 5*, &11+ )3@. &2

"he 1th up to the &+th pro!issor# notes provide for the pa#!ent of interest at the rate the8an: !a# at an# ti!e %ithout notice, raise %ithin the li!its allo%ed b# la% = = =. &+

On the other hand, the &(th up to the )2th pro!issor# notes includin PN 1+*+)5+, %hichis the )2th pro!issor# note carried the follo%in provision>







= = = 4or this purpose, IFAe aree that the rate of interest herein stipulated !a# beincreased or decreased for the subse'uent Interest Periods, %ith prior notice to the8orro%er in the event of chanes in interest rate prescribed b# la% or the Monetar# 8oard of the Central 8an: of the Philippines, or in the 8an:Bs overall cost of funds. IFAe hereb# areethat in the event IF%e are not areeable to the interest rate fi=ed for an# Interest Period, IF%eshall have the option top repa# the loan or credit facilit# %ithout penalt# %ithin ten -&*calendar da#s fro! the Interest Settin Date.&( -E!phasis supplied

Respondent reularl# rene%ed the line fro! &11* up to &11+, and petitioners !ade ood onthe pro!issor# notes, reliiousl# pa#in the interests %ithout ob?ection or fail. 8ut in &11+,petitioners faltered %hen the interest rates soared due to the sian financial crisis.PetitionersB sole outstandin pro!issor# note for P).3 !illion PN 1+*+)5+ e=ecuted in6ul# &11+ and due &)* da#s later or on October )(, &11+ beca!e past due, and despiterepeated de!ands, petitioners failed to !a:e ood on the note.

Incidentall#, PN 1+*+)5+ provided for the penalt# e'uivalent to )7@ per annu! in case ofdefault, as follo%s>

Aithout need for notice or de!and, failure to pa# this note or an# install!ent thereon, %hendue, shall constitute default and in such cases or in case of arnish!ent, receivership orban:ruptc# or suit of an# :ind filed aainst !eFus b# the 8an:, the outstandin principal ofthis note, at the option of the 8an: and %ithout prior notice of de!and, shall i!!ediatel#beco!e due and pa#able and shall be sub?ect to a penalt# chare of t%ent# four percent-)7@ per annu! based on the defaulted principal a!ount. = = = &1 -E!phasis supplied

PN8 prepared a State!ent of ccount)* as of October &), &11(, detailin the a!ount dueand de!andable fro! petitioners in the total a!ount of P5,2)*,37&.2*, bro:en do%n asfollo%s>

Principal P ),3**,***.**

Interest 35(,(+7.17

Penalties 3(&,222.22

"otal P 5,2)*,37&.2*

Despite de!and, petitioners failed to pa# the foreoin a!ount. "hus, PN8 foreclosed onthe !ortae, and on 6anuar# &7, &111, "C"s "/&7)3* and "/&2)*( %ere sold to it atauction for the a!ount of P7,5)7,&+).12.)& "he sheriffBs certificate of sale %as reistered on

March &&, &111.

More than a #ear later, or on March )7, )***, petitioners filed Civil Case No. 31+3, see:inannul!ent of the foreclosure sale and an accountin of the PN8 credit. Petitionerstheori<ed that after the first pro!issor# note %here the# areed to pa# &1.3@ interest, thesucceedin stipulations for the pa#!ent of interest in their loan aree!ents %ith PN8 %hich alleedl# left to the latter the sole %ill to deter!ine the interest rate beca!e null andvoid. Petitioners added that because the interest rates %ere fi=ed b# respondent %ithout











their prior consent or aree!ent, these rates are void, and as a result, petitioners shouldonl# be !ade liable for interest at the leal rate of &)@. "he# clai!ed further that the#overpaid interests on the credit, and concluded that due to this overpa#!ent of steepinterest chares, their debt should no% be dee!ed paid, and the foreclosure and sale of"C"s "/&7)3* and "/&2)*( beca!e unnecessar# and %ronful. s for the i!posed penalt#of P3(&,222.22, petitioners alleed that since the Real Estate Mortae and theSupple!ent thereto did not include penalties as part of the secured a!ount, the sa!eshould be e=cluded fro! the foreclosure a!ount or bid price, even if such penalties areprovided for in the final Pro!issor# Note, or PN 1+*+)5+.))

In addition, petitioners souht to be rei!bursed an alleed overpa#!ent of P(7(,)(3.**!ade durin the period uust )&, &11& to March 3, &11(,resultin fro! respondentBsi!position of the alleed illeal and steep interest rates. "he# also pra#ed to bea%arded P)**,***.** b# %a# of attorne#Bs fees.)5

In its ns%er,)7 PN8 denied that it unilaterall# i!posed or fi=ed interest rates$ that petitionersareed that %ithout prior notice, PN8 !a# !odif# interest rates dependin on future polic#

adopted b# it$ and that the i!position of penalties %as areed upon in the Credit ree!ent. It added that the i!position of penalties is supported b# the all/inclusive clausein the Real Estate Mortae aree!ent %hich provides that the !ortae shall stand assecurit# for an# and all other obliations of %hatever :ind and nature o%in to respondent,%hich thus includes penalties i!posed upon default or non/pa#!ent of the principal andinterest on due date.

On pre/trial, the parties !utuall# areed to the follo%in !aterial facts, a!on others>

a "hat since &11& up to &11(, petitioners had paid PN8 the total a!ountof P5,7(7,)(+.**$)3 and

b "hat PN8 sent, and petitioners received, a March &*, )*** de!and letter.)2

Durin trial, petitioner ;#dia Silos -;#dia testified that the Credit ree!ent, the !end!ent to Credit ree!ent, Real Estate Mortae and the Supple!ent thereto %ereall prepared b# respondent PN8 and %ere presented to her and her husband Eduardo onl#for sinature$ that she %as told b# PN8 that the latter alone %ould deter!ine the interestrate$ that as to the !end!ent to Credit ree!ent, she %as told that PN8 %ould fill up theinterest rate portion thereof$ that at the ti!e the parties e=ecuted the said Credit ree!ent,she %as not infor!ed about the applicable spread that PN8 %ould i!pose on her account$that the interest rate portion of all Pro!issor# Notes she and Eduardo issued %ere al%a#sleft in blan: %hen the# e=ecuted the!, %ith respondentBs !ere assurance that it %ould be

the one to enter or indicate thereon the prevailin interest rate at the ti!e of avail!ent$ andthat the# areed to such arrane!ent. She further testified that the t%o Real EstateMortae aree!ents she sined did not stipulate the pa#!ent of penalties$ that she andEduardo consulted %ith a la%#er, and %ere told that PN8Bs actions %ere i!proper, and soon March )*, )***, the# %rote to the latter see:in a reco!putation of their outstandinobliation$ and %hen PN8 did not oblie, the# instituted Civil Case No. 31+3. )+















On cross/e=a!ination, ;#dia testified that she has been in business for )* #ears$ that shealso borro%ed fro! other individuals and another ban:$ that it %as onl# %ith ban:s that she%as as:ed to sin loan docu!ents %ith no indicated interest rate$ that she did not bother toread the ter!s of the loan docu!ents %hich she sined$ and that she received several PN8state!ents of account detailin their outstandin obliations, but she did not co!plain$ thatshe assu!ed instead that %hat %as %ritten therein is correct.)(

4or his part, PN8 9alibo 8ranch Manaer Diosdado spa, 6r. -spa, the sole %itness forrespondent, stated on cross/e=a!ination that as a practice, the deter!ination of the pri!erates of interest %as the responsibilit# solel# of PN8Bs "reasur# Depart!ent %hich is basedin Manila$ that these pri!e rates %ere si!pl# co!!unicated to all PN8 branches fori!ple!entation$ that there are a !ultitude of considerations %hich deter!ine the interestrate, such as the cost of !one#, forein currenc# values, PN8Bs spread, ban: ad!inistrativecosts, profitabilit#, and the practice in the ban:in industr#$ that in ever# repricin of eachloan avail!ent, the borro%er has the riht to 'uestion the rates, but that this %as not doneb# the petitioners$ and that an#thin that is not found in the Pro!issor# Note !a# besupple!ented b# the Credit ree!ent.)1

Rulin of the Reional "rial Court

On 4ebruar# )(, )**5, the trial court rendered ?ud!ent dis!issin Civil Case No. 31+3. 5*

It ruled that>

&. Ahile the Credit ree!ent allo%s PN8 to unilaterall# increase its spread over thefloatin interest rate at an# ti!e dependin on %hatever polic# it !a# adopt in thefuture, it li:e%ise allo%s for the decrease at an# ti!e of the sa!e. "hus, suchstipulation authori<in both the increase and decrease of interest rates as !a# be

applicable is valid,5&

as %as held in Consolidated 8an: and "rust Corporation-SO;ID8N9 v. Court of ppeals$5)

). 8an:s are allo%ed to stipulate that interest rates on loans need not be fi=ed andinstead be !ade dependent on prevailin rates upon %hich to pe such variableinterest rates$55

5. "he Pro!issor# Note, as the principal contract evidencin petitionersB loan,prevails over the Credit ree!ent and the Real Estate Mortae.

s such, the rate of interest, penalties and attorne#Bs fees stipulated in thePro!issor# Note prevail over those !entioned in the Credit ree!ent and the Real

Estate Mortae aree!ents$57

7. Rouhl#, PN8Bs co!putation of the total a!ount of petitionersB obliation iscorrect$53

3. 8ecause the loan %as ad!ittedl# due and de!andable, the foreclosure %asreularl# !ade$52





















2. 8# the ad!ission of petitioners durin pre/trial, all pa#!ents !ade to PN8 %ereproperl# applied to the principal, interest and penalties.5+

"he dispositive portion of the trial courtBs Decision reads>

IN VIEA O4 "GE 4ORE0OIN0, ?ud!ent is hereb# rendered in favor of the respondentand aainst the petitioners b# DISMISSIN0 the latterBs petition.

Costs aainst the petitioners.

SO ORDERED.5(

Petitioners !oved for reconsideration. In an Order 51 dated 6une 7, )**5, the trial courtranted onl# a !odification in the a%ard of attorne#Bs fees, reducin the sa!e fro! &*@ to&@. "hus, PN8 %as ordered to refund to petitioner the e=cess in attorne#Bs fees in thea!ount of P532,3(1.1*, vi<>

AGERE4ORE, ?ud!ent is hereb# rendered upholdin the validit# of the interest ratechared b# the respondent as %ell as the e=tra/?udicial foreclosure proceedins and theCertificate of Sale. Go%ever, respondent is directed to refund to the petitioner the a!ountof P532,3(1.1* representin the e=cess interest chared aainst the latter.

No pronounce!ent as to costs.

SO ORDERED.7*

Rulin of the Court of ppeals

Petitioners appealed to the C, %hich issued the 'uestioned Decision %ith the follo%indecretal portion>

AGERE4ORE, in vie% of the foreoin, the instant appeal is PR";H 0RN"ED. "he!odified Decision of the Reional "rial Court per Order dated 6une 7, )**5 is hereb#

44IRMED %ith MODI4IC"IONS, to %it>

&. "Jhat the interest rate to be applied after the e=piration of the first 5*/da# interestperiod for PN. No. 1+*+)5+ should be &)@ per annu!$

). "Jhat the attorne#Bs fees of&*@ is valid and bindin$ and

5. "Jhat PN8J is hereb# ordered to rei!burse petitionersJ the e=cess in the bidprice of P5++,3*3.11 %hich is the difference bet%een the total a!ount due PN8Jand the a!ount of its bid price.

SO ORDERED.7&













On the other hand, respondent did not appeal the 6une 7,)**5 Order of the trial court %hichreduced its a%ard of attorne#Bs fees. It si!pl# raised the issue in its appelleeBs brief in theC, and included a pra#er for the reversal of said Order.

In effect, the C li!ited petitionersB appeal to the follo%in issues>

& Ahether = = = the interest rates on petitionersB outstandin obliation %ereunilaterall# and arbitraril# i!posed b# PN8$

) Ahether = = = the penalt# chares %ere secured b# the real estate !ortae$ and

5 Ahether = = = the e=tra?udicial foreclosure and sale are valid. 7)

"he C noted that, based on receipts presented b# petitioners durin trial, the latter dutifull#paid a total ofP5,*)+,5)7.2* in interest for the period uust +, &11& to uust 2, &11+,over and above the P).3 !illion principal obliation. nd this is e=clusive of pa#!ents forinsurance pre!iu!s, docu!entar# sta!p ta=es, and penalt#. ll the %hile, petitioners did

not co!plain nor ob?ect to the i!position of interest$ the# in fact paid the sa!e reliiousl#and %ithout fail for seven #ears. "he appellate court ruled that petitioners are thus estoppedfro! 'uestionin the sa!e.

"he C nevertheless noted that for the period 6ul# 5*, &11+ to uust &7, &11+, PN8%ronl# applied an interest rate of )3.+)@ instead of the areed )3@$ thus it overcharedpetitioners, and the latter paid, an e=cess ofP+52.32 in interest.

On the issue of penalties, the C ruled that the e=press tenor of the Real Estate Mortaearee!ents conte!plated the inclusion of the PN 1+*+)5+/stipulated )7@ penalt# in thea!ount to be secured b# the !ortaed propert#, thus

4or and in consideration of certain loans, overdrafts and other credit acco!!odationsobtained fro! the MOR"00EE and to secure the pa#!ent of the sa!e and those othersthat the MOR"00EE !a# e=tend to the MOR"00OR, includin interest and e=penses,and other obliations o%in b# the MOR"00OR to the MOR"00EE, %hether direct orindirect, principal or secondar#, as appearin in the accounts, boo:s and records of theMOR"00EE, the MOR"00OR does hereb# transfer and conve# b# %a# of !ortaeunto the MOR"00EE = = =75 -E!phasis supplied

"he C believes that the )7@ penalt# is covered b# the phrase and other obliations o%inb# the !ortaor to the !ortaee and should thus be added to the a!ount secured b#the !ortaes.77

"he C then proceeded to declare valid the foreclosure and sale of properties covered b#"C"s "/&7)3* and "/&2)*(, %hich ca!e as a necessar# result of petitionersB failure to pa#the outstandin obliation upon de!and.73"he C sa% fit to increase the trial courtBs a%ardof &@ to &*@, findin the latter rate to be reasonable and citin the Real Estate Mortaearee!ent %hich authori<ed the collection of the hiher rate.72













4inall#, the C ruled that petitioners are entitled to P5++,3*3.*1 surplus, %hich is thedifference bet%een PN8Bs bid price of P7,5)7,&+).12 and petitionersB total co!putedobliation as of 6anuar# &7, &111, or the date of the auction sale, in the a!ountof P5,172,22+.(+.7+

Gence, the present Petition.

Issues

"he follo%in issues are raised in this Petition>

I

. "GE COR" O4 PPE;S S AE;; S "GE ;OAER COR" ERREDIN NO" N;;I4HIN0 "GE IN"ERES" R"E PROVISION IN "GE CREDI"

0REEMEN" D"ED 6;H )7, &1(1 K K K ND IN "GE MENDMEN" "OCREDI" 0REEMEN" D"ED0S" )&, &11& K K K AGICG ;E4" "O

"GE SO;E NI;"ER; DE"ERMIN"ION O4 "GE RESPONDEN" PN8"GE ORI0IN; 4IKIN0 O4 IN"ERES" R"E ND I"S INCRESE, AGICG

0REEMEN" IS CON"RRH "O ;A, R". &5*( O4 "GE NEA CIVI;CODEJ, S ENNCI"ED IN PONCINO ;MEID V. COR" O4

PPE;S,0.R. NO.J &&57&), PRI; &+, &112, ND CON"RRH "OP8;IC PO;ICH ND P8;IC IN"ERES", ND IN PP;HIN0 "GEPRINCIP;E O4 ES"OPPE; RISIN0 4ROM "GE ;;E0ED DE;HEDCOMP;IN" O4 PE"I"IONERSJ, ND "GEIRJ PHMEN" O4 "GEIN"ERES" CGR0ED.

8. CONSELEN";H, "GE COR" O4 PPE;S ND "GE ;OAER COR"

ERRED IN NO" DEC;RIN0 "G" PN8 IS NO" " ;; EN"I";ED "O NHIN"ERES" EKCEP" "GE ;E0; R"E 4ROM D"E O4 DEMND, ND INNO" PP;HIN0 "GE EKCESS OVER "GE ;E0; R"E O4 "GE

DMI""ED PHMEN"S MDE 8H PE"I"IONERSJ 4ROM &11&/&11( IN"GE DMI""ED "O"; MON" O4 P5,7(7,)(+.**, "O PHMEN" O4"GE PRINCIP; O4P),3**,***.**J ;EVIN0 N OVERPHMEN"O4P1(7,)(+.** RE4ND8;E 8H RESPONDEN" "O PE"I"IONERSJAI"G IN"ERES" O4 &)@ PER NNM.

II

"GE COR" O4 PPE;S ND "GE ;OAER COR" ERRED IN GO;DIN0 "G"

PEN;"IES RE INC;DEDIN "GE SECRED MON", S86EC" "O4OREC;OSRE, AGEN NO PEN;"IES RE MEN"IONED NORJ PROVIDED 4OR IN"GE RE; ES""E MOR"00E S SECRED MON" ND "GERE4ORE "GE

MON" O4 PEN;"IES SGO;DGVE 8EEN EKC;DED 4ROM "GEJ4OREC;OSRE MON".

III





"GE COR" O4 PPE;S ERRED IN REVERSIN0 "GE R;IN0 O4 "GE ;OAERCOR", AGICG REDCED "GE ""ORNEHBS 4EES O4 &*@ O4 "GE "O";INDE8"EDNESS CGR0ED IN "GE K K K EK"R6DICI; 4OREC;OSRE "OON;H&@, ND ARDIN0J &*@ ""ORNEHBS 4EES.7(

PetitionersB ru!ents

Petitioners insist that the interest rate provision in the Credit ree!ent and the !end!ent to Credit ree!ent should be declared null and void, for the# releated toPN8 the sole po%er to fi= interest rates based on arbitrar# criteria or factors such as ban:polic#, profitabilit#, cost of !one#, forein currenc# values, and ban: ad!inistrative costs$spaces for interest rates in the t%o Credit ree!ents and the pro!issor# notes %ere leftblan: for PN8 to unilaterall# fill, and their consent or aree!ent to the interest ratesi!posed thereafter %as not obtained$ the interest rate, %hich consists of the pri!e rate plusthe ban: spread, is deter!ined not b# aree!ent of the parties but b# PN8Bs "reasur#Depart!ent in Manila. Petitioners conclude that b# this !ethod of fi=in the interest rates,the principle of !utualit# of contracts is violated, and public polic# as %ell as Circular

1*371 of the then Central 8an: had been breached.

Petitioners 'uestion the CBs application of the principle of estoppel, sa#in that no estoppelcan proceed fro! an illeal act. "houh the# failed to ti!el# 'uestion the i!position of thealleed illeal interest rates and continued to pa# the loan on the basis of these rates, the#cannot be dee!ed to have ac'uiesced, and hence could recover %hat the# erroneousl#paid.3*

Petitioners arue that if the interest rates %ere nullified, then their obliation to PN8 isdee!ed e=tinuished as of 6ul# &11+$ !oreover, it %ould appear that the# even !ade anover pa#!ent to the ban: in the a!ount ofP1(7,)(+.**.

Ne=t, petitioners suest that since the Real Estate Mortae aree!ents did not includenor specif#, as part of the secured a!ount, the penalt# of )7@ authori<ed in PN 1+*+)5+,such a!ount of P3(&,222.22 could not be !ade ans%erable b# or collected fro! the!ortaes coverin "C"s "/&7)3* and "/&2)*(. Clai!in support fro! Philippine 8an: ofCo!!unications P8Co!J v. Court of ppeals,3& petitioners insist that the phrase and otherobliations o%in b# the !ortaor to the !ortaee3) in the !ortae aree!ents cannote!brace theP3(&,222.22 penalt#, because, as held in the P8Co! case, aJ penalt# charedoes not belon to the species of obliations enu!erated in the !ortae, hence, the saidcontract cannot be understood to secure the penalt#$ 35%hile the !ortaes are theaccessor# contracts, %hat ite!s are secured !a# onl# be deter!ined fro! the provisions of the !ortae contracts, and not fro! the Credit ree!ent or the pro!issor# notes.

4inall#, petitioners sub!it that the trial courtBs a%ard of &@ attorne#Bs fees should be!aintained, iven that in foreclosures, a la%#erBs %or: consists !erel# in the preparationand filin of the petition, and involves !ini!al stud#.37 "o allo% the i!position of astaerin P512,)&&.** for such %or: %ould be contrar# to e'uit#. Petitioners state that thepurpose of attorne#Bs fees in cases of this nature is not to ive respondent a larerco!pensation for the loan than the la% alread# allo%s, but to protect it aainst an# futureloss or da!ae b# bein co!pelled to retain counsel = = = to institute ?udicial proceedins



















for the collection of its credit.33 nd because the instant case involves a si!ple e=tra?udicialforeclosure, attorne#Bs fees !a# be e'uitabl# te!pered.

RespondentBs ru!ents

4or its part, respondent disputes petitionersB clai! that interest rates %ere unilaterall# fi=edb# it, ta:in relief in the C pronounce!ent that petitioners are dee!ed estopped b# theirfailure to 'uestion the i!posed rates and their continued pa#!ent thereof %ithoutopposition. It adds that because the Credit ree!ent and pro!issor# notes contained bothan escalation clause and a de/escalation clause, it !a# not be said that the ban: violatedthe principle of !utualit#. 8esides, the increase or decrease in interest rates have been!utuall# areed upon b# the parties, as sho%n b# petitionersB continuous pa#!ent %ithoutprotest. Respondent adds that the alleed unilateral i!position of interest rates is not aproper sub?ect for revie% b# the Court because the issue %as never raised in the lo%ercourt.

s for petitionersB clai! that interest rates i!posed b# it are null and void for the reasons

that & the Credit ree!ents and the pro!issor# notes %ere sined in blan:$ ) interestrates %ere at short periods$ 5 no interest rates could be chared %here no aree!ent oninterest rates %as !ade in %ritin$ 7 PN8 fi=ed interest rates on the basis of arbitrar#policies and standards left to its choosin$ and 3 interest rates based on pri!e rate plusapplicable spread are indeter!inate and arbitrar# PN8 counters>

a. "hat Credit ree!ents and pro!issor# notes %ere sined b# petitionersJ inblan: Respondent clai!s that this issue %as never raised in the lo%er court.8esides, docu!entar# evidence prevails over testi!onial evidence$ ;#dia SilosBtesti!on# in this reard is self/servin, unsupported and uncorroborated, and forbein the lone evidence on this issue. "he fact re!ains that these docu!ents are inproper for!, presu!ed reular, and endure, aainst arbitrar# clai!s b# Silos %hois an e=perienced business person that she sined 'uestionable loan docu!ents%hose provisions for interest rates %ere left blan:, and #et she continued to pa# theinterests %ithout protest for a nu!ber of #ears. 32

b. "hat interest rates %ere at short periods Respondent arues that the la% %hichoverns and prohibits chanes in interest rates !ade !ore than once ever# t%elve!onths has been re!oved3+ %ith the issuance of Presidential Decree No. (3(.3(

c. "hat no interest rates could be chared %here no aree!ent on interest rates %as!ade in %ritin in violation of rticle &132 of the Civil Code, %hich provides that nointerest shall be due unless it has been e=pressl# stipulated in %ritin Respondent

insists that the stipulated )3@ per annu! as e!bodied in PN 1+*+)5+ should bei!posed durin the interi!, or the period after the loan beca!e due and %hile itre!ains unpaid, and not the leal interest of &)@ as clai!ed b# petitioners. 31

d. "hat PN8 fi=ed interest rates on the basis of arbitrar# policies and standards left toits choosin ccordin to respondent, interest rates %ere fi=ed ta:in intoconsideration increases or decreases as provided b# la% or b# the Monetar# 8oard,the ban:Bs overall costs of funds, and upon aree!ent of the parties.2*















e. "hat interest rates based on pri!e rate plus applicable spread are indeter!inateand arbitrar# On this score, respondent sub!its there are various factors thatinfluence interest rates, fro! political events to econo!ic develop!ents, etc.$ thecost of !one#, profitabilit# and forein currenc# transactions !a# not bediscounted.2&

On the issue of penalties, respondent reiterates the trial courtBs findin that durin pre/trial,petitioners ad!itted that the State!ent of ccount as of October &), &11( %hich detailedand included penalt# chares as part of the total outstandin obliation o%in to the ban: %as correct. Respondent ?ustifies the i!position and collection of a penalt# as a nor!alban:in practice, and the standard rate per annu! for all co!!ercial ban:s, at the ti!e,%as )7@.

Respondent adds that the purpose of the penalt# or a penal clause for that !atter is toensure the perfor!ance of the obliation and substitute for da!aes and the pa#!ent ofinterest in the event of non/co!pliance.2) nd the pro!issor# note bein the principalaree!ent as opposed to the !ortae, %hich is a !ere accessor# should prevail. "his

bein the case, its inclusion as part of the secured a!ount in the !ortae aree!ents isvalid and necessar#.

Reardin the foreclosure of the !ortaes, respondent accuses petitioners of pre/e!ptinconsolidation of its o%nership over "C"s "/&7)3* and "/&2)*($ that petitioners filed CivilCase No. 31+3 ostensibl# to 'uestion the foreclosure and sale of properties covered b#"C"s "/&7)3* and "/&2)*( in a desperate !ove to retain o%nership over these properties,because the# failed to ti!el# redee! the!.

Respondent directs the attention of the Court to its petition in 0.R. No. &(&*72, 25 %here thepropriet# of the CBs rulin on the follo%in issues is s'uarel# raised>

&. "hat the interest rate to be applied after the e=piration of the first 5*/da# interestperiod for PN 1+*+)5+ should be &)@ per annu!$ and

). "hat PN8 should rei!burse petitioners the e=cess in the bid price of P5++,3*3.11%hich is the difference bet%een the total a!ount due to PN8 and the a!ount of itsbid price.

Our Rulin

"he Court rants the Petition.

8efore an#thin else, it !ust be said that it is not the function of the Court to re/e=a!ine orre/evaluate evidence adduced b# the parties in the proceedins belo%. "he rule ad!its ofcertain %ell/reconi<ed e=ceptions, thouh, as %hen the lo%er courtsB findins are notsupported b# the evidence on record or are based on a !isapprehension of facts, or %hencertain relevant and undisputed facts %ere !anifestl# overloo:ed that, if properl#considered, %ould ?ustif# a different conclusion. "his case falls %ithin such e=ceptions.









"he Court notes that on March 3, )**(, a Resolution %as issued b# the CourtBs 4irstDivision den#in respondentBs petition in 0.R. No. &(&*72, due to late filin, failure to attachthe re'uired affidavit of service of the petition on the trial court and the petitioners, andsub!ission of a defective verification and certification of non/foru! shoppin. On 6une )3,)**(, the Court issued another Resolution den#in %ith finalit# respondentBs !otion forreconsideration of the March 3, )**( Resolution. nd on uust &3, )**(, entr# of

?ud!ent %as !ade. "his thus settles the issues, as above/stated, coverin a the interestrate or &)@ per annu! that applies upon e=piration of the first 5* da#s interest periodprovided under PN 1+*+)5+, and bthe CBs decree that PN8 should rei!burse petitionerthe e=cess in the bid price of P5++,3*3.*1.

It appears that respondentBs practice, !ore than once proscribed b# the Court, has beencarried over once !ore to the petitioners. In a nu!ber of decided cases, the Court struc:do%n provisions in credit docu!ents issued b# PN8 to, or re'uired of, its borro%ers %hichallo% the ban: to increase or decrease interest rates %ithin the li!its allo%ed b# la% at an#ti!e dependin on %hatever polic# it !a# adopt in the future. "hus, in Philippine National8an: v. Court of ppeals,27 such stipulation and si!ilar ones %ere declared in violation of

rticle &5*(23 of the Civil Code. In a second case, Philippine National 8an: v. Court of ppeals,22 the ver# sa!e stipulations found in the credit aree!ent and the pro!issor#notes prepared and issued b# the respondent %ere aain invalidated. "he Court thereinsaid>

"he Credit ree!ent provided inter alia, that

-a "he 8N9 reserves the riht to increase the interest rate %ithin the li!its allo%ed b# la%at an# ti!e dependin on %hatever polic# it !a# adopt in the future$ Provided, that theinterest rate on this acco!!odation shall be correspondinl# decreased in the event thatthe applicable !a=i!u! interest is reduced b# la% or b# the Monetar# 8oard. In eithercase, the ad?ust!ent in the interest rate areed upon shall ta:e effect on the effectivit# dateof the increase or decrease in the !a=i!u! interest rate.

"he Pro!issor# Note, in turn, authori<ed the PN8 to raise the rate of interest, at an# ti!e%ithout notice, be#ond the stipulated rate of &)@ but onl# %ithin the li!its allo%ed b# la%.

"he Real Estate Mortae contract li:e%ise provided that

-: INCRESE O4 IN"ERES" R"E> "he rate of interest chared on the obliation securedb# this !ortae as %ell as the interest on the a!ount %hich !a# have been advanced b#the MOR"00EE, in accordance %ith the provision hereof, shall be sub?ect durin the lifeof this contract to such an increase %ithin the rate allo%ed b# la%, as the 8oard of Directors

of the MOR"00EE !a# prescribe for its debtors.

= = = =

In !a:in the unilateral increases in interest rates, petitioner ban: relied on the escalationclause contained in their credit aree!ent %hich provides, as follo%s>









"he 8an: reserves the riht to increase the interest rate %ithin the li!its allo%ed b# la% atan# ti!e dependin on %hatever polic# it !a# adopt in the future and provided, that, theinterest rate on this acco!!odation shall be correspondinl# decreased in the event thatthe applicable !a=i!u! interest rate is reduced b# la% or b# the Monetar# 8oard. In eithercase, the ad?ust!ent in the interest rate areed upon shall ta:e effect on the effectivit# dateof the increase or decrease in !a=i!u! interest rate.

"his clause is authori<ed b# Section ) of Presidential Decree -P.D. No. &2(7 %hich furthera!ended ct No. )233 -"he sur# ;a%, as a!ended, thus>

Section ). "he sa!e ct is hereb# a!ended b# addin a ne% section after Section +, toread as follo%s>

Sec. +/a. Parties to an aree!ent pertainin to a loan or forbearance of !one#, oods orcredits !a# stipulate that the rate of interest areed upon !a# be increased in the eventthat the applicable !a=i!u! rate of interest is increased b#la% or b# the Monetar# 8oard$Provided, "hat such stipulation shall be valid onl# if there is also a stipulation in the

aree!ent that the rate of interest areed upon shall be reduced in the event that theapplicable !a=i!u! rate of interest is reduced b# la% or b# the Monetar# 8oard$ Providedfurther, "hat the ad?ust!ent in the rate of interest areed upon shall ta:e effect on or afterthe effectivit# of the increase or decrease in the !a=i!u! rate of interest.

Section & of P.D. No. &2(7 also e!po%ered the Central 8an:Bs Monetar# 8oard to prescribethe !a=i!u! rates of interest for loans and certain forbearances. Pursuant to suchauthorit#, the Monetar# 8oard issued Central 8an: -C.8. Circular No. 1*3, series of &1(),Section 3 of %hich provides>

Sec. 3. Section &5*5 of the Manual of Reulations -for 8an:s and Other 4inancial

Inter!ediaries is hereb# a!ended to read as follo%s>

Sec. &5*5. Interest and Other Chares.

"he rate of interest, includin co!!issions, pre!iu!s, fees and other chares, on an#loan, or forbearance of an# !one#, oods or credits, reardless of !aturit# and %hethersecured or unsecured, shall not be sub?ect to an# ceilin prescribed under or pursuant tothe sur# ;a%, as a!ended.

P.D. No. &2(7 and C.8. Circular No. 1*3 no !ore than allo% contractin parties to stipulatefreel# reardin an# subse'uent ad?ust!ent in the interest rate that shall accrue on a loanor forbearance of !one#, oods or credits. In fine, the# can aree to ad?ust, up%ard or

do%n%ard, the interest previousl# stipulated. Go%ever, contrar# to the stubborn insistenceof petitioner ban:, the said la% and circular did not authori<e either part# to unilaterall# raisethe interest rate %ithout the otherBs consent.

It is basic that there can be no contract in the true sense in the absence of the ele!ent ofaree!ent, or of !utual assent of the parties. If this assent is %antin on the part of the one%ho contracts, his act has no !ore efficac# than if it had been done under duress or b# aperson of unsound !ind.



Si!ilarl#, contract chanes !ust be !ade %ith the consent of the contractin parties. "he!inds of all the parties !ust !eet as to the proposed !odification, especiall# %hen itaffects an i!portant aspect of the aree!ent. In the case of loan contracts, it cannot beainsaid that the rate of interest is al%a#s a vital co!ponent, for it can !a:e or brea: acapital venture. "hus, an# chane !ust be !utuall# areed upon, other%ise, it is bereft ofan# bindin effect.

Ae cannot countenance petitioner ban:Bs posturin that the escalation clause at benchives it unbridled riht to unilaterall# up%ardl# ad?ust the interest on private respondentsBloan. "hat %ould co!pletel# ta:e a%a# fro! private respondents the riht to assent to ani!portant !odification in their aree!ent, and %ould neate the ele!ent of !utualit# incontracts. In Philippine National 8an: v. Court of ppeals, et al., &12 SCR 352, 377/373-&11& %e held

= = = "he unilateral action of the PN8 in increasin the interest rate on the privaterespondentBs loan violated the !utualit# of contracts ordained in rticle &5*( of the CivilCode>

rt. &5*(. "he contract !ust bind both contractin parties$ its validit# or co!pliance cannotbe left to the %ill of one of the!.

In order that obliations arisin fro! contracts !a# have the force of la% bet%een theparties, there !ust be !utualit# bet%een the parties based on their essential e'ualit#. contract containin a condition %hich !a:es its fulfill!ent dependent e=clusivel# upon theuncontrolled %ill of one of the contractin parties, is void . . . . Gence, even assu!in thatthe . . . loan aree!ent bet%een the PN8 and the private respondent ave the PN8 alicense -althouh in fact there %as none to increase the interest rate at %ill durin the ter!of the loan, that license %ould have been null and void for bein violative of the principle of!utualit# essential in contracts. It %ould have invested the loan aree!ent %ith thecharacter of a contract of adhesion, %here the parties do not barain on e'ual footin, the%ea:er part#Bs -the debtor participation bein reduced to the alternative to ta:e it or leaveit . . . . Such a contract is a veritable trap for the %ea:er part# %ho! the courts of ?ustice!ust protect aainst abuse and i!position.2+ -E!phases supplied

"hen aain, in a third case, Spouses l!eda v. Court of ppeals,2( the Court invalidated thever# sa!e provisions in the respondentBs prepared Credit ree!ent, declarin thus>

"he bindin effect of an# aree!ent bet%een parties to a contract is pre!ised on t%osettled principles> -& that an# obliation arisin fro! contract has the force of la% bet%eenthe parties$ and -) that there !ust be !utualit# bet%een the parties based on their

essential e'ualit#. n# contract %hich appears to be heavil# %eihed in favor of one of theparties so as to lead to an unconscionable result is void. n# stipulation reardin thevalidit# or co!pliance of the contract %hich is left solel# to the %ill of one of the parties, isli:e%ise, invalid.

It is plainl# obvious, therefore, fro! the undisputed facts of the case that respondent ban:unilaterall# altered the ter!s of its contract %ith petitioners b# increasin the interest rateson the loan %ithout the prior assent of the latter. In fact, the !anner of aree!ent is itself







e=plicitl# stipulated b# the Civil Code %hen it provides, in rticle &132 that No interest shallbe due unless it has been e=pressl# stipulated in %ritin. Ahat has been stipulated in%ritin fro! a perusal of interest rate provision of the credit aree!ent sined bet%een theparties is that petitioners %ere bound !erel# to pa# )&@ interest, sub?ect to a possibleescalation or de/escalation, %hen & the circu!stances %arrant such escalation or de/escalation$ ) %ithin the li!its allo%ed b# la%$ and 5 upon aree!ent.

Indeed, the interest rate %hich appears to have been areed upon b# the parties to thecontract in this case %as the )&@ rate stipulated in the interest provision. n# doubt aboutthis is in fact readil# resolved b# a careful readin of the credit aree!ent because thesa!e plainl# uses the phrase interest rate areed upon, in reference to the oriinal )&@interest rate. = = =

= = = =

Petitioners never areed in %ritin to pa# the increased interest rates de!anded b#respondent ban: in contravention to the tenor of their credit aree!ent. "hat an increase in

interest rates fro! &(@ to as !uch as 2(@ is e=cessive and unconscionable isindisputable. 8et%een &1(& and &1(7, petitioners had paid an a!ount e'uivalent to virtuall#half of the entire principal -P+,+53,**7.22 %hich %as applied to interest alone. 8# the ti!ethe spouses tendered the a!ount of P7*,&7),3&(.** in settle!ent of their obliations$respondent ban: %as de!andin P3(,5++,7(+.** over and above those a!ounts alread#previousl# paid b# the spouses.

Escalation clauses are not basicall# %ron or leall# ob?ectionable so lon as the# are notsolel# potestative but based on reasonable and valid rounds. Gere, as clearl#de!onstrated above, not onl# areJ the increases of the interest rates on the basis of theescalation clause patentl# unreasonable and unconscionable, but also there are no validand reasonable standards upon %hich the increases are anchored.

= = = =

In the face of the une'uivocal interest rate provisions in the credit aree!ent and in the la%re'uirin the parties to aree to chanes in the interest rate in %ritin, %e hold that theunilateral and proressive increases i!posed b# respondent PN8 %ere null and void. "heireffect %as to increase the total obliation on an eihteen !illion peso loan to an a!ount%a# over three ti!es that %hich %as oriinall# ranted to the borro%ers. "hat theseincreases, occasioned b# craft# !anipulations in the interest rates is unconscionable andneutrali<es the salutar# policies of e=tendin loans to spur business cannot bedisputed.21 -E!phases supplied

Still, in a fourth case, Philippine National 8an: v. Court of ppeals,+* the above doctrine %asreiterated>

"he pro!issor# note contained the follo%in stipulation>

4or value received, IF%e, private respondentsJ ?ointl# and severall# pro!ise to pa# to theORDER of the PGI;IPPINE N"ION; 8N9, at its office in San 6ose Cit#, Philippines, the







su! of 4I4"EEN "GOSND ON;H -P&3,***.**, Philippine Currenc#, toether %ithinterest thereon at the rate of &)@ per annu! until paid, %hich interest rate the 8an: !a# atan# ti!e %ithout notice, raise %ithin the li!its allo%ed b# la%, and IF%e also aree to pa#

?ointl# and severall# @ per annu! penalt# chare, b# %a# of li'uidated da!aesshould this note be unpaid or is not rene%ed on due dated.

Pa#!ent of this note shall be as follo%s>

"GREE GNDRED SIK"H 4IVE DHS 4"ER D"E

On the reverse side of the note the follo%in condition %as sta!ped>

ll short/ter! loans to be ranted startin 6anuar# &, &1+( shall be !ade sub?ect to thecondition that an# andFor all e=tensions hereof that %ill leave an# portion of the a!ount stillunpaid after +5* da#s shall auto!aticall# convert the outstandin balance into a !ediu! orlon/ter! obliation as the case !a# be and ive the 8an: the riht to chare the interestrates prescribed under its policies fro! the date the account %as oriinall# ranted.

"o secure pa#!ent of the loan the parties e=ecuted a real estate !ortae contract %hichprovided>

-: INCRESE O4 IN"ERES" R"E>

"he rate of interest chared on the obliation secured b# this !ortae as %ell as theinterest on the a!ount %hich !a# have been advanced b# the MOR"00EE, inaccordance %ith the provision hereof, shall be sub?ect durin the life of this contract to suchan increase %ithin the rate allo%ed b# la%, as the 8oard of Directors of the MOR"00EE!a# prescribe for its debtors.

= = = =

"o bein %ith, PN8Bs aru!ent rests on a !isapprehension of the i!port of the appellatecourtBs rulin. "he Court of ppeals nullified the interest rate increases not because thepro!issor# note did not co!pl# %ith P.D. No. &2(7 b# providin for a de/escalation, butbecause the absence of such provision !ade the clause so one/sided as to !a:e itunreasonable.

"hat rulin is correct. It is in line %ith our decision in 8anco 4ilipino Savins Mortae8an: v. Navarro that althouh P.D. No. &2(7 is not to be retroactivel# applied to loansranted before its effectivit#, there !ust nevertheless be a de/escalation clause to !itiate

the one/sidedness of the escalation clause. Indeed because of concern for the une'ualstatus of borro%ers vis/Q/vis the ban:s, our cases after 8anco 4ilipino have fashioned therule that an# increase in the rate of interest !ade pursuant to an escalation clause !ust bethe result of aree!ent bet%een the parties.

"hus in Philippine National 8an: v. Court of ppeals, t%o pro!issor# notes authori<ed PN8to increase the stipulated interest per annu! %ithin the li!its allo%ed b# la% at an# ti!edependin on %hatever polic# PN8J !a# adopt in the future$ Provided, that the interest rate



on this note shall be correspondinl# decreased in the event that the applicable !a=i!u!interest rate is reduced b# la% or b# the Monetar# 8oard. "he real estate !ortae li:e%iseprovided>

"he rate of interest chared on the obliation secured b# this !ortae as %ell as theinterest on the a!ount %hich !a# have been advanced b# the MOR"00EE, inaccordance %ith the provisions hereof, shall be sub?ect durin the life of this contract tosuch an increase %ithin the rate allo%ed b# la%, as the 8oard of Directors of theMOR"00EE !a# prescribe for its debtors.

Pursuant to these clauses, PN8 successivel# increased the interest fro! &(@ to 5)@, thento 7&@ and then to 7(@. "his Court declared the increases unilaterall# i!posed b# PN8J tobe in violation of the principle of !utualit# as e!bodied in rt.&5*( of the Civil Code, %hichprovides that tJhe contract !ust bind both contractin parties$ its validit# or co!pliancecannot be left to the %ill of one of the!. s the Court e=plained>

In order that obliations arisin fro! contracts !a# have the force of la% bet%een the

parties, there !ust be !utualit# bet%een the parties based on their essential e'ualit#. contract containin a condition %hich !a:es its fulfill!ent dependent e=clusivel# upon theuncontrolled %ill of one of the contractin parties, is void -0arcia vs. Rita ;earda, Inc., )&SCR 333. Gence, even assu!in that the P&.( !illion loan aree!ent bet%een the PN8and the private respondent ave the PN8 a license -althouh in fact there %as none toincrease the interest rate at %ill durin the ter! of the loan, that license %ould have beennull and void for bein violative of the principle of !utualit# essential in contracts. It %ouldhave invested the loan aree!ent %ith the character of a contract of adhesion, %here theparties do not barain on e'ual footin, the %ea:er part#Bs -the debtor participation beinreduced to the alternative to ta:e it or leave it -Lua vs. ;a% nion Roc: Insurance Co.,13 Phil. (3. Such a contract is a veritable trap for the %ea:er part# %ho! the courts of

?ustice !ust protect aainst abuse and i!position.

si!ilar rulin %as !ade in Philippine National 8an: v. Court of ppeals. "he creditaree!ent in that case provided>

"he 8N9 reserves the riht to increase the interest rate %ithin the li!its allo%ed b# la% atan# ti!e dependin on %hatever polic# it !a# adopt in the future> Provided, that the interestrate on this acco!!odation shall be correspondinl# decreased in the event that theapplicable !a=i!u! interest is reduced b# la% or b# the Monetar# 8oard. . . .

s in the first case, PN8 successivel# increased the stipulated interest so that %hat %asoriinall# &)@ per annu! beca!e, after onl# t%o #ears, 7)@. In declarin the increases

invalid, %e held>

Ae cannot countenance petitioner ban:Bs posturin that the escalation clause at benchives it unbridled riht to unilaterall# up%ardl# ad?ust the interest on private respondentsBloan. "hat %ould co!pletel# ta:e a%a# fro! private respondents the riht to assent to ani!portant !odification in their aree!ent, and %ould neate the ele!ent of !utualit# incontracts.



Onl# recentl# %e invalidated another round of interest increases decreed b# PN8 pursuantto a si!ilar aree!ent it had %ith other borro%ers>

AJhile the sur# ;a% ceilin on interest rates %as lifted b# C.8. Circular 1*3, nothin in thesaid circular could possibl# be read as rantin respondent ban: carte blanche authorit# toraise interest rates to levels %hich %ould either enslave its borro%ers or lead to ahe!orrhain of their assets.

In this case no atte!pt %as !ade b# PN8 to secure the confor!it# of private respondentsto the successive increases in the interest rate. Private respondentsB assent to the increasescan not be i!plied fro! their lac: of response to the letters sent b# PN8, infor!in the! ofthe increases. 4or as stated in one case, no one receivin a proposal to chane a contractis oblied to ans%er the proposal.+& -E!phasis supplied

Ae !ade the sa!e pronounce!ent in a fifth case, Ne% Sa!pauita 8uilders Construction,Inc. v. Philippine National 8an:,+) thus

Courts have the authorit# to stri:e do%n or to !odif# provisions in pro!issor# notes thatrant the lenders unrestrained po%er to increase interest rates, penalties and other charesat the latterBs sole discretion and %ithout ivin prior notice to and securin the consent ofthe borro%ers. "his unilateral authorit# is anathe!a to the !utualit# of contracts and enablelenders to ta:e undue advantae of borro%ers. lthouh the sur# ;a% has been effectivel#repealed, courts !a# still reduce ini'uitous or unconscionable rates chared for the use of!one#. 4urther!ore, e=cessive interests, penalties and other chares not revealed indisclosure state!ents issued b# ban:s, even if stipulated in the pro!issor# notes, cannotbe iven effect under the "ruth in ;endin ct.+5 -E!phasis supplied

Het aain, in a si=th disposition, Philippine National 8an: v. Spouses Roca!ora, +7 the above

pronounce!ents %ere reiterated to debun: PN8Bs repeated reliance on its invalidatedcontract stipulations>

Ae repeated this rule in the &117 case of PN8 v. C and 6a#!e 4ernande< and the &112case of PN8 v. C and Spouses 8asco. "a:in no heed of these rulins, the escalationclause PN8 used in the present case to ?ustif# the increased interest rates is no differentfro! the escalation clause assailed in the &112 PN8 case$ in both, the interest rates %ereincreased fro! the areed &)@ per annu! rate to 7)@. = = =

= = = =

On the strenth of this rulin, PN8Bs aru!ent that the spouses Roca!oraBs failure to

contest the increased interest rates that %ere purportedl# reflected in the state!ents ofaccount and the de!and letters sent b# the ban: a!ounted to their i!plied acceptance ofthe increase should li:e%ise fail.

Evidentl#, PN8Bs failure to secure the spouses Roca!oraBs consent to the increased interestrates pro!pted the lo%er courts to declare e=cessive and illeal the interest rates i!posed."oo around this lo%er court findin, PN8 allees that the P)*2,)1+.7+ deficienc# clai!%as co!puted usin onl# the oriinal &)@ per annu! interest rate. Ae find this unli:el#.












Our e=a!ination of PN8Bs o%n leders, included in the records of the case, clearl# indicatesthat PN8 i!posed interest rates hiher than the areed &)@ per annu! rate. "hisconfir!ator# findin, albeit based solel# on leders found in the records, reinforces theapplication in this case of the rule that findins of the R"C, %hen affir!ed b# the C, arebindin upon this Court.+3 -E!phases supplied

Veril#, all these cases, includin the present one, involve identical or si!ilar provisionsfound in respondentBs credit aree!ents and pro!issor# notes. "hus, the 6ul# &1(1 Credit

ree!ent e=ecuted b# petitioners and respondent contained the follo%in stipulation oninterest>

&.*5. Interest. -a "he ;oan shall be sub?ect to interest at the rate of &1.3@ per annu!J.Interest shall be pa#able in advance ever# one hundred t%ent# da#s at the rate prevailin atthe ti!e of the rene%al.

-b "he 8orro%er arees that the 8an: !a# !odif# the interest rate in the ;oan dependinon %hatever polic# the 8an: !a# adopt in the future, includin %ithout li!itation, the shiftin

fro! the floatin interest rate s#ste! to the fi=ed interest rate s#ste!, or vice versa. Aherethe 8an: has i!posed on the ;oan interest at a rate per annu! %hich is e'ual to the 8an:Bsspread over the current floatin interest rate, the 8orro%er hereb# arees that the 8an:!a#, %ithout need of notice to the 8orro%er, increase or decrease its spread over thefloatin interest rate at an# ti!e dependin on %hatever polic# it !a# adopt in thefuture.+2 -E!phases supplied

%hile the eiht pro!issor# notes issued pursuant thereto ranted PN8 the riht to increaseor reduce interest rates %ithin the li!its allo%ed b# la% or the Monetar# 8oard ++ and theReal Estate Mortae aree!ent included the sa!e riht to increase or reduce interestrates at an# ti!e dependin on %hatever polic# PN8 !a# adopt in the future. +(

On the basis of the Credit ree!ent, petitioners issued pro!issor# notes %hich the#sined in blan:, and respondent later on entered their correspondin interest rates, asfollo%s>

&st Pro!issor# Note dated 6ul# )7, &1(1 &1.3@$

)nd Pro!issor# Note dated Nove!ber )), &1(1 )5@$

5rd Pro!issor# Note dated March )&, &11* ))@$

7th Pro!issor# Note dated 6ul# &1, &11* )7@$

3th Pro!issor# Note dated Dece!ber &+, &11* )(@$

2th Pro!issor# Note dated 4ebruar# &7, &11& 5)@$

+th Pro!issor# Note dated March &, &11& 5*@$ and

(th Pro!issor# Note dated 6ul# &&, &11& )7@.+1















On the other hand, the uust &11& !end!ent to Credit ree!ent contains the follo%instipulation reardin interest>

&.*5. Interest on ;ine vail!ents. -a "he 8orro%ers aree to pa# interest on each vail!ent fro! date of each vail!ent up to but not includin the date of full pa#!entthereof at the rate per annu! %hich is deter!ined b# the 8an: to be pri!e rate plusapplicable spread in effect as of the date of each vail!ent.(* -E!phases supplied

and under this !end!ent to Credit ree!ent, petitioners aain e=ecuted and sined thefollo%in pro!issor# notes in blan:, for the respondent to later on enter the correspondininterest rates, %hich it did, as follo%s>

1th Pro!issor# Note dated Nove!ber (, &11& )2@$

&*th Pro!issor# Note dated March &1, &11) )3@$

&&th Pro!issor# Note dated 6ul# &&, &11) )5@$

&)th Pro!issor# Note dated Nove!ber &*, &11) )&@$

&5th Pro!issor# Note dated March &3, &115 )&@$

&7th Pro!issor# Note dated 6ul# &), &115 &+.3@$

&3th Pro!issor# Note dated Nove!ber &+, &115 )&@$

&2th Pro!issor# Note dated March )(, &117 )&@$

&+th Pro!issor# Note dated 6ul# &5, &117 )&@$

&(th Pro!issor# Note dated Nove!ber &2, &117 &2@$

&1th Pro!issor# Note dated pril &*, &113 )&@$

)*th Pro!issor# Note dated 6ul# &1, &113 &(.3@$

)&st Pro!issor# Note dated Dece!ber &(, &113 &(.+3@$

))nd Pro!issor# Note dated pril )), &112 &(.3@$

)5rd Pro!issor# Note dated 6ul# )), &112 &(.3@$

)7th Pro!issor# Note dated Nove!ber )3, &112 &(@$

)3th Pro!issor# Note dated Ma# 5*, &11+ &+.3@$ and

)2th Pro!issor# Note -PN 1+*+)5+ dated 6ul# 5*, &11+ )3@. (&







"he 1th up to the &+th pro!issor# notes provide for the pa#!ent of interest at the rate the8an: !a# at an# ti!e %ithout notice, raise %ithin the li!its allo%ed b# la% = = =. () On theother hand, the &(th up to the )2th pro!issor# notes %hich includes PN 1+*+)5+ carried the follo%in provision>

= = = 4or this purpose, IFAe aree that the rate of interest herein stipulated !a# beincreased or decreased for the subse'uent Interest Periods, %ith prior notice to the8orro%er in the event of chanes in interest rate prescribed b# la% or the Monetar# 8oard of the Central 8an: of the Philippines, or in the 8an:Bs overall cost of funds. IFAe hereb# areethat in the event IF%e are not areeable to the interest rate fi=ed for an# Interest Period, IF%eshall have the option to prepa# the loan or credit facilit# %ithout penalt# %ithin ten -&*calendar da#s fro! the Interest Settin Date.(5 -E!phasis supplied

"hese stipulations !ust be once !ore invalidated, as %as done in previous cases. "heco!!on deno!inator in these cases is the lac: of aree!ent of the parties to the i!posedinterest rates. 4or this case, this lac: of consent b# the petitioners has been !ade obviousb# the fact that the# sined the pro!issor# notes in blan: for the respondent to fill. Ae find

credible the testi!on# of ;#dia in this respect. Respondent failed to discredit her$ in fact, its%itness PN8 9alibo 8ranch Manaer spa ad!itted that interest rates %ere fi=ed solel# b#its "reasur# Depart!ent in Manila, %hich %ere then si!pl# co!!unicated to all PN8branches for i!ple!entation. If this %ere the case, then this %ould e=plain %h# petitionershad to sin the pro!issor# notes in blan:, since the i!posable interest rates have #et to bedeter!ined and fi=ed b# respondentBs "reasur# Depart!ent in Manila.

Moreover, in spaBs enu!eration of the factors that deter!ine the interest rates PN8 fi=es such as cost of !one#, forein currenc# values, ban: ad!inistrative costs, profitabilit#, andconsiderations %hich affect the ban:in industr# it can be seen that considerations %hichaffect PN8Bs borro%ers are inored. borro%erBs current financial state, his feedbac: oropinions, the nature and purpose of his borro%ins, the effect of forein currenc# values orfluctuations on his business or borro%in, etc. these are not factors %hich influence thefi=in of interest rates to be i!posed on hi!. Clearl#, respondentBs !ethod of fi=in interestrates based on one/sided, indeter!inate, and sub?ective criteria such as profitabilit#, cost of!one#, ban: costs, etc. is arbitrar# for there is no fi=ed standard or !arin above or belo%these considerations.

"he stipulation in the pro!issor# notes sub?ectin the interest rate to revie% does not render the i!position b# CP8 of interest rates on the obliations of the spouses 8eluso valid.

ccordin to said stipulation>

"he interest rate shall be sub?ect to revie% and !a# be increased or decreased b# the

;ENDER considerin a!on others the prevailin financial and !onetar# conditions$ or therate of interest and chares %hich other ban:s or financial institutions chare or offer tochare for si!ilar acco!!odations$ andFor the resultin profitabilit# to the ;ENDER afterdue consideration of all dealins %ith the 8ORROAER.

It should be pointed out that the authorit# to revie% the interest rate %as iven toJ CP8alone as the lender. Moreover, CP8 !a# appl# the considerations enu!erated in thisprovision as it %ishes. s %orded in the above provision, CP8 !a# ive as !uch %eiht







as it desires to each of the follo%in considerations> -& the prevailin financial and!onetar# condition$-) the rate of interest and chares %hich other ban:s or financialinstitutions chare or offer to chare for si!ilar acco!!odations$ andFor-5 the resultinprofitabilit# to the ;ENDER -CP8 after due consideration of all dealins %ith the8ORROAER -the spouses 8eluso. ain, as in the case of the interest rate provision,there is no fi=ed !arin above or belo% these considerations.

In vie% of the foreoin, the Separabilit# Clause cannot save either of the t%o options ofCP8 as to the interest to be i!posed, as both options violate the principle of !utualit# ofcontracts.(7 -E!phases supplied

"o repeat %hat has been said in the above/cited cases, an# !odification in the contract,such as the interest rates, !ust be !ade %ith the consent of the contractin parties. 1âwphi1 "he!inds of all the parties !ust !eet as to the proposed !odification, especiall# %hen itaffects an i!portant aspect of the aree!ent. In the case of loan aree!ents, the rate ofinterest is a principal condition, if not the !ost i!portant co!ponent. "hus, an# !odificationthereof !ust be !utuall# areed upon$ other%ise, it has no bindin effect.

Ahat is even !ore larin in the present case is that, the stipulations in 'uestion no lonerprovide that the parties shall aree upon the interest rate to be fi=ed$ /instead, the# are%orded in such a %a# that the borro%er shall aree to %hatever interest rate respondentfi=es. In credit aree!ents covered b# the above/cited cases, it is provided that>

"he 8an: reserves the riht to increase the interest rate %ithin the li!its allo%ed b# la% atan# ti!e dependin on %hatever polic# it !a# adopt in the future> Provided, that, theinterest rate on this acco!!odation shall be correspondinl# decreased in the event thatthe applicable !a=i!u! interest rate is reduced b# la% or b# the Monetar# 8oard. In eithercase, the ad?ust!ent in the interest rate areed upon shall ta:e effect on the effectivit# dateof the increase or decrease in !a=i!u! interest rate.(3 -E!phasis supplied

Ahereas, in the present credit aree!ents under scrutin#, it is stated that>

IN "GE 6;H &1(1 CREDI" 0REEMEN"

-b "he 8orro%er arees that the 8an: !a# !odif# the interest rate on the ;oan dependinon %hatever polic# the 8an: !a# adopt in the future, includin %ithout li!itation, the shiftinfro! the floatin interest rate s#ste! to the fi=ed interest rate s#ste!, or vice versa. Aherethe 8an: has i!posed on the ;oan interest at a rate per annu!, %hich is e'ual to the8an:Bs spread over the current floatin interest rate, the 8orro%er hereb# arees that the8an: !a#, %ithout need of notice to the 8orro%er, increase or decrease its spread over the

floatin interest rate at an# ti!e dependin on %hatever polic# it !a# adopt in thefuture.(2 -E!phases supplied

IN "GE 0S" &11& MENDMEN" "O CREDI" 0REEMEN"

&.*5. Interest on ;ine vail!ents. -a "he 8orro%ers aree to pa# interest on each vail!ent fro! date of each vail!ent up to but not includin the date of full pa#!ent










thereof at the rate per annu! %hich is deter!ined b# the 8an: to be pri!e rate plusapplicable spread in effect as of the date of each vail!ent.(+ -E!phasis supplied

Plainl#, %ith the present credit aree!ent, the ele!ent of consent or aree!ent b# theborro%er is no% co!pletel# lac:in, %hich !a:es respondentBs unla%ful act all the !orereprehensible.

ccordinl#, petitioners are correct in aruin that estoppel should not appl# to the!, foreJstoppel cannot be predicated on an illeal act. s bet%een the parties to a contract,validit# cannot be iven to it b# estoppel if it is prohibited b# la% or is aainst public polic#. ((

It appears that b# its acts, respondent violated the "ruth in ;endin ct, or Republic ct No.5+23, %hich %as enacted to protect = = = citi<ens fro! a lac: of a%areness of the true costof credit to the user b# usin a full disclosure of such cost %ith a vie% of preventin theuninfor!ed use of credit to the detri!ent of the national econo!#.(1 "he la% ives adetailed enu!eration of the specific infor!ation re'uired to be disclosed, a!on %hich arethe interest and other chares incident to the e=tension of credit.1* Section 7 thereof

provides that a disclosure state!ent !ust be furnished prior to the consu!!ation of thetransaction, thus>

SEC. 7. n# creditor shall furnish to each person to %ho! credit is e=tended, prior to theconsu!!ation of the transaction, a clear state!ent in %ritin settin forth, to the e=tentapplicable and in accordance %ith rules and reulations prescribed b# the 8oard, thefollo%in infor!ation>

-& the cash price or delivered price of the propert# or service to be ac'uired$

-) the a!ounts, if an#, to be credited as do%n pa#!ent andFor trade/in$

-5 the difference bet%een the a!ounts set forth under clauses -& and -)$

-7 the chares, individuall# ite!i<ed, %hich are paid or to be paid b# such person inconnection %ith the transaction but %hich are not incident to the e=tension of credit$

-3 the total a!ount to be financed$

-2 the finance chare e=pressed in ter!s of pesos and centavos$ and

-+ the percentae that the finance bears to the total a!ount to be financede=pressed as a si!ple annual rate on the outstandin unpaid balance of theobliation.

nder Section 7-2, finance chare represents the a!ount to be paid b# the debtorincident to the e=tension of credit such as interest or discounts, collection fees, creditinvestiation fees, attorne#Bs fees, and other service chares. "he total finance charerepresents the difference bet%een -& the areate consideration -do%n pa#!ent plusinstall!ents on the part of the debtor, and -) the su! of the cash price and non/financechares.1&













8# re'uirin the petitioners to sin the credit docu!ents and the pro!issor# notes in blan:,and then unilaterall# fillin the! up later on, respondent violated the "ruth in ;endin ct,and %as re!iss in its disclosure obliations. In one case, %hich the Court finds applicablehere, it %as held>

CP8 further arues that since the spouses 8eluso %ere dul# iven copies of the sub?ectpro!issor# notes after their e=ecution, then the# %ere dul# notified of the ter!s thereof, insubstantial co!pliance %ith the "ruth in ;endin ct.

Once !ore, %e disaree. Section 7 of the "ruth in ;endin ct clearl# provides that thedisclosure state!ent !ust be furnished prior to the consu!!ation of the transaction>

SEC. 7. n# creditor shall furnish to each person to %ho! credit is e=tended, prior to theconsu!!ation of the transaction, a clear state!ent in %ritin settin forth, to the e=tentapplicable and in accordance %ith rules and reulations prescribed b# the 8oard, thefollo%in infor!ation>

-& the cash price or delivered price of the propert# or service to be ac'uired$

-) the a!ounts, if an#, to be credited as do%n pa#!ent andFor trade/in$

-5 the difference bet%een the a!ounts set forth under clauses -& and -)$

-7 the chares, individuall# ite!i<ed, %hich are paid or to be paid b# such person inconnection %ith the transaction but %hich are not incident to the e=tension of credit$

-3 the total a!ount to be financed$

-2 the finance chare e=pressed in ter!s of pesos and centavos$ and

-+ the percentae that the finance bears to the total a!ount to be financede=pressed as a si!ple annual rate on the outstandin unpaid balance of theobliation.

"he rationale of this provision is to protect users of credit fro! a lac: of a%areness of thetrue cost thereof, proceedin fro! the e=perience that ban:s are able to conceal such truecost b# hidden chares, uncertaint# of interest rates, deduction of interests fro! the loaneda!ount, and the li:e. "he la% thereb# see:s to protect debtors b# per!ittin the! to full#appreciate the true cost of their loan, to enable the! to ive full consent to the contract, andto properl# evaluate their options in arrivin at business decisions. pholdin CP8Bs clai!of substantial co!pliance %ould defeat these purposes of the "ruth in ;endin ct. "hebelated discover# of the true cost of credit %ill too often not be able to reverse the ill effectsof an alread# consu!!ated business decision.

In addition, the pro!issor# notes, the copies of %hich %ere presented to the spouses8eluso after e=ecution, are not sufficient notification fro! CP8. s earlier discussed, theinterest rate provision therein does not sufficientl# indicate %ith particularit# the interest rateto be applied to the loan covered b# said pro!issor# notes.1)-E!phases supplied





Go%ever, the one/#ear period %ithin %hich an action for violation of the "ruth in ;endin ct!a# be filed evidentl# prescribed lon ao, or so!eti!e in )**&, one #ear after petitionersreceived the March )*** de!and letter %hich contained the illeal chares.

"he fact that petitioners later received several state!ents of account detailin itsoutstandin obliations does not cure respondentBs breach. "o repeat, the belated discover#of the true cost of credit does not reverse the ill effects of an alread# consu!!atedbusiness decision.15

Neither !a# the state!ents be considered proposals sent to secure the petitionersBconfor!it#$ the# %ere sent after the i!position and application of the interest rate, and notbefore. nd even if it %ere to be presu!ed that these are proposals or offers, there %as noacceptance b# petitioners. No one receivin a proposal to !odif# a loan contract,especiall# reardin interest, is oblied to ans%er the proposal. 17

;oan and credit arrane!ents !a# be !ade enticin b#, or s%eetened %ith, offers of lo%initial interest rates, but actuall# acco!panied b# provisions %ritten in fine print that allo%

lenders to later on increase or decrease interest rates unilaterall#, %ithout the consent of theborro%er, and dependin on co!ple= and sub?ective factors. 8ecause the# have been luredinto these contracts b# initiall# lo% interest rates, borro%ers et cauht and stuc: in the %ebof subse'uent steep rates and penalties, surchares and the li:e. 8ein ordinar# individualsor entities, the# naturall# dread leal co!plications and cannot afford court litiation$ the#succu!b to %hatever chares the lenders i!pose. t the ver# least, borro%ers should bechared rihtl#$ but then aain this is not possible in a one/sided credit s#ste! %here thete!ptation to abuse is stron and the %illinness to rectif# is !ade %ea: b# the eternaldesire for profit.

0iven the above supposition, the Court cannot subscribe to respondentBs aru!ent that inever# repricin of petitionersB loan avail!ent, the# are iven the riht to 'uestion the interestrates i!posed. "he i!port of respondentBs line of reasonin cannot be other than that if oneout of ever# hundred borro%ers 'uestions respondentBs practice of unilaterall# fi=in interestrates, then onl# the loan arrane!ent %ith that lone co!plainin borro%er %ill en?o# thebenefit of revie% or re/neotiation$ as to the 11 others, the 'uestionable practice %illcontinue unchec:ed, and respondent %ill continue to reap the profits fro! suchunscrupulous practice. "he Court can no !ore condone a vie% so perverse. "his is e=actl#%hat the Court !eant in the i!!ediatel# precedin cited case %hen it said that the belateddiscover# of the true cost of credit does not reverse the ill effects of an alread#consu!!ated business decision$13 as to the 11 borro%ers %ho did not or could notco!plain, the illeal act shall have beco!e a fait acco!pli to their detri!ent, the# havealread# suffered the oppressive rates.

8esides, that petitioners are iven the riht to 'uestion the interest rates i!posed is, underthe circu!stances, irrelevant$ %e have a situation %here the petitioners do not stand one'ual footin %ith the respondent. It is doubtful that an# borro%er %ho finds hi!self inpetitionersB position %ould dare 'uestion respondentBs po%er to arbitraril# !odif# interestrates at an# ti!e. In the second place, on %hat basis could an# borro%er 'uestion suchpo%er, %hen the criteria or standards %hich are reall# one/sided, arbitrar# and sub?ective

for the e=ercise of such po%er are precisel# lost on hi!










4or the sa!e reasons, the Court cannot validl# consider that, as stipulated in the &(th up tothe )2th pro!issor# notes, petitioners are ranted the option to prepa# the loan or creditfacilit# %ithout penalt# %ithin &* calendar da#s fro! the Interest Settin Date if the# are notareeable to the interest rate fi=ed. It has been sho%n that the pro!issor# notes aree=ecuted and sined in blan:, !eanin that b# the ti!e petitioners learn of the interest rate,the# are alread# bound to pa# it because the# have alread# pre/sined the note %here therate is subse'uentl# entered.

8esides, pre!iu! !a# not be placed upon a stipulation in a contract %hich rants one part#the riht to choose %hether to continue %ith or %ithdra% fro! the aree!ent if it discoversthat %hat the other part# has been doin all alon is i!proper or illeal.

"hus said, respondentBs aru!ents relative to the credit docu!ents that docu!entar#evidence prevails over testi!onial evidence$ that the credit docu!ents are in proper for!,presu!ed reular, and endure, aainst arbitrar# clai!s b# petitioners, e=perienced businesspersons that the# are, the# sined 'uestionable loan docu!ents %hose provisions forinterest rates %ere left blan:, and #et the# continued to pa# the interests %ithout protest for

a nu!ber of #ears deserve no consideration.

Aith reard to interest, the Court finds that since the escalation clause is annulled, theprincipal a!ount of the loan is sub?ect to the oriinal or stipulated rate of interest, and upon!aturit#, the a!ount due shall be sub?ect to leal interest at the rate of &)@ per annu!."his is the unifor! rulin adopted in previous cases, includin those cited here.12 "heinterests paid b# petitioners should be applied first to the pa#!ent of the stipulated or lealand unpaid interest, as the case !a# be, and later, to the capital or principal.1+ Respondentshould then refund the e=cess a!ount of interest that it has illeall# i!posed uponpetitioners$ tJhe a!ount to be refunded refers to that paid b# petitioners %hen the# had noobliation to do so.1( "hus, the partiesB oriinal aree!ent stipulated the pa#!ent of &1.3@interest$ ho%ever, this rate %as intended to appl# onl# to the first pro!issor# note %hiche=pired on Nove!ber )&, &1(1 and %as paid b# petitioners$ it %as not intended to appl# tothe %hole duration of the loan. Subse'uent hiher interest rates have been declared illeal$but because onl# the rates are found to be i!proper, the obliation to pa# interest subsists,the sa!e to be fi=ed at the leal rate of &)@ per annu!. Go%ever, the &)@ interest shallappl# onl# until 6une 5*, )*&5. Startin 6ul#&, )*&5, the prevailin rate of interest shall be2@ per annu! pursuant to our rulin in Nacar v. 0aller# 4ra!es11 and 8an:o Sentral nPilipinas/Monetar# 8oard Circular No. +11.

No% to the issue of penalt#. PN 1+*+)5+ provides that failure to pa# it or an# install!entthereon, %hen due, shall constitute default, and a penalt# chare of )7@ per annu! basedon the defaulted principal a!ount shall be i!posed. Petitioners clai! that this penalt#

should be e=cluded fro! the foreclosure a!ount or bid price because the Real EstateMortae and the Supple!ent thereto did not specificall# include it as part of the secureda!ount. Respondent ?ustifies its inclusion in the secured a!ount, sa#in that the purpose of the penalt# or a penal clause is to ensure the perfor!ance of the obliation and substitutefor da!aes and the pa#!ent of interest in the event of non/co!pliance.&** Respondentadds that the i!position and collection of a penalt# is a nor!al ban:in practice, and thestandard rate per annu! for all co!!ercial ban:s, at the ti!e, %as )7@. Its inclusion aspart of the secured a!ount in the !ortae aree!ents is thus valid and necessar#.













"he Court sustains petitionersB vie% that the penalt# !a# not be included as part of thesecured a!ount. Gavin found the credit aree!ents and pro!issor# notes to be tainted,%e !ust accord the sa!e treat!ent to the !ortaes. fter all, aJ !ortae and a notesecured b# it are dee!ed parts of one transaction and are construed toether.&*& 8ein sotainted and havin the attributes of a contract of adhesion as the principal credit docu!ents,%e !ust construe the !ortae contracts strictl#, and aainst the part# %ho drafted it. ne=a!ination of the !ortae aree!ents reveals that no%here is it stated that penalties areto be included in the secured a!ount. Construin this silence strictl# aainst therespondent, the Court can onl# conclude that the parties did not intend to include thepenalt# allo%ed under PN 1+*+)5+ as part of the secured a!ount. 0iven its resources,respondent could have if it trul# %anted to convenientl# prepared and e=ecuted ana!ended !ortae aree!ent %ith the petitioners, thereb# includin penalties in thea!ount to be secured b# the encu!bered properties. Het it did not.

Aith reard to attorne#Bs fees, it %as plain error for the C to have passed upon the issuesince it %as not raised b# the petitioners in their appeal$ it %as the respondent thati!properl# brouht it up in its appelleeBs brief, %hen it should have interposed an appeal,

since the trial courtBs Decision on this issue is adverse to it. It is an ele!entar# principle inthe sub?ect of appeals that an appellee %ho does not hi!self appeal cannot obtain fro! theappellate court an# affir!ative relief other than those ranted in the decision of the courtbelo%.

= = = Jn appellee, %ho is at the sa!e ti!e not an appellant, !a# on appeal be per!itted to!a:e counter assin!ents of error in ordinar# actions, %hen the purpose is !erel# todefend hi!self aainst an appeal in %hich errors are alleed to have been co!!itted b# thetrial court both in the appreciation of facts and in the interpretation of the la%, in order tosustain the ?ud!ent in his favor but not %hen his purpose is to see: !odification orreversal of the ?ud!ent, in %hich case it is necessar# for hi! to have e=cepted to andappealed fro! the ?ud!ent.&*)

Since petitioners did not raise the issue of reduction of attorne#Bs fees, the C possessedno authorit# to pass upon it at the instance of respondent. "he rulin of the trial court in thisrespect should re!ain undisturbed.

4or the fi=in of the proper a!ounts due and o%in to the parties to the respondent ascreditor and to the petitioners %ho are entitled to a refund as a conse'uence ofoverpa#!ent considerin that the# paid !ore b# %a# of interest chares than the &)@ perannu!&*5 herein allo%ed the case should be re!anded to the lo%er court for properaccountin and co!putation, appl#in the follo%in procedure>

&. "he &st Pro!issor# Note %ith the &1.3@ interest rate is dee!ed proper and paid$

). ll subse'uent pro!issor# notes -fro! the )nd to the )2th pro!issor# notes shallcarr# an interest rate of onl# &)@ per annu!.&*7 "hus, interest pa#!ent !ade ine=cess of &)@ on the )nd pro!issor# note shall i!!ediatel# be applied to theprincipal, and the principal shall be accordinl# reduced. "he reduced principal shallthen be sub?ected to the &)@&*3 interest on the 5rd pro!issor# note, and the e=cessover &)@ interest pa#!ent on the 5rd pro!issor# note shall aain be applied to the














principal, %hich shall aain be reduced accordinl#. "he reduced principal shall thenbe sub?ected to the &)@ interest on the 7th pro!issor# note, and the e=cessover&)@ interest pa#!ent on the 7th pro!issor# note shall aain be applied to theprincipal, %hich shall aain be reduced accordinl#. nd so on and so forth$

5. fter the above procedure is carried out, the trial court shall be able to conclude ifpetitioners a still have an O"S"NDIN0 8;NCEFO8;I0"ION or b MDEPHMEN"S OVER ND 8OVE "GEIR "O"; O8;I0"ION -principal andinterest$

7. Such outstandin balanceFobliation, if there be an#, shall then be sub?ected to a&)@ per annu! interest fro! October )(, &11+ until 6anuar# &7, &111, %hich is thedate of the auction sale$

3. Such outstandin balanceFobliation shall also be chared a )7@ per annu!penalt# fro! uust &7, &11+ until 6anuar# &7, &111. 8ut fro! this total penalt#, thepetitionersB previous pa#!ent of penalties in the a!ount of P)*),***.**!ade on

6anuar# )+, &11(&*2 shall be DEDC"ED$

2. "o this outstandin balance -5., the interest -7., penalties -3., and the final ande=ecutor# a%ard of &@ attorne#Bs fees shall be DDED$

+. "he su! total of the outstandin balance -5., interest -7. and &@ attorne#Bs fees-2. shall be DEDC"ED fro! the bid price of P7,5)7,&+).12. "he penalties -3. arenot included because the# are not included in the secured a!ount$

(. "he difference in -+. P7,5)7,&+).12 ;ESS su! total of the outstandin balance-5., interest -7., and &@ attorne#Bs fees -2.J shall be DE;IVERED "O "GE

PE"I"IONERS$

1. Respondent !a# then proceed to consolidate its title to "C"s "/&7)3* and "/&2)*($

&*. ON "GE O"GER GND, if after perfor!in the procedure in -)., it turns out thatpetitioners !ade an OVERPHMEN", the interest -7., penalties -3., and the a%ardof &@ attorne#Bs fees -2. shall be DEDC"ED fro! the overpa#!ent. "here is nooutstandin balanceFobliation precisel# because petitioners have paid be#ond thea!ount of the principal and interest$

&&. If the overpa#!ent e=ceeds the su! total of the interest -7., penalties -3., and

a%ard of &@ attorne#Bs fees -2., the e=cess shall be RE"RNED to the petitioners,%ith leal interest, under the principle of solutio indebiti$&*+

&). ;i:e%ise, if the overpa#!ent e=ceeds the total a!ount of interest -7. and a%ardof &@ attorne#Bs fees -2., the trial court shall INV;ID"E "GE EK"R6DICI;4OREC;OSRE ND S;E$







&5. GOAEVER, if the total a!ount of interest -7. and a%ard of &@ attorne#Bs fees-2. e=ceed petitionersB overpa#!ent, then the e=cess shall be DEDC"ED fro! thebid price of P7,5)7,&+).12$

&7. "he difference in -&5. P7,5)7,&+).12 ;ESS su! total of the interest -7. and &@attorne#Bs fees -2.J shall be DE;IVERED "O "GE PE"I"IONERS$

&3. Respondent !a# then proceed to consolidate its title to "C"s "/&7)3* and "/&2)*(. "he outstandin penalties, if an#, shall be collected b# other !eans.

4ro! the above, it %ill be seen that if, after proper accountin, it turns out that thepetitioners !ade pa#!ents e=ceedin %hat the# actuall# o%e b# %a# of principal,interest, and attorne#Bs fees, then the !ortaed properties need not ans%er for an#outstandin secured a!ount, because there is not an#$ 'uite the contrar#,respondent !ust refund the e=cess to petitioners. 1âwphi1 In such case, the e=tra?udicialforeclosure and sale of the properties shall be declared null and void for obvious lac:of basis, the case bein one of solutio indebiti instead. If, on the other hand, it turns

out that petitionersB overpa#!ents in interests do not e=ceed their total obliation,then the respondent !a# consolidate its o%nership over the properties, since theperiod for rede!ption has e=pired. Its onl# obliation %ill be to return the differencebet%een its bid price -P7,5)7,&+).12 and petitionersB total obliation outstandin e=cept penalties after appl#in the latterBs overpa#!ents.

AGERE4ORE, pre!ises considered, the Petition is 0RN"ED. "he Ma# (, )**+ Decisionof the Court of ppeals in C/0.R. CV No. +123* is NN;;ED and SE" SIDE.6ud!ent is hereb# rendered as follo%s>

&. "he interest rates i!posed and indicated in the )nd up to the )2th Pro!issor#

Notes are DEC;RED N;; ND VOID, and such notes shall instead be sub?ect tointerest at the rate of t%elve percent -&)@ per annu! up to 6une 5*, )*&5, andstartin 6ul# &, )*&5, si= percent -2@ per annu! until full satisfaction$

). "he penalt# chare i!posed in Pro!issor# Note No. 1+*+)5+ shall beEKC;DED fro! the a!ounts secured b# the real estate !ortaes$

5. "he trial courtBs a%ard of one per cent -&@ attorne#Bs fees is REINS""ED$

7. "he case is ordered REMNDED to the Reional "rial Court, 8ranch 2 of 9alibo, :lan for the co!putation of overpa#!ents !ade b# petitioners spouses Eduardoand ;#dia Silos to respondent Philippine National 8an:, ta:in into consideration the

foreoin dispositions, and appl#in the procedure hereinabove set forth$

3. "hereafter, the trial court is ORDERED to !a:e a deter!ination as to the validit#of the e=tra?udicial foreclosure and sale, declarin the sa!e null and void in case ofoverpa#!ent and orderin the release and return of "ransfer Certificates of "itleNos. "/&7)3* and "C" "/&2)*( to petitioners, or orderin the deliver# to thepetitioners of the difference bet%een the bid price and the total re!ainin obliationof petitioners, if an#$



2. In the !eanti!e, the respondent Philippine National 8an: is EN6OINED fro!consolidatin title to "ransfer Certificates of "itle Nos. "/&7)3* and "/&2)*( until allthe steps in the procedure above set forth have been ta:en and applied$

+. "he rei!burse!ent of the e=cess in the bid price of P5++,3*3.11, %hichrespondent Philippine National 8an: is ordered to rei!burse petitioners, should beGE;D IN 8EHNCE until the true a!ount o%in to or o%ed b# the parties asaainst each other is deter!ined$

(. Considerin that this case has been pendin for such a lon ti!e and that furtherproceedins, albeit unco!plicated, are re'uired, the trial court is ORDERED toproceed %ith dispatch.

SO ORDERED.

MAR!ANO C. DEL CAST!LLO ssociate 6ustice

AE CONCR>

ANTON!O T. CARP!O ssociate 6ustice

Chairperson

TERES!TA J. LEONARDO%DECASTRO&

ssociate 6ustice

JOSE PORTUGAL PERE' ssociate 6ustice

ESTELA M. PERLAS%#ERNA#E ssociate 6ustice

" " E S " " I O N

I attest that the conclusions in the above Decision had been reached in consultation beforethe case %as assined to the %riter of the opinion of the Courts Division.

ANTON!O T. CARP!O ssociate 6usticeChairperson

C E R " I 4 I C " I O N

Pursuant to Section &5, rticle VIII of the Constitution and the Division Chairpersons ttestation, I certif# that the conclusions in the above Decision had been reached inconsultation before the case %as assined to the %riter of the opinion of the CourtsDivision.



MAR!A LOURDES P. A. SERENOChief 6ustice

Spouses Silos vs. PNB

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