PHILIPPINE NATIONAL BANK, PETITIONER, VS. COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ AND AMADO FERNANDEZ, RESPONDENTS.

Petitioner bank seeks the review of the decision, dated October
15, 1992, of the Court of Appeals^[1] in
CA-­G.R. CV No. 27195, the dispositive portion of which reads as follows:

“WHEREFORE, the judgment appealed from is hereby SET ASIDE and
a new one is entered ordering defendant-appellee PNB to re-apply the interest
rate of 12% per annum to plaintiffs-appellants’ (referring to herein private
respondents) indebtedness and to accordingly take the appropriate charges from
plaintiffs-appellants’ (private respondents’) payment of P81,000.00 made on
December 26, 1985. Any balance on the
indebtedness should, likewise, be charged interest at the rate of 12% per
annum.

“SO ORDERED.”

The parties do not dispute the facts as laid down by respondent
court in its impugned decision, viz.:

“On April 7, 1982, (private respondents) as owners of a
NACIDA-registered enterprise, obtained a loan under the Cottage Industry
Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the
amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit
Agreement. Under the Promissory Note
covering the loan, the loan was to be amortized over a period of three (3)
years to end on March 29, 1985, at twelve (12%) percent interest annually.

“To secure the loan, (private respondents) executed a Real
Estate Mortgage over a 1.5542-hectare parcel of unregistered agricultural land
located at Cambang-ug, Toledo City, which was appraised by the PNB at P1,062.52
and given a loan value of P531.26 by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a
thermo plastic-forming machine, which had an appraised value of P8,800 and a
loan value of P4,400.00.

“The Credit Agreement provided inter alia, that
—

‘(a) 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 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 the maximum interest rate.’

“The Promissory Note, in
turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only ‘within the limits
allowed by law.’

The Real Estate Mortgage contract likewise provided that -?

‘(k) INCREASE OF
INTEREST RATE: The rate of interest
charged on the obligation secured by this mortgage as well as the interest on
the amount which may have been advanced by the MORTGAGEE, in accordance with
the provision hereof, shall be subject during the life of this contract to such
an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.’

“On February 17, 1983, (private respondents) were granted an
additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by the PNB, for
which (private respondents) executed another Promissory Note, which was to
mature on April 1, 1985. Other than the
date of maturity, the second promissory note contained the same terms and
stipulations as the previous note. The
parties likewise executed a new Credit Agreement, changing the amount of the
loan from P50,000.00 to P100,000.00, but otherwise preserving the stipulations
contained in the original agreement.

“As additional security for the loan, (private respondents)
constituted another real estate mortgage over 2 parcels of registered land,
with a combined area of 311 square meters, located at Guadalupe, Cebu
City. The land, upon which several
buildings are standing, was appraised by the PNB to have a value of P40,000.00
and a loan value of P28,000.00.

“In a letter dated August 1, 1984, the PNB informed (private
respondents) ‘that the interest rate of your CIGLF loan account with us is now
25% per annum plus a penalty of 6% per annum on past dues.’ The PNB further
increased this interest rate to 30% on October 15, 1984; and to 42% on October
25, 1984.

“The records show that as of December 1985, (private
respondents) had an outstanding principal account of P81,000.00 of which
P18,523.14 was credited to the principal, P57,488.89 to the interest, and the
rest to penalty and other charges. Thus, as of said date, the unpaid principal obligation of (private
respondents) amounted to P62,830.32.

“Thereafter, (private respondents) exerted efforts to get the
PNB to re-adopt the 12% interest and to condone the present interest and penalties
due; but to no avail.”^[2]
(Citations omitted.)

On December 15, 1987, private respondents filed a suit for
specific performance against
petitioner PNB and the NACIDA. It was
docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial Court, 7th
Judicial Region, Cebu City, Br. 7.^[3]
Private respondents prayed the trial court to order:

“1. The PNB and
NACIDA to issue in (private respondents’) favor, a release of mortgage;

“2. The PNB to pay
pecuniary consequential damages for the destruction of (private respondents’)
enterprise;

“3. The PNB to pay
moral and exemplary damages as well as the costs of suit; and

“4. Granting
(private respondents) such other relief as may be found just and equitable in
the premises.”^[4]

On February 28, 1990, the trial court dismissed private
respondents’ complaint in Civil Case No. CEB-­5610. On October 15, 1992, the Court of Appeals reversed the dismissal
with respect to petitioner bank, and disallowed the increases in interest
rates.

Petitioner bank now contends that “respondent Court of
Appeals committed grave error when it ruled (1) that the increase in interest
rates are unauthorized; (2) that the Credit Agreement and the Promissory Notes
are not the law between the parties; (3) that CB Circular No. 773 and CB
Circular No. 905 are not applicable; and (4) that private respondents are not
estopped from questioning the increase of rate of interest made by
petitioner.”^[5]

The petition is bereft of merit.

In making the unilateral increases in interest rates, petitioner
bank relied on the escalation clause contained in their credit agreement which
provides, as follows:

“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 and 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.”

This clause is
authorized by Section 2 of Presidential Decree (P.D.) No. 1684 which further
amended Act No. 2655 (“The Usury Law”), as amended, thus:

“Section 2. The same
Act is hereby amended by adding a new section after Section 7, to read as
follows:

‘Sec. 7-a. Parties to an
agreement pertaining to a loan or forbearance of money, goods or credits may
stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest is increased by law or by the
Monetary Board: Provided, That such
stipulation shall be valid only if there is also a stipulation in the agreement
that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary
Board: Provided further, That the
adjustment in the rate of interest agreed upon shall take effect on or after the
effectivity of the increase or decrease in the maximum rate of interest.”

Section 1 of P.D. No. 1684 also empowered the Central Bank’s
Monetary Board to prescribe the maximum rates of interest for loans and certain
forbearances. Pursuant to such authority,
the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982,
Section 5 of which provides:

“SEC. 5. Section 1303
of the Manual of Regulations (for Banks and Other Financial Intermediaries) is
hereby amended to read as follows:

‘SEC. 1303. Interest and
Other Charges. The rate of
interest, including commissions, premiums, fees and other charges, on any loan,
or forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.'”

P.D. No. 1684 and C.B. Circular No. 905 no more than allow
contracting parties to stipulate freely regarding any subsequent adjustment in
the interest rate that shall accrue on a loan or forbearance of money, goods or
credits. In fine, they can agree
to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence
of petitioner bank, the said law and circular did not authorize either party to
unilaterally raise the interest rate without the other’s consent.

It is basic that there can be no contract in the true sense in
the absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on
the part of one who contracts, his act has no more efficacy than if it had been
done under duress or by a person of unsound mind.^[6]

Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all
the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of
interest is always a vital component, for it can make or break a capital
venture. Thus, any change must be mutually
agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank’s posturing that the
escalation clause at bench gives it unbridled right to unilaterally upwardly
adjust the interest on private respondents’ loan. That would completely take away from private
respondents the right to assent to an important modification in their
agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court
of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

“xxx (T)he unilateral action of the PNB in increasing the
interest rate on the private respondent’s loan violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:

‘ART. 1308. The contract
must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them.’

In order that obligations arising from contracts may have the force
or law between the parties, there must be mutuality between the parties
based on their essential equality. A
contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is
void xxx. Hence, even assuming that the xxx loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the
interest rate at will during the term of the loan, that license would have been
null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the
loan agreement with the character of a contract of adhesion, where the parties
do not bargain on equal footing, the
weaker party’s (the debtor) participation being reduced to the alternative ‘to
take it or leave it’ xxx. Such a contract
is a veritable trap for the weaker party whom the courts of justice must
protect against abuse and imposition.” (Citations omitted.)

Private respondents are not also estopped from assailing the
unilateral increases in interest rate made by petitioner bank. No one receiving a proposal to change a
contract to which he is a party, is obliged to answer the proposal, and his
silence per se cannot
be construed as an acceptance.^[7] In
the case at bench, the circumstances do not show that private respondents implicitly
agreed to the proposed increases in interest rate which by any standard were
too sudden and too stiff.

IN VIEW WHEREOF, the instant petition is DENIED for lack of merit, and the decision
of the Court of Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against
petitioner.

SO ORDERED.

Narvasa, C.J., (Chairman), Regalado, and Mendoza, JJ., concur.

^[1]
Through its Second Division, composed of Associate Justices Santiago M. Kapunan
(chairman and ponente), Oscar M. Herrera, and Serafin V.C. Guingona.

^[2]
Rollo, pp. 32-34.

^[3]
Presided by Judge Generoso A. Juaban.

^[4]
Rollo, p. 35.

^[5]
Petition, p. 9; Rollo, p.
16.

^[6]
See Mutual Life Ins. Co. of New York v. Young’s Adm’rs, 23 L.Ed.
152; Noland Co. v. Graver Tank & Mfg. Co., 301 F.2d 43; Miller v.
Miller, 134 F.2d 583, 588; See also Linne v. Ronkienen, 37
N.W.2d 237, 239.

^[7] See Suitter v.
Thompson, 358 P.2d 267; Levy v. Baetjer, 81 A.2d 644.