SILOS v.

PNB

DOCTRINE:
Escalation clauses providing for unilateral increases made by one party violates
the principle of mutuality of contracts. Although these provisions are deemed
part of the contract, there cannot be a unilateral increase by one party
because there must still be assent by the other party. In a loan contract, since
interest rates are an essential part, any changes to it must be mutually assented
to by both parties.

FACTS:
Spouses Silos secured a credit line with PNB involving a Credit Agreement and a
mortgage to secure such an agreement. The spouses also issued several
promissory notes to cover their payment. In all documents, there were
escalation clauses/provisions allowing PNB to increase or reduce interest rates
unilaterally. These were found to be violative of the principle of the mutuality of
contracts.

ISSUE: WON the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement is null and void for giving PNB the sole power
to fix the rates [YES]

HELD: The provision giving PNB the sole unilateral determination to fix the interest
is void.

Spouses: The provision relegates to PNB the sole power to 
fix the rates based
on arbitrary criteria and the promissory notes were left blank for PNB to
unilaterally fill = violates the principle of mutuality of contracts.

PNB: Since the Credit Agreement and promissory notes contained both an
escalation clause and a de-escalation clause, the bank did not violate the
principle of mutuality; plus, the parties mutually agreed, as shown by the
continuous payment without protest by the spouses.

Spouses: Principle of estoppel doesn’t apply because no estoppel can proceed

from an illegal act 
 PNB: Spouses are estopped because they failed to
question the imposed rates and they continued to pay without opposition.

In a number of decided cases, the Court struck down provisions in credit

documents issued by PNB to, or required of, its borrowers which allow the bank
to increase or decrease interest rates “within the limits allowed by law at any
time depending on whatever policy it may adopt in the future”

a) PNB v. CA (1991): stipulation and similar ones were declared in violation of

Art. 1308 NCC.
b) PNB v. CA (1994): again invalidated
 Bank relied on the escalation clause, which is 
authorized by Sec. 2 of
PD 1684, which amended 
Act No. 2655 (“The Usury Law”)
 Sec. 1 of PD 1684 also empowered the Monetary 
Board to prescribe
maximum rates of interest for loans and certain forbearances and the
Central Bank Circular (issued by the Monetary Board) provides that the
rate of interest shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law
 Court here held that while PD 1684 and CB Circular No. 905 allowed
 contracting parties to stipulate freely regarding adjustments in the
interest rate, the law and circular did not authorize either party to
unilaterally raise the interest rate without the other’s consent 

 There can be no contract in the true sense in the absence of the
element of agreement or of mutual assent of the parties
 Contract changes must be made with the consent of the contracting
parties, especially when it affects an important aspect of the
agreement; rate of interest is always a vital component of loan
contracts
 Cannot countenance PNB’s posturing that the escalation clause gives
it unbridled right to unilaterally upwardly adjust the interest because it
would take away the respondents’ right to assent to an important
modification in their agreement and would negate the element of
mutuality of contracts
c) Sps. Almeda v. CA (1996): court invalidated the same provisions as in the
instant case’s Credit Agreement
 Here, PNB unilaterally altered the terms of its 
contract by increasing
the interest rates on the loan 
without the prior assent of the
petitioners
 Escalation clauses are not basically wrong or legally objectionable so
long as they are not solely potestative but based on reasonable and
valid 
grounds 

d) PNB v. CA (1996):
 The Court in Banco Filipino Savings & Mortgage 
Bank v. Navarro said
that there must be a de- escalation clause to mitigate the one-
sidedness of the escalation clause because of concern for the
unequal status of borrowers vis-à-vis the banks and any increase in the
rate of interest made pursuant to an escalation clause must be the
result of agreement between the parties 

 Court, citing a PNB v. CA case, declared that increases unilaterally
imposed by PNB are in violation of the principle of mutuality as
embodied in Art. 1308, NCC 

 Court cited another PNB v. CA case which stated that while the Usury
Law ceiling on rates was lifted, nothing could be read as granting the
bank carte blanche authority to raise interest rates to levels which
would either enslave its borrowers or lead to a hemorrhaging of their
assets; Court found that there was no attempt by PNB there to secure
the conformity of the borrowers, and the assent to the increases
CANNOT be implied from the lack of response to the letters of PNB
informing them of increases
e) e) New Sampaguita Builders Construction, Inc. v. PNB (2004): court said
that excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the promissory
notes, cannot be given effect under the Truth in Lending Act 

f) PNB v. Sps. Rocamora (2009): above pronouncements were reiterated to
debunk PNB’s repeated reliance on its invalidated contract stipulations
 PNB’s argument that the spouses failure to contest the increased
interest rates amounted to implied acceptance increase should fail
 All the cases, including the present one, involve identical or 
similar
provisions 

 SC: These stipulations must be once more invalidated, as 
was done
in previous cases. The common denominator in these cases is the lack
of agreement of the parties to the imposed interest rates

 - Lack of consent: spouses signed the promissory notes 
in blank
(credible testimony by Lydia)

- PNB Branch Manager even admitted that interest rates 
were
fixed solely by its Treasury Department, and the factors considered
do not include factors which affect PNB’s borrowers
- PNB’s method of fixing interest rates is arbitrary based on one-
sided, indeterminate, and subjective criteria 

 SC: any modification in the contract, such as the interest rates, must
be made with the consent of the contracting parties. The minds of all
the parties must meet as to the proposed modification, especially
when it affects an important aspect of the agreement. In the case of
loan agreements, the rate of interest is a principal condition, if not the
most important component. Thus, any modification thereof must be
mutually agreed upon; otherwise, it has no binding effect.

- The stipulations here don’t even provide that the parties will agree
upon the interest rate – they are worded in such a way that the
borrower shall agree to whatever interest rate PNB fixes (ABSURD)
 SC: with the present credit agreement, the element of consent or
agreement by the borrower is now completely lacking, which makes
respondent’s unlawful act all the more reprehensible.
 SC: petitioners are correct in arguing that estoppel should not apply to
them, for “estoppel cannot be predicated on an illegal act.

- Since PNB violated the Truth in Lending Act (RA 3765), which was
enacted to protect citizens from a lack of awareness of the true
cost of credit to the user by using a full disclosure of such cost
- By requiring the spouses to sign the documents and notes in blank,
and then unilaterally filling them up later on, PNB violated the Truth
in Lending Act, and was remiss in its disclosure obligations
- BUT the 1-year period to file a case prescribed already

 SC: Cannot subscribe to PNB’s argument that in every repricing, the
spouses are given the right to question the interest rates = if only one
questions PNB’s practice, the rest will still be victim to the questionable
practice and the Court cannot condone this

 Since the escalation clause is annulled, the principal amount of the
loan is subject to the original or stipulated rate of interest, and upon
maturity, the amount due shall be subject to legal interest at the rate
of 12% per annum

- Interests to be applied first to the payment of the stipulated or
legal and unpaid interest, and later, to the capital or principal

- Because only the interest rates are found to be improper, the
obligation to pay interest subsists, fixed at the legal rate of 12% per
annum (only until June 30, 2013). Starting July 1, 2013, it shall be 6%
per annum, pursuant to Nacar v. Gallery Frames and Monetary
Board Circular No. 799

DISPOSITIVE: Petition granted. CA Decision ANNULLED and SET ASIDE