UY TAM and UY YET, plaintiffs-appellants,

vs.
THOMAS LEONARD, ET AL., defendants-appellees.

O'Brien and de Witt for appellants.

City Attorney Nesmith for appellees.

TRENT, J.:

An appeal from a judgment of the Court of First Instances of the city of Manila sustained the
defendants' demurrer upon the ground that the complaint does not state facts sufficient to constitutes
a cause of action, and dismissing the complaint with costs.

This is an action by a third person upon a bond executed between the individual defendants as
obligors and the city of Manila as obligee. The bond was executed in connection with and to secure
the performance of a contract entered into by Hosty and Brown, the principals of the bond, for
furnishing crushed rock to the city of Manila for one year. The plaintiffs furnished the contractors
with certain materials for use in the performance of said contract, having previously notified the
defendants of the acceptance of the conditions of the bond relating to laborers and material men.
The city of Manila was joined as a party defendant for the reason that it refused to joint as a party
plaintiff in collecting the amount claimed by the plaintiffs. No damages are claimed against the city,
and the city is merely a party pro forma.

The bond reads as follows: "Know all men by these presents, that we, R.C. Hosty and W. W.
Brown, of the city of Manila, Province of Manila, Island of Luzon, Philippine Islands, as principals,
and George C. Sellner. Geo E. Brown, Walter E. Olsen, Harold M. Pitt, and Thomas Leonard, all of
the city of Manila, P.I., as sureties are held and bond unto the city of Manila in the penal sum of
twenty-eight thousand five hundred pesos, Philippine currency, to the payment of which sum well
and truly to be made, we bind ourselves, our heirs, executors, and administrators, in the amount for
which each has severally qualified as shown in the several affidavits hereto attached.

The condition of this obligation is such that whereas the above-bounden R.C. Hosty and
W.W. Brown have on the 12th day of January, 1911, entered into a contract with the city of
Manila, represented by the president of its Municipal Board, for furnishing crushed rock for
a period of one year:

Now, therefore, if the above-bounden R.C. Hosty and W.W. Brown, their heirs, executors,
and administrators, shall and will, in all respects, duly and fully observe and perform all and
singular the covenants, conditions, and agreements in and by the said contract agreed and
covenanted by said R.C. Hosty and W.W. Brown to be observed and performed according to
the true intent and meaning of the said contract, and as well during any period of extension
of said contract that may be granted on the part of the city of Manila as during the original
 term of the same, and shall promptly make all payments to all persons supplying them labor
or materials in the prosecution of the work provided for in said contract, then the above
obligation shall be void and of no effect; otherwise, to remain in full force and virtue.

It is hereby stipulated that suit on this bond may be brought in the courts of the Philippine
Islands for the district in which the said contract is executed; and if at the time of the suit any
of the obligor is found therein, service of process as to such obligors may be made by
delivering a copy of the same to the clerk of said court, who is hereby appointed agent of the
obligors for this purpose.

Article 1257 of the Civil Code reads: "Contracts shall only be valid between the parties who
execute them and their heirs, except, with regard to the latter, the case in which the rights and
obligations arising from the contract are not transmissible, either by their nature, or by agreement,
or by provision of law.

Should the contract contain any stipulation in favor of a third person, he may demand its
fulfillment, provided he has given notice of his acceptance to the persons bound before it
may have been revoked.

The second paragraph of this article creates an apparent exception to the first. (20 Scaevola, 552.)
Under the first paragraph, the cardinal rule of contract is laid that only parties thereto and their
privies acquire rights and assume obligations thereunder; while the second paragraph permits a third
person to avail himself of a benefit extended to him by its term. Manresa says that the second
paragraph of this article corresponds almost always to the jurisdiction conception of a gift, it being
necessary in such case to apply the rules relating to gifts in so far as the form of acceptance is
concerned. This is true where the stipulation is for the sole benefit of the third person. But where,
for instance, a transfer of property is coupled with the purchaser's promise to pay a debt owing from
the seller to a third persons, it can scarcely be said that the stipulation is in the nature of a gift, and
yet such a stipulation is in favor of a third person. So, stipulations in favor of a third persons may be
divided into two classes: those where the stipulation is intended for the sole benefit of such person,
and those where an obligation is due from the promise to the third person which the former seeks to
discharged by means of such stipulation.

The civil-law origin and history of the second paragraph of article 1257 is a matter upon which the
authorities are in some conflict. Perhaps the first unequivocal authority in the civil-law countries
recognizing without reservation such a stipulation is the Code of Napoleon of 1804, which provided
as follows: "A person may likewise stipulate for the benefit of a third party when such is the
condition of the stipulation that the persons makes for himself to of the donation which he makes to
another person. The persons who has made the stipulation cannot revoke it if the third party has
declared that he wished to take advantage of it." (Art. 1121.)

Contracts only produce effects between contracting parties. They do not affect third parties
and do not benefit them except in the case provided by article 1121. (Art. 1165.)
The Partidas, which were in force in Spain until the adoption of the present Civil Code, contained a
general rule invalidating such stipulations, followed by some exceptions whereby representative or
attorney in fact of third persons were allowed to recover on such stipulation. We find in the Fifth
Partida, title XI, law 7, as follows: "One man cannot receive from another a promise in the name of
a third person under whose power he is not. As if one should say to the other, "Do you promise be
that you will give to such a one, such a thing? and the other answer, "I promise." Such a promise
would not be obligatory on him who made it; and the third person in whose name it was made
neither can nor ought to compel him to its performance."

But is seems clear that the supreme court of Spain recognized a contrary doctrine without
reservation as early as 1868. Its judgement of June 24 of that years, as well as the one dated October
17, 1874, are quoted by Scaevola as bearing out the principle as it is found in the Civil Code.

Pothier, of a much later date than the Partidas, treats of the subject as follows: "Reasons for the
principle that a person cannot stipulate or promise for another. — When I stipulate with you for a
third person, the agreement is void: for by this agreement you do not contract any obligation in
favor either of such third persons or myself. It is evidence that you do not contract any in favor of
the third person: for it is a principle that agreements can have no effect except between the
contracting parties, and consequently that they cannot secure any right to a third person who is not a
party to them, as we shall see hereafter. By this agreement you do not contract any civil obligation
in my favor: for what I have stipulated in favor of the third person, not being anything in which I
have an interest capable of pecuniary appreciation, no damage can result to me from a failure in the
performance of your promise, and therefore you may be guilty of such failure with impunity."
(Obligations, No. 54.)

This first part of the principle that nothing but what one of the parties stipulates on his own
behalf can be the object of an obligation only prevails when considered as a matter of law,
(dans le for exterieur) and which regard to civil obligations: but in point of conscience, if I
agree with you that you shall something to, or do something for a third person, the agreement
is binding: although the interest which I have in the subject is not capable of precuniary
appreciation, still it is real interest: hominis enim interest alterum hominem beneficio affici,
and this interest arising from mere affection for a third persons gives me a sufficient rights in
point of conscience to require the performance of your promise, and is sufficient to render
you culpable in refusing to accomplish it, provided you have it in your power, and the other
person is willing to accept of what was promised to be given. (Id., 55.)

For the rest, according to the principles of this ancient law, the third person who was no
party to this contract of donation, subject to the charge of your giving him something, had
not any action against you for the recovery of it; and this was founded upon the principle that
contracts have no except between the contracting parties: hence it follows, that no right can
arise from a contract to a person who was not party to it: but according to the constitution of
 the Emperors, the third persons in whose favor the donor imposed a charge on his donation
has an action against the donatory to compel him to execute it. (Id., 71.)

In Louisiana, the Civil Code provides: "A person may also, in his own name make some advantage
for a third person the condition or consideration of a commutative contract; and if such a third
person consents to avail himself of the advantage stipulated in his favor, the contract cannot be
revoked." (Art. 1890.)

But a contract in which anything is stipulated for the benefit of a third person who has
signified his assent to accept it cannot be revoked as to the advantage stipulated in his favor,
without his consent. (Art. 1902.)

In discussing the history of these provision the supreme court of that State said Duchamp vs.
Nicholson (2 Mart. N.S., 672): "According to the ancient Roman law, no person could stipulated for
another, but an indirect mode was resorted to, of receiving promises or engagements for the benefits
of third party. The person receiving the engagement, made a donation to the obligor, and imposed a
condition that he should give a certain sum to a third party. If the person thus promising failed to
comply with his engagement, he who stipulated had an action to recover back the amount given as a
donation, but the party for whose benefit the stipulation was made could not bring an action of any
kind to enforce it.

In the latter days of the Roman jurisprudence, a change was introduced which, with more
regard to equity, extended to him for whose benefit the stipulation was made an action to
carry it into effect. (Code, liv. 8, tit. 55, 1. 3.)

Hence, according to Merlin, even before the massage of the Napoleon code, it was not
doubted in France, that a third party might sue to enforce an obligation in which he had an
interest. (Merlin, Questions de Droit, vol. 5, verbo, stipulation pour autrui, 3 Pothier, Traite
des Obligations, No. 71.)

Since the enactment of the Napoleon code, the 1121st article of which expressly provides
that "stipulations may be made to the profit (or benefit) of a third party," there seems not to
be any doubt entertained on the question. Toulier states, "The third party to whose profit the
burden has been imposed in a contract in which he took no part may act directly to force the
promisor to fulfill his promise." (Toullier, Droit Civil Francais, liv. 3, tit. 3, chap. 2,
No. 150.)

The author of the Curia Philippica seems to have thought such a right was not conferred by
the Roman law, but that it was given by the positive law of Spain. (Curia Phil., lib. 2, cap. 6,
no. 4, verbo, cesion; Novisima Recopilacion, lib. 10, tit. 1, ley 1.) It is a matter of title
importance from what source that right sprang, so that it existed. And even if it was not
found in that jurisprudence, the provision in our code which is, verbatim, that of the
Napoleon just referred to, we are satisfied, introduces it. (C. Code, 263, art. 20.)
Again in Gravier vs. Gravier's heirs (3 Mart. N.S., 206), it is said: "A law of
the recopilacion permits in express terms a contract to be made for the benefit of a thirds party. It is
the opinion of the Spanish commentators, that according to this law, the person in whose favor the
stipulation is made, may maintain an action to enforce it. In this they seem to think a material
different exists between the laws of Spain and those of Rome. But according to other writers on the
civil law, this is a mistakes. Merlin, who has examined the subject fully, and who cites a vast
number of authorities in support of his opinion, shows, we think, satisfactorily, that the early
established doctrine in the Roman jurisprudence, that no one could stipulate for another, was
subsequently altered and modified by different edicts of the emperors: and in the late and more
improved state of their laws, such contracts were authorized, and might be enforced by the third
person, in whose favor they were made."

It appears certain that the Roman law did not at first recognize stipulations in favor of third person
at all. If there as a gradual relaxation of the rule, it is still clear from what Pothier and the Partidas
say that the civil law was still against the enforcement of such stipulations, although many
exceptions to the rule had crept into the law. With the enactment of the French Code and of the
Spanish Civil Code, whatever vestige of the ancient Roman law remained was swept away, and it is
with this modern law we have to deal.

If we turn now to Anglo-American law, we find the same opposition against permitting the
enforcement of stipulations of a contract in favor of a third person as was encountered in the civil
law. In fact, the English courts to this day decline to recognize stipulation pour autrui. "As a
general rule a contract affects only the parties to it, and cannot be enforced by or against a person
who is not a party, even if the contract is made for his benefit and purports to give him the right to
sue or to make him liable upon it." (Halsbury's Laws of England, vol. 7, p. 342.)

This has been denominated the English doctrine, and American commentators frequently suggest
that it has been evaded in same cases by a strained application of the law of trust (15 Harvard Law
review, 775; Page on Contracts, sec. 1318); and the doctrine was found so inconvenient in the
administration of the modern insurance law that the Married Woman's Property Act (45 and 46
Vict., c. 75, sec. 11) gave to a wife, husband, or children named as beneficiary in a policy the right
to its proceeds, although they were not allowed to sue directly for the them. (15 Harv. Law Rev.,
775.) The English rule has been followed in some of the states of the American Union, but possibly
with still less rigor. The case law indicating the jurisdiction in which the English rule has found
favor, as well, indeed, as a general survey of the whole field of American case law on
stipulations pour autrui has been collected in the excellent monographic notes to Baxter vs.
Camp (71 Am. St. rep., 169), and Jefferson vs. Asch (25 L.R.A., 257). The provisions of our Civil
Code make futile an examination of the authorities supporting the English rule.

But in the greater number of the American states, stipulations pour autrui are enforced with more or
less liberality. And where the law is in such condition, it is referred to as the American rule in
contradistinction to the English rule above referred to. A case often cited as the real starting point of
the American doctrine is Lawrence vs. Fox (20 N.Y., 268). In that case, one Holly gave the
defendant $300 to be delivered by him to the plaintiff the next day in payment of a debt owing from
Holly to the plaintiff. The court held that the plaintiff had a right of action to recover the money. In
a few states, where condification of substantive law has done its work, legislative recognition of
stipulations pour autrui may be found. Thus, in California (Civil Code, sec. 1559), it provided that:
"A contract, made expressly for the benefit of a third person, may be enforced by him at any time
before the parties thereto rescind it."

Exactly the same provision is found in Idaho (Rev. Codes, se. 3317); North Codes, sec. 2103.). The
Georgia Code (sec. 2747) provides that "if there be valid consideration for the promise, it matters
not from whom it is moved, the promise may sustain his action though a stranger to the
consideration."

As stated above, the enforcement of stipulations pour autrui under the American rule is hedged in
with various restrictions, not at all uniform in the various states where the principle is recognized.
The doctrine was limited in Vrooman vs. Turner (69 N.Y., 280), as follows: "To give a third party
who may derive a benefit from the performance of the promise, an action, there must be, first, an
intent by the promise to secure some benefit to the third party, and second, some privity between
the two, the promise and the party to be benefited, and some obligation or duty owing from the
former to the latter which would give him a legal or equitable claim to the benefit of the promise or
an equivalent from him personally."

This New York limitation of the rule is approved in Nevada (Ferris vs. Carson Water Co., 16 Nev.,
440); and Kansas (Burton vs. Larkin, 36 Kan 246); an possibly in some other state. In Illinois no
obligation need be due from the promise to the third person (Dean vs. Walker, 107 III., 540). This is
also true in Ohio (Brewer vs. Maurer, 38 Ohio, 543; 43 Am. Rep., 436) Am. Dec., 262.)
Compromises between the two extremes of various shades may be found many other jurisdictions.
it would not be profitable to pursue this branch of the injury to its ultimate end for we do not think
that limitations on the rule of this nature are applicable in this jurisdiction. Article 1257 makes no
such restriction. The reason for it in the United States is possibly due to some extent to the aversion
in that country against enforcing an executory gift.

Another limitation to the doctrine, however, which has been extremely developed by the American
courts, is worthy of more attention, and is, we believed, equally applicable in this country. It is no
artificial limitation but one arising from necessity, and without which the rule itself would not be
workable, and indeed, the freedom of contract be considerably impaired. it is that a mere incidental
interest of the third person is not within the doctrine. A statement of this limitation which has
received approval on more than one occasion is the following from Simson vs. Brown (68 N.Y.,
355); "It is not yet promise made by one to another, from the performance of which a benefit may
ensue to a third, which gives a right of action to such third person, he being neither privy to the
contract nor to the consideration. The contract must be made for his benefit as an object, and he
must be the party intended to be benefited."
In Crandall vs. Paine (154 ill., 627), it is said: "It would be going too far to hold that a mere
stranger to the contract, who was to derive only an incidental benefit therefrom, might recover for a
breach of such contract."

In 2 Page on Contracts, sections 1312 and 1313, many cases are collected as illustrations of what
has been held to be an incidental benefit. A contract between the United States and a state for the
maintenance of a canal cannot be enforced by one who has made of water furnished from such
canal. (Walsh vs. C.H.V. & Athens R. Co., 176 U. S. 469.) A contract between an employer and
employee, whereby the former agreed to furnish the latter s physician if the employee was injured
in the course of his employment, could not be enforced by a physician whom the employee
engaged. (Thomas Mfg. Co. vs. Prather, 65 Ark., 27.) A very numerous group of such cases
involves contracts with a city to furnish water for fire protection, the weight of authority holding
that inhabitants of the city have only an accidental benefit therein, and, hence, no action against the
contractor for non-observance of the contract. These cases are collected and the rule affirmed
in Allen & Currey Mfg. Co. vs. Shreveport Waterworks Co. (113 La., 1091). A number of French
cases are reviewed in the last cited in which an alleged stipulation pour autrui was held to be only
an incidental interest.

A contract by an employer with a physician to attend to all his sick and injured employees
held not a stipulation pour autrui, and the employee had no right of action against the
physician for breach of contract. Montastier c. A ——, Pau, 1st May, 1900, Sirey, 1900, vol.
2, p. 301, J.P. 1900, part 2, p. 301. A corporation bought a boatload of coal, and, before
having paid for it, it was put in the hands of a receiver. Held, that a contract by which a
person agreed with the receiver to pay this debt was not a stipulation pour autrui, and the
seller of the coal had no action upon it. Watts-Ward c. Cels, 20th Dec., 1898, Sirey, 1901,
vol. 1, p. 270, J.P. 1901, part 1, p. 270.

In this last case, the court said: "If article 1121 of the Civil Code (Code Napoleon) permits a
stipulation to be made in favor of third person when such is the condition of the stipulation made
for one's self, we must not conclude therefrom that any clause in a contract susceptible of procuring
advantages to a third person brings into existence in favor of the latter a right of action directly
against the contractor, when it has not been the intention of the parties to confer it upon him."

Just above we have said that, with the enactment of the second paragraph of article 1257 of the
Civil Code, the law invalidating stipulations pour autrui was swept away. What was that
prohibition? It was not a prohibition against indirect benefit to third persons arising from a contract
between parties. The prohibition was a limitation upon the freedom of the parties to insert what they
pleased in a contract. The law of the Partidas which we have quoted above illustrate this quite
accurately. It states the rule against stipulations pour autrui and then gives the following concrete
example: "Do you promise me that you will give to such a one such a thing?" and the other answers,
"I promise." And it says that such a promise cannot be enforced. In other words, the actual intent
and desire of the parties to confer a favor upon a third person was what the law prohibited. It took
no cognizance of the indirect benefits the third person which might arise through the due
performance of the contract. These were allowed to fall where they might. And, indeed, any
principle of law which would endeavor to take notice of such incidental benefits accruing to
strangers by the performance of a contract would be too unwieldy and complicated and too
restrictive upon the freedom to contract to be practicable. The prohibition is directed to what the
parties may voluntarily agree to perform. The word used, stipulation (estipulacion), is defined by
Escriche in his Diccionario de Legislacion y Jurisprudencia, as follows:

A promise made juridically, according to the solemnities and forms prescribed by law; or an
unilateral contract by which a person, in suitable response to a question addressed him by
another, cedes the thing or authorizes the doing of the act requested, thereby becoming
obliged to fulfill the said contract.

The Latin equivalent, stipulatio, is defined in Black's Law Dictionary as follows: "In the Roman
law, stipulatio was the verbal contract (verbis obligatio), and was the most solemn and formal of all
the contracts in that system of jurisprudence. It was entered into by question and corresponding
answer thereto, by the parties, both being present at the same time, and usually by such words as
'spondes?' 'spondeo,' 'promittis?' 'promitto,' and the like."

A stipulation is one of the intended feature or effects of a contract. The parties set their minds upon
it and agree to its consummation. Each party to the contract may or may not speculate upon
probable consequence performance thereof will have upon the fortunes of third persons. But what
they stipulate they desire to accomplish. Their minds met upon the point. Now, the law prohibited a
stipulation in favor of third person. In other words, the law prohibited the parties agreeing to the
performance of an act which would directly and materially benefit one not a party to the contract. A
meeting of their minds upon such a matter was, by law, deprived of contractual effect. This was the
prohibition which was swept away by the second paragraph of article 1257. The exact words of the
latter are, any stipulation in favor of a third person. Bearing in mind the meaning of the
word stipulation as it is used in the Partidas and defined in the dictionaries, it will be at once seen
that contracting parties may now do what was prohibited to them under the former law. Their minds
may unite upon an act to be performed in favor of third person and the law will now enforce
performance. The word any clears up all doubts as to the entire removal of restrictions upon the
right of contracting parties to stipulate in favor of a third person. So, we believe the fairest test, in
this jurisdiction at least, whereby to determine whether the interest of a third person in a contract is
a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties
as disclosed by their contract.

If a third person claims an enforcible interest in the contract, that question must be settled by
determining whether the contracting parties desired to tender him such an interest. Did they
deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon
such third person? In resolving this question, of course, the ordinary rules of construction and
interpretation of writings must be observed.
The very next article of the code seems to furnish additional evidence that this must be the true test
of a stipulation pour autrui. Article 1258 reads: "Contracts are perfected by mere consent, and from
that time they are binding, not only with regard to the fulfillment of what has been expressly
stipulated, but also with regard to all the consequences which, according to their character, are in
accordance with good faith, use, and law."

It is elementary that parties do not attempt to stipulation all that their contract legally binds them to.
They have in mind the salient points of the contract, the particular acts they desire to be performed,
the sine quo non of the agreement, and usually specify these, that is, expressly stipulate them. But
they leave to the law such matters as the statutes of fraud, prescription, exemption, etc., and they
leave not a little sometimes to custom or usage. So, this article recognizes a distinction between the
obligation of a contract, those which are expressly stipulated and all others. Since the rights of a
third person under the second paragraph of the preceding article are limited to the stipulations of the
contract, it is clear that the cannot base his claims upon any other ground than that the
parties intended to benefits him.

In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature
of a gift or whether there is an obligation owing from the promise to the third person. That no such
obligation exists may in some degree assist in determining whether the parties intended to benefit a
third person, whether the stipulated for him. Thus in a purely commercial contract, as is the one we
have under consideration in the case at bar, it is not likely that the promise would go out of his way
to favor a third person without exacting a "pount of flesh." On the contrary, where the third person
is a close relative of the promise, we may often expect an expression of generosity and find some
reason for believing that the promise did exact a promise in benefit of his relative. But these are at
best mere aids in arriving at the intention of the parties. We close this part of the discussion by
quoting from Elliott on Contracts, section 1413, as follows:

It is a rule of practically universal application that there must exist on the part of the original
parties to the contract a clear intent to benefit the third party, although a majority of the
courts do not go so far as to hold with Connecticut that the contract must be for the sole and
exclusive benefits of the third party.

We now come to a consideration of the bond which is the basis of this action. It being a contractor's
bond does not in any degree distinguish it from other contracts in applying the test we have outlined
above for determining whether it contains a stipulation pour autrui. On the contrary, the rule
requiring a clear intent on the part of the parties to benefit a third person should be reenforced by a
due regard for article 1827 of the Civil Code, which provides: "Security is not presumed; it must be
express and cannot be extended further than that specified therein."

Did the parties to the bond intend to secure the claims of materialmen? Did the city of Manila so
demand, and did the sureties so promise? Or did the city only demand and the sureties only promise
to secure the city Manila in damages against such claims? These are the controlling question upon
which depend the plaintiffs' claim that the clause referring to the materialmen, etc., is a
stipulation pour autrui.

In the first place, we are informed by the pleadings that the alleged promise refused to join as
plaintiff in this action as we find on this appeal its brief opposing the pretensions of the plaintiffs.
We have, thus, the parties signatory to the bond all denying that they intended to confer a benefit
upon the materialman by the terms of the bond. If, us urged by the appellants, the city is not liable
for their claims, any intention on its part to secure their payment must have been an act of
generosity. If so, why this change of front? Why was the favor withdrawn?

Again, legal precision would require that the materialmen and other mentioned in the controverted
clause of the bond should have been included as obligees on the bond had it been desired to protect
their claims thereby. if the contention of the appellants be true that the city had no interest to
subserve in inserting the clause in question and if that were the view taken by the city officials, the
city must be considered by all hands as a mere nominal obligee as to this clause. Why, then, did
they not make the bond read ad hoc "unto all materialmen," etc.?

Again, the closing stipulation is that 'suit on this bond may be brought . . . in the district in which
the said contract is executed." Here was another neglected opportunity, if, indeed, it were the
intention of the parties to confer an interest in the upon the materialmen, to show to whom the
bondsmen were obligated. Having named the obligee in the bond, the parties concluded by
providing for it enforcement. By whom? By the city of Manila or by any person interested therein
or benefited thereby? No, indeed. There is no more effort to name the materialmen as entitled to a
right to bring action on the bond in the judicial district of Manila than there is to name them
obligees in the bond. Undoubtedly the city required the insertion of the disputed clause in the bond.
If it were inserted for the purpose of protecting materialmen, why were not apt words used to that
end? The attention of the sureties being called to possible litigation by the last paragraph of the
bond, it might also be asked whether, assuming that they understood the bond to be for the benefit
of materialmen, etc., they desired to make themselves liable to suits by an indefinite number of
undetermined persons for claims as yet unknown? They might well agree to answer in damages to
the city of Manila by reason of such claims and yet hesitate upon the proposition that they answer
directly and for the full amount of such claims.

As illustrative of the apt words used in a bond securing unnamed persons, we call attention to Act
No. 1901, which specifies the contents of a sheriff's bond. The Act provides that it shall read "for
the benefit of whom it may concern" and that it shall be available "for the benefit of the
Government and of any person in interest."

It seems to us that to hold that the parties intended to make the materialmen obligees in the bond
involves a disregard for its actual language which is not becoming in a court of law. To reach such a
conclusion it is necessary to surmount two rules of construction peculiarly applicable to the
instrument: first, that a stipulation pour autrui must be clearly expressed; and second, that a contract
of surety is not to be presumed but must be express. if these be disposed of, it then becomes
necessary to insert actual words in the bond, naming the materialmen, etc., as obligees, and giving
them the right to sue thereon in the judicial district of Manila; and the conclusion must finally be
reached that the sureties and the city officials are now acting in collusion in denying that there was
an intention to confer the benefit of the bond upon the materialmen.

But if the clause in question was not inserted for the benefit of the materialmen and the city is not
any way liable for their claims against the contractor, for what purpose was it inserted in the bond?
The first answer which suggests itself to this question, assuming that the hypothesis is correct, is
that it was inserted ex abundanti cautela. And this does not appear so specious when we consider
such article of the Civil Code as article 1111, which gives to creditors the rights and actions of their
insolvent debtors and article 1597, which gives to materialmen and laborers a right of action against
the owner for any sum remaining in his hands due the contractor. At the present time we refrain
from determining whether the city had legal reason for protecting itself in the bond from the claims
of materialmen for the reason that the question appears to us too difficult for an offhand decision.
But we do think that these articles of the code show some considerable reason for inserting in the
bond protection against such claims.

Litigation has occurred with some frequency in the United States on contractors' bonds which
contain clauses similar to the one under consideration. We have made some study of these cases,
and they seem to call for some comment. In some of them the bond read directly to the
materialmen, etc. With these cases we are incomplete accord, and had the bond in the instant case
read there could be no doubt as to the liability of the bondsmen to the plaintiffs. We cite, as
instances of this class of cases, St. Louis vs. Von Martin Lumber and Mfg. Co. vs. Peterson and
Sampson (124 Iowa, 599); Philadelphia vs. Harry C. Nichols Co. (214 Pa., 265).

In those cases which may be said to run directly counter to the view we have taken of the bond
under consideration, the materialmen, etc., were not named or referred to in any way as obligees in
the bond. yet, the sureties were held liable. From both Nebraska and Indiana come a number of
cases which have so construed bonds given by contractors and reading only to the owner as oblige.
The indiana cases are collected in the late case of Knight and Jillson Co. vs. Castle (172 Ind., 97);
while the Nebraska cases are collected in Korsmeyer Plumbing and Heating Co. vs. McClay (43
Neb., court of Missouri, in Devers vs. Howard (144 Mo., 671), apparently allowed recovery upon
such a bond, although the decision hardly gives a sufficient outline of the bond to so state
positively. In all these case, the language of the bonds declared upon was disregarded, and by what
we deem a forced and unwarranted construction of the instruments, it was held that the parties had
expressly stipulated in favor of the materialmen, etc.

The last class of cases to which we find it necessary to refer supports the stand taken by us. The
decision in Electric Appliance Co. vs. United States Fidelity and Guaranty Co. (110 Wis., 434),
concludes as follows: "We have arrived at the conclusion that the contract and bond in suit do not
disclose an intent to secure third parties. We deem it clear, under the circumstances, that the bond
was taken for the city's benefits, and this conclusion is amply confirmed by the practical
construction given it by the parties."

Brower Lumber Co. vs. Miller (28 Ore., 565), and Weller vs. Goble (66 Iowa, 113), are also in
accord with us. The only decision from Louisiana, which should be regarded with special interest
coming as it does from a civil law jurisdiction, is also wholly in our favor. (Salem Brick and
Lumber Co. vs. Le Sassier, 106 La., 398.) Counsel has made strenuous efforts to distinguish that
case from the one at bar. It is asserted that the clause in that bond was inserted by way of preamble
to a condition in the bond and was not a condition, properly speaking, of the bond, while in the
bond at bar the clause constitute an express stipulation. We doubt if so fine a distinction may fairly
be drawn. But we think the opinion of the supreme court of Louisiana as to whether it be a case in
point is decisive for us. The case is thus reviewed in Allen and Currey Mfg. Co. vs. Shreveport
Waterworks Co. (113 La., 1091), under the following introductory was very strong, yet not strong
enough to induce the courts to recognize a stipulation pour autrui, the following cases may be
cited."

For a lengthy review of the American case law upon this particular phase of stipulations pour autrui,
see the monographic not of Jefferson vs. Asch (27 L.R.A. [N.S.], 573).

For the foregoing reasons the judgment of the lower court, sustaining the demurrer to the complaint,
is affirmed, with costs against the appellants. So ordered.

Arellano C.J., Torres, Carson and Araullo, JJ., concur.

GEORGE A. KAUFFMAN, plaintiff-appellee,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.

Roman J. Lacson for appellant.

Ross and Lawrence for appellee.

STREET, J.:

At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman,
was the president of a domestic corporation engaged chiefly in the exportation of hemp from the
Philippine Islands and known as the Philippine Fiber and Produce Company, of which company the
plaintiff apparently held in his own right nearly the entire issue of capital stock. On February 5,
1918, the board of directors of said company, declared a dividend of P100,000 from its surplus
earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount
was accordingly placed to his credit on the books of the company, and so remained until in October
of the same year when an unsuccessful effort was made to transmit the whole, or a greater part
thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the Philippine
Fiber and Produce Company, presented himself in the exchange department of the Philippine
National Bank in Manila and requested that a telegraphic transfer of $45,000 should be made to the
plaintiff in New York City, upon account of the Philippine Fiber and Produce Company. He was
informed that the total cost of said transfer, including exchange and cost of message, would be
P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and Produce Company,
thereupon drew and delivered a check for that amount on the Philippine National Bank; and the
same was accepted by the officer selling the exchange in payment of the transfer in question. As
evidence of this transaction a document was made out and delivered to Wicks, which is referred to
by the bank's assistant cashier as its official receipt. This memorandum receipt is in the following
language:

October 9th, 1918.

CABLE TRANSFER BOUGHT FROM

PHILIPPINE NATIONAL BANK,
Manila, P.I. Stamp P18

Foreign Amount Rate

$45,000. 3/8 % P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman, New York. Total
P90,355.50. Account of Philippine Fiber and Produce Company. Sold to Messrs. Philippine Fiber
and Produce Company, Manila.

(Sgd.) Y LERMA,
Manager, Foreign Department.

On the same day the Philippine National Bank dispatched to its New York agency a cablegram to
the following effect:

Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.)
PHILIPPINE NATIONAL BANK, Manila.

Upon receiving this telegraphic message, the bank's representative in New York sent a cable
message in reply suggesting the advisability of withholding this money from Kauffman, in view of
his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The Philippine
National Bank acquiesced in this and on October 11 dispatched to its New York agency another
message to withhold the Kauffman payment as suggested.

Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to Kauffman
in New York, advising him that $45,000 had been placed to his credit in the New York agency of
the Philippine National Bank; and in response to this advice Kauffman presented himself at the
office of the Philippine National Bank in New York City on October 15, 1918, and demanded the
money. By this time, however, the message from the Philippine National Bank of October 11,
directing the withholding of payment had been received in New York, and payment was therefore
refused.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First
Instance of the city of Manila to recover said sum, with interest and costs; and judgment having
been there entered favorably to the plaintiff, the defendant appealed.

Among additional facts pertinent to the case we note the circumstance that at the time of the
transaction above-mentioned, the Philippines Fiber and Produce Company did not have on deposit
in the Philippine National Bank money adequate to pay the check for P90,355.50, which was
delivered in payment of the telegraphic order; but the company did have credit to that extent, or
more, for overdraft in current account, and the check in question was charged as an overdraft
against the Philippine Fiber and Produce Company and has remained on the books of the bank as an
interest-bearing item in the account of said company.

It is furthermore noteworthy that no evidence has been introduced tending to show failure of
consideration with respect to the amount paid for said telegraphic order. It is true that in the
defendant's answer it is suggested that the failure of the bank to pay over the amount of this
remittance to the plaintiff in New York City, pursuant to its agreement, was due to a desire to
protect the bank in its relations with the Philippine Fiber and Produce Company, whose credit was
secured at the bank by warehouse receipts on Philippine products; and it is alleged that after the
exchange in question was sold the bank found that it did not have sufficient to warrant payment of
the remittance. In view, however, of the failure of the bank to substantiate these allegations, or to
offer any other proof showing failure of consideration, it must be assumed that the obligation of the
bank was supported by adequate consideration.

In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch as
the plaintiff Kauffman was not a party to the contract with the bank for the transmission of this
credit, no right of action can be vested in him for the breach thereof. "In this situation," — we here
quote the words of the appellant's brief, — "if there exists a cause of action against the defendant, it
would not be in favor of the plaintiff who had taken no part at all in the transaction nor had entered
into any contract with the plaintiff, but in favor of the Philippine Fiber and Produce Company, the
party which contracted in its own name with the defendant."

The question thus placed before us is one purely of law; and at the very threshold of the discussion
it can be stated that the provisions of the Negotiable Instruments Law can come into operation there
must be a document in existence of the character described in section 1 of the Law; and no rights
properly speaking arise in respect to said instrument until it is delivered. In the case before us there
was an order, it is true, transmitted by the defendant bank to its New York branch, for the payment
of a specified sum of money to George A. Kauffman. But this order was not made payable "to order
or "to bearer," as required in subsection (d) of that Act; and inasmuch as it never left the possession
of the bank, or its representative in New York City, there was no delivery in the sense intended in
section 16 of the same Law. In this connection it is unnecessary to point out that the official receipt
delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot
itself be viewed in the light of a negotiable instrument, although it affords complete proof of the
obligation actually assumed by the bank.

Stated in bare simplicity the admitted facts show that the defendant bank for a valuable
consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918, to
cause a sum of money to be paid to the plaintiff in New York City; and the question is whether the
plaintiff can maintain an action against the bank for the nonperformance of said undertaking. In
other words, is the lack of privity with the contract on the part of the plaintiff fatal to the
maintenance of an action by him?

The only express provision of law that has been cited as bearing directly on this question is the
second paragraph of article 1257 of the Civil Code; and unless the present action can be maintained
under the provision, the plaintiff admittedly has no case. This provision states an exception to the
more general rule expressed in the first paragraph of the same article to the effect that contracts are
productive of effects only between the parties who execute them; and in harmony with this general
rule are numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibañez de
Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584; Manila Railroad
Co. vs. Compañia Trasatlantica and Atlantic, Gulf and Pacific Co., 38 Phil., 873, 894.)

The paragraph introducing the exception which we are now to consider is in these words:

Should the contract contain any stipulation in favor of a third person, he may demand its
fulfillment, provided he has given notice of his acceptance to the person bound before the
stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)

In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation
upon the history and interpretation of the paragraph above quoted and so complete is the discussion
contained in that opinion that it would be idle for us here to go over the same matter. Suffice it to
say that Justice Trent, speaking for the court in that case, sums up its conclusions upon the
conditions governing the right of the person for whose benefit a contract is made to maintain an
action for the breach thereof in the following words:

So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest
of a third person in a contract is a stipulation pour autrui, or merely an incidental interest, is to rely
upon the intention of the parties as disclosed by their contract.

If a third person claims an enforcible interest in the contract, the question must be settled by
determining whether the contracting parties desired to tender him such an interest. Did they
deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon
such third person? In resolving this question, of course, the ordinary rules of construction and
interpretation of writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)

Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters
not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the
promise to the third person. That no such obligation exists may in some degree assist in determining
whether the parties intended to benefit a third person, whether they stipulated for him." (Uy Tam
and Uy Yet vs. Leonard, supra.)

In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is
clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be
paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the
paragraph above quoted; and the circumstances under which that promise was given disclose an
evident intention on the part of the contracting parties that the plaintiff should have the money upon
demand in New York City. The recognition of this unqualified right in the plaintiff to receive the
money implies in our opinion the right in him to maintain an action to recover it; and indeed if the
provision in question were not applicable to the facts now before us, it would be difficult to
conceive of a case arising under it.

It will be noted that under the paragraph cited a third person seeking to enforce compliance with a
stipulation in his favor must signify his acceptance before it has been revoked. In this case the
plaintiff clearly signified his acceptance to the bank by demanding payment; and although the
Philippine National Bank had already directed its New York agency to withhold payment when this
demand was made, the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties, or at least by
direction of the party purchasing he exchange.

In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc. Bank
(130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York on March 1, 1921,
wherein it is held that, by selling a cable transfer of funds on a foreign country in ordinary course, a
bank incurs a simple contractual obligation, and cannot be considered as holding the money which
was paid for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers,
therefore, mean a method of transmitting money by cable wherein the seller engages that he has the
balance at the point on which the payment is ordered and that on receipt of the cable directing the
transfer his correspondent at such point will make payment to the beneficiary described in the cable.
All these transaction are matters of purchase and sale create no trust relationship."

As we view it there is nothing in the decision referred to decisive of the question now before us,
wish is merely that of the right of the beneficiary to maintain an action against the bank selling the
transfer.
Upon the considerations already stated, we are of the opinion that the right of action exists, and the
judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be
computed as prescribed in section 510 of the Code of Civil Procedure.

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to
annul the Court of Appeals Decision[1] dated 21 January 2003 and its Resolution[2] dated 9
September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and
Resolution affirmed in turn the Decision[3] dated 23 March 2000 and Order[4] dated 8 May 2000 of
the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring
void the interest rate provided in the promissory notes executed by the respondents Spouses Samuel
and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).

The procedural and factual antecedents of this case are as follows:

On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a maximum amount
of P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other
than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by
Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the
obligation. The Credit Agreement was subsequently amended to increase the amount of the
Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to 28
February 1998.

The spouses Beluso availed themselves of the credit line under the following Promissory Notes:

PN # Date of PN Maturity Date Amount

Secured

8314-96-00083-3 29 April 1996 27 August P 700,000

1996

8314-96-00085-0 2 May 1996 30 August P 500,000

1996

8314-96-000292- 20 November 20 March P 800,000

2 1996 1997
The three promissory notes were renewed several times. On 30 April 1997, the payment of the
principal and interest of the latter two promissory notes were debited from the spouses Belusos
account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the spouses
Beluso under one promissory note with a due date of 28 February 1998.

To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes for a total of P350,000.00:

PN # Date of PN Maturity Date Amount

Secured

97-00363-1 11 December 1997 28 February P 200,000

1998

98-00002-4 2 January 1998 28 February P 150,000

1998

However, the spouses Beluso alleged that the amounts covered by these last two promissory notes
were never released or credited to their account and, thus, claimed that the principal indebtedness
was only P2 Million.

In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to
34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum
of P763,692.03.

From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
obligations of the spouses Beluso, as follows:
 PN # Amount Interest Penalty Total
Secured

97-00363-1 P 200,000 31% 36% P 225,313.24

97-00366-6 P 700,000 30.17% 32.786% P 795,294.72

(102 days)
(7 days)

97-00368-2 P 1,300,000 28% 30.41% P 1,462,124.54

(102 days)
(2 days)

98-00002-4 P 150,000 33% 36% P 170,034.71

(102 days)

The spouses Beluso, however, failed to make any payment of the foregoing amounts.

On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation
of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On 28
December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure their
credit line, which, by that time, already ballooned to P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:

PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by
[UCPB] void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to
return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses Beluso]
the amount of P50,000.00 by way of attorneys fees; and to pay the costs of suit.[The spouses
Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.[5]

On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,[6] prompting UCPB to appeal
the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to
wit:

WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial
Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the
modification that defendant-appellant UCPB is not liable for attorneys fees or the costs of suit.[7]

On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack of
merit. UCPB thus filed the present petition, submitting the following issues for our resolution:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS

AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
WHICH DECLARED VOID THE PROVISION ON INTEREST RATE AGREED UPON
BETWEEN PETITIONER AND RESPONDENTS

II

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS

AND REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL
COURT OF RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY
PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY
THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)
III

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS

AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
WHICH ANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT
PROPERTIES DUE TO AN ALLEGED INCORRECT COMPUTATION OF RESPONDENTS
INDEBTEDNESS

IV

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS

AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT
WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING
ACT

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS

AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE
BECAUSE THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING[8]

Validity of the Interest Rates

The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were
determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE
BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT
PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines,
the sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at the
rate indicative of DBD retail rate or as determined by the Branch Head.[9]

UCPB asserts that this is a reversible error, and claims that while the interest rate was not
numerically quantified in the face of the promissory notes, it was nonetheless categorically fixed, at
the time of execution thereof, at the rate indicative of the DBD retail rate. UCPB contends that said
provision must be read with another stipulation in the promissory notes subjecting to review the
interest rate as fixed:

The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.[10]

In this regard, UCPB avers that these are valid reference rates akin to a prevailing rate or prime rate
allowed by this Court in Polotan v. Court of Appeals.[11] Furthermore, UCPB argues that even if the
proviso as determined by the branch head is considered void, such a declaration would not ipso
facto render the connecting clause indicative of DBD retail rate void in view of the separability
clause of the Credit Agreement, which reads:

Section 9.08 Separability Clause. If any one or more of the provisions contained in this
AGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the remaining provisions
hereof shall not in any way be affected or impaired.[12]

According to UCPB, the imposition of the questioned interest rates did not infringe on the principle
of mutuality of contracts, because the spouses Beluso had the liberty to choose whether or not to
renew their credit line at the new interest rates pegged by petitioner.[13] UCPB also claims that
assuming there was any defect in the mutuality of the contract at the time of its inception, such
defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the
credit line from April 1996 to February 1998 without airing any protest with respect to the interest
rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel.[14]

We agree with the Court of Appeals, and find no merit in the contentions of UCPB.

Article 1308 of the Civil Code provides:

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

We applied this provision in Philippine National Bank v. Court of Appeals,[15] where we held:

In order that obligations arising from contracts may have the force of 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 (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming
that the P1.8 million 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" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts
of justice must protect against abuse and imposition.

The provision stating that the interest shall be at the rate indicative of DBD retail rate or as
determined by the Branch Head is indeed dependent solely on the will of petitioner UCPB. Under
such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a rate
indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is given
this choice, the rate should be categorically determinable in both choices. If either of these two
choices presents an opportunity for UCPB to fix the rate at will, the bank can easily choose such an
option, thus making the entire interest rate provision violative of the principle of mutuality of
contracts.

Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a
rate as determined by the Branch Head gives the latter unfettered discretion on what the rate may
be. The Branch Head may choose any rate he or she desires. As regards the rate indicative of the
DBD retail rate, the same cannot be considered as valid for being akin to a prevailing rate or prime
rate allowed by this Court in Polotan. The interest rate in Polotan reads:

The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and
Trust Company. x x x.[16]

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties
can easily determine the interest rate by applying simple arithmetic. On the other hand, the
provision in the case at bar does not specify any margin above or below the DBD retail rate. UCPB
can peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered
discretion in determining the interest rate.

The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to
said stipulation:

The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.[17]

It should be pointed out that the authority to review the interest rate was given UCPB alone as the
lender. Moreover, UCPB may apply the considerations enumerated in this provision as it wishes. As
worded in the above provision, UCPB may give as much weight as it desires to each of the
following considerations: (1) the prevailing financial and monetary condition; (2) the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of
the interest rate provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as
to the interest to be imposed, as both options violate the principle of mutuality of contracts.

UCPB likewise failed to convince us that the spouses Beluso were in estoppel.

Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot
be given to it by estoppel if it is prohibited by law or is against public policy.[18]

The interest rate provisions in the case at bar are illegal not only because of the provisions of the
Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate the
Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of
credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of
the State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens
from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such
cost with a view of preventing the uninformed use of credit to the detriment of the national
economy.[19]

Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions
are found in the promissory notes themselves, not in the credit line. In fixing the interest rates in the
promissory notes to cover the renewed credit line, UCPB still reserved to itself the same two
options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation

UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed
by UCPB, both failed to include in their computation of the outstanding obligation of the spouses
Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges were also
deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II on Interest
and other Bank Charges of the subject Credit Agreement, provides:

Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this
ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be
subject to a penalty charge of one percent (1%) of the amount of such obligation per month
computed from due date until the obligation is paid in full. If the bank accelerates teh (sic) payment
of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used on the
total principal amount outstanding and unpaid computed from the date of acceleration until the
obligation is paid in full.[20]

Paragraph 4 of the promissory notes also states:

In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally,
agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on the Note
as attorneys fee, aside from the expenses and costs of collection whether actually incurred or not,
and a penalty charge of one percent (1%) per month on the total amount due and unpaid from date
of default until fully paid.[21]

Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of the
Credit Agreement, thus:

If the BANK shall require the services of counsel for the enforcement of its rights under this
AGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall be
entitled to recover attorneys fees equivalent to not less than twenty-five percent (25%) of the total
amounts due and outstanding exclusive of costs and other expenses.[22]
Another alleged computational error pointed out by UCPB is the negation of the Compounding
Interest agreed upon by the parties under Section 2.02 of the Credit Agreement:

Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and
shall be subject to the same interest rate as herein stipulated.[23]

and paragraph 3 of the subject promissory notes:

Interest not paid when due shall be added to, and become part of the principal and shall likewise
bear interest at the same rate.[24]

UCPB lastly avers that the application of the spouses Belusos payments in the disputed computation
does not reflect the parties agreement. The RTC deducted the payment made by the spouses Beluso
amounting to P763,693.00 from the principal of P2,350,000.00. This was allegedly inconsistent
with the Credit Agreement, as well as with the agreement of the parties as to the facts of the case. In
paragraph 7 of the spouses Belusos Manifestation and Motion on Proposed Stipulation of Facts and
Issues vis--vis UCPBs Manifestation, the parties agreed that the amount of P763,693.00 was applied
to the interest and not to the principal, in accord with Section 3.03, Article II of the Credit
Agreement on Order of the Application of Payments, which provides:

Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in
accordance with the following order of preference:

1. Accounts receivable and other out-of-pocket expenses

2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;

3. Penalty charges;
4. Past due interest;

5. Principal amortization/Payment in arrears;

6. Advance interest;

7. Outstanding balance; and

8. All other obligations of CLIENT to the BANK, if any.[25]

Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been
erroneously excluded by the RTC and the Court of Appeals from the computation of the total
amount due and demandable from spouses Beluso.

The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand should be considered void. There being no
valid demand, according to the spouses Beluso, there would be no default, and therefore the
interests and penalties would not commence to run. As it was likewise improper to foreclose the
mortgaged properties or file a case against the spouses Beluso, attorneys fees were not warranted.

We agree with UCPB on this score. Default commences upon judicial or extrajudicial
demand.[26] The excess amount in such a demand does not nullify the demand itself, which is valid
with respect to the proper amount. A contrary ruling would put commercial transactions in disarray,
as validity of demands would be dependent on the exactness of the computations thereof, which are
too often contested.

There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point.

As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that
said legal interest should be imposed, thus: There being no valid stipulation as to interest, the legal
rate of interest shall be charged.[27] It seems that the RTC inadvertently overlooked its non-inclusion
in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in
both the body and the prayer of its petition with the RTC:

12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is
null and void, only the legal rate of interest which is 12% per annum can be legally charged and
imposed by the bank, which would amount to only about P599,000.00 since 1996 up to August 31,
1998.

xxxx

WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:

xxxx

2. By way of example for the public good against the Banks taking unfair advantage of the weaker
party to their contract, declaring the legal rate of 12% per annum, as the imposable rate of interest
up to February 28, 1999 on the loan of 2.350 million.[28]

All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a
12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its
computation, however, the spouses Beluso merely defended in the appellate courts this non-
inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12%
legal interest in favor of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall earn interest.

We must likewise uphold the contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes providing for the compounding of
interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses
Beluso in their petition with the RTC. The compounding of interests has furthermore been declared
by this Court to be legal. We have held in Tan v. Court of Appeals,[29] that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by stipulation capitalize the interest due and
unpaid, which as added principal, shall earn new interest.

As regards the imposition of penalties, however, although we are likewise upholding the imposition
thereof in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests,
the penalty stipulated in the contract may also be reduced by the courts if it is iniquitous or
unconscionable.[30]

We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering
the fact that this penalty is already over and above the compounded interest likewise imposed in the
contract. If a 36% interest in itself has been declared unconscionable by this Court, [31] what more a
30.41% to 36% penalty, over and above the payment of compounded interest? UCPB itself must
have realized this, as it gave us a sample computation of the spouses Belusos obligation if both the
interest and the penalty charge are reduced to 12%.

As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there had
been no demand. Filing a case in court is the judicial demand referred to in Article 1169[32] of the
Civil Code, which would put the obligor in delay.

The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso
were forced to litigate the issue on the illegality of the interest rate provision of the promissory
notes. The award of attorneys fees, it must be recalled, falls under the sound discretion of the
court.[33] Since both parties were forced to litigate to protect their respective rights, and both are
entitled to the award of attorneys fees from the other, practical reasons dictate that we set off or
compensate both parties liabilities for attorneys fees. Therefore, instead of awarding attorneys fees
in favor of petitioner, we shall merely affirm the deletion of the award of attorneys fees to the
spouses Beluso.

In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of
12% per annum and a penalty charge of 12% per annum. We also hold that, instead of awarding
attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of attorneys
fees to the spouses Beluso.

Annulment of the Foreclosure Sale

Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated
on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to
exercise their right of redemption which expired on 25 March 2000. The RTC, however, annulled
the foreclosure of mortgage based on an alleged incorrect computation of the spouses Belusos
indebtedness.

UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the
case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale
were mooted by the subsequent issuance of new certificates of title in the name of said bank. UCPB
claims that the spouses Belusos action for annulment of foreclosure constitutes a collateral attack on
its certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise
known as the Property Registration Decree, which provides:

Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in
accordance with law.

The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on
their account, they cannot be said to be in default for refusing to pay the same. Consequently,
according to the spouses Beluso, the enforcement of such illegal and overcharged demand through
foreclosure of mortgage should be voided.

We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already
found that a valid demand was made by UCPB upon the spouses Beluso, despite being excessive,
the spouses Beluso are considered in default with respect to the proper amount of their obligation to
UCPB and, thus, the property they mortgaged to secure such amounts may be
foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent of the
amounts to which UCPB is rightfully entitled.

As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this
case. The grounds for the proper annulment of the foreclosure sale are the following: (1) that there
was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser; (2)
that the sale had not been fairly and regularly conducted; or (3) that the price was inadequate and
the inadequacy was so great as to shock the conscience of the court.[34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged
violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such penalty must be made under the following
circumstances:

Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable to
such person in the amount of P100 or in an amount equal to twice the finance charge required by
such creditor in connection with such transaction, whichever is greater, except that such liability
shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought
by such person within one year from the date of the occurrence of the violation, in any court
of competent jurisdiction. x x x (Emphasis ours.)

According to UCPB, the Court of Appeals even stated that [a]dmittedly the original complaint did
not explicitly allege a violation of the Truth in Lending Act and no action to formally admit the
amended petition [which expressly alleges violation of the Truth in Lending Act] was made either
by [respondents] spouses Beluso and the lower court. x x x.[35]

UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending
Act had been barred by the one-year prescriptive period provided for in the Act. UCPB asserts that
per the records of the case, the latest of the subject promissory notes had been executed on 2
January 1998, but the original petition of the spouses Beluso was filed before the RTC on 9
February 1999, which was after the expiration of the period to file the same on 2 January 1999.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act
and no action to formally admit the amended petition was made either by [respondents] spouses
Beluso and the lower court. In such transactions, the debtor and the lending institutions do not deal
on an equal footing and this law was intended to protect the public from hidden or undisclosed
charges on their loan obligations, requiring a full disclosure thereof by the lender. We find that its
infringement may be inferred or implied from allegations that when [respondents] spouses Beluso
executed the promissory notes, the interest rate chargeable thereon were left blank. Thus,
[petitioner] UCPB failed to discharge its duty to disclose in full to [respondents] Spouses Beluso the
charges applicable on their loans.[36]

We agree with the Court of Appeals. The allegations in the complaint, much more than the title
thereof, are controlling. Other than that stated by the Court of Appeals, we find that the allegation
of violation of the Truth in Lending Act can also be inferred from the same allegation in the
complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the
provision of their promissory note granting respondent bank the power to unilaterally fix the
interest rates, which rate was not determined in the promissory note but was left solely to the will of
the Branch Head of the respondent Bank, x x x.[37]
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates
certainly also means that the promissory notes do not contain a clear statement in writing of (6) the
finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance
charge bears to the amount to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.[38] Furthermore, the spouses Belusos prayer for such other reliefs
just and equitable in the premises should be deemed to include the civil penalty provided for in
Section 6(a) of the Truth in Lending Act.

UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending
Act has already prescribed is likewise without merit. The penalty for the violation of the act is P100
or an amount equal to twice the finance charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on any credit
transaction.[39] As this penalty depends on the finance charge required of the borrower, the
borrowers cause of action would only accrue when such finance charge is required. In the case at
bar, the date of the demand for payment of the finance charge is 2 September 1998, while the
foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is therefore
within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the complaint.[40]Pertinent provisions of the Act
read:

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person
any information in violation of this Act or any regulation issued thereunder shall be liable to such
person in the amount of P100 or in an amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is the greater, except that such liability shall
not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of the violation, in any court of competent
jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the
creditor shall be liable for reasonable attorneys fees and court costs as determined by the court.

xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less
than 6 months, nor more than one year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said
Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section
6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty therefor is
an amount of P100 or in an amount equal to twice the finance charge required by the creditor in
connection with such transaction, whichever is greater, except that the liability shall not
exceed P2,000.00 on any credit transaction. The action to recover such penalty may be instituted by
the aggrieved private person separately and independently from the criminal case for the same
offense.

In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in
Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory
notes void, and (2) the action to declare the foreclosure void. This joinder is allowed under Rule 2,
Section 5 of the Rules of Court, which provides:

SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the
following conditions:

(a) The party joining the causes of action shall comply with the rules on joinder of parties;

(b) The joinder shall not include special civil actions or actions governed by special rules;

(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies therein; and

(d) Where the claims in all the causes of action are principally for recovery of money, the aggregate
amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was
not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due
process mandates that a defendant should be sufficiently apprised of the matters he or she would be
defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses
Beluso before the RTC, the claim for civil sanctions for violation of the Truth in Lending Act was
expressly alleged, thus:

Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing
the borrower in writing before the execution of the Promissory Notes of the interest rate expressed
as a percentage of the total loan, the respondent bank instead is liable to pay petitioners double the
amount the bank is charging petitioners by way of sanction for its violation.[41]

In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:

b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act
provision to express the interest rate as a simple annual percentage of the loan?[42]

These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the
assertion of this issue in this case as to prevent it from putting up a defense thereto is plainly
hogwash.

Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending Act, considering that the present action
allegedly involved a single credit transaction as there was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the
Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. There had been no
question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the above-
quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:

(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies therein.

Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the
former is merely a preparatory contract to the contract of loan or mutuum. Under such credit line,
the bank is merely obliged, for the considerations specified therefor, to lend to the other party
amounts not exceeding the limit provided. The credit transaction thus occurred not when the credit
line was opened, but rather when the credit line was availed of. In the case at bar, the violation of
the Truth in Lending Act allegedly occurred not when the parties executed the Credit Agreement,
where no interest rate was mentioned, but when the parties executed the promissory notes, where
the allegedly offending interest rate was stipulated.

UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the following
information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2)

(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost
thereof, proceeding from the experience that banks are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the
like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of
their loan, to enable them to give full consent to the contract, and to properly evaluate their options
in arriving at business decisions.Upholding UCPBs claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too
often not be able to reverse the ill effects of an already consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied to the
loan covered by said promissory notes.

Forum Shopping

UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City)
on the ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before the
RTC of Roxas City, involving the same parties and issues. UCPB claims that while Civil Case No.
V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary
restraining order and/or injunction to stop foreclosure of spouses Belusos properties, it poses issues
which are similar to those of the present case.[43] To prove its point, UCPB cited the spouses
Belusos Amended Petition in Civil Case No. V-7227, which contains similar allegations as those in
the present case.The RTC of Makati denied UCPBs Motion to Dismiss Case No. 99-314 for lack of
merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same
issue with us now.

The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a
Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the true
account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314 before
the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that
Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the
restraining order, UCPB proceeded with the foreclosure and auction sale. As the act sought to be
restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had to file
a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC,
Makati City.

Even if we assume for the sake of argument, however, that only one cause of action is involved in
the two civil actions, namely, the violation of the right of the spouses Beluso not to have their
property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the filing
of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before the
filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as provided for
in the Credit Agreement is in Makati City.

Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following
instances:

SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss
based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action or
claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not
in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or pleading
asserting a claim, a motion to dismiss may be made on any of the following grounds:

(a) That the court has no jurisdiction over the person of the defending party;

(b) That the court has no jurisdiction over the subject matter of the claim;

(c) That venue is improperly laid;

(d) That the plaintiff has no legal capacity to sue;

(e) That there is another action pending between the same parties for the same cause;

(f) That the cause of action is barred by a prior judgment or by the statute of limitations;

(g) That the pleading asserting the claim states no cause of action;

(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived,
abandoned, or otherwise extinguished;

(i) That the claim on which the action is founded is unenforceable under the provisions of the
statute of frauds; and

(j) That a condition precedent for filing the claim has not been complied with.[44] (Emphases
supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for the
dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As
regards all the other grounds, the complainant is allowed to file same action, but should take care
that, this time, it is filed with the proper court or after the accomplishment of the erstwhile absent
condition precedent, as the case may be.

UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the
spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been
ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence,
there were allegedly two pending actions between the same parties on the same issue at the time of
the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will still not
change our findings. It is indeed the general rule that in cases where there are two pending actions
between the same parties on the same issue, it should be the later case that should be
dismissed. However, this rule is not absolute. According to this Court in Allied Banking
Corporation v. Court of Appeals[45]:

In these cases, it is evident that the first action was filed in anticipation of the filing of the later
action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal of the
second action.

Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed
if the later action is the more appropriate vehicle for the ventilation of the issues between the
parties. Thus, in Ramos v. Peralta, it was held:

[T]he rule on litis pendentia does not require that the later case should yield to the earlier case.
What is required merely is that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.

Given, therefore, the pendency of two actions, the following are the relevant considerations in
determining which action should be dismissed: (1) the date of filing, with preference generally
given to the first action filed to be retained; (2) whether the action sought to be dismissed was filed
merely to preempt the later action or to anticipate its filing and lay the basis for its dismissal; and
(3) whether the action is the appropriate vehicle for litigating the issues between the parties.

In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for
injunction against a foreclosure sale that has already been held, while Civil Case No. 99-314 before
the RTC of Makati City includes an action for the annulment of said foreclosure, an action certainly
more proper in view of the execution of the foreclosure sale. The former case was improperly filed
in Roxas City, while the latter was filed in Makati City, the proper venue of the action as mandated
by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is the more appropriate
vehicle for litigating the issues between the parties, as compared to Civil Case No. V-7227. Thus,
we rule that the RTC of Makati City was not in error in not dismissing Civil Case No. 99-314.

WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the
following MODIFICATIONS:

1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent

spouses Samuel and Odette Beluso are also liable for the following amounts:

a. Penalty of 12% per annum on the amount due[46] from the date of demand; and

b. Compounded legal interest of 12% per annum on the amount due[47] from date of demand;

2. The following amounts shall be deducted from the liability of the spouses Samuel and
Odette Beluso:

a. Payments made by the spouses in the amount of P763,692.00. These payments shall be
applied to the date of actual payment of the following in the order that they are listed, to wit:

i. penalty charges due and demandable as of the

time of payment;

ii. interest due and demandable as of the time of

payment;

iii. principal amortization/payment in arrears as of

the time of payment;

iv. outstanding balance.

b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be
deducted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to the
following in the order that they are listed, to wit:

i. penalty charges due and demandable as of time

of payment;

ii. interest due and demandable as of the time of

payment;

iii. principal amortization/payment in arrears as of

the time of payment;

iv. outstanding balance.

3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts

which the Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in
this Decision, shall be deducted from the proceeds of the foreclosure sale.

Philippine Savings Bank vs. Castillo, G.R. No. 193178. May 30, 2011

This is a petition for review on certiorari[1] under Rule 45 of the Rules of Court, seeking to partially
reconsider and modify the Decision[2] dated August 27, 2009 and the Resolution[3] dated August 4,
2010 of the Court of Appeals (CA) in CA-G.R. CV No. 86445.

Respondent spouses Alfredo M. Castillo and Elizabeth Capati-Castillo were the registered owners
of a lot located in Tondo, Manila, covered by Transfer Certificate of Title (TCT) No.
233242. Respondent spouses Romeo B. Capati and Aquilina M. Lobo were the registered owners of
another lot, covered by TCT No. 227858, also located in Tondo, Manila.

On May 7, 1997, respondents obtained a loan, with real estate mortgage over the said properties,
from petitioner Philippine Savings Bank, as evidenced by a Promissory Note with a face value
of P2,500,000.00. The Promissory Note, in part, reads:

FOR VALUE RECEIVED, I/We, solidarily, jointly and severally, promise to

pay to the order of PHILIPPINE SAVINGS BANK, at its head office or at the above
 stated Branch the sum of TWO MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (P2,500,000.00), Philippine currency, with interest at the rate of seventeen per
centum (17%) per annum, from date until paid, as follows:

P43,449.41 (principal and interest) monthly for fifty nine (59) months starting
June 07, 1997 and every 7th day of the month thereafter with balloon payment on May
07, 2002.

Also, the rate of interest herein provided shall be subject to review and/or
adjustment every ninety (90) days.

All amortizations which are not paid on due date shall bear a penalty
equivalent to three percent (3%) of the amount due for every month or fraction of a
months delay.

The rate of interest and/or bank charges herein stipulated, during the terms of
this promissory note, its extensions, renewals or other modifications, may be
increased, decreased or otherwise changed from time to time within the rate of interest
and charges allowed under present or future law(s) and/or government regulation(s) as
the PHILIPPINE SAVINGS BANK may prescribe for its debtors.

Upon default of payment of any installment and/or interest when due, all other
installments and interest remaining unpaid shall immediately become due and
payable. Also, said interest not paid when due shall be added to, and become part of
the principal and shall likewise bear interest at the same rate herein provided.[4]

From the release of the loan in May 1997 until December 1999, petitioner had increased and
decreased the rate of interest, the highest of which was 29% and the lowest was 15.5% per annum,
per the Promissory Note.
Respondents were notified in writing of these changes in the interest rate. They neither gave their
confirmation thereto nor did they formally question the changes. However, respondent Alfredo
Castillo sent several letters to petitioner requesting for the reduction of the interest
rates.[5] Petitioner denied these requests.

Respondents regularly paid their amortizations until December 1999, when they defaulted due to
financial constraints. Per petitioners table of application of payment, respondents outstanding
balance was P2,231,798.11.[6] Petitioner claimed that as of February 11, 2000, respondents had a
total outstanding obligation of P2,525,910.29.[7] Petitioner sent them demand letters. Respondents
failed to pay.

Thus, petitioner initiated an extrajudicial foreclosure sale of the mortgaged properties. The auction
sale was conducted on June 16, 2000, with the properties sold for P2,778,611.27 and awarded to
petitioner as the only bidder. Being the mortgagee, petitioner no longer paid the said amount but
rather credited it to the loan amortizations and arrears, past due interest, penalty charges, attorneys
fees, all legal fees and expenses incidental to the foreclosure and sale, and partial payment of the
mortgaged debt. On even date, a certificate of sale was issued and submitted to the Clerk of Court
and to the Ex-Officio Sheriff of Manila.

On July 3, 2000, the certificate of sale, sans the approval of the Executive Judge of the Regional
Trial Court (RTC), was registered with the Registry of Deeds of Manila.

Respondents failed to redeem the property within the one-year redemption period. However, on
July 18, 2001, Alfredo Castillo sent a letter to petitioner requesting for an extension of 60 days
before consolidation of its title so that they could redeem the properties, offering P3,000,000.00 as
redemption price. Petitioner conceded to Alfredo Castillos request, but respondents still failed to
redeem the properties.

On October 1, 2001, respondents filed a case for Reformation of Instruments, Declaration of Nullity
of Notarial Foreclosure Proceedings and Certificate of Sale, Cancellation of Annotations on TCT
Nos. 233242 and 227858, and Damages, with a plea for the issuance of a temporary restraining
order (TRO) and/or writ of preliminary prohibitory injunction, with the RTC, Branch 14, Manila.
On October 5, 2001, the RTC issued a TRO. Eventually, on October 25, 2001, it issued a writ of
preliminary injunction.

After trial, the RTC rendered its decision dated July 30, 2005, the dispositive portion of which
reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs, and

against the defendants in the following manner:

1. Declaring the questioned increases of interest as unreasonable, excessive and

arbitrary and ordering the defendant Philippine Savings Bank to refund to the
plaintiffs, the amount of interest collected in excess of seventeen percent (17%)
per annum;

2. Declaring the Extrajudicial Foreclosure conducted by the defendants on June

16, 2000 and the subsequent proceedings taken thereafter to be void ab initio. In
this connection, defendant Register of Deeds is hereby ordered to cause the
cancellation of the corresponding annotations at the back of Transfer Certificates
of Title No. 227858 and 233242 in the name of Spouses Alfredo and Elizabeth
Castillo and Spouses Romeo Capati and Aquilina M. Lobo;

3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs the amount

of Php50,000.00 as moral damages; Php50,000.00 as exemplary damages; and
attorneys fees in the amount of Php30,000.00 and Php3,000.00 per appearance.

4. Defendants counterclaims are hereby DISMISSED for lack of merit.

With costs against the defendant Philippine Savings Bank, Inc.

 SO ORDERED.[8]

Petitioner filed a motion for reconsideration. The RTC partially granted the motion in its November
30, 2005 Order, modifying the interest rate from 17% to 24% per annum.[9]

Petitioner appealed to the CA. The CA modified the decision of the RTC, thus

WHEREFORE, in view of the foregoing, the Decision of the Regional Trial

Court is hereby AFFIRMED WITH MODIFICATIONS. The fallo shall now read:

WHEREFORE, judgment is hereby rendered in favor of the

plaintiffs and against the defendants in the following manner:

1. Declaring the questioned increases of interest as

unreasonable, excessive and arbitrary and ordering the
defendant Philippine Savings Bank to refund to the plaintiffs,
the amount of interest collected in excess of seventeen
percent (17%) per annum;

2. Declaring the Extrajudicial Foreclosure conducted by the

defendants on June 16, 2000 and the subsequent proceedings
taken thereafter to be valid[;]

3. Defendant Philippine Savings Bank is adjudged to pay

plaintiffs the amount of Php 25,000.00 as moral damages;
Php 50,000.00 as exemplary damages; and attorneys fees in
the amount of Php 30,000.00 and Php 3,000.00 per
appearance;
 4. Defendants counterclaims are hereby DISMISSED for lack
of merit.

With costs against the defendant Philippine Savings Bank, Inc.

SO ORDERED.[10]

Hence, this petition anchored on the contention that the CA erred in: (1) declaring that the
modifications in the interest rates are unreasonable; and (2) sustaining the award of damages and
attorneys fees.

The petition should be partially granted.

The unilateral determination and imposition of the increased rates is violative of the principle of
mutuality of contracts under Article 1308 of the Civil Code, which provides that [t]he contract must
bind both contracting parties; its validity or compliance cannot be left to the will of one of
them.[11] A perusal of the Promissory Note will readily show that the increase or decrease of interest
rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker
before a new interest rate could be enforced.Any contract which appears to be heavily weighed in
favor of one of the parties so as to lead to an unconscionable result, thus partaking of the nature of a
contract of adhesion, is void. Any stipulation regarding the validity or compliance of the contract
left solely to the will of one of the parties is likewise invalid.

Petitioner contends that respondents acquiesced to the imposition of the modified interest
rates; thus, there was no violation of the principle of mutuality of contracts. To buttress its position,
petitioner points out that the exhibits presented by respondents during trial contained a uniform
provision, which states:
 The interest rate adjustment is in accordance with the Conformity Letter you
have signed amending your accounts interest rate review period from ninety (90) to
thirty days.[12]

It further claims that respondents requested several times for the reduction of the interest rates, thus,
manifesting their recognition of the legality of the said rates. It also asserts that the contractual
provision on the interest rates cannot be said to be lopsided in its favor, considering that it had, on
several occasions, lowered the interest rates.

We disagree. The above-quoted provision of respondents exhibits readily shows that the
conformity letter signed by them does not pertain to the modification of the interest rates, but rather
only to the amendment of the interest rate review period from 90 days to 30 days. Verily, the
conformity of respondents with respect to the shortening of the interest rate review period from 90
days to 30 days is separate and distinct from and cannot substitute for the required conformity of
respondents with respect to the modification of the interest rate itself.

Moreover, respondents assent to the modifications in the interest rates cannot be implied
from their lack of response to the memos sent by petitioner, informing them of the
amendments. The said memos were in the nature of a proposal to change the contract with respect
to one of its significant components, i.e., the interest rates. As we have held, no one receiving a
proposal to change a contract is obliged to answer the proposal.[13] Therefore, respondents could
neither be faulted, nor could they be deemed to have assented to the modified interest rates, for not
replying to the said memos from petitioner.

We likewise disagree with petitioners assertion that respondents recognized the legality of
the imposed interest rates through the letters requesting for the reduction of the rates. The request
for reduction of the interest does not translate to consent thereto. To be sure, a cursory reading of
the said letters would clearly show that Alfredo Castillo was, in fact, questioning the propriety of
the interest rates imposed on their loan, viz.:
 The undersigned is a mortgagor of Philippine Savings Bank with an
outstanding balance of TWO MILLION FOUR HUNDRED THIRTY EIGHT
THOUSAND SIX HUNDRED SIX and 63/100 (P2,438,606.63) at an interest rate of
26% per annum (as per April 6, 1997 inquiry to Leo of the Accounting Dept.) and
with a monthly amortization of FIFTY EIGHT THOUSAND THREE HUNDRED
FIFTY EIGHT AND 38/100 (P58,358.38).

I understand that the present interest rate is lower than the last months
27%. However, it does not give our company any break from coping with our
receivables. Our clients, Mercure Philippine Village Hotel, Puerto Azul Beach Hotel,
Grand Air Caterer, to name a few, did not settle their obligation to us inspite of what
was agreed upon during our meeting held last February 1998. Their pledge of paying
us at least ONE MILLION PESOS PER AFFILIATION, which we allocate to pay our
balance to your bank, was not a reliable deal to foresee because, as of this very day,
not even half of the amount assured to us was settled. This situation puts the company
in critical condition since we will again shoulder all the interests imposed on our
loans, while, we ourselves, did not impose any surcharge with our receivables.

In connection with this, may I request for a reduction of interest rate, in my

favor, i.e., from 26% to 21% per annum. If such appeal is granted to us, we are
assuring you of our prompt payment and keen observance to your rules and
regulations.[14]

The undersigned is a mortgagor of Philippine Savings Bank with an

outstanding balance of TWO MILLION FOUR HUNDRED THIRTY THREE
THOUSAND EIGHTY FOUR and 73/100 (P2,433,084.73) at an interest rate of
22.5% per annum (as per April 24, 1998 memo faxed to us) and with a monthly
amortization of FIFTY TWO THOUSAND FIVE HUNDRED FIFTY EIGHT AND
01/100 (P52,55[8].01).

Such reduction of interest rate is an effect of our currencys development. But

based on our inquiries and research to different financial institutions, the rate your
bank is imposing to us is still higher compared to the eighteen and a half percent
(18.5%) others are asking. With this situation, we are again requesting for a decrease
on the interest rate, that is, from 22.5% to 18.5%.This figure stated is not fictitious
since other banks advertising are published to leading newspapers. The difference
between your rate is visibly greater and has an immense effect on our financial
obligations.[15]

The undersigned is a mortgagor at Philippine Savings Bank with an

outstanding balance of TWO MILLION FOUR HUNDRED THOUSAND EIGHT
HUNDRED ELEVEN and 03/100 (Php 2,40[0],811.03) at an interest rate of 21% per
annum.

Letters of reconsideration were constantly sent to you to grant us lower interest

rate. However, no assistance with regard to that request has been extended to us. In
view of this, I am requesting for a transfer of our loan from PSBank Head Office to
PSBank Mabini Branch. This transfer is purposely intended for an appeal [for] a
lower interest rate.[16]

Being a mortgagor of PSBank, I have [been] repeatedly asking for a reduction

of your interest rate. However, my request has been denied since the term I
started. Many banks offer a much lower interest rate and fair business transactions
(e.g. Development Bank of Singapore [which] offers 13% p.a. interest rate).

In this connection, once more, I am requesting for a reduction of the interest

rate applied to my loan to maintain our business relationship.[17]
Basic is the rule that there can be no contract in its true sense without the mutual assent of the
parties. If this consent is absent on the part of one who contracts, the act has no more efficacy than
if it had been done under duress or by a person of unsound mind. 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, the interest rate is undeniably always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed upon, otherwise, it produces no binding
effect.[18]

Escalation clauses are generally valid and do not contravene public policy. They are common in
credit agreements as means of maintaining fiscal stability and retaining the value of money on long-
term contracts. To prevent any one-sidedness that these clauses may cause, we have held in Banco
Filipino Savings and Mortgage Bank v. Judge Navarro[19]that there should be a corresponding de-
escalation clause that would authorize a reduction in the interest rates corresponding to downward
changes made by law or by the Monetary Board. As can be gleaned from the parties loan
agreement, a de-escalation clause is provided, by virtue of which, petitioner had lowered its interest
rates.

Nevertheless, the validity of the escalation clause did not give petitioner the unbridled right to
unilaterally adjust interest rates. The adjustment should have still been subjected to the mutual
agreement of the contracting parties. In light of the absence of consent on the part of respondents to
the modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the
inclusion of a de-escalation clause in the loan agreement.

The order of refund was based on the fact that the increases in the interest rate were null and
void for being violative of the principle of mutuality of contracts. The amount to be refunded refers
to that paid by respondents when they had no obligation to do so. Simply put, petitioner should
refund the amount of interest that it has illegally imposed upon respondents. Any deficiency in the
payment of the obligation can be collected by petitioner in a foreclosure proceeding, which it
already did.

On the matter of damages, we agree with petitioner. Moral damages are not recoverable simply
because a contract has been breached. They are recoverable only if the party from whom it is
claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The
breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a
breach of contract may give rise to exemplary damages only if the guilty party acted in a fraudulent
or malevolent manner.[20]

In this case, we are not sufficiently convinced that fraud, bad faith, or wanton disregard of
contractual obligations can be imputed to petitioner simply because it unilaterally imposed the
changes in interest rates, which can be attributed merely to bad business judgment or attendant
negligence. Bad faith pertains to a dishonest purpose, to some moral obliquity, or to the conscious
doing of a wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes
of the nature of fraud. Respondents failed to sufficiently establish this requirement. Thus, the award
of moral and exemplary damages is unwarranted. In the same vein, respondents cannot recover
attorneys fees and litigation expenses. Accordingly, these awards should be deleted.[21]

However, as regards the above mentioned award for refund to respondents of their interest
payments in excess of 17% per annum, the same should include legal interest. In Eastern Shipping
Lines, Inc. v. Court of Appeals,[22] we have held that when an obligation is breached, and it consists
in the payment of a sum of money, the interest on the amount of damages shall be at the rate of
12% per annum, reckoned from the time of the filing of the complaint.[23]

WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Decision dated August
27, 2009 and the Resolution dated August 4, 2010 of the Court of Appeals in CA-G.R. CV No.
86445 are AFFIRMED WITH MODIFICATIONS, such that the award for moral damages,
exemplary damages, attorneys fees, and litigation expenses is DELETED, and the order of refund
in favor of respondents of interest payments made in excess of 17% per annum shall bear interest of
12% per annum from the time of the filing of the complaint until its full satisfaction.

ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, HON. JOSE C.

DE GUZMAN, OSCAR D. TANQUECO, LUCIA D. TANQUECO-MATIAS, RUBEN
D. TANQUECO and NESTOR D. TANQUECO, respondents

There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a
contract of lease to the effect that the contract "may be renewed for a like term at the option of the
lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art.
1308 of the Civil Code and, corollarily, what is the meaning of the clause"may be renewed for a
like term at the option of the lessee;" and, (b) whether a lessee has the legal personality to assail the
validity of a deed of donation executed by the lessor over the leased premises.
 Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot
located at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by
TCT No. 136779 in their name. On 30 June 1978 they leased the property to petitioner Allied
Banking Corporation (ALLIED) for a monthly rental of P1,000.00 for the first three (3) years,
adjustable by 25% every three (3) years thereafter.[1] The lease contract specifically states in its
Provision No. 1 that "the term of this lease shall be fourteen (14) years commencing from April 1,
1978 and may be renewed for a like term at the option of the lessee."

Pursuant to their lease agreement, ALLIED introduced an improvement on the property

consisting of a concrete building with a floor area of 340-square meters which it used as a branch
office. As stipulated, the ownership of the building would be transferred to the lessors upon the
expiration of the original term of the lease.

Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject
property in favor of their four (4) children, namely, private respondents herein Oscar D. Tanqueco,
Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted the donation
in the same public instrument.

On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos
notified petitioner ALLIED that they were no longer interested in renewing the
lease.[2] ALLIEDreplied that it was exercising its option to renew their lease under the same terms
with additional proposals.[3] Respondent Ruben D. Tanqueco, acting in behalf of all the donee-
lessors, made a counter-proposal.[4] ALLIED however rejected the counter-proposal and insisted on
Provision No. 1 of their lease contract.

When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a
cashiers check in the amount of P68,400.00 representing the advance rental payments for six (6)
months taking into account the escalation clause. Private respondents however returned the check to
ALLIED, prompting the latter to consign the amount in court.

An action for ejectment was commenced before the Metropolitan Trial Court of Quezon
City. After trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being
violative of Art. 1308 of the Civil Code thus -

x x x but such provision [in the lease contract], to the mind of the Court, does not add luster to
defendants cause nor constitutes as an unbridled or unlimited license or sanctuary of the defendant
to perpetuate its occupancy on the subject property. The basic intention of the law in any contract is
mutuality and equality. In other words, the validity of a contract cannot be left at (sic) the will of
one of the contracting parties. Otherwise, it infringes (upon) Article 1308 of the New Civil Code,
which provides: The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them x x x x Using the principle laid down in the case of Garcia v.
Legarda as cornerstone, it is evident that the renewal of the lease in this case cannot be left at the
sole option or will of the defendant notwithstanding provision no. 1 of their expired contract. For
that would amount to a situation where the continuance andeffectivity of a
contract will depend only upon the sole will or power of the lessee, which is repugnant to the very
spirit envisioned under Article 1308 of the New Civil Code x x x x the theory adopted by this Court
in the case at bar finds ample affirmation from the principle echoed by the Supreme Court in the
case of Lao Lim v. CA, 191 SCRA 150, 154, 155.

On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision
was affirmed.[5]

On 20 February 1993, while the case was pending in the Court of Appeals, ALLIED vacated
the leased premises by reason of the controversy.[6]

ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon
hence valid and binding on both parties, and the exercise by petitioner of its option to renew the
contract was part of their agreement and in pursuance thereof.

We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as
the principle of mutuality of contracts. It provides that "the contract must bind both the
contracting parties; its validity or compliance cannot be left to the will of one of them." This
binding effect of a contract on both parties is based on the principle that the obligations arising from
contracts have the force of law between the contracting parties, and there must be mutuality
between them based essentially on their equality under which it is repugnant to have one party
bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void
a contract containing a condition which makes its fulfillment dependent solely upon the
uncontrolled will of one of the contracting parties.

An express agreement which gives the lessee the sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding on the parties. This option, which is provided in
the same lease agreement, is fundamentally part of the consideration in the contract and is no
different from any other provision of the lease carrying an undertaking on the part of the lessor to
act conditioned on the performance by the lessee. It is a purely executory contract and at most
confers a right to obtain a renewal if there is compliance with the conditions on which the right is
made to depend. The right of renewal constitutes a part of the lessees interest in the land and forms
a substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the lessee
does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the
option to the lessee. And while the lessee has a right to elect whether to continue with the lease or
not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound
by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is
entitled to retain possession of the property for the duration of the new lease, and the lessor
may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he
should subsequently decide to abandon the premises. Mutuality obtains in such a contract and
equality exists between the lessor and the lessee since they remain with the same faculties in respect
to fulfillment.[7]

The case of Lao Lim v. Court of Appeals[8] relied upon by the trial court is not applicable
here. In that case, the stipulation in the disputed compromise agreement was to the effect that the
lessee would be allowed to stay in the premises "as long as he needs it and can pay the rents." In the
present case, the questioned provision states that the lease "may be renewed for a like term at the
option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee
likewise becomes bound only when he exercises his option and the lessor cannot thereafter be
excused from performing his part of the agreement.

Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc.,[9] is
misplaced. In that case, what was involved was a contract to sell involving residential lots, which
gave the vendor the right to declare the contract cancelled and of no effect upon the failure of the
vendee to fulfill any of the conditions therein set forth. In the instant case, we are dealing with a
contract of lease which gives the lessee the right to renew the same.

With respect to the meaning of the clause "may be renewed for a like term at the option of the
lessee," we sustain petitioner's contention that its exercise of the option resulted in the automatic
extension of the contract of lease under the same terms and conditions. The subject contract simply
provides that "the term of this lease shall be fourteen (14) years and may be renewed for a like term
at the option of the lessee." As we see it, the only term on which there has been a clear agreement is
the period of the new contract, i.e., fourteen (14) years, which is evident from the clause "may be
renewed for a like term at the option of the lessee," the phrase "for a like term" referring to the
period. It is silent as to what the specific terms and conditions of the renewed lease shall be. Shall it
be the same terms and conditions as in the original contract, or shall it be under the terms and
conditions as may be mutually agreed upon by the parties after the expiration of the existing lease?

In Ledesma v. Javellana[10] this Court was confronted with a similar problem. In that case the
lessee was given the sole option to renew the lease, but the contract failed to specify the terms and
conditions that would govern the new contract. When the lease expired, the lessee demanded an
extension under the same terms and conditions. The lessor expressed conformity to the renewal of
the contract but refused to accede to the claim of the lessee that the renewal should be under the
same terms and conditions as the original contract. In sustaining the lessee, this Court made the
following pronouncement:

x x x in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It
was held that 'such a clause relates to the very contract in which it is placed, and does not permit the
defendant upon the renewal of the contract in which the clause is found, to insist upon different
terms than those embraced in the contract to be renewed;' and that 'a stipulation to renew always
relates to the contract in which it is found and the rights granted thereunder, unless it expressly
provides for variations in the terms of the contract to be renewed.'

The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am.
Jur. 2d, Sec. 1159, at p. 45, we find the following citations: 'The rule is well-established that a
general covenant to renew or extend a lease which makes no provision as to the terms of a
renewal or extension implies a renewal or extension upon the same terms as provided in the original
lease.'

In the lease contract under consideration, there is no provision to indicate that the renewal will be
subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions
of lease contracts of the kind presently considered that the principles stated above squarely
apply. We do not agree with the contention of the appellants that if it was intended by the parties to
renew the contract under the same terms and conditions stipulated in the contract of lease, such
should have expressly so stated in the contract itself. The same argument could easily be
interposed by the appellee who could likewise contend that if the intention was to renew the
contract of lease under such new terms and conditions that the parties may agree upon, the contract
should have so specified. Between the two assertions, there is more logic in the latter.

The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to
a contract of lease, the tenant is the one favored and not the landlord. 'As a general rule, in
construing provisions relating to renewals or extensions, where there is any uncertainty, the tenant
is favored, and not the landlord, because the latter, having the power of stipulating in his own favor,
has neglected to do so; and also upon the principle that every man's grant is to be taken
most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'

Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in
the renewed contract were still subject to mutual agreement by and between the parties, then the
option - which is an integral part of the consideration for the contract - would be rendered
worthless. For then, the lessor could easily defeat the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the
case at bar. As in a statute no word, clause, sentence, provision or part of a contract shall be
considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be
reasonably avoided. To this end, a construction which will render every word operative is to be
preferred over that which would make some words idle and nugatory.[11]

Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993
indicating its abandonment of whatever rights it had under the renewal clause. Consequently, what
remains to be done is for ALLIED to pay rentals for the continued use of the premises until it
vacated the same, computed from the expiration of the original term of the contract on 31 March
1992 to the time it actually left the premises on 20 February 1993, deducting therefrom the amount
of P68,400.00 consigned in court by ALLIED and any other amount which it may have deposited
or advanced in conection with the lease. Since the old lease contract was deemed renewed under the
same terms and conditions upon the exercise by ALLIED of its option, the basis of the computation
of rentals should be the rental rate provided for in the existing contract.

Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A
person who is not principally or subsidiarily bound has no legal capacity to challenge the validity
of the contract.[12] He must first have an interest in it. "Interest" within the meaning of the term
means material interest, an interest to be affected by the deed, as distinguished from a mere
incidental interest. Hence, a person who is not a party to a contract and for whose benefit it was not
expressly made cannot maintain an action on it, even if the contract, if performed by the parties
thereto would incidentally affect him,[13] except when he is prejudiced in his rights with respect to
one of the contracting parties and can show the detriment which couldpositively result to him from
the contract in which he had no intervention.[14] We find none in the instant case.

WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE.
Considering that petitioner ALLIED BANKING CORPORATION already vacated the leased
premises as of 20 February 1993, the renewed lease contract is deemed terminated as of that
date. However, petitioner is required to pay rentals to respondent lessors at the rate provided in their
existing contract, subject to computation in view of the consignment in court of P68,400.00 by
petitioner, and of such other amounts it may have deposited or advanced in connection with the
lease.

SO ORDERED.

Villanueva vs. PNB G.R. No. 154493. December 6, 2006

REYNALDO VILLANUEVA, G.R. NO. 154493

Petitioner,

Present:

PANGANIBAN, C.J.

(Chairperson)

YNARES-SANTIAGO,

- versus - AUSTRIA-MARTINEZ,

CALLEJO, SR., and

CHICO-NAZARIO, JJ.

PHILIPPINE NATIONAL BANK

(PNB),

Respondent. Promulgated:

December 6, 2006

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

DECISION

AUSTRIA-MARTINEZ, J.:

The Petition for Review on Certiorari under Rule 45 before this Court assails the January 29, 2002
Decision[1] and June 27, 2002 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No.
52008[3] which reversed and set aside the September 14, 1995 Decision[4] of the Regional Trial
Court, Branch 22, General Santos City (RTC) in Civil Case No. 4553.

As culled from the records, the facts are as follows:

The Special Assets Management Department (SAMD) of the Philippine National Bank (PNB)
issued an advertisement for the sale thru bidding of certain PNB properties
in Calumpang, General Santos City, including Lot No. 17, covered by TCT No. T-15042, consisting
of 22,780 square meters, with an advertised floor price of P1,409,000.00, and Lot No. 19, covered
by TCT No. T-15036, consisting of 41,190 square meters, with an advertised floor price
of P2,268,000.00.[5] Bidding was subject to the following conditions: 1) that cash bids be submitted
not later than April 27, 1989; 2) that said bids be accompanied by a 10% deposit in managers or
cashiers check; and 3) that all acceptable bids be subject to approval by PNB authorities.

In a June 28, 1990 letter[6] to the Manager, PNB-General Santos Branch, Reynaldo Villanueva
(Villanueva) offered to purchase Lot Nos. 17 and 19 for P3,677,000.00. He also manifested that he
was depositing P400,000.00 to show his good faith but with the understanding that said amount
may be treated as part of the payment of the purchase price only when his offer is accepted by PNB.
At the bottom of said letter there appears an unsigned marginal note stating that P400,000.00 was
deposited into Villanuevas account (Savings Account No. 43612) with PNB-General Santos
Branch. [7]

PNB-General Santos Branch forwarded the June 28, 1990 letter of Villanueva to Ramon Guevara
(Guevara), Vice President, SAMD.[8] On July 6, 1990, Guevara informed Villanueva that only Lot
No. 19 is available and that the asking price therefor is P2,883,300.00.[9] Guevara further wrote:

If our quoted price is acceptable to you, please submit a revised offer to purchase. Sale shall be
subject to our Board of Directors approval and to other terms and conditions imposed by the
Bank on sale of acquired assets. [10] (Emphasis ours)

Instead of submitting a revised offer, Villanueva merely inserted at the bottom of Guevaras letter
a July 11, 1990 marginal note, which reads:

C O N F O R M E:

PRICE OF P2,883,300.00 (downpayment of P600,000.00 and the balance payable in two (2) years
at quarterly amortizations.) [11]
Villanueva paid P200,000.00 to PNB which issued O.R. No. 16997 to acknowledge receipt of the
partial payment deposit on offer to purchase.[12] On the dorsal portion of Official Receipt No.
16997, Villanueva signed a typewritten note, stating:

This is a deposit made to show the sincerity of my purchase offer with the understanding that it
shall be returned without interest if my offer is not favorably considered or be forfeited if my offer
is approved but I fail/refuse to push through the purchase.[13]

Also, on July 24, 1990, P380,000.00 was debited from Villanuevas Savings Account No. 43612 and
credited to SAMD.[14]

On October 11, 1990, however, Guevara wrote Villanueva that, upon orders of the PNB Board of
Directors to conduct another appraisal and public bidding of Lot No. 19,SAMD is
deferring negotiations with him over said property and returning his deposit
of P580,000.00.[15] Undaunted, Villanueva attempted to deliver postdated checks covering the
balance of the purchase price but PNB refused the same.

Hence, Villanueva filed with the RTC a Complaint[16] for specific performance and damages against
PNB. In its September 14, 1995 Decision, the RTC granted the Complaint, thus:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant directing it
to do the following:

1. To execute a deed of sale in favor of the plaintiff over Lot 19 comprising 41,190 square meters
situated at Calumpang, General Santos City covered by TCT No. T-15036 after payment of the
balance in cash in the amount of P2,303,300.00;
2. To pay the plaintiff P1,000,000.00 as moral damages; P500,000.00 as attorneys fees, plus
litigation expenses and costs of the suit.

SO ORDERED.[17]

The RTC anchored its judgment on the finding that there existed a perfected contract of sale
between PNB and Villanueva. It found:

The following facts are either admitted or undisputed:

xxx

The defendant through Vice-President Guevara negotiated with the plaintiff in connection with the
offer of the plaintiff to buy Lots 17 & 19. The offer of plaintiff to buy, however, was accepted by
the defendant only insofar as Lot 19 is concerned as exemplified by its letter dated July 6,
1990 where the plaintiff signified his concurrence after conferring with the defendants vice-
president. The conformity of the plaintiff was typewritten by the defendants own people where the
plaintiff accepted the price of P2,883,300.00. The defendant also issued a receipt to the plaintiff on
the same day when the plaintiff paid the amount of P200,000.00 to complete
the downpayment of P600,000.00 (Exhibit F & Exhibit I). With this development, the plaintiff was
also given the go signal by the defendant to improve Lot 19 because it was already in effect sold to
him and because of that the defendant fenced the lot and completed his two houses on the
property.[18]

The RTC also pointed out that Villanuevas P580,000.00 downpayment was actually in the nature of
earnest money acceptance of which by PNB signified that there was already a sale. [19] The RTC
further cited contemporaneous acts of PNB purportedly indicating that, as early as July 25, 1990, it
considered Lot 19 already sold, as shown by Guevaras July 25, 1990 letter (Exh. H)[20] to another
interested buyer.

PNB appealed to the CA which reversed and set aside the September 14, 1995 RTC Decision, thus:
WHEREFORE, the appealed decision is REVERSED and SET ASIDE and another rendered
DISMISSING the complaint.

SO ORDERED.[21]

According to the CA, there was no perfected contract of sale because the July 6, 1990 letter of
Guevara constituted a qualified acceptance of the June 28, 1990 offer of Villanueva, and to which
Villanueva replied on July 11, 1990 with a modified offer. The CA held:

In the case at bench, consent, in respect to the price and manner of its payment, is lacking. The
record shows that appellant, thru Guevaras July 6, 1990 letter, made a qualified acceptance
of appellees letter-offer dated June 28, 1990 by imposing an asking price of P2,883,300.00 in cash
for Lot 19. The letter dated July 6, 1990 constituted a counter-offer (Art. 1319, Civil Code), to
which appellee made a new proposal, i.e., to pay the amount of P2,883,300.00 in staggered
amounts, that is, P600,000.00 as downpayment and the balance within two years in quarterly
amortizations.

A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and a
rejection of the original offer (Art. 1319, id.). Consequently, when something is desired which is
not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent
because any modification or variation from the terms of the offer annuls the offer (Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Philippines, 6th ed., 1996, p. 450, cited in
ABS-CBN Broadcasting Corporation v. Court of Appeals, et al., 301 SCRA 572).

Appellees new proposal, which constitutes a counter-offer, was not accepted by appellant, its board
having decided to have Lot 19 reappraised and sold thru public bidding.

Moreover, it was clearly stated in Guevaras July 6, 1990 letter that the sale shall be subject to our
Board of Directors approval and to other terms and conditions imposed by the Bank on sale of
acquired assets.[22]
Villanuevas Motion for Reconsideration[23] was denied by the CA in its Resolution of June 27,
2002.

Petitioner Villanueva now assails before this Court the January 29, 2002 Decision and June 27,
2002 Resolution of the CA. He assigns five issues which may be condensed into two: first, whether
a perfected contract of sale exists between petitioner and respondent PNB; and second, whether the
conduct and actuation of respondent constitutes bad faith as to entitle petitioner to moral and
exemplary damages and attorneys fees.

The Court sustains the CA on both issues.

Contracts of sale are perfected by mutual consent whereby the seller obligates himself, for a price
certain, to deliver and transfer ownership of a specified thing or right to the buyer over which the
latter agrees.[24] Mutual consent being a state of mind, its existence may only be inferred from the
confluence of two acts of the parties: an offer certain as to the object of the contract and its
consideration, and an acceptance of the offer which is absolute in that it refers to the exact object
and consideration embodied in said offer.[25]While it is impossible to expect the acceptance
to echo every nuance of the offer, it is imperative that it assents to those points in the offer which,
under the operative facts of each contract, are not only material but motivating as well. Anything
short of that level of mutuality produces not a contract but a mere counter-offer awaiting
acceptance.[26] More particularly on the matter of the consideration of the contract, the offer and its
acceptance must be unanimous both on the rate of the payment and on its term. An acceptance of an
offer which agrees to the rate but varies the term is ineffective. [27]

To determine whether there was mutual consent between the parties herein, it is necessary to retrace
each offer and acceptance they made.

Respondent began with an invitation to bid issued in April 1989 covering several of its acquired
assets in Calumpang, General Santos City, including Lot No. 19 for which the floor price
was P2,268,000.00. The offer was subject to the condition that sealed bids, accompanied by a 10%
deposit in managers or cashiers check, be submitted not later than 10 oclock in the morning of April
27, 1989.

On June 28, 1990, petitioner made an offer to buy Lot No. 17 and Lot No. 19 for an aggregate price
of P3,677,000.00. It is noted that this offer exactly corresponded to the April 1989 invitation to bid
issued by respondent in that the proposed aggregate purchase price for Lot Nos. 17 and 19 matched
the advertised floor prices for the same properties. However, it cannot be said that the June 28,
1990 letter of petitioner was an effective acceptance of the April 1989 invitation to bid for, by its
express terms, said invitation lapsed on April 27, 1989.[28] More than that, the April 1989 invitation
was subject to the condition that all sealed bids submitted and accepted be approved by respondents
higher authorities.

Thus, the June 28, 1990 letter of petitioner was an offer to buy independent of the April 1989
invitation to bid. It was a definite offer as it identified with certainty the properties sought to be
purchased and fixed the contract price.

However, respondent replied to the June 28, 1990 offer with a July 6, 1990 letter that only Lot No.
19 is available and that the price therefor is now P2,883,300.00. As the CA pointed out, this reply
was certainly not an acceptance of the June 28, 1990 offer but a mere counter-offer. It deviated
from the original offer on three material points: first, the object of the proposed sale is now only Lot
No. 19 rather than Lot Nos. 17 and 19; second, the area of the property to be sold is still 41,190 sq.
m but an 8,797-sq. m portion is now part of a public road; and third, the consideration is P2,883,300
for one lot rather than P3,677,000.00 for two lots. More important, this July 6, 1990 counter-offer
imposed two conditions: one, that petitioner submit a revised offer to purchase based on the quoted
price; and two, that the sale of the property be approved by the Board of Directors and subjected to
other terms and conditions imposed by the Bank on the sale of acquired assets.

In reply to the July 6, 1990 counter-offer, petitioner signed his July 11, 1990 conformity to the
quoted price of P2,883,300.00 but inserted the term downpayment of P600,000.00 and the balance
payable in two years at quarterly amortization. The CA viewed this July 11, 1990 conformity not as
an acceptance of the July 6, 1990 counter-offer but a further counter-offer for, while petitioner
accepted the P2,883,300.00 price for Lot No. 19, he qualified his acceptance by proposing a two-
year payment term.
Petitioner does not directly impugn such reasoning of the CA. He merely questions it for taking up
the issue of whether his July 11, 1990 conformity modified the July 6, 1990 counter-offer as this
was allegedly never raised during the trial nor on appeal.[29]

Such argument is not well taken. From beginning to end, respondent denied that a contract of sale
with petitioner was ever perfected.[30] Its defense was broad enough to encompass every issue
relating to the concurrence of the elements of contract, specifically on whether it consented to the
object of the sale and its consideration. There was nothing to prevent the CA from inquiring into the
offers and counter-offers of the parties to determine whether there was indeed a perfected contract
between them.

Moreover, there is merit in the ruling of the CA that the July 11, 1990 marginal note was a further
counter-offer which did not lead to the perfection of a contract of sale between the
parties. Petitioners own June 28, 1990 offer quoted the price of P3,677,000.00 for two lots but was
silent on the term of payment. Respondents July 6, 1990 counter-offer quoted the price
of P2,833,300.00 and was also silent on the term of payment. Up to that point, the term or schedule
of payment was not on the negotiation table. Thus,when petitioner suddenly introduced a term of
payment in his July 11, 1990 counter-offer, he interjected into the negotiations a new substantial
matter on which the parties had no prior discussion and over which they must yet
agree.[31] Petitioners July 11, 1990 counter-offer, therefore, did not usher the parties beyond the
negotiation stage of contract making towards its perfection. He made a counter-offer that required
acceptance by respondent.

As it were, respondent, through its Board of Directors, did not accept this last counter-offer. As
stated in its October 11, 1990 letter to petitioner, respondent ordered the reappraisal of the property,
in clear repudiation not only of the proposed price but also the term of payment thereof.

Petitioner insists, however, that the October 11, 1990 repudiation was belated as respondent had
already agreed to his July 11, 1990 counter-offer when it accepted his downpayment or earnest
money of P580,000.00.[32] He cites Article 1482 of the Civil Code where it says that acceptance
of downpayment or earnest money presupposes the perfection of a contract.

Not so. Acceptance of petitioners payments did not amount to an implied acceptance of his last
counter-offer.
To begin with, PNB-General Santos Branch, which accepted petitioners P380,000.00 payment, and
PNB-SAMD, which accepted his P200,000.00 payment, had no authority to bind respondent to a
contract of sale with petitioner.[33] Petitioner is well aware of this. To recall, petitioner sent his June
28, 1990 offer to PNB-General Santos Branch. Said branch did not act on his offer except to
endorse it to Guevarra. Thereafter, petitioner transacted directly with Guevarra. Petitioner then
cannot pretend that PNB-General Santos Branch had authority to accept his July 11, 1990 counter-
offer by merely accepting his P380,000.00 payment.

Neither did SAMD have authority to bind PNB. In its April 1989 invitation to bid, as well as
its July 6, 1990 counter-offer, SAMD was always careful to emphasize that whatever offer is made
and entertained will be subject to the approval of respondents higher authorities. This is a
reasonable disclaimer considering the corporate nature of respondent. [34]

Moreover, petitioners payment of P200,000.00 was with the clear understanding that his July 11,
1990 counter-offer was still subject to approval by respondent. This is borne out by
respondents Exhibits 2-a and 2-b, which petitioner never controverted, where it appears on the
dorsal portion of O.R. No. 16997 that petitioner acceded that the amount he paid was a mere
x x x deposit made to show the sincerity of [his] purchase offer with the understanding that it shall
be returned without interest if [his] offer is not favorably considered x x x.[35] This was a clear
acknowledgment on his part that there was yet no perfected contract with respondent and that even
with the payments he had advanced, his July 11, 1990 counter-offer was still subject to
consideration by respondent.

Not only that, in the same Exh. 2-a as well as in his June 28, 1990 offer, petitioner referred to his
payments as mere deposits. Even O.R. No. 16997 refers to petitioners payment as mere deposit. It is
only in the debit notice issued by PNB-General Santos Branch where petitioners payment is
referred to as downpayment. But then, as we said, PNB-General Santos Branch has no authority to
bind respondent by its interpretation of the nature of the payment made by petitioner.

In sum, the amounts paid by petitioner were not in the nature of downpayment or earnest money but
were mere deposits or proof of his interest in the purchase of Lot No. 19. Acceptance of said
amounts by respondent does not presuppose perfection of any contract.[36]
It must be noted that petitioner has expressly admitted that he had withdrawn the entire amount
of P580,000.00 deposit from PNB-General Santos Branch.[37]

With the foregoing disquisition, the Court foregoes resolution of the second issue as it is evident
that respondent acted well within its rights when it rejected the last counter-offer of petitioner.

In fine, petitioners petition lacks merit.

WHEREFORE, the petition is DENIED. The Decision dated January 29, 2002 and
Resolution dated June 27, 2002 of the Court of Appeals are AFFIRMED.

SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and
LAND BANK OF THE PHILIPPINES, respondents.

DECISION

PANGANIBAN, J.:

May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of
the voluntary resignation of the borrower?

Such is the query raised in the petition for review on certiorari now before us, which assails the
Decision promulgated on June 19, 1991 by respondent Court of Appeals[1] in CA-G.R. CV No.
24956, upholding the validity and enforceability of the escalation by private respondent Land Bank
of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses.

The Antecedent Facts

Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before
the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties, after
entering into a joint stipulation of facts, submitted the case for decision on the basis of said
stipulation and memoranda. The stipulation reads in part:[2]

1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17,
1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she
applied for a housing loan of P148,000.00, payable within 25 years from (respondent banks)
Provident Fund on July 20, 1983;

2. That (petitioners) and (respondent bank), through the latters duly authorized representative,
executed the Housing Loan Agreement, x x x ;
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through
the latters authorized representative, also executed a Real Estate Mortgage and Promissory Note, x
x x;

4. That the loan x x x was actually given to (petitioner) Gilda Florendo, x x x, in her capacity as
employee of (respondent bank);

5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioners) loan from
9% per annum to 17%, the said increase to take effect on March 19, 1985;

6. That the details of the increase are embodied in (Landbanks) ManCom Resolution No. 85-08
dated March 19, 1985, x x x, and in a PF (Provident Fund) Memorandum Circular (No. 85-08,
Series of 1985), x x x;

7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7,
1985, x x x. Enclosed with the letter are a copy of the PF Memo Circular x x x and a Statement of
Account as of May 31, 1985, x x x;

8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent
bank) replied through a letter dated July 1, 1985, x x x. Enclosed with the letter is a Memorandum
dated June 26, 1985 of (respondent banks) legal counsel, A.B.F. Gaviola, Jr., x x x;

9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest
or the new monthly installments based on the increased interest rate, but Plaintiff just as vehemently
maintained that the said increase is unlawful and unjustifiable. Because of (respondent banks)
repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages;

10. That, just the same, despite (respondent banks) demands that (petitioners) pay the increased
interest or increased monthly installments, they (petitioners) have faithfully paid and discharged
their loan obligations, more particularly the monthly payment of the original stipulated installment
of P1,248.72. Disregarding (respondent banks) repeated demand for increased interest and monthly
installment, (petitioners) are presently up-to-date in the payments of their obligations under the
original contracts (Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with
(respondent bank);

xxxxxxxxx

The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to
above as the basis for the escalation are:

a. Section I-F of Article VI of the Housing Loan Agreement,[3] which provides that, for as long as
the loan or any portion thereof or any sum that may be due and payable under the said loan
agreement remains outstanding, the borrower shall --
f) Comply with all the rules and regulations of the program imposed by the LENDER and to
comply with all the rules and regulations that the Central Bank of the Philippines has imposed or
will impose in connection with the financing programs for bank officers and employees in the form
of fringe benefits.

b. Paragraph (f) of the Real Estate Mortgage[4] which states:

The rate of interest charged on the obligation secured by this mortgage x x x, shall be Subject,
during the life of this contract, to such an increase/decrease in accordance with prevailing rules,
regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of
Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the
increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall
only apply to the remaining balance of the loan.

c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident
Fund) Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing
loans of bank employees who voluntarily secede (resign) from the Bank; the range of rates varied
depending upon the number of years service rendered by the employees concerned. The rates were
made applicable to those who had previously resigned from the bank as well as those who would be
resigning in the future.

The trial court ruled in favor of respondent bank, and held that the bank was vested with authority
to increase the interest rate (and the corresponding monthly amortizations) pursuant to said
escalation provisions in the housing loan agreement and the mortgage contract. The dispositive
portion of the said decision reads:[5]

WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring
that the rate of interest on the loan agreement in question shall be 17% per annum and the monthly
amortization on said loan properly raised to P2,064.75 a month, upon the finality of this judgment.

x x x x x x x x x.

Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and
was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank likewise
appealed and contested the propriety of having the increased interest rate apply only upon the
finality of the judgment and not from March 19, 1985.

The respondent Court subsequently affirmed with modification the decision of the trial court,
holding that:[6]

x x x Among the salient provisions of the mortgage is paragraph (f) which provides that the interest
rate shall be subject, during the term of the loan, to such increases/decreases as may be allowed
under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the
Bank may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the
interest rate on their original loan. Such an agreement is a contractual one and the spouses are
bound by it. Escalation clauses have been ruled to be valid stipulations in contracts in order to
maintain fiscal stability and to retain the value of money in long term contracts (Insular Bank of
Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the
conditions for the validity of an escalation clause such as the one which refers to an increase rate is
that the contract should also contain a proviso for a decrease when circumstances so warrant
it. Paragraph (f) referred to above contains such provision.

A contract is binding on the parties no matter that a provision thereof later proves onerous and
which on hindsight, a party feels he should not have agreed to in the first place.

and disposed as follows:[7]

WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of
17% on the balance of the loan of the spouses shall be computed starting July 1, 1985.

Dissatisfied, the petitioners had recourse to this Court.

The Issues

Petitioners ascribe to respondent Court a grave and patent error in not nullifying the respondent
banks unilateral increase of the interest rate and monthly amortizations of the loan --

1. x x x (simply because of) a bare and unqualified stipulation that the interest rate may be
increased;

2. x x x on the ground that the increase has no basis in the contracts between the parties;

3. x x x on the ground that the increase violates Section 7-A of the Usury Law;

4. x x x on the ground that the increase and the contractual provision that (respondent bank) relies
upon for the increase are contrary to morals, good customs, public order and public policy.[8]

The key issue may be simply presented as follows: Did the respondent bank have a valid and legal
basis to impose an increased interest rate on the petitioners housing loan?

The Courts Ruling

Basis for Increased Interest Rate

Petitioners argue that the HLA provision covers only administrative and other matters, and does not
include interest rates per se, since Article VI of the agreement deals with insurance on and upkeep
of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague
because it does not state if the prevailing CB rules and regulations referred to therein are those
prevailing at the time of the execution of these contracts or at the time of the increase or decrease of
the interest rate. They insist that the banks authority to escalate interest rates has not been shown to
be crystal-clear as a matter of fact and established beyond doubt. The contracts being contracts of
adhesion, any vagueness in their provisions should be interpreted in favor of petitioners.

We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does
not make any reference to increases or decreases in the interest rate on loans.However, paragraph
(f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the
parties were and are bound by the said stipulation that (t)he rate of interest charged on the
obligation secured by this mortgage x x x, shall be subject, during the life of this contract, to such
an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central
Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent
bank) may prescribe for its debtors x x x.[9] Contrary to petitioners allegation, there is no vagueness
in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite
clear to them.

In Banco Filipino Savings & Mortgage Bank vs. Navarro,[10] this Court in essence ruled that in
general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses
Salazar,[11] the Court reiterated the rule that escalation clauses are valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value of money in long term contracts.

Application of the Escalation to Petitioners

Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for
resigned employees, it could not apply as to petitioner-employee because nowhere in the loan
agreement or mortgage contract is it provided that petitioner-wifes resignation will be a ground for
the adjustment of interest rates, which is the very bedrock of and the raison detre specified in said
ManCom Resolution.

They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No.
2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest,
and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of
contracts, per Philippine National Bank vs. Court of Appeals.[12]

What is actually central to the disposition of this case is not really the validity of the escalation
clause but the retroactive enforcement of the ManCom Resolution as against petitioner-
employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no
Central Bank rule, regulation or other issuance which would have triggered an application of the
escalation clause as to her factual situation.

In Banco Filipino,[13] this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed
the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation
clause in the loan agreement authorizing the bank to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law should be enacted
increasing the lawful rates of interest that may be charged on this particular kind of loan. In said
case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled
that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative
regulation.

In PNB vs. Court of Appeals,[14] this Court disallowed the increases in interest rate imposed by the
petitioner-bank therein, on the ground, among others, that said bank relied merely on its own Board
Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were
neither laws nor resolutions of the Monetary Board.

In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January
29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6,
1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling
prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and
other relevant CB issuances had already come into existence prior to the perfection of the housing
loan agreement and mortgage contract, and thus it may be said that these regulations had been taken
into consideration by the contracting parties when they first entered into their loan contract. In light
of the CB issuances in force at that time, respondent bank was fully aware that it could have
imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but
it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on
petitioners loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or
decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts
accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as employee
resignations, which could have been used to trigger an application of the escalation clause were
considered barred or waived. If the intention were otherwise, they -- especially respondent bank --
should have included such factors in their loan agreement.

ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board,
cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate increase be in accordance with
prevailing rules, regulations and circulars of the Central Bank x x x as the Provident Fund Board x x
x may prescribe. The Banco Filipino and PNB doctrines are applicable four-square in this case. As a
matter of fact, the said escalation clause further provides that the increased interest rate shall only
take effect on the date of effectivity of (the) increase/decrease authorized by the CB rule, regulation
or circular. Without such CB issuance, any proposed increased rate will never become effective.

We have already mentioned (and now reiterate our holding in several cases[15]) that by virtue of CB
Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners contention that the
escalation clause is violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and imposition
of increased interest rates by the herein respondent bank is obviously violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB:[16]

In order that obligations arising from contracts may have the force of 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 (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming
that the x x x 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 partys (the debtor) participation being
reduced to the alternative to take it or leave it (Qua vs. Law Union & Rock Insurance Co., 95 Phil.
85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition.

The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a
former bank employee was very knowledgeable concerning respondent banks lending rates and
procedures, and therefore, petitioners were on an equal footing with respondent bank as far as the
subject loan contract was concerned. That may have been true insofar as entering into the original
loan agreement and mortgage contract was concerned. However, that does not hold true when it
comes to the determination and imposition of escalated rates of interest as unilaterally provided in
the ManCom Resolution, where she had no voice at all in its preparation and application.

To allay fears that respondent bank will inordinately be prejudiced by being stuck with this
sweetheart loan at patently concessionary interest rates, which according to respondent bank is the
sweetest deal anyone could obtain and is an act of generosity considering that in 1985 lending rates
in the banking industry were peaking well over 30% p.a.,[17] we need only point out that the bank
had the option to impose in its loan contracts the condition that resignation of an employee-
borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such
omission. And it would be totally unfair to now impose said condition, not to mention that it would
violate the principle of mutuality of consent in contracts. It goes without saying that such escalation
ground can be included in future contracts -- not to agreements already validly entered into.

Let it be clear that this Court understands respondent banks position that the concessional interest
rate was really intended as a means to remunerate its employees and thus an escalation due to
resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus
the escalation provision could not be legally applied and enforced as against herein petitioners.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS
ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing
loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72.

SO ORDERED.

Narvasa, C.J., (Chairman), Davide, Jr., Melo, and Francisco, JJ., concur.

Silos vs. Philippine National Bank,

G.R. No. 181045 July 2, 2014

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

DEL CASTILLO, J.:

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the
most important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a
party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates
imposed. Premium may not be placed upon a stipulation in a contract which grants one party the
right to choose whether to continue with or withdraw from the agreement if it discovers that what
the other party has been doing all along is improper or illegal.

This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of
Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28, 2003
Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo,
Aklan in Civil Case No. 5975.

Factual Antecedents

Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of
operating a department store and buying and selling of ready-to-wear apparel. Respondent
Philippine National Bank (PNB) is a banking corporation organized and existing under Philippine
laws.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB, petitioners
constituted in August 1987 a Real Estate Mortgage5 over a 370-square meter lot in Kalibo, Aklan
covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was
increased to P1.8 million and the mortgage was correspondingly increased to P1.8 million.6

And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to cover the
same credit line, which was increased to P2.5 million, and additional security was given in the form
of a 134-square meter lot covered by TCT T-16208. In addition, petitioners issued eight Promissory
Notes8 and signed a Credit Agreement.9This July 1989 Credit Agreement contained a stipulation on
interest which provides as follows:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum. Interest shall
be payable in advance every one hundred twenty days at the rate prevailing at the time of the
renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice
to the Borrower, increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.10 (Emphases supplied)

The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to
increase or reduce interest rates "within the limits allowed by law or by the Monetary Board."11

The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at
any time depending on whatever policy PNB may adopt in the future."12

Petitioners religiously paid interest on the notes at the following rates:

1. 1st Promissory Note dated July 24, 1989 – 19.5%;

2. 2nd Promissory Note dated November 22, 1989 – 23%;

3. 3rd Promissory Note dated March 21, 1990 – 22%;

4. 4th Promissory Note dated July 19, 1990 – 24%;

5. 5th Promissory Note dated December 17, 1990 – 28%;

6. 6th Promissory Note dated February 14, 1991 – 32%;

7. 7th Promissory Note dated March 1, 1991 – 30%; and

8. 8th Promissory Note dated July 11, 1991 – 24%.13

In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the
following stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from
date of each Availment up to but not including the date of full payment thereof at the rate per
annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the
date of each Availment.15 (Emphases supplied)

Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18
Promissory Notes, which petitioners settled – except the last (the note covering the principal) – at
the following interest rates:

1. 9th Promissory Note dated November 8, 1991 – 26%;

2. 10th Promissory Note dated March 19, 1992 – 25%;

3. 11th Promissory Note dated July 11, 1992 – 23%;

4. 12th Promissory Note dated November 10, 1992 – 21%;

5. 13th Promissory Note dated March 15, 1993 – 21%;

6. 14th Promissory Note dated July 12, 1993 – 17.5%;

7. 15th Promissory Note dated November 17, 1993 – 21%;

8. 16th Promissory Note dated March 28, 1994 – 21%;

9. 17th Promissory Note dated July 13, 1994 – 21%;

10. 18th Promissory Note dated November 16, 1994 – 16%;

11. 19th Promissory Note dated April 10, 1995 – 21%;

12. 20th Promissory Note dated July 19, 1995 – 18.5%;

13. 21st Promissory Note dated December 18, 1995 – 18.75%;

14. 22nd Promissory Note dated April 22, 1996 – 18.5%;

15. 23rd Promissory Note dated July 22, 1996 – 18.5%;

16. 24th Promissory Note dated November 25, 1996 – 18%;

17. 25th Promissory Note dated May 30, 1997 – 17.5%; and
18. 26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.16

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank
may at any time without notice, raise within the limits allowed by law x x x."17

On the other hand, the 18th up to the 26th promissory notes – including PN 9707237, which is the
26th promissory note – carried the following provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option top repay the
loan or credit facility without penalty within ten (10) calendar days from the Interest Setting
Date.18 (Emphasis supplied)

Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the
promissory notes, religiously paying the interests without objection or fail. But in 1997, petitioners
faltered when the interest rates soared due to the Asian financial crisis. Petitioners’ sole outstanding
promissory note for P2.5 million – PN 9707237 executed in July 1997 and due 120 days later or on
October 28, 1997 – became past due, and despite repeated demands, petitioners failed to make good
on the note.

Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default,
as follows:

Without need for notice or demand, failure to pay this note or any installment thereon, when due,
shall constitute default and in such cases or in case of garnishment, receivership or bankruptcy or
suit of any kind filed against me/us by the Bank, the outstanding principal of this note, at the option
of the Bank and without prior notice of demand, shall immediately become due and payable and
shall be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted
principal amount. x x x19 (Emphasis supplied)

PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and
demandable from petitioners in the total amount of P3,620,541.60, broken down as follows:

Principal P 2,500,000.00

Interest 538,874.94

Penalties 581,666.66
 Total P 3,620,541.60

Despite demand, petitioners failed to pay the foregoing amount. Thus, PNB foreclosed on the
mortgage, and on January 14, 1999, TCTs T-14250 and T-16208 were sold to it at auction for the
amount of P4,324,172.96.21 The sheriff’s certificate of sale was registered on March 11, 1999.

More than a year later, or on March 24, 2000, petitioners filed Civil Case No. 5975, seeking
annulment of the foreclosure sale and an accounting of the PNB credit. Petitioners theorized that
after the first promissory note where they agreed to pay 19.5% interest, the succeeding stipulations
for the payment of interest in their loan agreements with PNB – which allegedly left to the latter the
sole will to determine the interest rate – became null and void. Petitioners added that because the
interest rates were fixed by respondent without their prior consent or agreement, these rates are
void, and as a result, petitioners should only be made liable for interest at the legal rate of 12%.
They claimed further that they overpaid interests on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should now be deemed paid, and the foreclosure
and sale of TCTs T-14250 and T-16208 became unnecessary and wrongful. As for the imposed
penalty of P581,666.66, petitioners alleged that since the Real Estate Mortgage and the Supplement
thereto did not include penalties as part of the secured amount, the same should be excluded from
the foreclosure amount or bid price, even if such penalties are provided for in the final Promissory
Note, or PN 9707237.22

In addition, petitioners sought to be reimbursed an alleged overpayment of P848,285.00 made

during the period August 21, 1991 to March 5, 1998,resulting from respondent’s imposition of the
alleged illegal and steep interest rates. They also prayed to be awarded P200,000.00 by way of
attorney’s fees.23

In its Answer,24 PNB denied that it unilaterally imposed or fixed interest rates; that petitioners
agreed that without prior notice, PNB may modify interest rates depending on future policy adopted
by it; and that the imposition of penalties was agreed upon in the Credit Agreement. It added that
the imposition of penalties is supported by the all-inclusive clause in the Real Estate Mortgage
agreement which provides that the mortgage shall stand as security for any and all other obligations
of whatever kind and nature owing to respondent, which thus includes penalties imposed upon
default or non-payment of the principal and interest on due date.

On pre-trial, the parties mutually agreed to the following material facts, among others:

a) That since 1991 up to 1998, petitioners had paid PNB the total amount of P3,484,287.00;25 and

b) That PNB sent, and petitioners received, a March 10, 2000 demand letter.26

During trial, petitioner Lydia Silos (Lydia) testified that the Credit Agreement, the Amendment to
Credit Agreement, Real Estate Mortgage and the Supplement thereto were all prepared by
respondent PNB and were presented to her and her husband Eduardo only for signature; that she
was told by PNB that the latter alone would determine the interest rate; that as to the Amendment to
Credit Agreement, she was told that PNB would fill up the interest rate portion thereof; that at the
time the parties executed the said Credit Agreement, she was not informed about the applicable
spread that PNB would impose on her account; that the interest rate portion of all Promissory Notes
she and Eduardo issued were always left in blank when they executed them, with respondent’s mere
assurance that it would be the one to enter or indicate thereon the prevailing interest rate at the time
of availment; and that they agreed to such arrangement. She further testified that the two Real
Estate Mortgage agreements she signed did not stipulate the payment of penalties; that she and
Eduardo consulted with a lawyer, and were told that PNB’s actions were improper, and so on
March 20, 2000, they wrote to the latter seeking a recomputation of their outstanding obligation;
and when PNB did not oblige, they instituted Civil Case No. 5975.27

On cross-examination, Lydia testified that she has been in business for 20 years; that she also
borrowed from other individuals and another bank; that it was only with banks that she was asked to
sign loan documents with no indicated interest rate; that she did not bother to read the terms of the
loan documents which she signed; and that she received several PNB statements of account
detailing their outstanding obligations, but she did not complain; that she assumed instead that what
was written therein is correct.28

For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for
respondent, stated on cross-examination that as a practice, the determination of the prime rates of
interest was the responsibility solely of PNB’s Treasury Department which is based in Manila; that
these prime rates were simply communicated to all PNB branches for implementation; that there are
a multitude of considerations which determine the interest rate, such as the cost of money, foreign
currency values, PNB’s spread, bank administrative costs, profitability, and the practice in the
banking industry; that in every repricing of each loan availment, the borrower has the right to
question the rates, but that this was not done by the petitioners; and that anything that is not found
in the Promissory Note may be supplemented by the Credit Agreement.29

Ruling of the Regional Trial Court

On February 28, 2003, the trial court rendered judgment dismissing Civil Case No. 5975.30

It ruled that:

1. While the Credit Agreement allows PNB to unilaterally increase its spread over the floating
interest rate at any time depending on whatever policy it may adopt in the future, it likewise allows
for the decrease at any time of the same. Thus, such stipulation authorizing both the increase and
decrease of interest rates as may be applicable is valid,31 as was held in Consolidated Bank and
Trust Corporation (SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on loans need not be fixed and instead be made
dependent on prevailing rates upon which to peg such variable interest rates;33

3. The Promissory Note, as the principal contract evidencing petitioners’ loan, prevails over the
Credit Agreement and the Real Estate Mortgage.

As such, the rate of interest, penalties and attorney’s fees stipulated in the Promissory Note prevail
over those mentioned in the Credit Agreement and the Real Estate Mortgage agreements;34

4. Roughly, PNB’s computation of the total amount of petitioners’ obligation is correct;35

5. Because the loan was admittedly due and demandable, the foreclosure was regularly made;36

6. By the admission of petitioners during pre-trial, all payments made to PNB were properly applied
to the principal, interest and penalties.37

The dispositive portion of the trial court’s Decision reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the respondent and
against the petitioners by DISMISSING the latter’s petition.

Costs against the petitioners.

SO ORDERED.38

Petitioners moved for reconsideration. In an Order39 dated June 4, 2003, the trial court granted only
a modification in the award of attorney’s fees, reducing the same from 10% to 1%. Thus, PNB was
ordered to refund to petitioner the excess in attorney’s fees in the amount of P356,589.90, viz:

WHEREFORE, judgment is hereby rendered upholding the validity of the interest rate charged by
the respondent as well as the extra-judicial foreclosure proceedings and the Certificate of Sale.
However, respondent is directed to refund to the petitioner the amount of P356,589.90 representing
the excess interest charged against the latter.

No pronouncement as to costs.

SO ORDERED.40

Ruling of the Court of Appeals

Petitioners appealed to the CA, which issued the questioned Decision with the following decretal
portion:

WHEREFORE, in view of the foregoing, the instant appeal is PARTLY GRANTED. The modified
Decision of the Regional Trial Court per Order dated June 4, 2003 is hereby AFFIRMED with
MODIFICATIONS, to wit:
1. [T]hat the interest rate to be applied after the expiration of the first 30-day interest period for PN.
No. 9707237 should be 12% per annum;

2. [T]hat the attorney’s fees of10% is valid and binding; and

3. [T]hat [PNB] is hereby ordered to reimburse [petitioners] the excess in the bid price
of P377,505.99 which is the difference between the total amount due [PNB] and the amount of its
bid price.

SO ORDERED.41

On the other hand, respondent did not appeal the June 4,2003 Order of the trial court which reduced
its award of attorney’s fees. It simply raised the issue in its appellee’s brief in the CA, and included
a prayer for the reversal of said Order.

In effect, the CA limited petitioners’ appeal to the following issues:

1) Whether x x x the interest rates on petitioners’ outstanding obligation were unilaterally and
arbitrarily imposed by PNB;

2) Whether x x x the penalty charges were secured by the real estate mortgage; and

3) Whether x x x the extrajudicial foreclosure and sale are valid.42

The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid a
total of P3,027,324.60 in interest for the period August 7, 1991 to August 6, 1997, over and above
the P2.5 million principal obligation. And this is exclusive of payments for insurance premiums,
documentary stamp taxes, and penalty. All the while, petitioners did not complain nor object to the
imposition of interest; they in fact paid the same religiously and without fail for seven years. The
appellate court ruled that petitioners are thus estopped from questioning the same.

The CA nevertheless noted that for the period July 30, 1997 to August 14, 1997, PNB wrongly
applied an interest rate of 25.72% instead of the agreed 25%; thus it overcharged petitioners, and
the latter paid, an excess of P736.56 in interest.

On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage
agreements contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the amount to
be secured by the mortgaged property, thus –

For and in consideration of certain loans, overdrafts and other credit accommodations obtained from
the MORTGAGEE and to secure the payment of the same and those others that the MORTGAGEE
may extend to the MORTGAGOR, including interest and expenses, and other obligations owing by
the MORTGAGOR to the MORTGAGEE, whether direct or indirect, principal or secondary, as
appearing in the accounts, books and records of the MORTGAGEE, the MORTGAGOR does
hereby transfer and convey by way of mortgage unto the MORTGAGEE x x x43 (Emphasis
supplied)

The CA believes that the 24% penalty is covered by the phrase "and other obligations owing by the
mortgagor to the mortgagee" and should thus be added to the amount secured by the mortgages.44

The CA then proceeded to declare valid the foreclosure and sale of properties covered by TCTs T-
14250 and T-16208, which came as a necessary result of petitioners’ failure to pay the outstanding
obligation upon demand.45The CA saw fit to increase the trial court’s award of 1% to 10%, finding
the latter rate to be reasonable and citing the Real Estate Mortgage agreement which authorized the
collection of the higher rate.46

Finally, the CA ruled that petitioners are entitled to P377,505.09 surplus, which is the difference
between PNB’s bid price of P4,324,172.96 and petitioners’ total computed obligation as of January
14, 1999, or the date of the auction sale, in the amount of P3,946,667.87.47

Hence, the present Petition.

Issues

The following issues are raised in this Petition:

A. THE COURT OF APPEALS AS WELL AS THE LOWER COURT ERRED IN NOT

NULLIFYING THE INTEREST RATE PROVISION IN THE CREDIT AGREEMENT DATED
JULY 24, 1989 X X X AND IN THE AMENDMENT TO CREDIT AGREEMENT
DATEDAUGUST 21, 1991 X X X WHICH LEFT TO THE SOLE UNILATERAL
DETERMINATION OF THE RESPONDENT PNB THE ORIGINAL FIXING OF INTEREST
RATE AND ITS INCREASE, WHICH AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF
THE [NEW CIVIL CODE], AS ENUNCIATED IN PONCIANO ALMEIDA V. COURT OF
APPEALS,G.R. [NO.] 113412, APRIL 17, 1996, AND CONTRARY TO PUBLIC POLICY AND
PUBLIC INTEREST, AND IN APPLYING THE PRINCIPLE OF ESTOPPEL ARISING FROM
THE ALLEGED DELAYED COMPLAINT OF PETITIONER[S], AND [THEIR] PAYMENT OF
THE INTEREST CHARGED.

B. CONSEQUENTLY, THE COURT OF APPEALS AND THE LOWER COURT ERRED IN

NOT DECLARING THAT PNB IS NOT AT ALL ENTITLED TO ANY INTEREST EXCEPT
THE LEGAL RATE FROM DATE OF DEMAND, AND IN NOT APPLYING THE EXCESS
OVER THE LEGAL RATE OF THE ADMITTED PAYMENTS MADE BY PETITIONER[S]
FROM 1991-1998 IN THE ADMITTED TOTAL AMOUNT OF P3,484,287.00, TO PAYMENT
OF THE PRINCIPAL OF P2,500,000.[00] LEAVING AN OVERPAYMENT OFP984,287.00
REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER
ANNUM.
II

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN HOLDING THAT
PENALTIES ARE INCLUDEDIN THE SECURED AMOUNT, SUBJECT TO FORECLOSURE,
WHEN NO PENALTIES ARE MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE
MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE AMOUNT OF PENALTIES
SHOULDHAVE BEEN EXCLUDED FROM [THE] FORECLOSURE AMOUNT.

III

THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF THE LOWER COURT,
WHICH REDUCED THE ATTORNEY’S FEES OF 10% OF THE TOTAL INDEBTEDNESS
CHARGED IN THE X X X EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND
[AWARDING] 10% ATTORNEY’S FEES.48

Petitioners’ Arguments

Petitioners insist that the interest rate provision in the Credit Agreement and the Amendment to
Credit Agreement should be declared null and void, for they relegated to PNB the sole power to fix
interest rates based on arbitrary criteria or factors such as bank policy, profitability, cost of money,
foreign currency values, and bank administrative costs; spaces for interest rates in the two Credit
Agreements and the promissory notes were left blank for PNB to unilaterally fill, and their consent
or agreement to the interest rates imposed thereafter was not obtained; the interest rate, which
consists of the prime rate plus the bank spread, is determined not by agreement of the parties but by
PNB’s Treasury Department in Manila. Petitioners conclude that by this method of fixing the
interest rates, the principle of mutuality of contracts is violated, and public policy as well as
Circular 90549 of the then Central Bank had been breached.

Petitioners question the CA’s application of the principle of estoppel, saying that no estoppel can
proceed from an illegal act. Though they failed to timely question the imposition of the alleged
illegal interest rates and continued to pay the loan on the basis of these rates, they cannot be deemed
to have acquiesced, and hence could recover what they erroneously paid.50

Petitioners argue that if the interest rates were nullified, then their obligation to PNB is deemed
extinguished as of July 1997; moreover, it would appear that they even made an over payment to
the bank in the amount of P984,287.00.

Next, petitioners suggest that since the Real Estate Mortgage agreements did not include nor
specify, as part of the secured amount, the penalty of 24% authorized in PN 9707237, such amount
of P581,666.66 could not be made answerable by or collected from the mortgages covering TCTs
T-14250 and T-16208. Claiming support from Philippine Bank of Communications [PBCom] v.
Court of Appeals,51 petitioners insist that the phrase "and other obligations owing by the mortgagor
to the mortgagee"52 in the mortgage agreements cannot embrace the P581,666.66 penalty, because,
as held in the PBCom case, "[a] penalty charge does not belong to the species of obligations
enumerated in the mortgage, hence, the said contract cannot be understood to secure the
penalty";53while the mortgages are the accessory contracts, what items are secured may only be
determined from the provisions of the mortgage contracts, and not from the Credit Agreement or
the promissory notes.

Finally, petitioners submit that the trial court’s award of 1% attorney’s fees should be maintained,
given that in foreclosures, a lawyer’s work consists merely in the preparation and filing of the
petition, and involves minimal study.54 To allow the imposition of a staggering P396,211.00 for
such work would be contrary to equity. Petitioners state that the purpose of attorney’s fees in cases
of this nature "is not to give respondent a larger compensation for the loan than the law already
allows, but to protect it against any future loss or damage by being compelled to retain counsel x x
x to institute judicial proceedings for the collection of its credit."55 And because the instant case
involves a simple extrajudicial foreclosure, attorney’s fees may be equitably tempered.

Respondent’s Arguments

For its part, respondent disputes petitioners’ claim that interest rates were unilaterally fixed by it,
taking relief in the CA pronouncement that petitioners are deemed estopped by their failure to
question the imposed rates and their continued payment thereof without opposition. It adds that
because the Credit Agreement and promissory notes contained both an escalation clause and a de-
escalation clause, it may not be said that the bank violated the principle of mutuality. Besides, the
increase or decrease in interest rates have been mutually agreed upon by the parties, as shown by
petitioners’ continuous payment without protest. Respondent adds that the alleged unilateral
imposition of interest rates is not a proper subject for review by the Court because the issue was
never raised in the lower court.

As for petitioners’ claim that interest rates imposed by it are null and void for the reasons that 1) the
Credit Agreements and the promissory notes were signed in blank; 2) interest rates were at short
periods; 3) no interest rates could be charged where no agreement on interest rates was made in
writing; 4) PNB fixed interest rates on the basis of arbitrary policies and standards left to its
choosing; and 5) interest rates based on prime rate plus applicable spread are indeterminate and
arbitrary – PNB counters:

a. That Credit Agreements and promissory notes were signed by petitioner[s] in blank – Respondent
claims that this issue was never raised in the lower court. Besides, documentary evidence prevails
over testimonial evidence; Lydia Silos’ testimony in this regard is self-serving, unsupported and
uncorroborated, and for being the lone evidence on this issue. The fact remains that these
documents are in proper form, presumed regular, and endure, against arbitrary claims by Silos –
who is an experienced business person – that she signed questionable loan documents whose
provisions for interest rates were left blank, and yet she continued to pay the interests without
protest for a number of years.56
b. That interest rates were at short periods – Respondent argues that the law which governs and
prohibits changes in interest rates made more than once every twelve months has been
removed57 with the issuance of Presidential Decree No. 858.58

c. That no interest rates could be charged where no agreement on interest rates was made in writing
in violation of Article 1956 of the Civil Code, which provides that no interest shall be due unless it
has been expressly stipulated in writing – Respondent insists that the stipulated 25% per annum as
embodied in PN 9707237 should be imposed during the interim, or the period after the loan became
due and while it remains unpaid, and not the legal interest of 12% as claimed by petitioners.59

d. That PNB fixed interest rates on the basis of arbitrary policies and standards left to its choosing –
According to respondent, interest rates were fixed taking into consideration increases or decreases
as provided by law or by the Monetary Board, the bank’s overall costs of funds, and upon
agreement of the parties.60

e. That interest rates based on prime rate plus applicable spread are indeterminate and arbitrary –
On this score, respondent submits there are various factors that influence interest rates, from
political events to economic developments, etc.; the cost of money, profitability and foreign
currency transactions may not be discounted.61

On the issue of penalties, respondent reiterates the trial court’s finding that during pre-trial,
petitioners admitted that the Statement of Account as of October 12, 1998 – which detailed and
included penalty charges as part of the total outstanding obligation owing to the bank – was correct.
Respondent justifies the imposition and collection of a penalty as a normal banking practice, and
the standard rate per annum for all commercial banks, at the time, was 24%.

Respondent adds that the purpose of the penalty or a penal clause for that matter is to ensure the
performance of the obligation and substitute for damages and the payment of interest in the event of
non-compliance.62 And the promissory note – being the principal agreement as opposed to the
mortgage, which is a mere accessory – should prevail. This being the case, its inclusion as part of
the secured amount in the mortgage agreements is valid and necessary.

Regarding the foreclosure of the mortgages, respondent accuses petitioners of pre-empting

consolidation of its ownership over TCTs T-14250 and T-16208; that petitioners filed Civil Case
No. 5975 ostensibly to question the foreclosure and sale of properties covered by TCTs T-14250
and T-16208 in a desperate move to retain ownership over these properties, because they failed to
timely redeem them.

Respondent directs the attention of the Court to its petition in G.R. No. 181046,63 where the
propriety of the CA’s ruling on the following issues is squarely raised:

1. That the interest rate to be applied after the expiration of the first 30-day interest period for PN
9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in the bid price of P377,505.99 which is the
difference between the total amount due to PNB and the amount of its bid price.

Our Ruling

The Court grants the Petition.

Before anything else, it must be said that it is not the function of the Court to re-examine or re-
evaluate evidence adduced by the parties in the proceedings below. The rule admits of certain well-
recognized exceptions, though, as when the lower courts’ findings are not supported by the
evidence on record or are based on a misapprehension of facts, or when certain relevant and
undisputed facts were manifestly overlooked that, if properly considered, would justify a different
conclusion. This case falls within such exceptions.

The Court notes that on March 5, 2008, a Resolution was issued by the Court’s First Division
denying respondent’s petition in G.R. No. 181046, due to late filing, failure to attach the required
affidavit of service of the petition on the trial court and the petitioners, and submission of a
defective verification and certification of non-forum shopping. On June 25, 2008, the Court issued
another Resolution denying with finality respondent’s motion for reconsideration of the March 5,
2008 Resolution. And on August 15, 2008, entry of judgment was made. This thus settles the issues,
as above-stated, covering a) the interest rate – or 12% per annum– that applies upon expiration of
the first 30 days interest period provided under PN 9707237, and b)the CA’s decree that PNB
should reimburse petitioner the excess in the bid price of P377,505.09.

It appears that respondent’s practice, more than once proscribed by the Court, has been carried over
once more to the petitioners. 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." Thus, in Philippine National Bank v. Court of Appeals,64 such
stipulation and similar ones were declared in violation of Article 130865 of the Civil Code. In a
second case, Philippine National Bank v. Court of Appeals,66 the very same stipulations found in
the credit agreement and the promissory notes prepared and issued by the respondent were again
invalidated. The Court therein said:

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.

xxxx

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 bylaw 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 the one who contracts, his
act has no more efficacy than if it had been done under duress or by a person of unsound mind.

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 —

x x x The 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 of 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 . . . . Hence, even assuming that the . . . 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" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition.67 (Emphases supplied)

Then again, in a third case, Spouses Almeda v. Court of Appeals,68 the Court invalidated the very
same provisions in the respondent’s prepared Credit Agreement, declaring thus:

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

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly
stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it
has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of
interest rate provision of the credit agreement signed between the parties is that petitioners were
bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3)
upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily
resolved by a careful reading of the credit agreement because the same plainly uses the phrase
"interest rate agreed upon," in reference to the original 21% interest rate. x x x

xxxx

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank
in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to
as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66)
which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00
in settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above
those amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above, not
only [are] the increases of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and reasonable standards upon which
the increases are anchored.

xxxx

In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral
and progressive increases imposed by respondent PNB were null and void. Their effect was to
increase the total obligation on an eighteen million peso loan to an amount way over three times
that which was originally granted to the borrowers. That these increases, occasioned by crafty
manipulations in the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.69 (Emphases supplied)

Still, in a fourth case, Philippine National Bank v. Court of Appeals,70 the above doctrine was
reiterated:

The promissory note contained the following stipulation:

For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER
of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of
FIFTEEN THOUSAND ONLY (P15,000.00), Philippine Currency, together with interest thereon at
the rate of 12% per annum until paid, which interest rate the Bank may at any time without notice,
raise within the limits allowed by law, and I/we also agree to pay jointly and severally ____% per
annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed
on due dated.

Payment of this note shall be as follows:

*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE

On the reverse side of the note the following condition was stamped:

All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition
that any and/or all extensions hereof that will leave any portion of the amount still unpaid after 730
days shall automatically convert the outstanding balance into a medium or long-term obligation as
the case may be and give the Bank the right to charge the interest rates prescribed under its policies
from the date the account was originally granted.

To secure payment of the loan the parties executed a real estate mortgage contract which provided:

(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.

xxxx

To begin with, PNB’s argument rests on a misapprehension of the import of the appellate court’s
ruling. The Court of Appeals nullified the interest rate increases not because the promissory note
did not comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of
such provision made the clause so one-sided as to make it unreasonable.

That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v.
Navarro that although P.D. No. 1684 is not to be retroactively applied to loans granted before its
effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sidedness of the
escalation clause. Indeed because of concern for the unequal status of borrowers vis-à-vis the banks,
our cases after Banco Filipino have fashioned the rule that any increase in the rate of interest made
pursuant to an escalation clause must be the result of agreement between the parties.

Thus in Philippine National Bank v. Court of Appeals, two promissory notes authorized PNB to
increase the stipulated interest per annum" within the limits allowed by law at any time depending
on whatever policy [PNB] may adopt in the future; Provided, that the interest rate on this note shall
be correspondingly decreased in the event that the applicable maximum interest rate is reduced by
law or by the Monetary Board." The real estate mortgage likewise provided:

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 provisions
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.

Pursuant to these clauses, PNB successively increased the interest from 18% to 32%, then to 41%
and then to 48%. This Court declared the increases unilaterally imposed by [PNB] to be in violation
of the principle of mutuality as embodied in Art.1308 of the Civil Code, which provides that "[t]he
contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them." As the Court explained:

In order that obligations arising from contracts may have the force of 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 (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming
that the P1.8 million 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" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts
of justice must protect against abuse and imposition.

A similar ruling was made in Philippine National Bank v. Court of Appeals. The credit agreement
in that case provided:

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. . . .

As in the first case, PNB successively increased the stipulated interest so that what was originally
12% per annum became, after only two years, 42%. In declaring the increases invalid, we held:

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.

Only recently we invalidated another round of interest increases decreed by PNB pursuant to a
similar agreement it had with other borrowers:

[W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said
circular could possibly be read as granting respondent bank carte blanche authority to raise interest
rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets.

In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents’ assent to the increases can not be
implied from their lack of response to the letters sent by PNB, informing them of the increases. For
as stated in one case, no one receiving a proposal to change a contract is obliged to answer the
proposal.71 (Emphasis supplied)

We made the same pronouncement in a fifth case, New Sampaguita Builders Construction, Inc. v.
Philippine National Bank,72 thus –

Courts have the authority to strike down or to modify provisions in promissory notes that grant the
lenders unrestrained power to increase interest rates, penalties and other charges at the latter’s sole
discretion and without giving prior notice to and securing the consent of the borrowers. This
unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue
advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still
reduce iniquitous or unconscionable rates charged for the use of money. Furthermore, 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.73 (Emphasis supplied)

Yet again, in a sixth disposition, Philippine National Bank v. Spouses Rocamora, 74 the above
pronouncements were reiterated to debunk PNB’s repeated reliance on its invalidated contract
stipulations:

We repeated this rule in the 1994 case of PNB v. CA and Jayme Fernandez and the 1996 case of
PNB v. CA and Spouses Basco. Taking no heed of these rulings, the escalation clause PNB used in
the present case to justify the increased interest rates is no different from the escalation clause
assailed in the 1996 PNB case; in both, the interest rates were increased from the agreed 12% per
annum rate to 42%. x x x

xxxx

On the strength of this ruling, PNB’s argument – that the spouses Rocamora’s failure to contest the
increased interest rates that were purportedly reflected in the statements of account and the demand
letters sent by the bank amounted to their implied acceptance of the increase – should likewise fail.

Evidently, PNB’s failure to secure the spouses Rocamora’s consent to the increased interest rates
prompted the lower courts to declare excessive and illegal the interest rates imposed. Togo around
this lower court finding, PNB alleges that the P206,297.47 deficiency claim was computed using
only the original 12% per annum interest rate. We find this unlikely. Our examination of PNB’s
own ledgers, included in the records of the case, clearly indicates that PNB imposed interest rates
higher than the agreed 12% per annum rate. This confirmatory finding, albeit based solely on
ledgers found in the records, reinforces the application in this case of the rule that findings of the
RTC, when affirmed by the CA, are binding upon this Court.75 (Emphases supplied)

Verily, all these cases, including the present one, involve identical or similar provisions found in
respondent’s credit agreements and promissory notes. Thus, the July 1989 Credit Agreement
executed by petitioners and respondent contained the following stipulation on interest:

1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% [per annum]. Interest
shall be payable in advance every one hundred twenty days at the rate prevailing at the time of the
renewal.

(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum which is equal to the Bank’s spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice
to the Borrower, increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.76 (Emphases supplied)

while the eight promissory notes issued pursuant thereto granted PNB the right to increase or reduce
interest rates "within the limits allowed by law or the Monetary Board"77 and the Real Estate
Mortgage agreement included the same right to increase or reduce interest rates "at any time
depending on whatever policy PNB may adopt in the future."78

On the basis of the Credit Agreement, petitioners issued promissory notes which they signed in
blank, and respondent later on entered their corresponding interest rates, as follows:

1st Promissory Note dated July 24, 1989 – 19.5%;

2nd Promissory Note dated November 22, 1989 – 23%;

3rd Promissory Note dated March 21, 1990 – 22%;

4th Promissory Note dated July 19, 1990 – 24%;

5th Promissory Note dated December 17, 1990 – 28%;

6th Promissory Note dated February 14, 1991 – 32%;

7th Promissory Note dated March 1, 1991 – 30%; and

8th Promissory Note dated July 11, 1991 – 24%.79

On the other hand, the August 1991 Amendment to Credit Agreement contains the following
stipulation regarding interest:

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from
date of each Availment up to but not including the date of full payment thereof at the rate per
annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the
date of each Availment.80 (Emphases supplied)

and under this Amendment to Credit Agreement, petitioners again executed and signed the
following promissory notes in blank, for the respondent to later on enter the corresponding interest
rates, which it did, as follows:

9th Promissory Note dated November 8, 1991 – 26%;

10th Promissory Note dated March 19, 1992 – 25%;

11th Promissory Note dated July 11, 1992 – 23%;

12th Promissory Note dated November 10, 1992 – 21%;

13th Promissory Note dated March 15, 1993 – 21%;

14th Promissory Note dated July 12, 1993 – 17.5%;

15th Promissory Note dated November 17, 1993 – 21%;

16th Promissory Note dated March 28, 1994 – 21%;

17th Promissory Note dated July 13, 1994 – 21%;

18th Promissory Note dated November 16, 1994 – 16%;

19th Promissory Note dated April 10, 1995 – 21%;

20th Promissory Note dated July 19, 1995 – 18.5%;

21st Promissory Note dated December 18, 1995 – 18.75%;

22nd Promissory Note dated April 22, 1996 – 18.5%;

23rd Promissory Note dated July 22, 1996 – 18.5%;

24th Promissory Note dated November 25, 1996 – 18%;

25th Promissory Note dated May 30, 1997 – 17.5%; and

26th Promissory Note (PN 9707237) dated July 30, 1997 – 25%.81

The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank
may at any time without notice, raise within the limits allowed by law x x x."82 On the other hand,
the 18th up to the 26th promissory notes – which includes PN 9707237 – carried the following
provision:

x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/we are not
agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to prepay the
loan or credit facility without penalty within ten (10) calendar days from the Interest Setting
Date.83 (Emphasis supplied)

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. For
this case, this lack of consent by the petitioners has been made obvious by the fact that they signed
the promissory notes in blank for the respondent to fill. We find credible the testimony of Lydia in
this respect. Respondent failed to discredit her; in fact, its witness PNB Kalibo Branch Manager
Aspa admitted that interest rates were fixed solely by its Treasury Department in Manila, which
were then simply communicated to all PNB branches for implementation. If this were the case, then
this would explain why petitioners had to sign the promissory notes in blank, since the imposable
interest rates have yet to be determined and fixed by respondent’s Treasury Department in Manila.

Moreover, in Aspa’s enumeration of the factors that determine the interest rates PNB fixes – such as
cost of money, foreign currency values, bank administrative costs, profitability, and considerations
which affect the banking industry – it can be seen that considerations which affect PNB’s borrowers
are ignored. A borrower’s current financial state, his feedback or opinions, the nature and purpose
of his borrowings, the effect of foreign currency values or fluctuations on his business or
borrowing, etc. – these are not factors which influence the fixing of interest rates to be imposed on
him. Clearly, respondent’s method of fixing interest rates based on one-sided, indeterminate, and
subjective criteria such as profitability, cost of money, bank costs, etc. is arbitrary for there is no
fixed standard or margin above or below these considerations.

The stipulation in the promissory notes subjecting the interest rate to review does not render the
imposition by UCPB of interest rates on the obligations of the spouses Beluso valid. According to
said stipulation:

The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of interest
and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all
dealings with the BORROWER.

It should be pointed out that the authority to review the interest rate was given [to] UCPB alone as
the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each of
the following considerations: (1) the prevailing financial and monetary condition;(2) the rate of
interest and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or(3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of
the interest rate provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as
to the interest to be imposed, as both options violate the principle of mutuality of
contracts.84 (Emphases supplied)

To repeat what has been said in the above-cited cases, any modification in the contract, such as the
interest rates, must be made with the consent of the contracting parties.1âwphi1 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.

What is even more glaring in the present case is that, the stipulations in question no longer provide
that the parties shall agree upon the interest rate to be fixed; -instead, they are worded in such a way
that the borrower shall agree to whatever interest rate respondent fixes. In credit agreements
covered by the above-cited cases, it is provided that:

The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future: Provided, that, the interest rate on this
accommodation shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in
maximum interest rate.85 (Emphasis supplied)

Whereas, in the present credit agreements under scrutiny, it is stated that:

IN THE JULY 1989 CREDIT AGREEMENT

(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on
whatever policy the Bank may adopt in the future, including without limitation, the shifting from
the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has
imposed on the Loan interest at a rate per annum, which is equal to the Bank’s spread over the
current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice
to the Borrower, increase or decrease its spread over the floating interest rate at any time depending
on whatever policy it may adopt in the future.86 (Emphases supplied)

IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT

1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from
date of each Availment up to but not including the date of full payment thereof at the rate per
annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the
date of each Availment.87 (Emphasis supplied)

Plainly, with the present credit agreement, the element of consent or agreement by the borrower is
now completely lacking, which makes respondent’s unlawful act all the more reprehensible.

Accordingly, petitioners are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is against public policy."88

It appears that by its acts, respondent violated the Truth in Lending Act, or Republic Act No. 3765,
which was enacted "to protect x x x citizens from a lack of awareness of the true cost of credit to the
user by using a full disclosure of such cost with a view of preventing the uninformed use of credit to
the detriment of the national economy."89 The law "gives a detailed enumeration of the specific
information required to be disclosed, among which are the interest and other charges incident to the
extension of credit."90 Section 4 thereof provides that a disclosure statement must be furnished prior
to the consummation of the transaction, thus:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

Under Section 4(6), "finance charge" represents the amount to be paid by the debtor incident to the
extension of credit such as interest or discounts, collection fees, credit investigation fees, attorney’s
fees, and other service charges. The total finance charge represents the difference between (1) the
aggregate consideration (down payment plus installments) on the part of the debtor, and (2) the sum
of the cash price and non-finance charges.91

By requiring the petitioners to sign the credit documents and the promissory notes in blank, and
then unilaterally filling them up later on, respondent violated the Truth in Lending Act, and was
remiss in its disclosure obligations. In one case, which the Court finds applicable here, it was held:

UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.

Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure
statement must be furnished prior to the consummation of the transaction:

SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) the percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.

The rationale of this provision is to protect users of credit from a lack of awareness of the true cost
thereof, proceeding from the experience that banks are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like.
The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their
loan, to enable them to give full consent to the contract, and to properly evaluate their options in
arriving at business decisions. Upholding UCPB’s claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too
often not be able to reverse the ill effects of an already consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses Beluso after
execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied to the
loan covered by said promissory notes.92(Emphases supplied)

However, the one-year period within which an action for violation of the Truth in Lending Act may
be filed evidently prescribed long ago, or sometime in 2001, one year after petitioners received the
March 2000 demand letter which contained the illegal charges.

The fact that petitioners later received several statements of account detailing its outstanding
obligations does not cure respondent’s breach. To repeat, the belated discovery of the true cost of
credit does not reverse the ill effects of an already consummated business decision.93

Neither may the statements be considered proposals sent to secure the petitioners’ conformity; they
were sent after the imposition and application of the interest rate, and not before. And even if it
were to be presumed that these are proposals or offers, there was no acceptance by petitioners. "No
one receiving a proposal to modify a loan contract, especially regarding interest, is obliged to
answer the proposal."94
Loan and credit arrangements may be made enticing by, or "sweetened" with, offers of low initial
interest rates, but actually accompanied by provisions written in fine print that allow lenders to later
on increase or decrease interest rates unilaterally, without the consent of the borrower, and
depending on complex and subjective factors. Because they have been lured into these contracts by
initially low interest rates, borrowers get caught and stuck in the web of subsequent steep rates and
penalties, surcharges and the like. Being ordinary individuals or entities, they naturally dread legal
complications and cannot afford court litigation; they succumb to whatever charges the lenders
impose. At the very least, borrowers should be charged rightly; but then again this is not possible in
a one-sided credit system where the temptation to abuse is strong and the willingness to rectify is
made weak by the eternal desire for profit.

Given the above supposition, the Court cannot subscribe to respondent’s argument that in every
repricing of petitioners’ loan availment, they are given the right to question the interest rates
imposed. The import of respondent’s line of reasoning cannot be other than that if one out of every
hundred borrowers questions respondent’s practice of unilaterally fixing interest rates, then only the
loan arrangement with that lone complaining borrower will enjoy the benefit of review or re-
negotiation; as to the 99 others, the questionable practice will continue unchecked, and respondent
will continue to reap the profits from such unscrupulous practice. The Court can no more condone a
view so perverse. This is exactly what the Court meant in the immediately preceding cited case
when it said that "the belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision;"95 as to the 99 borrowers who did not or could not
complain, the illegal act shall have become a fait accompli– to their detriment, they have already
suffered the oppressive rates.

Besides, that petitioners are given the right to question the interest rates imposed is, under the
circumstances, irrelevant; we have a situation where the petitioners do not stand on equal footing
with the respondent. It is doubtful that any borrower who finds himself in petitioners’ position
would dare question respondent’s power to arbitrarily modify interest rates at any time. In the
second place, on what basis could any borrower question such power, when the criteria or standards
– which are really one-sided, arbitrary and subjective – for the exercise of such power are precisely
lost on him?

For the same reasons, the Court cannot validly consider that, as stipulated in the 18th up to the 26th
promissory notes, petitioners are granted the option to prepay the loan or credit facility without
penalty within 10 calendar days from the Interest Setting Date if they are not agreeable to the
interest rate fixed. It has been shown that the promissory notes are executed and signed in blank,
meaning that by the time petitioners learn of the interest rate, they are already bound to pay it
because they have already pre-signed the note where the rate is subsequently entered.

Besides, premium may not be placed upon a stipulation in a contract which grants one party the
right to choose whether to continue with or withdraw from the agreement if it discovers that what
the other party has been doing all along is improper or illegal.
Thus said, respondent’s arguments relative to the credit documents – that documentary evidence
prevails over testimonial evidence; that the credit documents are in proper form, presumed regular,
and endure, against arbitrary claims by petitioners, experienced business persons that they are, they
signed questionable loan documents whose provisions for interest rates were left blank, and yet they
continued to pay the interests without protest for a number of years – deserve no consideration.

With regard to interest, the Court finds that 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. This is the uniform
ruling adopted in previous cases, including those cited here.96 The interests paid by petitioners
should be applied first to the payment of the stipulated or legal and unpaid interest, as the case may
be, and later, to the capital or principal.97 Respondent should then refund the excess amount of
interest that it has illegally imposed upon petitioners; "[t]he amount to be refunded refers to that
paid by petitioners when they had no obligation to do so."98 Thus, the parties’ original agreement
stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first
promissory note which expired on November 21, 1989 and was paid by petitioners; it was not
intended to apply to the whole duration of the loan. Subsequent higher interest rates have been
declared illegal; but because only the rates are found to be improper, the obligation to pay interest
subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall
apply only until June 30, 2013. Starting July1, 2013, the prevailing rate of interest shall be 6% per
annum pursuant to our ruling in Nacar v. Gallery Frames99 and Bangko Sentral ng Pilipinas-
Monetary Board Circular No. 799.

Now to the issue of penalty. PN 9707237 provides that failure to pay it or any installment thereon,
when due, shall constitute default, and a penalty charge of 24% per annum based on the defaulted
principal amount shall be imposed. Petitioners claim that this penalty should be excluded from the
foreclosure amount or bid price because the Real Estate Mortgage and the Supplement thereto did
not specifically include it as part of the secured amount. Respondent justifies its inclusion in the
secured amount, saying that the purpose of the penalty or a penal clause is to ensure the
performance of the obligation and substitute for damages and the payment of interest in the event of
non-compliance.100 Respondent adds that the imposition and collection of a penalty is a normal
banking practice, and the standard rate per annum for all commercial banks, at the time, was 24%.
Its inclusion as part of the secured amount in the mortgage agreements is thus valid and necessary.

The Court sustains petitioners’ view that the penalty may not be included as part of the secured
amount. Having found the credit agreements and promissory notes to be tainted, we must accord the
same treatment to the mortgages. After all, "[a] mortgage and a note secured by it are deemed parts
of one transaction and are construed together."101 Being so tainted and having the attributes of a
contract of adhesion as the principal credit documents, we must construe the mortgage contracts
strictly, and against the party who drafted it. An examination of the mortgage agreements reveals
that nowhere is it stated that penalties are to be included in the secured amount. Construing this
silence strictly against the respondent, the Court can only conclude that the parties did not intend to
include the penalty allowed under PN 9707237 as part of the secured amount. Given its resources,
respondent could have – if it truly wanted to – conveniently prepared and executed an amended
mortgage agreement with the petitioners, thereby including penalties in the amount to be secured by
the encumbered properties. Yet it did not.

With regard to attorney’s fees, it was plain error for the CA to have passed upon the issue since it
was not raised by the petitioners in their appeal; it was the respondent that improperly brought it up
in its appellee’s brief, when it should have interposed an appeal, since the trial court’s Decision on
this issue is adverse to it. It is an elementary principle in the subject of appeals that an appellee who
does not himself appeal cannot obtain from the appellate court any affirmative relief other than
those granted in the decision of the court below.

x x x [A]n appellee, who is at the same time not an appellant, may on appeal be permitted to make
counter assignments of error in ordinary actions, when the purpose is merely to defend himself
against an appeal in which errors are alleged to have been committed by the trial court both in the
appreciation of facts and in the interpretation of the law, in order to sustain the judgment in his
favor but not when his purpose is to seek modification or reversal of the judgment, in which case it
is necessary for him to have excepted to and appealed from the judgment.102

Since petitioners did not raise the issue of reduction of attorney’s fees, the CA possessed no
authority to pass upon it at the instance of respondent. The ruling of the trial court in this respect
should remain undisturbed.

For the fixing of the proper amounts due and owing to the parties – to the respondent as creditor and
to the petitioners who are entitled to a refund as a consequence of overpayment considering that
they paid more by way of interest charges than the 12% per annum103 herein allowed – the case
should be remanded to the lower court for proper accounting and computation, applying the
following procedure:

1. The 1st Promissory Note with the 19.5% interest rate is deemed proper and paid;

2. All subsequent promissory notes (from the 2nd to the 26th promissory notes) shall carry an
interest rate of only 12% per annum.104 Thus, interest payment made in excess of 12% on the 2nd
promissory note shall immediately be applied to the principal, and the principal shall be accordingly
reduced. The reduced principal shall then be subjected to the 12%105 interest on the 3rd promissory
note, and the excess over 12% interest payment on the 3rd promissory note shall again be applied to
the principal, which shall again be reduced accordingly. The reduced principal shall then be
subjected to the 12% interest on the 4th promissory note, and the excess over12% interest payment
on the 4th promissory note shall again be applied to the principal, which shall again be reduced
accordingly. And so on and so forth;
3. After the above procedure is carried out, the trial court shall be able to conclude if petitioners a)
still have an OUTSTANDING BALANCE/OBLIGATION or b) MADE PAYMENTS OVER AND
ABOVE THEIR TOTAL OBLIGATION (principal and interest);

4. Such outstanding balance/obligation, if there be any, shall then be subjected to a 12% per annum
interest from October 28, 1997 until January 14, 1999, which is the date of the auction sale;

5. Such outstanding balance/obligation shall also be charged a 24% per annum penalty from August
14, 1997 until January 14, 1999. But from this total penalty, the petitioners’ previous payment of
penalties in the amount of P202,000.00made on January 27, 1998106 shall be DEDUCTED;

6. To this outstanding balance (3.), the interest (4.), penalties (5.), and the final and executory award
of 1% attorney’s fees shall be ADDED;

7. The sum total of the outstanding balance (3.), interest (4.) and 1% attorney’s fees (6.) shall be
DEDUCTED from the bid price of P4,324,172.96. The penalties (5.) are not included because they
are not included in the secured amount;

8. The difference in (7.) [P4,324,172.96 LESS sum total of the outstanding balance (3.), interest
(4.), and 1% attorney’s fees (6.)] shall be DELIVERED TO THE PETITIONERS;

9. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208;

10. ON THE OTHER HAND, if after performing the procedure in (2.), it turns out that petitioners
made an OVERPAYMENT, the interest (4.), penalties (5.), and the award of 1% attorney’s fees (6.)
shall be DEDUCTED from the overpayment. There is no outstanding balance/obligation precisely
because petitioners have paid beyond the amount of the principal and interest;

11. If the overpayment exceeds the sum total of the interest (4.), penalties (5.), and award of 1%
attorney’s fees (6.), the excess shall be RETURNED to the petitioners, with legal interest, under the
principle of solutio indebiti;107

12. Likewise, if the overpayment exceeds the total amount of interest (4.) and award of 1%
attorney’s fees (6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL FORECLOSURE
AND SALE;

13. HOWEVER, if the total amount of interest (4.) and award of 1% attorney’s fees (6.) exceed
petitioners’ overpayment, then the excess shall be DEDUCTED from the bid price
of P4,324,172.96;

14. The difference in (13.) [P4,324,172.96 LESS sum total of the interest (4.) and 1% attorney’s
fees (6.)] shall be DELIVERED TO THE PETITIONERS;

15. Respondent may then proceed to consolidate its title to TCTs T-14250 and T-16208. The
outstanding penalties, if any, shall be collected by other means.
From the above, it will be seen that if, after proper accounting, it turns out that the petitioners made
payments exceeding what they actually owe by way of principal, interest, and attorney’s fees, then
the mortgaged properties need not answer for any outstanding secured amount, because there is not
any; quite the contrary, respondent must refund the excess to petitioners.1âwphi1 In such case, the
extrajudicial foreclosure and sale of the properties shall be declared null and void for obvious lack
of basis, the case being one of solutio indebiti instead. If, on the other hand, it turns out that
petitioners’ overpayments in interests do not exceed their total obligation, then the respondent may
consolidate its ownership over the properties, since the period for redemption has expired. Its only
obligation will be to return the difference between its bid price (P4,324,172.96) and petitioners’
total obligation outstanding – except penalties – after applying the latter’s overpayments.

WHEREFORE, premises considered, the Petition is GRANTED. The May 8, 2007 Decision of the
Court of Appeals in CA-G.R. CV No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby
rendered as follows:

1. The interest rates imposed and indicated in the 2nd up to the 26th Promissory Notes are
DECLARED NULL AND VOID, and such notes shall instead be subject to interest at the rate of
twelve percent (12%) per annum up to June 30, 2013, and starting July 1, 2013, six percent (6%)
per annum until full satisfaction;

2. The penalty charge imposed in Promissory Note No. 9707237 shall be EXCLUDED from the
amounts secured by the real estate mortgages;

3. The trial court’s award of one per cent (1%) attorney’s fees is REINSTATED;

4. The case is ordered REMANDED to the Regional Trial Court, Branch 6 of Kalibo, Aklan for the
computation of overpayments made by petitioners spouses Eduardo and Lydia Silos to respondent
Philippine National Bank, taking into consideration the foregoing dispositions, and applying the
procedure hereinabove set forth;

5. Thereafter, the trial court is ORDERED to make a determination as to the validity of the
extrajudicial foreclosure and sale, declaring the same null and void in case of overpayment and
ordering the release and return of Transfer Certificates of Title Nos. T-14250 and TCT T-16208 to
petitioners, or ordering the delivery to the petitioners of the difference between the bid price and the
total remaining obligation of petitioners, if any;

6. In the meantime, the respondent Philippine National Bank is ENJOINED from consolidating title
to Transfer Certificates of Title Nos. T-14250 and T-16208 until all the steps in the procedure above
set forth have been taken and applied;

7. The reimbursement of the excess in the bid price of P377,505.99, which respondent Philippine
National Bank is ordered to reimburse petitioners, should be HELD IN ABEYANCE until the true
amount owing to or owed by the parties as against each other is determined;
8. Considering that this case has been pending for such a long time and that further proceedings,
albeit uncomplicated, are required, the trial court is ORDERED to proceed with dispatch.