536

SUPREMECOURTREPORTSANNOTATED
PhilippineNationalBankvs.CourtofAppeals
*

G.R.No.88880.April30,1991.

PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON.

COURTOFAPPEALSandAMBROSIOPADILLA,respondents.
Commercial Law CB Circular No. 905 PD 116 Although CB
CircularNo.905Seriesof1982removedtheUsuryLawceilingoninterest
rates, it did not authorize the PNB or any bank to increase the agreed
interest rates from 18% to 48% within 4 months, in violation of PD 116
which limits such charges to once every twelve months.In the present
case,thePNBreliedonitsownBoardResolutionNo.681(Exh.10),PNB
Circular No. 407984 (Exh. 13), and PNB Circular No. 4012984 (Exh.
15),butthoseresolutionandcircularsareneither
_______________
*FIRSTDIVISION.

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537

PhilippineNationalBankvs.CourtofAppeals

lawsnorresolutionsoftheMonetaryBoard.CBCircularNo.905,Seriesof
1982 (Exh. 11) removed the Usury Law ceiling on interest ratesx x x
increases in interest rates are not subject to any ceiling prescribed by the
UsuryLaw.butitdidnotauthorizethePNB,oranybankforthatmatter,to
unilaterally and successively increase the agreed interest rates from 18% to
48%withinaspanoffour(4)months,inviolationofP.D.116whichlimits
suchchangestoonceeverytwelvemonths.
Same Civil Law Mutuality of Contracts A contract containing a
condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties is void.Besides
violatingP.D.116,theunilateralactionofthePNBinincreasingtheinterest
rate on the private respondents loan, violated the mutuality of contracts
ordainedinArticle1308oftheCivilCode:ART.1308.Thecontractmust
bindbothcontractingpartiesitsvalidityorcompliancecannotbelefttothe

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
thepartiesbasedontheiressentialequality.Acontractcontainingacondition
whichmakesitsfulfillmentdependentexclusivelyupontheuncontrolledwill
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 partys (the
debtor) participation being reduced to the alternative to take it or leave it
(Quavs.LawUnion&RockInsuranceCo.,95Phil.85).Suchacontractis
averitabletrapfortheweakerpartywhomthecourtsofjusticemustprotect
againstabuseandimposition.
SameSameIncreaseofinterestrateTheincreasesimposedbyPNB
contraveneArt.1956oftheCivilCode.PNBssuccessiveincreasesofthe
interest rate on the private respondents loan, over the latters protest, were
arbitrary as they violated an express provision of the Credit Agreement
(Exh.1)Section9.01thatitstermsmaybeamendedonlybyaninstrument
inwritingsignedbythepartytobeboundasburdenedbysuchamendment.
TheincreasesimposedbyPNBalsocontraveneArt.1956oftheCivilCode
whichprovidesthat
538

538

SUPREMECOURTREPORTSANNOTATED
PhilippineNationalBankvs.CourtofAppeals

nointerestshallbedueunlessithasbeenexpresslystipulatedinwriting.

PETITIONforcertioraritoreviewthedecisionoftheCourtof
Appeals.
ThefactsarestatedintheopinionoftheCourt.
TheChiefLegalCounselforpetitioner.
AmbrosioPadilla,Mempin&ReyesLawOfficesforprivate
respondent.
GRIOAQUINO,J.:
ThePhilippineNationalBank(PNB)hasappealedbycertiorarifrom
thedecisionpromulgatedonJune27,1989bytheCourtofAppeals
in CAG.R. CV No. 09791 entitled, AMBROSIO PADILLA,
plaintiffappellant versus PHILIPPINE NATIONAL BANK,
defendantappellee, reversing the decision of the trial court which
haddismissedtheprivaterespondentscomplainttoannulinterest
increases.(p.32,Rollo.)TheCourtofAppealsrenderedjudgment:

x x x declaring the questioned increases of interest as unreasonable,

excessiveandarbitraryandorderingthedefendantappellee[PNB]torefund
totheplaintiffappellanttheamountofinterestcollectedfromJuly,1984in
excess of twentyfour percent (24%) per annum. Costs against the
defendantappellee.(pp.1415,Rollo.)

InJuly1982,theprivaterespondentappliedfor,andwasgrantedby
petitionerPNB,acreditlineofP1.8million,securedbyarealestate
mortgage,foratermoftwo(2)years,with18%interestperannum.
Private respondent executed in favor of the PNB a Credit
Agreement,two(2)promissorynotesintheamountofP900,000.00
each,andaRealEstateMortgageContract.
TheCreditAgreementprovidedthat
9.06 Other Conditions. The Borrowers hereby agree to be bound by the
rulesandregulationsoftheCentralBankandthecurrentandgeneralpolicies
of the Bank and those which the Bank may adopt in the future, which may
haverelationtoorinanywayaffecttheLine,
539

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539

PhilippineNationalBankvs.CourtofAppeals

whichrules,regulationsandpoliciesareincorporatedhereinbyreferenceas
ifsetforthhereininfull.Promptlyuponreceiptofawrittenrequestfromthe
Bank, the Borrowers shall execute and deliver such documents and
instruments, in form and substance satisfactory to the Bank, in order to
effectuateorotherwisecomplywithsuchrules,regulationsandpolicies.(p.
85,Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to

increase the stipulated 18% interest per annum within the limits
allowedbylawatanytimedependingonwhateverpolicyit[PNB]
mayadoptinthefutureProvided,that,theinterestrateonthisnote
shall be correspondingly decreased in the event that the applicable
maximuminterestrateisreducedbylaworbytheMonetaryBoard.
(pp.8586,Rolloitalicsours.)
TheRealEstateMortgageContractlikewiseprovidedthat:
(k)INCREASEOFINTERESTRATE
The rate of interest charged on the obligation secured by this mortgage
aswellastheinterestontheamountwhichmayhavebeenadvancedbythe
MORTGAGEE, in accordance with the provisions hereof, shall be subject
duringthelifeofthiscontracttosuchanincreasewithintherateallowedby
law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors.(p.86,Rolloemphasissupplied.)

Four (4) months advance interest and incidental expenses/ charges

were deducted from the loan, the net proceeds of which were
released to the private respondent by crediting or transferring the
amounttohiscurrentaccountwiththebank.

OnJune20,1984,PNBinformedtheprivaterespondentthat(1)
hiscreditlineofP1.8millionwillexpireonJuly4,1984,(2)[i]f
renewal of the line for another year is intended, please submit
soonest possible your request, and (3) the present policy of the
Bank requires at least 30% reduction of principal before your line
canberenewed.(pp.8687,Rollo.)Complying,privaterespondent
onJune25,1984,paidPNBP540,000.00(30%ofP1.8million)and
requestedthatthebalanceofP1,260,000.00berenewedforanother
periodoftwo(2)yearsunderthesamearrangementandthatthe
increase of the interest rate of my mortgage loan be from 18% to
21%(p.87,
540

540

SUPREMECOURTREPORTSANNOTATED
PhilippineNationalBankvs.CourtofAppeals

Rollo.)
OnJuly4,1984,privaterespondentpaidPNBP360,000.00.
On July 18, 1984, private respondent reiterated in writing his
requestthattheincreaseintherateofinterestfrom18%befixedat
21%of24%.(p.87,Rollo.)
On July 26, 1984, private respondent made an additional
paymentofP100,000.
OnAugust10,1984,PNBinformedprivaterespondentthatwe
cannotgiveduecoursetoyourrequestforpreferentialinterestrate
inviewofthefollowingreasons:ExistingLoanPoliciesofthebank
requires 32% for loan of more than one year Our present cost of
fundshassubstantiallyincreased.(pp.8788,Rollo.)
On August 17, 1984, private respondent further paid PNB
P150,000.00.
In a letter dated August 24, 1984 to PNB, private respondent
announced that he would continue making further payments, and
insteadofaloanofmorethanoneyear,Ishallpaythesaidloan
beforethelapseofoneyearorbeforeJuly4,1985.xxxIreiterate
my request that the increase of my rate of interest from 18% be
fixed at 21% or 24%. (p. 88, Rollo.) On September 12, 1984,
privaterespondentpaidPNBP160,000.00.
In letters dated September 12, 1984 and September 13, 1984,
PNB informed private respondent that the interest rate on your
outstandingline/loanisherebyadjustedfrom32%p.a.to41%p.a.
(35% prime rate + 6%) effective September 6, 1984 and further
explained why we can not grant your request for a lower rate of
21%or24%.(pp.8889,Rollo.)
InaletterdatedSeptember24,1984toPNB,privaterespondent
registeredhisprotestagainsttheincreaseofinterestratefrom18%
to 32% on July 4, 1984 and from 32% to 41% on September 6,
1984.
On October 15, 1984, private respondent reiterated his request
thattheinterestrateshouldnotbeincreasedfrom18%to32%and

from 32% to 41%. He also attached (as payment) a check for

P140,000.00.
Like rubbing salt on the private respondents wound, the
petitioner informed private respondent on October 29, 1984, that
theinterestrateonyouroutstandingline/loanishereby
541

VOL.196,APRIL30,1991

541

PhilippineNationalBankvs.CourtofAppeals

adjustedfrom41%p.a.to48%p.a.(42%primerateplus6%spread)
effective25October1984.(p.89,Rollo.)
In November 1984, private respondent paid PNB P50,000.00
thusreducinghisprincipalloanobligationtoP300,000.00.
OnDecember18,1984,privaterespondentfiledintheRegional
Trial Court of Manila a complaint against PNB entitled,
AMBROSIO PADILLA vs. PHILIPPINE NATIONAL BANK
(CivilCaseNo.8428391),prayingthatjudgmentberendered:
a. Declaringthattheunilateralincreaseofinterestratesfrom
18%to32%,thento41%andagainto48%areillegal,not
validnorbindingonplaintiff,andthatanadjustmentofhis
interestratefrom18%to24%isreasonable,fairandjust
b. TheinterestrateontheP900,000.00releasedonSeptember
27, 1982 be counted from said date and not from July 4,
1984
c. Theexcessofinterestpaymentcollectedbydefendantbank
by debiting plaintiffs current account be refunded to
plaintifforcreditedtohiscurrentaccount
d. Pending the determination of the merits of this case, a
restrainingorderand/orawritofpreliminaryinjunctionbe
issued(1)torestrainand/orenjoindefendantbankfor[sic]
collectingfromplaintiffand/ordebitinghiscurrentaccount
withillegalandexcessiveincreasesofinterestratesand(2)
topreventdefendantbankfromdeclaringplaintiffindefault
for nonpayment and from instituting any foreclosure
proceeding, extrajudicial or judicial, of the valuable
commercialpropertyofplaintiff.(pp.8990,Rollo.)
In its answer to the complaint, PNB denied that the increases in
interest rates were illegal, unilateral excessive and arbitrary and
recitedthereasonsjustifyingsaidincreases.
On March 31, 1985, the private respondent paid the P300,000
balanceofhisobligationtoPNBN(Exh.5).
ThetrialcourtrenderedjudgmentonApril14,1986,dismissing
thecomplaintbecausetheincreasesofinterestwereproperlymade.
The private respondent appealed to the Court of Appeals. On
June27,1989,theCourtofAppealsreversedthetrialcourt,hence,
PNBsrecoursetothisCourtbyapetitionforreviewunderRule45
oftheRulesofCourt.

TheassignmentsoferrorraisedinPNBspetitionforreviewcan
beresolvedintoasinglelegalissueofwhetherthebank,
542

542

SUPREMECOURTREPORTSANNOTATED
PhilippineNationalBankvs.CourtofAppeals

within the term of the loan which it granted to the private

respondent, may unilaterally change or increase the interest rate
stipulatedthereinatwillandasoftenasitpleased.
Theanswertothatquestionisno.
Inthefirstplace,althoughSection2,P.D.No.116ofJanuary29,
1973,authorizestheMonetaryBoardtoprescribethemaximumrate
orratesofinterestforloansorrenewalthereofandtochangesuch
rateorrateswheneverwarrantedbyprevailingeconomicandsocial
conditions, it expressly provides that such changes shall not be
madeoftenerthanonceeverytwelvemonths.
In this case, PNB, over the objection of the private respondent,
andwithoutauthorityfromtheMonetaryBoard,withinaperiodof
onlyfour(4)months,increasedthe18%interestrateontheprivate
respondents loan obligation three (3) times: (a) to 32% in July
1984 (b) to 41% in October 1984 and (c) to 48% in November
1984.Thoseincreaseswerenullandvoid,foriftheMonetaryBoard
itselfwasnotauthorizedtomakesuchchangesoftenerthanoncea
year,evenlesssomayabankwhichissubordinatetotheBoard.
Secondly, as pointed out by the Court of Appeals, while the
private respondentdebtor did agree in the Deed of Real Estate
Mortgage(Exh.5)thattheinterestratemaybeincreasedduringthe
lifeofthecontracttosuchincreasewithintherateallowedbylaw,
as the Board of Directors of the MORTGAGEE may prescribe
(Exh. 5e1) or within the limits allowed by law (Promissory
Notes, Exhs. 2, 3, and 4), no law was ever passed in July to
November 1984 increasing the interest rates on loans or renewals
thereofto32%,41%and48%(perannum),andnodocumentswere
executedanddeliveredbythedebtortoeffectuatetheincreases.The
CourtofAppealsobserved.
x x x We focus Our attention first of all on the agreement between the
parties as embodied in the following instruments, to wit: (1) Exhibit 1
Credit Agreement dated July 1, 1982 (2) Exhibit 2Promissory Note
datedJuly5,1982(3)Exhibit3PromissoryNotedatedJanuary3,1983
(4) Exhibit 4Promissory Note, dated December 13, 1983 and (5)
Exhibit5RealEstateMortgagecontractdatedJuly1,1982.
Exhibit1statesinitsportionmarkedExhibit1g1:
543

VOL.196,APRIL30,1991
PhilippineNationalBankvs.CourtofAppeals

543

9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulationsoftheCentralBankandthecurrentandgeneralpoliciesoftheBankand
thosewhichtheBankmayadoptinthefuture,whichmayhaverelationtoorinany
wayaffecttheLine,whichrules,regulationsandpoliciesareincorporatedhereinby
referenceasifsetforthhereininfull.Promptlyuponreceiptofawrittenrequestfrom
theBank,theBorrowersshallexecuteanddeliversuchdocumentsandinstruments,in
form and substance satisfactory to the Bank, in order to effectuate or otherwise
complywithsuchrules,regulationsandpolicies.

Exhibits2,3,and4intheirportionsrespectivelymarkedExhibits
2B, 3B, and 4B uniformly authorize the defendant bank to increase
the stipualted interest rte of 18% per annum 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 note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced
bylaworbytheMonetaryBoard.
Exhibit5initsportionmarkedExhibit5e1stipulates:
(k)INCREASEOFINTERESTRATE
Therateofinterestchargedontheobligationsecuredbythismortgageaswellas
theinterestontheamountwhichmayhavebeenadvancedbytheMORTGAGEE,in
accordancewiththeprovisionshereof,shallbesubjectduringthelifeofthiscontract
tosuchanincreasewithintherateallowedbylaw,astheBoardofDirectorsofthe
MORTGAGEEmayprescribeforitsdebtors.

Clearly,then,theagreementbetweenthepartiesauthorizedthedefendant
banktoincreasetheinterestratebeyondtheoriginalrateof18%perannum
butwithinthelimitsallowedbylaworwithintherateallowedbylaw,it
being declared the obligation of the plaintiff as borrower to execute and
deliver the corresponding documents and instruments to effectuate the
increase.(pp.1112,Rollo.)

In Banco Filipino Savings and Mortgage Bank vs. Navarro, 15

SCRA 346 (1987), this Court disauthorized the bank from raising
theinterestrateontheborrowersloanfrom12%to17%despitean
escalation clause in the loan agreement signed by the debtors
authorizingBancoFilipinotocorrespondinglyincreasetheinterest
ratestipulatedinthiscontractwithoutadvancenoticetome/usinthe
eventalawshouldbeenacted
544

544

SUPREMECOURTREPORTSANNOTATED
PhilippineNationalBankvs.CourtofAppeals

increasing the lawful rates of interest that may be charged on this

particularkindofloan.(italicssupplied.)
IntheBancoFilipino case, the bank relied on Section 3 of CB
CircularNo.494datedJuly1,1976(72O.G.No.3,p.676J)which
providedthatthemaximumrateofinterest,includingcommissions
premiums,feesandotherchargesonloanswithamaturityofmore
than730daysbybankinginstitutionxxxshallbe19%.

ThisCourtdisallowedtheincreaseforthesimplereasonthatsaid
Circular No. 494, although it has the effect of law is not a law.
Speaking through Mme. Justice Ameurfina M. Herrera, this Court
held:
It is now clear that from March 17, 1980, escalation clauses to be valid
should specifically provide: (1) that there can be an increase in interest if
increased by law or by the Monetary Board and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the
stipulatedinterestintheeventthattheapplicablemaximumrateofinterest
isreducedbylaworbytheMonetaryBoard.(p.111,Rollo.)

Inthepresentcase,thePNBreliedonitsownBoardResolutionNo.
681 (Exh. 10), PNB Circular No. 407984 (Exh. 13), and PNB
CircularNo.4012984(Exh.15),butthoseresolutionandcirculars
areneitherlawsnorresolutionsoftheMonetaryBoard.
CB Circular No. 905, Series of 1982 (Exh. 11) removed the
UsuryLawceilingoninterestrates
xxxincreasesininterestratesarenotsubjecttoanyceilingprescribedby
theUsuryLaw.

but it did not authorize the PNB, or any bank for that matter, to
unilaterallyandsuccessivelyincreasetheagreedinterestratesfrom
18% to 48% within a span of four (4) months, in violation of P.D.
116whichlimitssuchchangestoonceeverytwelvemonths.
Besides violating P.D. 116, the unilateral action of the PNB in
increasingtheinterestrateontheprivaterespondentsloan,violated
the mutuality of contracts ordained in Article 1308 of the Civil
Code:
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VOL.196,APRIL30,1991

545

PhilippineNationalBankvs.CourtofAppeals
ART.1308.Thecontractmustbindbothcontractingpartiesitsvalidityor
compliancecannotbelefttothewillofoneofthem.

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
assumingthattheP1.8millionloanagreementbetweenthePNBand
theprivaterespondentgavethePNBalicense(althoughinfactthere
wasnone)toincreasetheinterestrateatwillduringthetermofthe
loan,thatlicensewouldhavebeennullandvoidforbeingviolative
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
InsuranceCo.,95Phil.85).Suchacontractisaveritabletrapforthe
weakerpartywhomthecourtsofjusticemustprotectagainstabuse
andimposition.
PNBs successive increases of the interest rate on the private
respondents loan, over the latters protest, were arbitrary as they
violated an express provision of the Credit Agreement (Exh. 1)
Section9.01thatitstermsmaybeamendedonlybyaninstrument
in writing signed by the party to be bound as burdened by such
amendment. The increases imposed by PNB also contravene Art.
1956oftheCivilCodewhichprovidesthatnointerestshallbedue
unlessithasbeenexpresslystipulatedinwriting.
The debtor herein never agreed in writing to pay the interest
increasesfixedbythePNBbeyond24%perannum,hence,heisnot
boundtopayahigherratethanthat.
That an increase in the interest rate from 18% to 48% within a
period of four (4) months is excessive, as found by the Court of
Appeals,isindisputable.
WHEREFORE,findingnoreversibleerrorinthedecisionofthe
CourtofAppealsinCAG.R.CVNo.09791,theCourtresolvedto
denythepetitionforreviewforlackofmerit,with
546

546

SUPREMECOURTREPORTSANNOTATED
Peoplevs.Motar

costsagainstthepetitioner.
SOORDERED.
Narvasa(Chairman),Cruz,GancaycoandMedialdea,JJ.,
concur.
Petitiondenied.
Note.Both Article 2212 of the Civil Code and Sec. 5 of the
UsuryLawrefertostipulatedorconventionalinterestanddoesnot
apply where no interest was stipulated by the parties (Philippine
American Accident Insurance Company, Inc. vs. Flores, 97 SCRA
811.)
o0o

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