SPOUSES EDUARDO and LYDIA SILOS vs PHILIPPINE NATIONAL BANK

G.R. No. 181045, July 2, 2014

FACTS:
Spouses Eduardo and Lydia Silos have been in the business for about two decades of operating
a department store and buying and selling of ready-to-wear apparel. Respondent PNB is a
banking corporation organized and existing under Philippine laws.
Spouses Silos secured a revolving credit line with Philippine National Bank (PNB) through a real
estate mortgage as a security. After two years, their credit line increased. Spouses Silos then
signed a Credit Agreement which was also amended two years later, and several Promissory
Notes (PN) as regards their Credit Agreements with PNB. The said loan was initially subjected to
a19.5% interest rate per annum. In the Credit Agreements, Spouses Silos bound themselves to
the power of PNB to modify the interest rate depending on whatever policy that PNB may adopt
in the future, without the need of notice upon them. Thus, the said interest rates played from 16%
to as high as 32% per annum. Spouses Silos acceded to the policy by pre-signing a total of
twenty-six (26) PNs leaving the individual applicable interest rates at hand blank since it would be
subject to modification by PNB. Spouses Silos regularly renewed and made good on their
promissory notes, religiously paid the interests without objection or fail. However, during the 1997
Asian Financial Crisis, Spouses Silos faltered when the interest rates soared. Spouses Silos 26th
Promissory Note became past due, and despite repeated demands by PNB, they failed to make
good on the note. Thus, PNB foreclosed and auctioned the involved security for the mortgage.
Spouses Silos instituted an action to annul the foreclosure sale on the ground that the succeeding
interest rates used in their loan agreements was left to the sole will of PNB, the same fixed by the
latter without their prior consent and thus, void. The Regional Trial Court (RTC) ruled that such
stipulation authorizing both the increase and decrease of interest rates as may be applicable is
valid. The Court of Appeals (CA) affirmed the RTC decision.

ISSUE:
May the bank, on its own, modify the interest rate in a loan agreement without violating
the mutuality of contracts?

RULING:
No.
 Any modification in the contract, such as the interest rates, must bemade with the
consent of the contracting parties. The minds of all the parties must meet as to the proposed
modification, especially when it affects an important aspect of the agreement. In the case of loan
agreements, the rate of interest is a principal condition, if not the most important component.
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 struck 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