SPOUSES EDUARDO & LYDIA SILOS v.

PHILIPPINE NATIONAL
BANK
G.R. No. 181045, 2 July 2014, SECOND DIVISION, (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.

Spouses Eduardo and Lydia Silos secureda 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 a
19.5% 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 PNs, 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’
26thPN 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 be

made with the consent of the contracting parties. The minds of all the parties must
meet as to the proposed modification, especially when it affects an important aspect
of the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component.

UST Law Review, Vol. LIX, No. 1, May 2015

 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.

UST Law Review, Vol. LIX, No. 1, May 2015