FLORIENDO V METROBANK

ISSUE: Whether the mortgage contract and the promissory note express the true agreement
between the parties herein.

RULING:

Petitioner contends that the "escalation clause" in the promissory note imposing 15.446% interest
on the loan "for the first 30 days subject to upward/downward adjustment every 30 days
thereafter" is illegal, excessive and arbitrary. The determination to increase or decrease such
interest rate is primarily left to the discretion of respondent bank.

We agree.

We hold that the increases of interest rate unilaterally imposed by respondent bank without
petitioner’s assent are violative of the principle of mutuality of contracts ordained in Article 1308
of the Civil Code3 which provides:

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

The binding effect of any agreement between the parties to a contract is premised on two settled
principles: (1) that obligations arising from contracts have the force of law between the
contracting parties; and (2) that there must be mutuality between the parties based on their
essential equality to which is repugnant to have one party bound by the contract leaving the other
free therefrom.4 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.
In sum, we find that the requisites for reformation of the mortgage contract and promissory note
are present in this case. There has been meeting of minds of the parties upon these documents.
However, these documents do not express the parties’ true agreement on interest rates. And the
failure of these documents to express their agreement on interest rates was due to respondent
bank’s inequitable conduct.

NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) AND

SPOUSES EDUARDO R. DEE AND ARCELITA M. DEE, PETITIONERS, VS.
PHILIPPINE NATIONAL BANK, RESPONDENT.

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.

We ruled that while it is true that escalation clauses are valid in maintaining fiscal stability and
retaining the value of money on long term contracts, however, giving respondent an unbridled
right to adjust the interest independently and upwardly would completely take away from
petitioner the right to assent to an important modification in their agreement, hence, would
negate the element of mutuality in their contracts. Such escalation clause would make the
fulfillment of the contracts dependent exclusively upon the uncontrolled will of respondent bank
and is therefore void. In the present case, the promissory note gives respondent bank authority to
increase the interest rate at will during the term of the loan. This stipulation violates the principle
of mutuality between the parties. It would be converting the loan agreement into a contract of
adhesion where the parties do not bargain on equal footing, the weaker party’s (petitioner’s)
participation being reduced to the alternative "to take it or leave it.9 While the Usury Law ceiling
on interest rate was lifted by Central Bank Circular No. 905, nothing therein could possibly be
read as granting respondent bank carte blanche authority to raise interest rate to levels which
would either enslave its borrower (petitioner herein) or lead to hemorrhaging of his assets.

PHIL. SAVINGS BANK v CASTILLO

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 account’s 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.

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 Navarro19 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.1avvphi1

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.