Case Digest: G.R. No. 173227.

January 20, 2009

Sebastian Siga-an, petitioner, vs. Alicia Villanueva, respondent.
Facts:
Respondent filed a complaint for sum of money against petitioner. Respondent claimed
that petitioner approached her inside the PNO and offered to loan her the amount of
P540,000.00 of which the loan agreement was not reduced in writing and there was no
stipulation as to the payment of interest for the loan. Respondent issued a check worth
P500,000.00 to petitioner as partial payment of the loan. She then issued another check
in the amount of P200,000.00 to petitioner as payment of the remaining balance of the
loan of which the excess amount of P160,000.00 would be applied as interest for the
loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay
additional interest and threatened to block or disapprove her transactions with the
PNO if she would not comply with his demand. Thus, she paid additional amounts in
cash and checks as interests for the loan. She asked petitioner for receipt for the
payments but was told that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to P1,200,000.00.
The RTC rendered a Decision holding that respondent made an overpayment of
her loan obligation to petitioner and that the latter should refund the excess amount to
the former. It ratiocinated that respondent’s obligation was only to pay the loaned
amount of P540,000.00, and that the alleged interests due should not be included in the
computation of respondent’s total monetary debt because there was no agreement
between them regarding payment of interest. It concluded that since respondent made
an excess payment to petitioner in the amount of P660,000.00 through mistake,
petitioner should return the said amount to respondent pursuant to the principle of
solutio indebiti. Also, petitioner should pay moral damages for the sleepless nights and
wounded feelings experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the public good, plus attorney’s
fees and costs of suit.

Issue:
(1) Whether or not interest was due to petitioner; and
(2) whether the principle of solutio indebiti applies to the case at bar.

Ruling:
(1) No. Compensatory interest is not chargeable in the instant case because it was not
duly proven that respondent defaulted in paying the loan and no interest was due on
the loan because there was no written agreement as regards payment of interest. Article
1956 of the Civil Code, which refers to monetary interest, specifically mandates that
no interest shall be due unless it has been expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and (2) the agreement
for the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of monetary interest. Thus, we have held that
collection of interest without any stipulation therefor in writing is prohibited by law.

(2) Petitioner cannot be compelled to return the alleged excess amount paid by
respondent as interest. Under Article 1960 of the Civil Code, if the borrower of loan
pays interest when there has been no stipulation therefor, the provisions of the Civil
Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if something is
received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship
is created under a quasi-contract whereby the payor becomes the creditor who then
has the right to demand the return of payment made by mistake, and the person who
has no right to receive such payment becomes obligated to return the same. The quasi-
contract of solutio indebiti harks back to the ancient principle that no one shall enrich
himself unjustly at the expense of another. The principle of solutio indebiti applies
where (1) a payment is made when there exists no binding relation between the payor,
who has no duty to pay, and the person who received the payment; and (2) the payment
is made through mistake, and not through liberality or some other cause. We have held
that the principle of solutio indebiti applies in case of erroneous payment of undue
interest.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent to pay interest and
threatened to block her transactions with the PNO if she would not pay interest. This
forced respondent to pay interest despite lack of agreement thereto. Thus, the award
of exemplary damages is appropriate so as to deter petitioner and other lenders from
committing similar and other serious wrongdoings.
State Investment House, Inc. v. CA
GR No. 90676 June 19, 1991

Facts: Private respondents Spouses Rafael & Refugia Aquino pledged certain shares of
stock to petitioner to secure a loan. Prior to the execution of such pledge, respondents,
agreed with the petitioner for the latter's purchase of receivables from Spouses Jose and
Marcelina Aquino. Respondent spouses paid their loan partly from their own money
and from the proceeds of a new loan secured by the same pledge. Upon maturity of the
new loan, petitioner demanded payment. Respondents expressed willingness to pay
requesting that upon payment the shares of stocks pledged be released. Petitioner
denied the request on the ground that the loan extended to Jose & Marcelina had
remained. Respondent sued the petitioner. The trial judge ruled in their favor. During
execution, the petitioner refused to accept payment demanding that interests be paid.

Issue: Are the respondents liable for payment of interest even without mora? If they
are liable, on what rate should the interests be?

Held: On the first issue, yes. The respondents may not be in default in view of their
expressed willingness to pay the same upon demand and the refusal of the petitioner to
accept. However, their tender of payment should have been properly consigned with
the court. On the second issue, since respondent spouses were held not to have been in
delay, they were properly liable only for the principal of the loan and the stipulated
regular or monetary interest of 17% per annum. They were not liable for penalty or
compensatory interest, fixed by the promissory note in Account No. IF-82-0904-AA at
two percent (2%) per month or twenty-four (24%) per annum. It must be stressed that
the appropriate measure for damages in case of delay in discharging an obligation
consisting of the payment of a sum or money, is the payment of penalty interest at the
rate agreed upon; and in the absence of a stipulation of a particular rate of penalty
interest, then the payment of additional interest at a rate equal to the regular monetary
interest; and if no regular interest had been agreed upon, then payment of legal interest
or six percent (6%)per annum, or in the case of loans or forbearances of money, 12 %
per annum as provided for in Central Bank Circular No. 416.
Medel vs Court of Appeals, 299 SCRA 481; GR No. 131622, November 27, 1998
(Credit Transactions – Loans, Usury Law, Interest Rates)
Facts:
Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in
2 months and executed a promissory note. Plaintiff gave only the amount of P47, 000.00
to the borrowers and retained P3, 000.00 as advance interest for 1 month at 6% per
month.
Defendants obtained another loan from Defendant in the amount of P90, 000.00,
payable in 2 months, at 6% interest per month. They executed a promissory note to
evidence the loan and received only P84, 000.00 out of the proceeds of the loan.
For the third time, Defendants secured from Plaintiff another loan in the amount
of P300, 000.00, maturing in 1 month, and secured by a real estate mortgage. They
executed a promissory note in favor of the Plaintiff. However, only the sum of P275,
000.00, was given to them out of the proceeds of the loan.
Upon maturity of the three promissory notes, Defendants failed to pay the
indebtedness.
Defendants consolidated all their previous unpaid loans totalling P440, 000.00,
and sought from Plaintiff another loan in the amount of P60, 000.00, bringing their
indebtedness to a total of P50,000.00. They executed another promissory note in favor
of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest per month plus 2%
service charge per annum, with an additional amount of 1% per month as penalty
charges.
On maturity of the loan, the Defendants failed to pay the indebtedness which
prompt the Plaintiffs to file with the RTC a complaint for collection of the full amount
of the loan including interests and other charges.
Declaring that the due execution and genuineness of the four promissory notes
has been duly proved, the RTC ruled that although the Usury Law had been repealed,
the interest charged on the loans was unconscionable and “revolting to the conscience”
and ordered the payment of the amount of the first 3 loans with a 12% interest per
annum and 1% per month as penalty.
On appeal, Plaintiff-appellants argued that the promissory note, which
consolidated all the unpaid loans of the defendants, is the law that governs the parties.
The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that
the Usury Law has become legally inexistent with the promulgation by the Central
Bank in 1982 of Circular No. 905, the lender and the borrower could agree on any
interest that may be charged on the loan, and ordered the Defendants to pay the
Plaintiffs the sum of P500,000, plus 5.5% per month interest and 2& service charge per
annum , and 1% per month as penalty charges.
Defendants filed the present case via petition for review on certiorari.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500,
000.00 is usurious.

Held: No.
A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is
excessive, iniquitous, unconscionable and exorbitant, but it cannot be considered
“usurious” because Central Bank Circular No. 905 has expressly removed the interest
ceilings prescribed by the Usury Law and that the Usury Law is now “legally
inexistent.”

Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another law.
Jurisprudence provides that CB Circular did not repeal nor in a way amend the
Usury Law but simply suspended the latter’s effectivity (Security Bank and Trust Co vs
RTC). Usury has been legally non-existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon.

Law: Article 2227, Civil Code

The courts shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.

>>>>>>>>>>>>>>>
The SC agree with petitioners that the stipulated rate of interest at 5.5% per
month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant.
However, SC cannot consider the rate "usurious" because it has consistently held that
Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly
removed the interest ceilings prescribed by the Usury Law and that the Usury Law is
now "legally inexistent".
In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch
61 the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the
Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a
Central Bank Circular cannot repeal a law. Only a law can repeal another law." In the
recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that "by
virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has
been legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon."
Nevertheless, SC find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or unconscionable,
and, hence, contrary to morals ("contra bonos mores"), if not against the law. The
stipulation is void. The courts shall reduce equitably liquidated damages, whether
intended as an indemnity or a penalty if they are iniquitous or unconscionable.
Consequently, the Court of Appeals erred in upholding the stipulation of the
parties. Rather, we agree with the trial court that, under the circumstances, interest at
12% per annum, and an additional 1% a month penalty charge as liquidated damages
may be more reasonable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905,
nothing in the said circular could possibly be read as granting carte blanche authority
to lenders to raise interest rates to levels which would either enslave their borrowers
or lead to a haemorrhaging of their assets (Almeda vs. CA, 256 SCRA 292 [1996]).
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND
MERCANTILE INSURANCE COMPANY, INC., respondents.
VITUG, J.:
FACTS:
 This is an action against defendants shipping company, arrastre operator and
broker-forwarder for damages sustained by a shipment while in defendants'
custody, filed by the insurer-subrogee who paid the consignee the value of such
losses/damages.
 The losses/damages were sustained while in the respective and/or successive
custody and possession of defendants carrier (Eastern), arrastre operator (Metro
Port) and broker (Allied Brokerage).
 As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants.
DECISION OF LOWER COURTS:
 trial court: ordered payment of damages, jointly and severally
 CA: affirmed trial court.

ISSUES:
(a) whether or not a claim for damage sustained on a shipment of goods can be a
solidary, or joint and several, liability of the common carrier, the arrastre operator and
the customs broker;
(b) whether the payment of legal interest on an award for loss or damage is to be
computed from the time the complaint is filed or from the date the decision appealed
from is rendered; and
(c) whether the applicable rate of interest, referred to above, is twelve percent (12%)
or six percent (6%).

RULING:
(a.) YES, it is solidary. Since it is the duty of the ARRASTRE to take good care of the
goods that are in its custody and to deliver them in good condition to the consignee,
such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the
CARRIER are therefore charged with the obligation to deliver the goods in good
condition to the consignee.

The common carrier's duty to observe the requisite diligence in the shipment of
goods lasts from the time the articles are surrendered to or unconditionally placed in
the possession of, and received by, the carrier for transportation until delivered to, or
until the lapse of a reasonable time for their acceptance by, the person entitled to
receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646;
Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are
lost or arrive in damaged condition, a presumption arises against the carrier of its failure
to observe that diligence, and there need not be an express finding of negligence to hold
it liable.

(b) FOLLOW THESE VERY IMPORTANT RULES (GUIDANCE BY THE SUPREME

COURT)
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.

(c) SIX PERCENT (6%) on the amount due computed from the decision, dated 03
February 1988, of the court a quo (Court of Appeals) AND A TWELVE PERCENT
(12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon
finality of the Supreme Court decision until the payment thereof.

RATIO: when the judgment awarding a sum of money becomes final and executory,
the monetary award shall earn interest at 12% per annum from the date of such finality
until its satisfaction, regardless of whether the case involves a loan or forbearance of
money. The reason is that this interim period is deemed to be by then equivalent to a
forbearance of credit.

NOTES: the Central Bank Circular imposing the 12% interest per annum applies only
to loans or forbearance of money, goods or credits, as well as to judgments involving
such loan or forbearance of money, goods or credits, and that the 6% interest under the
Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations
in general. Observe, too, that in these cases, a common time frame in the computation
of the 6% interest per annum has been applied, i.e., from the time the complaint is filed
until the adjudged amount is fully paid.
DARIO NACAR, PETITIONER, vs. GALLERY FRAMES AND/OR FELIPE BORDEY,
JR., RESPONDENTS.
G.R. No. 189871 August 13, 2013
FACTS
On January 24, 1997, Dario Nacar got dismissed by his employer, Gallery Frames.
He filed a complaint; the Labor Arbiter ruled that petitioner was dismissed without just
cause. A computation for the separation pay and back wages were made it amounted to
Php 158,919.92. The respondent sought appeal to the NLRC, CA and Supreme Court,
but they were all dismissed, thus the judgment became final on April 17, 2002.
During the execution of the final judgment, the petitioner filed a motion for the
re-computation of the damages. The amount previously computed includes the
separation pay and back wages up to the time of his dismissal. The petitioner argued
that the damages should cover the period until the date of final judgment. A re-
computation was made and the damages was increased to 471,320.31. Respondent
prayed for the quashal of such motion on the ground that the judgment made by the
SC is already final and the amount should not be further altered.
Petitioner also filed another motion asking the court to order the respondent to
pay the appropriate legal interest of the damages from the date of final judgment until
full payment.
ISSUES
1. Whether or not a subsequent correction of the damages awarded during the final
judgment of the Supreme Court violates the rule on immutability of judgments.
2. Whether or not the re-computation made by the Labor Arbiter is correct.
3. Whether or not appropriate interests may be claimed by the petitioner.
RULING
1. Whether or not a subsequent correction of the damages awarded during the final
judgment of the Supreme Court violates the rule on immutability of judgments.
The Supreme Court ruled that a correction in the computation of the damages
does not violate the rule on immutability of judgments. The final decision made by the
Supreme Court to award the petitioner with damages with regards to the dismissal
without justifiable cause can be divided into two important parts. One is the finding
that an illegal dismissal was indeed made. And the other is the computation of damages.
According to a previous case of Session Delights Ice Cream and Fast Foods v. Court of
Appeals, the Supreme Court held that the second part of the decision - being merely a
computation of what the first part of the decision established and declared - can, by its
nature, be re-computed. The re-computation of the consequences of illegal dismissal
upon execution of the decision does not constitute an alteration or amendment of the
final decision being implemented. The illegal dismissal ruling stands; only the
computation of monetary consequences of this dismissal is affected, and this is not a
violation of the principle of immutability of final judgments.

2. Whether or not the re-computation made by the Labor Arbiter is correct.

The Supreme Court believes that the amount of 471,320.31 as damages is correct.
According to Article 279 of the Labor Code, reliefs in case of illegal dismissal continue
to add up until its full satisfaction. The original computation clearly includes damages
only up to the finality of the labor arbiter's decision. Therefore, the Supreme Court
approves the decision confirming that a re-computation is necessary. The labor arbiter
re-computed the award to include the separation pay and the back wages due up to the
finality of the decision that fully terminated the case on the merits.

3. Whether or not appropriate interests may be claimed by the petitioner.

The Supreme Court ruled that the petitioner shall be entitled to interest. In the
case of Eastern Shipping Lines, Inc. v. Court of Appeals, among the guidelines laid down
by the Supreme Court regarding the manner of computing legal interest is - when the
judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest shall be 12% per annum from such finality until its satisfaction. In
addition to this, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013 declared that the rate of interest for the loan or
forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of an express contract as to such rate of interest, shall be six percent (6%) per
annum. Consequently, the twelve percent (12%) per annum legal interest shall apply
until June 30, 2013. Afterwards, the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable.
The respondent was ordered to pay interest of twelve percent (12%) per annum
of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and six
percent (6%) per annum from July 1, 2013 until their full satisfaction.
Sps. Juico v. China Banking Corp. | G.R. No. 187678 | April 10, 2013 | Villarama, Jr., J
Summary: Sps. Juico obtained a P10, 355, 000 loan from China Bank, evidenced by
promissory notes (which provided that interest may change monthly, depending on the
prevailing market rate), secured by REM. They failed to pay the monthly amortizations
so the mortgaged property was sold. CBC demanded for the payment o the deficiency
as the indebtedness of Juico had ballooned to P19, 201, 776.63 already (taking into
account interest which varied monthly from 15%-24.5%). SC held that while there is
nothing inherently wrong with escalation clauses per se, an escalation clause "which
grants the creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an important
modification in the agreement" is nevertheless void. Here, the escalation clause is void
because it grants respondent the power to impose an increased rate of interest without
a written notice to petitioners and their written consent.
Facts:
 Sps. Ignacio and Alice Juico, obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes both dated October 6, 1998 for
Php 6,216,000 and Php 4, 139,000, secured by a Real Estate Mortgage over their
White Plains property.
 Sps. Juico failed to pay the monthly amortizations due so CBC demanded the full
payment of the outstanding balance with accrued monthly interests (interests
varying from 15% to as high as 24.5% such that the total indebtedness ballooned to
P 19, 201, 776.63).
 The mortgaged property was sold at public auction, with CBC as highest bidder for
the amount of P10,300,000.
 May 8, 2001, Sps. Juico received a demand letter from CBC for the payment of
P8,901,776.63, the amount of deficiency after applying the proceeds of the
foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent
filed a collection suit in the trial court.
 Sps. Juico admitted the existence of the debt but averred that the complaint states no
cause of action considering that the principal of the loan was already paid when the
mortgaged property was extrajudicially foreclosed.
 Annabelle Yu, CBC’s Senior Loans Assistant who handled the account of Sps. Juico,
testified that the interest rate changes every month based on the prevailing market
rate and she notified petitioners of the prevailing rate by calling them monthly
before their account becomes past due.
 Ignacio Juico admitted that prior to the release of the loan, he was required to sign a
blank promissory note and was informed that the interest rate on the loan will be
based on prevailing market rates. He further testified that he is a Doctor of Medicine
 and admitted having read the promissory notes and that he is aware of his obligation
under them before he signed the same.
 RTC ruled in favor of CBC. CA affirmed. The CA recognized respondent’s right to
claim the deficiency from the debtor where the proceeds of the sale in an
extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt.
Also, it found as valid the stipulation in the promissory notes that interest will be
based on the prevailing rate. It noted that the parties agreed on the interest rate
which was not unilaterally imposed by the bank but was the rate offered daily by all
commercial banks as approved by the Monetary Board. Having signed the
promissory notes, the CA ruled that petitioners are bound by the stipulations
contained therein.
Issue: WoN the interest rates imposed by CBC are valid? NO.
Sps. Juico contend that the interest rates imposed by respondent are not valid as they
were not by virtue of any law or BSP regulation. They insist that the interest rates were
unilaterally imposed by the bank.
SC: The appeal is partly meritorious.
 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.
 Escalation clauses refer to stipulations allowing an increase in the interest rate agreed
upon by the contracting parties. There is nothing inherently wrong with escalation
clauses which are valid stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money in long term contracts. Hence, such
stipulations are not void per se.
 Nevertheless, an escalation clause "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of
the right to assent to an important modification in the agreement" is void. A
stipulation of such nature violates the principle of mutuality of contracts.
 Here, the escalation clause is void because it grants respondent the power to impose
an increased rate of interest without a written notice to petitioners and their written
consent. Respondent’s monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing statement based on the
new imposed interest with corresponding computation of the total debt should have
been provided by the respondent to enable petitioners to make an informed decision.
An appropriate form must also be signed by the petitioners to indicate their
 conformity to the new rates. Compliance with these requisites is essential to preserve
the mutuality of contracts.
 Modifications in the rate of interest for loans pursuant to an escalation clause must
be the result of an agreement between the parties. Unless such important change in
the contract terms is mutually agreed upon, it has no binding effect. In the absence
of consent on the part of the petitioners to the modifications in the interest rates, the
adjusted rates cannot bind them.
 Any interest in excess of 15% (the interest rate imposed on the first year) is invalid.
Disposition: Petition PARTLY GRANTED. Assailed decision MODIFIED. Sps. Juico
ORDERED to pay jointly and severally respondent China Banking Corporation P4, 7
61 ,865. 79.
CONCURRING OPINION
SERENO, J.:
 Not all escalation clauses in loan agreements are void per se. It is actually 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." Given the
fluctuating economic conditions, practical reasons allow banks to stipulate that
interest rates on a loan will not be fixed and will instead depend on market
conditions. Note that there should always be a reference rate upon which to peg such
variable interest rates.
 It is not enough to state, as akin to China Bank's provision, that the bank may
increase or decrease the interest rate in the event a law or a Central Bank regulation
is passed, that spells a vague condition.
 These points must be considered by creditors and debtors in the drafting of valid
escalation clauses:
o Firstly, as a matter of equity and consistent with P.O. No. 1684, the escalation
clause must be paired with a de-escalation clause.
o Secondly, so as not to violate the principle of mutuality, the escalation must be
pegged to the prevailing market rates, and not merely make a generalized
reference to "any increase or decrease in the interest rate" in the event a law or
a Central Bank regulation is passed.
o Thirdly, consistent with the nature of contracts, the proposed modification
must be the result of an agreement between the parties.
G.R. No. 171925 : July 23, 2010
SOLIDBANK CORPORATION, (now Metroplolitan Bank and Trust Company),
Petitioner, vs. PERMANENT HOMES, INCORPORATED, Respondent.
FACTS:
The records disclose that PERMANENT HOMES is a real estate development
company, and to finance its housing project known as the “Buena Vida Townhome”
located within Merville Subdivision, Parañaque City, it applied and was subsequently
granted by SOLIDBANK with an “Omnibus Line” credit facility in the total amount of
SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as time loan for a
term of up to three hundred sixty (360) days, with interest thereon at prevailing market
rates, and subject to monthly repricing. The remaining ONE MILLION was available
for domestic bills purchase.
To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three(3)
townhouse units within the Buena Vida project in Parañaque. At the time, however,
the instant complaint was filed against SOLIDBANK, a total of thirty six (36)
townhouse units were mortgaged with said bank. Of the 60 million available to
PERMANENT HOMES, it availed of a total of 41.5 million pesos covered by three(3)
promissory notes. There was a standing agreement by the parties that any increase or
decrease in interest rates shall be subject to the mutual agreement of the parties.
For the three loan availments that PERMANENT HOMES obtained, the herein
respondent argued that SOLIDBANK unilaterally and arbitrarily accelerated the
interest rates without any declared basis of such increases, of which PERMANENT
HOMES had not agreed to, or at the very least, been informed of.
On July 5, 2002, the trial court promulgated its Decision in favor of Solidbank.
Permanent then filed an appeal before the appellate court which was granted, in which
reversed and set aside the assailed decision dated July 5, 2002. Hence, the present
petition.
ISSUES: (1) WON the Honorable Court of Appeals was correct in ruling that the
increases in the interest rates on Permanent’s loans are void for having been
unilaterally imposed without basis.
(2) WON the Honorable Court of Appeals was correct in ordering the parties to enter
into an express agreement regarding the applicable interest rates on Permanent’s loan
availments subsequent to the initial thirty-day (30) period.
RULING: (1) Yes. Although interest rates are no longer subject to a ceiling, the lender
still does not have an unbridled license to impose increased interest rates. The lender
and the borrower should agree on the imposed rate, and such imposed rate should be
in writing of which was not provided by petitioner.
(2) Yes. 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 quality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties is
void. There was no showing that either Solidbank or Permanent coerced each other to
enter into the loan agreements. The terms of the Omnibus Line Agreement and the
promissory notes were mutually and freely agreed upon by the parties.