ARTICLE 1306.

AUTONOMY OF WILL

NO. Obligations arising from contracts have the force of law between the parties and should be complied with in good faith.
The law stresses the obligatory nature of a binding and valid agreement. The provision limiting liability for defects and fixing
Golangco v. PNB TCGI ccepted the turnover of the completed work by WGCC
specific guaranty periods was not only fair and equitable but also necessary.
Any defect therein should have been brought to WGCC's attention within the one-year defects liability period in the
Stipulations are the law Issue : W/N WGCC is liable for defects in the granittite wash-out finish that occurred after the
contract.
between the parties lapse of the one-year defects liability period
There were no hidden defects.
Contract should not be interpreted to favor the one who caused the confusion, if any.

CA correctly found that the interest rate imposed was unconscionable and should be reduced to the interest rate of 12%
5% interest rate per month is excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the law = VOID
AB INITIO and CONTRARY TO Art. 1306
Castro v. TAN 30,000.00 loan by her husband which she paid after his death
Freedom to Contract is not absolute. Still subject to reasonabl legislative regulation aimed at the promotion of public health,
Interest rate of 60% p.a. (5% per month), compounded monthly
morals, safety, and welfare
IR was unconscionable Extrajuidicial foreclosure proceedings on their property
Being void = non-existent from the very beginning = the debt to be considered without the stipulation of the iniquitous and
= no correct amount of
unconscionable interest rate.
debt Issue : W/N the interest rate is unconscionable
Proper to be given the opportunity to repay the REAL amount of their indebtedness.
x correct amount of debt = x foreclosure proceedings may be instituted
No stipulation on liquidated damages = cannot be imposed

Mallari v. Prudential
300,000.00 loan with IR of 21% p.a.
Bank The IR agreed upon by the parties is only 23% p.a. or less than 2% per month = NOT UNCONSCIONABLE
1.7M loan with IR of 23% p.a.
Borrowers cannot renege on their obligation to comply with what is incumbent upon them under the contract of loan as said
23% per annum interest contract is the law between the parties and they are bound by its stipulation
Issue: W/N the 23% IR p.a. and 12% p.a. penalty charge on the 1.7M laon is excessive or
rate is not Jurisprudence established that 24% p.a. was not considered unconscionable
unconscionable
unconscionable

ARTICLE 1308. MUTUALITY OF CONTRACTS/CONTRACT OF ADHESION

Sps. Fernandez obtained a loan from PNB for 50,000.00

Under the PN, the loan was to be amorized over a period of 3 years at 12% p.a. interest
Credit Agreement : The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the future. xxx or
PNB v. CA Decreased in the event that the applicable maximum interest is reduced by law or by the
Monetary Board.
Contract of Adhesion. In any case, the adjustment in the IR agreed upon shall take effect on the effectivity date
Violated the Element of of the increase or decrease in the maximum interest rate.
Mutuality of Contracts PN = Authorized PNB to raise the IR, at any time, WITHOUT NOTICE, beyond the stipulated
12% but only WITHIN THE LIMITS ALLOWED BY LAW
PNB increase it to 25% p.a. and then to 30% and to 42%
Issue : Unilateral increases by PNB
In making the unilateral increases, PNB relied on the ESCALATION CLAUSE
They agreed to adjust upward or downward, the interest previously stipulated. However, the said law and circular DID NOT
AUTHORIZE either party to unilaterally raise the interest rate without the other's consent.
If the assent is wanting on the part of one of the parties, his act has no efficacy than if it had been done under duress by a
person of unsound mind.
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.
ANY CHANGE must be MUTUALLY agreed upon, otherwise, it is bereft of any binding effect.
Unilateral right to make changes = negate the element of mutuality of contracts
No estoppel to assail the unilateral increases in the IR made by PNB. His silence cannot be construed as an acceptance

Allied Banking leased the property of Sps. Tanqueco for 14 years.
Tanqueco spouses executed a Deed of Donation and notified Allied Banking that they were no
Allied Banking v. CA longer interested in renewing the lease.
The contract may be renewed for a like term at the option of the lessee
Sole option of the Allied Banking replied exercising its option to renew the lease under the same terms with
lessee to renew the additional proposals. Allied asserted its sole option to renew the lease
contract Allied vacated the property while the case was pending in the RTC.
Issue : Sole option of the lessee for renewal
The basic intention of the law in any contract is mutuality and equality. The validity of the contract cannot be left at the will
of one of the contracting parties. The ultimate purpose is to render void a contract containing a condition which makes it
fulfillment dependent solely upon the controlled will of one of the contracting parties.
Express agreement which gives the lessee the sole option to renew the lease DOES NOT render it void for lack of
mutuality. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with
the same faculties in respect to fulfillment.
FOR A LIKE TERM = refers to the period which is 14 years "implies a renewal upon the same terms as provided in the
original lease"
In case of uncertainty, the tenant is the one favored and not the landlord
Allied cannot assail the validity of the donation, not being a party thereto.
Renewed lease DEEMED terminated when Allied vacated the property

1,000,000.00 loan from Metrobank + REM Requisites for reformation : 1)There must be a meeting of the minds upon the contract 2)The instrument does not express
Floirendo Jr. v. PNB PNs : 15.446% p.a. for the first 30 days, subject to upward/downward adjustment every 30 the true agreement 3)Failure must not be due to mistake, fraud, inequitable conduct or accident
days thereafter + penalty charge of 18% p.a. + may be increased/decreased by Bank without Unilateral imposition by Metrobank of the increases in IR are violative of the principle of mutuality of contracts
Reformation was advance notice in the event of changes in the IR prescribed by law or the Monetary Board Two settled principles : 1)That obligations arising from contracts have the force of law between the contracting parties 2)
proper. PNB cannot Metrobank started imposing higher IRs which VARIED through the months = Petitioner could That there must be mutuality between the parties based on their essential equality to which is repugnant to have one party
unilaterally increase the no longer pay the high IRs so he negotiated for the renewal of his loan. bound by the contract leaving the other free therefrom
IR without the Metrobank initiated foreclosure proceedings. Floreindo filed a complaint for reformation, There can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the
knowledge and consent claiming that it was a contract of Adhesion parties
of Floirendo Contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet
Issue : Validity of the escalation clause as to the propose modificaion, especially when it affects an important aspect of the agreement.

Juico obtained loan in 6,216,000 and 4,139,000 secured by REM ; Juico was a Doctor
Ms. Annabelle Yu called Sps. Juico monthly to inform them of the prevailing rates to be used
Juico v. China Banking in computing the interest of their loan
YU : Interest rate changes every month based on the prevailing rate and she notified Sps.
When Escalation Clause Juico by calling them.
is Valid and when it is On written authority from Sps. Juico to increase the interest rate unilaterally : The PNs
Void indicated that Sps. Juico agreed to pay interest at the prevailing rate
Issue : Are the IRs valid?
Escalation Clause : stipulations allowing an increase in the IR agreed upon by the contracting parties. Not void per
se but an Escalation Clause which grants to 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.
The adjustment should have been subjected to the mutual agreement of the contracting parties.
Escalation clause which required a written notice to and conformity by the borrower to the increase interest rate is valid
No indiation that Sps. Juico were coerced into agreeing with the foregoing provisions of the promissory notes. But,
Escalation Clause is still void because it grants China Banking the power to impose increased rate of interest without a
written notice to petitioners and their written consent
Modification must be the result of agreement between the parties

Credit Agreement : The loan would be subjected to interest at a rate determined by the BANK to be its prime rate plus
PNB v. Manalo Sps. Manalo loaned 1,000,000.00 secured by REM
appicable spread, prevailing at the current month. Unilateral Determination of the IR contravened the principle of
Sps. Manalo were surprised to find out that the 1M was not used to update their account nor
mutuality of contracts
Unilateral declaration of that their loan was not restructured nor converted into a long-term loan
No mutuality = Contract of Adhesion + NO ESTOPPEL to assail the unilateral increase in the interest rates.
IRs contravened the
Credit Agreement explicitly provided that prior notice was necessary before PNB coulrd increase the IRs. Failing to do so
principle of mutuality of Issue : Failure of PNB to specify the applicable interest rate and the lack of mutuality in the
= PNB also violated the contract stipulations
Contracts execution of credit agreements
The varying IRs imposed by PNB have to be vacated and declared null and void, and 12% p.a. shall be imposed

Jonsay v. Solid Bank Momarco obtained 40M and 20M loans from Solidbank. Consolidated under one PN with
A uniform clause in the PNs permitted Solidbank to increase the rate within the limits allowed by law at any time depending
stipulated IR of 18.75% per annum, along with an escalation clause. Solidbank eventually
on whatever policy it may adopt in the future, without even giving prior notice to petitioners.
Disregarded the unilaterally increased the interest charges up to 30% p.a.
One-sided impositions do not have the force of law between the parties, because such impositions are not based on the
unilaterally escalated Extrajudicial Foreclosure. RTC ruled that it was a Contract of Adhesion where Solidbank failed
parties' essential equality.
IRs and imposed the to take into account the payments made by Momarco.
Lifting on ceiling under the Usury Law does not grant lenders the carte blanche authority to raise IRs to levels which will
mutually agreed
either enslave their borrowers or lead to a hemorrhaging of their assets.
stipulated rates Issue : Increases in the IR

2 settled principles
Any modification or change must be made with the consent of the contracting parties, and must be mutually agreed upon.
Credit line to Sps. Rodrigo in the amount of 1,000,000.00
Otherwise, it has no binding effect.
7. Interest on Availments - at a rate p.a. determined from time to time by Security Bank and
Security Bank v. Sps. IRs are only allowed if agreed upon by express stipulation of the parties, and only when reduced into writing. Any change to
advised through my Statement of Account every month
Rodrigo it must be mutually agreed upon, or it produces no binding effect.
17. Late Payment Charges - 2% per month
Floating Rate of Interest refer to the variable interest rate stated on a market-based reference rate agreed upon by the
Addendum : I give my continuing consent without need of additional confirmation to the interest
Escalation Clause v. parties. Refer to interest rate itself that is not fixed.
stipulated as computed by SBC.
Floating Rate of Interest Violated the Principle on Mutuality of Contracts:
1)Authority to change the IR was given to SBC alone, without the need of written assent of Sps. Mercado
Issue : The IR provisions in the agreement violate the principle of mutuality of contracts
2)The IR to be imposed is determined solely by SBC for lack of a stated, valid reference rate. SB's prevailing lending rate is
NOT synonymous with "prevailing market rate".