Vasquez v.

PNB
G.R. No. 228355, Aug 28, 2019
Caguioa, J.
Topic: Mutuality of Contracts

Facts: The main issue arose when PNB averred that Vasquez had no cause of action against the bank
because the purported increases in the interest rate in the loan agreements were freely, voluntarily,
and mutually agreed upon by the parties. Furthermore, the penalty charges imposed to Vasquez
were provided for in the Credit Agreement to which the former agreed and signed. The RTC
dismissed the Compliant of Vasquez. The CA modified the RTC’s decision. CA held that RTC was
correct in holding that Vasquez failed to discharge the burden of showing the obligation has already
been discharged. The CA held that the unilateral imposition of increased interest rates is violative of
the principle of mutuality of contracts and declared the same void. Hence, the CA imposed the
applicable legal rate of interest of 12% per annum. The CA also held that the penalty interest of 36%
is unconscionable. The penalty charge was reduced to 12% per annum.  Hence this case.

Issue: Whether the interest rates is one-sided.

Ruling: Yes, the loan agreement interest is clearly one-sided.

Considering the foregoing, without a doubt, the interest rate scheme imposed upon Vasquez under
the loan agreement is clearly one-sided, unilateral, and violative of one of the fundamental
characteristics of contracts — which is the essential equality of the contracting parties, oftentimes
called the principle of mutuality of contracts. Therefore, the interest rate scheme provided under
the Credit Agreement and the promissory notes is null and void.
The principle of mutuality of contracts is pronounced in Article 1308 of the Civil Code, which
states that a contract "must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them." The principle of mutuality of contracts dictates that a contract must be
rendered void when the execution of its terms is skewed in favor of one party.  As explained by
recognized Civil Law Commentator, former CA Justice Eduardo P. Caguioa, the reason for this
principle "is in order to maintain the enforceability of contracts, for otherwise the same would be
illusory." 
As applied to the imposition of monetary interest, the Court has held that "[t]here is no
mutuality of contracts when the determination or imposition of interest rates is at the sole
discretion of a party to the contract. Further, escalation clauses in contracts are void when they
allow the creditor to unilaterally adjust the interest rates without the consent of the
debtor."  Jurisprudence holds that provisions in a loan agreement that grant 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 reek of unilateral authority
that is anathema to the mutuality of contracts and enable lenders to take undue advantage of
borrowers. The rate of interest is a principal condition, if not the most important component, of a
loan agreement. Thus, "any modification thereof must be mutually agreed upon; otherwise, it has no
binding effect." 
In Security Bank Corp. v. Spouses Mercado,"[s]tipulations as to the payment of interest are
subject to the principle of mutuality of contracts. As a principal condition and an important
component in contracts of loan, interest rates are only allowed if agreed upon by express stipulation
of the parties, and only when reduced into writing. Any change to it must be mutually agreed upon,
or it produces no binding effect." 
Illustrative is the case of Sps. Limso v. Philippine National Bank. The said case, which also
features PNB, involved loan agreements that merely provided the imposition of interest rates.
However, the specific interest rates were not clearly stipulated in the loan documents. Subsequent
increases in the interest rates were made at the sole discretion of PNB. The Court held therein that
the interest rates were null and void and struck them down for being unreasonable and for being
violative of the principle of the mutuality of contracts, even if the debtors therein readily consented
to the arrangement. 
The exact same situation presented in the aforesaid case is present here. While providing
the payment of interest on the subject loans, the loan documents executed by the parties, on their
face, failed to fix the specific interest rates clearly and definitively to be applied on the subject loans.
Further, under the Credit Agreement, PNB reserved its unilateral right to increase or decrease the
interest rate, should PNB's cost of money to fund or maintain the loan change. Then, as proven by
the Statement of Account on record, subsequent increases in the monetary interest were
unilaterally made by PNB which were admittedly without notifying Vasquez beforehand. Hence, the
interest rates imposed by PNB in the instant case should be deemed null and void for being violative
of the principle of mutuality of contracts, even assuming arguendo that Vasquez intelligently
consented to the interest rates provisos found in the Credit Agreement and the other loan
documents.
Therefore, considering the foregoing discussion, the Court finds no error in the CA's finding
in the assailed Decision that the interest rate scheme imposed by PNB on Vasquez' loan obligation
was unilateral in nature, and, necessarily, null and void.