REYNALDO P. FLOIRENDO, JR. v.

METROPOLITAN BANK and TRUST COMPANY

G.R. No. 148325, September 3, 2007

FACTS: Reynaldo P. Floirendo, Jr., petitioner, is the president and chairman of the Board of Directors of Reymill
Realty Corporation, a domestic corporation engaged in real estate business. He obtained a loanofP1,000,000.00
from the Metropolitan Bank and Trust Company to infuse additional working capital for his company. As security,
he executed a real estate mortgage over his four (4) parcels of land. The loan was renewed for another year
secured by the same real estate mortgage. Petitioner signed a promissory note fixing the rate of interest at
"15.446% per annum for the first 30 days, subject to upward/downward adjustment every 30 days thereafter" and
a penalty charge of 18% per annum "based on any unpaid principal to be computed from date of default until
payment of the obligation." The bank started imposing higher interest rates on petitioner’s loan which varied
through the months and as a result, petitioner could no longer pay the high interest rates charged by the bank.
Thus, he negotiated for the renewal of his loan. Respondent bank agreed provided petitioner would pay the
arrears in interest. Despite payment by petitioner, the bank, instead of renewing the loan, filed a petition for
foreclosure of mortgage which was granted.

Prior thereto or on August 11, 1998, petitioner filed with the RTC, Branch 39, same city, a complaint for
reformation of real estate mortgage contract and promissory note, docketed as Civil Case No. 98-476. Referring to
the real estate mortgage and the promissory note as "contracts of adhesion," petitioner alleged that the increased
interest rates unilaterally imposed by respondent bank are scandalous, immoral, illegal and unconscionable. He
also alleged that the terms and conditions of the real estate mortgage and the promissory note are such that they
could be interpreted by respondent bank in whatever manner it wants, leaving petitioner at its mercy. Petitioner
thus prayed for reformation of these documents and the issuance of a temporary restraining order (TRO) and a
writ of preliminary injunction to enjoin the foreclosure and sale at public auction of his four (4) parcels of land.

In its Answer, the bank asserted that the interest stipulated by the parties in the promissory note is not per annum
but on a month to month basis. That the interest appearing therein was good only for the first 30 days of the loan,
subject to upward and downward adjustment every 30 days thereafter. The terms of the real estate mortgage and
promissory note voluntarily entered into by petitioner are clear and unequivocal. There is, therefore, no legal and
factual basis for an action for reformation of instruments. The RTC dismissed the complaint for reformation of
instruments, dissolved the writ of preliminary injunction and directed the sale at public auction of petitioner’s
mortgaged properties.

The RTC ruled that in order that an action for reformation of an instrument may prosper, the following requisites
must occur:

1.) There must have been a meeting of the minds upon the contract;

2.) The instrument or document evidencing the contract does not express the true agreement between the parties;
and

3.) The failure of the instrument to express the agreement must be due to mistake, fraud, inequitable conduct or
accident.

The court was convinced that there was certainly a meeting of the minds between the parties. Plaintiff and
defendant bank entered into a contract of loan, the terms and conditions of which, especially on the rates of
interest, are clearly and unequivocally spelled out in the promissory note. The court believes that there was
absolutely no mistake, fraud or anything that could have prevented a meeting of the minds between the parties.
As to the validity of the escalation clause, the RTC held that escalation clauses are valid stipulations in commercial
contract to maintain fiscal stability and to retain the value of money in loan term contracts, and hence, the bank is
allowed to impose the interest rate questioned by plaintiff of which defendant bank is very clear that the rate of
interest is 15.446% per annum for the first 30 days subject to upward/downward adjustment every 30 days
thereafter. As to the validity of the foreclosure of the real estate mortgage, the RTC ruled that it is a settled rule
that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose
the mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the
obligation.

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

RULING: No. The Court held 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 Code
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. The provision in
the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the
rate of interest and/or bank charges "without advance notice" to petitioner, "in the event of change in the interest
rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give respondent
bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly
upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence
of mutuality of the contract. It has the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it.”

Moreover, 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. Here, the rate increases are excessive and arbitrary. It bears reiterating that respondent bank
unilaterally increased the interest rate without petitioner's knowledge and consent.

As mentioned earlier, petitioner negotiated for the renewal of his loan. As required by respondent bank, he paid
the interests due. Respondent bank then could not claim that there was no attempt on his part to comply with his
obligation. Yet, respondent bank hastily filed a petition to foreclose the mortgage to gain the upperhand in taking
petitioner's four (4) parcels of land at bargain prices. Obviously, respondent bank acted in bad faith.

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.
ANG YU ASUNCION v. CA

G.R. No. 109125, December 2, 1994

FACTS: A complaint for Specific Performance was filed by Ang Yu Asuncion et al., against Bobby Cu Unjieng and
Jose Tan. The plaintiffs were tenants or lessees of residential and commercial spaces owned by defendants in
Binondo. On several conditions defendants informed the plaintiffs that they are offering to sell the premises and
are giving them priority to acquire the same.

During negotiations, Cu Unjieng offered a price of P6- million while plaintiffs made a counter of offer of P5-million.
Plaintiff thereafter asked the defendants to put their offer in writing to which the defendants acceded. In reply to
defendants’ letter, plaintiffs wrote, asking thatthey specify the terms and conditions of the offer to sell. When the
plaintiffs did not receive any reply, they sent another letter with the same request. Since defendants failed to
specify the terms and conditions of the offer to sell and because of information received that the defendants were
about to sell the property, plaintiffs were compelled to file the complaint to compel defendants to sell the
property to them.

Judgment was rendered in favor of the Unjiengs and against the petitioners summarily dismissing the complaint
subject to the aforementioned condition that if the defendants subsequently decide to offer their property for sale
for a purchase price of P11M or lower, then the petitioners has the option to purchase the property or of first
refusal, otherwise, defendants need not offer the property to the petitioners if the purchase price is higher than
P11M. While the case was pending consideration by the SC, the Unjieng spouses executed a Deed of Sale to Buen
Realty as the new owner. Buen Realty wrote a letter to the Petitioners demanding that the latter vacate the
premises. In its reply, it stated that Buen Realty and Development Corporation brought the property subject to the
notice of lis pendens. The lessees filed a Motion for Execution. The court ruled in favor of the petitioners and
ordered the defendants are hereby ordered to execute the necessary Deed of Sale of the property in litigation in
favor of plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of P15 Million pesos in
recognition of plaintiffs' right of first refusal and that a new Transfer Certificate of Title be issued in favor of the
buyer and ruled that the issuance of another title to Buen Realty Corporation, has been executed in bad faith.

ISSUE: Whether or not Buen Realty can be bound by the writ of execution by virtue of the notice of lis pendens.

RULING: No. Right of first refusal is not a perfected contract of sale under Article 1458 of the Civil Code In the law
on sales, the so-called “right of first refusal” is an innovative juridical relation.

In a right of first refusal, while the object might be made determinate, the exercise of the right, however, would be
dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with another but
also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best be so
described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other
laws of general application, the pertinent scattered provisions of the Civil Code on human conduct (Law on Human
Relations under Arts. 19-21 of the Civil Code).

The proper action for violation of the right of first refusal is to file an action for damages and NOT writ of execution
The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a “right of first refusal” in
favor of petitioners (Ang Yu et. al). The consequence of such a declaration entails no more than what has
heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private
respondents to honor the right of first refusal, the remedy is not a writ of execution on the judgment, since there is
none to execute, but an action for damages in a proper forum for the purpose.
An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed,
can be obligatory on the parties, and compliance therewith may accordingly be exacted. On the other hand, an
accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract
of option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the
Civil Code:

Art. 1479. . . . An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price.

Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a
bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their
respective undertakings.

Buen Realty cannot be ousted from the ownership and possession of the property Furthermore, whether private
respondent Buen Realty Development Corporation, the alleged purchaser of the property, has acted in good faith
or bad faith and whether or not it should, in any case, be considered bound to respect the registration of the lis
pendens in Civil Case No. 87-41058 are matters that must be independently addressed in appropriate proceedings.
Buen Realty, not having been impleaded in Civil Case No. 87-41058, cannot be held subject to the writ of execution
issued by respondent Judge, let alone ousted from the ownership and possession of the property, without first
being duly afforded its day in court.