Silvano, Czarina Audrey T.

3LM2

Case Digest

January 27, 2016 G.R. No. 158622

SPOUSES ROBERT ALAN L. and NANCY LEE LIMSO, Petitioners, vs. PHILIPPINE NATIONAL BANK and THE
REGISTER OF DEEDS OF DAVAO CITY, Respondents.

Summary of Facts: In 1993, Sps. Limso and Davao Sunrise took out a loan secured by real estate mortgages from
Philippine National Bank amounting to P700 Million. The loan contract was subsequently restructured on January
1999. The provision under their loan contract on the interest rate states that the same shall be determined "at
the rate per annum to be set by the Bank. The interest rate shall be reset by the Bank every month." The Sps. and
Davao Sunrise were notified through a letter that the interest rate approved by the top management of PNB is
20.756% and as of December 1998, the interest on the loan amounted to P217 Million. However, due to their
financial difficulties and despite repeated demands by PNB, Sps. Limso and Davao Sunrise failed to pay their debt.
The Sps. and Davao Sunrise files a complaint in court praying for the declaration of nullity of unilateral imposition
and increases of interest rates.

Issue: Whether the provision under the loan contract regarding the unilateral imposition and increases of interest
rates violates the principle of mutuality of contract.

Held: Yes. The SC held that the provision violates the principle of mutuality of contract. The SC held that the
interest on the principal loan obligation shall be at the rate of 12% per annum and computed from January 28,
1999, the date of the execution of the Conversion, Restructuring and Extension Agreement. Interest rate on the
conventional interest shall be at the rate of 12% per annum from the date of judicial demand, to June 30, 2013.
From July 1, 2013 until full satisfaction, the interest rate on the conventional interest shall be computed at 6% per
annum in view of this court's ruling in Nacar v. Gallery Frames. According to the SC, there was no mutuality of
contract between the parties since the interest rates imposed were based on the sole discretion of Philippine
National Bank. Further, the escalation clauses in the real estate mortgage "[did] not specify a fixed or base
interest[.]" Thus, the interest rates are invalid. The principle of mutuality of contracts is stated in Article 1308 of
the Civil Code as follows:

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

The importance of the principle of mutuality of contracts was discussed in Juico v. China Banking Corporation:
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. 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 Court of
Appeals also noted that since the interest rates imposed were at the sole discretion of Philippine National Bank,
and that Spouses Limso and Davao Sunrise were merely notified when there were changes in the interest rates,
Philippine National Bank violated the principle of mutuality of contracts.
 Critique

I agree with the decision of the Supreme Court that the interest rate imposed by Philippine National Bank is in
violation of the mutuality of contracts. As mentioned in the case, 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 the case at bar, it was found that the restricting agreement provided for the terms that the interest rate shall
be “at the rate per annum to be set by the Bank. The interest rate shall be reset by the Bank every month.” These
rates were then sent by the bank through notices to which Petitioner spouses had no chance to negotiate the
terms. This term positioned the bank in an extremely advantageous position over the Spouses as it was solely up
to them to determine the interest rate which led to an exorbitant amount of approximately 217 million pesos in
interest alone. I am in the position that the bank should not take advantage of the dire circumstances of its clients
in order to get the upper hand and though banks are businesses, the interest rates should still be contained within
the legal parameters of the law. Should stipulations in the likes of this be allowed by the Courts, imbalance and
injustice would surely ensue.