INTEREST CASES (CREDS TO ALL AUTHORS)

CASTELO vs. CA (244 SCRA 180)

FACTS: October 15, 1982 – Petitioners Castelo et. Al entered into a contract of “Deed of Conditional Sale” with
respondent de la Rosa involving a parcel of land. The agreed price of the land was P269,408.00. Upon signing the
contract, private respondent paid petitioners P106,000.00 leaving a balance of P163,408.00. The Deed also stipulated
that the balance be paid on or before Dec. 31, 1982 without interest and penalty. If the said balance remain unpaid the
vendors agree to give the vendee a grace period of 6 mos to pay said balance. Provided that interest at the rate of 12%
per annum shall be charged and 1% penalty charge a month shall be imposed on the remaining diminishing balance.
Respondent de la Rosa was unable to pay the remaining balance.

On July 29, 1983 - Petitioners filed an action for specific performance with damages in the RTC. REGIONAL TRIAL COURT
ordered the ordered the rescission of the Deed of Conditional Sale. Petitioners went on Certiorari to the COURT OF
APPEALS questioning the RTC’s decision rescinding the contract. They claimed that rescission was only an alternative
remedy available under the Civil Code, they only asked for specific performance with damages. The COURT OF APPEALS
annulled and set aside the RTC’s decision. The Writ of Certiorari was granted allowing the amendment of the complaint
to conform to the evidence already presented and ordering the defendant to comply with her obligation under the
conditional sale to pay the balance, interest and in default, rescission is the remedy left. Petitioners filed for a motion of
execution then the writ of execution was issued requiring de la Rosa to pay P197,723.68).

Petitioners filed a MOTION FOR RECONSIDERATION contending that the sum was erroneous. They argued that the
obligation of private respondent was to pay (a) interest at the rate of twelve percent (12%) per annum plus (b) one
percent (1%) penalty charge per month, from default, i.e. from 1 January 1983. The amount to be paid by the Defendant
should be P398,814.88

The trial court DENIED the motion. The trial court stated that it did not have authority to enlarge the scope of the
dispositive portion of the CA’s decision. The trial court said that the phrase "to pay interest" found in the dispositive
portion of the Court of Appeals' November 21, 1986 decision did not refer to the stipulation in the "Deed of Conditional
Sale" but rather to the legal rate of interest imposed by the Court of Appeals which started to run from February 12,
1987, the date of entry of judgment.

Petitioners again moved for reconsideration without success. Then appealed to CA but dismissed for lack of merit.
Hence, this petition for review contending that the CA erred in ignoring the stipulation for payment of interest in case of
default found in the "Deed of Conditional Sale."

ISSUE: What is the correct interpretation of the phrase “to pay interest” set out in the dispositive portion of the CA’s
decision.

HELD: The established doctrine is that when the dispositive portion of a judgment, which has become final and
executory, contains a clerical error or an ambiguity arising from an inadvertent omission, such error or ambiguity may be
clarified by reference to the body of the decision itself.

SC believe and so hold that the phrase “to pay interest,” found in the dispositive portion of the CA decision must, under
applicable law, refer to the interest stipulated by the parties in the Deed of Conditional Sale which they had entered into
on 15 October 1982. SC notes, in the first place, that the phrase “to pay interest” comes close upon the heels of the
preceding phrase "to comply with her obligation under the conditional sale to pay the balance — of P163,408.00." A
strong inference thus arises that the "interest" required to be paid is the interest stipulated as part of the “obligation [of
private respondent dela Rosa] under the conditional sale [agreement] to pay the balance of [the purchase price of the
land.

In the computation for the amount to be paid, The question is whether, during the period of 1 January 1983 up to 30
June 1983, 12% interest per annum plus 1% penalty charge a month was payable "on the remaining diminishing
balance;" or whether during the period from 1 January 1983 to 30 June 1983, only 12% per annum interest was payable
while the 1% per month penalty charge would in addition begin to accrue on any balance remaining unpaid as of 1 July
1983.

SC believed the parties intended the latter view. The interpretation SC adopted is also supported by the principle that in
case of ambiguity in contract language, that interpretation which establishes a less onerous transmission of rights or
imposition of lesser burdens which permits greater reciprocity between the parties, is to be adopted (Art. 1378).

LIAM LAW vs. OLYMPIC SAWMILL CO., (129 SCRA 439; 1984)

Obligations and Contracts: Usurious Transactions – Article 1175

FACTS: On or about September 7, 1957, the petitioner loaned P10,000.00, without interest, to the respondent. The loan
became ultimately due on January 31, 1960 but was not paid. The petitioner asked for a 3-month extension, or up to
April 30, 1960. On March 17, 1960, the parties executed another loan document for the payment of P10, 000.00
extended up to April 30, 1960 but the obligation was increased by P6,000.00 to answer for the attorney’s fees, legal
interest, and other cost incident thereto. The petitioner again failed to pay their obligation by April 30, 1960. On
September 23, 1957, the respondent instituted a collection case. The petitioner admitted the P10, 000.00 principal
obligation but claimed that the additional P6, 000.00 constituted usurious interest.

ISSUE: Whether or not the additional P6, 000.00 constituted usurious interest.

HELD: No. Usury has been legally non-existent. Interest can now be charged as lender and borrower may agree upon.
In the present case, the petitioner had not proven that the P6, 000.00 additional obligation was illegal.

DARIO NACAR vs. GALLERY FRAMES AND/OR FELIPE BORDEY, JR. (G.R. No. 189871; August 13, 2013)

FACTS: Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey, Jr. Nacar alleged that he was
dismissed without cause by Gallery Frames on January 24, 1997. On October 15, 1998, the Labor Arbiter (LA) found
Gallery Frames guilty of illegal dismissal hence the Arbiter awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay.

Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme Court affirmed the decision of the Labor
Arbiter and the decision became final on May 27, 2002.

After the finality of the SC decision, Nacar filed a motion before the LA for recomputation as he alleged that his
backwages should be computed from the time of his illegal dismissal (January 24, 1997) until the finality of the SC
decision (May 27, 2002) with interest. The LA denied the motion as he ruled that the reckoning point of the computation
should only be from the time Nacar was illegally dismissed (January 24, 1997) until the decision of the LA (October 15,
1998). The LA reasoned that the said date should be the reckoning point because Nacar did not appeal hence as to him,
that decision became final and executory.
ISSUE: Whether or not the Labor Arbiter is correct.

HELD: No. There are two parts of a decision when it comes to illegal dismissal cases (referring to cases where the
dismissed employee wins, or loses but wins on appeal). The first part is the ruling that the employee was illegally
dismissed. This is immediately final even if the employer appeals – but will be reversed if employer wins on appeal. The
second part is the ruling on the award of backwages and/or separation pay. For backwages, it will be computed from the
date of illegal dismissal until the date of the decision of the Labor Arbiter. But if the employer appeals, then the end date
shall be extended until the day when the appellate court’s decision shall become final. Hence, as a consequence, the
liability of the employer, if he loses on appeal, will increase – this is just but a risk that the employer cannot avoid when
it continued to seek recourses against the Labor Arbiter’s decision. This is also in accordance with Article 279 of the
Labor Code.

Anent the issue of award of interest in the form of actual or compensatory damages, the Supreme Court ruled that the
old case of Eastern Shipping Lines vs CA is already modified by the promulgation of the Bangko Sentral ng Pilipinas
Monetary Board Resolution No. 796 which lowered the legal rate of interest from 12% to 6%. Specifically, the rules on
interest are now as follows:

1. Monetary Obligations ex. Loans:

a. If stipulated in writing:

a.1. shall run from date of judicial demand (filing of the case)

a.2. rate of interest shall be that amount stipulated

b. If not stipulated in writing

b.1. shall run from date of default (either failure to pay upon extra-judicial demand or upon
judicial demand whichever is appropriate and subject to the provisions of Article 1169 of the
Civil Code)

b.2. rate of interest shall be 6% per annum

2. Non-Monetary Obligations (such as the case at bar)

a. If already liquidated, rate of interest shall be 6% per annum, demandable from date of judicial or
extra-judicial demand (Art. 1169, Civil Code)

b. If unliquidated, no interest

Except: When later on established with certainty. Interest shall still be 6% per annum demandable from
the date of judgment because such on such date, it is already deemed that the amount of damages is
already ascertained.

3. Compounded Interest

– This is applicable to both monetary and non-monetary obligations

– 6% per annum computed against award of damages (interest) granted by the court. To be computed from the
date when the court’s decision becomes final and executory until the award is fully satisfied by the losing party.

4. The 6% per annum rate of legal interest shall be applied prospectively:

– Final and executory judgments awarding damages on or after July 1, 2013 shall apply the 12% rate for unpaid
obligations until June 30, 2013; unpaid obligations with respect to said judgments on or after July 1, 2013 shall
still incur the 6% rate.

SPOUSES ANDAL vs. PNB (G.R. No. 194201)

FACTS: Sept. 7, 1995, petitioners obtained a loan from respondent bank (P21.8M) for which 12 promissory notes were
executed, with varying interest rates (17.5-27%). It was agreed that the rate of interest may be increased or decreased
with prior notice to the petitioners in the event of changes in interest rates prescribed by law or the Monetary Board.

Petitioners also executed a real estate mortgage in favor of the respondent bank over 5 parcels of lands, including all
improvements thereon, covered by Transfer of Certificate Titles of the Registry of Deeds.

Respondent bank advised petitioners to pay their loan, otherwise they would declare it due and demandable.
Petitioners paid P14.8M to avoid foreclosure. Respondent bank executed a release of real estate mortgage over two of
the parcels of land. Despite payment, respondent foreclosed the remaining real estate mortgage over the remaining
three parcels of land.

A public auction sale resulted in respondent bank as the winning bidder. A Certificate of sale of the properties was
issued.

Petitioners filed a complaint for annulment of mortgage, sheriff’s certificate of sale, declaration of nullity of the
increased interest rates and penalty charges plus damages.

CONTENTION OF THE PETITIONERS:

1. They tried to pay their loan obligation but the exorbitant rate of interest unilaterally determined and imposed
by the respondent bank.

2. They signed the promissory notes in blank, relying on the representation that they were bank requirements

3. The exobrbitant and unilateral interest rates are a form of unjust enrichment, giving respondent

4. The bank no right to foreclose the mortgages

RTC Ruling: In favor of petitioners, ordering that the rate of interest be reduced to 6% in accordance with Art. 2209, NCC
and declaring the foreclosure sales as void.

CA Ruling: Affirmed the RTC decision with the modification that the interest be 12% per annum instead of 6%.
Stipulations in a contract have the force of law between the parties so long as they are not contrary to law, morals, etc.
Since parties expressly stipulated in the promissory notes that a rate of interest would be applied, the petitioners are
bound thereby.

The CA finds it more credible that the petitioners had signed blank promissory notes which respondent bank had filled
with high interest rates. This violates the principle of mutuality of contracts. Since the interest rates in the promissory
notes are void, the rate of interest should be 12% (since what is involved is a loan or forebearance of money).
Petitioners-spouses insist that "if the application of the doctrine of operative facts is upheld, as applied in Caraig vs.
Alday, interest in the instant case would be computed only from the finality of judgment declaring the foreclosure sale
null and void. If Mercado vs. China Banking Corporation, applying by analogy the rule on void usurious interest to void
potestative interest rate, is further sustained, no interest is due when the potestative interest rate stipulation is declared
null and void, as in the instant case.

ISSUES: Whether interest should be imposed on the loan.

RULING: Yes. The petitioners had agreed to payment of interest on their loan obligation. The subsequent declaration
that the rate of interest was illegal does not entitle them to stop payment of interest. Only the rate was declared void,
but the stipulation requiring them to pay interest remains valid and binding. They are liable to pay interest from the time
they defaulted until the obligation is fully paid.

Petition is DENIED and the CA decision is AFFIRMED with the MODIFICATION that the 12% interest per annum shall be
applied from the date of default until June 30, 2013, after which date and until fully paid, the obligation shall earn
interest at 6% per annum.

FIRST UNITED CONSTRUCTORS CORP. AND BLUE STAR CONSTRUCTION CORPORATION vs. BAYANIHAN AUTOMOTIVE
CORPORATION (G.R No. 164985 January 15, 2014)

FACTS: Petitioners First United Constructors Corporation andBlue Star Construction Corporation were associate
construction firms sharing financial resources, equipment and technical personnel on a case-to-case basis. From May 27,
1992 to July 8, 1992, they ordered six units of dump trucks from the respondent .On September 19, 1992, FUCC ordered
from the respondent one unit of Hino Prime Mover and ordered again on September 29, 1992, one unit of Isuzu Transit
Mixer. For the two purchases, FUCC partially paid in cash, and the balance through post-dated checks. Upon
presentment of the checks for payment, the respondent learned that FUCC had ordered the payment stopped. The
respondent immediately demanded the full settlement of their obligation from the petitioners, but to no avail. The
petitioners informed the respondent that they were withholding payment of the checks due to the breakdown of one of
the dump trucks they had earlier purchased from respondent. The petitioners submit that they were justified in stopping
the payment of the two checks due to the respondent’s breach of warranty by refusing to repair or replace the defective
second dump truck earlier purchased.

ISSUE: Whether or not the petitioners can validly exercise the right of recoupment through the withholding of payment
of the unpaid balance of the purchase price.

HELD: No, Petitioners could not validly resort to recoupment against respondent. Recoupment (reconvencion) is the act
of rebating or recouping a part of a claim Defendants-appellants’ act of ordering the payment on the prime mover and
transit mixer stopped was improper considering that the said sale was a different contract from that of the dump trucks
earlier purchased by defendants-appellants. The claim of defendants-appellants for breach of warranty is therefore not
a proper subject of recoupment since it does not arise out of the contract or transaction sued on or the claim of plaintiff-
appellee for unpaid balances on the last two (2) purchases. Recoupment must arise out of the contract or transaction
upon which the plaintiff’s claim is founded. To be entitled to recoupment, therefore, the claim must arise from the same
transaction. That there was a series of purchases made by petitioners could not be considered as a single transaction.
FLORANTE VITUG vs. EVANGELINE ABUDA (G.R. No. 201264)

GR No. 201264, January 11, 2016

FACTS: Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug. As security or the loan, Vitug mortgaged to
Abuda his property. The property was then subject of a Conditional contract to Sell between the National Housing
Authority and Vitug. That, upon consummation and completion of the sale by the NHA of said property, the title-award
thereof, shall be received by the Mortgagee by virtue of a Special Power of Attorney, executed by Mortgagor in her
favor. The parties executed a restructured mortgage contract on the property to secure the amount of P600,000.00
representing the original P250,000.00 loan, additional loans, and subsequent credit accommodations given by Abuda to
Vitug with an interest of 5% per month. By then, the property was covered by transfer certificate of title under Vitug’s
name. Spouses Vitug failed to pay their loans despite Abuda’s demands.

Abuda filed a complaint for foreclosure of Property before the Regional Trial Court of Manila. On December 19, 2008,
the Regional Trial Court promulgated a Decision in favor of Abuda. On appeal, the RTC ruled in favor of Abuda and
ordered Vitug to pay the principal sum with interest and upon default of the defendant to fully pay the aforesaid sums,
the subject mortgaged property shall be sold at a public auction to pay off the mortgage debt. The RTC judgement was
affirmed by the CA, with the modification as to the payment of interest, since the CA found the interest rate between
the parties unconscionable.

ISSUE: W/N The interest rates were unconscionable.

HELD: The Court of Appeals correctly found that the interest rates of 5% or 10% per month imposed on petitioner's loan
were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the implementation of the
Usury Law ceiling on interest effective January 1, 1983. The freedom to stipulate interest rates is granted under the
assumption that we have a perfectly competitive market for loans where a borrower has many options from whom to
borrow. It assumes that parties are on equal footing during bargaining and that neither of the parties has a relatively
greater bargaining power to command a higher or lower interest rate. It assumes that the parties are equally in control
of the interest rate and equally have options to accept or deny the other party's proposals. In other words, the freedom
is granted based on the premise that parties arrive at interest rates that they are willing but are not compelled to take
either by force of another person or by force of circumstances.

However, the premise is not always true. There are imperfections in the loan market. One party may have more
bargaining power than the other. A borrower may be in need of funds more than a lender is in need of lending them. In
that case, the lender has more commanding power to set the price of borrowing than the borrower has the freedom to
negotiate for a lower interest rate. Hence, there are instances when the state must step in to correct market
imperfections resulting from unequal bargaining positions of the parties. Article 1306 of the Civil Code limits the
freedom to contract to promote public morals, safety, and welfare.

In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor unconscionable. Iniquitous or
unconscionable interest rates are illegal and, therefore, void for being against public morals. The lifting of the ceiling on
interest rates may not be read as "grant[ing] lenders carte blanche [authority] to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets."

Voluntariness of stipulations on interest rates is not sufficient to make the interest rates valid. In Castro v. Tan, The
imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral
and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any
reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere
of public or private morals.

Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary power to equitably
reduce it if it is later found to be iniquitous or unconscionable. Courts approximate what the prevailing market rate
would have been under the circumstances had the parties had equal bargaining power. An interest rate is not inherently
conscionable or unconscionable. Interest rates become unconscionable in light of the context in which they were
imposed or applied.

SPS. SALVADOR AND ALMA ABELLA, vs. SPS. ROMEO ABELLA ANNIE ABELLA, (G.R. No. 195166)

FACTS: On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint for sum of money and damages
with prayer for preliminary attachment against respondents Spouses Romeo and Annie Abella before the Regional Trial
Court, Branch 8, Kalibo, Aklan. In their Complaint, petitioners alleged that respondents obtained a loan from them in the
amount of P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and was payable
within one (1) year. Petitioners added that respondents were able to pay a total of P200,000.00, leaving an unpaid
balance of P300,000.00. In their Answer (with counterclaim and motion to dismiss), respondents alleged that the
amount involved did not pertain to a loan they obtained from petitioners but was part of the capital for a joint venture
involving the lending of money. In the Decision dated December 28, 2005, the Regional Trial Court ruled in favor of
petitioners. It noted that the terms of the acknowledgment receipt executed by respondents clearly showed that: (a)
respondents were indebted to the extent of P500,000.00; (b) this indebtedness was to be paid within one (1) year; and
(c) the indebtedness was subject to interest. Thus, the trial court concluded that respondents obtained a simple loan,
although they later invested its proceeds in a lending enterprise. The Regional Trial Court adjudged respondents
solidarily liable to petitioners. The Court of Appeals noted that while the acknowledgement receipt showed that interest
was to be charged, no particular interest rate was specified. Thus, at the time respondents were making interest
payments of 2.5% per month, these interest payments were invalid for not being properly stipulated by the parties.

ISSUE: Whether or not interest accrued on respondents’ loan from petitioners. If so, at what rate?

HELD: Yes, interest accrued on respondents’ loan. Article 1956 of the Civil Code spells out the basic rule that "no interest
shall be due unless it has been expressly stipulated in writing." The controversy, however, stems from the
acknowledgment receipt’s failure to state the exact rate of interest. Jurisprudence is clear about the applicable interest
rate if a written instrument fails to specify a rate. In Spouses Toring v. Spouses Olan, this court clarified the effect of
Article 1956 of the Civil Code and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance
of money, according to the Civil Code, the interest due should be that stipulated in writing, and in the absence thereof,
the rate shall be 12% per annum." The Monetary Board, in its Resolution No. 796 (May 16, 2013), approved the
following revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982. Thus, from the foregoing, in the absence of an express stipulation as to the
rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per but will now be six percent (6%)
per annum effective July 1, 2013.
SPS IGNACIO AND ALICE JUICO vs. CHINA BANKING CORP. (G.R. No. 187678)

DOCTRINE : the escalation clause is void if it grants respondent the power to impose an increased rate of interest
without a written notice to petitioners and their written consent.

FACTS: Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes for the sums of Php6,216,000 and Php4, 139,000, respectively. The
loan was secured by a Real Estate Mortgage (REM) over petitioners’ property located at 49 Greensville St., White Plains,
Quezon City. The respondent demanded the full payment of the outstanding balance with accrued monthly interests.

As of February 23, 2001, the amount due on the two promissory notes totaled Php19,201,776. On the same day, the
mortgaged property was sold at public auction, with respondent China bank as highest bidder for the amount of
Php10,300,000. Petitioners received a demand letter dated May 2, 2001 from respondent for the payment of
Php8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale

The respondent prayed that judgment be rendered ordering the petitioners to pay jointly and severally:
(1)Php8,901,776.63 representing the amount of deficiency, plus interests at the legal rate, from February 23, 2001 until
fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3)
an amount equivalent to 10% of the foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of
suit.

Chinabank’s Senior Loans Assistant (SLA) stated that as of now the outstanding balance of petitioners was
Php15,190,961.48. The SLA reiterated that the interest rate changes every month based on the prevailing market rate.
The SLA notified petitioners of the prevailing rate by calling them monthly. It was increased unilaterally by Chinabank.

RTC: Ordered Spouses to pay bank Php9M plus the interest which amounted to Php15M. CA AFFIRMED.

PETITIONER: They insist that the increase in interest rates were unilaterally imposed by the bank and thus violate the
principle of mutuality of contracts.

ISSUE: Whether or not the increase in interest rates is void for violating the mutuality of contracts.

HELD: Yes. Under Article 1308, the contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless it has been
expressly stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on xxx (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.

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties.
This Court has long recognized that there is nothing inherently wrong with escalation clauses. 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. In a case, SC said that petitioner’s assent to the
modifications in the interest rates cannot be implied from their lack of response to the memos sent by respondent

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in
the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors to
adjust the interest independently and upwardly would completely take away from the debtors the right to assent to an
important modification in their agreement and would also negate the element of mutuality in their contracts.

More recently in Solidbank Corporation v. Permanent Homes, Incorporated,39 we upheld as valid an escalation clause
which required a written notice to and conformity by the borrower to the increased interest rate.

In Polotan, Sr. v. CA ,On petitioner’s contention that the interest rate was unilaterally imposed and based on the
standards and rate formulated solely by respondent credit card company, we held: Cardholder hereby authorizes
Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates x
x x" is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it is
also dependent on the prevailing market rates. Thus, it was valid because it wasn’t solely potestative as it was based on
the market rates(something outside the control of respondent).

Here, the interest rates would vary as determined by prevailing market rates. Evidently, the parties intended the interest
on petitioners’ loan, including any upward or downward adjustment, to be determined by the prevailing market rates
and not dictated by respondent’s policy.

HOWEVER, SC holds that the escalation clause here is still 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. For indeed, one-sided impositions do not have the force of law between the parties,
because such impositions are not based on the parties’ essential equality.

In the absence of consent on the part of the petitioners to the modifications in the interest rates, the adjusted rates
cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%, the rate charged for the first year.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal obligation under the two
promissory notes which they failed to settle is Php10,355,000. However, due to China Bank’s unilateral increases in the
interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the
period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to Php19,201,776.63. Note that the
original amount of principal loan almost doubled in only 16 months. The Court also finds the penalty charges imposed
excessive and arbitrary; hence the same is hereby reduced to 1% per month or 12% per annum.

SPOUSES ROBERT ALAN L. AND NANCY LEE LIMSO, vs. PHILIPPINE NATIONAL BANK AND THE REGISTER OF DEEDS OF
DAVAO CITY, RESPONDENTS.; ET AL. (G.R. No. 158622, 169441, 172958, 173194, 196958, 197120, 205463)

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.

When there is no mutuality between the parties to a contract, it means that the parties were not on equal
footing when the terms of the contract were negotiated. Thus, 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.

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. The Court of Appeals ruled that:

We cannot subscribe to appellant bank’s allegation that plaintiffs-appellees agreed to these interest rates by receiving
various letters from PNB. Those letters cannot be construed as agreements as a simple reading of those letters would
show that they are mere notices informing plaintiffs-appellees that the bank, through its top management, had already
imposed interest rates on their loan. The uniform wordings of the said letters go this way:

This refers to your existing credit facility in the principal amount of P850.0 MM granted by the Philippine
National Bank by and under the terms and conditions of that Credit Agreement dated 12.2.97 (Renewal of Credit
Facility).

We wish to advise you that the top management has approved an interest rate of 20.756% which will be used in
computing the interest due on your existing peso and redenominated availments against the credit facility for
the period July 20 to August 19, 1998.
 If you are amenable to this arrangement, please signify your conformity on the space provided below and return
to us the original copy of the document. If we receive no written objection by the end of 10 days from date of
receipt of this letter, we will take it to mean that you agree to the new interest rate we quote. On the other
hand, if you disagree with the quoted rate, you will have to pay the loan in full within the same ten-day period
otherwise, the entire loan will be considered due and demandable.

The contents of the letter quoted by the Court of Appeals show that there was no room for negotiation among
Philippine National Bank, Spouses Limso, and Davao Sunrise when it came to the applicable interest rate. Since there
was no room for negotiations between the parties with regard to the increases of the rates of interest, the principle of
mutuality of contracts was violated. There was no meeting of the minds between Spouses Limso, Davao Sunrise, and
Philippine National Bank because the increases in the interest rates were imposed on them unilaterally.

MAMBULAO LUMBER COMPANY vs. PNB (G.R. NO. L-22973)

FCATS: Petitioner Mambulao Lumber applied for an industrial loan with herein respondent PNB and was approved with
its real estate, machinery and equipments as collateral. PNB released the approved loan but petitioner failed to pay and
was later discovered to have already stopped in its operation. PNB then moved for the foreclosure and sale of the
mortgaged properties. The properties were sold and petitioner sent a bank draft to PNB to settle the balance of the
obligation. PNB however alleges that a remaining balance stands and a foreclosure sale would still be held unless
petitioner remits said amount. The foreclosure sale proceeded and petitioner’s properties were taken out of its
compound. Petitioner filed actions before the court and claims among others, moral damages.

ISSUE: Whether or not petitioner corporation, who has already ceased its operation, may claim for moral damages.

HELD: NO. Herein appellant’s claim for moral damages, however, seems to have no legal or factual basis. Obviously, an
artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. A corporation may have
a good reputation which, if besmirched, may also be a ground for the award of moral damages. The same cannot be
considered under the facts of this case, however, not only because it is admitted that herein appellant had already
ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason that whatever
adverse effects of the foreclosure sale of the chattels could have upon its reputation or business standing would
undoubtedly be the same whether the sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is
the place agreed upon by the parties in the mortgage contract.

PHILIPPINE NATIONAL BANK vs. THE HON. COURT OF APEALS and AMBROSIO PADILLA, (GR No. 88880. April 30, 1991)

FACTS: Private respondent (PR) Ambrosio Padilla, applied for and was granted a credit line of 321.8 million, by petitioner
PNB. This was for a term of 2 years at 18% interest per annum and was secured by real estate mortgage and 2
promissory notes executed in favor of Petitioner by PR. The credit agreement and the promissory notes, in effect,
provide that PR agrees to be bound by “increases to the interest rate stipulated, provided it is within the limits provided
for by law”. Conflict in this case arose when Petitioner unilaterally increased the interest rate from 18% to: (1) 32% [July
1984]; (2) 41% [October 1984]; and (3) 48% [November 1984], or 3 times within the span of a single year. This was done
despite the numerous letters of request made by PR that the interest rate be increased only to 21% or 24%.PR filed a
complaint against Petitioner with the RTC. The latter dismissed the case for lack of merit. Appeal by PR to CA resulted in
his favor. Hence the petition for certiorari under Rule 45 of ROC filed by PNB with SC.
ISSUE: Despite the removal of the Usury Law ceiling on interest, may the bank validly increase the stipulated interest
rate on loans contracted with third persons as often as necessary and against the protest of such persons.

HELD: NO. Although under Sec. 2 of PD 116, the Monetary Board is authorized to prescribe the maximum rate of interest
for loans and to change such rates whenever warranted by prevailing economic and social conditions, by express
provision, it may not do so “oftener than once every 12 months”. If the Monetary Board cannot, much less can PNB,
effect increases on the interest rates more than once a year. Based on the credit agreement and promissory notes
executed between the parties, although PR did agree to increase on the interest rates allowed by law, no law was
passed warranting Petitioner to effect increase on the interest rates on the existing loan of PR for the months of July to
November of 1984.Neither there being any document executed and delivered by PR to effect such increase. For
escalation clauses to be valid and warrant the increase of the interest rates on loans, there must be:(1) increase was
made by law or by the Monetary Board; (2) stipulation must include a clause for the reduction of the stipulated interest
rate in the event that the maximum interest is lowered by law or by the Monetary board. In this case, PNB merely relied
on its own Board Resolutions, which are not laws nor resolutions of the Monetary Board. Despite the suspension of the
Usury Law, imposing a ceiling on interest rates, this does not authorize banks to unilaterally and successively increase
interest rates in violation of Sec. 2 PD 116.Increases unilaterally effected by PNB was in violation of the Mutuality of
Contracts under Art. 1308. This provides that the validity and compliance of the parties to the contract cannot be left to
the will of one of the contracting parties. Increases made are therefore void. Increase on the stipulated interest rates
made by PNB also contravenes Art. 1956. It provides that, “no interest shall be due unless it has been expressly
stipulated in writing”. PR never agreed in writing to pay interest imposed by PNB in excess of 24% per annum. Interest
rate imposed by PNB, as correctly found by CA, is indubitably excessive.

RUIZ vs. CANEBA (GR No. 84884 December 3, 1990)

FACTS: Petitioners spouses Ruiz, leased the premises of common-law-spouses Sangalang and Cruz. Later on, the co-
owners decided to sell the leased promises to the lessees for and in consideration of 175K payable in installments
subject to such conditions as the continuation of payment of monthly rentals by the lessee-buyers until the full amount
is paid, and an stipulation that the contracts would be subject to rescision in the event the lessee-buyers would default
in the payment of the agreed price—upon rescision, the supposed lessee-buyers should return the amount advanced to
the lessor-sellers while the former vacates the property. The petitioners defaulted payments so the parties rescinded
the contract but could not however agree as to the amount. The lessee-buyers asked for 24% per annum interests on
the amount advanced by them to the co-owners, while the latter, on the other hand, asked for the additional rentals for
another portion of the property which the petitioner had already been using since the execution of the contract, these
issues was however raised after judgment had been entered and writ of execution issued.

ISSUE: Should awards by courts be subject to legal interests however the judgment did not provide for such?

HELD: No. Anent the Ruizes' claim of interest as aforementioned, it has been held in the case of Santulan v. Fule, 133
SCRA 762 (1984) that where the court judgment which did not provide for interest is already final, there is no reason to
add interest in the judgment. Interest was not demanded by the Ruizes when the case was pending before the lower
court, hence, there is no reason for Supreme Court to grant such claim. As ruled by the Court, such claim is groundless
since the decision and orders sought to be enforced do not direct the payment of interest and have long become final
(Canonizado v. Ordoñez-Benitez, 149 SCRA 555 [1987]).

Finally, as to Sangalang's claim for P1,500.00 as monthly rental for Door No. 2, the records show that such claim was
never raised in the trial court. The issue of additional rentals was brought up by Sangalang only when the motion for
execution of par. 3 of the dispositive portion of the decision was filed by the Ruiz spouses (Rollo, p. 189). It is a basic rule
that an issue which was not raised in the court below cannot be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due process.

JOVEN DE CORTES vs. VENTURANZA, 79 SCRA 709 [1977]

FACTS: The remaining balance of Debtor’s indebtedness to Creditor is P576,573.90 with an agreed interest at the rate of
6% per annum from January 1, 1959, secured by Real Estate Mortgage on Debtor’s land. Then Debtor defaulted. So,
Creditor filed a suit for foreclosure of mortgage on December 12, 1962.

ISSUE: How much interest is payable?

HELD: The interest at 6% per annum from January 1, 1959 to December 12, 1962 is P136,482.13. This is to be added to
the principal amount, thus making a total of P713,056.03 which shall earn legal interest at 6% (now 12%) per annum
from December 12, 1962 until fully paid. Such interest is not due by stipulation but by the mandate of the law, i.e.,
Article 2212.

RCBC v. CA (GR Nos. 128833, 128834, 128866, 20 April 1998)

FACTS: GOYU was granted credit facilities and accommodations by the RCBC initially in the amount of P 30 million. Upon
GOYU’s application, the credit was increased to P50 Million, then P90 Million, then P117 Million. As security, GOYU
executed 2 REM and 2 CM in favor of RCBC, which were registered with the RD. Under the 4 contracts, GOYU committed
itself to insure the mortgaged properties with an insurance company approved by RCBC, and subsequently endorse and
deliver the insurance policies to RCBC. GOYU then obtained 10 policies from MICO. GOYU’s buildings were gutted by fire
and it claimed indemnity from MICO but the latter denied the claim on the ground that the insurance policies were
either attached pursuant to writs of attachments/garnishments issued by various courts or that the proceeds were also
claimed by other creditors of GOYU. GOYU, alleging better rights to the proceeds, filed for specific performance and
damges before the RTC of Manila Br 3. The trial court ruled in favor of GOYU for the fire loss claims but ordered it to pay
RCBC its loan obligations. On appeal to the CA, it affirmed the ruling with regard to the liabilities of MICO and RCBC. The
trial court and appellate courts both held that, since the endorsements do not bear the signature of any officer of GOYU,
they concluded that the endorsements are defective. The CA then ordered GOYU to pay its obligation to RCBC without
any interest, surcharges and penalties.

ISSUE: Whether or not the ruling of the appellate court is correct.

HELD: The Court held in the negative. The essence or rationale for the payment of interest or cost of money is separate
and distinct from that of surcharges and penalties. The charging of interest for loans forms a very essential and
fundamental element of the banking business.