Eduardo v. Philippine National Bank

DEL CASTILLO, J.:

In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates imposed.

Premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or illegal. This Petition for Review on Certiorari1 questions the May 8, 2007 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 79650, which affirmed with modifications the February 28, 2003 Decision3 and the June 4, 2003 Order4 of the Regional Trial Court (RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975. Factual Antecedents Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two decades of operating a department store and buying and selling of ready-to-wear apparel.

Respondent Philippine National Bank (PNB) is a banking corporation organized and existing under Philippine laws. To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners constituted in August 1987 a Real Estate Mortgage5 over a 370-square meter lot in Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988,the credit line was increased to ₱1.8 million and the mortgage was correspondingly increased to ₱1.8 million.6 And in July 1989, a Supplement to the Existing Real Estate Mortgage7 was executed to cover the same credit line, which was increased to ₱2.5 million, and additional security was given in the form of a 134-square meter lot covered by TCT T-16208.

In addition, petitioners issued eight Promissory Notes8 and signed a Credit Agreement.9 This July 1989 Credit Agreement contained a stipulation on interest which provides as follows: 1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per annum.

Interest shall be payable in advance every one hundred twenty days at the rate prevailing at the time of the renewal. (b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa. Where the Bank has imposed on the Loan interest at a rate per annum, which is equal to the Bank's spread over the current floating interest rate, the Borrower hereby agrees that the Bank may, without need of notice to the Borrower, increase or decrease its spread over the floating interest rate at any time depending on whatever policy it may adopt in the future.10 (Emphases supplied) The eight Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or reduce interest rates "within the limits allowed by law or by the Monetary Board."11 The Real Estate Mortgage agreement provided the same right to increase or reduce interest rates "at any time depending on whatever policy PNB may adopt in the future."12 Petitioners religiously paid interest on the notes at the following rates: 1.

1st Promissory Note dated July 24, 1989 - 19.5%; 2. 2nd Promissory Note dated November 22, 1989 - 23%; 3. 3rd Promissory Note dated March 21, 1990 - 22%; 4.

4th Promissory Note dated July 19, 1990 - 24%; 5. 5th Promissory Note dated December 17, 1990 - 28%; 6. 6th Promissory Note dated February 14, 1991 - 32%; 7.

7th Promissory Note dated March 1, 1991 - 30%; and 8.

8th Promissory Note dated July 11, 1991 - 24%.13 In August 1991, an Amendment to Credit Agreement14 was executed by the parties, with the following stipulation regarding interest: 1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each Availment from date of each Availment up to but not including the date of full payment thereof at the rate per annum which is determined by the Bank to be prime rate plus applicable spread in effect as of the date of each Availment.15 (Emphases supplied) Under this Amendment to Credit Agreement, petitioners issued in favor of PNB the following 18 Promissory Notes, which petitioners settled - except the last (the note covering the principal) - at the following interest rates: 1.

9th Promissory Note dated November 8, 1991 - 26%; 2. 10th Promissory Note dated March 19, 1992 - 25%; 3. 11th Promissory Note dated July 11, 1992 - 23%; 4.

12th Promissory Note dated November 10, 1992 - 21%; 5. 13th Promissory Note dated March 15, 1993 - 21%; 6. 14th Promissory Note dated July 12, 1993 - 17.5%; 7.

15th Promissory Note dated November 17, 1993 - 21%; 8. 16th Promissory Note dated March 28, 1994 - 21%; 9. 17th Promissory Note dated July 13, 1994 - 21%; 10.

18th Promissory Note dated November 16, 1994 - 16%; 11. 19th Promissory Note dated April 10, 1995 - 21%; 12. 20th Promissory Note dated July 19, 1995 - 18.5%; 13.

21st Promissory Note dated December 18, 1995 - 18.75%; 14. 22nd Promissory Note dated April 22, 1996 - 18.5%; 15. 23rd Promissory Note dated July 22, 1996 - 18.5%; 16.

24th Promissory Note dated November 25, 1996 - 18%; 17. 25th Promissory Note dated May 30, 1997 - 17.5%; and 18. 26th Promissory Note (PN 9707237) dated July 30, 1997 - 25%.16 The 9th up to the 17th promissory notes provide for the payment of interest at the "rate the Bank may at any time without notice, raise within the limits allowed by law x x x."17 On the other hand, the 18th up to the 26th promissory notes - including PN 9707237, which is the 26th promissory note - carried the following provision: x x x For this purpose, I/We agree that the rate of interest herein stipulated may be increased or decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, or in the Bank's overall cost of funds.

I/We hereby agree that in the event I/we are not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option top repay the loan or credit facility without penalty within ten (10) calendar days from the Interest Setting Date.18 (Emphasis supplied) Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good on the promissory notes, religiously paying the interests without objection or fail. But in 1997, petitioners faltered when the interest rates soared due to the Asian financial crisis. Petitioners' sole outstanding promissory note for ₱2.5 million - PN 9707237 executed in July 1997 and due 120 days later or on October 28, 1997 - became past due, and despite repeated demands, petitioners failed to make good on the note.

Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default, as follows: Without need for notice or demand, failure to pay this note or any installment thereon, when due, shall constitute default and in such cases or in case of garnishment, receivership or bankruptcy or suit of any kind filed against me/us by the Bank, the outstanding principal of this note, at the option of the Bank and without prior notice of demand, shall immediately become due and payable and shall be subject to a penalty charge of twenty four percent (24%) per annum based on the defaulted principal amount.

x x x19 (Emphasis supplied) PNB prepared a Statement of Account20 as of October 12, 1998, detailing the amount due and demandable from petitioners in the total amount of ₱3,620,541.60, broken down as follows: Principal P 2,500,000.00 Interest 538,874.94 Penalties 581,666.66