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PHILIPPINE SAVINGS BANK v. SPS. ALFREDO M. CASTILLO

FACTS:

The respondent spouses Alfredo Castillo and Elizabeth Capati-Castillo owned a lot covered by Transfer Certificate of Title (TCT) No. 233242 in Tondo, Manila, while the respondent spouses Romeo B. Capati and Aquilina M. Lobo owned another lot covered by TCT No. 227858, also located in Tondo, Manila. On May 7, 1997, the respondents obtained a loan with real estate mortgage over their properties from the petitioner Philippine Savings Bank. The loan was evidenced by a Promissory Note with a face value of P2,500,000.00. The Promissory Note allowed the petitioner to increase or decrease the interest rates unilaterally without the consent of the respondents. From May 1997 to December 1999, the petitioner increased and decreased the interest rates from a high of 29% to a low of 15.5% per annum. The respondents regularly paid their amortizations until December 1999 when they defaulted due to financial constraints. The petitioner initiated an extrajudicial foreclosure sale of the mortgaged properties, which was conducted on June 16, 2000. The properties were sold to the petitioner as the only bidder. The respondents failed to redeem the properties within the one-year redemption period. On October 1, 2001, the respondents filed a case seeking the nullity of the foreclosure proceedings and certificate of sale, cancellation of annotations on their TCTs, and damages. The trial court rendered a decision in favor of the respondents, declaring the increases in interest as unreasonable and voiding the extrajudicial foreclosure. The trial court awarded damages and attorney's fees to the respondents. On appeal, the CA affirmed the decision of the trial court with modifications. The petitioner filed this petition for review on certiorari challenging the modifications made by the CA.

ISSUES:

  1. Whether the unilateral determination and imposition of increased interest rates violates the principle of mutuality of contracts

  2. Whether the respondents' acquiescence to the imposition of modified interest rates absolves the petitioner from violating the principle of mutuality of contracts

  3. Whether the lack of response to memos proposing changes to the contract signifies respondents' assent to the modified interest rates

  4. Whether the request for reduction of interest rates implies recognition and consent to the legality of the imposed interest rates

  5. Whether the adjustment in the interest rate by the petitioner was valid without the consent of the respondents.

  6. Whether the petitioner is liable to refund the respondents the amount of interest that was illegally imposed upon them.

  7. Whether the respondents are entitled to moral and exemplary damages, attorney's fees, and litigation expenses.

RULING:

  1. Yes, the unilateral determination and imposition of increased interest rates violates the principle of mutuality of contracts.

  2. No, the respondents' acquiescence to the imposition of modified interest rates does not absolve the petitioner from violating the principle of mutuality of contracts.

  3. No, the lack of response to memos proposing changes to the contract does not signify respondents' assent to the modified interest rates.

  4. No, the request for reduction of interest rates does not imply recognition and consent to the legality of the imposed interest rates.

  5. The adjustment in the interest rate by the petitioner was not valid without the consent of the respondents. Any change in the loan agreement, especially one that affects an important aspect such as the interest rate, must be mutually agreed upon by the contracting parties. In this case, since there was no consent on the part of the respondents to the modifications in the interest rates, the adjusted rates cannot bind them.

  6. The petitioner is liable to refund the respondents the amount of interest that was illegally imposed upon them. The increases in the interest rate were deemed null and void for being violative of the principle of mutuality of contracts. The amount to be refunded refers to the interest payments made by the respondents when they had no obligation to do so.

  7. The respondents are not entitled to moral and exemplary damages, attorney's fees, and litigation expenses. The petitioner's unilateral imposition of changes in the interest rates can be attributed to bad business judgment or attendant negligence, and not fraud, bad faith, or wanton disregard of contractual obligations. Therefore, the award for moral and exemplary damages, attorney's fees, and litigation expenses should be deleted.

PRINCIPLES:

  • The principle of mutuality of contracts under Article 1308 of the Civil Code requires that a contract must bind both parties and its validity or compliance cannot be left to the will of only one party.

  • Contracts of adhesion, which heavily favor one party and lead to an unconscionable result, are considered void.

  • Modification of significant components of a contract, such as interest rates, require the conformity of both parties.

  • The lack of response to a proposal to change a contract does not imply assent or agreement to the proposed changes.

  • Requesting for a reduction of interest rates does not imply recognition and consent to the legality of the imposed interest rates.

  • There can be no contract without the mutual assent of the parties, and any contract changes must be made with the consent of the contracting parties.

  • Escalation clauses in loan contracts are valid and do not contravene public policy, but the adjustment of interest rates should still be subject to the mutual agreement of the contracting parties.

  • Changes in interest rates in loan contracts that are not mutually agreed upon do not bind the parties, even if there is a de-escalation clause in the agreement.

  • Increases in the interest rate that are null and void entitle the borrower to a refund of the amount paid as interest.

  • Moral damages and exemplary damages are recoverable only if the breaching party acted fraudulently or in bad faith, while attorney's fees and litigation expenses may be recovered if the guilty party acted in a fraudulent or malevolent manner.

  • When an obligation consists of the payment of a sum of money and it is breached, the interest on the amount of damages shall be at the rate of 12% per annum, reckoned from the time of the filing of the complaint.