PNB vs.

CA
G.R. No. 88880 | April 30, 1991 | Grio-Aquino, J.

Petitioner: Philippine National Bank
Respondents: CA, Ambrosio Padilla

Summary: Ambrosio Padilla, applied for and was granted a credit line of 1.8million by 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. The credit agreement and the promissory notes, in effect, provide that Padilla 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 4
months. This was done despite the numerous letters of request made by PR that the interest rate be
increased only to 21% or 24%. The issue is whether or not PNB may unilaterally increase the interest rates
pursuant to the terms of the loan. The SC ruled in favor of Padilla. PD 116 provides that no increases in
interest shall be made by the Monetary Board once for every 12 months. Since the MB cannot increase
interests for more than once a year, much less can PNB do so. Also, for escalation clauses to be valid, the
increase must be made by law or the Monetary Board, and stipulation must include a clause for reduction of
the interest rate in the event that the maximum interest is reduced by law. Further, even though the
agreement explicitly permits unilateral increase by the PNB, the provision authorizing such is void for
being violative of the principle of mutuality of contracts. It also contravenes Art. 1956 of the Civil Code
because Padilla never agreed in writing in the increase of the interest rate.

Facts:
In July 1982, Padilla applied for and was granted by PNB a credit line of 1.8 million secured by a
real estate mortgage. The loan has a term of 2 years with 18% interest per annum. Padilla executed
2 promissory notes in the amount of 900k each.
Take note of the following very important stipulations contained in the loan instruments:
o Credit Agreement provides that: The Borrowers hereby agree to be bound by the rules
and regulations of the Central Bank and the current and general policies of the Bank and
those which the Bank may adopt in the future, which may have relation to or in any way
affect the Line xxx. Borrowers shall execute and deliver such documents and instruments,
in form and substance satisfactory to the Bank, in order to effectuate or otherwise comply
with such rules, regulations and policies.
o The promissory notes, on the other hand uniformly authorized the PNB to increase the
stipulated 18% interest per annum within the limits allowed by law at any time
depending on whatever policy it [PNB] may adopt in the future; Provided, that, the
interest rate on this note shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board.
o Real Estate Mortgage Contract provides: The rate of interest charged on the obligation
secured by this mortgage as well as the interest on the amount which may have been
advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be
subject during the life of this contract to such an increase within the rate allowed by law,
as the Board of Directors of the MORTGAGEE may prescribe for its debtors.
In June 1984, PNB informed Padilla that the loan will expire. Should Padilla wish to renew it, the
principal must be reduced by 30%. Since Padilla wishes to renew the loan for two years under the
same arrangement, he paid 540k to PNB (30% of 1.8M). Now, there is a balance of 1,260,000 to
be paid in two years.
Now, existing loan policies of the bank requires 32% interest for loan of more than one year. In
line with this, Padilla asked the bank to give him a preferential interest rate instead of just 21% or
24% (from the original 18%).
o PNB denied the request for preferential interest rate. It reiterated the loan policies of the
bank, and because their present cost of funds has substantially increased.
Padilla never reneged on its obligation and continued to pay the amounts due.
2 months after the loan was renewed, Padilla told PNB that it would continue to make further
payments. However, instead of a loan of more than one year, he will complete/fully pay the loan
in less than a year (kasi ayaw nya pumasok dun sa policy daw ng bank na 32% interest if more
than 1 year yung loan). He again requested that the interest rate be fixed at a preferential rate of
21% or 24%.
PNB again rejected the request the Padilla. Instead, it informed Padilla that the interest rate on
your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate + 6%)
effective September 6, 1984; and further explained why we can not grant your request for a
lower rate of 21% or 24%.
o Padilla protested this and sent letters again to PNB, reiterating his request.
Eto na ang lala: Like rubbing salt on the private respondents wound, PNB informed Padilla on
October 29, 1984, that the interest rate on your outstanding line/loan is hereby adjusted from 41%
p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25 October 1984.
Padilla filed with the RTC Manila a complaint against PNB, praying that the unilateral increase of
18%-32%, then to 41%, then to 48%, are illegal and not valid, and that the amounts paid be
refunded to him. (Note that at this point, the loan obligation of Padilla is fully paid. He just wants
to be refunded).
RTC ruled in favor of PNB and held that the increases of interest were properly made.
CA reversed the trial court, hence, this petition for review.

Issue/Held: Whether the bank, within the term of the loan which it granted to Padilla, may unilaterally
change or increase the interest rate stipulated therein at will and often as it pleased NO.

Ratio:

P.D. No. 116
In the first place, although Section 2, P.D. No. 116 of January 29, 1973, authorizes the Monetary
Board to prescribe the maximum rate or rates of interest for loans or renewal thereof and to change
such rate or rates whenever warranted by prevailing economic and social conditions, it expressly
provides that such changes shall not be made oftener than once every twelve months.
o In this case, PNB, over the objection of Padilla and without authority from the Monetary
Board, increased the interest rate three times within a span of only four months.
o Those increases were null and void, for if the Monetary Board itself was not authorized to
make such changes oftener than once a year, even less so may a bank which is
subordinate to the Board.

PNB resolutions are not laws nor resolutions of the Monetary Board
Look at the terms of the agreement above. As pointed out by the Court of Appeals, while Padilla
did agree in the Deed of Real Estate Mortgage that the interest rate may be increased during the
life of the contract to such increase within the rate allowed by law, as the Board of Directors of
the MORTGAGEE may prescribe or within the limits allowed by law, no law was ever passed
in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41%
and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate
the increases.
In Banco Filipino vs. Navarro, the SC disauthorized the bank from raising the interest rate on the
borrowers loan from 12% to 17% despite an escalation clause in the loan agreement signed by the
debtors authorizing Banco Filipino to correspondingly increase the interest rate stipulated in this
contract without advance notice to me/us in the event a law should be enacted increasing the
lawful rates of interest that may be charged on this particular kind of loan.
o In this case, Banco Filipino relied on a CB Circular which provides that the maximum
rate of interest for loans with a term of more than 730 days shall be 19%.
o The SC said that Banco Filipinos reliance of the circular is erroneous because it is NOT
A LAW.
The SC also held that for escalation clauses to be valid, it should specifically provide the
following:
o That there can be an increase in interest if increased by law or by the Monetary Board;
o In order for such stipulation to be valid, it must include a provision for reduction of the
stipulated interest in the event that the applicable maximum rate of interest is reduced by
law or by the Monetary Board.
In this case, PNB relied on its own BOARD RESOLUTIONS!
o Note that these resolutions are neither laws nor resolutions of the Monetary Board.
CB Circular 905 may have removed the Usury Law ceiling on interest rates, but it did not
authorize PNB or any bank to unilaterally and successively increase the agreed interest rates from
18% to 48% within a span of 4 months.

Civil Code
The unilateral action of the PNB in increasing the interest rate on the Padillas loan, violated the
mutuality of contracts ordained in Article 1308 of the Civil Code:
o The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them
A contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void.
Hence, even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest rate at
will during the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts.
o It would have been a contract of adhesion, Padilla being the weaker party whom the
courts must protect against abuse and imposition.
Also, Padilla never agreed in writing to the increase in the interest rates. As such, it violated an
express provision in the Credit Agreement, which provides that the terms may be amended only
by an instrument in writing signed by the party to be bound as burdened by such amendment.
Lastly, since Padilla never agreed in writing to the increase, PNB also violated Art. 1956 of the
Civil Code which provides that no interest shall be due unless it has been expressly stipulated in
writing.