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PNB
DOCTRINE:
Escalation clauses providing for unilateral increases made by one party violates
the principle of mutuality of contracts. Although these provisions are deemed
part of the contract, there cannot be a unilateral increase by one party
because there must still be assent by the other party. In a loan contract, since
interest rates are an essential part, any changes to it must be mutually assented
to by both parties.
FACTS:
Spouses Silos secured a credit line with PNB involving a Credit Agreement and a
mortgage to secure such an agreement. The spouses also issued several
promissory notes to cover their payment. In all documents, there were
escalation clauses/provisions allowing PNB to increase or reduce interest rates
unilaterally. These were found to be violative of the principle of the mutuality of
contracts.
ISSUE: WON the interest rate provision in the Credit Agreement and the
Amendment to Credit Agreement is null and void for giving PNB the sole power
to fix the rates [YES]
HELD: The provision giving PNB the sole unilateral determination to fix the interest
is void.
Spouses: The provision relegates to PNB the sole power to
fix the rates based
on arbitrary criteria and the promissory notes were left blank for PNB to
unilaterally fill = violates the principle of mutuality of contracts.
PNB: Since the Credit Agreement and promissory notes contained both an
escalation clause and a de-escalation clause, the bank did not violate the
principle of mutuality; plus, the parties mutually agreed, as shown by the
continuous payment without protest by the spouses.