BPI INVESTMENT CORPORATION, petitioner, vs. HON.

COURT OF APPEALS and ALS

MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
DECISION

FACTS:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a
house on his lot in New Alabang Village. Said house and lot were mortgaged to AIDC to secure
the loan.
Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua
for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas
indebtedness with AIDC.
The latter, however, was not willing to extend the old interest rate to private respondents and
proposed to grant them a new loan of P500,000 to be applied to Roas debt and secured by the
same property, with higher interest (20% per annum) to be applied to Roa’s debt, secured by the
same property and penalty interest at the rate of 21% per annum per day from the date the
amortization became due and payable.
Private respondents executed a mortgage deed containing the above stipulations with the
provision that payment of the monthly amortization shall commence on May 1, 1981.
In August 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC. This reduced Roas
principal balance to P457,204.90 (deduct from the 500k balance that the respondents assumed).
Thereafter in September 1982, BPIIC released to private respondents P7,146.87, purporting to
be what was left of their loan after full payment of Roas loan.
In 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that
they failed to pay the mortgage indebtedness which from May 1981 to 1984.
ALS and Litonjua filed civil case against BPIIC. They maintained that they should not be made to
pay amortization before the actual release of the P500,000 loan in August and September 1982.
Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to private
respondents.
The trial court rendered its judgment favoring ALS and Antonio K. Litonjua and against BPI
Investment Corporation.
CA affirmed in toto the decision of RTC. Court of Appeals reasoned that a simple loan is perfected
only upon the delivery of the object of the contract. The contract of loan between BPIIC and ALS
& Litonjua was perfected only on September 1982, the date when BPIIC released the purported
balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness. Thus,
payment of the monthly amortization should commence only a month after the said date, as can
be inferred from the stipulations in the contract.

ISSUE: WHETHER OR NOT A CONTRACT OF LOAN IN THIS CASE IS A CONSENSUAL CONTRACT.

No. A loan contract is not a consensual contract but a real contract. It is perfected only upon the
delivery of the object of the contract.
Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is
binding upon parties, but the commodatum or simple loan itself shall not be perfected until
the delivery of the object of the contract

In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on
the other, was perfected only on 1982, the date of the second release of the loan. Following the
intentions of the parties on the commencement of the monthly amortization, private
respondents obligation to pay commenced only on October 1982, a month after the perfection
of the contract.

SC also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. [8]As
averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. It is a basic principle in reciprocal
obligations that neither party incurs in delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. Only when a party has performed
his part of the contract can he demand that the other party also fulfills his own obligation and if
the latter fails, default sets in. Consequently, petitioner could only demand for the payment of
the monthly amortization after September 1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13,
1982 and not May 1, 1981.

Note- The contract of loan shall be considered a perfected consensual contract that falls under
the first clause of Article 1934, Civil Code when it is an accepted promise to deliver something by
way of simple loan.
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,
vs.
PHILIPPINE NATIONAL BANK, Respondent.

FACTS:

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.

Spouses Eduardo and Lydia Silos secureda revolving credit line with Philippine National Bank
(PNB)through a real estate mortgage as a security. After two years, their credit line increased.
Spouses Silos then signed a Credit Agreement, which was also amended two years later, and
several Promissory Notes (PN) as regards their Credit Agreements with PNB.The said loan was
initially subjected to a 19.5% interest rate per annum. In the Credit Agreements, Spouses Silos
bound themselves to the power of PNB to modify the interest rate depending on whatever policy
that PNB may adopt in the future, without the need of notice upon them. Thus, the said interest
rates played from 16% to as high as 32% per annum. Spouses Silos acceded to the policy by pre-
signing a total of twenty-six (26) PNs leaving the individual applicable interest rates at hand blank
since it would be subject to
modification by PNB.
Spouses Silos regularly renewed and made good on their PNs, religiously paid the interests
without objection or fail. However, during the 1997 Asian Financial Crisis, Spouses Silos faltered
when the interest rates soared. Spouses Silos’ 26thPN became past due, and despite repeated
demands by PNB, they failed to make good on the note. Thus, PNB foreclosed and auctioned the
involved security for the mortgage. Spouses Silos instituted an action to annul the foreclosure
sale on the ground that the succeeding interest rates used in their loan agreements was left to
the sole will of PNB, the same fixed by the latter without their prior consent and thus, void. The
Regional Trial Court (RTC) ruled that such stipulation authorizing both the increase and decrease
of interest rates as may be applicable is valid. The Court of Appeals (CA) affirmed the RTC
decision.

ISSUE: WON the increasing interest of the loan is valid.

HELD: No.

It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one
who contracts, his act has no more efficacy than if it had been done under duress or by a person
of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds
of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus,
any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

SC cannot countenance petitioner bank’s posturing that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts. In
Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

x x x The unilateral action of the PNB in increasing the interest rate on the private respondent’s
loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. 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 . . . 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. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor)
participation being reduced to the alternative "to take it or leave it" . . . . Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.67 (Emphases supplied)

Respondent bank unilaterally altered the terms of its contract with petitioners by increasing
the interest rates on the loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that
"No interest shall be due unless it has been expressly stipulated in writing." What has been
"stipulated in writing" from a perusal of interest rate provision of the credit agreement signed
between the parties is that petitioners were bound merely to pay 21% interest, subject to a
possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-
escalation; 2) within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract
in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact
readily resolved by a careful reading of the credit agreement because the same plainly uses the
phrase "interest rate agreed upon," in reference to the original 21% interest rate. x x x

xxxx
Petitioners never agreed in writing to pay the increased interest rates demanded by respondent
bank in contravention to the tenor of their credit agreement. That an increase in interest rates
from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and
1984, petitioners had paid an amount equivalent to virtually half of the entire principal
(₱7,735,004.66) which was applied to interest alone. By the time the spouses tendered the
amount of ₱40,142,518.00 in settlement of their obligations; respondent bank was demanding
over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds. Here, as clearly demonstrated above,
not only [are] the increases of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and reasonable standards upon
which the increases are anchored.

xxxx

In the face of the unequivocal interest rate provisions in the credit agreement and in the law
requiring the parties to agree to changes in the interest rate in writing, we hold that the
unilateral and progressive increases imposed by respondent PNB were null and void.