G.R. No.

L-30771 May 28, 1984

LIAM LAW, plaintiff-appellee, VS OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendants-appellants.
This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal was
originally taken to the then Court of Appeals, which endorsed it to this instance stating that the issue involved was one of
law.
It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and
defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31, 1960, but was not paid
on that date, with the debtors asking for an extension of three months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April 30,
1960, but the obligation was increased by P6,000.00 as follows:
That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the principal
obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be paid unto the
creditor and his successors in interest upon the termination of this agreement.
Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this
collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00
constituted usurious interest.
Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment on real
and personal properties of defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment was implemented,
proceedings before the Trial Court versed principally in regards to the attachment.
On January 18, 1961, an Order was issued by the Trial Court stating that "after considering the manifestation of both
counsel in Chambers, the Court hereby allows both parties to simultaneously submit a Motion for Summary
Judgment. 1 The plaintiff filed his Motion for Summary Judgment on January 31, 1961, while defendants filed theirs on
February 2, 196l. 2
On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00 plus
the further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from April 30,
1960." It is from this judgment that defendants have appealed.
We have decided to affirm.
Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, "it is
presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having been held, it
has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's
finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing
loss of interest income, attorney's fees and incidentals.
The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious interest.
They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied specifically and under
oath". 3
Section 9 of the Usury Law (Act 2655) provided:
SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint
brought or filed against said person or corporation before a competent court to recover the money or
other personal or real property, seeds or agricultural products, charged or received in violation of the

provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of
the facts contained in the latter.
The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the
usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury,
the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present,
where it is the defendant, not the plaintiff, who is alleging usury.
Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and borrower
may agree upon. 4 The Rules of Court in regards to allegations of usury, procedural in nature, should be considered
repealed with retroactive effect.
Statutes regulating the procedure of the courts will be construed as applicable to actions pending and
undetermined at the time of their passage. Procedural laws are retrospective in that sense and to that
extent. 5
... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19 December
1953, and may be retroactively applied to the case at bar because it is procedural in nature. ... 6
WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs.
SO ORDERED.

SPOUSES
FLORANTE
and
CORPORATION, respondent.

LAARNI

BAUTISTA, petitioners,

vs. PILAR

DEVELOPMENT

This petition for review seeks to reverse and set aside the Decision and Resolution of the Court of Appeals in CAG.R. CV No. 51363[1] which reversed the Decision of the Regional Trial Court, Makati, Branch 138 in Civil Case No.
17702.[2]
The following facts are uncontroverted.
In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar Village, Las Pinas, Metro
Manila. To partially finance the purchase, they obtained from the Apex Mortgage & Loan Corporation (Apex) a loan in the
amount of P100,180.00. They executed a promissory note on December 22, 1978 obligating themselves, jointly and
severally, to pay the "principal sum of P100,180.00 with interest rate of 12% and service charge of 3%" for a period of 240
months, or twenty years, from date, in monthly installments of P1,378.83. [3] Late payments were to be charged a penalty
of one and one-half per cent (1 1/2%) of the amount due. In the same promissory note, petitioners authorized Apex to
"increase the rate of interest and/or service charges" without notice to them in the event that a law, Presidential Decree or
any Central Bank regulation should be enacted increasing the lawful rate of interest and service charges on the loan.
[4]
Payment of the promissory note was secured by a second mortgage on the house and lot purchased by petitioners. [5]
Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory
note in favor of Apex. This note was in the amount of P142,326.43 at the increased interest rate of twenty-one per cent
(21%) per annum with no provision for service charge but with penalty charge of 1 1/2% for late payments. Payment was
to be made for a period of 196 months or 16.33 years in monthly installments of P2,576.68, inclusive of principal and
interest. Petitioner spouses also authorized Apex to "increase/decrease the rate of interest and/or service charges" on the
note in the event any law or Central Bank regulation shall be passed increasing or decreasing the same. [6]

In November 1983, petitioner spouses again failed to pay the installments. On June 6, 1984, Apex assigned the
second promissory note to respondent Pilar Development Corporation without notice to petitioners.
On August 31, 1987, respondent corporation, as successor-in-interest of Apex, instituted against petitioner spouses
Civil Case No. 17702 before the Regional Trial Court, Makati, Branch 138.Respondent corporation sought to collect from
petitioners the amount of P140,515.11 representing the unpaid balance of the principal debt from November 23, 1983,
including interest at the rate of twenty-one per cent (21%) under the second promissory note, and 25% and 36% per
annum in accordance with Central Bank Circular No. 905, series of 1982. Respondent also sought payment of ten per
cent (10%) of the amount due as attorney's fees.[7]
In their answer, petitioner spouses mainly contended that the terms of the second promissory note increasing the
interest rate to 21% and the escalation clauses authorizing Apex to increase interest rates pursuant to any law or Central
Bank regulation are null and void in the absence of a de-escalation clause in the same note. [8]
After pre-trial, both parties submitted the case for decision on the sole issue of the interest rate.
The trial court rendered judgment on September 22, 1995. It ordered petitioner spouses to pay respondent
corporation the sum of P140,515.11, with interest at the rate of 12% per annum, plus service charge, viz:
"WHEREFORE, judgment is hereby rendered as follows:
(a) Plaintiff is entitled to collect from the defendants the amount of P140,515.11 with interest at the rate of 12% per annum
from November 23, 1983 until the amount is fully paid plus the stipulated service charge;
(b) Ordering defendants as joint and several obligors to pay plaintiff the amount stated in paragraph (a) hereof;
(c) Counterclaim is hereby dismissed.
No pronouncement as to costs.
SO ORDERED."[9]
Both parties appealed to the Court of Appeals. In a Decision dated May 14, 1998, the appellate court reversed the
trial court by applying the interest rate of 21% per annum, and adding attorney's fees of 10%. Thus:
"IN VIEW OF ALL THE FOREGOING, the appealed judgment is hereby REVERSED and SET ASIDE and a new one
entered ordering the defendants to pay the plaintiffs the amount of P142,326.43, as principal with interest at the rate of
21% from November 23, 1983 until the amount is fully paid; the sum equivalent to 10% of the amount due as attorney's
fees and the costs of this suit.
SO ORDERED." [10]
Petitioner spouses moved for reconsideration. In a Resolution dated August 18, 1998, the Court of Appeals denied
the motion but reduced the principal amount of the obligation from P142,326.42 to P140,515.11. [11]
Hence this recourse.
Petitioner spouses claim that the Court of Appeals erred:
I
IN RULING THAT THE TWO (2) PROMISSORY NOTES EXECUTED BY THE PARTIES ARE INDEPENDENT OF EACH
OTHER.

CONVERSELY, IN NOT RULING THAT THE SAID PROMISSORY NOTES CONSTITUTE A SINGLE-LOAN
TRANSACTION.
II
IN RULING THAT THE APPLICABLE RATE OF INTEREST IS 21% PER ANNUM AS STIPULATED IN THE SECOND
PROMISSORY NOTE.
CONVERSELY, IN NOT RULING THAT THE ESCALATION OF INTEREST RATE FROM 12% PER ANNUM (1ST
PROMISSORY NOTE) TO 21% PER ANNUM (2ND PROMISSORY NOTE) IS UNLAWFUL.
III
IN RULING THAT 10% OF THE AMOUNT DUE IS AWARDABLE AS ATTORNEY'S FEES.
CONVERSELY, IN NOT RULING THAT THE AWARD OF 10% ATTORNEY'S FEES IS NOT PROPER UNDER THE
CIRCUMSTANCES.
IV
IN RULING THAT NOTICE OF ASSIGNMENT OF CREDIT IS "POINTLESS AND UNSUSTAINABLE."
CONVERSELY, IN NOT RULING THAT NOTICE TO THE DEBTOR IS REQUIRED WHEN CREDIT IS ASSIGNED.
V
IN NOT RULING THAT UNDER THE CIRCUMSTANCES PETITIONERS ARE ENTITLED TO MORAL AND EXEMPLARY
DAMAGES.[12]
The controversy in this petition involves the rate of interest respondent creditor is entitled to collect on petitioners'
loan: whether it be 12% under the promissory note of December 22, 1978, or 21% under the promissory note of
September 20, 1982.
Petitioners claim that the interest rate of 12% per annum should be adjudged inasmuch as the two promissory notes
constitute one transaction. Allegedly, the first note defined the terms and conditions of the loan while the second note is
merely an extension of and derives its existence from the former. Hence, the second note is governed by the stipulations
in the first note.[13]
The two promissory notes are identically entitled "Promissory Note with Authority to Assign Credit." The notes were
prepared by Apex in standard form and consist of two (2) pages each. Except for one or two stipulations, they contain the
same provisions and the same blanks for the amount of the loan and other pertinent data subject of each note. However,
on the upper right portion of the second note, there appears a typewritten entry which reads:
"This cancels PN # A-387-78 dated December 22, 1978." [14]
Correspondingly, on the face of each page of the first promissory note, i.e., PN No. A-387-78 dated December 22, 1978,
the word "Cancelled" is boldly stamped twice with the date "September 16, 1982" and a signature written in a space inside
the letters of the word.[15]
The first promissory note was cancelled by the express terms of the second promissory note. To cancel is to strike
out, to revoke, rescind or abandon, to terminate. [16] In fine, the first note was revoked and terminated. Simply put, it was
novated. The extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which
extinguishes or modifies the first is a novation. [17] Novation is made either by changing the object or principal conditions,

referred to as an objective or real novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, which is known as subjective or personal novation. [18] In both objective and subjective novation, a
dual purpose is achieved-- an obligation is extinguished and a new one is created in lieu thereof. [19] Novation may either
be express, when the new obligation declares in unequivocal terms that the old obligation is extinguished; or implied,
when the new obligation is on every point incompatible with the old one. [20] Express novation takes place when the
contracting parties expressly disclose that their object in making the new contract is to extinguish the old contract,
otherwise the old contract remains in force and the new contract is merely added to it, and each gives rise to an obligation
still in force.[21]
Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2) the agreement of all
parties to the new contract; (3) the extinguishment of the old contract; and (4) the validity of the new one. [22] In the instant
case, all four requisites have been complied with. The first promissory note was a valid and subsisting contract when
petitioner spouses and Apex executed the second promissory note. The second promissory note absorbed the unpaid
principal and interest of P142,326.43 in the first note which amount became the principal debt therein, payable at a higher
interest rate of 21% per annum. Thus, the terms of the second promissory note provided for a higher principal, a higher
interest rate, and a higher monthly amortization, all to be paid within a shorter period of 16.33 years. These changes are
substantial and constitute the principal conditions of the obligation. [23] Both parties voluntarily accepted the terms of the
second note; and also in the same note, they unequivocally stipulated to extinguish the first note. Clearly, there
was animus novandi, an express intention to novate. [24] The first promissory note was cancelled and replaced by the
second note. This second note became the new contract governing the parties' obligations.
In their second assigned error, petitioners contend that in the second promissory note, the escalation of the interest
rate from 12% to 21% per annum is unlawful and cannot be imposed for failure of the escalation provisions to include
valid de-escalation clauses. In the absence of de-escalation clauses, the Court of Appeals allegedly erred in applying
Central Bank Circulars Nos. 705, 712 and 905 issued by the Monetary Board of the Central Bank of the Philippines. [25]
At the time the parties executed the first promissory note in 1978, the interest of 12% was the maximum rate fixed by
the Usury Law for loans secured by a mortgage upon registered real estate. [26] On December 1, 1979, the Monetary Board
of the Central Bank of the Philippines [27] issued Circular No. 705 which fixed the effective rate of interest on loan
transactions with maturities of more than 730 days to twenty-one per cent (21%) per annum for both secured and
unsecured loans.[28] On January 28, 1980, The Monetary Board issued Circular No. 712 reiterating the effective interest
rate of 21% on said loan transactions. [29] On January 1, 1983, CB Circular No. 905, series of 1982, took effect. This
Circular declared that the rate of interest on any loan or forbearance of any money, goods or credits, regardless of
maturity and whether secured or unsecured, "shall not be subject to any ceiling prescribed under or pursuant to the Usury
Law, as amended."[30] In short, Circular No. 905 removed the ceiling on interest rates for secured and unsecured loans,
regardless of maturity.[31]
When the second promissory note was executed on September 20, 1982, Central Bank Circulars Nos. 705 and 712
were already in effect. These Circulars fixed the effective interest rate for secured loan transactions with maturities of
more than 730 days, i.e, two (2) years, at 21% per annum. The interest rate of 21% provided in the second promissory
note was therefore authorized under these Circulars.
The question of whether the escalation clauses in the second promissory note are valid is irrelevant. Respondent
corporation has signified that it is collecting petitioners' debt only at the fixed interest rate of 21% per annum, as expressly
agreed upon in the second promissory note, not at the escalated rates authorized under the escalation clauses. [32] The
Court of Appeals therefore did not err in applying the interest rate of 21% to petitioner's loan under the second promissory
note.
Neither did the Court of Appeals err in imposing attorney's fees of ten per cent (10%) on the amount due. The award
of attorney's fees is expressly stipulated in the fourth paragraph of the promissory note itself, viz:
"In case of non-payment of the amount of this note or any portion of it on demand when given due, or any other amount/s
due on account of this note, the entire obligation shall become due and demandable, and if for the enforcement of the
payment thereof, APEX MORTGAGE AND LOANS CORP. is constrained to entrust the case to its attorneys, I/We, jointly

and severally, bind myself/ourselves to pay TEN (10%) per cent on the amount due on the note as attorney's fees, such
amount in no case to be less than FIVE HUNDRED (P500.00) PESOS in addition to the legal fees and other incidental
expenses."[33]
Petitioners' lack of bad faith in resisting imposition of the increased interest rate cannot serve to mitigate their liability
for liquidated damages. Petitioner Florante Bautista is a lawyer and he should have been aware of the effects of the
stipulations in the second promissory note and the pertinent CB Circulars on his obligation. At the same time, there is no
showing that the amount of liquidated damages is iniquitous and unconscionable for this court to equitably reduce the
same.[34]
Finally, the fact that petitioners were not notified of the assignment of their credit by Apex to herein respondent
corporation is not material. In the eighth paragraph of the second promissory note, petitioners expressly waived notice to
any assignment of credit, viz:
"It is understood that APEX MORTGAGE AND LOANS CORPORATION has the right to assign this promissory note, or
make use of it as collateral in favor of any third person whomsoever and this will constitute as an authority therefore
waiver of notice of such action taken [sic]."[35]
The purpose of the notice is only to inform the debtor that from the date of the assignment, payment should be made to
the assignee and not to the original creditor.[36]
IN VIEW WHEREOF, the petition is denied and the Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 51363 are affirmed.
SO ORDERED.

First Metro vs Este del Sol,, GR No. 141811, 15 November 2001, 369 SCRA 99
FACTS
FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal. Under the agreement,
the interest was 16% pa based on the diminishing balance. In case of default, an acceleration clause was provided and
the amount due is subject to 20% one-time penalty on the amount due and such amount shall bear interest at the highest
rate permitted by law. respondent executed a REM, individual continuing suretyship and an underwriting agreement
whereby FMIC shall underwrite the public offering of one P120,000 common shares of respondents capital stock for onetime underwriting fee of P200,000. For failure to pay its obligation, FMIC caused the foreclosure of the REM. At the public
auction, FIC was the highest bidder. Petitioner filed to collect for alleged deficiency balance against respondents since it
failed to collect from the sureties, plus interest at 21% pa. the trial court ruled in favor of FMIC. Respondents appealed
before the CA which held that the fees provided for in the Underwriting and Consultacy Agreements were mere
subterfuges to camouflage the excessively usurious interest charged. The CA ordered FMIC to reimburse petitioner
representing what is ue to petitioner and what is due to respondent.
ISSUE
Whether or not the interests are lawful
HELD
No. an apparently lawful loan is usurious when it is intended that additional compensation for the loan be
disguised by an ostensibly unrelated contract for the payment by the borrower for the lenders services which re of little
value or which are not in fact to be rendered. Article 1957 clearly provides: contracts and stipulations, under any cloak or
device whatever, intended to circumvent the law agaistn usury shall be void. The borrower may recover in accordance
with the laws on usury.
Imperial VS Jaucian
FACTS:
Petitioner obtained six (6) separate loans amounting to P 320,000.00 from the respondent. In the written
agreement, they agreed upon the 16% interest per month plus penalty charge of 5% per month and the 25% attorneys
fee, failure to pay the said loans on the stipulated date.

Petitioner executed six (6) separate promissory notes and issued several checks as guarantee for payment.
When the said loans become overdue and unpaid, especially when the petitioners checks issued were dishonored,
respondent made repeated oral and written demands for payment.
The petitioner was able to pay only P 116,540.00 as found by the RTC. Although she alleged that she had
already paid the amount of P 441,780.00 and the excess of P 121,780.00 is more than the interest that could be legally
charged, the Court affirms the findings of RTC that petitioner is still indebted to the respondent.

ISSUE:
Whether or not the stipulated interest of 16% per month, 5% per month for penalty charge and 25% attorneys fee
are usurious.

HELD:
YES. The rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. While the Usury
Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche
authority to raise interests rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.
When the agreed rate is iniquitous or unconscionable, it considered contrary to morals, if not against the law.
Such stipulation is void. Since the stipulation is void, it is as if there was no express contract thereon. Hence, courts may
reduce the interest rate as reason and equity demand.
The interest rate of 16% per month was reduced to 1.167% per month or 14% per annum and the penalty charge
of 5% per month was also reduced to 1.167% per month or 14% per annum.
The attorneys fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal
clause. So long as the stipulation does not contravene the law, morals, public order or public policy, it is binding upon the
obligor. Nevertheless, in the case at bar, petitioners failure to comply fully with her obligation was not motivated by ill will
or malice. The partial payments she made were manifestations of her good faith. Hence the attorneys fees were reduced
to 10% of the total due and payable.

G.R. No. 148491

February 8, 2007

SPOUSES ZACARIAS BACOLOR and CATHERINE BACOLOR, Petitioners, VS

BANCO FILIPINO SAVINGS AND MORTGAGE BANK, DAGUPAN CITY BRANCH and MARCELINO C.
BONUAN, Respondents.
Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the
Decision 1 of the Court of Appeals in CA-G.R. CV No. 47732 promulgated on February 23, 2001 and its Resolution dated
May 30, 2001.
On February 11, 1982, spouses Zacarias and Catherine Bacolor, herein petitioners, obtained a loan ofP244,000.00 from
Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, respondent. They executed a promissory note
providing that the amount shall be payable within a period of ten (10) years with a monthly amortization of P5,380.00
beginning March 11, 1982 and every 11th day of the month thereafter; that the interest rate shall be twenty-four percent
(24%) per annum, with a penalty of three percent (3%) on any unpaid monthly amortization; that there shall be a service
charge of three percent (3%) per annum on the loan; and that in case respondent bank seeks the assistance of counsel to
enforce the collection of the loan, petitioners shall be liable for ten percent (10%) of the amount due as attorneys fees and
fifteen percent (15%) of the amount due as liquidated damages.
As security for the loan, petitioners mortgaged with respondent bank their parcel of land located in Dagupan City,
Pangasinan, registered under Transfer Certificate of Title No. 40827.
From March 11, 1982 to July 10, 1991, petitioners paid respondent bank P412, 199.36. Thereafter, they failed to pay the
remaining balance of the loan.

On August 7, 1992, petitioners received from respondent bank a statement of account stating that their indebtedness as of
July 31, 1992 amounts to P840,845.61.
In its letter dated January 13, 1993, respondent bank informed petitioners that should they fail to pay their loan within
fifteen (15) days from notice, appropriate action shall be taken against them.
Due to petitioners failure to settle their obligation, respondent instituted, on March 5, 1993, an action for extra-judicial
foreclosure of mortgage.
Prior thereto, or on February 1, 1993, petitioners filed with Branch 40 of the same RTC, a complaint for violation of the
Usury Law against respondent, docketed as Civil Case No. D-10480. They alleged that the provisions of the promissory
note constitute a usurious transaction considering the (1) rate of interest, (2) the rate of penalties, service charge,
attorneys fees and liquidated damages, and (3) deductions for surcharges and insurance premium. In their amended
complaint, petitioners further alleged that, during the closure of respondent bank, it ceased to be a banking institution and,
therefore, could not charge interests and institute foreclosure proceeding.
On August 25, 1994, the RTC rendered its decision dismissing petitioners complaint, holding that:
(1) The terms and conditions of the Deed of Mortgage and the Promissory Note are legal and not usurious.
The plaintiff freely signed the Deed of Mortgage and the Promissory Note with full knowledge of its terms and conditions.
The interest rate of 24% per annum is not usurious and does not violate the Usury Law (Act 2655) as amended by P.D.
No. 166.
The rate of interest, including commissions, premiums, fees and other charges, on a loan or forbearance of any money
etc., regardless of maturity x x x, shall not be subject to any ceiling under or pursuant to the Usury Law, as amended (CB
Circular no. 905). Hence, the 24% interest per annum is allowed under P.D. No. 166.
For sometime now, usury has been legally non-existent. Interest can now be as lender and borrower may agree upon
(Verdejo v. CA, Jan. 29, 1988. 157 SCRA 743).
The imposition of penalties in case the obligation is not fulfilled is not prohibited by the Usury Law. Parties to a contract of
loan may validly agree upon the imposition of penalty charges in case of delay or non-payment of the loan. The purpose is
to compel the debtor to pay his debt on time (Go Chioco v. Martinez, 45 Phil. 256, 265).
(2) The closure of Banco Filipino did not suspend or stop its usual and normal banking operations like the collection of
loan receivables and foreclosures of mortgages.
In view of the foregoing, plaintiffs failed to substantiate their cause of action against the defendant.

On appeal, the Court of Appeals rendered its Decision affirming the Decision of the trial court. Petitioners subsequent
motion for reconsideration was denied.
Hence, this present petition for review on certiorari raising this lone issue: whether the interest rate is "excessive and
unconscionable."
It is the petitioners contention that while the Usury Law ceiling on interest rates was lifted by Central Bank Circular No.
905, there is nothing in the said circular which grants respondent bank carte blanche authority to raise interest rates to
levels which "either enslave the borrower or lead to a hemorrhaging of their assets." 3

In its comment 4 , respondent bank maintained that petitioner, by signing the Deed of Mortgage and Promissory Note,
knowingly and freely consented to its terms and conditions. A contract between the parties must not be impaired. The
interest rate of 24% per annum is not usurious and does not violate the Usury Law. 5
The petition lacks merit.
Article 1956 of the Civil Code provides that no interest shall be due unless it has been expressly stipulated in
writing. Here, the parties agreed in writing on February 11, 1982 that the rate of interest on the petitioners loan shall be
24% per annum.
At the time the parties entered into the loan transaction, the applicable law was the Usury Law (Act 2655), as amended by
P.D. No. 166, which provides that the rate of interest for the forbearance of money when secured by a mortgage upon real
estate, should not be more than 6% per annum or the maximum rate prescribed by the Monetary Board of the Central
Bank of the Philippines in force at the time the loan was granted. Central Bank Circular No. 783, which took effect on July
1, 1981, removed the ceiling on interest rates on a certain class of loans, thus:
SECTION 2. The interest rate on a loan forbearance of any money, goods, or credits with a maturity of more than seven
hundred thirty (730) days shall not be subject to any ceiling. 6
In the present case, the term of the subject loan is for a period of 10 years. Considering that its maturity is more than 730
days, the interest rate is not subject to any ceiling following the above provision. Therefore, the 24% interest rate agreed
upon by parties does not violate the Usury Law, as amended by P.D. 116.
This Court has consistently held that for sometime now, usury has been legally non-inexistent and that interest can now
be charged as lender and borrower may agree upon. 7 As a matter of fact, Section 1 of Central Bank Circular No. 905
states that:
SECTION 1. The rate of interest, including commissions, premiums, fees and other charges , on a loan or forbearance of
any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected
by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury
Law, as amended. 8
Moreover, in Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction
Corporation, 9 this Court has ruled that:
With the suspension of the Usury Law and the removal of interest ceiling, the parties are free to stipulate the interest to be
imposed on monetary obligations. Absent any evidence of fraud, undue influence, or any vice of consent exercised by one
party against the other, the interest rate agreed upon is binding upon them.
There is no indication in the records that any of the incidents which vitiate consent on the part of petitioners is present.
Indeed, the interest rate agreed upon is binding on them. With respect to the penalty and service charges, the same are
unconscionable or excessive.
Petitioners invoke this Courts rulings in Almeda vs. Court of Appeals 10 and Medel vs. Court of Appeals 11 to show that the
interest rate in the subject promissory note is unconscionable. Their reliance on these cases is misplaced. In Almeda,
what this Court struck down as being unconscionable and excessive was the unilateral increase in the interest rates
from 18% to 68%. This Court ruled thus:
It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms
of its contract by increasing the interest rates of 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 the interest rate

provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest x x
x.
Petitioners also cannot find refuge in Medel. In this case, what this Court declared as unconscionable was the imposition
of a 66% interest rate per annum. In the instant case, the interest rate is only 24% per annum, agreed upon by both
parties. By no means can it be considered unconscionable or excessive.1awphi1.net
Verily, petitioners cannot now renege on their obligation to comply with what is incumbent upon them under the loan
agreement. A contract is the law between the parties and they are bound by its stipulations. 12
Petitioners further contend that during the closure of respondent bank (from January 1, 1985 to July 1, 1994), it lost its
function as a banking institution and, therefore, could no longer charge interests and institute foreclosure proceedings.
In the case of Banco Filipino Savings & Mortgage Bank vs. Monetary Board, Central Bank of the Philippines, 13this Court
ruled that the banks closure did not diminish the authority and powers of the designated liquidator to effectuate and carry
on the administration of the bank, thus:
x x x. We did not prohibit however acts such as receiving collectibles and receivables or paying off creditors claims and
other transactions pertaining to the normal operations of a bank. There is no doubt that that the prosecution of suits for
collection and the foreclosure of mortgages against debtors of the bank by the liquidator are among the usual and
ordinary transactions pertaining to the administration of a bank. x x x.
Likewise, in Banco Filipino Savings and Mortgage Bank vs. Ybaez, 14 where one of the issues was whether respondent
bank can collect interest on its loans during its period of liquidation and closure, this Court held:
In Banco Filipino Savings and Mortgage Bank v. Monetary Board, the validity of the closure and receivership of Banco
Filipino was put in issue. But the pendency of the case did not diminish the authority of the designated liquidator to
administer and continue the banks transactions. The Court allowed the bank liquidator to continue receiving collectibles
and receivables or paying off creditors claims and other transactions pertaining to normal operations of a bank. Among
these transactions were the prosecution of suits against debtors for collection and for foreclosure of mortgages. The bank
was allowed to collect interests on its loans while under liquidation, provided that the interests were legal.
In fine, we hold that the interest rate on the loan agreed upon between the parties is not excessive or unconscionable; and
that during the closure of respondent bank, it could still function as a bonding institution, hence, could continue collecting
interests from petitioners.
WHEREFORE, we DENY the petition and AFFIRM the challenged Decision and Resolution of the Court of Appeals in CAG.R. CV No. 47732. Costs against petitioners.
SO ORDERED.
G.R. No. 106018 December 5, 1994
WILFREDO VERDEJO, petitioner, VS
HONORABLE COURT OF APPEALS, HERMINIA PATINIO and JOHN DOE, respondents.
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court of the decision of the Court of
Appeals in CA-G.R. CV No. 22638, titled "Wilfredo Verdejo v. Herminia Patinio and John Doe."
On January 11, 1985, petitioner instituted an action for sum of money against private respondents, docketed as Civil Case
No. 2546-P before the Regional Trial Court, Branch 111, Pasay City. He alleged that on November 17, 1983, private
respondents executed in his favor a Deed of Sale with Right to Repurchase for the sum of P60,560.00, to be paid every

15 days starting January 1984 until fully paid. Private respondents failed to make any payment notwithstanding repeated
demands by petitioner, causing the latter to file said action (Rollo, p. 22).
In their answer with counterclaim, private respondents denied having received the amount of P60,560.00 from petitioner.
The claimed that they had been previously borrowing from petitioner and for the purpose of reconciling their outstanding
accounts of P20,000.00 at 10% interest per month, and P7,000.00 at 12% interest per month, the said deed of sale was
executed. However, it was understood by the parties that the amount of P60,560.00 represented their outstanding account
of P27,000.00 plus 10% interest per month. Private respondents pointed out that the actual loan received sometime in
1982 was much lower than P60,650.00 and that the same had already been paid (Rollo, pp. 25-29).
Private respondents further argued that petitioner charged usurious interest rates of 10% to 12% per month in
contravention of the Usury Law. They sought the recovery of P12,490.00 representing overpayment of interest, damages
and attorney's fees.
The trial court dismissed the complaint in its Decision dated September 3, 1986, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered dismissing plaintiff's complaint for lack of merit.
On defendants' counterclaim, plaintiff is hereby ordered to refund to defendants the amount of P13,890.00
and to further pay to defendants the amount of P5,000.00 as attorney's fees and the costs of this suit
(Rollo,
p. 41).
The trial court found that the Deed of Sale with Right to Repurchase was the culmination of a series of loan transactions
entered into by the parties. Of the P60,650.00 consideration, the actual amount received by private respondents by way of
loan was P22,000.00 with the balance of P38,560.00 representing interest. It ruled that the usurious interest rates were
incorporated to the main consideration of P60,650.00 to circumvent the laws against usury. Considering that at the time
the loans were entered into, the Usury Law was still in effect and beyond the scope of Central Bank (CB) Circular No. 905,
January 1, 1983, which lifted the ceiling on interest rates prescribed under the Usury Law, it held that the contract of loan
was valid as to the loan but avoid as to the usurious interest (Rollo, pp. 37-39).
The trial court also found that private respondents made a total payment of P35,890.00 with an overpayment of
P13,890.00 (Rollo, p. 41).
On appeal by petitioner, the Court of Appeals modified the judgment of the trial court in its Decision dated April 30, 1992,
the dispositive portion of which provides:
WHEREFORE, except for the modification that plaintiff Wilfredo Verdejo should be ordered to refund
defendant Herminia Patinio the amount of P15,990.00 instead of P13,890.00 as found by the lower court,
and that the award of attorney's fees of P5,000.00 should be disallowed, the Decision of September 3,
1986 of the RTC-Pasay City, Branch 111, in Civil Case No. 2546-P, is hereby AFFIRMED, in all other
respects (Rollo, p. 106).
The appellate court explained that the loans were obtained by private respondents before the promulgation of CB Circular
No. 905, thus:
. . . While Exhibit A, Deed of Sale with Right to Repurchase, was executed on November 17, 1983, the
same was a consolidation or carry over of previous loan transactions in February, 1982 (Exhibit
1), November, 1982 (Exhibit 2), and November-December, 1982 (Exhibit 1), before the "open ceiling
policy" of the Central Bank Circular No. 905 took effect. At the time the transactions took place per
Exhibits 1, 2 and 3, the Usury Law was still in effect, and Exhibit A, which was merely a carry over of
transactions in Exhibits 1, 2 and 3 could not legalize previous unlawful loan transactions (Rollo, p. 103,
Emphasis supplied).

The Court of Appeals denied petitioner's motion for reconsideration in its Resolution dated June 23, 1992 (Rollo, p. 111).
Hence, the instant petition where petitioner raised the following errors of the appellate court in: (1) holding that the Deed
of Sale with Right to Repurchase cannot be enforced against private respondent Herminia Patinio notwithstanding the
effectivity of CB Circular No. 905; and (2) making conclusions of fact unsupported by substantial evidence.
The petition is bereft of merit and merely raises factual issues, the determination of which is best left to the trial court.
Well-settled is the rule that findings of fact of the trial court and the Court of Appeals are not to be disturbed on appeal and
are entitled to great weight and respect (Tay Chun Suy v. Court of Appeals, 229 SCRA 151 [1993]). We see no reason to
depart from the findings of the Court of Appeals.
CONSIDERING THE FOREGOING, the Court Resolved to DENY the petition for lack of merit.
SO ORDERED.

Bulos vs Yasuma

In 1988, Bulos, Atty. Tabalingcos and Dr. Lim incurred a P2.5M loan from Yasuma, a Japanese national. The terms of the
loan provide that it is payable in 3 months at 4% interest rate; that in case of nonpayment, it shall continue at that rate until
paid or 48% per annum. And in case of litigation, plus 20% of principal balance for attys fees. Dr. Lim signed the
promissory note in behalf of the others as agreed upon. Each of them mortgaged their respective properties in favor of
Yasuma.
The three failed to pay upon maturity in 1989. Loan then was already at P2.7M. Yasuma foreclosed the mortgaged
properties. The sale amounted to P1.6M leaving a balance of P1.06M. Interest also accrued and other
penalties ballooning the balance to P2.4M.
Yasuma won a subsequent collection suit. Bulos appealed. The Court of Appeals affirmed the lower court. It ruled that
Yasuma is entitled to the 20% principal balance for attys fees as per contract. The CA however reduced the interest rate
to 21% per annum.
In the main, Bulos claims that his obligation was extinguished when his property was foreclosed via dacion en pago and
when he offered his shares of stock in the Rural Bank of Paranaque to Yasuma.

ISSUE: Whether or not Bulos is correct.

HELD: No. The dacion en pago merely paid off a portion of the loan. Second, Yasuma is a foreign national and is banned
by law to be shareholder in a rural bank.
The additional penalty of paying an additional 20% for attys fees is valid for it was agreed upon in the promissory note.
The parties are bound by it.
The 48% per annum interest rate is excessive as well as the reduced amount of 21% per annum. Though the ceiling of
interest rate has been removed by CB Circular 905, in no way shall interest rates be excessive as to enslave borrowers.
Interest rates of 3% per month or higher is already excessive. Hence, the interest is reduced to the legal rate which is at
12% per annum.

G.R. No. L-57314 November 29, 1983

TEODORO SANCHEZ, petitioner, vs.
HON. CARLOS R. BUENVIAJE, Presiding Judge, Branch VII, Court of First Instance of Camarines Sur, Iriga City,
and ALEJO SANCHEZ, respondents.
This is a petition to review a decision rendered by the defunct Court of First Instance of Camarines Sur, Branch VII, with
following factual background.
On August 25, 1976, Alejo Sanchez sued Teodoro Sanchez and Leonor Santilles in the Municipal Court of Bato,
Camarines Sur, for the recovery of P2,000.00 which the latter had promised to pay in two notes. Said notes also
contained stipulations for interest at the rate of 10% per month The Municipal Court rendered judgment ordering Teodoro
Sanchez only to pay to Alejo Sanchez P2,000.00 plus interest thereon at the legal rate from the filing of the complaint.
Teodoro appealed to the Court of First Instance of Camarines Sur which rendered the following judgment: t.hqw
WHEREFORE, the judgment rendered by the lower court is hereby AFFIRMED with modification as to
costs. Judgment is hereby rendered, ordering the defendant to pay his indebtedness to plaintiff in the total
sum of P2,000.00, plus interest thereon at the legal rate from the firing of the complaint in this case to
actual payment. Defendant to pay double the costs of this suit. (Rollo p. 30.)
In his petition for review, Teodoro claims that in a loan with usurious interest both the loan and the usurious interest are
void.
Alejo was required to comment on the petition but it appears that he died sometime in the latter part of 1980 and the early
part of 1981. (Rollo, p. 42.) Accordingly, his children were impleaded as respondents and required to file comment which
they failed to do despite notice to them.
The absence of comment on the part of the private respondents notwithstanding, We resolve the petition without any
difficulty.
It is now well-settled that: "the Usury Law (Act No. 2655), by its letter and spirit, does not deprive the lender of his right to
recover of the borrower the money actually loaned this only in the case that the interest collected is usurious. The law, as
it is now, does not provide for the forfeiture of the capital in favor of the debtor in usurious contract ... (Lopez and Javelona
vs. El Hogar Filipino, 47 Phil. 249, 275 [1925].)
True it is that in Briones vs. Cammayo, L-23559, Oct. 4, 1971; 41 SCRA 404, Chief Justice Concepcion and now Chief
Justice Fernando concurred with Justice Castro who opined that both loan and usurious interest are void. However, it
must be emphasized that eight other justices maintained that only the usurious interest is void but not the principal
obligation.
WHEREFORE, finding the judgment sought to be reviewed to be in accordance with law, the petition is hereby dismissed
for lack of merit with costs against the petitioner.
SO ORDERED.1wph1.t
G.R. No. 113412 April 17, 1996
Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,
vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda and
Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six years at an
interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract
covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at
Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was executed
between the parties. Pertinent portions of the said agreement are quoted below:
SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semiannually in arrears, the first interest payment to become due and payable six (6) months from date of
initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a
penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not
rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future; provided, that
the interest rate on this/these accommodations shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall take effect on
the effectivity date of the increase or decrease of the maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66, 2 a substantial
portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank, over petitioners' protestations,
raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon
increased from an initial 21% to a high of 68% between March of 1984 to September, 1986. 4
Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the spouses
filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and temporary
restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition, which was
raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB
could unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and in relation to
Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a writ of preliminary
injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit
agreement. By this time the spouses were already in default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering the
extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14, 1989. Upon
motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary injunction,
staying the public auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ of
preliminary injunction. Petitioners filed a motion for reconsideration. In the interim, respondent bank once more set a new
date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date, however, petitioners
tendered to respondent bank the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued
interest calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount of
P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary
injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz. On
March 15, 1990, respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary injunction
enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a
motion for reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who issued
an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank filed a petition
for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following orders of the Regional
Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the
foreclosure sale of Mavin Plaza set on March 12, 1990;
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the
writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the
writ of preliminary injunction; and
4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for
reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding respondent
bank's right to foreclose the mortgaged property pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for
Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993 and October 28, 1993,
respectively, were denied by respondent court in its resolution dated January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal issues namely:
1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit
agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza under the
mandatory foreclosure provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were
illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the
agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property
pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased rates
upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the
parties based on their essential equality. 6 Any contract which appears to be heavily weighed in favor of one of the parties
so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which
is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that 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 deescalation; 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. The interest provision states:
(c) interest and Charges
(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event that the applicable maximum interest
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally raising the
interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the aforestated increases violated the
principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
rates
. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the
agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which
limits such changes to once every twelve months.
Besides violating P.D. 116, 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. 308. 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 (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). 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. 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
lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the
weaker party whom the courts of justice must protect against abuse and imposition.
PNB's successive increases of the interest rate on the private respondent's loan, over the latter's protest,
were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its

terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by
such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which
provides that "no interest shall be due unless it has been expressly stipulated in writing."
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24%per
annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as
found by the Court of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the latter's
vehement protests, were arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any lending
institution for that matter, to progressively increase interest rates on borrowings to an extent which would have made it
virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit agreements are
perfectly valid and do not contravene public policy. Such clauses, however, (as are stipulations in other contracts) are
nonetheless still subject to laws and provisions governing agreements between parties, which agreements while they
may be the law between the contracting parties implicitly incorporate provisions of existing law. Consequently, while the
Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as
granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers
or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending institutions to
industries and businesses in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and
lopsided policy regarding the interest rates of petitioners' borrowings in the instant case.
Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by
respondent bank, for the credit agreement specifically requires that the increase be "within the limits allowed by law". In
the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No. 905 could not be
properly invoked to justify the escalation clauses of such contracts, not being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement requires that the same be made "within the limits allowed by
law," obviously referring specifically to legislative enactments not administrative circulars. Note that the phrase "limits
imposed by law," refers only to the escalation clause. However, the same agreement allows reduction on the basis of law
or the Monetary Board. Had the parties intended the word "law" to refer to both legislative enactments and administrative
circulars and issuances, the agreement would not have gone as far as making a distinction between "law or the Monetary
Board Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction was the subject of the
Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that:
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from
12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase.
the interest rate stipulated in this contract without advance notice to me/us in the event.
a law
increasing
the lawful rates of interest that may be charged

on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that the interest rate may be increased "in the event
a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind
of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not
strictly a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An
administrative regulation adopted pursuant to law has the force and effect of law." "That administrative
rules and regulations have the force of law can no longer be questioned."
The distinction between a law and an administrative regulation is recognized in the Monetary Board
guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra).
According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No.
494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank
regulation is promulgated increasing the maximum rate for loans." The guidelines thus presuppose that a
Central Bank regulation is not within the term "any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a
to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate
of interest agreed upon may be increased in the event that the applicable maximum rate of interest is
increased "by law or by the Monetary Board." To quote:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or
credits may stipulate that the rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in the
agreement that the rate of interest agreed upon shall be reduced in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall take effect
on or after the effectivity of the increase or decrease in the maximum rate of interest.'
(Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that
there can be an increase in interest if increased by law or by the Monetary Board; and (2) 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."
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 (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of
P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 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. 9 Here, as clearly demonstrated above, not only 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.
We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose
petitioners' properties under P.D. 385. We find respondent's pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be
denied substantial cash inflows necessary to finance the government's development projects all over the country by large
borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans. 10 In facilitating
collection of debts through its automatic foreclosure provisions, the government is however, not exempted from observing
basic principles of law, and ordinary fairness and decency under the due process clause of the Constitution. 11
In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on merit
in the courts below, the exact amount of petitioner's obligations could not be determined. Thus, the foreclosure provisions
of P.D. 385 could be validly invoked by respondent only after settlement of the question involving the interest rate on the
loan, and only after the spouses refused to meet their obligations following such determination. In Filipinas Marble
Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that:
We cannot, at this point, conclude that respondent DBP together with the Bancom people actually
misappropriated and misspent the $5 million loan in whole or in part although the trial court found that
there is "persuasive" evidence that such acts were committed by the respondent. This matter should
rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot
automatically be applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under
the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would
unduly prejudice the petitioner, its employees and their families.
Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or
not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was
no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385
will have to await the presentation of evidence in a trial on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry
during the Marcos Martial Law years. This we can not allow to happen. For the benefit of future
generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in
public so that the same may NEVER be repeated.
It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the
parties below to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of the
Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent bank. The
latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to settle their
obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations
in the courts below, in spite of the unsettled differences in interpretation of the credit agreement was obviously made in
bad faith, to gain the upper hand over petitioners.
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. Their effect was to increase the total obligation on an eighteen million peso loan to an amount
way over three times that which was originally granted to the borrowers. That these increases, occasioned by crafty

manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur
business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as the
resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial
Court of Makati for further proceedings.
SO ORDERED.