New Sampaguita Builders Construction vs PNB

The New Sampaguita Builders Construction (Sampaguita), through its President Mr. Dee, had obtained a
loan accommodation from PNB amounting to Php 8M, secured by Real Estate Mortgages. As such,
Sampaguita executed a promissory note in favor of the bank.
It was stipulated that the said promissory notes would earn interest under the following rates; 19.5% in
the first, and 21.5% in the second and third. It was also stipulated that the bank may increase the
interest rate within the limits prescribed by law at any time depending on the bank policy it may have
in the future, without need of notice to Sampaguita.
Sampaguita defaulted in its payment, causing PNB to demand payment thereof under the pain of
foreclosure. Sampaguita, through its President Mr. Dee had made several arrangements with PNB by
tendering several checks. However, the said checks bounced, causing PNB to foreclose the said
mortgages and have the properties sold in public auction.
Since the proceeds of the auction sale was insufficient to settle the principal amount, PNB instituted a
collection suit against Sampaguita for Php 2.1M with interest and other charges.
However, the trial court dismissed the action, holding that Sampaguita had availed of the PNB Debt
Relief Package, relieving Sampaguita of its loan obligation with the bank.
Upon recourse of PNB with the CA, the appellate court reversed the trial court ruling, holding that
Sampaguita did not qualify under the PNB Debt Relief Package.
Sampaguita sought recourse with the SC and challenged, among other things, the power of the bank to
unilaterally increase the interest rate without prior notice to Sampaguita.
WON the stipulation empowering the bank to unilaterally increase the interest rate is valid.
(1.) NO. The stipulation is void. Such condition cannot give the bank unrestrained freedom to charge any
rate other than that which was agreed upon. No interest shall be due unless such is expressly stipulated in
writing. The interest rate cannot be unilaterally altered by the bank without consent of Sampaguita.
The unilateral determination and imposition of increased rates is violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code. One-sided impositions do not have the force of law
between the parties on account that such impositions are not based on the parties essential equality and
mutuality.
(2.) Although escalation clauses are valid in maintaining fiscal stability and retaining the value of money
on long-term contracts, giving respondent an unbridled right to adjust the interest independently and
upwardly would completely take away from petitioners the right to assent to an important modification in
their agreement and would also negate the element of mutuality in their contracts.
The clause which made the fulfillment of the contracts dependent exclusively upon the uncontrolled
will of bank and was therefore void. Besides, the pro forma promissory notes have the character of
a contract adhesion which is strictly construed against the party making the contract.

While the Usury Law ceiling on interest rates was lifted by Central Bank Circular No. 905, nothing in the
said Circular grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets.
Beltran vs PAIC Finance
The Spouses Beltran purchased from SESCO a unit of Performance Analyzer. As such, the spouses made
initial payments to decrease the outstanding balance. It was agreed by the parties that the balance of the
spouses Beltran would be financed by PAIC Finance. Under the agreement, the spouses will lease the unit
from PAIC until the principal amount is fully settled; that in such case, ownership over the unit shall be
vested to the spouses Beltran.
However, the unit malfunctioned despite the repairs earlier made by SESCO. The said repairs were found
to be unsatisfactory by the Beltrans who thereupon decided to return the unit and discontinued the
monthly rental payments to PAIC. Consequently, PAIC filed an action for collection of sum of money
against the spouses Beltran, demanding payment for the arrears in rental.
The trial court ruled to dismiss the complaint, holding that since the contract is one of lease, the lessor
PAIC is obliged to deliver the object of the lease in such condition as to render it fit for the use
intended, as provided under the Civil Code. As such, the Performance Analyzer proved to be unfit for the
use intended soon after delivery. Consequently, the lease must be deemed extinguished because the thing
leased was totally unfit for the purposes of the lease.
Upon appeal of PAIC with the CA, the appellate court affirmed the trail court decision, but held that the
contract under consideration is not one of lease but one of sale. It held that the contract of lease is but
a scheme to simulate the real agreement which is a financing arrangement where the spouses Beltran
would pay the unpaid balance to PAIC who shouldered the purchase price of the Performance
Analyzer.
PAIC sought recourse with the SC, arguing that the CA erred in applying the provisions under the Civil
Code in determining the character of the agreement; that the agreement is one of a Financial Lease
Agreement governed under R.A. 5980, entitled An act regulating the organization of Financial
Companies.
WON the agreement in the present case is a Financial Lease.
(1.) YES. The contract in consideration is a Financial Lease. Financial leases, while they are complex
arrangements, cannot be casually dismissed as "simulated contracts." To the contrary, they are genuine or
legitimate contracts which have been accorded statutory recognition under R.A. 5980, the Financing
Company Act.
The basic purpose of a financial leasing transaction is to enable the prospective buyer of equipment, who
is unable to pay for such equipment in cash in one lump sum, to lease such equipment in the meantime for
his use, at a fixed rental sufficient to amortize at least 70% of the acquisition cost (including the expenses
and a margin of profit for the financial lessor) with the expectation that at the end of the lease period, the
buyer/financial lessee will be able to pay any remaining balance of the purchase price.
A financing lease may be seen to be a contract sui generis, possessing some but not necessarily all of the
elements of an ordinary or civil law lease. Thus, legal title to the equipment leased is lodged in the
financial lessor. The financial lessee is entitled to the possession and use of the leased equipment. At the

same time, the financial lessee is obligated to make periodic payments denominated as lease rentals,
which enable the financial lessor to recover the purchase price of the equipment which had been paid to
the supplier thereof. The Beltrans are therefore bound to pay to PAIC all the rental payments which
accrued and are due and payable under that contract.
Sia vs CA
The plaintiff Sia rented a safety deposit box of the defendant Security Bank for the safekeeping of the
plaintiffs stamp collection. However, the stamp collection was damaged by flood water which seeped
through the safety deposit box contained in the vault of the defendant bank.
The plaintiff now sued the bank for damages. The defendant bank argued that it has limited liability under
the Rules and Regulations Concerning Lease of Safety Deposit Box. It also argued that the contract
between the bank and the plaintiff is not one of deposit, but is actually a lease agreement; that it must be
absolved of any liability as the damage to the stamp collection was by reason of flood, a fortuitous event.
The trial court held in favor of the plaintiff and ordered the defendant bank to pay the corresponding
damages sought after.
Upon appeal of the bank with the CA, the appellate court reversed the trial court ruling, holding that the
agreement is not one of deposit but one of lease, hence the Civil Code provisions on Deposits are not
applicable. It also held that under the lease agreement, the defendant banks liability is limited to the
exercise of diligence to prevent the opening of the safety deposit box by any person other than the
plaintiff or his representatives; that there is no showing that the defendant bank did not exercise
diligence in the safekeeping of the stamps; that the damage was due to a fortuitous event; that the
bank does not have custody of the items deposited.
WON the agreement is one of lease.
(1.) NO. The utilization of a safety deposit box is not governed under the law on lease, nor is exclusively
governed by the law on deposit. In the case of Agro Industrial vs CA, the SC declared that such is a
special kind of deposit; that the relationship between a bank renting out a safety deposit box and its
customers is that of a bailor bailee.
Any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being contrary to law and public policy. The
stipulation that the bank is not a depositary and that it is merely liable to exercise due diligence in
preventing any person aside from the plaintiff or his representatives from opening the safety deposit box
are void as they are contrary to law and public policy.
It is not correct to assert that the Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises and is under its absolute control;
moreover, the Bank keeps the guard key to the said box.
(2.) The bank is negligent in keeping the items deposited safe. The bank was aware of the floods of 1985
and 1986; it also knew that the floodwaters inundated the room where the safety deposit box was located.
In view thereof, it should have lost no time in notifying the petitioner in order that the box could have
been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this
respect, it failed to exercise the reasonable care and prudence expected of a good father of a family,
thereby becoming a party to the aggravation of the injury or loss.

Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the
Civil Code, which reads; Those who in the performance of their obligation are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for damages.