Vasquez v PNB

G.R. No. 228355. August 28, 2019

Justice Caguioa

FACTS:
1. Ricardo Vasquez was granted a loan by PNB secured by a REM. The interest rate agreed
upon by the parties was only 17% per annum. When Vasquez failed to pay some
amortizations of his loan, PNB unilaterally escalated the interest rate from 17 to 24%,
34%, without the prior knowledge of Vaszquez as borrower. Because of Vasquz being in
default, the properties subject of the REM are sold in a public auction.
2. Because of this, Vasquez filed a complaint with preliminary injunction to forestall the
sale of the properties. RTC dismissed the complaint, ruling that the stipulations in the
loan were executed by the parties willfully and voluntarily. CA affirmed with
modifications, but still ruled that the escalation of interest rates by Vasquez was valid.

ISSUE: Whether the escalation made by PNB was valid. NO. It violates the principle on mutuality
of contracts.
RATIONALE:
1. Even though there was stipulation in the loan agreement that the interest rates would
be subjected to escalations, PNB failed to sufficiently explain exactly how PNB arrived at
such interest rates.
a. PNB decided on its own to modify and increase the rates of interest, without
notifying and informing Vasquez before it modi􏰋ed the monetary interest rates,
and the basis for such modification. PNB merely sent statements of accounts
already imposing the interest rates unilaterally determined by PNB.
b. Not all escalation clauses are invalid. As explained in Sps. Almeda v. CA,
"[e]scalation 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 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."
2. The interest rate scheme imposed upon Vasquez under the loan agreement isclearly
one-sided, unilateral, and violative of one of the fundamental characteristics of
contracts — which is the essential equality of the contracting parties, oftentimes called
the principle of mutuality of contracts.
a. Therefore, the interest rate scheme provided under the Credit Agreement and
the promissory notes is null and void.
b. The principle of mutuality of contracts is pronounced in Article 1308 of the Civil
Code, which states that a contract "must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them."
c. The principle of mutuality of contracts dictates that a contract must be
rendered void when the execution of its terms is skewed in favor of one party.
As explained by recognized Civil Law Commentator, former CA Justice Eduardo P.
 Caguioa, the reason for this principle "is in order to maintain the enforceability
of contracts, for otherwise the same would be illusory."
d. As applied to the imposition of monetary interest, the Court has held that
"[t]here is no mutuality of contracts when the determination or imposition of
interest rates is at the sole discretion of a party to the contract. Further,
escalation clauses in contracts are void when they allow the creditor to
unilaterally adjust the interest rates without the consent of the debtor."
e. Jurisprudence holds that provisions in a loan agreement that grant lenders
unrestrained power to increase interest rates, penalties and other charges at the
latter's sole discretion and without giving prior notice to and securing the
consent of the borrowers reek of unilateral authority that is anathema to the
mutuality of contracts and enable lenders to take undue advantage of
borrowers. The rate of interest is a principal condition, if not the most important
component, of a loan agreement. Thus, "any modification thereof must be
mutually agreed upon; otherwise, it has no binding effect."
3. While providing the payment of interest on the subject loans, the loan documents
executed by the parties, on their face, failed to clearly and definitely fix the specific
interest rates to be applied on the subject loans.
a. Further, under the Credit Agreement, PNB reserved its unilateral right to
increase or decrease the interest rate, should PNB's cost of money to fund or
maintain the loan change. Then, as proven by the Statement of Account on
record, subsequent increases in the monetary interest were unilaterally made by
PNB which were admittedly without notifying Vasquez beforehand.
b. Hence, the interest rates imposed by PNB in the instant case should be deemed
null and void for being violative of the principle of mutuality of contracts, even
assuming arguendo that Vasquez intelligently consented to the interest rates
provisos found in the Credit Agreement and the other loan documents.
4. The foreclosure sale of the subject properties is null and void. Necessarily, the said
foreclosure sale cannot be deemed to have transferred the right of ownership and
possession to PNB and its successors-in-interest.