Philippine Savings Bank vs Spouses Castillo

G.R. No. 193178               May 30, 2011

Facts:
Respondent spouses Castillo & Spouses Capati-Lobo were the registered owners of lots located in Tondo, Manila
On May 7, 1997, respondents obtained a loan, with real estate mortgage over the said properties, from petitioner Philippine
Savings Bank, with a face value of ₱2.5M. The Promissory Note, in part, reads:
(The whole agreement will be posted at the notes in the bottom)
FOR VALUE RECEIVED, I/We, solidarily, jointly and severally, promise to pay to the order of PHILIPPINE SAVINGS BANK, xxx (₱2,500,000.00),
Philippine currency, with interest at the rate of seventeen per centum (17%) per annum, from date until paid, as follows:
xxx
Also, the rate of interest herein provided shall be subject to review and/or adjustment every ninety (90) days.
xx
The rate of interest and/or bank charges herein stipulated, during the terms of this promissory note, its extensions, renewals or other
modifications, may be increased, decreased or otherwise changed from time to time within the rate of interest and charges allowed under
present or future law(s) and/or government regulation(s) as the PHILIPPINE SAVINGS BANK may prescribe for its debtors.
xxx
From the release of the loan in May 1997 until Dec 1999, petitioner had increased and decreased the rate of interest, the highest
of which was 29% and the lowest was 15.5% per annum, per the Promissory Note.
Respondents were notified in writing of these changes in the interest rate. They neither gave their confirmation thereto nor did
they formally question the changes. However, respondent Castillo sent several letters to petitioner requesting for the reduction of
the interest rates. Petitioner denied these requests.
Respondents defaulted in December 1999. Petitioner claimed that as of Feb 11, 2000, respondents had a total outstanding
obligation of ₱2,525,910.29. Petitioner sent them demand letters. Respondents failed to pay.
Thus, petitioner initiated an extrajudicial foreclosure sale. The auction sale was conducted on Jun 16, 2000, with the properties
sold for ₱2,778,611.27 and awarded to petitioner.
(RTC & CA posted at the notes in the bottom)
ISSUE #1
Were the modifications in the interest rates are unreasonable?
Ruling #1:
Yes. The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of contracts
under Article 1308 of the Civil Code, which provides that "[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them." A perusal of the Promissory Note will readily show that the increase or
decrease of interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker before a new
interest rate could be enforced. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or
compliance of the contract left solely to the will of one of the parties is likewise invalid.
Petitioner contends that respondents acquiesced to the imposition of the modified interest rates; thus, there was no violation of
the principle of mutuality of contracts. To buttress its position, petitioner points out that the exhibits presented by respondents
during trial contained a uniform provision, which states:
The interest rate adjustment is in accordance with the Conformity Letter you have signed amending your account’s interest rate review period
from ninety (90) to thirty days.
It further claims that respondents requested several times for the reduction of the interest rates, thus, manifesting their
recognition of the legality of the said rates. It also asserts that the contractual provision on the interest rates cannot be said to be
lopsided in its favor, considering that it had, on several occasions, lowered the interest rates.
We disagree. The above-quoted provision of respondents’ exhibits readily shows that the conformity letter signed by them does
not pertain to the modification of the interest rates, but rather only to the amendment of the interest rate review period from 90
days to 30 days. Verily, the conformity of respondents with respect to the shortening of the interest rate review period from 90 days
to 30 days is separate and distinct from and cannot substitute for the required conformity of respondents with respect to the
modification of the interest rate itself.
Issue #2:
Can a contract be changed without the consent of the other parties?

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Ruling #2:
No: Contract changes must be made with the consent of the contracting parties
Basic is the rule that there can be no contract in its true sense without the mutual assent of the parties . If this consent is absent
on the part of one who contracts, the 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, the
interest rate is undeniably always a vital component, for it can make or break a capital venture. Thus, any change must be mutually
agreed upon, otherwise, it produces no binding effect. 18
Escalation clauses are generally valid and do not contravene public policy. They are common in credit agreements as means of
maintaining fiscal stability and retaining the value of money on long-term contracts. To prevent any one-sidedness that these clauses
may cause, we have held in Banco Filipino Savings and Mortgage Bank v. Judge Navarro that there should be a corresponding de-
escalation clause that would authorize a reduction in the interest rates corresponding to downward changes made by law or by the
Monetary Board. As can be gleaned from the parties’ loan agreement, a de-escalation clause is provided, by virtue of which,
petitioner had lowered its interest rates.
Nevertheless, the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest rates .
The adjustment should have still been subjected to the mutual agreement of the contracting parties. In light of the absence of
consent on the part of respondents to the modifications in the interest rates, the adjusted rates cannot bind them notwithstanding
the inclusion of a de-escalation clause in the loan agreement.
The order of refund was based on the fact that the increases in the interest rate were null and void for being violative of the
principle of mutuality of contracts. The amount to be refunded refers to that paid by respondents when they had no obligation to do
so. Simply put, petitioner should refund the amount of interest that it has illegally imposed upon respondents. Any deficiency in
the payment of the obligation can be collected by petitioner in a foreclosure proceeding, which it already did.
Issue #3: (Probably dli na i.ask)
Can moral damages be recovered in case of breach of contract?
Ruling #3
No. Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party
from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract may give rise to exemplary
damages only if the guilty party acted in a fraudulent or malevolent manner.
In this case, we are not sufficiently convinced that fraud, bad faith, or wanton disregard of contractual obligations can be imputed
to petitioner simply because it unilaterally imposed the changes in interest rates, which can be attributed merely to bad business
judgment or attendant negligence. Bad faith pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a
wrong, a breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud. Respondents failed
to sufficiently establish this requirement. Thus, the award of moral and exemplary damages is unwarranted. In the same vein,
respondents cannot recover attorney’s fees and litigation expenses. Accordingly, these awards should be deleted.
However, as regards the above mentioned award for refund to respondents of their interest payments in excess of 17% per
annum, the same should include legal interest. In Eastern Shipping Lines, Inc. v. Court of Appeals,  we have held that when an
obligation is breached, and it consists in the payment of a sum of money, the interest on the amount of damages shall be at the rate
of 12% per annum, reckoned from the time of the filing of the complaint.

Xxxxxxxxxxxxxx notes xxxxxxxxxxxxxxxx

Notes
Full agreement:

FOR VALUE RECEIVED, I/We, solidarily, jointly and severally, promise to pay to the order of PHILIPPINE SAVINGS BANK, at its head office or
at the above stated Branch the sum of TWO MILLION FIVE HUNDRED THOUSAND PESOS ONLY (₱2,500,000.00), Philippine currency, with
interest at the rate of seventeen per centum (17%) per annum, from date until paid, as follows:
₱43,449.41 (principal and interest) monthly for fifty nine (59) months starting June 07, 1997 and every 7th day of the month thereafter with
balloon payment on May 07, 2002.
Also, the rate of interest herein provided shall be subject to review and/or adjustment every ninety (90) days.
All amortizations which are not paid on due date shall bear a penalty equivalent to three percent (3%) of the amount due for every month
or fraction of a month’s delay.

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 The rate of interest and/or bank charges herein stipulated, during the terms of this promissory note, its extensions, renewals or other
modifications, may be increased, decreased or otherwise changed from time to time within the rate of interest and charges allowed under
present or future law(s) and/or government regulation(s) as the PHILIPPINE SAVINGS BANK may prescribe for its debtors.
Upon default of payment of any installment and/or interest when due, all other installments and interest remaining unpaid shall
immediately become due and payable. Also, said interest not paid when due shall be added to, and become part of the principal and shall
likewise bear interest at the same rate herein provided. 4
RTC Decision (just in case I ask)
On October 1, 2001, respondents filed a case for Reformation of Instruments, Declaration of Nullity of Notarial Foreclosure Proceedings and Certificate
of Sale, Cancellation of Annotations on both lots, and Damages, with a plea for the issuance of a temporary restraining order (TRO) and/or writ of
preliminary prohibitory injunction, with the RTC, Branch 14, Manila.
In favor of the plaintiffs (the spouses), and against the defendants in the following manner:
1. Declared the increases of interest as unreasonable, excessive and arbitrary and ordering the defendant Philippine Savings Bank to refund to the
plaintiffs, the amount of interest collected in excess of seventeen percent (17%) per annum;
2. Declared the Extrajudicial Foreclosure conducted by the defendants on June 16, 2000 and the subsequent proceedings taken thereafter to be void ab
initio. (ordered to cause the cancellation of the corresponding annotations at the back of Transfer Certificates)
3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs moral, exemplary damages; and attorney’s fees.
CA Decision
AFFIRMED WITH MODIFICATIONS.
1. Declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering the defendant Philippine Savings Bank to refund
to the plaintiffs, the amount of interest collected in excess of seventeen percent (17%) per annum;
2. Declaries the Extrajudicial Foreclosure conducted by the defendants and the subsequent proceedings taken thereafter to be valid[;]
3. Defendant Philippine Savings Bank is adjudged to pay plaintiffs moral damages; exemplary damages; and attorney’s fees

Dispositive
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Decision dated August 27, 2009 and the Resolution dated August 4,
2010 of the Court of Appeals in CA-G.R. CV No. 86445 are AFFIRMED WITH MODIFICATIONS, such that the award for moral damages,
exemplary damages, attorney’s fees, and litigation expenses is DELETED, and the order of refund in favor of respondents of interest
payments made in excess of 17% per annum shall bear interest of 12% per annum from the time of the filing of the complaint until
its full satisfaction.
SO ORDERED.

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