G.R. No. 107569 November 8, 1994
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.

FACTS

On April 7, 1982, private respondents Remedios Jayme-Fernandez and Amado Fernandez obtained a P50,000 loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from petitioner Philippine National Bank (PNB). The loan, evidenced by a Credit Agreement and Promissory Note, was amortized over three years at 12% annual interest and secured by a Real Estate Mortgage and a Chattel Mortgage. On February 17, 1983, private respondents were granted an additional P50,000 NACIDA loan, executing a new Promissory Note and amending the Credit Agreement to P100,000, with additional real estate mortgage security. The Credit Agreement contained a clause reserving PNB’s right to increase the interest rate within limits allowed by law, with corresponding decreases if the maximum rate is reduced. The Promissory Note and Real Estate Mortgage contract contained similar provisions. In 1984, PNB informed private respondents of successive interest rate increases: to 25% per annum plus 6% penalty on August 1, to 30% on October 15, and to 42% on October 25. As of December 1985, a P81,000 payment was applied mostly to interest and penalties, leaving a principal balance of P62,830.32. Private respondents’ efforts to have PNB re-adopt the 12% rate and condone penalties failed. They filed a suit for specific performance against PNB and NACIDA in the Regional Trial Court of Cebu, which dismissed the complaint. The Court of Appeals reversed the dismissal concerning PNB, ordering it to re-apply the 12% interest rate to the indebtedness.

ISSUE

Whether the escalation clause in the loan agreements authorized petitioner PNB to unilaterally increase the interest rates on the loan without the consent of private respondents.

RULING

No. The Supreme Court denied the petition and affirmed the decision of the Court of Appeals. The escalation clause, authorized by Section 2 of Presidential Decree No. 1684 and referenced under Central Bank Circular No. 905, allows contracting parties to stipulate adjustments in the interest rate subsequent to the agreement. However, these legal provisions do not authorize one party to unilaterally raise the interest rate without the other party’s consent. A contract requires mutual assent, and any modification, especially to a vital component like the interest rate, must be mutually agreed upon. The unilateral action of PNB in increasing the interest rate violated the principle of mutuality of contracts under Article 1308 of the Civil Code, which states that a contract must bind both parties and its validity or compliance cannot be left to the will of one of them. A clause granting one party an unbridled right to adjust rates unilaterally would be void for lack of mutuality and would characterize the agreement as a contract of adhesion. Private respondents were not estopped from questioning the increases, as silence to a proposal does not constitute acceptance.