G.R. No. 109563 July 9, 1996
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, MARIA AMOR BASCOS and MARCIANO BASCOS, respondents.

FACTS

Spouses Maria Amor and Marciano Bascos obtained a P15,000 loan from PNB, secured by a real estate mortgage. The promissory note stipulated a 12% annual interest rate but contained clauses allowing PNB to unilaterally increase the rate “within the limits allowed by law.” The real estate mortgage contract contained a similar escalation clause. Following an extension of the loan term, PNB successively increased the interest rate from 12% to 28% per annum between 1979 and 1984. Upon the spouses’ default, PNB sought to foreclose the mortgage to collect the ballooned indebtedness.
The spouses filed a complaint seeking to nullify the interest rate increases. They argued the escalation clauses were invalid and the increases violated Article 1959 of the Civil Code. The Regional Trial Court ruled in favor of the spouses, declaring the increases null and void and limiting the interest to the original 12%. The Court of Appeals affirmed this decision.

ISSUE

Whether the escalation clauses in the loan documents validly authorized PNB to unilaterally impose successive increases in the interest rate.

RULING

The Supreme Court affirmed the lower courts’ decisions, ruling the escalation clauses invalid. The legal logic rests on the principle of mutuality of contracts under Article 1308 of the Civil Code, which requires that contracts must bind both parties and their validity cannot be left to the will of one. The clauses granted PNB a blanket authority to increase rates at any time based solely on its own policies, without any stipulation requiring the borrowers’ consent to such modifications. This created a unilateral determination of the principal monetary obligation, placing the borrowers at the absolute mercy of the bank.
The Court emphasized that while Central Bank Circular No. 905 lifted interest rate ceilings, it did not grant lenders unbridled authority to impose oppressive increases. A valid escalation clause must provide for a corresponding de-escalation and, more importantly, must be based on movements of an objective financial indicator or market rate. It cannot be based solely on the lender’s discretion. PNB’s successive increases, implemented without securing the borrowers’ express consent, effectively negated the consensual nature of the contract. The spouses’ mere receipt of notices and lack of protest did not constitute implied assent to the modifications. Consequently, the unilateral increases were void, and the original stipulated interest rate of 12% per annum was upheld.