G.R. No. 174433, February 24, 2014
PHILIPPINE NATIONAL BANK, Petitioner, vs. SPOUSES ENRIQUE MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J. MANALO, and ARMA J. MANALO, Respondents.

FACTS

Respondent Spouses Enrique Manalo and Rosalinda Jacinto obtained an All-Purpose Credit Facility from Philippine National Bank (PNB), secured by a Real Estate Mortgage. The credit facility was renewed and increased several times, culminating in a renewal for ₱7,000,000.00 on September 20, 1996. The spouses agreed to make monthly interest payments. PNB claimed their last payment was in December 1997. After sending two demand letters, PNB foreclosed the mortgage and was the highest bidder at the foreclosure sale. More than a year after the Certificate of Sale was issued, the Spouses Manalo filed an action to nullify the foreclosure proceedings and for damages. They alleged, among other things, that they had obtained a ₱1,000,000.00 loan from a third party to update their account based on PNB’s assurances of restructuring, and that PNB did not comply with Act No. 3135’s publication requirements. The Regional Trial Court (RTC) ruled in favor of PNB, upholding the foreclosure’s validity. On appeal, the Court of Appeals (CA) affirmed the foreclosure’s validity but modified the spouses’ liability for interest. The CA found the credit agreements were contracts of adhesion and that PNB unilaterally increased interest rates without prior notice, violating the principle of mutuality. The CA nullified the imposed rates and fixed the interest at 12% per annum from default, ordering a recomputation of the indebtedness. PNB appealed to the Supreme Court.

ISSUE

1. Whether the Court of Appeals erred in nullifying the imposed interest rates and fixing them at 12% per annum, considering the issue was allegedly raised for the first time on appeal and was not part of the pre-trial issues or formally offered evidence.
2. Whether the Court of Appeals correctly ruled that there was no mutuality of consent in the imposition of interest rates on the loan.

RULING

The Supreme Court DENIED the petition and AFFIRMED the CA decision with modification.
1. On the procedural issue, the Supreme Court held that the CA correctly passed upon the issue of interest rates. The RTC, in its decision, had already addressed and ruled upon the validity of the interest rates and penalty charges, despite the spouses not raising them as formal issues during pre-trial, because PNB did not object to the presentation of evidence on these matters and even rebutted the arguments in its memorandum. Therefore, the issue was properly before the appellate court.
2. On the substantive issue, the Supreme Court upheld the CA’s ruling that the unilateral imposition and increase of interest rates by PNB violated the principle of mutuality of contracts under Article 1308 of the Civil Code. The credit agreements, prepared solely by PNB, were contracts of adhesion. The stipulation allowing PNB to increase interest rates “within the limits allowed by law” was too vague and granted PNB unchecked discretion, leaving the borrowers with no choice but to accept the increases. This made the imposition dependent solely on the will of PNB. The Court emphasized that while banks are free to set interest rates, they must do so reasonably and not arbitrarily, and cannot take advantage of borrowers’ lack of familiarity with banking procedures. The Court affirmed the CA’s imposition of a 12% per annum interest rate from the date of default, following Eastern Shipping Lines, Inc. v. Court of Appeals. The Court also modified the CA decision by ordering that any amount refundable to the respondents from the recomputation shall earn interest at 12% per annum from March 28, 2006 (CA decision date) until June 30, 2013, and 6% per annum from July 1, 2013 until finality. The total refundable amount and its accrued interest shall further earn interest at 6% per annum until fully refunded.