GR 193178; (May, 2011) (Digest)
G.R. No. 193178 ; May 30, 2011
PHILIPPINE SAVINGS BANK, Petitioner, vs. SPOUSES ALFREDO M. CASTILLO AND ELIZABETH C. CASTILLO, and SPOUSES ROMEO B. CAPATI and AQUILINA M. LOBO, Respondents.
FACTS
Respondent spouses were registered owners of two lots in Tondo, Manila. On May 7, 1997, they obtained a loan of ₱2,500,000.00 from petitioner Philippine Savings Bank, secured by a real estate mortgage over the properties. The Promissory Note stipulated an initial interest rate of 17% per annum, subject to review/adjustment every ninety (90) days, and allowed the bank to unilaterally increase, decrease, or change the interest rate and charges within the limits allowed by law. It also provided for a 3% monthly penalty on overdue amortizations and that unpaid interest would be added to the principal.
From May 1997 until December 1999, the bank unilaterally increased and decreased the interest rate, with the highest being 29% per annum. Respondents were notified in writing of these changes but did not formally confirm or question them, although respondent Alfredo Castillo sent several letters requesting a reduction of the rates, which the bank denied.
Respondents regularly paid amortizations until December 1999, when they defaulted. The bank initiated extrajudicial foreclosure. An auction sale was held on June 16, 2000, with the properties sold to the bank as the sole bidder for ₱2,778,611.27. The certificate of sale was registered on July 3, 2000, without the approval of the Executive Judge. Respondents failed to redeem the properties within the one-year period, despite a requested and granted 60-day extension.
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, and Damages with the RTC of Manila. The RTC declared the interest increases unreasonable and the foreclosure void, ordering a refund of excess interest, cancellation of annotations, and awarding damages. Upon petitioner’s motion, the RTC modified the interest rate to 24% per annum. On appeal, the CA affirmed the RTC with modifications, declaring the foreclosure valid but sustaining the finding that the interest increases were unreasonable and the award of damages. Petitioner elevated the case to the Supreme Court.
ISSUE
1. Whether the unilateral determination and imposition of increased interest rates by the bank is valid.
2. Whether the award of damages and attorney’s fees to respondents is proper.
RULING
The Supreme Court PARTIALLY GRANTED the petition.
1. On the Interest Rates: The unilateral determination and imposition of increased interest rates is VOID for violating the principle of mutuality of contracts under Article 1308 of the Civil Code. The contract must bind both parties; its validity or compliance cannot be left to the will of one of them. A perusal of the Promissory Note shows that the increase or decrease of interest rates hinged solely on the discretion of the petitioner bank and did not require the conformity of the respondents before enforcement. Any contract which is heavily weighed in favor of one party, leading to an unconscionable result, partakes of the nature of a contract of adhesion and is void. Any stipulation leaving the validity or compliance of the contract solely to the will of one party is likewise invalid.
The Court rejected the bank’s contention that respondents acquiesced to the modified rates by requesting reductions, as such requests did not constitute consent to the unilateral impositions. The contractual provision was lopsided and violative of mutuality.
2. On Damages and Attorney’s Fees: The Court found the award of damages and attorney’s fees to be PROPER. The bank’s act of imposing interest rates in a manner that violated the principle of mutuality of contracts constituted a breach of its contractual obligations in bad faith. This justified the award of moral and exemplary damages, as well as attorney’s fees, to the respondents.
The Supreme Court upheld the modified decision of the Court of Appeals.