G.R. No. 228355 & G.R. No. 228397, August 28, 2019
ENGR. RICARDO O. VASQUEZ, PETITIONER, VS. PHILIPPINE NATIONAL BANK AND NOTARY PUBLIC JUDE JOSE F. LATORRE, JR., PUBLIC AUCTION OFFICER, RESPONDENTS. [CONSOLIDATED WITH] PHILIPPINE NATIONAL BANK, PETITIONER, V. ENGR. RICARDO O. VASQUEZ, RESPONDENT.

FACTS

Engr. Ricardo O. Vasquez obtained two loans from Philippine National Bank (PNB) in 1996, totaling P1.4 million, secured by a real estate mortgage over four parcels of land. The Credit Agreement stipulated an interest rate of 17% per annum. Vasquez alleged that PNB unilaterally and excessively increased the interest rate, escalating it up to 34% and imposing penalty charges, which ballooned his obligation to over P2.3 million by 1998. His requests for recomputation were ignored. Consequently, PNB extrajudicially foreclosed the mortgaged properties.
Vasquez filed a complaint for specific performance and annulment of foreclosure with the RTC, which ruled in his favor. The RTC declared the unilateral interest rate increases and penalty charges void, ordering PNB to recompute the obligation using the stipulated 17% rate and to return any excess payment or the foreclosed properties’ value. The CA modified this decision, affirming the invalidity of the unilateral increases but upholding the validity of the penalty clause. Both parties elevated the case to the Supreme Court via Rule 45 petitions.

ISSUE

The core issue is whether PNB’s unilateral imposition of increased interest rates and penalty charges was valid under the parties’ loan agreements.

RULING

The Supreme Court denied both petitions, affirming the CA’s decision with modification on the applicable interest. The Court held that the stipulated 17% interest was valid. However, PNB’s subsequent unilateral increases were void. The legal logic is rooted in the principle of mutuality of contracts under Article 1308 of the Civil Code. An escalation clause must be based on clear, valid, and reasonable grounds specifically stated in the contract. The Credit Agreement’s provision allowing PNB to “increase or decrease the interest rate” based on “such basis as may be determined by the BANK” was too vague and granted PNB absolute, unbridled discretion. This violated the principle of mutuality, making the unilateral increases invalid.
Regarding penalties, the Court found the clause valid as it was expressly agreed upon in the Credit Agreement’s General Conditions, which Vasquez signed. The penalty charge of 23% per annum was deemed not iniquitous or unconscionable. Consequently, the obligation must be recomputed using the original 17% interest, plus the valid 23% penalty charge on unpaid amounts from default. From the finality of judgment until full payment, the total amount shall earn legal interest at 6% per annum. The foreclosure was deemed valid only to the extent of the lawfully recomputed obligation.