G.R. No. 228904. October 13, 2021.
PHILIPPINE NATIONAL BANK, PETITIONER, VS. AIC CONSTRUCTION CORPORATION, SPOUSES RODOLFO C. BACANI AND MA. AURORA C. BACANI, RESPONDENTS.

FACTS

Respondent AIC Construction Corporation, owned by respondent spouses Rodolfo and Ma. Aurora Bacani, obtained an omnibus credit line from petitioner Philippine National Bank (PNB) in 1989, secured by a real estate mortgage and the spouses’ joint and solidary liability. The credit agreement stipulated that interest on availments would be at a rate per annum determined by PNB to be the Bank’s prime rate plus an applicable spread. The credit line increased over the years, and by its maturity in September 1998, the obligation amounted to P65 million (P40 million principal and P25 million capitalized interest). Respondents attempted to settle the debt via a dacion en pago, but no agreement was reached. PNB eventually foreclosed on the mortgaged properties. Respondents filed a complaint against PNB for annulment of interest and penalty increases, accounting, and damages, alleging the charges were excessive, exorbitant, and unconscionable, and that the mortgage improperly included their family home. The Regional Trial Court dismissed the complaint, finding respondents failed to prove the interest was iniquitous. The Court of Appeals modified the ruling, affirming the dismissal regarding the dacion en pago and PNB’s good faith but holding that the interest provision violated the principle of mutuality of contracts for being unilateral and the rates were unreasonable and unconscionable. It imposed the legal interest rate and excluded the penalty charge from the secured amount. PNB filed this Petition for Review, arguing the interest provision was valid and mutually agreed upon.

ISSUE

Whether the interest rate provision in the credit agreement, which allowed PNB to unilaterally determine the rate as “the Bank’s prime rate plus applicable spread,” is valid or if it is void for violating the principle of mutuality of contracts and for being unconscionable.

RULING

The Supreme Court DENIED the petition and AFFIRMED the Court of Appeals’ Decision with MODIFICATION. The interest rate provision is void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code. The stipulation granted PNB the exclusive and unilateral right to determine the interest rate (its prime rate plus a spread) without reference to a definite, objective, or external standard, leaving it solely to PNB’s will. Such a potestative condition renders the obligation void. Furthermore, the imposed interest rates, which at one point reached 24.4% per annum and were capitalized into the principal, were found to be excessive, iniquitous, and unconscionable. The Court, exercising its equity jurisdiction, reduced the interest. Following the guidelines in Nacar v. Gallery Frames, the legal interest rate of 12% per annum shall apply to the principal obligation from the effectivity of the loan agreement until November 17, 2003 (date of the certificate of sale). For the conventional interest (the capitalized interest), the legal rate of 12% per annum shall run from the date of judicial demand, January 21, 2002, until November 17, 2003. All unpaid amounts shall earn interest at 6% per annum from November 18, 2003, until full satisfaction. The penalty charge of 24% per annum is excluded from the amount secured by the mortgage. PNB is ordered to provide respondents with a detailed written accounting of the loan obligation.