Complaint for Reformation or Annulment of Contract

SPOUSES ROBERT ALAN L. AND NANCY LEE LIMSO,

vs.

PHILIPPINE NATIONAL BANK AND THE REGISTER OF DEEDS OF DAVAO CITY, RESPONDENTS.; ET AL.

G.R. No. 158622, 169441, 172958, 173194, 196958, 197120, 205463

Leonen, J.

Facts:

In 1993, Sps. Limso and Davao Sunrise took out a loan secured by real estate mortgages from Philippine
National Bank amounting to P700 Million. The loan contract was subsequently restructured on January 1999.
The provision under their loan contract on the interest rate states that the same shall be determined "at the
rate per annum to be set by the Bank. The interest rate shall be reset by the Bank every month."

The Sps. and Davao Sunrise were notified through a letter that the interest rate approved by the top
management of PNB is 20.756% and as of December 1998, the interest on the loan amounted to P217 Million.
However, due to their financial difficulties and despite repeated demands by PNB, Sps. Limso and Davao
Sunrise failed to pay their debt.

The Sps. and Davao Sunrise files a complaint in court praying for the declaration of nullity of unilateral
imposition and increases of interest rates.

Issue:

Whether the provision under the loan contract regarding the unilateral imposition and increases of interest
rates violates the principle of mutuality of contract.

Ruling:

Yes. The SC held that the provision violates the principle of mutuality of contract.

The SC held that the interest on the principal loan obligation shall be at the rate of 12% per annum and
computed from January 28, 1999, the date of the execution of the Conversion, Restructuring and Extension
Agreement. Interest rate on the conventional interest shall be at the rate of 12% per annum from the date of
judicial demand, to June 30, 2013. From July 1, 2013 until full satisfaction, the interest rate on the
conventional interest shall be computed at 6% per annum in view of this court's ruling in Nacar v. Gallery
Frames.

According to the SC, there was no mutuality of contract between the parties since the interest rates
imposed were based on the sole discretion of Philippine National Bank. Further, the escalation clauses in the
real estate mortgage "[did] not specify a fixed or base interest[.]" Thus, the interest rates are invalid.

The principle of mutuality of contracts is stated in Article 1308 of the Civil Code as follows:
 Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.

The importance of the principle of mutuality of contracts was discussed in Juico v. China Banking
Corporation:

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1)
that any obligation arising from contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is
likewise, invalid.

When there is no mutuality between the parties to a contract, it means that the parties were not on equal
footing when the terms of the contract were negotiated. Thus, the principle of mutuality of contracts dictates
that a contract must be rendered void when the execution of its terms is skewed in favor of one party.

The Court of Appeals also noted that since the interest rates imposed were at the sole discretion of
Philippine National Bank, and that Spouses Limso and Davao Sunrise were merely notified when there were
changes in the interest rates, Philippine National Bank violated the principle of mutuality of contracts. The
Court of Appeals ruled that:

We cannot subscribe to appellant bank’s allegation that plaintiffs-appellees agreed to these interest rates
by receiving various letters from PNB. Those letters cannot be construed as agreements as a simple reading of
those letters would show that they are mere notices informing plaintiffs-appellees that the bank, through its
top management, had already imposed interest rates on their loan. The uniform wordings of the said letters go
this way:

This refers to your existing credit facility in the principal amount of P850.0 MM granted by the Philippine
National Bank by and under the terms and conditions of that Credit Agreement dated 12.2.97 (Renewal of
Credit Facility).

We wish to advise you that the top management has approved an interest rate of 20.756% which will be
used in computing the interest due on your existing peso and redenominated availments against the credit
facility for the period July 20 to August 19, 1998.

If you are amenable to this arrangement, please signify your conformity on the space provided below and
return to us the original copy of the document. If we receive no written objection by the end of 10 days from
date of receipt of this letter, we will take it to mean that you agree to the new interest rate we quote. On the
other hand, if you disagree with the quoted rate, you will have to pay the loan in full within the same ten-day
period otherwise, the entire loan will be considered due and demandable.

The contents of the letter quoted by the Court of Appeals show that there was no room for negotiation
among Philippine National Bank, Spouses Limso, and Davao Sunrise when it came to the applicable interest
rate. Since there was no room for negotiations between the parties with regard to the increases of the rates of
interest, the principle of mutuality of contracts was violated. There was no meeting of the minds between
Spouses Limso, Davao Sunrise, and Philippine National Bank because the increases in the interest rates were
imposed on them unilaterally.