Mutuality of Contracts: Banks Cannot Unilaterally Impose Interest Rate Hikes on Loans

The Supreme Court has long protected borrowers from arbitrary interest rate hikes by banks. In Philippine National Bank v. Spouses Manalo (G.R. No. 174433, February 24, 2014), the Court struck down a bank's unilateral imposition of increased interest rates, reaffirming that contracts must bind both parties equally. The ruling is a significant reminder that even in loan agreements prepared by banks, the principle of mutuality of contracts under Article 1308 of the Civil Code cannot be ignored.

The Facts of the Case

Spouses Enrique Manalo and Rosalinda Jacinto obtained an All-Purpose Credit Facility from Philippine National Bank (PNB) in 1993 to finance the construction of their house. The facility was renewed and increased several times, eventually reaching P7,000,000.00 in 1996. The loan was secured by a Real Estate Mortgage over their property.

The credit agreement stipulated that the loan would bear interest at a rate "determined by the Bank to be its prime rate plus applicable spread, prevailing at the current month." After the spouses defaulted on their payments, PNB foreclosed on the mortgage and bought the properties at the foreclosure sale for P15,127,000.00.

The spouses later filed an action to nullify the foreclosure proceedings, arguing among other things that PNB had unilaterally imposed interest rates ranging from 19% to as high as 28% without their consent or prior notice.

The Issue

The central question was whether PNB could unilaterally increase the interest rates on the loan without the borrowers' consent, and whether such unilateral action violated the principle of mutuality of contracts.

The Ruling

The Supreme Court ruled against PNB, affirming the Court of Appeals' decision that the unilateral imposition and increase of interest rates was null and void.

The Court emphasized that while banks are free to determine interest rates, they can do so only reasonably, not arbitrarily. Banks may not take advantage of ordinary borrowers' lack of familiarity with banking procedures and jargon. Any stipulation on interest unilaterally imposed and increased by banks shall be struck down as violative of the principle of mutuality of contracts.

Article 1308 of the Civil Code provides: "The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." The Court held that PNB's credit agreement, which gave the bank the sole prerogative to determine and increase interest rates, contravened this principle.

The Court also rejected PNB's argument that the borrowers' continued payment of interest without protest indicated their assent to the increased rates. Citing Philippine National Bank v. Court of Appeals (G.R. No. 107569, November 8, 1994), the Court ruled that a borrower is not estopped from assailing a unilateral increase in interest since no one who receives a proposal to change a contract is obliged to answer it, and silence cannot be construed as acceptance.

Additionally, the Court noted that the credit agreements expressly required prior notice before any interest rate increase. PNB failed to notify the borrowers, thereby violating the very contract it had prepared.

Interest Rate Applied

Since the varying interest rates were declared void, the Court applied the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals (G.R. No. 97412, July 12, 1994) and fixed the interest rate at 12% per annum from the borrowers' default.

Following Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013), the Court applied Monetary Board Circular No. 799, which reduced the legal interest rate from 12% to 6% per annum effective July 1, 2013. The refund due to the spouses bore interest at 12% per annum from March 28, 2006 until June 30, 2013, and 6% per annum from July 1, 2013 until finality of the decision.

Practical Takeaways

• Banks cannot unilaterally change loan terms. Any interest rate increase must be agreed upon by both parties, not merely imposed by the bank.
• Contracts of adhesion are construed against the drafter. When a bank prepares the loan documents, any ambiguity is interpreted against the bank, which is presumed to be the stronger party.
• Paying without protest does not mean consent. A borrower who continues paying at increased rates is not estopped from later challenging those rates as invalid.
• Read your loan documents carefully. Look for provisions that give the bank sole discretion to set or change interest rates—these may be challenged as violative of mutuality of contracts.
• Prior notice requirements matter. If your loan agreement requires notice before an interest rate change, the bank must comply strictly with that requirement.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.