Mutuality of Contracts When Banks Unilaterally Impose Interest Rates

The principle of mutuality of contracts holds that obligations arising from contracts must be binding on both parties, and their validity cannot be left to the will of one party alone. This principle is central to a 2013 Supreme Court ruling involving spouses who obtained a loan from Philippine National Bank (PNB) and later faced foreclosure after the bank unilaterally imposed increased interest rates. The case, Spouses Andal v. Philippine National Bank (G.R. No. 194201, November 27, 2013), clarifies the limits of a bank's power to adjust interest rates and the consequences when those adjustments violate the law.

The Facts of the Case

In September 1995, Spouses Bayani and Gracia Andal obtained a loan of P21,805,000.00 from PNB, executing twelve promissory notes with varying interest rates of 17.5% to 27% per interest period. The agreement allowed the bank to increase or decrease rates for subsequent periods, with prior notice to the borrowers, in case of changes in interest rates prescribed by law or the Monetary Board, or in the bank's overall cost of funds. The loan was secured by a real estate mortgage over five parcels of land.

In July 2001, the spouses paid P14,800,000.00 to avoid foreclosure. Despite this payment, PNB proceeded to foreclose on three of the five properties. The spouses filed a complaint seeking to annul the mortgage and the foreclosure sale, arguing that the bank had unilaterally imposed exorbitant interest rates without their written consent.

The Issue

The central issue was whether PNB could unilaterally impose increased interest rates on the loan without the borrowers' written consent, and what interest rate should apply when such unilateral imposition is declared void.

The Ruling

The Supreme Court denied PNB's appeal and affirmed the Court of Appeals' decision with a modification. The Court held that the unilateral determination and imposition of interest rates by the bank, without the borrowers' assent, violated the principle of mutuality of contracts under Article 1308 of the Civil Code. The Court found that the promissory notes were signed in blank with respect to interest rates, allowing the bank to impose rates without prior notice or agreement.

However, the Court rejected the spouses' argument that no interest should be due at all. The Court emphasized that only the rate of interest was declared void; the stipulation requiring the borrowers to pay interest remained valid and binding. The borrowers were liable to pay interest from the time they defaulted.

The Applicable Interest Rates

The Court specified the interest rates to be applied. The 12% per annum legal interest applied from the date of default (May 20, 2011, when the resolution in a related case became final and executory) until June 30, 2013. From July 1, 2013, pursuant to Bangko Sentral ng Pilipinas Circular No. 799 and the ruling in Nacar v. Gallery Frames (G.R. No. 189871, August 13, 2013), the legal interest rate was reduced to 6% per annum until the obligation is fully paid.

Practical Takeaways

• Banks cannot unilaterally impose interest rates. Any increase in interest rates must be expressly agreed upon in writing by the borrower, as required by Central Bank regulations and Article 1956 of the Civil Code.
• Mutuality of contracts is a fundamental principle. The validity of an obligation cannot be left to the sole will of one party. A stipulation giving the creditor the sole prerogative to fix interest rates is a potestative condition that is void under Article 1308.
• Void interest rates do not mean no interest is due. When an interest rate stipulation is declared void for being unconscionable or violative of mutuality, the borrower still owes interest at the legal rate, not zero interest.
• The legal interest rate has changed. The 12% per annum rate applies only until June 30, 2013. From July 1, 2013 onward, the applicable legal interest rate for loans or forbearance of money is 6% per annum.
• Foreclosure based on void interest rates is premature. If a borrower cannot be considered in default because the interest rates imposed were illegal and unconscionable, the bank has no right to foreclose on the mortgaged properties.

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