The Supreme Court affirmed that interest rates on loans cannot be unilaterally increased by banks without the borrower’s express written consent. This ruling protects borrowers from unfair lending practices, ensuring that loan agreements adhere to the principle of mutuality of contracts, where both parties agree to the terms. The Court clarified that while the obligation to pay interest remains, the rate must be fair and agreed upon, reinforcing the need for transparency and mutual consent in financial agreements.

Andal vs. PNB: Can Banks Change Loan Terms Without Your Say?

The case of Spouses Bayani H. Andal and Gracia G. Andal vs. Philippine National Bank (PNB) revolves around a loan obtained by the petitioners from PNB, secured by a real estate mortgage. The loan was subject to varying interest rates, which PNB adjusted, claiming the right to do so based on changes in the law, Monetary Board regulations, or the bank’s cost of funds. The spouses Andal argued that these interest rate adjustments were unilateral and exorbitant, leading to their inability to pay the loan, and that PNB’s subsequent foreclosure of their properties was illegal. The central legal question was whether PNB could unilaterally increase interest rates without the written consent of the spouses Andal, and if not, what the consequences would be on the loan agreement and the foreclosure proceedings.

The Regional Trial Court (RTC) initially ruled in favor of the spouses Andal, reducing the interest rate to 6% per annum and declaring the foreclosure sale void. The RTC found that PNB had unilaterally increased the interest rates without the written consent of the spouses Andal, violating Article 1956 of the Civil Code, which states that “[n]o interest shall be due unless it has been expressly stipulated in writing.” The RTC also cited Central Bank Circular No. 1171, which requires that any increase in interest rates must be expressly agreed to in writing by the borrower.

“Any stipulation where the fixing of interest rate is the sole prerogative of the creditor/mortgagee, belongs to the class of potestative condition which is null and void under Art. 1308 of the New Civil Code. The fulfillment of a condition cannot be left to the sole will of [one of] the contracting parties.”

On appeal, the Court of Appeals (CA) affirmed the RTC’s decision but modified the interest rate to 12% per annum, computed from the time of default. The CA agreed that PNB’s unilateral determination and imposition of interest rates violated the principle of mutuality of contracts under Article 1308 of the Civil Code. However, the CA disagreed with the RTC’s imposition of a 6% interest rate, citing jurisprudence that in the absence of a valid stipulation, the legal rate of interest should be applied.

“The unilateral determination and imposition of interest rates by [respondent] bank without [petitioners-spouses’] assent is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code x x x.”

The Supreme Court (SC) upheld the CA’s decision, emphasizing the importance of mutuality in contracts. The SC reiterated that the contract of loan between the spouses Andal and PNB stipulated the payment of interest, and that only the rate of interest was declared void for being illegal and unconscionable. The SC clarified that the spouses Andal were still liable to pay interest from the time they defaulted in payment until their loan was fully paid. The Court also addressed the issue of when the spouses Andal should be considered in default, determining it to be the date the Resolution of the Court in G.R. No. 194164 became final and executory.

Building on this principle, the Supreme Court also addressed the applicable interest rate following the issuance of Circular No. 799 by the Bangko Sentral ng Pilipinas. The Court specified that from May 20, 2011 (the date of default) until June 30, 2013, the interest rate of 12% per annum would apply. Subsequently, from July 1, 2013, until the loan was fully paid, the legal rate of 6% per annum would be applied to the unpaid obligation. This adjustment reflects the evolving legal landscape regarding interest rates and their application in loan agreements.

The principle of mutuality of contracts, as enshrined in Article 1308 of the Civil Code, is a cornerstone of contract law. This principle dictates that a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In the context of loan agreements, this means that key terms, such as interest rates, cannot be unilaterally altered by one party without the express consent of the other. The Andal case reinforces this principle by invalidating PNB’s unilateral increases in interest rates, thereby protecting the spouses Andal from potentially exploitative lending practices.

The Supreme Court’s decision underscores the need for transparency and mutual agreement in financial transactions. Banks and other lending institutions must ensure that borrowers are fully informed of all terms and conditions of a loan, including the method of calculating interest and any potential for adjustments. Any changes to these terms must be expressly agreed upon in writing by both parties to be valid and enforceable. This requirement protects borrowers from hidden fees and unexpected increases in their financial obligations.

The legal framework surrounding interest rates in the Philippines has evolved over time, with the Bangko Sentral ng Pilipinas playing a key role in setting guidelines and regulations. Central Bank Circular No. 1171, cited in the RTC’s decision, requires that any increase in interest rates must be expressly agreed to in writing by the borrower. Subsequent circulars and court decisions have further clarified the application of interest rates in loan agreements, including the legal rate of interest to be applied in the absence of a valid stipulation.

This approach contrasts with scenarios where parties have equal bargaining power and knowingly consent to variable interest rates. In such cases, courts may uphold the validity of floating interest rate clauses, provided that the method of calculation is clearly defined and the borrower is aware of the potential for fluctuations. However, in situations where one party has significantly less bargaining power, such as individual borrowers dealing with large financial institutions, courts are more likely to scrutinize the fairness and transparency of loan agreements.

The practical implications of this case are significant for both borrowers and lenders. Borrowers are empowered to challenge unilateral increases in interest rates and seek legal recourse if they believe their rights have been violated. Lenders are put on notice that they must adhere to the principle of mutuality of contracts and obtain the express written consent of borrowers before making any changes to the terms of a loan agreement. This promotes fairness and transparency in financial transactions and helps to prevent disputes between borrowers and lenders.

What was the key issue in this case?	The key issue was whether Philippine National Bank (PNB) could unilaterally increase interest rates on a loan without the written consent of the borrowers, Spouses Andal.
What did the Supreme Court rule?	The Supreme Court affirmed that interest rates cannot be unilaterally increased by banks without the borrower’s express written consent, upholding the principle of mutuality of contracts.
What is the principle of mutuality of contracts?	The principle of mutuality of contracts means that a contract must bind both parties, and its validity or compliance cannot be left to the will of one of them.
What interest rate was ultimately applied to the loan?	The Court applied a 12% per annum interest rate from the date of default (May 20, 2011) until June 30, 2013, and then a 6% per annum rate from July 1, 2013, until the loan is fully paid.
Why was the foreclosure sale declared void?	The foreclosure sale was declared void because PNB had illegally and unilaterally increased the interest rates, meaning the Spouses Andal were not actually in default.
What is the significance of Central Bank Circular No. 1171?	Central Bank Circular No. 1171 requires that any increase in interest rates must be expressly agreed to in writing by the borrower, which PNB failed to obtain in this case.
What does this case mean for borrowers?	This case protects borrowers from unfair lending practices by ensuring that loan agreements adhere to the principle of mutuality of contracts, requiring transparency and mutual consent.
What does this case mean for lenders?	Lenders must ensure that they obtain the express written consent of borrowers before making any changes to the terms of a loan agreement, including interest rates.

In conclusion, the Andal vs. PNB case serves as a crucial reminder of the importance of fairness, transparency, and mutual consent in financial agreements. The Supreme Court’s decision reinforces the principle of mutuality of contracts and protects borrowers from exploitative lending practices. By invalidating unilateral increases in interest rates, the Court has helped to level the playing field between borrowers and lenders, ensuring that loan agreements are based on a genuine meeting of the minds.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Spouses Bayani H. Andal and Gracia G. Andal, vs. Philippine National Bank, G.R. No. 194201, November 27, 2013