Algarme, Danielle Kym Marie R.

Topic: Simple Loan

Spouses Limso v. Philippine National Bank

G.R. Nos. 158622, 169441, 172958, 173194, 196958, 197120, 205463
January 27, 2016 | Leonen, J.
FACTS:

 Spouses Limso and Davao Sunrise Investment and Development Corporation took out
a loan of P700 million divided into two kinds (300 million revolving credit ine and a P 400
million seen year long term loan) with Philippine National Bank (PNB) and secured it with
real estate mortgage
 After having difficulty in paying the loan they requested to restructure their loan. PNB
then executed a Conversion, Restructuring and Extension Agreement which totaled to
1.067 billion which included the unpaid interest. A provision under the loan contract was
that the interest rate 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 restructured loan was
secured with the properties which are 4 parcels of land registered under Davao Sunrise.
 Spouses Limso and Davao Sunrise failed to pay even after PNB sent demand letters.
On August 21, 2000 PNB filed a Petition for Extrajudicial Foreclosure of Real Estate
Mortgage before the Sheriff’s Office in Davao. PNB was declared the highest bidder.
 Before the Sherriff could issue the provisional Certificate of Sale, spouses Limso and
Davao Sunrise filed a Complaint for reformation or Annulment of Contract against PNB
and the sheriff of Davao City. After its filling the executive judge of RTC Davao City
issued a restraining order against PNB. 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.
HELD
The Supreme Court ruled that the provision violated the principle of mutuality of
contracts. There is no mutuality of contract when the determination of interest rates are at the
sole discretion of one party. It was further held that escalation clauses in contracts are void
when they allow the creditor to unilaterally adjust the interest rates without the consent of the
debtor. 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 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’
Article 1318 of the Civil Code states that “there is no contract unless the following
requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject
Algarme, Danielle Kym Marie R. Topic: Simple Loan

matter of the contract; (3) cause of the obligation which is established. When one of the
elements is not present the contract cannot be perfected. In this case, petitioner Sps. Limso and
Davao Sunrise gave no consent as to the increase in the interest rates. Since there was no
room for negotiation regarding the interest rates, the principal of mutuality of contracts was
violated. There was no meeting of the mind and consequently PNB’s unilateral imposition on the
increases in the interest rates are not valid.