Philippine Supreme Court Jurisprudence > Year 2010 > July 2010 Decisions > [G.R. No. 171925 : July 23, 2010] SOLIDBANK CORPORATION, (NOW METROPOLITAN BANK AND TRUST COMPANY), PETITIONER, VS. PERMANENT HOMES, INCORPORATED, RESPONDENT. :

G.R. No. 171925 is a petition for review^[1] assailing the Decision^[2] promulgated on 29 June 2005 by the Court of Appeals (appellate court) as well as the Resolution^[3] promulgated on 14 March 2006 in CA-G.R. CV  No. 75926.  The appellate court granted the petition filed by Permanent Homes, Incorporated (Permanent) and reversed the decision of the Regional Trial Court of Makati City, Branch 58 (trial court) dated 5 July 2002 in Civil Case No. 98-654. The appellate court ordered Solidbank Corporation (Solidbank) and Permanent to enter into an express agreement about the applicable interest rates on Permanent's loan.  Solidbank was also ordered to render an accounting of Permanent's payments, not to impose interest on interest upon Permanent's loans, and to release the remaining amount available under Permanent's omnibus credit line.

The Facts

The appellate court narrated the facts as follows:

The records disclose that PERMANENT HOMES is a real estate development company, and to finance its housing project known as the "Buena Vida Townhomes" located within Merville Subdivision, Paraסaque City, it applied and was subsequently granted by SOLIDBANK with an "Omnibus Line" credit facility in the total amount of SIXTY MILLION PESOS.  Of the entire loan, FIFTY NINE MILLION as ^[sic] time loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing market rates, and subject to monthly repricing.  The remaining ONE MILLION was available for domestic bills purchase.

To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three (3) townhouse units within the Buena Vida project in Paraסaque.  At the time, however, the instant complaint was filed against SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged with said bank.

Of the 60 million available to PERMANENT  HOMES, it availed of a total of 41.5 million pesos, covered by three (3) promissory notes, which contain the following provisions, thus:

"xxx

5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets.  For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us.  The adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice.  Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment."

Contrary, however, to the specific provisions as afore-quoted, there was a standing agreement by the parties that any increase or decrease in interest rates shall be subject to the mutual agreement of the parties.

For the first loan availment of PERMANENT HOMES on March 20, 1997, in the amount of 19.6 MILLION, from the initial interest rate of 14.25% per annum (p.a.), the same was increased 15% p.a. effective May 19, 1997; it was again increased to 26% p.a. effective July 18, 1997.  It was thereafter reduced to  20% p.a. effective August 18, 1997, and then increased to  24% p.a. effective September 17, 1997. The rate was increased further to 30% p.a. effective October 17, 1997, then decreased to  27% p.a. on November 17, 1997, and again increased to 34% p.a. effective December 17, 1997.  The rate then decreased to  30% p.a. on January 16, 1998.

For the second loan availment in the amount of 18 million, the rate was initially pegged at 15.75% p.a. on June 24, 1997. A month later, the rate increased to 23.5% p.a.  It thereafter decreased to 20% p.a. effective August 24, 1997, but again increased to 22.5% p.a. effective September 24, 1997.  For the next month, the rate surged to  30% p.a., and decreased to  27% p.a. for the month of November.  The rate again surged to  34% p.a. for the month of December, and was decreased to  30% p.a. from January 22, 1998 to February 20, 1998.

For the third loan availment on July 15, 1997, in the amount of 3.9 million, the interest rate was initially pegged at  35% p.a., but this was decreased to  21% p.a. from August 14 until September 11, 1997.  The rate increased slightly to  23% p.a. on September 12, 1997, and surged to 27% p.a. on October 13, 1997.  The rate went down slightly to  27% p.a. for the month of November, and to  26% p.a. for the month of December. The rate, however, again surged to  30% p.a. on January 12, 1998 before settling at  29% p.a. for the month of February.

It is [Permanent's] stand that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been informed of.  This is contrary to their earlier agreement that any interest rate changes will be subject to mutual agreement of the parties. PERMANENT HOMES further admits that it was not able to protest such arbitrary increases at the time they were imposed by SOLIDBANK, for fear that SOLIDBANK might cut off the credit facility it extended to PERMANENT HOMES.  Permanent was then in the midst of the construction of its project in Merville, Paraסaque City, and SOLIDBANK knew that it was relying substantially on the credit facility the latter extended to it.

[Permanent] thus filed a case before the trial court seeking the following:  (1) the annulment of the increases in interest rates on the loans it obtained from SOLIDBANK, on the ground that it was violative of the principle of mutuality of agreement of the parties, as enunciated in Article 1409 of the New Civil Code, (2) the fixing of the interest rates at the applicable interest rate, and (3) for the trial court to order SOLIDBANK to make an accounting of the payments it made, so as to determine the amount of refund PERMANENT is entitled to, as well as to order SOLIDBANK to release the remaining available balance of the loan it extended to PERMANENT. In addition, [Permanent] prays for the payment of compensatory, moral and exemplary damages.

SOLIDBANK, on the other hand, avers that PERMANENT HOMES has no cause of action against it, in view of the pertinent provisions of the Omnibus Credit Line and the promissory notes agreed to and signed by PERMANENT HOMES.  Thus, in accordance with said provisions, SOLIDBANK was authorized to, upon due notice, periodically adjust the interest rates on PERMANENT HOMES' loan availments during the monthly interest repricing dates, depending on the changes in prevailing interest rates in the local and international capital markets. In fact, SOLIDBANK avers that four (4) days before July 15, 1997, the Bangko Sentral ng Pilipinas (BSP) declared that it could no longer support the Philippine currency from external speculative forces, hence, the local currency was allowed to seek its own exchange rate level.  As a result of the volatile exchange rate ratio, banks were then hesitant to extend loans, and in some instances that it granted loans, they had to ensure that they will not be at the losing end of the deal, so to speak, by the repricing of the interest rates every month.  SOLIDBANK insists that PERMANENT HOMES should not be allowed to renege on its contractual obligations, as it freely and voluntarily bound itself to the provisions of the Omnibus Credit Line and the promissory notes.

PERMANENT HOMES presented as witnesses Jacqueline S. Lim, its Vice President and Chief Financial Officer, Engr. Rey A. Romasanta, its Executive Vice President and Chief Operating Officer, and Martha Julia Flores, its Treasury Officer.

On March 24, 1998, the trial court issued a temporary restraining order (TRO), after a summary hearing, which enjoined SOLIDBANK from implementing and collecting the increases in interest rates and from initiating any action, including the foreclosure of the mortgaged properties.

Ms. Lim's testimony centered on PERMANENT HOMES' allegations that the repricing of the interest rates was done by SOLIDBANK without any written agreement entered into between the parties.  In fact, Ms. Lim accounted that SOLIDBANK will merely advise them of the interest rate for the period, after said period had already commenced, and at times very late in the period, by fax messages.  When PERMANENT HOMES called SOLIDBANK's attention to the seemingly surging rates it imposed on its loan, SOLIDBANK will merely answer that it was the bank's policy, without offering any basis for such increase. Furthermore, Ms. Lim also mentioned SOLIDBANK's alleged practice of imposing interest on unpaid interest, at the highest rate of 30% p.a..  Ms. Lim also presented a tabulation, which presents the number of days their billing statements were sent late, from the time the interest period started.  It is PERMANENT HOMES' stand that since the purpose of the billing statements was to inform them beforehand of the applicable interest rate for the period, the late billings will clearly show SOLIDBANK's arbitrary imposition of the repriced interest rates, as well as its indifference to PERMANENT HOMES' plight.

To illustrate, for the first loan availment in the amount of P19.6 million, the billing statements which should have notified PERMANENT HOMES of the repriced interest rates were faxed  to PERMANENT HOMES between eighteen (18) to thirty-three (33) days late.  For the second loan availment in the amount of P18 million, the faxed billings were late between six (6) to twenty-one (21) days, and one instance where PERMANENT HOMES received no billing at all.  For the third loan availment in the amount of P3.9 million, the faxed billings were late between seven (7) to twenty-nine (29) days, and also an instance where PERMANENT HOMES received no billing at all.

This practice, according to Ms. Lim, clearly affected its operations, as the completion of its construction project was unnecessarily delayed, to its prejudice and its buyers.  This was the import of the testimony of PERMANENT HOMES' second witness, Engr. Rey A. Romasanta. According to Engr. Rey, the target date of completion was August 1997, but in view of the shortage of funds by reason of SOLIDBANK's refusal for PERMANENT HOMES to make further availments on its omnibus credit line, the project was completed only on February 1998.

PERMANENT HOMES' third and final witness was Martha Julia Flores, its Treasury Officer, who explained that as such, it was her who received the late billings from SOLIDBANK.  She would also call up SOLIDBANK to ask what the repriced interest rate for the coming interest period, to no avail, as SOLIDBANK will merely fax its billings almost always, as abovementioned, late in the period. Ms. Flores admitted that she prepared the tabulation presented before the court, which showed how late SOLIDBANK's billings were sent to PERMANENT HOMES, as well as the computation of interest rates that SOLIDBANK had allegedly overcharged on its loan, vis-a-vis the average of the high and the low published lending rates of SOLIDBANK.

SOLIDBANK, to establish its defense, presented its lone witness, Mr. Cesar Lugtu, who testified to the effect that, contrary to PERMANENT HOMES' assertions that it was not promptly informed of the repriced interest rates, SOLIDBANK's officers verbally advised PERMANENT HOMES of the repriced rates at the start of the period, and even added that their transaction[s] were based on trust.  Aside from these allegations, however, no written memorandum or note was presented by SOLIDBANK to support their assertion that PERMANENT HOMES was timely advised of the repriced interests.^[4]

The Trial Court's Ruling

On 5 July 2002, the trial court promulgated its Decision in favor of Solidbank.  The trial court ratiocinated and ruled thus:

It becomes crystal clear that there is sufficient proof to show that the instant case was instituted by [Permanent] as an after-thought and as an obvious subterfuge intended to completely lay on the defendant the blame for the debacle of its Buena Vida project.  An afterthought because the records of the case show that the complaint was filed in March 16, 1998, already after it was having difficulty making the amortization payments, the last of which being in February 1998. A subterfuge because plaintiff, instead of blaming itself and its own business judgment that went sour, would rather put the blame on [Solidbank], taking advantage of every conceivable gray area of its contract with [Solidbank] to avoid its own liabilities. In fact, this complaint was made the very basis for [Permanent] to altogether stop the payment of its loan from [Solidbank] including the interest payment (TSN, May 07, 1998, p. 60).

x x x x

WHEREFORE, finding the complaint not impressed with merit, judgment is hereby rendered dismissing the said complaint.  The Counterclaim is likewise dismissed for lack of evidence to support the same.

SO ORDERED.^[5]

Permanent filed an appeal before the appellate court.

The Appellate Court's Ruling

The appellate court granted Permanent's appeal, and set aside the trial court's ruling.  The appellate court not only recognized the validity of escalation clauses, but also underscored the necessity of a basis for the increase in interest rates and of the principle of mutuality of contracts.

The dispositive portion of the appellate court's decision reads, thus:

THE FOREGOING CONSIDERED, the instant appeal is hereby GRANTED, the assailed decision dated July 5, 2002 is REVERSED and SET ASIDE, and a new one is hereby entered as follows:

(1)  Unless the parties herein subsequently enter into an express agreement regarding the applicable interest rates on PERMANENT HOMES' loan availments subsequent to the initial thirty-day (30) period, the legal rate of twelve percent (12%) per annum is hereby FIXED, to be applied on the outstanding balance of the loan;

(2)  SOLIDBANK is ordered to render an accounting of all the payments made by PERMANENT HOMES, and in case there is excess payment by reason of the wrongful imposition of the repriced interest rates, to apply such amount to the interest payment at the legal rate, and thereafter to the outstanding principal amount;

(3)  SOLIDBANK is directed not to impose penalties, particularly interest on interest, upon PERMANENT HOMES' loan, there being no evidence that the latter was in default on its payments;

(4)  SOLIDBANK is hereby ordered to release the remaining amount available under the omnibus credit line, subject, however, to availability of funds on the part of SOLIDBANK.

No pronouncement as to costs.

SO ORDERED.^[6]

The appellate court resolved to deny Solidbank's Motion for Reconsideration for lack of merit.^[7]

The Issues

Solidbank raised the following issues in their petition:

(A) Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest rates on [Permanent's] loans are void for having been unilaterally imposed without basis.

(B) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an express agreement regarding the applicable interest rates on Permanent's loan availments subsequent to the initial thirty-day (30) period.

(C) Whether the Honorable Court of Appeals was correct in ruling that [Permanent] is entitled to attorney's fees notwithstanding the absence of bad faith or malice on the part of [Solidbank].^[8]

The Court's Ruling

The petition has merit.

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983.  These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account.^[9] Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates.  The lender and the borrower should agree on the imposed rate, and  such imposed rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the following provisions:

5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets.  For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us.  The adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice.  Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment.

The stipulations on interest rate repricing are valid because (1)  the parties mutually agreed on said stipulations; (2) repricing takes effect only upon Solidbank's written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and  "adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent," emphasize that  Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates.

In order that obligations arising from contracts may have the force of law between the parties, there must be a mutuality between the parties based on their essential equality.^[10]  A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void.^[11]  There was no showing that either Solidbank or Permanent coerced each other to enter into the loan agreements. The terms of the Omnibus Line Agreement and the promissory notes were mutually and freely agreed upon by the parties.

Moreover, Solidbank's range of lending rates were consistent with "prevailing rates in the local or international capital markets." Permanent presented a tabulation^[12] of the range of Solidbank's lending rates, as reported to Bangko Sentral ng Pilipinas and compared the lending rates with the interest rates charged by Solidbank on Permanent's loans, thus:

	Solidbank's range of lending rates as per BSP records
	High	Low	Interest rates charged by Solidbank on Permanent's loans	Excess Interest Rate Over the Average of High and Low Rates
Sept. 12, 1997	25.0%	22.0%	23.0%
Sept. 17, 1997	27.0%	24.0%	24.0%
Sept. 22, 1997	26.0%	23.0%	22.5%
Oct. 13, 1997	29.0%	26.0%	28.0%
Oct. 17, 1997	30.0%	27.0%	30.0%
Oct. 22, 1997	32.0%	29.0%	30.0%
Nov. 12, 1997	28.0%	25.0%	27.0%
Nov. 17, 1997	28.0%	25.0%	27.0%
Nov. 21, 1997	27.0%	24.0%	27.0%
Dec. 12, 1997	25.0%	23.0%	26.0%	2.0%
Dec. 17, 1997	25.0%	23.0%	34.0%	10.0%
Dec. 22, 1997	25.0%	23.0%	32.0%	8.0%
Jan. 12, 1998	26.0%	24.0%	30.0%	5.0%
Jan. 16, 1998	28.0%	25.0%	30.0%	3.5%
Jan. 22, 1998	28.0%	25.0%	30.0%	3.5%
Feb. 9, 1998	27.0%	24.0%	30.0%	3.5%
Feb. 11, 1998	27.0%	24.0%	29.0%	4.5%
Feb. 12, 1998	27.0%	24.0%	30.0%	4.5%

The repriced interest rates from 12 September to 21 November 1997 conformed to the range of Solidbank's lending rates to other borrowers.  The 12 December 1997 to 12 February 1998 repriced interest rates were not unconscionably out of line with the upper range of lending rates to other borrowers. The interest rate repricing happened at the height of the Asian financial crises in late 1997, when banks clamped down on lendings because of higher credit risks across industries, particularly the real estate industry.

We also recognize that Solidbank admitted that it did not promptly send Permanent written repriced rates, but rather verbally advised Permanent's officers over the phone at the start of the period.  Solidbank did not present any written memorandum to support its allegation that it promptly advised Permanent of the change in interest rates.^[13]  Solidbank advised Permanent on the repriced interest rate applicable for the 30-day interest period only after the period had begun.  Permanent presented a tabulation which showed that  Solidbank either did not send a billing statement, or sent a billing statement 6 to 33 days late.^[14]  We reproduce the tabulation below:

PN #435 - P19.6MM
Reference No.	Interest Period		Date Billing Statements were faxed to Permanent	Number of days Billing Statement was Late
1	03/20/97	04/18/97	04/17/97	28
2	04/18/97	05/19/97	05/16/97	28
	05/19/97	06/19/97		no statement received
3	06/19/97	07/18/97	07/12/97	23
4	07/18/97	08/18/97	08/05/97	18
5	08/18/97	09/17/97	09/10/97	23
6	09/17/97	10/17/97	10/06/97	19
7	10/17/97	11/17/97	11/11/97	25
8	11/17/97	12/17/97	12/12/97	25
9	12/17/97	01/16/98	01/09/98	23
14	01/16/98	02/20/98	02/18/98	33

    
    

PN #969 - P18MM
Reference No.	Interest Period		Date Billing Statements were faxed to Permanent	Number of days Billing Statement was Late
3	06/24/97	07/24/97	07/12/97	18
4	07/24/97	08/22/97	08/05/97	12
5	08/22/97	09/22/97	09/10/97	19
6	09/22/97	10/22/97	10/06/97	14
7	10/22/97	11/21/97	11/11/97	20
8	11/21/97	12/22/97	12/12/97	21
9	12/22/97	01/22/98	01/09/98	18
	01/22/98	02/12/97		no statement received
14	02/12/98	02/20/98	02/18/98	6

PN #1077 - P3.9MM
Reference No.	Interest Period		Date Billing Statements were faxed to Permanent	Number of days Billing Statement was Late
10	07/15/97	08/14/97	08/14/97	30
11	08/14/97	08/26/97	08/26/97	12
5	08/26/97	09/12/97	09/10/97	15
6	09/12/97	10/13/97	10/06/97	24
7	10/13/97	11/12/97	11/11/97	29
12	11/12/97	12/12/97	12/10/97	28
9	12/12/97	01/12/98	01/09/98	28
13	01/12/98	02/09/98	02/09/98	28
	02/09/98	02/11/98		no statement received
14	02/11/98	03/13/98	02/18/98	7

We rule that Solidbank's computation of the interest due from Permanent should be adjusted to take effect only upon Permanent's receipt of the written notice from Solidbank.

WHEREFORE, we GRANT the petition in part.  We SET ASIDE the Decision of the Court of Appeals  promulgated on 29 June 2005  as well as the Resolution promulgated on 14 March 2006 in CA-G.R. CV No. 75926 and AFFIRM the decision of the Regional Trial Court of Makati City, Branch 58 dated 5 July 2002 in Civil Case No. 98-654 with the MODIFICATION that the repricing of the interest rates should take effect only upon Permanent Homes, Incorporated's receipt of the written notice from Solidbank Corporation of the adjustment in interest rate.  The records of this case are therefore remanded to the trial court for the computation of the proper interest payments based on the dates of receipt of written notice.

  SO ORDERED.

Nachura, Peralta, Del Castillo,^* and Abad, JJ., concur.

Endnotes:

---

^* Designated additional member per Raffle dated 7 July 2010.

^[1] Under Rule 45 of the 1997 Rules of Civil Procedure.

^[2] Rollo, pp. 43-65.  Penned by Associate Justice Danilo B. Pine, with Associate Justices  Rodrigo V.  Cosico and Arcangelita Romilla-Lontok, concurring.

^[3] Id. at 67-68.  Penned by Associate Justice Rodrigo V. Cosico, with Associate Justices Josefina Guevara-Salonga and Arcangelita Romilla-Lontok, concurring.

^[4] Id. at 43-49.

^[5] Id. at 164, 171.

^[6] Id. at 63-64.

^[7] Id. at 67-68.

^[8] Id. at 18.

^[9] Philippine National Bank v. Spouses Encina, G.R. No. 174055, 12 February 2008, 544 SCRA 608.

^[10]  Philippine National Bank v. Court of Appeals, G.R. No. 88880, 30 April 1991, 196 SCRA 536,  545.

^[11]  See Garcia, et al. v. Rita Legarda, Inc., 128 Phil. 590 (1967).

^[12]  Records, Vol. II, p. 95.

^[13]  Id. at 49.

^[14]  Id. at 59; Records, Vol. II, p. 85.