SPOUSES EDUARDO & LYDIA SILOS

v.
PHILIPPINE NATIONALBANKG.R. No. 181045, 2 July 2014, SECOND
DIVISION, (Del Castillo,
J
.)
In loan agreements, it cannot be denied that the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof must
be mutually agreed upon; otherwise, it has no binding effect.

FACTS: Spouses Eduardo and Lydia Silos secured a revolving credit line with Philippine
National Bank (PNB) through a real estate mortgage as a security. After two years, their
credit line increased. Spouses Silos then signed a Credit
Agreement, which was also amended two years later, and several Promissory Notes (PN)
as regards their Credit Agreements with PNB. The said loan was initially subjected to
a19.5% interest rate per annum. In the Credit Agreements, Spouses Silos bound
themselves to the power of PNB to modify the interest rate depending on whatever policy
that PNB may adopt in the future, without the need of notice upon them. Thus, the
said interest rates played from 16% to as high as 32% per annum. Spouses Silos acceded
to the policy by pre-signing a total of twenty-six (26) PNs leaving the individual
applicable interest rates at hand blank since it would be subject to modification by PNB.
Spouses Silos regularly renewed and made good on their PNs, religiously paid the
interests without objection or fail. However, during the 1997 Asian Financial Crisis,
Spouses Silos faltered when the interest rate soared. Spouses Silos the PN became past
due, and despite repeated demands by PNB, they failed to make good on the note.

Thus, PNB foreclosed and auctioned the involved security for the mortgage. Spouses
Silos instituted an action to annul the foreclosure sale on the ground that the succeeding
interest rates used in their loan agreements was left to the sole will of PNB, the same
fixed by the latter without their prior consent and thus, void. The Regional Trial Court
(RTC) ruled that such stipulation authorizing both the increase and decrease of interest
rates as may be applicable is valid. The Court of Appeals (CA) affirmed the RTC
decision.

ISSUE: May the bank, on its own, modify the interest rate in a loan agreement without
violating the mutuality of contracts?

RULING: No.
Any modification in the contract, such as the interest rates, must be made with the
consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the agreement.
In the case of loan agreements, the rate of interest is a principal condition, if not the most
important component.