PHILIPPINE NATIONAL BANK petitioner, vs, THE HON.

COURT OF "PEALS and

AMBROSIO PADILLA, respondents.
FACTS:
Private respondent (PR) Ambrosio Padilla, applied for and was granted a credit line of
321.8million, by petitioner PNB. This was for a term of 2 years at 18% interest per annum
and was secured by real estate mortgage and 2 promissory notes executed in favor of
Petitioner by PR. The credit agreement and the promissory notes, in effect, provide that
PR agrees to be bound by increases to the interest rate stipulated, provided it is within
the limits provided for by law.
Conflict in this case arose when Petitioner unilaterally increased the interest rate from
18% to: (1) 32% [July 1984]; (2) 41% [October 1984]; and (3) 48% [November 1984], or
3 times within the span of a single year. This was done despite the numerous letters of
request made by PR that the interest rate be increased only to 21% or 24%.
PR filed a complaint against Petitioner with the RTC. The latter dismissed the case for
lack of merit.
Appeal by PR to CA resulted in his favor. Hence the petition for certiorari under Rule 45 of
ROC filed by
PNB with SC.
ISSUE: Despite the removal of the Usury Law ceiling on interest, may the bank validly
increase the stipulated interest rate on loans contracted with third persons as often as
necessary and against the protest of such persons.
HELD:
NO
RATIO: Although under Sec. 2 of PD 116, the Monetary Board is authorized to prescribe
the maximum rate of interest for loans and to change such rates whenever warranted by
prevailing economic and social conditions, by express provision, it may not do so oftener
than once every 12 months. If the Monetary Board cannot, much less can PNB, effect
increases on the interest rates more than once a year.
Based on the credit agreement and promissory notes executed between the parties,
although PR did agree to increase on the interest rates allowed by law, no law was
passed warranting Petitioner to effect increase on the interest rates on the existing loan
of PR for the months of July to November of 1984.
Neither there being any document executed and delivered by PR to effect such increase.
For escalation clauses to be valid and warrant the increase of the interest rates on loans,
there must be:
(1) increase was made by law or by the Monetary Board; (2) stipulation must include a
clause for the reduction of the stipulated interest rate in the event that the maximum
interest is lowered by law or by the
Monetary board. In this case, PNB merely relied on its own Board Resolutions, which are
not laws nor resolutions of the Monetary Board.

Despite the suspension of the Usury Law, imposing a ceiling on interest rates, this does
not authorize banks to unilaterally and successively increase interest rates in violation of
Sec. 2 PD 116.
Increases unilaterally effected by PNB was in violation of the Mutuality of Contracts
under Art. 1308. This provides that the validity and compliance of the parties to the
contract cannot be left to the will of one of the contracting parties. Increases made are
therefore void.
Increase on the stipulated interest rates made by PNB also contravenes Art. 1956. It
provides that, no interest shall be due unless it has been expressly stipulated in
writing. PR never agreed in writing to pay interest imposed by PNB in excess of 24% per
annum. Interest rate imposed by PNB, as correctly found by CA, is indubitably excessive.