Mendoza v CA

Petitioner Danilo D. Mendoza is engaged in the domestic and international

trading of raw materials and chemicals. He operates under the business name
Atlantic.
Respondent PNB extended P500,000 credit line and P1 million letter of credit
in favor of Petitioner Mendoza.
As security, Mendoza mortgaged real and personal properties to PNB. The real
estate mortgage provided for an escalation clause.
Mendoza also executed 3 promissory notes covering the P500,000 credit line
with an annual interest rate of 12% until paid and that PNB may raise the
interest without further notice.
He also executed 11 Application and Agreement for the Commercial Letter of
Credit providing for 9% annual interest from the date of drafts until the arrival
of payment in New York and that PNB may increase the interest without
further notice.
PNB sent a letter to Mendoza, informing him that the interest rates increased
to 14% per annum.
Mendoza made some proposals for the restructuring of his past due accounts
into 5 year term loan and for an additional P2 million letter of credit. However,
PNB did not approve his proposal and reduced the letter of credit to P 1 million
only.
Mendoza claimed that he was forced to sign 2 blank promissory notes and
claimed that his proposal for 5 year restructuring of his past due accounts was
approved.
He also alleged that PNB violated their agreement because PNB inserted 21%
instead of 18% in the first promissory note and 18% instead of 12% in the
second promissory note.
The 2 promissory notes also provided escalation clauses.
The 2 newly executed promissory notes novated the earlier promissory notes
and 11 Application and Agreement for Commercial Letter of Credit.
Due to Mendozas failure to pay the 2 promissory notes, PNB foreclosed the
real and personal mortgages.
Mendoza filed for specific performance, nullification of foreclosure and
damages.
WON the interest rates imposed on the 2 newly executed promissory notes were
valid.
NO. The Court upheld the validity of the 2 newly executed promissory notes.
BUT it ruled that interest rates imposed on the said notes are not valid on the
ground that Mendoza was not informed beforehand by PNB of the change in
the stipulated interest rates.
It held that unilateral determination and imposition of increased interest rates
by PNB is violative of the principle of mutuality of contract.
Contract changes must be made with the consent of the contracting parties.
The minds of all parties must meet as to the proposed modification, especially
when it affects an important aspect of the agreement.
No one receiving a proposal to change a contract to which the party is obliged
to answer the proposal, and his silence per se cannot be construed as
acceptance.

DOCTRINE:
The Court upheld the validity of the 2 newly executed promissory notes , BUT it
ruled that the interest rates imposed on the said notes are not valid.
Unilateral determination and imposition of increased interest rates by PNB is
violative of the principle of mutuality of contract.
Contract changes must be made with the consent of the contracting parties ,
especially when it affects an important aspect of the agreement.
Silence per se cannot be construed as acceptance.