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Silos v. PNB, G.R. No.

181045, July 2, 2015

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.

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 a 19.5% 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 rates soared. Spouses Silos 26thPN 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.

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

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