G.R. No. 228904 - Philippine National Bank vs. AIC Construction Corp.

Case Summary (G.R. No. 228904)

Factual Background

AIC CONSTRUCTION CORPORATION was a domestic construction company owned by the Bacani Spouses which obtained an omnibus credit line from PHILIPPINE NATIONAL BANK. The loan agreement contained an interest clause providing that interest on each availment would be charged “at the rate per annum which is determined by the Bank to be the Bank's prime rate plus applicable spread in effect as of the date of the relevant availment.” The Bacani Spouses executed a real estate mortgage as security and undertook joint and several liability. By the loan’s maturity in September 1998, the indebtedness had grown to P65 million stated as P40 million principal and P25 million interest capitalized into principal. Respondents proposed a dacion en pago of properties but negotiations failed and foreclosure proceeded.

Trial Court Proceedings

Respondents filed suit for annulment of interest and penalty increases, accounting, exemption of the family home, and damages, alleging bad faith, arbitrary valuation practices, inclusion of their family home among foreclosed properties, and that interest and penalties were excessive and unconscionable. PHILIPPINE NATIONAL BANK answered contending there was no obligation to accept dacion en pago, that the mortgage could be foreclosed, and that interest and penalties were valid because respondents freely contracted and had long availed themselves of the credit line. The Regional Trial Court dismissed respondents’ complaint, finding that they failed to prove that the interest was iniquitous or unconscionable and that they did not specify the annual interest rate charged.

Court of Appeals Ruling

The Court of Appeals modified the trial court’s judgment. It held that PHILIPPINE NATIONAL BANK was not bound to accept the proposed dacion en pago and that there was insufficient proof of bad faith in the bank’s negotiations. The appellate court nonetheless found the applicable interest rates unreasonable, usurious, and unconscionable because the rate was not specified in the mortgage or credit documents and the provision vesting rate-setting in the bank violated the principle of mutuality under Art. 1308, Civil Code. Relying on this Court’s precedents, the Court of Appeals applied the legal rate of interest as enumerated in Nacar v. Gallery Frames and ordered the bank to furnish a detailed accounting, to compute interest on the P65 million principal at 12% per annum up to November 17, 2003, to apply 12% per annum to conventional interest from January 21, 2002 to November 17, 2003, and to exclude the 24% per annum penalty charge from the amount secured by the mortgage.

Parties’ Contentions on Review

On petition, PHILIPPINE NATIONAL BANK argued that the interest provision did not violate mutuality because the rate-determination was not a potestative condition but a contractual term tied to a determinable market standard, i.e., the bank’s prevailing prime rate plus spread, and that respondents freely agreed to varying rates over many years. The bank maintained that comparable clauses have been upheld where a reference rate exists and that respondents were sophisticated and informed. Respondents countered that the bank unilaterally imposed usurious and unconscionable interest and penalties, that the clause was void under Spouses Silos v. Philippine National Bank because rates were fixed through subjective, one-sided criteria, and that courts have power to equitably reduce iniquitous rates and penalties.

Issue Presented

The sole issue for resolution was whether the Court of Appeals erred in declaring the interest charges imposed by PHILIPPINE NATIONAL BANK to be usurious and unconscionable and in applying the legal rate of interest to the parties’ loan.

Supreme Court Disposition

The Supreme Court denied the petition and affirmed the Court of Appeals’ Decision and Resolution. The Court ordered PHILIPPINE NATIONAL BANK to furnish respondents a detailed accounting within thirty days of finality. The Court directed that interest on the P65 million principal be computed at 12% per annum from the effectivity of the loan agreement up to November 17, 2003, that conventional interest be computed at 12% per annum from January 21, 2002 to November 17, 2003, and that the penalty charge be excluded from the amount secured by the mortgage.

Legal Basis and Reasoning

The Court anchored its ruling on the principle of mutuality under Art. 1308, Civil Code, holding that contract validity or compliance cannot be left to the will of one party. The Court found the interest clause—authorizing the bank to determine the prime rate plus spread—analogous to the stipulation invalidated in Spouses Silos, because it left rate-setting to the bank’s unilateral and subjective determination and deprived respondents of genuine consent. The Court reiterated that freedom to stipulate interest does not preclude judicial intervention where the market is imperfect and bargaining positions unequal, citing Vitug v. Abuda and the doctrine that courts may equitably reduce iniquitous or unconscionable interest. The Court further observed that respondents had demonstrat

Case Syllabus (G.R. No. 228904)

Parties and Procedural Posture

PHILIPPINE NATIONAL BANK filed a Petition for Review on Certiorari under Rule 45, Rules of Court, seeking reversal of the Court of Appeals' decision modifying the Regional Trial Court's dismissal.
AIC Construction Corporation is the corporate borrower in the loan transaction and is a domestic construction company.
Spouses Rodolfo C. Bacani and Ma. Aurora C. Bacani executed the real estate mortgage and undertook joint and several liability with AIC Construction Corporation.
The trial court dismissed respondents' complaint, the Court of Appeals modified the dismissal and applied the legal rate of interest, and the Supreme Court denied the petition and affirmed the Court of Appeals.

Key Factual Allegations

AIC Construction Corporation opened a current account in 1988 and obtained an omnibus credit line of P10 million about a year later.
The credit line grew over time and by the loan maturity in September 1998 the outstanding amounted to P65 million, composed of P40 million principal and P25 million interest charges capitalized by PHILIPPINE NATIONAL BANK.
AIC Construction Corporation proposed restructuring by a dacion en pago of multiple properties, but the parties failed to agree on the dacion en pago valuation.
PHILIPPINE NATIONAL BANK made a final demand on April 30, 2001 for P140,837,511.29, and the mortgaged properties were later foreclosed with a notice of sale issued January 21, 2002.
AIC Construction Corporation filed suit on February 27, 2002 seeking annulment of interest and penalty increases, accounting, exemption of family home, and damages, alleging bad faith, capricious valuation policies, inclusion of the family home in foreclosure, and unconscionable interest and penalties.

Contractual Provision

The loan agreement contained clause 2.03 providing that interest on each availment would be at “the rate per annum which is determined by the Bank to be the Bank's prime rate plus applicable spread in effect as of the date of the relevant availment.”
The interest provision permitted the bank to determine the effective interest rate without a fixed numerical rate being specified in the mortgage or promissory notes.
The promissory and credit documents therefore allowed variation in the rate according to a standard administratively set by the bank rather than by prior mutual assent to a fixed rate.

Issues Presented

The sole issue was whether the Court of Appeals erred in finding the interest charges imposed by PHILIPPINE NATIONAL BANK to be usurious and unconscionable and in applying the legal rate of interest to the loan.
A subsidiary issue was whether the interest-determining provision violated the principle of mutuality of contracts under Article 1308 of the Civil Code.
Another subsidiary issue was whether the bank's practices violated Republic Act No. 3765, the Truth in Lending Act, by failing to disclose the true cost of credit.

Contentions of Petitioner

PHILIPPINE NATIONAL BANK argued that the interest provision did not violate Article 1308 because the rate was a term of the loan and its determination was incidental and based on a determinable market standard rather than the bank's sole will.
Petitioner maintained that the variable rate was pegged to prevailing market conditions with a spread and thus was a determinable reference rather than a unilateral condition.
Petitioner asserted that respondents freely and intelligently agreed to the varying interest rates and that they were estopped from attacking the rates after decades of availing the credit line.
Petitioner further contended that similarly worded provisions had been upheld and that the interest rates charged were not exorbitant given their range and market variability.

Contentions of Respondents

AIC Construction Corporation and the Bacani Spouses alleged that petitioner unilaterally imposed usurious, excessive, and unconscionable interest and penalty charges through subjective and one-sided criteria.
Respondents asserted that the parties did not agree on the applicable interest rates and that the bank’s capricio