PHILIPPINE NATIONAL BANK, Petitioner,

vs.
TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC., (now PRIME EAST PROPERTIES, INC.) and AFPRSBS, INC., Respondents.
DECISION
Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties
Inc.5(PEPI) on an installment basis a residential lot located in Binangonan, Rizal. Subsequently, PEPI assigned
its rights over a 213,093-sq m property to respondent Armed Forces of the Philippines-Retirement and
Separation Benefits System, Inc. (AFP-RSBS), which included the property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00 loan from petitioner Philippine
National Bank (petitioner), secured by a mortgage over several properties, including Dees property.
After Dees full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFPRSBS in Dees favor. Consequently, Dee sought from the petitioner the delivery of the owners duplicate title
over the property, to no avail. Thus, she filed a complaint for specific performance to compel delivery by the
petitioner, PEPI and AFP-RSBS.
The petitioner claims that it has a valid mortgage over Dees property, which was part of the property
mortgaged by PEPI to it to secure its loan obligation, and that Dee and PEPI are bound by such mortgage. The
petitioner also argues that it is not privy to the transactions between the subdivision project buyers and PEPI,
and has no obligation to perform any of their respective undertakings under their contract. 14
The petitioner also maintains that Presidential Decree (P.D.) No. 957 15 cannot nullify the subsisting agreement
between it and PEPI, and that the petitioners rights over the mortgaged properties are protected by Act
313516. If at all, the petitioner can be compelled to release or cancel the mortgage only after the provisions of
P.D. No. 957 on redemption of the mortgage by the owner/developer (Section 25) are complied with. The
petitioner also objects to the denomination by the CA of the provisions in the Affidavit of Undertaking as
stipulations pour autrui,17arguing that the release of the title was conditioned on Dees direct payment to it. 18
Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle the obligation under
the mortgage contract between PEPI and the petitioner as it is merely an investor in the subdivision project and
is not privy to the mortgage.19
Respondent PEPI, on the other hand, claims that the title over the subject property is one of the properties due
for release by the petitioner as it has already been the subject of a Memorandum of Agreement and dacion en
pago entered into between them.20 The agreement was reached after PEPI filed a petition for rehabilitation,
and contained the stipulation that the petitioner agreed to release the mortgage lien on fully paid mortgaged
properties upon the issuance of the certificates of title over the dacioned properties. 21
ISSUE:
HELD:
The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent PEPI
and AFP-RSBS in its transactions with Dee because it is not a privy thereto. The basic principle of relativity of
contracts is that contracts can only bind the parties who entered into it,23 and cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with knowledge thereof. 24 "Where there is no privity
of contract, there is likewise no obligation or liability to speak about." 25
It must be stressed that the mortgage contract between PEPI and the petitioner is merely an accessory
contract to the principal three-year loan takeout from the petitioner by PEPI for its expansion project. It need
not be belaboured that "[a] mortgage is an accessory undertaking to secure the fulfillment of a principal
obligation,"28 and it does not affect the ownership of the property as it is nothing more than a lien thereon
serving as security for a debt.29
Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract between
respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay the purchase price of the
property. On this point, PEPI was acting fully well within its right when it mortgaged the property to the
petitioner, for in a contract to sell, ownership is retained by the seller and is not to pass until full payment of the
purchase price.30 In other words, at the time of the mortgage, PEPI was still the owner of the property.
Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, the former is still
bound to respect the transactions between respondents PEPI and Dee. The petitioner was well aware that the
properties mortgaged by PEPI were also the subject of existing contracts to sell with other buyers. While it may
be that the petitioner is protected by Act No. 3135, as amended, it cannot claim any superior right as against
the installment buyers. This is because the contract between the respondents is protected by P.D. No. 957, a
social justice measure enacted primarily to protect innocent lot buyers.
Petitioner Philippine National Bank and respondents Prime East Properties Inc. and Armed Forces of the
Philippines-Retirement and Separation Benefits System, Inc. are hereby ENJOINED to strictly comply with the
Housing and Land Use Regulatory Board

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes for the sums of 6,216,000 and P4, 139,000. The loan was
secured by a Real Estate Mortgage.
When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of the
outstanding balance with accrued monthly interests.
As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63 representing
the principal, interests, penalties and attorneys fees. On the same day, the mortgaged property was sold at
public auction, with respondent as highest bidder for the amount of P10,300,000.
On May 8, 2001, petitioners received 8 a demand letter9 from respondent for the payment ofP8,901,776.63, the
amount of deficiency after applying the proceeds of the foreclosure sale
In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and
affirmative defense, that the complaint states no cause of action considering that the principal of the loan was
already paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000. Petitioners
contended that should they be held liable for any deficiency, it should be only for P55,000 representing the
difference between the total outstanding obligation of P10,355,000 and the bid price of P10,300,000.
It was reiterated that the interest rate changes every month based of the prevailing market rate and that the
petitioners were notified of the prevailing rate every month by way of phone calls before their account becomes
past due. There was no written authority from petitioners for respondent to increase the interest rate
unilaterally, however the petitioners signed a promissory note indicating that they agreed to pay interest at the
prevailing rate
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank
promissory note and was informed that the interest rate on the loan will be based on prevailing market rates.
Every month, respondent informs him by telephone of the prevailing interest rate. At first, he was able to pay
his monthly amortizations but when he started to incur delay in his payments due to the financial crisis,
respondent pressured him to pay in full, including charges and interests for the delay. His property was
eventually foreclosed and was sold at public auction. 18

The parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate offered
daily by all commercial banks as approved by the Monetary Board. Having signed the promissory notes, the
CA ruled that petitioners are bound by the stipulations contained therein.

ISSUE:
WON the interest rates imposed upon them by respondent are valid.
HELD:
Petitioners contend that the interest rates imposed by respondent are not valid as they were not by virtue of
any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation that was passed by an appropriate
government entity. They insist that the interest rates were unilaterally imposed by the bank and thus violate the
principle of mutuality of contracts. They argue that the escalation clause in the promissory notes does not give
respondent the unbridled authority to increase the interest rate unilaterally. Any change must be mutually
agreed upon.
The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will
of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless it has been
expressly stipulated in writing."
The binding effect of any agreement between parties to a contract is premised on two settled principles: (1)
that any obligation arising from contract has the force of law between the parties; and (2) that there must be
mutuality between the parties based on their essential equality. Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is
likewise, invalid.21
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting
parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses which
are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long
term contracts.22 Hence, such stipulations are not void per se. 23
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important modification
in the agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts.
It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an
increase in the stipulated rate of interest without the express conformity of the debtor.
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the
interest rate/service charge presently stipulated in this note without any advance notice to me/us in the event a
law or Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate
government entities, increasing or decreasing such interest rate or service charge. 36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and Trust
Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change
from time to time the rate of interest and/or bank charges "without advance notice" to petitioner, "in the event of
change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines,"
does not give respondent bank unrestrained freedom to charge any rate other than that which was agreed
upon.

Catungal v. RodriguezG.R. No. 146839, March 23, 2011Leonardo-De Castro,

FACTS
Agapita Catungal owned a parcel of land with an area of 65, 246 square meters inTalamban, Cebu City. She
entered into a Contract to Sell with Angel Rodriguez. Subsequently,the Contract to Sell was upgraded into a
Conditional Deed of Sale between the same parties.Rodriguez secured the necessary survey and plans that
reclassified the land from agricultural toresidential and actively negotiated for the road right of way. The
spouses Catungal requested anadvance of P5,000,000.00 on the purchase price. Rodriguez objected on the
unwarranteddemands in view of the terms of the Conditional Deed of Sale that allowed him sufficient time
tonegotiate a road right of way and exclusive right to rescind the contract. Thereafter, he received aletter from
Atty. Catungal that the contract is cancelled and terminated.Catungal
filed a complaint contending that the Catungals unilateral rescission of the Conditional
Deed of Sale was unjustified, arbitrary and unwarranted. However, the Catungals claims thatRodriguez does
not have an exclusive right to rescind the contract it being recorocal. The trialcourt ruled in favor of Rodriguez.
The Catungals appealed the decision to the Court of Appeals.In a Motion for Reconsideration, Atty. Borromeo,
a new counsel for the Catungals, argued forthe first time that the paragraphs 1(b) and 5(49) of the Conditional
Deed of Sale violated the principle of mutuality under Article 1308 of the Civil Code.
ISSUE
Whether paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of contracts
under Article 1308?
HELD
No. The Court held that in the Conditional Deed of Sale the respondent shall pay the balance of the purchase
price when he has successfully negotiated and secured a road right of way, isnot purely potestative as what
the petitioners contend. It is not dependent on the sole will ofthe debtor but also on the will of third persons
who own the adjacent land and from whomthe road right of way shall be negotiated. This mixed condition is
expressly allowed underArticle 1182 of the Civil Code. In other words, the obligation to pay the balance
isconditioned upon the acquisition of the road right-of-way, in accordance with paragraph 2 ofArticle 1181 of
the New Civil Code. In the event that the condition is not fulfilled, Rodriguez