PNB V.

CA
Facts:
April 7, 1982- private respondents, as
owners of a NACIDA-registered enterprise,
obtained a loan under the Cottage Industry
Guaranty Loan Fund (CIGLF) from petitioner,
PNB, in the amount of P50,000 as evidenced
by a Credit Agreement. The loan was to be
amortized over a period of 3 years to end on
March 20, 1985 at 12% interest annually.
The said loan was secured by a Real Estate
Mortgage over an agricultural land and
Chattel Mortgage over a thermo plasticforming machine.
The credit agreement provided that:
o The BANK reserves the right to increase
the interest rate within the limits allowed by
law at any time depending on whatever
policy it may adopt in the future; Provided,
that the interest rate on this accommodation
shall be correspondingly decreased in the
event that the applicable maximum interest
is reduced by law or by the Monetary Board.
In either case, the adjustment in the interest
rate agreed upon shall take effect on the
effectivity date of the increase or decrease
in the maximum interest rate.
The promissory note, in turn, authorized
PNB to raise the interest, at any time
without notice, beyond the stipulated rate of
12% but only within the limits allowed by
law.
February 17, 183- private respondents
were granted an additional NACIDA loan of
P50,000. PNB executed another promissory
note which is to mature on April 1, 1985. It
contained the same terms specified in the
previous note. The parties also executed a
new Credit Agreement, changing the amount
from P50,000 to P100,000, with the same
stipulations as the previous one.
August 1, 1984- petitioner sent a letter
to respondents informing them that the
interest rate of their CIGLF loan account was
raised to 25% per annum plus a penalty of
6% per annum on past dues. PNB further
increased the interest rate to 30% and 42 %
a few months later.
Thereafter, private respondents exerted
efforts to get PNB to re-adopt the 12%
interest and to condone the present interest
and penalties due, but to no avail.
December 15, 1987- private respondents
filed a suit for specific performance against
petitioner PNB and NACIDA praying to
release the mortgage; pay damages and

other relief which the court may find just and

equitable.
The trial court dismissed the case. CA
reversed the decision in favor of private
respondents and disallowed the increases in
interest rates.
Petitioners Contention: The increase in
interest rates is authorized by the escalation
clause specified in the Credit Agreement.
Issue: Whether or not the increase
interest rates made by petitioner is valid.

in

Held: No. The increase in interest rates

made by petitioner is invalid.
It is basic that there can be no contract in
the true sense in the absence of the element
of agreement, or of mutual assent of the
parties. If this assent is wanting on the part
of the one who contracts, his act has no
more efficacy than if it had been done under
duress or by a person of unsound mind.
Similarly, contract changes 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 contracts, it
cannot be gainsaid that the rate of interest
is always a vital component, for it can make
or break a capital venture. Thus, any change
must be mutually agreed upon, otherwise, it
is bereft of any binding effect.
The Court disagrees with petitioners
argument that the escalation clause gives it
the unbridled right to unilaterally upwardly
adjust the interest on private respondents'
loan. That would completely take away from
private respondents the right to assent to an
important modification in their agreement,
and would negate the element of mutuality
in contracts. In Philippine National Bank v.
Court of Appeals, et al., 196 SCRA 536, 544545 (1991) the Court held
. . . The unilateral action of the PNB in
increasing the interest rate on the private
respondent's loan violated the mutuality of
contracts ordained in Article 1308 of the
Civil Code:
Art. 1308. The contract must bind both
contracting
parties;
its
validity
or
compliance cannot be left to the will of one
of them.

In order that obligations arising from

contracts may have the force or law
between the parties, there must be
mutuality between the parties based on
their
essential
equality.
A
contract
containing a condition which makes its
fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting
parties, is void . . . . Hence, even assuming
that the . . . loan agreement between the
PNB and the private respondent gave the
PNB a license (although in fact there was
none) to increase the interest rate at will
during the term of the loan, that license
would have been null and void for being
violative of the principle of mutuality
essential in contracts. It would have invested
the loan agreement with the character of a
contract of adhesion, where the parties do
not bargain on equal footing, the weaker
party's (the debtor) participation being
reduced to the alternative "to take it or
leave it" . . . . Such a contract is a veritable
trap for the weaker party whom the courts of
justice must protect against abuse and
imposition. (Citation omitted.)
Private respondents are not also estopped
from assailing the unilateral increases in
interest rate made by petitioner bank. No
one receiving a proposal to change a
contract to which he is a party, is obliged to
answer the proposal, and his silence per se
cannot be construed as an acceptance. In
the case at bench, the circumstances do not
show that private respondents implicitly
agreed to the proposed increases in interest
rate which by any standard were too sudden
and too stiff.

ALLIED BANKING V. CA
FACTS:
Spouses Filemon Tanqueco and Lucia DomingoTanqueco owned a 512-square meter lot located at
No. 2 Sarmiento Street corner Quirino Highway,
Novaliches, Quezon City, covered by TCT No.
136779 in their name. On 30 June 1978 they leased
the property to petitioner Allied Banking
Corporation (ALLIED) for a monthly rental of
P1,000.00 for the first three (3) years, adjustable by
25% every three (3) years thereafter. 1 The lease
contract specifically states in its Provision No. 1
that "the term of this lease shall be fourteen (14)
years commencing from April 1, 1978 and may be
renewed for a like term at the option of the lessee."
Pursuant to their lease agreement, ALLIED

introduced an improvement on the property

consisting of a concrete building with a floor area
of 340-square meters which it used as a branch
office. As stipulated, the ownership of the building
would be transferred to the lessors upon the
expiration of the original term of the lease.
Sometime in February 1988 the Tanqueco spouses
executed a deed of donation over the subject
property in favor of their four (4) children, namely,
private respondents herein Oscar D. Tanqueco,
Lucia Tanqueco-Matias, Ruben D. Tanqueco and
Nestor D. Tanqueco, who accepted the donation in
the same public instrument.
On 13 February 1991, a year before the expiration
of the contract of lease, the Tanquecos notified
petitioner ALLIED that they were no longer
interested in renewing the lease. 2 ALLIED replied
that it was exercising its option to renew their lease
under the same terms with additional
proposals. 3 Respondent Ruben D. Tanqueco,
acting in behalf of all the donee-lessors, made a
counter-proposal. 4 ALLIED however rejected the
counter-proposal and insisted on Provision No. 1 of
their lease contract.
When the lease contract expired in 1992 private
respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to
renew the lease and enclosed in its reply letter a
cashier's check in the amount of P68,400.00
representing the advance rental payments for six (6)
months taking into account the escalation clause.
Private respondents however returned the check to
ALLIED, prompting the latter to consign the
amount in court.
An action for ejectment was commenced before the
Metropolitan Trial Court of Quezon City. After
trial, the MeTC-Br. 33 declared Provision No. 1 of
the lease contract void for being violative of Art.
1308 of the Civil Code
On appeal to the Regional Trial Court, and later to
the Court of Appeals, the assailed decision was
affirmed. 5
On 20 February 1993, while the case was pending
in the Court of Appeals ALLIED vacated the leased
premises by reason of the controversy. 6
ALLIED insists before us that Provision No. 1 of
the lease contract was mutually agreed upon hence
valid and binding on both parties, and the exercise
by petitioner of its option to renew the contract was
part of their agreement and in pursuance thereof.
ISSUE:
Whether a stipulation in a contract of lease to the
effect that the contract "may be renewed for a like
term at the option of the lessee" is void for being

potestative or violative of the principle of mutuality

of contracts under Art. 1308 of the Civil Code?
Rule:
No. Decision of the Court of Appeals is
REVERSED and SET ASIDE.
Article 1308 of the Civil Code expresses what is
known in law as the principle of mutuality of
contracts. It provides that "the contract must bind
both the contracting parties; its validity or
compliance cannot be left to the will of one of
them." This binding effect of a contract on both
parties is based on the principle that the obligations
arising from the contracts have the force of law
between the contracting parties, and there must be
mutuality between them based essentially on their
equality under which it is repugnant to have one
party bound by the contract while leaving the other
free therefrom. The ultimate purpose is to render
void a contract containing a condition which makes
its fulfillment dependent solely upon the
uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the
sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding
on the parties. This option, which is provided in the
same lease agreement, is fundamentally part of the
consideration in the contract and is no different
from any other provision of the lease carrying an
undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is
a purely executory contract and at most confers a
right to obtain a renewal if there is compliance with
the conditions on which the rights is made to
depend. The right of renewal constitutes a part of
the lessee's interest in the land and forms a
substantial and integral part of the agreement.
The fact that such option is binding only on the
lessor and can be exercised only by the lessee does
not render it void for lack of mutuality. After all,
the lessor is free to give or not to give the option to
the lessee. And while the lessee has a right to elect
whether to continue with the lease or not, once he
exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the
new lease agreement. Their rights and obligations
become mutually fixed, and the lessee is entitled to
retain possession of the property for the duration of
the new lease, and the lessor may hold him liable
for the rent therefor. The lessee cannot thereafter
escape liability even if he should subsequently
decide to abandon the premises. Mutuality obtains
in such a contract and equality exists between the
lessor and the lessee since they remain with the
same faculties in respect to fulfillment.

Fortunately for respondent lessors, ALLIED

vacated the premises on 20 February 1993
indicating its abandonment of whatever rights it
had under the renewal clause. Consequently, what
remains to be done is for ALLIED to pay rentals for
the continued use of premises until it vacated the
same, computed from the expiration of the original
term of the contract on 31 March 1992 to the time it
actually left the premises on 20 February 1993,
deducting therefrom the amount of P68,400.00
consigned in court by ALLIED and any other
amount which it may have deposited or advanced
in connection with the lease. Since the old lease
contract was deemed renewed under the same terms
and conditions upon the exercise by ALLIED of its
option, the basis of the computation of rentals
should be the rental rate provided for in the existing
contract.
Considering that petitioner ALLIED BANKING
CORPORATION already vacated the leased
premises as of 20 February 1993, the renewed lease
contract is deemed terminated as of that date.
However, petitioner is required to pay rentals to
respondent lessors at the rate provided in their
existing contract, subject to computation in view of
the consignment in court of P68,400.00 by
petitioner, and of such other amounts it may have
deposited or advanced in connection with the lease.
What is the meaning of the clause maybe renewed
for a like term at the option of the lessee?
With respect to the meaning of the clause "may be
renewed for a like term at the option of the lessee,"
we sustain petitioner's contention that its exercise
of the option resulted in the automatic extension of
the contract of lease under the same terms and
conditions. The subject contract simply provides
that "the term of this lease shall be fourteen (14)
years and may be renewed for a like term at the
option of the lessee." As we see it, the only term on
which there has been a clear agreement is the
period of the new contract, i.e., fourteen (14) years,
which is evident from the clause "may be renewed
for a like term at the option of the lessee," the
phrase "for a like term"referring to the period. It is
silent as to what the specific terms and conditions
of the renewed lease shall be. Shall it be the same
terms and conditions as in the original contract, or
shall it be under the terms and conditions as may be
mutually agreed upon by the parties after the
expiration of the existing lease?

G.R. No. 161718

December 14, 2011

MANILA INTERNATIONAL AIRPORT

AUTHORITY, Petitioner,
vs.
DING VELAYO SPORTS CENTER,
INC., Respondent.

and able to cooperate with the LESSOR in the

implementation of this general development plan
for the airport premises;

Before Us is a Petition for Review under Rule 45 of

the Rules of Court of the Decision1 dated January 8,
2004 of the Court Appeals in CA-G.R. CV No.
68787, affirming the Decision2 dated October 29,
1999 of Branch 111 of the Regional Trial Court
(RTC) of Pasay City in Civil Case No. 8847, which
granted
the
Complaint
for
Injunction,
Consignation, and Damages with prayer for a
Temporary Restraining Order filed by respondent
Ding Velayo Sports Center, Inc. against petitioner
Manila International Airport Authority (MIAA),
and essentially compelled petitioner to renew the
lease of respondent over a parcel of land within the
airport premises.

WHEREAS, the LESSEEs main interest is to have

a sufficient land area within which to construct a
modern hotel with such facilities as would
ordinarily go with modern hostelry, including
recreation halls, facilities for banks, tourist
agencies, travel bureaus, laundry shops, postal
stations, curio and native shops and other allied
business calculated to make the hotel and its
facilities comfortable, convenient and attractive,
and for this purpose, an initial land area of some
Thirty[-]Five Thousand Ten (35,010) square meters
would be first utilized.3

Below are the facts as culled from the records of

the case:
On February 15, 1967, petitioner (then still called
the Civil Aeronautics Administration or CAA) and
Salem Investment Corporation (Salem) entered into
a Contract of Lease whereby petitioner leased in
favor of Salem a parcel of land known as Lot 2-A,
with an area of 76,328 square meters, located in
front of the Manila International Airport (MIA) in
Pasay City, and registered under Transfer
Certificate of Title (TCT) No. 6735 in the name of
the Republic (Lot 2-A). Petitioner and Salem
entered into said Contract of Lease for the
following reasons:
WHEREAS, this particular portion of land is
presently an eyesore to the airport premises due to
the fact that a major portion of it consists of
swampy and talahib infested silt and abandoned
fishponds and occupied by squatters and some
[petitioners] employees with ungainly makeshift
dwellings;
WHEREAS, the LESSOR, in accordance with its
general plan to improve and beautify the airport
premises, is interested in developing this particular
area by providing such facilities and conveniences
as may be necessary for the comfort, convenience
and relaxation of transients, tourists and the general
public;
WHEREAS, the LESSEE, a corporation engaged in
hostelry and other allied business, is ready, willing

xxxx

The term of the lease and renewal thereof as

stipulated upon by petitioner and Salem are as
follows:
3. That the term of the lease shall be for a period of
Twenty-Five (25) years, commencing from the date
of receipt of approval of this Contract by the
Secretary of Public Works and Communications,
and at the option of the LESSEE, renewable for
another Twenty-Five (25) years. It is understood,
that after the first 25 years lease, the ownership of,
and full title to, all the buildings and permanent
improvements introduced by the LESSEE on the
leased premises including those introduced on the
Golf Driving Range shall automatically vest in the
LESSOR, without cost.
Upon the termination of the lease or should the
LESSEE not exercise this option for renewal, the
LESSEE shall deliver the peaceful possession of all
the building and other permanent improvements
herein above referred to, with the understanding
that the LESSEE shall have the right to remove
from the premises such equipment, furnitures,
accessories and other articles as would ordinarily
be classified as movable property under pertinent
provisions of law.
4. That the renewal of this lease contract shall be
for another period of Twenty-Five (25) years, under
the same terms and conditions herein stipulated;
provided, however that, since the ownership of the
hotel building and permanent improvement have
passed on the LESSOR, the LESSEE shall pay as
rental, in addition to the rentals herein agreed upon,
an amount equivalent to One percent (1%) of the

appraised value of the hotel building and

permanent improvements at the time of expiration
of Twenty-Five (25) years lease period, payable
annually.4
Subsequently, in a Transfer of Lease Rights and
Existing Improvements dated September 30, 1974,
Salem conveyed in favor of Ding Velayo Export
Corporation (Velayo Export), for the consideration
of P1,050,000.00, its leasehold rights over a portion
of Lot 2-A, measuring about 15,534 square meters,
with the improvements thereon, consisting of an
unfinished cinema-theater. Accordingly, petitioner
and Velayo Export executed a Contract of Lease
dated November 26, 1974 pertaining to the
aforementioned leased portion of Lot 2-A.
In turn, Velayo Export executed a Transfer of Lease
Rights dated April 27, 1976 by which it conveyed
to
respondent,
for
the
consideration
of P500,000.00, its leasehold rights over an 8,481square meter area (subject property) out of the
15,534-square meter portion it was leasing from
petitioner. As a result, petitioner and respondent
executed another Contract of Lease5 dated May 14,
1976 covering the subject property.
The Contract of Lease dated May 14, 1976 between
petitioner (as lessor) and respondent (as lessee)
specified how respondent shall develop and use the
subject property:
2. That the LESSEE shall utilize the premises as
the site for the construction of a Sports Complex
facilities and shopping centers in line with the
Presidential Decree for Sports Development and
Physical Fitness, including the beautification of the
premises and providing cemented parking areas.
3. That the LESSEE shall construct at its expense
on the leased premises a parking area parallel to
and fronting the Domestic Airport Terminal to be
open to the traveling public free of charge to ease
the problem of parking congestion at the Domestic
Airport.6
Pursuant to the aforequoted objectives, respondent
agreed to the following:
9. Physical improvements on building spaces and
areas subject of this agreement may be undertaken
by and at the expenses of the LESSEE. However,
no improvements may be commenced without prior
approval of the plans by the LESSOR and,
whenever deemed necessary a cash deposit shall be

made in favor of the LESSOR which shall be

equivalent to the cost of restoration of any portion
affected by such alteration or improvements;
10. The LESSEE agrees and binds himself to
complete
the
physical
improvements
or
contemplated structures within the leased premises
for a period of one (1) year. Failure on the part of
the LESSEE to do so within said period shall
automatically revoke the Contract of Lease without
necessity of judicial process.7
The lease rental shall be computed as follows:
5. That the LESSEE shall pay to the LESSOR as
monthly rentals for the leased premises the rate of
P0.45 per square meter for the first 300 square
meters, P0.30 per square meter for the next 500
square meters, and P0.25 per square meter for the
remaining area pursuant to Part VIII, Section 4 of
Administrative Order No. 4, Series of 1970, which
in the case of the 8,481 square meters herein leased
shall amount to P2,205.25 per month, or a royalty
equivalent to one percent (1%) of the monthly
gross income of the LESSEE, whichever is higher.
6. That for the purpose of accurately determining
the monthly gross income, the LESSEE hereby
gives its consent for the examination of the books
by authorized representatives of the LESSOR or the
Commission on Audit;
xxxx
13. If, during the lifetime of this agreement and
upon approval by the LESSOR, the leased area is
increased or diminished, or the LESSEE is
relocated to another area, rentals, fees, and charges
imposed shall be amended accordingly. Subsequent
amendments to the Administrative Order which
will affect an increase of the rates of fees, charges
and rentals agreed upon in this contract shall
automatically amend this contract to the extent that
the rates of fees, rentals, and charges are increased.
In the event of relocation of the LESSEE to other
areas, the cost of relocation shall be shouldered by
the LESSEE.8
Nonpayment of lease rentals shall have the
following consequence:
8. Failure on the part of the LESSEE TO PAY ANY
fees, charges, rentals or the royalty of one percent
(1%) within thirty (30) days after receipt of written

demand, the LESSOR shall deny the LESSEE of

the further use of the leased premises and /or any of
its facilities, utilities and services. x x x.9
The Contract of Lease prohibits respondent from
transferring its leasehold rights, engaging in any
other business outside those mentioned in said
Contract, and subletting the premises whether in
whole or in part, thus:
16. The LESSEE agrees not to assign, sell, transfer
or mortgage his rights under this agreement or
sublet the whole or part of premises covered by it
to a third party or parties nor engage in any other
business outside of those mentioned in this
contract. Violation of this provision shall also be a
ground for revocation of the lease contract without
need of judicial process.10
Period of the lease and renewal thereof are
governed by paragraphs 4 and 17 of the Contract of
Lease that read:
4. That the period of this lease shall take effect
from June 1, 1976 up to February 15, 1992 which is
equivalent to the unexpired portion of the lease
contract executed between [petitioner] and Ding
Velayo Export Corporation.
xxxx
17. The LESSEE, if desirous of continuing his
lease, should notify the LESSOR sixty (60) days
prior to expiration of the period agreed upon for the
renewal of the Contract of Lease.11
The lease may be revoked/terminated under the
following conditions:
15. This contract of lease may be terminated by
other party upon thirty (30) days notice in writing.
Failure on the part of the LESSEE to comply with
any of the provisions of this lease contract or any
violation of any rule or regulations of the Airport
shall give the LESSOR the right to revoke this
contract effective thirty (30) days after notice of
revocation without need of judicial demand.
However, the LESSEE shall remain liable and
obligated to pay rentals and other fees and charges
due and in arrears with interest at the rate of twelve
percent (12%) per annum;
xxxx

18. Upon termination or revocation of this contract

of lease as herein provided, the LESSEE shall
deliver possession of the premises to the LESSOR
in the same condition that they were received
giving allowance to normal wear and tear and to
damage or destruction caused by act of God. All
permanent improvements, however, which the
LESSEE might have constructed in the premises by
virtue hereof shall upon the termination of this
lease automatically become the absolute property
of the LESSOR without cost;
19. In the event that the LESSOR shall need the
leased premises in its airport development program,
the LESSEE agrees to vacate the premises within
thirty (30) days from receipt of notice. All
improvements not removed by the LESSEE within
the thirty (30) day period shall become the property
of the LESSOR without cost.12
Respondent began occupying the subject property
and paying petitioner the amount of P2,205.25 per
month as rental fee. Respondent then constructed a
multi-million plaza with a three-storey building on
said property. Respondent leased spaces in the
building to various business proprietors.
In a Letter13 dated April 11, 1979, petitioner
requested respondent for a copy of the latters
Gross Income Statement from December 1977 to
December 1978, duly certified by a certified public
accountant, for the purpose of computing the
royalty equivalent to 1% of the monthly gross
income of respondent. Acceding to this request,
respondent sent petitioner a Letter14 dated May 31,
1979 and appended therewith the requested income
statements which disclosed that the total gross
income of respondent for the period in question
amounted toP1,972,968.11. Respondent also
submitted to petitioner and the Commission on
Audit (COA) its duly audited financial
statements15 for the years 1984 to 1988.
Meanwhile, petitioner had continued billing
respondent the amount of P2,205.25 as monthly
rental fee, which the latter obediently paid.
Petitioner eventually issued Administrative Order
(AO) No. 4, series of 1982,16 and AO No. 1, series
of 1984, fixing various rates for the lease rentals of
its properties. AO No. 4, series of 1982, and AO
No. 1, series of 1984, allegedly effected an increase
in the lease rental of respondent for the subject
property, as provided for in paragraph 13 of the
Contract of Lease dated May 14, 1976 between
petitioner and respondent. However, said issuances

were subjected to review for revision purposes and

their implementation was suspended. Still,
petitioner, through a letter dated September 23,
1986, required respondent to pay a moratorium
rental at the rate of P5.00 per square meter rate per
month or a total of P42,405.00 every month.

More than 60 days prior to the expiration of the

lease between petitioner and respondent, the latter,
through its President, Conrado M. Velayo (Velayo),
sent the former a Letter18 dated December 2, 1991
stating that respondent was interested in renewing
the lease for another 25 years.

In a Letter17 dated October 18, 1986, respondent

opposed the implementation of any increase in its
lease rental for the subject property. Respondent
wrote:

Petitioner, through its General Manager, Eduardo

O. Carrascoso, in a Letter19 dated February 24,
1992, declined to renew the lease, ordered
respondent to vacate the subject property within
five days, and demanded respondent to pay arrears
in lease rentals as of January 1992 in the sum
of P15,671,173.75.

We believe that an increase in rental of a property

which does not form part of the Airport or its
immediate premises, like the premises leased to
DVSC, although owned by MIAA is not covered
by Batas Pambansa Blg. 325 or Finance Ministry
Order No. 6-83. Furthermore, the language of B.P.
No. 325 and Ministry Order No. 6-83 authorizes
the fixing or revision of fees and charges only for
"services and functions."
xxxx
Assuming that the increase in rental of MIAA
property is authorized by B.P. No. 325 and Ministry
Order No. 6-83, such increase as ordered in your
moratorium rental rate insofar as it is made
applicable to DVSC is not valid.
The increase which is around 2,000 percent or 20
times above present rental rate is unreasonably
high. Both B.P. No. 325 and Ministry Order No. 683 prescribed only "just and reasonable rates
sufficient to cover administrative costs."
Such increase in rental is uncalled for considering
that:
Upon termination of the lease, all the
improvements on the property shall belong to
MIAA without costs. The original cost of the
buildings and other improvements on the land we
have leased is P10,600,000.00. Said improvements
would now cost over P30,000,000.00. In effect the
Government would be collecting another P2.0
million a year.
We, therefore, request that the moratorium rate be
not applied to us.
Following the foregoing exchange, petitioner had
kept on charging respondent the original monthly
rental ofP2,205.25.

Velayo, on behalf of respondent, replied to

petitioner through a Letter20 dated March 3, 1992
that reads:
This refers to your letters which we received on 26
February 1992 and 27 February 1992, respectively,
the first as a response to our letter of 2 December
1991 where we informed you of our intention to
renew our lease contract, and the second wherein
you asked us to vacate within five (5) days the
leased premises.
Your second letter surprised us inasmuch as we
have been negotiating with you for the renewal of
our lease. In addition, your sudden decision gave us
no time to discuss your terms and conditions with
our Board considering that the issues involved
major decision.
For a smoother transition and for the mutual
interest of the government, the tenants and
ourselves, may we request for a reconsideration of
your decision, and we be given up to the end of
March 1992 to peacefully turn-over to you the
leased premises. This will enable you to create a
committee that will take-over the leased property
and its operations.
Likewise, consistent with our previous stand as
communicated to you by our legal counsel, copy of
which is hereto attached, we deny any liability on
rental increases.
In Letters21 all dated March 10, 1992, Velayo
informed petitioner that he already sent individual
letters to Manila Electric Company, Philippine
Long Distance Telephone Company, and Manila
Waterworks and Sewerage System, instructing the
said utility companies that succeeding billings for
electric, telephone, and water consumptions should

already be transferred to the account of petitioner in

light of the expected turn-over of the subject
property and improvements thereon from
respondent to petitioner.
However, around the same time, Samuel Alomesen
(Alomesen) became the new President and General
Manager of respondent, replacing Velayo.
Alomesen, acting on behalf of respondent, sent
petitioner a Letter22 dated March 25, 1992,
revoking the aforementioned Letters dated March 3
and 10, 1992 since these were purportedly sent by
Velayo without authority from respondents Board
of Directors. Respondent expressed its interest in
continuing the lease of the subject property for
another 25 years and tendered to petitioner a
managers check in the amount ofP8,821.00 as
payment for the lease rentals for the subject
property from December 1991 until March 1992.
Petitioner entirely disregarded the claims of
respondent and threatened to take-over the subject
property.
On March 30, 1992, respondent filed against
petitioner before the RTC a Complaint for
Injunction, Consignation, and Damages with a
Prayer
for
a
Temporary
Restraining
Order.23 Respondent essentially prayed for the RTC
to order the renewal of the Contract of Lease
between the parties for another 25-year term
counted from February 15, 1992. On even date, the
RTC
issued
a
Temporary
Restraining
Order24 preventing petitioner and all persons acting
on its behalf from taking possession of the entire or
any portion of the subject property, from
administering the said property, from collecting
rental payments from sub-lessees, and from taking
any action against respondent for the collection of
alleged arrears in rental payments until further
orders from the trial court.
In its Answer,25 petitioner contended that its
Contract of Lease with respondent was already
terminated on February 15, 1992, the expiration
date explicitly stated under paragraph 4 of the same
Contract. Petitioner was not bound to renew the
Contract of Lease with respondent. The renewal
provision under paragraph 17 of the Contract was
not automatic but merely directory and procedural
and that, in any event, Velayo, the former President
of respondent, already conceded to the non-renewal
of the Contract.

Petitioner likewise invoked paragraph 15 of the

Contract of Lease, i.e., its right to revoke the said
Contract in case of violation of any of the
provisions thereof by respondent. Petitioner averred
that respondent committed the following violations:
(1) respondent failed to fulfill the conditions set
forth under paragraphs 2 and 3 of the Contract as it
did not establish a shopping center on the subject
property and did not help ease the problems of
parking congestion at the Domestic Airport; (2)
respondent "sub-leased" the subject property in
defiance of the prohibition under paragraph 16 of
the Contract; and (3) respondent did not pay the
lease rentals in accordance with paragraphs 5 and
13 of the Contract, thus, incurring a total
outstanding balance of P15,671,173.75 as of
February 1992.
By way of counter-claim, petitioner demanded that
respondent pay the total outstanding balance of its
lease rentals for the subject property and turn-over
lease rentals it had collected from sub-lessees
beginning February 15, 1992.
After the preliminary hearing, the RTC issued a
Writ of Preliminary Injunction26 against petitioner
on April 30, 1992 upon the posting by respondent
of a bond in the amount of P100,000.00.
In an Order27 dated June 11, 1996, the RTC denied
the Omnibus Motion of petitioner for the
dissolution of the writ of injunction and
appointment of a receiver for the fruits of the
subject property; and at the same time, granted the
motion of respondent for the consignment of their
monthly lease rentals for the subject property with
the RTC.
The RTC terminated the pre-trial proceedings in an
Order28 dated October 23, 1997 for failure of the
parties to amicably settle the dispute. Thereafter,
trial on the merits ensued.
Respondent presented the testimonies of Mariano
Nocom,
Jr.,29 Gladioluz
Segundo,30 Mariano
Nocom, Sr.,31 and Rosila Mabanag.32 The RTC
admitted all the documentary evidence of
respondent in an Order33 dated December 14, 1998.
Petitioner, on the other hand, presented the lone
testimony of their accounting manager, Arlene
Britanico.34Among the numerous documents
submitted by petitioner as evidence were its own
issuances imposing various rates for the lease of its
properties, which allegedly effected an increase in

the lease rentals of respondent for the subject

property, specifically, AO No. 4, series of
1982;35 AO No. 1, series of 1984;36 AO No. 1,
series of 1990;37AO No. 1, series of
1993;38 Resolution No. 94-74,39 Resolution No. 9632,40 and Resolution No. 97-51,41 all amending AO
No. 1, series of 1993; and AO No. 1, series of
1998.42 All of the documentary evidence of
petitioner were admitted by the RTC in an
Order43 dated May 28, 1999.

rental during the stipulated lifetime of the contract

has no valid basis.

In its Decision dated October 29, 1999, the RTC

ruled in favor of respondent, disposing thus:

WHEREFORE, finding no reversible error

committed by the trial court, the instant appeal is
hereby DISMISSED, and the assailed decision is
hereby AFFIRMED.46

WHEREFORE, judgment is hereby rendered in

favor of [respondent] and against [petitioner].
Accordingly, [petitioner] is hereby ordered to:
1. Grant renewal of the lease contract for the same
term as stipulated in the old contract and the rental
to be based on the applicable rate of the time or
renewal;
2. To respect and maintain [respondents] peaceful
possession of the premises;
3. To accept the rental payment consigned by the
[respondent] to the court beginning December 1991
onward until and after a renewal has been duly
executed by both parties;
4. To pay [respondent] as and by way of attorneys
fees the sum of P500,000.00; and
5. To pay the cost of suit.44
Petitioner appealed the RTC judgment before the
Court of Appeals and assigned these errors:
I. The trial court gravely erred in declaring that
[respondent] is entitled to a renewal of the contract
of lease.
II. The trial court gravely erred in ordering the
renewal of the contract of lease despite of the fact
that it has no legal authority to do so.
III. The trial court gravely erred in declaring that
[respondent] did not violate the terms and
conditions of the contract.
IV. The trial court gravely erred in declaring that
[petitioners] act of effecting the increase in the

V. The trial court gravely erred in not finding that

[petitioner] is entitled to its counterclaim.45
The Court of Appeals promulgated its Decision on
January 8, 2004, finding no reversible error in the
appealed judgment of the RTC and decreeing as
follows:

Hence, the instant Petition for Review, wherein

petitioner basically attributed to the Court of
Appeals the very same errors it assigned to the
RTC.
Petitioner argues that the renewal of the Contract of
Lease cannot be made to depend on the sole will of
respondent for the same would then be void for
being a potestative condition.
We do not agree. As we have already explained in
Allied Banking Corporation v. Court of Appeals 47 :
Article 1308 of the Civil Code expresses what is
known in law as the principle of mutuality of
contracts. It provides that "the contract must bind
both the contracting parties; its validity or
compliance cannot be left to the will of one of
them." This binding effect of a contract on both
parties is based on the principle that the obligations
arising from contracts have the force of law
between the contracting parties, and there must be
mutuality between them based essentially on their
equality under which it is repugnant to have one
party bound by the contract while leaving the other
free therefrom. The ultimate purpose is to render
void a contract containing a condition which makes
its fulfillment dependent solely upon the
uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the
sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding
on the parties. This option, which is provided in the
same lease agreement, is fundamentally part of the
consideration in the contract and is no different
from any other provision of the lease carrying an
undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is

a purely executory contract and at most confers a

right to obtain a renewal if there is compliance with
the conditions on which the right is made to
depend. The right of renewal constitutes a part of
the lessee's interest in the land and forms a
substantial and integral part of the agreement.
The fact that such option is binding only on the
lessor and can be exercised only by the lessee does
not render it void for lack of mutuality. After all,
the lessor is free to give or not to give the option to
the lessee. And while the lessee has a right to elect
whether to continue with the lease or not, once he
exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the
new lease agreement. Their rights and obligations
become mutually fixed, and the lessee is entitled to
retain possession of the property for the duration of
the new lease, and the lessor may hold him liable
for the rent therefor. The lessee cannot thereafter
escape liability even if he should subsequently
decide to abandon the premises. Mutuality obtains
in such a contract and equality exists between the
lessor and the lessee since they remain with the
same faculties in respect to fulfillment.48
Paragraph 17 of the Contract of Lease dated May
14, 1976 between petitioner and respondent solely
granted to respondent the option of renewing the
lease of the subject property, the only express
requirement was for respondent to notify petitioner
of its decision to renew the lease within 60 days
prior to the expiration of the original lease term. It
has not been disputed that said Contract of Lease
was willingly and knowingly entered into by
petitioner and respondent. Thus, petitioner freely
consented to giving respondent the exclusive right
to choose whether or not to renew the lease. As we
stated in Allied Banking, the right of renewal
constitutes a part of the interest of respondent, as
lessee, in the subject property, and forms a
substantial and integral part of the lease agreement
with petitioner. Records show that respondent had
duly complied with the only condition for renewal
under Section 17 of the Contract of Lease by
notifying petitioner 60 days prior to the expiration
of said Contract that it chooses to renew the lease.
We cannot now allow petitioner to arbitrarily deny
respondent of said right after having previously
agreed to the grant of the same.
Equally unmeritorious is the assertion of petitioner
that paragraph 17 of the Contract of Lease dated
May 14, 1976 merely provides a procedural basis
for a negotiation for renewal of the lease and the

terms thereof. The exercise by respondent of its

option to renew the lease need no longer be subject
to negotiations. We reiterate the point we made in
Allied Banking that:
[I]f we were to adopt the contrary theory that the
terms and conditions to be embodied in the
renewed contract were still subject to mutual
agreement by and between the parties, then the
option - which is an integral part of the
consideration for the contract - would be rendered
worthless. For then, the lessor could easily defeat
the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the
parties from reaching an agreement, as in the case
at bar. As in a statute, no word, clause, sentence,
provision or part of a contract shall be considered
surplusage or superfluous, meaningless, void,
insignificant or nugatory, if that can be reasonably
avoided. To this end, a construction which will
render every word operative is to be preferred over
that which would make some words idle and
nugatory.49
In case the lessee chooses to renew the lease but
there are no specified terms and conditions for the
new contract of lease, the same terms and
conditions as the original contract of lease shall
continue to govern, as the following survey of cases
in Allied Banking would show:
In Ledesma v. Javellana this Court was confronted
with a similar problem. In that case the lessee was
given the sole option to renew the lease, but the
contract failed to specify the terms and conditions
that would govern the new contract. When the lease
expired, the lessee demanded an extension under
the same terms and conditions. The lessor
expressed conformity to the renewal of the contract
but refused to accede to the claim of the lessee that
the renewal should be under the same terms and
conditions as the original contract. In sustaining the
lessee, this Court made the following
pronouncement:
x x x [i]n the case of Hicks v. Manila Hotel
Company, a similar issue was resolved by this
Court. It was held that 'such a clause relates to the
very contract in which it is placed, and does not
permit the defendant upon the renewal of the
contract in which the clause is found, to insist upon
different terms than those embraced in the contract
to be renewed'; and that 'a stipulation to renew
always relates to the contract in which it is found
and the rights granted thereunder, unless it

expressly provides for variations in the terms of the

contract to be renewed.'
The same principle is upheld in American Law
regarding the renewal of lease contracts. In 50 Am.
Jur. 2d, Sec. 1159, at p. 45, we find the following
citations: 'The rule is well-established that a general
covenant to renew or extend a lease which makes
no provision as to the terms of a renewal or
extension implies a renewal or extension upon the
same terms as provided in the original lease.'
In the lease contract under consideration, there is
no provision to indicate that the renewal will be
subject to new terms and conditions that the parties
may yet agree upon. It is to renewal provisions of
lease contracts of the kind presently considered that
the principles stated above squarely apply. We do
not agree with the contention of the appellants that
if it was intended by the parties to renew the
contract under the same terms and conditions
stipulated in the contract of lease, such should have
expressly so stated in the contract itself. The same
argument could easily be interposed by the appellee
who could likewise contend that if the intention
was to renew the contract of lease under such new
terms and conditions that the parties may agree
upon, the contract should have so specified.
Between the two assertions, there is more logic in
the latter.
The settled rule is that in case of uncertainty as to
the meaning of a provision granting extension to a
contract of lease, the tenant is the one favored and
not the landlord. 'As a general rule, in construing
provisions relating to renewals or extensions,
where there is any uncertainty, the tenant is
favored, and not the landlord, because the latter,
having the power of stipulating in his own favor,
has neglected to do so; and also upon the principle
that every man's grant is to be taken most strongly
against himself (50 Am Jur. 2d, Sec. 1162, p. 48;
see also 51 C.J.S. 599).'50 (Emphases supplied.)
Being consistent with the foregoing principles, we
sustain the interpretation of the RTC of paragraph
17 of the Contract of Lease dated May 14, 1976
between petitioner and respondent, to wit:
[Paragraph 17 of the Contract of Lease dated May
14, 1976] admits several meanings. In simpler
terms, the phrase, i.e., "if desirous of continuing his
lease, may be simply restated, i.e., if he wants to go
on with his lease, considering the word
`CONTINUE in its verb form ordinarily means

to go on in present state, or even restated in another

way if desirous of extending his lease, because
the word `continue in its verb form also means
extend uniformly." Thus, if we are to adopt the
interpretation of [petitioner] that the stipulation
merely established the procedural basis for a
negotiation for renewal then the aforequoted phrase
would be rendered a mere surplusage, meaningless
and insignificant. But if we are to prod deeper to
the very context of the entire stipulations setforth in
the contract and from what is obvious with respect
to the intentions of the contracting parties based on
their contemporaneous and subsequent acts
including but not limited to the historical
antecedents of the agreement then an interpretation
invariably different from that of [petitioner]
becomes inevitable.
Specifically, the extraneous source of the lease
contract in question could be the original and
renewed contract of lease by and between Salem
Investment Corporation and CAA the
predecessor-in-interest of [petitioner] executed on
February 10, 1967 (Exh. "M"). Under the said lease
contract between CAA and Salem, the term is for a
period of twenty-five (25) years renewable for
another 25 years at the option of the lessee Salem
(Exh. "Y-1"). Later, with the approval of CAA,
Salem transferred its leasehold rights over a portion
of the land leased to Ding Velayo Export
Corporation on September 30, 1974 (Exh. "N") and
in turn Velayo Export transferred its leasehold
rights over a portion of the leased land transferred
to it by Salem to Velayo Sports Complex, Inc.
[respondent] herein on April 29, 1976 (Exh. "O").
Thus, on May 14, 1976, [respondent] and CAA,
predecessor-in-interest of [petitioner], concluded
the lease agreement in question with a term
equivalent to the unexpired portion of the lease
between Velayo Export and CAA.
As culled from the transfers effected prior to the
May 14, 1976 agreement of [respondent] and
[petitioner]s predecessor-in-interest, the renewal of
the contract was clearly at the option of the lessee.
Considering that there was no evidence positively
showing that [respondent] and CAA expressly
intended the removal of the option for the renewal
of the lease contract from the lessee, it is but logical
to conclude, although the stipulation setforth in
paragraph 17 appears to have been worded or
couched in somewhat uncertain terms, that the
parties agreed that the option should remain with
the lessee. This must be so because based on the
context of their agreements and bolstered by the

testimony of Mr. Mariano Nocom of Salem

Investment and particularly Rosila Mabanag, one
of the signatory witness to the contract and a retired
employee of CAAs Legal Division the parties
really intended a renewal for the same term as it
was then the usual practice of CAA to have the
term of leases on lands where substantial amount
will be involved in the construction of the
improvements to be undertaken by the lessee to
give a renewal. In fact, it clearly appears that the
right of renewal constitutes a part of the lessees
interest in the land considering the multimillion
investments it made relative to the construction of
the building and facilities thereon and forms a
substantial
and
integral
part
of
the
agreement.51 (Emphases supplied.)
In sum, the renewed contract of lease of the subject
property between petitioner and respondent shall be
based on the same terms and conditions as the
original contract of lease. The "original contract of
lease" does not pertain to the Contract of Lease
dated May 14, 1976 between petitioner and
respondent alone, but also to the Contract of Lease
dated February 15, 1967 between petitioner (then
still called CAA) and Salem, as well as the
Contract of Lease dated November 26, 1974
between petitioner and Velayo Export all three
contracts being inextricably connected. Since the
Contract of Lease between petitioner and Salem
was for a term of 25 years, then the renewed
contract of lease of between petitioner and
respondent shall be for another term of 25 years.
This construction of the renewal clause under
paragraph 17 of the Contract of Lease dated May
14, 1976 between petitioner and respondent is most
consistent with the intent of the parties at the time
of the execution of said Contract and most effectual
in implementing the same.
In addition to challenging the exclusive right of
respondent to renew the Contract of Lease over the
subject property, petitioner insists on its right to
refuse the renewal because of purported violations
of the said Contract by respondent, particularly: (1)
subleasing of the premises; (2) failure to ease the
problems of parking congestion at the Domestic
Airport and to provide a shopping center and sports
facilities, such as an oval track and a swimming
pool; and (3) failure to pay monthly lease rentals in
the form of royalties equivalent to 1% of the gross
income of respondent or in accordance with the
rates fixed in the administrative orders of petitioner.

We find no violations by the respondent of the

Contract of Lease dated May 14, 1976 as to justify
the revocation or refusal to renew of said Contract
by petitioner.
The RTC is once again correct in its construal that
paragraph 16 of the Contract of Lease, prohibiting
the subleasing of the "premises," refers only to the
subject property. We stress that when the said
Contract was executed on May 14, 1976, the
"premises" leased by petitioner to respondent, and
which respondent was not allowed to sublease, is
the subject property, i.e., an idle piece of land with
an area of 8,481 square meters. More importantly,
being the builder of the improvements on the
subject property, said improvements are owned by
respondent until their turn-over to petitioner at the
end of the 25-year lease in 1992. As respondent is
not leasing the improvements from petitioner, then
it is not subleasing the same to third parties.
While the Contract of Lease expressly obligated
respondent to build certain improvements, such as
parking, shopping mall, and sports facilities, the
belated insistence by petitioner on compliance with
the same appears to be a mere afterthought.
Article 1235 of the Civil Code states that "[w]hen
the obligee accepts the performance, knowing its
incompleteness or irregularity, and without
expressing any protest or objection, the obligation
is deemed fully complied with."
As aptly observed by the RTC, paragraphs 9 and 10
of the Contract of Lease likewise expressly require
respondent to submit, for prior approval by
petitioner, all construction plans on the subject
property; and to complete the contemplated
improvements thereon within a year. The Contract
of Lease was executed on May 14, 1976, and the
one-year period expired on May 14, 1977. Yet,
petitioner did not register any protest or objection
to the alleged incompleteness of or irregularity in
the performance by respondent of its obligation to
build and develop improvements on the subject
property. In fact, upon the expiration of the original
25-year lease period in February 1992, petitioner
was already ready and willing to accept and
appropriate as its own the improvements built on
the subject property in 1992. Petitioner only raised
the
issue
of
the
purported
incompleteness/irregularity
of
the
said
improvements when it was brought to court by
respondent for refusing to renew the lease.

Just as the RTC adjudged, no fault could be

attributed to respondent for deficient payment of
lease rentals. Lease rentals were based on either the
rates fixed by AO No. 4, series of 1970, or 1% of
the monthly gross income of respondent, whichever
is higher. At the very beginning of the lease,
respondent had been paying monthly lease rentals
based on the rates fixed by AO No. 4, series of
1970, which amounted to P2,205.25 per month.
When requested, respondent submitted to petitioner
its gross income statements, so petitioner could
very well compute the 1% royalty. However,
petitioner continued to charge respondent
only P2,205.25 monthly lease rental, which the
latter faithfully paid.
Petitioner later demanded an increase in lease
rentals based on subsequent administrative
issuances raising the rates for the rental of its
properties. But the RTC found that the adverted
administrative orders were not published in full,
thus, the same were legally invalid within the
context of Article 2 of the Civil Code which
provides that "[l]aws shall take effect after fifteen
days following the completion of their publication
in the Official Gazette, unless it is otherwise
provided.
x
x
x"
In Taada
v.
52
Tuvera, http://sc.judiciary.gov.ph/jurisprudence/20
08/april2008/173918.htm - _ftn we enunciated that
publication is indispensable in order that all
statutes, including administrative rules that are
intended to enforce or implement existing laws,
attain binding force and effect, to wit:

administrative regulation on every occasion that

said regulation is being enforced.54 Since it is
petitioner which first invoked its administrative
orders to justify the increase in lease rentals of
respondent, then respondent may raise before the
court the invalidity of said administrative orders on
the ground of non-publication thereof.
Finally, petitioner cannot oppose the renewal of the
lease because of estoppel. Our following
disquisition in Kalalo v. Luz55 is relevant herein:
Under Article 1431 of the Civil Code, in order that
estoppel may apply the person, to whom
representations have been made and who claims the
estoppel in his favor must have relied or acted on
such representations. Said article provides:
"Art. 1431. Through estoppel an admission or
representation is rendered conclusive upon the
person making it, and cannot be denied or
disproved as against the person relying thereon."

Covered by this rule are presidential decrees and

executive orders promulgated by the President in
the exercise of legislative powers whenever the
same are validly delegated by the legislature or, at
present, directly conferred by the Constitution.
Administrative rules and regulations must also be
published if their purpose is to enforce or
implement existing law pursuant also to a valid
delegation.53

An essential element of estoppel is that the person

invoking it has been influenced and has relied on
the representations or conduct of the person sought
to be estopped, and this element is wanting in the
instant case. InCristobal vs. Gomez, this Court held
that no estoppel based on a document can be
invoked by one who has not been misled by the
false statements contained therein. And in Republic
of the Philippines vs. Garcia, et al., this Court ruled
that there is no estoppel when the statement or
action invoked as its basis did not mislead the
adverse party. Estoppel has been characterized as
harsh or odious, and not favored in law. When
misapplied, estoppel becomes a most effective
weapon to accomplish an injustice, inasmuch as it
shuts a man's mouth from speaking the truth and
debars the truth in a particular case. Estoppel
cannot be sustained by mere argument or doubtful
inference; it must be clearly proved in all its
essential elements by clear, convincing and
satisfactory evidence. No party should be precluded
from making out his case according to its truth
unless by force of some positive principle of law,
and, consequently, estoppel in pais must be applied
strictly and should not be enforced unless
substantiated in every particular.1wphi1

There is no basis for the argument of petitioner that

the validity of its administrative orders cannot be
collaterally attacked. To the contrary, we have
previously declared that a party may raise the
unconstitutionality
or
invalidity
of
an

The essential elements of estoppel in pais may be

considered in relation to the party sought to be
estopped, and in relation to the party invoking the
estoppel in his favor. As related to the party to be
estopped, the essential elements are: (1) conduct

We hold therefore that all statutes, including those

of local application and private laws, shall be
published as a condition for their effectivity, which
shall begin fifteen days after publication unless a
different effectivity date is fixed by the legislature.

amounting to false representation or concealment

of material facts; or at least calculated to convey
the impression that the facts are otherwise than, and
inconsistent with, those which the party
subsequently attempts to assert; (2) intent, or at
least expectation that his conduct shall be acted
upon by, or at least influence, the other party; and
(3) knowledge, actual or constructive, of the real
facts. As related to the party claiming the estoppel,
the essential elements are (1) lack of knowledge
and of the means of knowledge of the truth as the
facts in questions; (2) reliance, in good faith, upon
the conduct or statements of the party to be
estopped; (3) action or inaction based thereon of
such character as to change the position or status of
the party claiming the estoppel, to his injury,
detriment or prejudice.56 (Emphases ours.)

Petitioners, -versus- China Banking Corporation,

Respondent, G.R. No. 187678, April 10, 2013

Indeed, Velayos Letters dated March 3 and 10,

1992 to petitioner may have already expressed
acquiescence to the non-renewal of the lease and
turn-over of the improvements on the subject
property to petitioner. But not long thereafter,
Alomesen, the new President of respondent,
already wrote another Letter dated March 25, 1992,
which revoked Velayos earlier Letters for having
been sent without authority of the Board of
Directors of respondent, insisted on the renewal of
the lease, and tendered payment of past due lease
rentals. Respondent, through Alomesen, timely
acted to correct Velayos mistakes. In the 15-day
interval between Velayos Letter dated March 10,
1992 and Alomesens Letter dated March 25, 1992,
there is no showing that petitioner, relying in good
faith on Velayos Letters, acted or did not act as to
have caused it injury, detriment, or prejudice. There
is an utter lack of clear, convincing, and
satisfactory evidence on the part of petitioner, as
the party claiming estoppel, of the second and third
elements for the application of said principle
against respondent.

But 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.

WHEREFORE, the instant Petition is hereby

DENIED for lack of merit. The Decision dated
January 8, 2004 of the Court Appeals in CA-G.R.
CV No. 68787, which affirmed the Decision dated
October 29, 1999 of Branch 111 of the RTC of
Pasay City in Civil Case No. 8847, is hereby
AFFIRMED.
SO ORDERED.

Spouses Ignacio F. Juico and Alice P. Juico,

Ruling: The escalation clause is void because it

granted China Banking the power to impose an
increased rate of interest without a written notice to
the Juico couple and their written consent.
Definition: Escalation clauses refer to stipulations
allowing an increase in the interest rate agreed
upon by the contracting parties.
Doctrine: 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.

Facts:
Spouses Ignacio and Alice Juico got a loan from
China Banking Corporation as evidenced by 2
promissory notes. The loan was secured by a Real
Estate Mortgage over the Juico couples property
located at White Plains, Quezon City. The notes
contained the following escalation clause stating
that the interest rate would change every month
based on the prevailing market rate:
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.
The Juicos failed to pay the monthly amortizations
due. 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. The mortgaged property was sold at
public auction, with China Bank as the highest
bidder for the amount of Php 10,300,000.
After the auction, China Bank filed a collection
case with the Regional Trial Court (RTC) of Makati
City for Php 8,901,776.63, the amount of
deficiency after applying the proceeds of the

foreclosure sale to the mortgage debt.

The Court of Appeals affirms RTC ruling.
In their Answer, the Juicos admitted their debt but
claimed that the principal of the loan was already
paid when the mortgaged property was
extrajudicially foreclosed and sold for Php
10,300,000. They contended that should they be
held liable for any deficiency, it should be only for
Php 55,000 representing the difference between the
total outstanding obligation of Php 10,355,000 and
the bid price of Php 10,300,000.
At the trial, China Bank presented Ms. Annabelle
Cokai Yu, its Senior Loans Assistant, as witness.
She testified that she handled the account of the
Juicos and assisted them in processing their loan
application. She called them monthly to inform
them of the prevailing rates to be used in
computing interest due on their loan.
On cross-examination, Ms. Yu reiterated that the
interest rate changes every month based on the
prevailing market rate and she notified the Juicos of
the prevailing rate by calling them monthly before
their account becomes past due. When asked if
there was any written authority from the Juicos to
increase the interest rate unilaterally, Ms. Yu
answered that they signed a promissory note
indicating that they agreed to pay interest at the
prevailing rate.
In defense, Ignacio Juico testified that before the
loans release, 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. On cross-examination, Ignacio testified that
he is a Doctor of Medicine and also engaged in the
business of distributing medical supplies. Ignacio
admitted having read the promissory notes and that
he is aware of his obligation under them before he
signed them.
The RTC rules against the Juicos
The trial court held that:
(1) Ignacios claim that he signed the promissory
notes in blank cannot negate or mitigate his liability
since he admitted reading the Promissory Notes
before signing them.
(2) Considering the substantial amount involved, it
is unbelievable that the Juicos threw all caution to
the wind and simply signed the documents without
reading and understanding the contents.

PNB vs. Spouses Manalo

G.R. No. 174433 February 24, 2014
DOCTRINE: Although banks are free to determine
the rate of interest they could impose on their
borrowers, they can do so only reasonably, not
arbitrarily. They may not take advantage of the
ordinary borrowers' lack of familiarity with
banking procedures and jargon. Hence, any
stipulation on interest unilaterally imposed and
increased by them shall be struck down as violative
of the principle of mutuality of contracts.
FACTS:
1. The Spouses Manalo applied for an AllPurpose Credit Facility in the amount
of P1,000,000.00 with the PNB to finance
the construction of their house.
2. After PNB granted their application, they
executed a Real Estate Mortgage on
November 3, 1993 in favor of PNB over
their property covered by TCT No. S-23191
as security for the loan. The credit facility
was renewed and increased several times
over the years.
3. September 20, 1996: the credit facility was
renewed for P7,000,000.00. As a
consequence, the parties executed a
Supplement to and Amendment of Existing
Real Estate Mortgage whereby the property
covered by TCT No. 171859 was added as
security for the loan. It was agreed upon
that the Spouses Manalo would make
monthly payments on the interest. However,
PNB claimed that their last recorded
payment was made on December, 1997.
4. PNB sent them a demand letter for their
overdue account and required them to settle
it. PNB sent another demand letter because
they failed to heed the first demand.
5. After the Spouses Manalo failed to settle
their unpaid account despite the two
demand letters, PNB foreclosed the
mortgage. PNB was the highest bidder
for P15,127,000.00 during the foreclosure
sale.
6. After more than a year after the Certificate
of Sale had been issued to PNB, the
Spouses Manalo instituted an action for the
nullification of the foreclosure proceedings

and damages. The Spouses Manalo alleged:

that they had obtained a loan
for P1,000,000.00 from a certain Benito Tan
upon arrangements made by Antoninus
Yuvienco, then the General Manager of
PNBs Bangkal Branch where they had
transacted; that they had been made to
understand and had been assured that
the P1,000,000.00 would be used to update
their account, and that their loan would be
restructured and converted into a long-term
loan; that they had been surprised to learn,
therefore, that had been declared in default
of their obligations, and that the mortgage
on their property had been foreclosed and
their property had been sold; and that PNB
did not comply with Section 3 of Act No.
3135, as amended.
7. PNB and Antoninus Yuvienco countered
that the P1,000,000.00 loan obtained by the
Spouses Manalo from Benito Tan had been
credited to their account; that they did not
make any assurances on the restructuring
and conversion of the Spouses Manalos
loan into a long-term one; that PNBs right
to foreclose the mortgage had been clear
especially because the Spouses Manalo had
not assailed the validity of the loans and of
the mortgage; and that the Spouses Manalo
did not allege having fully paid their
indebtedness.
8. The RTC decided in favor of PNB that the
foreclosure proceedings were valid. It was
noted that during the pre-trial, the Spouses
Manalo had agreed to stipulate that PNB
had the right to foreclose upon the subject
properties and that the spouses main thrust
was to prove that the foreclosure
proceedings were invalid. In the course of
the presentation of their evidence, the
Spouses Manalo modified their position and
claimed that the loan document executed
were contracts of adhesion which were null
and void because they were prepared
entirely under the defendant PNBs
supervision. They also questioned the
interest rates and penalty charges imposed
arguing that these were iniquitous,
unconscionable and therefore likewise void.
Not having raised the
foregoing matters as issues
during the pre-trial, the
Spouses Manalo are
presumably estopped from
allowing these matters to

serve as part of their

evidence, more so because at
the pre-trial they expressly
recognized the defendant
PNBs right to foreclose
upon the subject property.
The RTC held, however, that
the Spouses Manalos
"contract of adhesion"
argument was unfounded
because they had still
accepted the terms and
conditions of their credit
agreement with PNB and had
exerted efforts to pay their
obligation; that the Spouses
Manalo were now estopped
from questioning the interest
rates unilaterally imposed by
PNB because they had paid
at those rates for three years
without protest; and that
their allegation about PNB
violating the notice and
publication requirements
during the foreclosure
proceedings was untenable
because personal notice to
the mortgagee was not
required under Act No. 3135.
9. The Spouses Manalo appealed to the CA,
insisting that:
(1) the credit agreements they
entered into with PNB were
contracts of adhesion; (2) no interest
was due from them because their
credit agreements with PNB did not
specify the interest rate, and PNB
could not unilaterally increase the
interest rate without first informing
them; and
(3) PNB did not comply with the
notice and publication requirements
under Section 3 of Act 3135.
10. CA upheld the validity of the foreclosure
proceedings initiated by PNB, but modified
the Spouses Manalos liability for interest.
The CA found it necessary to pass upon the
issues of PNBs failure to specify the
applicable interest and the lack of mutuality
in the execution of the credit agreements
considering the earlier cited observation
made by the trial court in its decision.
Applying Article 1956 of the
Civil Code, the CA held that

PNBs failure to indicate the

rate of interest in the credit
agreements would not
excuse the Spouses Manalo
from their contractual
obligation to pay interest to
PNB because of the express
agreement to pay interest in
the credit agreements.
Nevertheless, the CA ruled
that PNBs inadvertence to
specify the interest rate
should be construed against
it because the credit
agreements were clearly
contracts of adhesion due to
their having been prepared
solely by PNB.
The CA further held that
PNB could not unilaterally
increase the rate of interest
considering that the credit
agreements specifically
provided that prior notice
was required before an
increase in interest rate could
be effected. It found that
PNB did not adduce proof
showing that the Spouses
Manalo had been notified
before the increased interest
rates were imposed; and that
PNBs unilateral imposition
of the increased interest rate
was null and void for being
violative of the principle of
mutuality of contracts
enshrined in Article 1308 of
the Civil Code. Reinforcing
its "contract of adhesion"
conclusion, it added that the
Spouses Manalos being in
dire need of money rendered
them to be not on an equal
footing with PNB.
Consequently, the CA,
relying on Eastern Shipping
Lines, v. CA, fixed the
interest rate to be paid by the
Spouses Manalo at 12% per
annum, computed from their
default.

ISSUE: Whether or not there was no mutuality of

consent in the imposition of interest rates on the

Spouses loan despite the existence of facts and

circumstances showing their assent to the interest
rates imposed by PNB on the loan.
HELD: No. There was no mutuality of consent. The
credit agreement executed stipulated that the loan
would be subjected to interest at a rate "determined
by the Bank to be its prime rate plus applicable
spread, prevailing at the current month." This
stipulation was carried over to or adopted by the
subsequent renewals of the credit agreement. PNB
thereby arrogated unto itself the sole prerogative to
determine and increase the interest rates imposed
on the Spouses Manalo. Such a unilateral
determination of the interest rates contravened the
principle of mutuality of contracts embodied in
Article 1308 of the Civil Code.
The Court has declared that a contract where there
is no mutuality between the parties partakes of the
nature of a contract of adhesion, and any obscurity
will be construed against the party who prepared
the contract, the latter being presumed the stronger
party to the agreement, and who caused the
obscurity. PNB should then suffer the consequences
of its failure to specifically indicate the rates of
interest in the credit agreement.
We spoke clearly on this in Philippine Savings
Bank v. Castillo: the unilateral determination and
imposition of the increased rates is violative of the
principle of mutuality of contracts under Article
1308 of the Civil Code, which provides that the
contract must bind both contracting parties; its
validity or compliance cannot be left to the will of
one of them. A perusal of the Promissory Note will
readily show that the increase or decrease of
interest rates hinges solely on the discretion of
petitioner. It does not require the conformity of the
maker before a new interest rate could be enforced.
Any contract which appears to be heavily weighed
in favor of one of the parties so as to lead to an
unconscionable result, thus partaking of the nature
of a contract of adhesion, is void. Any stipulation
regarding the validity or compliance of the contract
left solely to the will of one of the parties is
likewise invalid.
PNB could not also justify the increases it had
effected on the interest rates by citing the fact that
the Spouses Manalo had paid the interests without
protest, and had renewed the loan several times. A
borrower is not estopped from assailing the
unilateral increase in the interest made by the
lender since no one who receives a proposal to

change a contract, to which he is a party, is obliged

to answer the same and said partys silence cannot
be construed as an acceptance thereof.
Lastly, the CA observed, and properly so, that the
credit agreements had explicitly provided that prior
notice would be necessary before PNB could
increase the interest rates. In failing to notify the
Spouses Manalo before imposing the increased
rates of interest, therefore, PNB violated the
stipulations of the very contract that it had
prepared. Hence, the varying interest rates imposed
by PNB have to be vacated and declared null and
void, and in their place an interest rate of 12% per
annum computed from their default is fixed
pursuant to the ruling in Eastern Shipping Lines,
Inc. v. CA. The CAs directive to PNB (a) to
recompute the Spouses Manalos indebtedness
under the oversight of the RTC; and (b) to refund to
them any excess of the winning bid submitted
during the foreclosure sale over their recomputed
indebtedness was warranted and equitable. Equally
warranted and equitable was to make the amount to
be refunded, if any, bear legal interest, to be
reckoned from the promulgation of the CAs
decision on March 28, 2006.
Indeed, the Court said in Eastern Shipping Lines,
Inc. v. CA that interest should be computed from
the time of the judicial or extrajudicial demand.
However, the Spouses Manalo did not demand
interest either judicially or extrajudicially. The
Spouses Manalo made no judicial or extrajudicial
demand from which to reckon the interest on any
amount to be refunded to them. Such demand could
only be reckoned from the promulgation of the
CAs decision because it was there that the right to
the refund was first judicially recognized.
Nevertheless, pursuant to Eastern Shipping Lines,
Inc. v. CA, the amount to be refunded and the
interest thereon should earn interest to be computed
from the finality of the judgment until the full
refund has been made.
Anent the correct rates of interest to be applied on
the amount to be refunded by PNB, the Court, in
Nacar v. Gallery Frames already applied Monetary
Board Circular No. 799 by reducing the interest
rates allowed in judgments from 12% per annum to
6% per annum. MB Circular No. 799 is applied
prospectively, and judgments that became final and
executory prior to its effectivity on July 1, 2013 are
not to be disturbed but continue to be implemented
applying the old legal rate of 12% per annum.
Hence, the old legal rate of 12% per annum applied

to judgments becoming final and executory prior to

July 1, 2013, but the new rate of 6% per annum
applies to judgments becoming final and executory
after said dater.
Conformably, the proper interest rates to be
imposed in the present case are as follows:
o Any amount to be refunded
to the Spouses Manalo shall
bear interest of 12% per
annum computed from
March 28, 2006, the date of
the promulgation of the CA
decision, until June 30, 2013;
and 6% per annum computed
from July 1, 2013 until
finality of this decision; and
o The amount to be refunded
and its accrued interest shall
earn interest of 6% per
annum until full refund.
WHEREFORE, the Court AFFIRMS the decision
promulgated by the CA subject to the
MODIFICATION that any amount to be refunded
to the Spouses Manalo shall bear interest of 12%
per annum computed from March 28, 2006 until
June 30, 2013, and 6% per annum computed from
July 1, 2013 until finality hereof; that the amount to
be refunded and its accrued interest shall earn
interest at 6o/o per annum until full refund; and
DIRECTS PNB to pay the costs of suit.