A CONTRACT THAT DEPENDS ON ONE PARTY'S WILL IS VOID

The Supreme Court of the Philippines (SC) has invalidated the foreclosure of multiple properties, determining that the interest assessed on the outstanding bank loan was inequitable and implemented without the consent of the borrower.

In a Resolution authored by Associate Justice Ricardo R. Rosario, the SC’s Special Third Division granted the Motion for Reconsideration submitted by Editha Ang and Violeta Fernandez, whose properties were foreclosed by United Coconut Planters Bank (UCPB) due to their failure to repay a PHP 16-million loan.

Ang and Fernandez secured a loan from UCPB; however, the loan documents stipulated that UCPB maintained the unilateral right to adjust the interest rate quarterly based on prevailing market conditions.

Upon the borrowers' failure to remit the total loan amount upon its due date, UCPB initiated extrajudicial foreclosure proceedings on their properties.

Subsequently, Ang and Fernandez filed a petition with the Regional Trial Court (RTC) seeking to annul the foreclosure sale, contending that the bank's sole authority to determine and modify the interest rate rendered the rate unjust and therefore invalid.

Initially, the SC acknowledged the invalidity of the interest rate yet upheld the foreclosure sale, asserting that the borrowers remained in default.

Upon further consideration, however, the SC concluded that if the interest rate was determined to be unconscionable or exclusively imposed by the lender, any subsequent foreclosure would also be rendered invalid.

The Court underscored that, according to the Civil Code, contracts must be equitable and mutually agreed upon. A contract that hinges solely on the will of one party is deemed void.

In this instance, the interest rate was exclusively established by UCPB. Consequently, as the interest rate was invalid, the foreclosure of the properties was also void.

The SC affirmed that the borrowers should be afforded the opportunity to repay the loan at an interest rate mutually agreed upon by both parties. Failure to do so would leave them vulnerable to the lender’s discretion, risking the loss of their properties without a fair opportunity to resolve their obligation.