Published 12 September 2022, The Daily Tribune

The Supreme Court has recently upheld two fundamental principles of contract in the case of United Coconut Planters Bank vs Editha Ang and Violeta Fernandez, the first being the mutuality of contracts as found under Article 1308 of the New Civil Code, and the second being that an invalid stipulation of interest does not invalidate the remedy of foreclosing the mortgagor’s property.

In this case, Ang and Fernandez entered into a Credit Agreement and Promissory Notes with UCPB for a total amount of P16 million with stipulations that the loan would be subject to interest. Under the Credit Agreement, the interest rate was stipulated to be:

• The prevailing market rate based on the Manila Reference Rate;

• The Treasury Bill Rate; or

• Other market-based reference rates then obtaining at the time of each availment and shall be subject to quarterly interest review and resetting at the option of the bank.

Under these stipulations, UCPB was given sole control over the interest rate of the agreement and was not required to adhere to the reference rates as stated in the stipulations. In esse, UCPB could ignore the stipulated rates as it had the discretion to review and reset the same. Effectively, this gave UCPB the power to fix the interest rate of the agreement at its own will, which principally violates the mutuality of contracts as found under Article 1308 of the New Civil Code, viz.:

Art. 1308 — The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

However, while the Court did nullify the stipulations on interest rate in the agreement between the parties, it did not nullify the foreclosure proceedings, which UCPB had already initiated after Ang and Fernandez failed to pay the total indebtedness. The Court cited Advocates for Truth in Lending Inc. vs Bangko Sentral Monetary Board, stating that “in a usurious loan with mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the creditor upon failure by the debtor to pay the debt due.”

The Court emphasized that even taking into consideration the fact that the total debt was inflated due to the interest, Ang and Fernandez were not able to pay back a substantial part of the principal amount even without the application of legal interest.

This case holds valuable lessons for both banks and borrowers when entering into loan agreements with one another. On one hand, banks should take note that interest rates must be fair and reasonable; otherwise, they shall be invalidated by the courts. On the other, borrowers should keep in mind that they cannot escape their obligations to pay back what is loaned to them. As the Supreme Court notably said, “You can’t have your cake, and eat it, too.” Invalid interest stipulations will not invalidate foreclosure proceeding.

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