United Coconut Planters Bank v. Ang and Fernandez (G.R. No. 222448, March 3, 2025)
In a landmark resolution promulgated on March 3, 2025, the Philippine Supreme Court shifted the jurisprudential landscape on bank foreclosure by invalidating extrajudicial foreclosure sales premised on loan agreements containing unilaterally adjustable interest rate provisions.
Factual and Procedural Background
Respondents Editha F. Ang and Violeta M. Fernandez obtained a P16 million loan from United Coconut Planters Bank (later substituted by Land Bank of the Philippines) to finance hotel renovation and working capital. The loan was secured by a mortgage over real property. The underlying credit agreement contained a contentious clause empowering the bank to adjust quarterly interest rates at its sole discretion based on certain market references.
Respondents defaulted in payment, triggering extrajudicial foreclosure. Lower courts diverged: the Regional Trial Court declared the interest provisions void but upheld the foreclosure; the Court of Appeals declared both the interest provisions and the foreclosure sale void. On appeal, this Court initially upheld foreclosure despite striking down the interest stipulations, but upon motion for reconsideration, reversed course and aligned with the Court of Appeals.
Principal Legal Issues
This case required resolution of three core legal questions:
1. Whether interest provisions that allow unilateral adjustment by the bank are valid.
2. Whether the invalidity of such provisions affects the existence of a legally due obligation.
3. Whether foreclosure proceedings predicated on such a contract can be validly upheld.
Supreme Court’s Doctrinal Holdings
I. Potestative, Unilateral Interest Clauses Are Void
The Court held that a clause granting the lender sole discretion to determine future interest rates renders the contract potestative and contrary to the mutuality of contracts mandated by Articles 1308 and 1309 of the Civil Code of the Philippines. A contract’s validity cannot depend solely on the will of one party; agreement must be mutual.
An interest rate provision susceptible to unilateral variation by the bank is not a genuine meeting of minds. It effectively places the borrower at the mercy of the lender’s whim, negating the contractual premise of bilateral consent. Such provisions are void ab initio, not merely voidable.
II. Void Interest Stipulations Undercut Legal Demand
Because the interest provisions were void, the amount allegedly due was not a legally enforceable obligation. Without a valid computation of what is owed, the basic premise for extrajudicial foreclosure—non-payment of a legitimately due debt—could not be said to exist.
In effect, the Court reaffirmed the principle that a foreclosure sale cannot stand where the mortgagor was not given a fair opportunity to settle their obligation because the creditor demanded payment on a debt compounded with unenforceable interest. This tenet draws from established foreclosure jurisprudence in Spouses Andal v. Philippine National Bank and Spouses Albos v. Spouses Embisan, which the Court now deems controlling.
III. Foreclosure Sale Is Void When Based on Invalid Obligation
Because the interest clause was void, the foreclosure proceedings predicated upon default under that obligation were also void. The Court articulated that foreclosure is a remedial right contingent on the existence of a valid underlying obligation. Where the debt is not legally due, foreclosure cannot be upheld merely for default.
The Court therefore set aside the foreclosure sale and aligned its ruling with the principle that lenders must furnish borrowers an opportunity to settle obligations under terms truly agreed upon by both parties.
Ratio Decidendi
At the core of the Court’s resolution is the principle that:
> A contractual term that confers sole discretion on one party to set material terms — such as interest — without mutual assent of the contracting parties, is void for lack of mutuality; consequently, foreclosure predicated on such void terms lacks legal foundation and must be set aside.
This embodies two interlocking legal maxims: (1) contracts must reflect fair and mutual consent; (2) remedies for enforcement — including foreclosure — cannot hinge on obligations that are legally non-existent.
Implications for Banking and Lending
This decision imposes a jurisprudential check on standardized bank loan practices that imbue lenders with excessive unilateral power. Banking contracts must guard against clauses that effectively empower lenders to unilaterally determine fundamental terms such as interest, lest they be vulnerable to nullification.
Borrowers, for their part, are now definitively entitled to a fair opportunity to settle their debt under terms mutually agreed upon — not terms unilaterally set by creditors.
Conclusion
United Coconut Planters Bank v. Ang and Fernandez marks a pivotal affirmation of contractual fairness in credit transactions. By holding that void interest provisions invalidate foreclosure actions predicated thereon, the Supreme Court reaffirmed the Civil Code’s mutuality doctrine and preserved equitable treatment for debtors. The decision is expected to resonate in banking litigation and contractual drafting for years to come.
(Assisted by ChatGPT, February 28, 2026)
