TL;DR

The Supreme Court affirmed that excessively high interest rates on loans are against public morals and therefore void. Even if borrowers agree to such rates, courts can reduce them to a reasonable level, typically 12% per annum. The Court also invalidated a clause in a real estate mortgage that waived the borrower’s right to redeem the property, stating such waivers must be explicitly clear and cannot be hidden in fine print within contracts of adhesion. This decision protects borrowers from unfair lending practices and ensures they retain their right to recover foreclosed property.

Mortgaged and Mangled: Can a Borrower Truly Waive Redemption Rights?

This case revolves around a loan obtained by Spouses Cesario Gravador and Norma de Vera, with Emma Concepcion Dumigpi as co-maker, from Asian Cathay Finance and Leasing Corporation (ACFLC). The loan was secured by a real estate mortgage on a property in Bulacan. When the borrowers defaulted, ACFLC demanded an exorbitant sum, leading the spouses to question the validity of the interest rates and a waiver of their right to redeem the property after foreclosure. This dispute reached the Supreme Court, raising vital questions about the limits of contractual freedom and the protection of borrowers’ rights against unconscionable lending practices.

The central issue before the Supreme Court was whether the interest rates imposed by ACFLC were unconscionable and whether the waiver of the right of redemption in the real estate mortgage was valid. ACFLC argued that parties have the freedom to stipulate interest rates, and the borrowers knowingly waived their right of redemption. The borrowers contended that the interest rates were excessive and the waiver was not made voluntarily.

The Supreme Court addressed the issue of unconscionable interest rates by referencing Central Bank Circular No. 905, which removed the Usury Law ceiling on interest rates. However, the Court emphasized that this freedom is not absolute. Interest rates, if found to be excessive, iniquitous, or unconscionable, can be equitably reduced or invalidated. In this case, the Court found that the demand for P1,871,480.00 on an P800,000.00 loan within three months was unconscionable, especially since ACFLC failed to provide a clear computation of the interest and penalties charged. This aligns with established jurisprudence that stipulations authorizing iniquitous or unconscionable interest are contrary to morals and void from the beginning under Article 1409 of the Civil Code.

Article 1409 of the Civil Code states that contracts with stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law, and are inexistent and void from the beginning.

Regarding the waiver of the right of redemption, the Court reiterated the rule that a valid waiver must be couched in clear and unequivocal terms, leaving no doubt as to the party’s intention to relinquish their right. The intention to waive a right must be shown clearly and convincingly. The Court found that the waiver in this case was contained in fine print within the real estate mortgage, which was a contract of adhesion prepared by ACFLC. Doubts in the interpretation of such contracts are resolved against the party that prepared them, especially concerning waivers, which are not presumed but must be clearly demonstrated. The Court agreed with the Court of Appeals that allowing such a waiver would essentially give the mortgagee absolute control over the foreclosed property, rendering the right of redemption nugatory.

Furthermore, the Court dismissed ACFLC’s argument that the borrowers’ complaint was a collateral attack on its certificate of title. The complaint for annulment of mortgage was filed before ACFLC consolidated its title over the property. At the time the suit was initiated, the title was still in the name of respondent Cesario. Therefore, the Court held that ACFLC’s title was subject to the outcome of the pending case.

The Supreme Court upheld the Court of Appeals’ decision, affirming the reduction of the interest rate to 12% per annum and the invalidation of the waiver of the right of redemption. This decision serves as a crucial reminder of the Court’s commitment to protecting borrowers from unfair lending practices and ensuring that fundamental rights, such as the right of redemption, are not easily relinquished. Borrowers must be vigilant in understanding the terms of their loan agreements, while lenders must ensure transparency and fairness in their dealings.

FAQs

This case reinforces the principle that contractual freedom is not absolute and that the courts will intervene to protect vulnerable parties from unconscionable agreements. It underscores the importance of clear and voluntary waivers of rights, particularly in contracts of adhesion.

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Asian Cathay Finance vs. Gravador, G.R. No. 186550, July 05, 2010