Consent in Contracts: Supreme Court Voids Mortgage for Lack of Genuine Agreement

The Supreme Court has ruled that a Promissory Note and Deed of Real Estate Mortgage are null and void when one party’s consent was obtained through misrepresentation. In a 2020 decision involving a bank and a borrower’s aunt, the Court protected a vulnerable individual from deceptive banking practices, reaffirming that genuine consent is the foundation of every valid contract.

The Facts of the Case

A man sought to repurchase his family’s foreclosed property from a bank. To secure a loan for the down payment, he involved his aunt. The bank allegedly convinced the aunt to sign a Promissory Note and Deed of Real Estate Mortgage, purportedly for her own loan, using her property as collateral.

The aunt, however, claimed she was misled. She believed she was merely providing a “garantiya” (guarantee) for her nephew’s loan, not entering into a separate personal loan secured by her property. With limited education and little understanding of English, she signed documents whose true nature she did not grasp.

The Requirement of Genuine Consent

Under Philippine law, a valid contract requires three essential elements: consent of the contracting parties, a definite object, and a lawful cause. Without these, no contract is perfected. Consent must be genuine—there must be a true “meeting of the minds” where both parties agree on the object and cause of the contract.

The Supreme Court found that the aunt’s consent was lacking. Evidence showed that the bank’s representative misrepresented the nature and purpose of the documents, taking advantage of her limited education and lack of English proficiency. The bank’s own employee admitted he was instructed to tell the aunt that the documents were for a mere “garantiya.”

Further supporting this finding, the Promissory Note stated the loan’s purpose as the purchase of machineries and maintenance of a rice mill and motor vehicle repair shop—activities the aunt was not involved in. This discrepancy confirmed that she was unaware of the transaction’s true nature.

Article 1332 of the Civil Code

The Court invoked Article 1332 of the Civil Code, which provides that when one party is unable to read, or the contract is in a language not understood by him, and mistake or fraud is alleged, the party enforcing the contract must show that the terms were fully explained to the disadvantaged party.

Since the aunt did not understand English, the burden fell on the bank to prove that the terms of the documents were fully explained to her. The bank failed to meet this burden. Instead, the evidence showed misrepresentation and a failure to ensure the aunt understood the implications of what she signed.

Irregular Notarization and Fiduciary Duty

The Court also criticized the Court of Appeals for relying on the notarization of the Deed of Real Estate Mortgage as proof of its regularity. The notarization was irregular—the aunt did not appear before the notary public, and the document was signed at her residence without a notary present. Consequently, the deed enjoyed no presumption of regularity.

The Court further emphasized the fiduciary duty of banking institutions. Banks must act with utmost diligence, good faith, and trustworthiness. The bank’s actions fell short of this standard, as it took advantage of the aunt’s vulnerability and misrepresented the nature of the transaction.

Damages Awarded

Given the gravity of the bank’s conduct, the Supreme Court reinstated the Regional Trial Court’s award of moral damages and attorney’s fees, and additionally awarded exemplary damages to the aunt. The exemplary damages served as a warning to banking institutions to uphold their fiduciary duties and act with utmost care and transparency in dealing with the public.

Practical Takeaways

• Consent must be genuine. A contract is void if one party did not truly understand and agree to its terms, especially where misrepresentation is involved.
• Article 1332 protects the disadvantaged. When a party cannot read or understand the contract’s language, the burden shifts to the enforcing party to prove the terms were fully explained.
• Notarization is not conclusive. An irregularly notarized document does not enjoy the presumption of regularity and cannot cure a lack of genuine consent.
• Banks owe a high duty of care. Financial institutions must act with utmost diligence and transparency, particularly when dealing with vulnerable customers.
• Remedies are available. Victims of deceptive practices may recover moral damages, attorney’s fees, and exemplary damages.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.