IMAGINE SIGNING UP A LOAN DOCUMENT WHICH STATES THAT YOU CONFESS TO ALL CONSEQUENCES OF A DEFAULT.
In a Bloomberg episode entitled “Sign Here to Lose Everything”, the show explores the world of lending where creditors require their debtors to sign loan documents which provide for stipulations whereby the debtors admit to the consequences and resulting liabilities of a default, which could include penalties, surcharges, interests, or whatever other contractual stipulations in case of default. Debtors thus end up paying more than the principal in the tenfold or more. (See YouTube video below.)
This contractual clauses is referred to as confession of judgment in the United States (U.S.). It is now being examined and evaluated considering the immense repercussions of debtors waiving their right to a trial, their bank accounts or any joint account with their name on it wiped clean, and any other property that may be seized as payment of the debt.
A debtor in the episode lost all his cash in his bank account and those of his children since his name appeared in the joint account, as well as the retirement funds and savings of his father who was is business partner and co-debtor in the loan document. He was harassed for the deficiency by collectors that he was even told that it won’t go away, and that the only way it was going to do so was either he won the lottery or die. The debtor thus ended up an attempt on the latter and even documented it.
Having experienced handling collection cases in court, and going over the stipulations in loan documents, I have not encountered a similar clause such as that of a confession of a judgment. It thus brings into the question: if and when such a clause is now reflected in loan documents, would a stipulation on confession of judgment be valid and legal in the Philippines?
As early as in 1922, Justice Malcom wrote in Philippine National Bank v. Manila Oil Refining & By-Products Company, Inc. (G.R. No. L-18103, 08 June 1922) that the determination of whether a confession of judgment was valid was a “first impression” in the Supreme Court at that time. “The question of first impression raised in this case concerns the validity in this jurisdiction of a provision in a promissory note whereby in case the same is not paid at maturity, the maker authorizes any attorney to appear and confess judgment thereon for the principal amount, with interest, costs, and attorney’s fees, and waives all errors, rights to inquisition, and appeal, and all property exceptions.”
He then proceeded to observe that there was no law or rules which “expressly or tacitly recognizes a confession of judgment commonly called a judgment note.” Instead, the Code of Civil Procedure was replete with provisions requiring a person to be given his day in court in accordance with the constitutional safeguards to due process.
He likewise noted the history of the confession of judgment and how various jurisdictions have differing opinion on the matter. “The practice of entering judgments in debt on warrants of attorney is of ancient origin. In the course of time a warrant of attorney to confess judgement became a familiar common law security. At common law, there were two kinds of judgments by confession; the one a judgment by cognovit actionem, and the other by confession relicta verificatione. A number of jurisdictions in the United States have accepted the common law view of judgments by confession, while still other jurisdictions have refused to sanction them.”
Considering the differences in opinions, Justice Malcolm observed that: “The weight of opinion is that, unless authorized by statute, warrants of attorney to confess judgment are void, as against public policy.”
They are void on the ground of public policy “because they enlarge the field for fraud, because under these instruments the promissor bargains away his right to a day in court, and because the effect of the instrument is to strike down the right of appeal accorded by statute. The recognition of such a form of obligation would bring about a complete reorganization of commercial customs and practices, with reference to short-term obligations. It can readily be seen that judgement notes, instead of resulting to the advantage of commercial life in the Philippines might be the source of abuse and oppression, and make the courts involuntary parties thereto. If the bank has a meritorious case, the judgement is ultimately certain in the courts.”
Thus, stipulation on confession of judgment is NOT valid in the Philippines as such is against public policy.