United Alloy Philippines Corporation vs. United Coconut Planters Bank

Contractual stipulations in loan agreements that grant lenders sole and exclusive discretion to adjust interest rates, penalties, and other charges without prior notice to and consent of borrowers are void ab initio for being contrary to the principle of mutuality of contracts under Article 1308 of the Civil Code; consequently, courts possess the authority to strike down or modify such unconscionable rates and impose the legal interest rates of 12% and 6% per annum as prescribed in Nacar v. Gallery Frames.

The case arose from a credit accommodation obtained by United Alloy Philippines Corporation (UNIALLOY) from United Coconut Planters Bank (UCPB), evidenced by a Credit Agreement, Surety Agreement executed by corporate officers, and six promissory notes. The transaction constitutes a simple loan (mutuum) whereby the bank delivered sums of money to the borrower with the obligation to return the same amount with interest. When UNIALLOY defaulted, UCPB initiated collection proceedings, while UNIALLOY filed a separate annulment action alleging fraud, leading to complex procedural litigation involving forum shopping allegations and venue disputes.

• On December 18, 2000, UNIALLOY applied for and was granted a credit accommodation by UCPB in the amount of PhP50,000,000.00, evidenced by a Credit Agreement, constituting a simple loan (mutuum).
• The obligation was secured by a Surety Agreement executed on the same date by UNIALLOY Chairman Jakob Van Der Sluis, President David C. Chua, his spouse Luten Chua, and Yang Kim Eng, binding themselves jointly and severally with UNIALLOY.
• UNIALLOY executed six promissory notes in favor of UCPB between December 18, 2000 and April 30, 2001, with amounts denominated in both US Dollars and Philippine Pesos.
• The promissory notes contained stipulations subjecting interest rates to review and adjustment at the sole discretion and exclusive will of UCPB.
• UNIALLOY failed to pay its loan obligations upon maturity, prompting UCPB to file the collection suit.
• UCPB imposed a 24% interest rate on the peso obligation for a six-month period based on the Consolidated Statement of Account, without prior disclosure or consent from the borrowers.
• The Surety Agreement expressly provided that it is a guarantee of payment and not merely of collection, and that the liability of the sureties is absolute, irrevocable, unconditional, and direct, not contingent upon the pursuit of remedies against the principal.

• The resolution of the collection case hinges on the outcome of G.R. No. 179257 (the annulment case), as both cases involve the same promissory notes.
• A potential conflict exists should the Court rule in G.R. No. 179257 that the promissory notes are null and void, while the present case requires collection based on the same instruments.
• The petitioners prayed for the dismissal of the collection case or the suspension of proceedings pending the final resolution of G.R. No. 179257 to avoid conflicting decisions.

• The Surety Agreement constitutes a continuing and absolute guarantee of payment, making the sureties jointly and severally liable with the principal debtor UNIALLOY.
• Obligations arising from contracts have the force of law between the contracting parties and must be complied with in good faith.
• The sureties expressly waived any defense or discharge based on the pursuit of remedies against the principal, and their liability is immediate and direct.
• The interest rates and penalties stipulated in the promissory notes are binding and enforceable as they were voluntarily agreed upon by the parties.

• Procedural:
  • Whether the RTC committed grave abuse of discretion in denying petitioners' Motion to Dismiss based on litis pendentia and forum shopping, and in proceeding to render judgment while the annulment case was pending.
  • Whether the RTC erred in denying petitioners' Omnibus Motion to Suspend Proceedings pending the resolution of the certiorari petition in G.R. No. 179257.
• Substantive Issues:
  • Whether petitioners, as sureties, are liable for the loan obligations of UNIALLOY under the Surety Agreement and promissory notes.
  • Whether the contractual stipulations granting UCPB unilateral power to adjust interest rates are valid and enforceable.
  • What is the proper rate of interest to be applied to the outstanding loan obligations.

• Procedural:
  • The RTC did not commit grave abuse of discretion in denying the Motion to Dismiss and the Omnibus Motion to Suspend Proceedings. The Supreme Court's decision in G.R. No. 179257, which affirmed the dismissal of UNIALLOY's annulment complaint with finality on January 20, 2016, eliminated any possibility of conflicting decisions between the two cases. The dismissal of the main action in the annulment case carried with it the dissolution of any ancillary relief previously granted, rendering the procedural objections moot.
• Substantive:
  • Petitioners are liable as sureties. The Surety Agreement is a valid and binding contract constituting a continuing guarantee of payment, not merely of collection. Under Article 1159 of the Civil Code, obligations arising from contracts have the force of law, and the sureties bound themselves jointly and severally with the principal to pay all sums due.
  • However, stipulations granting the lender sole discretion to adjust interest rates, penalties, and other charges are void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code. Such unilateral authority enables lenders to take undue advantage of borrowers and is anathema to contractual mutuality.
  • The Court modified the interest rates: the principal amounts shall earn interest at 12% per annum from the date of default (August 1, 2001) until June 30, 2013; 6% per annum from July 1, 2013 until the finality of the decision; and 6% per annum from finality until full payment (as forbearance of credit). The penalty charge of 12% per annum from August 1, 2001 until fully paid was maintained.

• Simple Loan (Mutuum) — A contract whereby one of the parties delivers to another money or other consumable thing, with the obligation to return the same amount of the same kind and quality. The transaction between UNIALLOY and UCPB constitutes a simple loan, creating obligations to return the principal with agreed interest.
• Mutuality of Contracts (Article 1308, Civil Code) — Contracts must bind both contracting parties; any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is invalid. The Court applied this to strike down clauses allowing unilateral interest rate adjustments by the lender.
• Suretyship as a Continuing Guarantee of Payment — A surety agreement that guarantees payment creates an immediate and direct liability on the part of the sureties, distinct from a guarantee of collection which requires exhaustion of remedies against the principal first. The sureties' liability is absolute, irrevocable, and unconditional.
• Judicial Power to Reduce Unconscionable Interest Rates — Even with the repeal of the Usury Law, courts retain the authority to strike down or modify iniquitous or unconscionable interest rates, penalties, and charges that are not revealed in disclosure statements under the Truth in Lending Act.

• "Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." — Citing Article 1159 of the Civil Code regarding the binding nature of the Surety Agreement.
• "Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void." — Establishing the standard for invalidating oppressive contractual terms.
• "Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid." — Applying Article 1308 on mutuality of contracts to unilateral interest rate adjustment clauses.
• "This unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of borrowers." — Explaining the rationale for voiding lender-favorable discretionary clauses.

• Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013 — Applied for the framework of legal interest rates (12% from default until June 30, 2013; 6% thereafter until finality; 6% from finality until full payment).
• Spouses Silos v. Philippine National Bank, G.R. No. 181045, July 2, 2014 — Cited for the doctrine that courts may strike down or modify provisions in promissory notes granting lenders unrestrained power to increase interest rates at their sole discretion, and for the principle that such unilateral authority violates mutuality of contracts.
• G.R. No. 179257 (United Alloy Philippines Corporation v. United Coconut Planters Bank, November 23, 2015) — Referenced as the final and executory decision dismissing the annulment complaint, which resolved the procedural issue of potential conflicting judgments.

• Article 1159, Civil Code — Provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith, forming the basis for enforcing the Surety Agreement.
• Article 1308, Civil Code — Establishes the principle of mutuality of contracts; any stipulation left solely to the will of one party is invalid, applied to invalidate unilateral interest rate adjustment clauses.
• Article 1933, Civil Code — Defines simple loan (mutuum) as a contract where one party delivers to another money or other consumable thing with the obligation to return the same amount of the same kind and quality (implied in the characterization of the transaction).
• Article 2087, Civil Code — Governs suretyship and the extent of the surety's liability (implied in the discussion of the Surety Agreement).
• Republic Act No. 3765 (Truth in Lending Act) — Cited for the principle that excessive interests, penalties, and other charges not revealed in disclosure statements cannot be given effect.