United Alloy Philippines Corporation vs. United Coconut Planters Bank

A surety is solidarily liable for the principal debtor's obligations, but stipulations allowing the lender to unilaterally adjust interest rates at its sole discretion without the borrower's consent are void for violating the mutuality of contracts.

UNIALLOY obtained a credit accommodation from UCPB, partly secured by a surety agreement executed by the Spouses Chua and other corporate officers. As part of the consideration, UNIALLOY also entered into a lease-purchase contract with UCPB for certain real properties. When UNIALLOY defaulted, UCPB filed a collection case and rescinded the lease-purchase contract, prompting UNIALLOY to file a separate annulment case alleging fraud.

• Original Filing: RTC of Makati City, Branch 135 (Civil Case No. 01-1332 — Collection); RTC of Cagayan de Oro City, Branch 40 (Civil Case No. 2001-219 — Annulment)
• Lower Court Decision: RTC CDO dismissed UNIALLOY's annulment case for improper venue, forum shopping, and harassment; RTC Makati ruled in favor of UCPB in the collection case, ordering UNIALLOY and sureties to pay the loan amounts, interest, penalties, and attorney's fees.
• Appeal: CA affirmed the RTC Makati decision in CA-G.R. CV No. 81079. Separately, CA affirmed the RTC CDO dismissal of the annulment case in CA G.R. SP No. 67079.
• SC Action: Petition for Review on Certiorari assailing the CA decision in the collection case. (The SC had already denied UNIALLOY's petition in G.R. No. 179257 regarding the annulment case, which became final on January 20, 2016).

• Credit Accommodation: On December 18, 2000, UNIALLOY applied for and was granted a PhP50,000,000.00 credit line from UCPB, evidenced by a Credit Agreement.
• The Surety Agreement: UNIALLOY Chairman Jakob Van Der Sluis, President David Chua, his spouse Luten Chua, and Yang Kim Eng executed a Surety Agreement, binding themselves jointly and severally with UNIALLOY to pay its obligations. The agreement waived notice of extensions/restructurings and stated the surety's liability was absolute and unconditional.
• The Promissory Notes: UNIALLOY executed six promissory notes in UCPB's favor between December 2000 and April 2001.
• The Lease-Purchase Contract: UNIALLOY and UCPB entered into a lease-purchase agreement for real properties co-owned by UCPB and DBP.
• Default and Dual Filings: UNIALLOY failed to pay its loan obligations. On August 27, 2001, UCPB filed a collection case with the RTC of Makati and unilaterally rescinded the lease-purchase contract. On the same day, UNIALLOY filed an annulment case with the RTC of CDO, alleging fraud and misrepresentation by UCPB and Van Der Sluis.
• Dismissal of the Annulment Case: The RTC CDO dismissed UNIALLOY's complaint for improper venue (the Lease Purchase Agreement had an exclusive Makati venue clause), forum shopping (failure to disclose a related pending case), and harassment. This dismissal was ultimately affirmed by the SC in G.R. No. 179257 and became final.
• Judgment in the Collection Case: The RTC Makati denied UNIALLOY's motion to dismiss based on litis pendentia and rendered judgment in favor of UCPB, ordering the payment of US$435,494.44 and PhP26,940,950.80 with interest, penalty charges, and attorney's fees. The CA affirmed this decision.

• The resolution of the collection case hinges on the outcome of the annulment case (G.R. No. 179257) because the same promissory notes are involved.
• A judgment in the annulment case declaring the promissory notes void would conflict with a judgment in the collection case ordering payment on those same notes.
• Prayed for the dismissal of the collection case or the suspension of proceedings pending the resolution of G.R. No. 179257.

• (Implicit from the SC's ruling and lower court affirmances) Petitioners are liable under the Surety Agreement and Promissory Notes.
• Obligations arising from contracts have the force of law and must be complied with in good faith under Article 1159 of the Civil Code.

• Procedural Issues:
  • Whether the RTC erred in denying the motion to dismiss/suspend proceedings based on the pendency of the annulment case.
• Substantive Issues:
  • Whether petitioners are liable to pay the amounts awarded by the RTC under the promissory notes and surety agreement.
  • Whether the interest rates and penalties imposed by UCPB are valid and enforceable.

• Procedural: The SC denied the motion to dismiss/suspend. The annulment case (G.R. No. 179257) had already been decided with finality, dismissing UNIALLOY's complaint. There was no longer any possibility of conflicting decisions between the RTC CDO and RTC Makati cases.
• Substantive: The SC ruled petitioners are liable under the Surety Agreement, but modified the imposed interest rates.
• Liability of Sureties: Petitioners do not deny their liability under the Surety Agreement, which binds them jointly and severally with UNIALLOY. Under Article 1159 of the Civil Code, obligations arising from contracts have the force of law and must be complied with in good faith.
• Unconscionable Interest Rates: The interest rates on the promissory notes were subject to review and adjustment at the sole discretion of UCPB. UCPB imposed a 24% interest rate on the total amount due for a short period of six months. Stipulations leaving the validity or compliance of a contract solely to the will of one party are invalid. Unilateral authority to increase interest rates without prior notice or consent violates the mutuality of contracts.
• Modification of Rates: Courts have the authority to strike down or modify provisions granting lenders unrestrained power to increase rates. Even with the Usury Law's effective repeal, courts may reduce iniquitous or unconscionable rates. Excessive charges not revealed in disclosure statements are also void under the Truth in Lending Act. The SC modified the interest to 12% per annum from default (August 1, 2001) until June 30, 2013, and 6% per annum from July 1, 2013 until finality, plus a 12% per annum penalty charge.

• Mutuality of Contracts — The principle that a contract must bind both parties equally; its validity or compliance cannot be left solely to the will of one of the parties. The SC applied this to strike down stipulations allowing UCPB to unilaterally adjust interest rates at its sole discretion without the borrower's consent.
• Unconscionable Interest Rates — Even with the effective repeal of the Usury Law, courts have the authority to reduce iniquitous or unconscionable interest rates. The SC applied this to strike down the 24% interest rate imposed by UCPB for a short six-month period, which was heavily weighed in favor of the bank.
• Surety Liability — A surety is bound jointly and severally with the principal obligor. The surety's liability is absolute, irrevocable, unconditional, direct, and immediate, not contingent upon the creditor pursuing remedies against the principal. The SC applied this to hold the Spouses Chua liable for UNIALLOY's debt.

• Article 1159, Civil Code — Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Applied to hold petitioners liable for their contractual obligations under the Surety Agreement.
• Truth in Lending Act — Excessive interests, penalties, and other charges not revealed in disclosure statements issued by banks cannot be given effect, even if stipulated in promissory notes. Applied to justify striking down the undisclosed, unilaterally adjusted interest rates.