Case Summary (G.R. No. L-24968)
Parties
Plaintiff-appellee: Saura Import & Export Co., Inc., borrower-applicant for an RFC loan to finance construction, machinery payment, and working capital for a jute mill.
Defendant-appellant: Rehabilitation Finance Corporation (later Development Bank of the Philippines), lender which approved but later conditioned, revised, and ultimately cancelled the loan/mortgage at the borrower’s request.
Key Dates
Loan application and arrival of machinery: July 1953.
RFC initial approval (Resolution No. 145): January 7, 1954; plaintiff notified January 9, 1954.
RFC re-examination order (Resolution No. 736): February 4, 1954.
Loan documents executed and mortgage registered: April 13–17, 1954.
RFC reduced loan (Resolution No. 3989): June 10, 1954.
China Engineers withdraws as co-signer: June–July 1954.
RFC restored loan to P500,000 with conditions (Resolution No. 9083): December 17, 1954; communicated December 22, 1954.
Correspondence re: availability of local raw materials and release requests: January 1955.
Mortgage cancellation at Saura’s request: June 17, 1955.
Plaintiff’s suit for damages filed: January 9, 1964.
Trial court judgment in favor of plaintiff: June 28, 1965.
Supreme Court decision (appeal): April 27, 1972.
Applicable Law
- Civil Code provisions on consensual contracts and perfection/extinguishment of obligations (as cited by the court). The court expressly referenced the Civil Code provision quoted in the decision.
- Doctrine of mutual desistance (mutuo disenso) as a mode of extinguishing obligations (cited authorities: Manresa, Castan).
- Contract law principles on offer, acceptance, conditions precedent and conditions subsequent, and the binding effect of agreed uses of loan proceeds.
Factual Background
Saura, Inc. applied in July 1953 to RFC for an industrial loan of P500,000, allocated as P250,000 for factory construction, P240,900 for machinery balance, and P9,100 working capital. The jute mill machinery had already arrived based on a letter of credit from Prudential Bank and Trust Co., and Saura had executed a trust receipt in favor of that bank. RFC approved the loan by Resolution No. 145 (Jan. 7, 1954), with specified allocations and co-makers required on promissory notes, and releases to be made as construction progressed. Subsequent internal re-examination was ordered by RFC (Resolution No. 736), committees were appointed to study the project, and loan documents were formally executed and the mortgage registered in April 1954.
RFC Resolutions and Loan Terms
RFC initially approved the P500,000 loan with express terms that proceeds be used exclusively for the enumerated purposes and that releases be contingent on construction progress and RFC certification. After re-examination, RFC’s Board reduced the loan to P300,000 (Resolution No. 3989) but later (Resolution No. 9083) restored the P500,000 approval conditioned upon certification by the Department of Agriculture and Natural Resources that the required raw materials (locally grown kenaf/jute) were available in the immediate vicinity and that production prospects would be adequate to supply the factory. The record demonstrates that RFC’s original approval was premised on the objective of developing sack manufacture using 100% locally grown raw materials.
Subsequent Negotiations and Correspondence
Saura, Inc. recognized that local kenaf availability was uncertain (citing a Bureau of Forestry study). Saura requested specific releases and asked for assurances that jute could be imported if needed; in particular, it sought P67,586.09 for raw materials and labor and proposed staged releases tied to opening letters of credit and arrival of raw jute. RFC replied (Jan. 25, 1955) reiterating its position that the loan’s basis was local raw material supply and declining to accede to a plan premised on imported jute, and indicating that releases would be subject to reappraisal and to the certification requirement. Negotiations then reached a standstill.
Cancellation of Mortgage and Subsequent Events
Saura, Inc. requested cancellation of the RFC mortgage; RFC cancelled and delivered the deed of cancellation on June 17, 1955. The cancellation appears linked to Saura’s registration of a mortgage in favor of Prudential Bank and Trust Co., and subsequently Prudential sued Saura for failure to pay an obligation on the trust receipt. Saura did not immediately contest RFC’s position or assert breach; it sought no reservation of rights at the time. In 1962 Saura applied to DBP for another loan (disapproved). The present suit for damages against RFC/DBP was filed only on January 9, 1964 — roughly nine years after mortgage cancellation.
Trial Court Judgment and Issues on Appeal
The trial court found a perfected contract between the parties and ruled that RFC/DBP breached its obligation to release loan proceeds, awarding Saura actual and consequential damages totaling P383,343.68, plus interest and attorney’s fees. On appeal, DBP argued (1) prescription/waiver/abandonment of cause of action by plaintiff, (2) absence of a perfected contract, and (3) plaintiff’s own noncompliance with contractual terms. The Supreme Court addressed primarily the question of whether the contract remained in force or had been extinguished.
Supreme Court Analysis — Existence of Contract and Conditionality
The Court acknowledged that there had been offer and acceptance: the loan application was approved and the mortgage executed and registered, thus evidencing a consensual contract under the Civil Code. The Court then examined the conditions attached to implementation. It emphasized that RFC’s insistence on certification of local raw material availability (Resolution No. 9083) was consistent with the stated basis of the original approval and constituted a step in the loan’s implementation rather than an alteration of substantive loan terms. Saura’s January 21, 1955 letter, requesting releases for imported raw jute and differing allocations, amounted to a proposed deviation from the original agreed uses of loan proceeds embodied in Resolution No. 145 and the mortgage. RFC’s refusal to permit diversion of proceeds was therefore within its rights under the existing terms and the implementation conditions it had imposed.
Supreme Court Analysis — Mutual Desistance (Mutuo Disenso) and Extinguishment
The Court found that after RFC declined Saura’s proposed diversion and insisted on certification and reappraisal, further negotiations stalled and Saura asked RFC to cancel t
Case Syllabus (G.R. No. L-24968)
Citation and Decision
- Reported at 150-A Phil. 251; 68 OG 6313 (August, 1972).
- G.R. No. L-24968. Decision dated April 27, 1972.
- Decision penned by Justice Makalintal.
- Judgment of the Court of First Instance of Manila reversed; complaint dismissed. Costs against the plaintiff-appellee.
- Justices Reyes, J.B.L., Acting C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo, and Antonio concurred. Justice Makasiar took no part.
Parties
- Plaintiff-Appellee: Saura Import & Export Co., Inc. (referred to in the decision as Saura, Inc.).
- Defendant-Appellant: Development Bank of the Philippines (DBP), successor to the Rehabilitation Finance Corporation (RFC).
Lower Court Judgment and Relief Awarded
- In Civil Case No. 55908, Court of First Instance of Manila rendered judgment on June 28, 1965.
- Judgment ordered defendant (DBP) to pay plaintiff (Saura, Inc.) actual and consequential damages in the amount of P383,343.68, plus interest at the legal rate from filing of the complaint.
- Judgment also awarded attorney’s fees in the amount of P5,000.00.
- Present appeal is from that judgment.
Loan Application and Intended Use of Proceeds (Factual Background)
- In July 1953 Saura, Inc. applied to RFC (predecessor of DBP) for an industrial loan of P500,000.00.
- The loan was to be used exclusively as follows:
- P250,000.00 for construction of a factory building (for manufacture of jute sacks).
- P240,900.00 to pay the balance of purchase price of jute mill machinery and equipment.
- P9,100.00 as additional working capital.
- Jute mill machinery had already been purchased on the strength of a letter of credit from the Prudential Bank and Trust Co., arrived in Davao City in July 1953.
- To secure release of the machinery without first paying the draft, Saura, Inc. executed a trust receipt in favor of the Prudential Bank and Trust Co.
RFC (DBP) Initial Approval — Resolution No. 145 (January 7, 1954)
- RFC passed Resolution No. 145 on January 7, 1954 approving the P500,000.00 loan, to be secured by a first mortgage on the factory buildings to be constructed, the land site, and the machinery and equipment to be installed.
- Terms included:
- Strict allocation of proceeds to the three purposes (construction, machinery purchase balance, working capital) as itemized above.
- Co-signers: "Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd." to sign promissory notes jointly with the borrower-corporation.
- Releases to be made at RFC discretion, subject to availability of funds, and as construction progressed certified by an RFC appraiser.
- Saura, Inc. was officially notified of Resolution No. 145 on January 9, 1954.
Saura, Inc. Request for Modification; RFC Reexamination — Resolution No. 736 (February 4, 1954)
- On January 8, 1954 (the day before official notification), Saura, Inc. requested modifications:
- In lieu of China Engineers, Ltd. co-signing beyond its stock subscription liability, Saura, Inc. proposed to put up a bond of P123,500.00 (equivalent to such subscription).
- Requested substitution of Maria S. Roca for Inocencia Arellano as co-maker, citing acquisition of shares.
- RFC approved reexamination via Resolution No. 736 (Feb. 4, 1954), designating a Board member to reexamine the loan with special reference to advisability given conditions in the operation of jute mills and to report at the next Board meeting.
Further Negotiations and Execution of Loan Documents (March–April 1954)
- March 24, 1954: Saura, Inc. wrote that China Engineers, Ltd. had agreed to act as co-signer and requested preparation of documents per Resolution No. 145.
- Parties named engineering committees to study the project; Saura, Inc. expressly stated such committee appointment should not be taken as acceptance of novation or new conditions to the agreement under Resolution No. 145.
- April 13, 1954: Loan documents executed — promissory note signed with F.R. Halling representing China Engineers, Ltd. as a co-signer; deed of mortgage executed.
- April 17, 1954: Mortgage was duly registered.
RFC Reexamination and Reduction of Loan — Resolution No. 3989 (June 10, 1954)
- Despite formal execution, RFC’s re-examination proceeded.
- June 10, 1954 RFC Board meeting attended by Ramon E. Saura resulted in Resolution No. 3989 reducing the loan from P500,000.00 to P300,000.00.
- Resolution No. 3989 authorized releases up to P100,000 as necessary to place factory in operation and provided that all terms of Resolution No. 145 not inconsistent remained in force.
China Engineers Withdrawal, Subsequent Correspondence, and RFC’s Position (June–July 1954)
- June 19, 1954: F.R. Halling (signed promissory note for China Engineers) wrote RFC that China Engineers no longer wished to avail of the loan and considered it cancelled insofar as they were concerned.
- July 2, 1954: Follow-up letter requested RFC withdraw registration of the mortgage.
- Saura, Inc. requested RFC grant the P500,000.00 loan; RFC denied the request and stated it was "constrained to consider as cancelled the loan of P300,000.00" due to China Engineers’ notification.
- July 24, 1954: Saura, Inc. protested cancellation and stated China Engineers would reinstate signature if RFC released the P500,000.00 originally approved.