THE CAPITAL INSURANCE & SURETY CO., INC. PLAINTIFF-APPELLEE, VS. CENTRAL AZUCARERA DEL DANAO, DEFENDANT-APPELLANT, CENTRAL AZUCARERA DEL DANAO, THIRD-PARTY PLAINTIFF-APPELLANT, …

This appeal by Central Azucarera del Danao, certified to us by
the Court of Appeals in the resolution of June 27, 1969,^[1] calls
for the interpretation of an agreement between appellant Central Azucarera del
Danao, the Philippine National Bank [PNB], Talisay-Silay Milling Co., Inc. and
J. Amado Araneta.

Entered into on March 3, 1960, subject Compromise Agreement
provides for the termination of the pending suits and countersuits between PNB
as bank creditor on the one hand and Central Azucarera del Danao, debtor, on
the other hand.^[2]

The Agreement involves a transfer and conveyance of stock
ownership, with the PNB exchanging its shares of stocks in Bacolod Murcia Milling
Co. Inc. and in Ma-ao Sugar Central Co. for the controlling shares of
Talisay-Silay Milling Co. Inc. in Central Azucarera del Danao, consisting of
not less than 93% of the latter’s paid-up capital stock^[3] to
forestall the intended foreclosure by PNB of Central Azucarera del Danao.^[4]
However, in acquiring the majority holdings in Central Azucarera del Danao,
PNB, at the instance of its chairman and president, sought to protect itself
from assuming payment of money claims rumored to have been fraudulently
incurred, the use thereof having been diverted without benefit to Central
Azucarera del Danao. Consequently, in
drawing up subject Agreement, PNB insisted on the inclusion of paragraphs 9 and
10, to wit:

“9) That all
obligations of Central Azucarera del Danao incurred before the date of this
agreement but not those incurred by the Bank during the period when the Central
Azucarera of Danao was under the management of the BANK in favor of trade
creditors for supplies, equipment, fuel and spare parts, outstanding in the
books of Danao shall be listed and itemized and only such items as are approved
and acknowledged by the BANK shall be considered as legitimately incurred and
due for payment by Danao;

This provision,
however, shall not apply to Central Azucarera del Danao’s account with the
Philippine National Bank and the Development Bank of the Philippines (formerly
R. F. C.) full responsibility for which shall remain with Central Azucarera del
Danao;

10) That any or all obligations purporting to be of
Central Azucarera del Danao but not appearing in the books thereof nor
acknowledged as in paragraph 9 above shall be borne and paid for by
Talisay-Silay Central and/or Mr. J. Amado Araneta.”

After the Agreement had taken force and effect, a complaint for
collection of sum of money was filed by Capital Insurance and Surety Co., Inc.
against Central Azucarera del Danao. It
alleged that on various dates during the period from 1954 to 1961, defendant
Central Azucarera del Danao secured from Capital Insurance different fire and
marine cargo insurance policies and surety bonds with total premiums amounting
to P57,323.71^[5]
and that said amount had remained unsatisfied, defendant Central Azucarera del
Danao having failed to pay plaintiff Capital Insurance, despite its repeated
demands thereon.

In its Answer, defendant Central Azucarera del Danao disclaimed
any liability for the unpaid P57,323.71 worth of premiums, invoking the
provisions of the above-quoted paragraphs 9 & 10 of subject Agreement. It theorized that pursuant to said
paragraphs 9 & 10, all the corporate liabilities of Central Azucarera del
Danao incurred before the PNB acquired the 93% shares of stock of Talisay-Silay
Milling Co., Inc. in accordance with the aforementioned settlement shall be
borne and paid for by the Talisay-Silay Milling Co., Inc. and/or Mr. J. Amado
Araneta. Defendant explained that in
this instance, since the fire and marine cargo insurance policies and surety
bonds were acquired prior to the stock ownership swap deal between PNB and Talisay-Silay
Milling Co., Inc., satisfaction of the unpaid premium shall be borne by
Talisay-Silay Milling Co., Inc. and/or Mr. J. Amado Araneta to the exclusion of
defendant Central Azucarera del Danao.

Having thus shifted the burden of paying the P57,323.71 worth of
premiums on Talisay-Silay Milling Co., Inc. and/or Mr. J. Amado Araneta, who
were both not impleaded in the main case for collection of a sum of money,
defendant Central Azucarera del Danao, with leave of court, filed a third-party
complaint praying that third-party defendants Talisay-Silay Miling Co., Inc.
and/or Mr. J. Amado Araneta be ordered to indemnify third-party plaintiff for
whatever the latter may be held accountable for in case the trial court rules
in favor of plaintiff Capital Insurance Co., Inc.

Third party defendants Talisay-Silay Milling Co., Inc. and Mr. J.
Amado Araneta, by way of special defense in their “Answer to Third-Party
Complaint,” stated that the provisions of paragraphs 9 & 10 of subject
agreement are not applicable in the present case. They contended that the obligation to pay P57,323.71
premiums was not one of the obligations contemplated under paragraph 9, for
which third-party defendants had by agreement bound themselves to pay. According to the third-party defendants,
paragraph 9, involved only those obligations incurred by Central Azucarera del
Danao in favor of trade creditors for supplies, equipment, fuel, and spare
parts. Obviously, argued third-party
defendants, payment of premiums did not fall under this enumeration. Thus, Central Azucarera del Danao was solely
liable for the payment of the P57,323.71 premiums.

Furthermore, third-party defendants opined that neither could
they be compelled under the provisions of paragraph 10 to assume payment of the
P57,323.71 premiums. The requisite
conditions in paragraph 10 required that only obligations not appearing
in the books of Central Azucarera del Danao nor those acknowledged, as
in paragraph 9 would be paid by third party defendants. These conditions, claimed third party
defendants, had not been met or fulfilled under the circumstances of the
case. It was their theory that these
two conditions provided in paragraph 10 must concur before they could be held
liable for payment of said amount. But
considering that the obligation in question actually appeared in the books of
Central Azucarera del Danao, thus leaving unsatisfied the first of the two
conditions, third-party defendants concluded that they were not accountable for
the unpaid premiums.

On August 22, 1963, plaintiff Capital Insurance and defendant
Central Azucarera del Danao agreed to a “Stipulation of Facts” where
the latter admitted having secured subject insurance policies without having
paid the premiums thereof, now sought to be collected by plaintiff Capital
Insurance.

Trial of the case on the merits then commenced, until its final
disposition by way of a decision dated March 30, 1964, holding as follows:

“WHEREFORE, judgment is hereby rendered, ordering the
defendant Central Azucarera del Danao to pay to plaintiff the amount of
P53,360.54 with legal interest from the filing of plaintiff’s complaint on June
18, 1962 until paid; plus the additional amount of P3,000.00 by way of damage
as and for reasonable attorney’s fees for plaintiff’s counsel; and to pay the
costs of this suit.

The third-party complaint of third-party plaintiff Central
Azucarera del Danao against third parties defendant Talisay-Silay Milling Co.
Inc., and J. Amado Araneta, is hereby dismissed, with costs against the
third-party plaintiff.”

The trial court found untenable Central Azucarera del Danao’s
contention that pursuant to the Agreement of March 3, 1960, Talisay-Silay
Milling Co., Inc., and/or Mr. J. Amado Araneta had, by substitution, become the
new debtors of plaintiff Capital Insurance & Surety Co., Inc. In this jurisdiction, explained the lower
court, an obligation extinguished by novation thru substitution of debtor
necessitates consent of the creditor. Absent the creditor’s consent, as in the case of plaintiff Capital Insurance
& Surety Co., Inc., the original debtor, defendant Central Azucarera del
Danao was still liable to fulfill its obligation.

With respect to the third-party complaint, lower court dismissed
the same thereby disallowing third party plaintiff Central Azucarera del Danao
from recovering indemnity from third party defendants, Talisay-Silay Milling
Co., Inc. and/or Mr. J. Amado Araneta on the basis of the Agreement of March 3,
1960, particularly under paragraphs 9 and 10 thereof.

According to the court below, paragraph 9 is restrictive in
scope, as it refers only to those obligations prior to the Agreement of March
3, 1960 and incurred from trade creditors for supplies, equipment, fuel and
spare parts. The exclusive enumeration
of these items precluded payment of premiums as one such obligation under
paragraph 9.

On the other hand, the trial court explained that under paragraph
10, Talisay-Silay Milling Co., Inc. and/or Mr. Amado Araneta shall assume the
obligations of Central Azucarera del Danao but only with respect to those
obligations not appearing in the books thereof nor acknowledged as in paragraph
9. Elucidating further, the trial court
said that the parties’ use of the term “nor” defined in the Webster
dictionary as a conjunction which means “and not”, “likewise
not” reveals the intention of holding liable Talisay-Silay Milling Co.
Inc. and/or Mr. J. Amado Araneta, upon the concurrence of the above-mentioned
conditions. This must be so, said the
trial court, since paragraph 10 may otherwise be read as follows:

“10) That any
or all obligations purporting to be of Central Azucarera del Danao but not
appearing in the books thereof AND NOT /nor/ acknowledged as in paragraph 9
above shall be borne and paid for by Talisay-Silay Central and/or J. Amado
Araneta.”

On the basis of the foregoing, the trial court ruled that since
it is clear that the obligation in favor of Capital Insurance and Surety Co.,
Inc. was admittedly recorded in the books of Central Azucarera del Danao, contrary
to the first condition precedent under paragraph 10, third party defendants
Talisay-Silay Milling Co., Inc. and/or Mr. J. Amado Araneta could not be
adjudged responsible for payment of subject premiums.

Having failed to prevail over third-party defendants. Central Azucarera del Danao elevated the
case before the Court of Appeals which certified the same to this Court, the
issue involved herein being a pure question of law.

For our determination then are the following issues: (a) whether or not Central Azucarera del
Danao, is directly liable to pay Capital Insurance and Surety Co., Inc., the
amount sued for; (b) if so, whether or not it can recover indemnity from
Talisay-Silay Milling Co. Inc. and/or Mr. J. Amado Araneta on the basis of
paragraphs 9 and 10 of the March 3, 1960 Agreement.

We resolve both issues in the affirmative. This Court is not the least persuaded with
appellant Central Azucarera del Danao’s contention that pursuant to the March
3, 1960 Agreement, all its corporate liabilities incurred prior thereto shall
be borne and paid for by Talisay-Silay Milling Co., Inc., and/or Mr. J. Amado
Araneta, to the exclusion of appellant. As against Capital Insurance and Surety Co., Inc., Central Azucarera del
Danao cannot invoke by way of defense the March 3, 1960 Agreement to evade
liability. The binding effect of the
March 3, 1960 Agreement does not extend to those not parties to the contract,
Capital Insurance & Surety Co., Inc. in this instance.^[6] Thus,
Article 1311, Civil Code of the Philippines provides, inter alia:

“ART. 1311. Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. The
heir is not liable beyond the value of the property he received from the
decedent.”

x x x x

Capital Insurance & Surety Co., Inc., cannot, therefore, be
prejudiced by the terms of the March 3, 1960 Agreement. Insofar as the insurance company is
concerned, Central Azucarera del Danao is and shall remain to be its debtor
until payment is made.

This ruling, however, should not be construed as a bar to Central
Azucarera del Danao’s right to be indemnified by Talisay-Silay Milling Co. Inc.
and/or Mr. J. Amado Araneta, under paragraphs 9 & 10 of the March 3, 1960
Agreement aforequoted.

According to Central Azucarera del Danao, common to both disputed
paragraphs is the condition precedent requiring approval by PNB of the accounts
and obligations incurred by it before PNB’s management thereof, prior to making
itself liable. Consequently, contrary
to the lower court’s opinion mere entry in its books is not enough to bind
Central Azucarera del Danao, for had it been so intended, PNB would not have
insisted on including in paragraph 10, the phrase “such as in paragraph
9”, which qualifies the kind of acknowledgement or acceptance required
before any unpaid account could be borne by Central Azucarera del Danao.

We find Central Azucarera del Danao’s interpretation correct and
convincing. In so holding, this Court
finds support in Article 1370 of the Civil Code, the provisions of which are
explicit on the correct interpretation of a contract, to wit:

“ART. 1370. If the
terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.

If the words appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former. (1281)”

The facts of the case before us show every indication of the
contracting parties’ conflicting interpretation of paragraphs 9 & 10.

Judicial determination of the parties’ intention is thus,
inevitable. To ascertain the same, the
contemporaneous and subsequent acts of the parties shall be considered.^[7]
It should be recalled that at the time PNB acquired Central Azucarera del Danao
from Talisay-Silay Milling Co., Inc. the identities of its creditors were not
yet disclosed because at the time the settlement was reached, the books of
Central Azucarera del Danao, then in the possession of Talisay-Silay Milling,
Co., Inc. and/or Mr. J. Amado Araneta as President of petitioner, had not yet
been turned over to PNB. Apprehensive
and wary of a sudden emergence of unknown creditors after its actual takeover
of Central Azucarera del Danao, PNB’s representatives insisted on the insertion
of paragaphs 9 and 10 in the proposed Agreement of March 3, 1960 to protect the
bank from the assumption of all unsettled obligations of Central Azucarera del
Danao, especially fraudulent claims.

It is thus illogical to hold liable, without a right to
indemnification, as the lower court did, Central Azucarera del Danao, just
because the unsettled obligation of P57,323.71 worth of premiums was
recorded in its books. For if this were
the case, there would have been no need for PNB’s insistence on the inclusion
of paragraphs 9 and 10 in the March 3, 1960 Agreement. Without these paragraphs, the possibility of
opening the floodgates to all kinds of creditors, legitimate or not, as long as
Central Azucarera del Danao’s books reflect certain debts owing to them, may
well come to pass. Thus, to adopt the
interpretation of the lower court would frustrate the will or intent of the
parties. It was too literal an approach
for the lower court to consider the word “nor” as the “key to
the intention of the parties” and therefrom provide direction for
interpretation of paragraph 10. The
phraseology of paragraph 10 cannot be made to control when already, its true
meaning may be gleaned from the unrebutted testimonies of PNB representatives.

WHEREFORE, the
judgment appealed from is hereby AFFIRMED subject to the modification that
Central Azucarera del Danao, defendant in Civil Case No. 50688 is thus ordered
to PAY Capital Insurance and Surety Co., Inc., the sum of P57,323.71
which is the value of unpaid premiums and documentary stamps, with legal
interest computed from the time of filing of the complaint on June 18, 1962 up
to the actual payment thereof, plus the additional amount of P5,000.00
representing attorney’s fees; and to pay the costs of this suit.

On the other hand, Talisay-Silay Milling Co., Inc., and Mr. J.
Amado Araneta, third-party defendants to the third-party complaint below are
solidarily liable to INDEMNIFY Central Azucarera del Danao, in the amount of
P57,323.71 with legal interest from the time of the filing of the third-party
complaint up to the actual payment thereof.

SO ORDERED.

Bidin, Davide, Jr., and
Melo, JJ., concur.

Feliciano, J., (Chairman), in
the result.

^[1]
Rollo, page 204

^[2]
“Agreement” paragraph No. 3, Record on Appeal pp. 23 & 24.

^[3]
“Agreement” paragraphs 1 & 2, Record on Appeal pages 22 – 23.

^[4]
“Motion to Dismiss Third Party Complaint”, Record on Appeal pages
33-34.

^[5]
Annex A of Complaint

^[6]
Pedro Martinez v. Antonio Ramos, in his own behalf and as administrator
of the estate of his father Julian Ramos, defendant and appellant and Alejandia
Ramos, defendant and appellee [No. 9417 December 4, 1914, 28 Phil. 589]

^[7]
Article 1371, Civil Code – Universal Textile Mills, Inc., and Patricio Lim v.
National Labor Relations Commission, Associated Labor Unions – TUCP and
Universal Textile Mills Workers Union – ALU [G.R. No. 87245, April 6, 1990 184
SCRA 273]; Jose Javier and Estrella F. Javier v. Court of Appeals and
Leonardo Tiro [G.R. No. 48194, March 15, 1990 183 SCRA 270]