SAURA IMPORT & EXPORT CO., INC., PLAINTIFF-APPELLEE, VS. DEVELOPMENT BANK OF THE PHILIPPINES, DEFENDANT-APPELLANT.

Saura Import and Export versus Development Bank of the Philippines

The Case

This is a claim for damages arising from an approved but unperformed industrial loan. Saura Import and Export Company sued the Development Bank of the Philippines, as successor of the Rehabilitation Finance Corporation, for failing to release the proceeds of a loan the corporation had approved for a jute mill project in Davao. The case matters because it teaches two things at once: when a loan contract is perfected, and how such a contract may later be extinguished by the parties' own conduct. The Supreme Court uses the second point to reverse a large award of damages.

Procedural History

The complaint was filed in the Court of First Instance of Manila. The trial court rendered judgment for Saura, ruling that a contract had been perfected between the parties and that the bank was guilty of breach, and sentencing the bank to pay actual and consequential damages, plus interest at the legal rate from the filing of the complaint, and attorney's fees. The bank appealed directly to the Supreme Court, raising prescription or waiver, the absence of a perfected contract, and the plaintiff's own non-compliance. The Supreme Court reversed the trial court and dismissed the complaint.

Facts

In July 1953 Saura applied to the Rehabilitation Finance Corporation for an industrial loan of 500,000 pesos, to be used for a factory building, for the balance of the purchase price of jute mill machinery already shipped to Davao, and for working capital. In January 1954 the corporation approved the loan by resolution, secured by a first mortgage, with releases to be made at its discretion subject to availability of funds and as construction progressed. Saura asked for changes in the co-makers, and the corporation created a committee to re-examine the project. In April 1954 the promissory note and the deed of mortgage were executed and the mortgage was registered.

The re-examination continued. In June 1954 the board reduced the loan to 300,000 pesos. Days later, China Engineers, which had signed as co-maker, withdrew and asked that the mortgage registration be withdrawn. The corporation then treated the 300,000 peso loan as cancelled. In December 1954 it restored the loan to 500,000 pesos, but required a certification from the Department of Agriculture and Natural Resources that the raw materials needed by the factory were available in the immediate vicinity and that there was a prospect of increased production. The corporation explained that the original approval was meant to develop the manufacture of sacks from locally available raw materials, principally kenaf.

In January 1955 Saura wrote that kenaf would not be available in sufficient quantity that year or probably the next, asked for assurances that it could import jute, and asked that part of the loan be released for raw materials and labor. The corporation refused, and the negotiations reached a standstill. Saura then asked that the mortgage be cancelled, and the corporation executed the deed of cancellation in June 1955, without any reservation of rights by Saura. Saura used the property to secure a separate obligation to the Prudential Bank, which later sued it. Only in January 1964, almost nine years after the cancellation, did Saura commence this action for damages.

Issues

• Whether or not there was a perfected contract between Saura and the Rehabilitation Finance Corporation.
• Whether or not the bank was guilty of breach of that contract, entitling Saura to damages.
• Whether or not the loan agreement was extinguished by the mutual desistance of the parties.

Applicable Provisions

Article 1954 of the Civil Code provides:

An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.

This is the provision the Court cites in holding that an accepted promise of a loan is a binding consensual contract, even though the loan itself is perfected only upon delivery of the money.

Ruling

On the first issue, the Court held that there was indeed a perfected consensual contract. There was offer and acceptance: the application was approved by resolution, and the corresponding mortgage was executed and registered. The Court quoted Article 1954 to show that the accepted promise to lend binds the parties.

On the second issue, however, the Court held that the perfection of the contract did not by itself resolve the claim for damages. The conditions imposed in the resolution restoring the loan were not a deviation from the agreement but a step in its implementation, since the corporation had always assumed that the factory would use locally grown raw materials. Saura's request to divert part of the proceeds to raw materials and labor departed from the agreed purposes of the loan. When the corporation refused, the negotiations reached an impasse, and Saura was in no position to comply with the conditions.

On the third issue, the Court held that the agreement was extinguished by mutual desistance, which it described as a mode of extinguishing obligations, reasoning that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. Saura's request for cancellation of the mortgage, made without any reservation of rights, and its silence for nine years, confirmed the desistance. The Court found it unnecessary to resolve the other issues raised.

Doctrine

First, an accepted promise to lend is a perfected consensual contract binding upon the parties under Article 1954 of the Civil Code, although the simple loan itself is perfected only upon delivery of the object. Second, the perfection of that contract does not automatically make the lender liable for damages; the borrower must show that the lender failed to fulfill its obligation under the agreed terms. Third, an obligation may be extinguished by mutual desistance, meaning mutual disagreement, just as mutual agreement created it. A borrower who asks for the cancellation of the mortgage without reserving rights, and who waits years before suing, is taken to have abandoned the contract.

Disposition

The Supreme Court reversed the judgment of the trial court and dismissed the complaint, with costs against Saura.

Remember This

Memorize this line: an accepted promise to lend is a binding consensual contract, but it may be extinguished by mutual desistance. Examiners use this case to test the distinction between perfection of a loan contract and the lender's liability for damages, and to test mutual desistance as a mode of extinguishing obligations.