GIL GONZALES, PETITIONER, VS. LA PREVISORA FILIPINA, MUTUAL BUILDING AND LOAN ASSOCIATION, AND JOSE D. MENDOZA, RESPONDENTS.

Gonzales versus La Previsora Filipina

The Case

This is Gil Gonzales against La Previsora Filipina, Mutual Building and Loan Association, and Jose D. Mendoza. Gonzales asks the Court to annul the extrajudicial foreclosure sale of his Tayuman street property and to declare that the property answers only for 3,800 pesos, the amount by which the loan exceeded the appraised value of Mendoza's own lot. The case matters because it is the classic lesson on how the Supreme Court reads a contract that names two signatories but contemplates only one borrower: the literal words yield to the evident intention of the parties, gathered from their conduct before and after signing, and an ambiguous term is construed against the party who drafted it.

Procedural History

Gil Gonzales sued in the Court of First Instance of Manila to annul the extrajudicial sale of his property, to declare that it responds only for 3,800 pesos, and to compel the association to accept that sum. The trial court held that Gonzales was a mere guarantor to the extent of 3,800 pesos, found that after crediting Mendoza's payments his liability stood at only 650 pesos, and declared the extrajudicial sale null and void insofar as it affected Gonzales' property.

The Court of Appeals reversed. It held that Gonzales was a coborrower jointly and severally liable with Mendoza for the full amount of the loan, but in equity allowed him to redeem by paying 4,691.49 pesos, applying the 3,800 pesos he had deposited with the clerk of court. Gonzales then came to the Supreme Court by certiorari.

Facts

Jose D. Mendoza applied to La Previsora Filipina for a loan of 9,000 pesos to build a house of strong materials on his lot on Fraternidad street in Pandacan, Manila. The association appraised his lot and the proposed improvements at only 5,200 pesos, so Mendoza was required to put up additional security for the deficiency of 3,800 pesos. He approached his friend Gil Gonzales, who agreed to mortgage his own land and building on Tayuman street, Santa Cruz, Manila, as collateral security.

The contract of loan and mortgage was prepared by the association. Although Gonzales signed it together with Mendoza, the document refers throughout to the stockholder-borrower in the singular. Clause nine cedes Mendoza's Pandacan lot as first mortgage, and in the same clause Gonzales appears simply as Mr. Gil Gonzales, who by way of collateral security pledges his Tayuman property, with the proviso that once the indebtedness is reduced to 5,200 pesos the association may cancel the incumbrance on his land. The money was invested in the improvements on Mendoza's lot, and it was Mendoza alone who paid principal and interest, and who paid for the shares of stock.

Mendoza's payments fell short of the stipulated monthly installments. On July 22, 1937, the association extrajudicially foreclosed the mortgage and bought the mortgaged premises of Mendoza and Gonzales for 12,245.98 pesos. Before the redemption period expired, Gonzales offered to pay 3,800 pesos, and upon refusal deposited the amount with the clerk of court on July 20, 1938. He had earlier commenced this action on June 6, 1938.

Issues

• Whether or not Gil Gonzales was a coborrower jointly and severally liable with Mendoza for the entire loan, or a mere collateral security for the 3,800 peso deficiency.
• Whether or not the proviso that the association "may" cancel the incumbrance once the debt is reduced to 5,200 pesos is a potestative condition leaving cancellation to the association's discretion.
• Whether or not Gonzales' liability may be reduced from 3,800 pesos to 650 pesos on the strength of his testimony about an unwritten agreement on the application of payments.

Applicable Provisions

Article 1281 of the Civil Code provides:

If the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its wording shall be followed. If the words appear to be contrary to the evident intention of the contracting parties, the intention shall prevail.

This is the Court's starting point: the words of the contract must yield to the evident intention of the parties.

Article 1282 of the Civil Code provides:

In order to judge as to the intention of the contracting parties, attention must be paid principally to their conduct at the time of making the contract and subsequently thereto.

This is the lens through which the Court reads the document, looking at what the parties actually did.

Article 1288 of the Civil Code provides:

Obscure terms of a contract shall not be so construed as to favor the party who occasioned the obscurity.

This resolves the ambiguity against the association, which prepared the contract.

Ruling

On the first issue, the Court held that it does not clearly and unequivocally appear that Gonzales is a coborrower, and there is no express stipulation making him jointly and severally liable. Even coborrowers are not bound in solido without an express stipulation to that effect. The Court noted that the association may lend only to its stockholders, that the loan was granted for improvements on Mendoza's exclusive land, that the stockholder-borrower is referred to in the singular throughout, that Gonzales appears in clause nine only as pledger of collateral security, and that Mendoza alone paid the loan and the shares. Gonzales therefore bound himself merely as collateral security for Mendoza's obligation to the extent of 3,800 pesos.

On the second issue, the Court held that the word "may" ordinarily indicates a potestative condition, but it may and should be read as "shall" when the apparent intention of the parties demands it. Read as discretionary, the proviso would be superfluous to the association and illusory to Gonzales, for a mortgagee needs no permission to cancel a mortgage. The Court said such a stipulation would not have been made in Gonzales' favor had he been a coborrower to the same extent as Mendoza.

On the third issue, the Court declined to review the reduction of Gonzales' obligation to 650 pesos. That finding rested on Gonzales' testimony about an unwritten agreement, which the Court of Appeals did not credit, and it involves a question of fact, not the interpretation of a written contract. Since Gonzales had fully discharged the 3,800 peso liability by tender and consignation, the amount due the association was fixed at 3,800 pesos.

Doctrine

First, a contract must be interpreted according to the evident intention of the parties, not merely the literal sense of its wording, and that intention is gathered principally from their conduct at the time of making the contract and afterwards. Second, obscure terms are construed against the party who occasioned the obscurity, here the association that prepared the document. Third, solidarity is never presumed; even coborrowers are not solidarily liable absent an express stipulation. Fourth, the word "may" may be read as "shall" where the apparent intention of the parties demands it, especially where a discretionary reading would render a stipulation illusory. Fifth, a person who signs a loan and mortgage as pledger of collateral security for a stated deficiency is a guarantor to that extent, not a coborrower for the whole debt.

Disposition

The judgment of the Court of Appeals was modified: La Previsora Filipina is entitled only to the 3,800 pesos deposited with the clerk of court, Gonzales is relieved of any further obligation, the sale of his property is void, and the register of deeds must cancel the association's title and issue a new one in his name, with costs against the association.

Remember This

The one line to memorize: the letter of the contract yields to the evident intention of the parties, and ambiguity is construed against him who caused it. Examiners use this case on the interpretation of contracts under Articles 1281, 1282, and 1288, on the rule that solidarity is not presumed, and on reading "may" as "shall" when the stipulation would otherwise be illusory.