Development Bank of the Philippines vs. Sta. Ines Melale Forest Products Corporation

A condition precedent is deemed fulfilled when the obligor voluntarily prevents its fulfillment, and the debtor loses the right to avail of the period when it violates an undertaking that formed the basis for the creditor's agreement to the period, making the obligation immediately demandable; moreover, novation by substitution of debtors requires the express consent of the creditor, which cannot be implied merely from a corporate officer's concurrent position in another corporation or from the officer's knowledge of the arrangement.

National Galleon Shipping Corporation (Galleon), organized in 1977 to operate international liner services, experienced severe financial distress in the late 1970s despite obtaining foreign loans guaranteed by the Development Bank of the Philippines (DBP). To secure DBP's guarantee, Galleon's major stockholders—Sta. Ines Melale Forest Products Corporation, Cuenca Investment Corporation, Universal Holdings Corporation, Rodolfo M. Cuenca, and Manuel I. Tinio—executed a Deed of Undertaking on October 10, 1979, making themselves personally liable for DBP's potential liabilities. In response to the company's deteriorating condition, then President Ferdinand Marcos issued Letter of Instructions (LOI) No. 1155 on July 21, 1981, directing the National Development Corporation (NDC) to acquire 100% of Galleon's shares for ₱46.7 million payable after five years without interest, and DBP to advance payments on Galleon's foreign obligations for three years convertible to preferred shares.

• The Financial Distress and Guarantees: Galleon Shipping Corporation, organized in 1977 to operate international liner services, faced financial difficulties and obtained foreign loans guaranteed by DBP. To secure DBP's guarantee, respondents executed a Deed of Undertaking on October 10, 1979, obligating themselves to guarantee DBP's potential liabilities, secured by mortgages over Galleon's vessels.
• Presidential Intervention: On July 21, 1981, President Marcos issued Letter of Instructions No. 1155, directing NDC to acquire 100% of Galleon's shares for ₱46.7 million payable after five years without interest, and DBP to advance principal and interest on Galleon's obligations for three years convertible to preferred shares.
• The Memorandum of Agreement: On August 10, 1981, pursuant to LOI 1155, respondents (as Sellers, represented by Cuenca) and NDC (as Buyer, represented by Roberto Ongpin) executed a Memorandum of Agreement whereby NDC agreed to assume immediate control over Galleon's management and operations, and the parties undertook to prepare and sign a share purchase agreement within 60 days covering 100% of Galleon's shares. The purchase price was to be paid five years from the date of the share purchase agreement. The MOA also provided for the release of respondents from their counter-guarantees to DBP upon execution of the share purchase agreement.
• Failure to Execute Share Purchase Agreement: NDC took over Galleon's operations immediately after the MOA was signed but, despite respondents' efforts to prepare the necessary financial statements and clear up accounts, the share purchase agreement was never executed. NDC's General Manager acknowledged reviewing Galleon's outstanding accounts in April 1982, but no formal share purchase agreement was signed, allegedly due to NDC's insistence on verifying accounts and respondents' demand for payment of advances.
• Rescission of Rehabilitation Plan: On February 10, 1982, President Marcos issued Letter of Instructions No. 1195, rescinding inconsistent provisions of LOI 1155 and directing DBP and NDC to take immediate steps including foreclosure of Galleon's vessels to limit government exposure.
• Transfer of Assets: On December 8, 1986, Proclamation No. 50 created the Asset Privatization Trust (APT), which took title to assets identified for privatization, including Galleon's loan accounts transferred from DBP to the National Government under a Deed of Transfer dated February 27, 1987.

• Lack of Authority: NDC maintained that Ongpin lacked authority from the NDC Board to sign the Memorandum of Agreement, rendering it non-binding on NDC.
• Preliminary Nature of MOA: NDC argued that the MOA was merely a preliminary agreement contemplating the future execution of a share purchase agreement, which was a condition precedent to any transfer of shares; since the share purchase agreement was never executed, no obligation to pay arose.
• No Prevention of Fulfillment: NDC denied preventing the execution of the share purchase agreement, alleging instead that Cuenca caused delays by insisting on payment of advances before relinquishing control.
• No Novation: DBP contended that novation did not occur because there was no second binding contract designed to replace the Deed of Undertaking, DBP did not consent to the substitution of debtors, and there was no unequivocal agreement declaring novation.
• Interest Rate Error: Both petitioners argued that the Court of Appeals erred in imposing 12% interest per annum instead of 6%.

• Perfection of Contract: Respondents argued that the MOA was a perfected contract of sale, and NDC was estopped from denying its validity having taken over Galleon's operations and enjoyed benefits therefrom.
• Prevention of Condition: Respondents maintained that NDC voluntarily prevented the execution of the share purchase agreement by deliberately delaying the review of Galleon's financial accounts, thereby invoking Article 1186 of the Civil Code (condition deemed fulfilled).
• Novation by Substitution: Respondents argued that novation occurred when NDC agreed to be substituted in their place as debtors under the Deed of Undertaking, and DBP was privy to this agreement because Ongpin was concurrently DBP Governor and NDC Chairman.
• Forbearance of Money: Respondents contended that the amounts due constituted forbearance of money justifying the 12% interest rate.

• Binding Effect of MOA: Whether the Memorandum of Agreement obligated NDC to purchase Galleon's shares of stock and pay the advances made by respondents.
• Novation: Whether the Memorandum of Agreement novated the Deed of Undertaking executed between DBP and respondents.
• Interest Rate: Whether the computation of legal interest should be at the rate of 6% per annum instead of 12% per annum.

• Binding Effect and Constructive Fulfillment: The Memorandum of Agreement did not constitute a perfected contract of sale but rather imposed an obligation to execute a share purchase agreement within 60 days, with the execution of the latter being a condition precedent to the transfer of shares and the running of the five-year payment period. However, the condition was deemed fulfilled under Article 1186 of the Civil Code because NDC, through its delay in reviewing financial accounts and failure to cooperate in drafting the share purchase agreement despite assuming control of Galleon's operations, voluntarily prevented the condition's fulfillment. Consequently, under Article 1198(4) of the Civil Code, NDC lost the right to make use of the period, making the obligation to pay the purchase price and advances immediately demandable.
• No Novation: Novation by substitution of debtors did not occur. Under Article 1293 of the Civil Code, substitution requires the express consent of the creditor. Ongpin's concurrent position as DBP Governor and NDC Chairman did not constitute implied authority to bind DBP to a novation; absent board authorization, Ongpin could not bind DBP, and novation cannot be presumed but must appear by express agreement or unequivocal acts. Thus, respondents remained liable to DBP under the Deed of Undertaking.
• Interest Rate Modification: The award of advances and purchase price constituted forbearance of money. Applying Nacar v. Gallery Frames and BSP Circular No. 799, the interest rate was modified to 12% per annum from April 22, 1985 (date of filing) until June 30, 2013; 6% per annum from July 1, 2013 until the Decision becomes final and executory; and 6% per annum from finality until satisfaction.

• Constructive Fulfillment of Conditions (Article 1186, Civil Code) — A condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. This doctrine applies where the obligor's actions or inactions, such as deliberate delay or failure to cooperate in satisfying a condition precedent, effectively block the condition from occurring. In this case, NDC's delay in reviewing financial accounts and failure to execute the share purchase agreement despite assuming control of Galleon's operations constituted voluntary prevention of the condition.
• Loss of Right to Period (Article 1198(4), Civil Code) — The debtor loses every right to make use of the period when the debtor violates any undertaking in consideration of which the creditor agreed to the period, rendering the obligation immediately demandable. NDC's failure to execute the share purchase agreement within the stipulated time frame violated the basis for the five-year payment period.
• Novation by Substitution of Debtors (Article 1293, Civil Code) — Substitution of a new debtor in place of the original one requires the express consent of the creditor; it cannot be implied from the creditor's mere knowledge of the arrangement or from the dual capacity of a corporate officer representing both the creditor and the new debtor. The principle of renuntiatio non praesumitur applies—waiver of rights must be clearly shown.
• Corporate Authority (Section 23, Corporation Code) — The corporate powers of a corporation are exercised by the board of directors; no person, not even officers, can validly bind the corporation without authority from the board, either express or implied by habit, custom, or acquiescence in the general course of business.
• Interest Rates on Forbearance — The rate of interest for the loan or forbearance of money in the absence of stipulation is 6% per annum from July 1, 2013 onwards (per BSP Circular 799), replacing the previous 12% rate under CB Circular 416; judgments final before July 1, 2013 retain their original rates, while those pending application of interest after that date follow the new 6% rate.

• "A condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfilment and a debtor loses the right to make use of the period when a condition is violated, making the obligation immediately demandable."
• "It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by new one, it implies on the part of the creditor a waiver of the right that he had before the novation, which waiver must be express under the principle that renuntiatio non prcesumitur, recognized by the law in declaring that a waiver of right may not be performed unless the will to waive is indisputably shown by him who holds the right."
• "The general rule is that, '[i]n the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation.'"

• Bautista v. Court of Appeals, 379 Phil. 386 (2000): Cited for the rule that where the language of a contract is plain and unambiguous, its meaning should be determined without reference to extrinsic facts or aids.
• Fernandez v. Court of Appeals, 248 Phil. 805 (1988): Cited for the principle that the task in contract interpretation is the ascertainment of the intention of the contracting parties by looking to all the words used, in context.
• Testate Estate of Mota v. Serra, 47 Phil. 464 (1925): Controlling precedent establishing that novation by substitution of debtors requires the express consent of the creditor under the principle renuntiatio non praesumitur.
• Peoples Aircargo and Warehousing Co. Inc. v. Court of Appeals, 357 Phil. 850 (1998): Cited for the rule regarding delegation of corporate authority under Section 23 of the Corporation Code.
• Nacar v. Gallery Frames, 716 Phil. 267 (2013): Controlling precedent modifying Eastern Shipping Lines guidelines on interest rates to reflect BSP Circular 799, establishing the 6% rate for forbearance of money from July 1, 2013.
• Eastern Shipping Lines, Inc. v. Court of Appeals, 304 Phil. 236 (1994): Cited for the general rules on imposition of interest prior to the Nacar modification.

• Article 1186, Civil Code: Provides that a condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
• Article 1198(4), Civil Code: Provides that the debtor loses the right to make use of the period when the debtor violates any undertaking in consideration of which the creditor agreed to the period.
• Article 1291, Civil Code: Defines novation as a mode of extinguishing an obligation by changing its object or principal conditions, substituting the person of the debtor, or subrogating a third person in the rights of the creditor.
• Article 1293, Civil Code: Provides that novation by substituting a new debtor may be made even without the knowledge or against the will of the original debtor, but must be with the consent of the creditor.
• Article 1370, Civil Code: Provides that when 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.
• Article 1374, Civil Code: Provides that various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.
• Section 23, Corporation Code: Provides that the corporate powers of all corporations shall be exercised, all business conducted and all property controlled and held by the board of directors.
• BSP Circular No. 799, Series of 2013: Revised the rate of interest for loan or forbearance of money in the absence of stipulation to 6% per annum, effective July 1, 2013.

Diosdado M. Peralta (Acting Chairperson), Lucas P. Bersamin, Jose Catral Mendoza, and Francis H. Jardeleza.