International Exchange Bank vs. Rudy S. Labos and Associates, Inc.

A third person who signs a conforme to a contract solely to give the consent required by a separate agreement does not thereby become a party to that contract, assume its obligations, or become solidarily liable for the principal obligor’s debt, absent a clear expression of such intention. The principle of relativity of contracts under Article 1311 of the Civil Code limits the binding effect of contracts to the parties, their assigns, and heirs; courts cannot supply material stipulations or impose obligations not agreed upon.

RSLAI, through its president Rodolfo S. Labos, obtained a P10 million credit line from IEB. As partial security, RSLAI assigned to IEB all its rights, title, and interest under a Contract to Sell with Rockwell Land Corporation over a condominium unit at Luna Gardens, Rockwell Center, Makati City. The Deed of Assignment dated July 2, 2003 contained a stipulation that RSLAI would not sell, assign, or transfer the property without IEB’s written consent. Rockwell’s president, Nestor J. Padilla, signed the conforme portion of the deed. RSLAI subsequently defaulted on its loan. IEB discovered that RSLAI had later assigned its rights over the same unit to JHL & Sons Realty, Inc., with Rockwell’s consent, resulting in the issuance of a condominium certificate in JHL’s name. IEB filed an action for sum of money against RSLAI, the sureties spouses Labos, and Rockwell, seeking to hold Rockwell solidarily liable for the outstanding obligation.

• Credit Line and Security Arrangement: On June 6 and July 2, 2003, IEB granted RSLAI, represented by Rodolfo S. Labos, a P10 million credit line. As partial security, RSLAI executed a Deed of Assignment dated July 2, 2003, assigning to IEB all its rights, title, and interest over Unit 23-A Luna Gardens, Rockwell Center, Makati City, which RSLAI was purchasing from Rockwell Land Corporation under a Contract to Sell dated December 20, 1999. The Deed provided that RSLAI would not sell, assign, or transfer the property without IEB’s written consent. Rockwell’s president, Nestor J. Padilla, signed the conforme portion of the Deed. Section 9(e) of the Contract to Sell between RSLAI and Rockwell required the developer’s express written consent before the purchaser could transfer or assign its rights.

• Loan Availments and Default: RSLAI drew four promissory notes totaling P9,438,744.94, all maturing on July 30, 2004. When RSLAI defaulted, IEB demanded payment. Pending loan restructuring negotiations, IEB consolidated the obligations into a single promissory note (No. SCL04469) for P5,434,709.95, maturing January 31, 2005. The restructuring ultimately failed, and RSLAI again failed to pay at maturity. IEB sent final demand letters dated April 5, 2005; the total outstanding obligation stood at P5,729,726.94. Rodolfo and Consuelo Labos had executed a Continuing Surety Agreement for the credit line.

• Subsequent Assignment to JHL & Sons Realty, Inc.: In August 2004, IEB inquired with Rockwell about the status of the assigned unit. Rockwell disclosed that Rodolfo S. Labos had earlier informed Rockwell of a transfer to JHL & Sons Realty, Inc. by virtue of a Deed of Assignment dated August 25, 2004. Rockwell allowed the transfer without securing IEB’s written conformity. A Deed of Absolute Sale was eventually executed in favor of JHL upon full payment of the recomputed purchase price, and Condominium Certificate No. 85534 was issued in JHL’s name on October 1, 2004.

• Defenses of Rockwell: Rockwell contended that it was not a party to the Deed of Assignment; its signature was merely a conforme acknowledging RSLAI’s right to assign, as required by the Contract to Sell, and did not impose any liability upon it for RSLAI’s loans. It further argued that Section 2.04 of the Deed was a void stipulation because it effectively prevented Rockwell, the owner, from alienating its own property, and that the unregistered Deed did not bind the property.

• Rockwell’s Binding Obligation under the Deed of Assignment: IEB argued that Rockwell became bound to the Deed of Assignment when its president signed the conforme, thereby consenting to the assignment and agreeing to the conditions in the Deed, particularly Section 2.04, which prohibited any transfer of the property without IEB’s written consent.

• Novation of the Contract to Sell: IEB maintained that the Deed of Assignment amended or supplemented the original Contract to Sell pursuant to Section 9(f) thereof, which allowed modifications in writing signed by both parties. Since the Deed was in writing and signed by RSLAI and Rockwell, its provisions—especially Section 2.04—became part of the Contract to Sell. A new contract to sell impliedly emerged, with IEB substituted as the purchaser, entitling IEB to enforce the buyer’s rights against Rockwell.

• Joint and Several Liability: IEB contended that Rockwell breached its obligations under the amended contract and should be held jointly and severally liable with RSLAI and the spouses Labos for actual damages equal to the unpaid loan of P5,729,726.94.

• Bad Faith and Double Dealing: IEB claimed Rockwell acted in bad faith and violated Articles 19 to 21 of the Civil Code by consenting to two irreconcilable assignments—first to IEB, then to JHL—amounting to a double sale or “double dealing.” Rockwell’s action was the proximate cause of IEB’s loss of substantial collateral and breached its fiduciary duty to observe honesty and good faith. IEB prayed for damages under Articles 1170-1173 in relation to Article 2201 of the Civil Code.

• Non-Party and Limited Effect of Conforme: Rockwell countered that it was not a party to the Deed of Assignment; the deed expressly identified only RSLAI and IEB as parties. Padilla’s signature was a mere conforme to the assignment, required by Section 9(e) of the Contract to Sell, signifying no objection to RSLAI’s transfer, and could not be construed as assuming RSLAI’s loan obligations.

• No Novation or New Contract with IEB: Rockwell argued that the Deed of Assignment did not amend or novate the Contract to Sell. It was a separate interim security arrangement between RSLAI and IEB that did not substitute IEB as the buyer, and there was no express or implied intention to create a new contract to sell.

• Absence of Solidary Liability: Rockwell maintained that solidarity cannot be presumed; it must be expressly stipulated or required by law or the nature of the obligation. No such basis existed to hold it solidarily liable for RSLAI’s debt.

• No Bad Faith or Double Sale: Rockwell contended it acted in good faith, merely recognizing RSLAI’s right to assign under the Contract to Sell. Only one sale occurred—the transfer to JHL. It owed no fiduciary duty to IEB as a mere assignee of the buyer’s rights. IEB failed to prove bad faith by clear and convincing evidence; mere allegations of ulterior motive were insufficient.

• Relativity of Contracts / Privity: Whether Rockwell became a party to the Deed of Assignment and assumed any obligation thereunder enforceable by IEB.
• Novation: Whether the execution of the Deed of Assignment novated the original Contract to Sell, such that IEB stepped into RSLAI’s shoes as the purchaser with rights against Rockwell.
• Solidary Liability: Whether Rockwell could be held jointly and severally liable with RSLAI and the spouses Labos for the outstanding loan.
• Bad Faith and Damages: Whether Rockwell’s consent to two successive assignments constituted bad faith, double sale, or a violation of Articles 19-21 and 1170-1173 of the Civil Code, entitling IEB to damages.

• Relativity of Contracts / Privity: The Deed of Assignment involved only RSLAI and IEB as parties; it did not list Rockwell as a party nor impose any obligation upon it. Rockwell’s president signed the conforme solely to comply with Section 9(e) of the Contract to Sell, which required the developer’s express written consent before RSLAI could assign its rights. Such conformity did not make Rockwell a party to the Deed or create liability for RSLAI’s debt. Section 2.04 of the Deed imposed the undertaking solely on RSLAI as assignor, not on Rockwell. Under Article 1311 of the Civil Code, contracts bind only the parties, their assigns, and heirs; without privity, no obligation could attach. Courts cannot supply material stipulations or impose obligations not agreed upon.

• Novation: No novation occurred. The Deed of Assignment was an interim security arrangement intended as a prelude to a real estate mortgage, as evidenced by Section 2.02 requiring RSLAI to execute a Deed of Real Mortgage once title was issued in its name; the Deed did not substitute IEB as buyer under the Contract to Sell. The two contracts involved different parties and obligations and could stand together, failing the test of irreconcilable incompatibility. Novation is never presumed, and IEB failed to prove its existence either by express stipulation or implied incompatibility. The Deed, being in essence a mortgage, did not amend or alter the Contract to Sell.

• Solidary Liability: Solidary liability was neither expressly stated in any agreement nor mandated by law or the nature of the obligation. Pursuant to Article 1207 of the Civil Code, solidarity must be clearly expressed; it cannot be inferred lightly. None of the qualifying circumstances were present, thus Rockwell could not be held jointly and severally liable with RSLAI and the spouses.

• Bad Faith and Damages: There was no double sale. The Deed of Assignment operated as a mortgage and did not convey ownership to IEB; only one sale occurred—to JHL. For liability under Article 19 (abuse of rights), the complainant must prove by clear and convincing evidence the existence of a legal right exercised in bad faith with the sole intent of prejudicing another. Bad faith imports a dishonest purpose akin to fraud, not mere bad judgment or negligence. IEB’s bare allegations of ulterior motive did not meet this standard. Consequently, no basis existed to award damages under Articles 19-21 or for contractual breach under Articles 1170-1173 and 2201.

• Principle of Relativity of Contracts — Under Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns, and heirs; they cannot favor or prejudice a third person. Where there is no privity, there is no obligation or liability. Applied: Rockwell, not being a party to the Deed of Assignment, could not be bound by it despite knowledge of its existence.

• Literal Interpretation of Contracts — When the terms of a contract are clear, the literal meaning governs. Courts have no authority to alter an agreement, supply material stipulations, or read into it words that it does not contain. Applied: The Deed unambiguously designated RSLAI and IEB as the only parties; its purpose as interim security could not be expanded to impose liability on Rockwell.

• Novation Not Presumed — Novation extinguishes an obligation by changing its object, principal conditions, or parties. It is never presumed and must be proven by express stipulation or by irreconcilable incompatibility between old and new obligations. The test is whether the two obligations can stand together; if they can, no novation occurs. Applied: The Contract to Sell and the Deed of Assignment had different parties and objects and could coexist; no novation was proved.

• Assignment as Security Constitutes a Mortgage — An assignment executed to guarantee an obligation is in effect a mortgage, not an absolute conveyance of title conferring ownership on the assignee. The assignor retains rights, and the assignee holds only a security interest. Applied: The Deed of Assignment was an “interim security” and precursor to a real estate mortgage; it did not transfer the buyer’s status to IEB, negating the claim of double sale.

• Solidary Liability Must Be Expressly Stated — Under Article 1207 of the Civil Code, solidary liability exists only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. It cannot be inferred lightly. Applied: No express provision, law, or nature of the obligation imposed solidary liability on Rockwell.

• Elements of Abuse of Rights (Article 19) — To hold a person liable under the principle of abuse of rights, three elements must concur: (1) existence of a legal right or duty; (2) exercise in bad faith; (3) sole intent to prejudice or injure another. Bad faith must be proven by clear and convincing evidence; it denotes a dishonest purpose or conscious wrongdoing, not mere bad judgment. Applied: IEB failed to prove any of these elements, particularly bad faith, thus no liability under Article 19 arose.

• “The basic principle of relativity of contracts is that contracts can only bind parties who entered into it, and cannot favor or prejudice a third person, even if he or she is aware of such contract and has acted with knowledge thereof. Where there is no privity of contract, there is likewise no obligation or liability to speak about.”

• “It is settled that the literal meaning shall govern when the terms of a contract are clear and leave no doubt as to the intention of the parties. The courts have no authority to alter the agreement or to make a new contract for the parties. … The courts cannot supply material stipulations or read into the contract words which it does not contain.”

• “Novation is never presumed. It must be ‘proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between old and new obligations or contracts.’ The test to determine the presence of incompatibility is whether or not the two obligations can stand together, each one having its independent existence.”

• “An assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee.”

• “It is a well-settled doctrine in this jurisdiction that solidary liability is not to be inferred lightly, and must be so clearly expressed.”

• “The person claiming bad faith must prove its existence by clear and convincing evidence for the law always presumes good faith. Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud.”

• Norton Resources v. All Asia Bank, 620 Phil. 381 (2009) — Emphasized that a written contract is the best evidence of the parties’ intention and courts cannot stipulate for them. Distinguished/Applied: The Deed of Assignment did not include Rockwell as a party, and the Court could not read it into the contract.

• Gaw v. Court of Appeals, 521 Phil. 549 (2006) — Reiterated that courts cannot create contracts for the parties or impose obligations not assumed. Applied to reject IEB’s plea to hold Rockwell liable under the Deed.

• The Commoner Lending Corp. v. Spouses Villanueva, G.R. No. 235260, August 27, 2020 — Established that the literal meaning of clear contract terms governs and courts cannot supply material stipulations. Applied in interpreting the purpose and scope of the Deed.

• Spouses Angeles v. Traders Royal Bank, G.R. No. 235604, May 3, 2021 — Stated that novation is never presumed. Invoked to require proof, which IEB failed to provide.

• CCC Insurance Corp. v. Kawasaki Steel Corp., 761 Phil. 1 (2015) — Clarified the test of incompatibility for novation. Applied to find that the Contract to Sell and the Deed of Assignment could stand together.

• Manila Banking Corp. v. Teodoro Jr., 251 Phil. 98 (1989) — Held that an assignment to guarantee an obligation is in effect a mortgage. Used to characterize the Deed as a security arrangement, not a transfer of ownership.

• Tocoms Philippines, Inc. v. Philips Electronics, G.R. No. 214046, February 5, 2020 — Enumerated the three elements of abuse of rights and the requirement of bad faith. Applied to reject IEB’s claim.

• Ona v. Northstar International Travel, Inc., G.R. No. 209581, January 15, 2020 — Held that bad faith must be proven by clear and convincing evidence and denotes a dishonest purpose. Applied to dismiss IEB’s bare assertions.

• Article 1311, Civil Code — Contracts take effect only between the parties, their assigns, and heirs. Barred enforcement of the Deed of Assignment against Rockwell as a non-party.

• Articles 19, 20, 21, Civil Code — Principles of human relations and abuse of rights. Liability could not be imposed on Rockwell absent proof of bad faith.

• Articles 1170, 1171, 1172, 1173, Civil Code — Liability for damages arising from fraud, negligence, delay, or contravention of contractual tenor. Inapplicable because Rockwell had no contractual obligation to IEB and no bad faith was shown.

• Article 2201, Civil Code — Measure of damages in contracts and quasi-contracts. Not triggered due to lack of breach and bad faith.

• Article 1207, Civil Code — Solidary liability requires express stipulation or imposition by law or nature of obligation. Used to negate Rockwell’s joint and several liability.

• Act No. 3135, as amended — Governs extrajudicial foreclosure of real estate mortgages; referenced in the Deed of Assignment, underscoring its mortgage nature.

Gesmundo, C.J. (Chairperson), Inting, Rosario, and Marquez, JJ., concur.