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

A third person who signs a contract solely to signify conformity or lack of objection to an assignment, as required by a separate agreement to which it is a party, does not thereby become a contracting party and cannot be held liable for obligations arising from that contract, absent explicit language imposing such liability. Moreover, solidary liability is never presumed; it must be expressly stipulated or required by law or the nature of the obligation.

IEB granted RSLAI a P10 million credit line. As partial security, RSLAI assigned to IEB its rights over a condominium unit it was purchasing from Rockwell under a Contract to Sell. The Deed of Assignment required Rockwell’s consent, which Rockwell gave by signing the conforme. RSLAI subsequently defaulted on its loan obligations. Meanwhile, RSLAI assigned the same unit to JHL & Sons Realty, Inc., again with Rockwell’s consent. IEB, claiming loss of collateral, filed suit against RSLAI, the sureties (spouses Labos), and Rockwell to recover the unpaid loan, seeking to hold all defendants jointly and severally liable.

• Credit Line and Security Arrangement: On June 6, 2003 and July 2, 2003, IEB granted RSLAI a P10 million omnibus credit line. As partial security, RSLAI assigned to IEB all its rights, title, and interest over Condominium Unit 23-A Luna Gardens, Rockwell Center, Makati — which RSLAI had purchased from Rockwell under a Contract to Sell dated December 20, 1999 — through a Deed of Assignment dated July 2, 2003. Under the Deed, RSLAI agreed not to sell, assign, or transfer the assigned property without IEB’s written consent. The Deed also provided that upon issuance of title to RSLAI, a real estate mortgage would be executed in IEB’s favor, and the Deed of Assignment would become null and void. As additional security, Rodolfo S. Labos executed a Continuing Surety Agreement for himself and as attorney-in-fact for Consuelo R. Labos.
• Default and Restructuring Attempt: RSLAI availed of the credit line under four promissory notes totaling P9,438,744.94, all maturing on July 30, 2004. RSLAI defaulted. Upon IEB’s demand, RSLAI requested a restructuring. IEB consolidated the outstanding obligations into a single promissory note (No. SCL04469) for P5,434,709.95, maturing on January 31, 2005. Restructuring negotiations ultimately failed, and RSLAI again defaulted. IEB sent final demand letters on April 5, 2005; the total outstanding obligation stood at P5,729,726.94.
• Post-Default Discovery of Transfer: In August 2004, IEB inquired with Rockwell regarding the status of the assigned unit. Rockwell, through its Assistant Vice President-Legal, confirmed in a letter dated September 9, 2004 that RSLAI had informed Rockwell of a transfer of ownership to JHL & Sons Realty, Inc. by virtue of a Deed of Assignment dated August 25, 2004. Rockwell had given its consent to this subsequent assignment. The property was later sold to JHL, and Condominium Certificate No. 85534 was issued in JHL’s name on October 1, 2004.
• IEB’s Claim Against Rockwell: IEB alleged that Rockwell violated the Deed of Assignment by allowing the transfer without IEB’s written conformity, thereby causing IEB to lose substantial collateral. IEB thus sought to hold Rockwell jointly and severally liable with RSLAI and the spouses Labos for the full amount of the unpaid loan.
• Rockwell’s Defense: Rockwell maintained that it was not a party to the Deed of Assignment; its signature on the conforme was solely to comply with the Contract to Sell’s requirement that the developer consent to any assignment, and did not amount to an assumption of RSLAI’s loan obligations. Rockwell also argued that the Deed of Assignment was not registered and did not bind the property.
• Lower Courts’ Findings: The RTC found RSLAI and the spouses Labos liable but dismissed the claim against Rockwell for lack of privity. The CA originally reversed and imposed solidary liability on Rockwell, but on reconsideration affirmed the RTC’s dismissal, finding that Rockwell did not assume any obligation under the Deed of Assignment.

• Rockwell as a Party to the Deed of Assignment: IEB argued that Rockwell became bound to the Deed of Assignment when its President signed the conforme portion, thereby assuming the obligation not to transfer the property without IEB’s consent.
• Novation and Subrogation: IEB contended that the Deed of Assignment novated the Contract to Sell between Rockwell and RSLAI, effectively making IEB the new purchaser who stepped into the shoes of RSLAI, and that Rockwell’s subsequent consent to the JHL assignment breached its obligations to IEB as the new buyer.
• Amendment of the Contract to Sell: IEB maintained that under Section 9(f) of the Contract to Sell, the Deed of Assignment — being in writing and signed by RSLAI and Rockwell — modified or supplemented the Contract to Sell, making Section 2.04’s restriction on transfer without IEB’s consent part of Rockwell’s obligations.
• Bad Faith and Double Sale: IEB claimed that Rockwell acted in bad faith by giving its consent twice — first to the assignment in favor of IEB, and later to the assignment in favor of JHL — resulting in two conflicting deeds over the same property, amounting to a double sale or “double dealing,” which proximately caused the loss of IEB’s collateral.
• Damages and Solidary Liability: IEB prayed that Rockwell be held jointly and severally liable for actual damages in the amount of RSLAI’s outstanding loan, invoking Articles 19 to 21 on abuse of rights and Articles 1170-1173 in relation to Article 2201 of the Civil Code for contractual breach.

• No Privity of Contract: Rockwell countered that it was not a party to the Deed of Assignment, which was solely between RSLAI and IEB; its signature was merely to signify conforme or lack of objection, as required by the Contract to Sell, and did not make it a contracting party.
• No Assumption of Liability: Rockwell argued that the conforme could not be construed as an assumption of RSLAI’s loan obligations, and the Deed of Assignment itself imposed no duty on Rockwell to obtain IEB’s consent or to answer for RSLAI’s debts.
• No Novation: Rockwell maintained that the Deed of Assignment was a security arrangement — a mortgage — and not a new contract to sell; thus, no novation of the original Contract to Sell took place and IEB did not become a purchaser.
• No Bad Faith or Double Sale: Rockwell asserted that the Deed of Assignment was not a sale but a mortgage; there was only one sale, which was to JHL. Its consent to the second assignment was proper under the Contract to Sell. IEB failed to prove bad faith by clear and convincing evidence, and mere allegation of ulterior motive was insufficient.
• No Solidary Liability: Rockwell argued that solidary liability must be expressly stated, and neither the Deed of Assignment nor any law imposed such liability on Rockwell.

• Privity of Contract / Party Status: Whether Rockwell became a party to the Deed of Assignment dated July 2, 2003 by signing the conforme portion, thereby subjecting itself to liability for RSLAI’s loan obligations.
• Novation: Whether the Deed of Assignment novated the original Contract to Sell between Rockwell and RSLAI, such that IEB was substituted as the buyer and could enforce the contract against Rockwell.
• Liability for Damages (Bad Faith / Abuse of Rights): Whether Rockwell can be held liable for damages under Articles 19, 20, 21, and 1170-1173 in relation to Article 2201 of the Civil Code on the ground that its consent to two successive assignments constituted bad faith and an abuse of rights.
• Solidary Liability: Whether Rockwell is jointly and severally liable with RSLAI and the spouses Labos for the unpaid loan.

• Privity of Contract / Party Status: Rockwell was not a party to the Deed of Assignment and could not be held liable under it. The plain language of the Deed identified only RSLAI and IEB as parties. Rockwell’s signature was affixed 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 transform Rockwell into a contracting party or constitute an assumption of RSLAI’s loan obligations. Courts cannot supply material stipulations or read into a contract words it does not contain.
• Novation: No novation occurred. The Deed of Assignment was, in essence, a mortgage or interim security for RSLAI’s loan, as evidenced by its terms and the stipulation that a real estate mortgage would replace it once title issued. The Contract to Sell and the Deed of Assignment are separate and distinct contracts involving different parties and obligations; they can stand together without irreconcilable incompatibility. Novation is never presumed and must be proven by express stipulation or clear implication, neither of which was present.
• Liability for Damages (Bad Faith / Abuse of Rights): Rockwell was not liable for damages. The Deed of Assignment being a mortgage, not an absolute conveyance, there was no double sale; only one sale to JHL occurred. Rockwell’s consent to the JHL assignment was a recognition of RSLAI’s right to assign under the Contract to Sell. The elements of abuse of rights under Article 19 — legal right or duty, exercise in bad faith, and sole intent to prejudice — were not established. Bad faith was not proven by clear and convincing evidence; IEB’s bare allegations of ulterior motive did not suffice.
• Solidary Liability: Rockwell was not solidarily liable. Under Article 1207 of the Civil Code, solidary liability must be expressly stipulated or required by law or the nature of the obligation. None of these circumstances applied to Rockwell.

• Relativity of Contracts (Article 1311, Civil Code): Contracts take effect only between the parties, their assigns and heirs, except where rights and obligations are not transmissible by their nature, stipulation, or provision of law. A third person who is not a party to a contract cannot be bound by its terms or held liable for obligations arising thereunder. Applied here to exclude Rockwell, who was not a named party to the Deed of Assignment, from liability.
• Literal Meaning Rule in Contract Interpretation: When the terms of a contract are clear and leave no doubt as to the intention of the parties, the literal meaning governs. Courts have no authority to alter the agreement, supply material stipulations, or read into the contract words it does not contain. The Deed of Assignment plainly identified only RSLAI and IEB as parties; no obligation on Rockwell’s part could be implied.
• Novation is Never Presumed: Novation must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between the old and new obligations. The test of incompatibility is whether the two obligations can stand together, each having independent existence. Because the Contract to Sell and the Deed of Assignment served different purposes (sale of unit vs. security for a loan), they could coexist and no novation occurred.
• Assignment to Guarantee an Obligation is a Mortgage: An assignment to guarantee an obligation is in effect a mortgage, not an absolute conveyance of title conferring ownership on the assignee. The Deed of Assignment, which was to be replaced by a real estate mortgage upon issuance of title, was thus a security arrangement, not a sale or a novation of the Contract to Sell.
• Abuse of Rights (Article 19, Civil Code): 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 of such right or discharge of such duty in bad faith; and (3) the exercise or discharge was made with the sole intent of prejudicing or injuring another. Bad faith must be proved by clear and convincing evidence; it imports a dishonest purpose or moral obliquity, not mere bad judgment or negligence. IEB failed to prove bad faith on Rockwell’s part.
• Solidary Liability Not Inferred Lightly (Article 1207, Civil Code): Solidary liability must be clearly expressed; it is not to be inferred lightly. There is solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. None of these grounds existed against Rockwell.

• “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.” — The Court’s restatement of the foundational rule that barred IEB’s claim against Rockwell.
• “Courts cannot supply material stipulations, read into contract words it does not contain or, for that matter, read into any other intention that would contradict its plain import.” — Applied to reject the argument that Rockwell’s conforme made it a party or imposed obligations not stated in the Deed.
• “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 controlling standard for novation that IEB failed to satisfy.
• “An assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee.” — Critical in holding that no double sale occurred and that the Deed of Assignment was only a security arrangement.
• “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 basis for absolving Rockwell of any solidary obligation.

• Philippine National Bank v. Dee, 727 Phil. 473 (2014): Followed for the principle that contracts bind only the parties and cannot prejudice third persons.
• Norton Resources v. All Asia Bank, 620 Phil. 381 (2009): Followed for the rule that a written contract is the best evidence of the parties’ intention and courts cannot stipulate for them or amend their agreement.
• Gaw v. Court of Appeals, 521 Phil. 549 (2006): Followed for the doctrine that courts cannot make new contracts for the parties or impose obligations not assumed.
• The Commoner Lending Corp. v. Spouses Villanueva, G.R. No. 235260, August 27, 2020 (Resolution): Cited for the literal meaning rule in interpreting contracts.
• Spouses Angeles v. Traders Royal Bank, G.R. No. 235604, May 3, 2021: Cited for the rule that novation is never presumed and must be proven.
• CCC Insurance Corp. v. Kawasaki Steel Corp., 761 Phil. 1 (2015): Cited for the test of incompatibility in determining novation.
• Yulim International Co., Ltd. v. International Exchange Bank, 754 Phil. 279 (2015): Cited for the nature of an assignment by way of mortgage.
• Manila Banking Corp. v. Teodoro Jr., 251 Phil. 98 (1989): Cited for the rule that an assignment to guarantee an obligation is in effect a mortgage.
• Tocoms Philippines, Inc. v. Philips Electronics, G.R. No. 214046, February 5, 2020: Cited for the elements of abuse of rights under Article 19 of the Civil Code.
• Ona v. Northstar International Travel, Inc., G.R. No. 209581, January 15, 2020 (Notice): Cited for the definition of bad faith and the standard of clear and convincing evidence.

• Article 1311, Civil Code: Applied to hold that the Deed of Assignment took effect only between RSLAI and IEB, and Rockwell, as a non-party, could not be bound by it.
• Article 1207, Civil Code: Applied to reject solidary liability against Rockwell, as solidarity was neither expressly stipulated nor required by law or the nature of the obligation.
• Articles 19, 20, 21, 1170-1173, 2201, Civil Code: Invoked by petitioner but held inapplicable to Rockwell for want of privity, bad faith, or contractual breach.

Gesmundo, C.J. (Chairperson), Inting, Rosario, and Marquez, JJ., concur. (Designated additional Member per February 28, 2022 Raffle vice J. Zalameda who recused due to prior action in the Court of Appeals.)