Kauffman vs. Philippine National Bank

A third person in whose favor a contract contains a stipulation may demand its fulfillment, provided he has given notice of his acceptance to the obligor before the stipulation is revoked. The bank's promise to pay Kauffman constituted such a stipulation, and his demand for payment constituted acceptance.

The case involves a common banking transaction—a telegraphic transfer of funds—and tests the legal rights of the named beneficiary who is not a direct party to the contract between the purchasing customer and the bank.

• Filed in the Court of First Instance of Manila (RTC).
• The RTC rendered judgment in favor of the plaintiff, Kauffman.
• The defendant, PNB, appealed directly to the Supreme Court.

• The Philippine Fiber and Produce Company, whose president and majority shareholder was George A. Kauffman, declared a P98,000 dividend payable to Kauffman.
• On October 9, 1918, the company's treasurer, George B. Wicks, purchased a telegraphic transfer from PNB's Manila office for $45,000 to be paid to Kauffman in New York. The company paid P90,355.50 via check.
• PNB cabled its New York agency to pay Kauffman.
• PNB later instructed its New York agency to withhold payment, allegedly to protect the bank's interests with the company.
• On October 15, 1918, Kauffman demanded payment in New York but was refused.
• The company's check was charged as an overdraft; no failure of consideration was proven.

• Kauffman was a stranger to the contract for the telegraphic transfer, which was between the bank and the Philippine Fiber and Produce Company.
• Due to lack of privity of contract, Kauffman had no cause of action against the bank. Any right of action belonged solely to the company.

• The contract between the bank and the company contained a clear stipulation in favor of Kauffman as the beneficiary.
• Under Article 1257 of the Civil Code, he had the right to demand fulfillment once he accepted the stipulation by demanding payment.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether a third-party beneficiary (Kauffman) to a contract for a telegraphic transfer can maintain a direct action against the bank (PNB) for its failure to make the payment.

• Procedural: N/A
• Substantive: Yes. The SC ruled for Kauffman. The bank's promise to pay a definite sum to Kauffman was a stipulation pour autrui (a stipulation in favor of a third person) under Article 1257 of the Civil Code. Kauffman's demand for payment in New York constituted his acceptance of this stipulation. The bank's unilateral attempt to revoke the order after Kauffman's acceptance was ineffective.

• Stipulation Pour Autrui (Stipulation in Favor of a Third Person) — A contract may contain a provision that benefits a third party who is not a signatory. That third party can enforce the contract if: (1) the stipulation is in their favor, and (2) they communicate their acceptance to the obligor before the stipulation is revoked.
• Application: The SC found the telegraphic transfer contract expressly named Kauffman as the payee, demonstrating the parties' intent to confer a benefit upon him. His demand for payment was a clear acceptance.

• "The bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the [law]; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have the money upon demand in New York City."
• "The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it."

• Uy Tam and Uy Yet vs. Leonard — Followed. The SC adopted its test for determining a stipulation pour autrui: reliance on the contracting parties' intention as disclosed by the contract. The SC noted this case provided a complete discussion on the history and interpretation of Article 1257.
• Wolfson vs. Estate of Martinez; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation; Manila Railroad Co. vs. Compañia Trasatlantica — Cited to illustrate the general rule that contracts bind only the parties, highlighting that the present case falls under the statutory exception.
• Legniti vs. Mechanics, etc. Bank — Distinguished. The SC noted this New York case held a cable transfer creates a simple contractual obligation, not a trust, but stated it was not decisive on the issue of the beneficiary's right to sue.

• Article 1257, Paragraph 2 of the Civil Code — The core provision. It grants a third-party beneficiary the right to demand fulfillment of a stipulation made in his favor, subject to his acceptance before revocation.
• Section 1 and 16 of the Negotiable Instruments Law — Applied to reject the argument that the transaction created a negotiable instrument. The SC noted the cable order was not payable to "order" or "bearer" and was never delivered, thus the NIL was inapplicable.
• Section 510 of the Code of Civil Procedure — Applied for the computation of interest on the judgment.