Land Settlement and Development Corporation vs. Garcia Plantation Co., Inc.

The parol evidence rule does not bar extrinsic evidence showing that a written agreement never became effective because of the failure of a collateral condition or stipulation prerequisite to liability. Thus, where the operation of a contract is made to depend upon a condition precedent, that condition may be established by parol evidence.

The Land Settlement and Development Corporation (LASEDECO) sold two tractors to Garcia Plantation Co., Inc. Salud C. de Garcia executed two promissory notes by which she personally assumed the company's account with LASEDECO, and Vicente B. Garcia was impleaded as her husband. The account was handled by LASEDECO's Board of Liquidators, through Manager Filomeno C. Kintanar, whose letter to Salud later became the subject of the parol-evidence dispute.

The Land Settlement and Development Corporation sued Garcia Plantation Co., Inc. and/or Salud C. de Garcia and Vicente B. Garcia for the recovery of P5,955.30, representing the unpaid balance of the purchase price of two tractors bought by Garcia Plantation Co., Inc. from the plaintiff. Salud C. de Garcia was made an alternative co-defendant because of two promissory notes she executed, by which she personally assumed the company's account with the plaintiff, and Vicente B. Garcia was included as her husband.

Defendants answered, admitting the execution of the two promissory notes but contending that the notes had been novated by a subsequent agreement contained in a letter, Exhibit L, sent by Filomeno C. Kintanar, Manager, Board of Liquidators of LASEDECO, which gave Salud C. de Garcia an extension until May 31, 1957 within which to pay the account. Because the complaint was filed on February 20, 1957, defendants claimed that the action was premature and prayed for dismissal. Plaintiff, in its reply and answer to the counterclaim, admitted the due execution and genuineness of Exhibit L but contended that it did not express the true intent and agreement of the parties, thereby placing that fact in issue.

After several postponements requested by both parties on the ground of a pending amicable settlement, trial on the merits was held on July 25, 1957. At trial, defendants admitted all the documentary evidence adduced by plaintiff showing that they were indebted to it. When plaintiff presented Atty. Lucido A. Guinto, Legal Officer of the Board of Liquidators, to testify on the true agreement and intention of the parties when Exhibit L was drafted and prepared, the lower court, upon the objection of defendants' counsel, ruled out the testimony and prevented the introduction of evidence under the parol evidence rule, Section 22, Rule 123. Plaintiff also intended to present Kintanar, the writer of the letter, to testify on the same matter, but in view of the ruling it rested its case.

The parol evidence consisted of the testimony of Guinto and Kintanar that, in view of Vicente B. Garcia's plea for an extension of time to pay the accounts, Kintanar gave defendants until May 31, 1957, to coincide with their ramie harvest, provided that they would make a substantial down payment immediately, with the understanding that upon non-payment of the substantial amount the extension would be deemed not granted and LASEDECO would feel free to seek redress in court. Exhibit L, dated November 20, 1956 and addressed to Mrs. Salud de Garcia in Tacurong, Cotabato, stated that the Board had granted her an extension until May 31, 1957 within which to pay her account and that the matter had been the subject of agreement between her husband and the office.

The lower court dismissed the case, stating that the action was premature.

• Amicable Settlement: Petitioner argued that the lower court erred in forcing the parties to trial despite requests by both parties for more time to submit an amicable settlement of the case.
• Parol Evidence / Condition Precedent: Petitioner argued that the lower court erred in excluding parol evidence tending to prove the true intention and agreement of the parties and the existence of a condition precedent before the extension granted in Exhibit L could become effective.
• Prematurity: Petitioner argued that the lower court erred in holding that the action was premature and in dismissing the case on that ground.
• True Agreement: Petitioner contended that Exhibit L did not express the true intent and agreement of the parties.

• Novation / Extension: Respondents contended that the two promissory notes had been novated by a subsequent agreement contained in Exhibit L, which granted Salud C. de Garcia an extension until May 31, 1957 within which to pay the account.
• Prematurity: Respondents claimed that because the complaint was filed on February 20, 1957, before the May 31, 1957 deadline, the action was premature and should be dismissed.
• Parol Evidence Objection: Respondents objected to the testimony offered to prove the alleged true agreement and condition precedent, prompting the lower court to exclude it under the parol evidence rule.

• Parol Evidence / Condition Precedent: Whether the lower court erred in excluding parol evidence tending to prove the true intention and agreement of the parties and the existence of a condition precedent before the extension in Exhibit L could become effective.
• Prematurity / Dismissal: Whether the lower court erred in holding that the action was premature and in dismissing the case on that ground.

• Parol Evidence / Condition Precedent: Yes. The parol evidence rule does not bar extrinsic evidence showing that a written instrument never became effective because of failure of a collateral condition or stipulation prerequisite to liability. The lower court thus erred in excluding the testimony offered to prove the alleged condition.
• Prematurity / Dismissal: Yes. If the condition precedent was not fulfilled, the extension in Exhibit L never became effective, and the complaint filed on February 20, 1957 was not premature. The dismissal on that ground was reversed.

• Parol Evidence / Condition Precedent: The fact that Exhibit L failed to express the true intent and agreement of the parties had been put in issue by the plaintiff's answer to the defendants' counterclaim. The parol evidence consisted of the testimony of Guinto and Kintanar that Kintanar gave defendants until May 31, 1957, to coincide with their ramie harvest, provided that they would make a substantial down payment immediately, with the understanding that upon non-payment the extension would be deemed not granted and LASEDECO would feel free to seek redress in court. The second paragraph of Exhibit L alluded to a "subject of agreement between your husband and this office," which was the condition to be complied with or the consideration given for the extension. The lower court should have admitted the parol evidence because the subject matter was one of the exceptions to the parol evidence rule. When the operation of a contract is made to depend upon the occurrence of an event, which is a condition precedent, such may be established by parol evidence. This is not varying the terms of a written contract by extrinsic agreement because there is no contract in existence; there is nothing to which to apply the excluding rule. The Court also relied on the rule that the parol evidence rule does not prevent extrinsic evidence showing that a supposed contract never became effective by reason of the failure of some collateral condition or stipulation prerequisite to liability, and on the rule that extrinsic evidence of prior or contemporaneous collateral parol agreements is admissible regardless of whether the written agreement refers to such collateral agreement. Because Exhibit L referred to a previous agreement, the Court could admit evidence of surrounding circumstances to arrive at the true intention of the parties.
• Prematurity / Dismissal: Had the trial court permitted the plaintiff to prove the condition precedent to the extension of payment, the plaintiff would have been able to show that because defendants failed to pay a substantial down payment, the agreement was breached and the contract contained in Exhibit L never became effective, so the extension should be considered as not having been given at all. Consequently, although the complaint was filed on February 20, 1957, three months before the May 31, 1957 deadline, there would be no premature institution of the case. The lower court therefore erred in dismissing the case.

• Parol Evidence Rule — Condition Precedent Exception — The parol evidence rule does not bar extrinsic evidence showing that a written instrument never became effective because of the failure of a collateral condition or stipulation prerequisite to liability. In this case, the Court applied the exception because the alleged condition precedent — an immediate substantial down payment — was the consideration for the extension in Exhibit L; proof of its non-fulfillment would show that the extension never took effect.
• Condition Precedent — A condition precedent is an event upon which the operation of a contract is made to depend. Such a condition may be established by parol evidence. Here, the extension was allegedly conditioned on the defendants' making a substantial down payment; failure to do so meant the extension was deemed not granted.
• Collateral Parol Agreements — The rule excluding parol evidence to vary or contradict a writing does not preclude extrinsic evidence of prior or contemporaneous collateral parol agreements between the parties, regardless of whether the written agreement refers to such collateral agreement. The Court relied on this principle because Exhibit L referred to a prior agreement between the husband and the office.
• Surrounding Circumstances — Courts may, in the exercise of sound discretion, admit evidence of surrounding circumstances to arrive at the true intention of the parties. The Court noted that Exhibit L referred to a previous agreement, justifying admission of extrinsic evidence to ascertain the parties' true intent.

• "When the operation of the contract is made to depend upon the occurrence of an event, which, for that reason is a condition precedent, such may be established by parol evidence." — This is the Court's core formulation of the condition-precedent exception to the parol evidence rule.
• "This rule does not prevent the introduction of extrinsic evidence to show that a supposed contract never became effective by reason of the failure of some collateral condition or stipulation, pre-requisite to liability" — Quoted by the Court from Peabody & Co. vs. Bromfield & Ross, this passage states the rationale for admitting parol evidence where no effective contract arose.
• "The rule excluding parol evidence to vary or contradict a writing, does not extend so far as to preclude the admission of extrinsic evidence, to show prior or contemporaneous collateral parol agreements between the parties, but such evidence may be received, regardless of whether or not the written agreement contains reference to such collateral agreement" — This passage defines the collateral-agreement exception applied to Exhibit L.
• "Had the trial court permitted, as it should, the plaintiff to prove the condition precedent to the extension of the payment the said plaintiff would have been able to show that because the defendants had failed to pay a substantial down payment, the agreement was breached and the contract contained in Exhibit "L", never became effective and the extension should be considered as not having been given at all." — This passage links the parol-evidence error to the conclusion that the action was not premature.

• Heirs of Dela Rama vs. Talisay-Silay Milling Co., 54 Phil. 580 — Cited for the proposition that the issue of whether the letter failed to express the true intent and agreement of the parties had been properly put in issue by the plaintiff's answer to the defendants' counterclaim.
• Peabody & Co. vs. Bromfield & Ross, 38 Phil. 841 — Cited for the rule that the parol evidence rule does not prevent extrinsic evidence showing that a supposed contract never became effective because of the failure of a collateral condition or stipulation prerequisite to liability.
• Robles vs. Lizarraga Hnos., 50 Phil. 387 — Cited for the rule that the parol evidence rule does not preclude extrinsic evidence of prior or contemporaneous collateral parol agreements, even if the written agreement refers to such collateral agreement.
• Aves & Alzona vs. Orilleneda, 70 Phil. 262 — Cited for the principle that courts may admit evidence of surrounding circumstances to arrive at the true intention of the parties.
• Heitman vs. Commercial Bank of Savannah, 6 Ga. App. 584, 65 SE 590 — Cited for the rationale that where no contract exists because a condition precedent has not occurred, there is nothing to which the excluding rule may apply.

• Section 22, Rule 123, Rules of Court — The lower court invoked this provision as the parol evidence rule to exclude the testimony of Atty. Guinto and Kintanar. The Supreme Court held that the provision did not bar evidence of a condition precedent or collateral condition showing that the written extension agreement never became effective.

Bengzon, C.J.; Padilla; Bautista Angelo; Concepcion; Reyes, J.B.L.; Barrera; Dizon; Regala; and Makalintal, JJ., concurred. Labrador, J., took no part.