Limpo vs. Court of Appeals and Security Bank and Trust Company

A compromise agreement binds only the parties to it, and a judgment based solely on such an agreement cannot impose liabilities on non-parties; when the judgment is silent as to a defendant, the silence operates as an implied absolution, and the judgment, once final, may not be revived against that defendant.

Security Bank and Trust Company (the Bank) filed a complaint for sum of money against Miguel F. Uy, Brigitte E. Uy, and Rolando Limpo as co-makers of a promissory note. While the case was pending, the Uy spouses entered into a Compromise Agreement with the Bank on February 1, 1983, without the participation or consent of Limpo. The trial court approved the agreement and rendered judgment on March 22, 1983, incorporating its terms, which imposed payment obligations only on the spouses Uy. After the Uys defaulted, the Bank sought execution and later filed a complaint for revival of judgment, again impleading Limpo.

• The Original Action: On November 11, 1980, Security Bank filed a complaint for sum of money in the RTC of Pasig (Civil Case No. 62226) against Miguel F. Uy, Brigitte E. Uy, and Rolando Limpo. All three were sued as co-makers of a promissory note.
• The Compromise Agreement: While the action was pending, the spouses Uy, without the participation of Limpo, entered into a Compromise Agreement with the Bank on February 1, 1983. That agreement contained the Uy spouses’ admission of liability in the amount of ₱38,833.44 as of January 12, 1983, stipulated a payment schedule with 20% per annum interest computed on a declining balance, and provided for acceleration and a 3% monthly default penalty upon failure to pay any installment. The agreement did not refer to Limpo.
• The Judgment on Compromise: On March 22, 1983, the RTC rendered a decision approving the compromise and reproducing its terms verbatim. The dispositive portion did not mention Limpo; it merely ordered the Uy spouses to comply with the payment terms.
• Revival of Judgment: The Uy spouses defaulted. The Bank’s ex-parte motion for execution filed on November 27, 1984 was not acted upon. On July 22, 1992, the Bank filed a complaint for revival of judgment, again impleading Limpo as defendant.
• Limpo’s Defense: Limpo raised two principal defenses: (1) he was not obligated under the compromise agreement or under the judgment based on it because he was not a party to the agreement; and (2) the action on the promissory note, a written contract, had prescribed, the ten-year prescriptive period having already elapsed when the revival complaint was filed.
• RTC Orders: The RTC dismissed the complaint against Limpo, ruling that the judgment sought to be revived did not include him. It also dismissed Limpo’s compulsory counterclaim.
• CA Proceedings: The Bank appealed. The Court of Appeals initially dismissed the appeal, taking the view that the compromise had superseded the promissory note and that Limpo, a non-party, was not bound. On the Bank’s motion for reconsideration, the CA reversed itself, holding that Limpo remained solidarily liable under the promissory note and that the compromise with the Uy spouses did not preclude a subsequent collection action against him. The CA thus ordered the continuation of proceedings against Limpo in the revival case.

• Non-Binding Nature of Compromise Agreement: Limpo maintained that he could not be bound by the Compromise Agreement because he did not participate in its execution and was not mentioned in any of its provisions. He invoked the principle of relativity of contracts.
• No Liability Under the Judgment on Compromise: Limpo argued that since the judgment merely approved the compromise agreement, it could not impose any obligation upon him. He contended that the judgment debtor was only the spouses Uy and that there was no basis to include him in a complaint for revival of judgment.
• Prescription: Limpo asserted that the action based on the promissory note was barred by prescription. He calculated that the ten-year prescriptive period for written contracts commenced when the note became due on September 19, 1979, was suspended by the filing of the original complaint in 1980, resumed upon rendition of the compromise judgment on March 22, 1983, and had already expired by the time the revival complaint was filed on July 22, 1992.

• Solidary Liability of Co-maker: Security Bank argued that Limpo remained solidarily liable under the promissory note. The Bank’s position, adopted by the Court of Appeals, was that if the Uy spouses became insolvent, the Bank could collect the entire obligation from Limpo as a co-maker, and a judgment against him would not be incompatible with the compromise agreement so long as no double recovery occurred.

• Binding Effect of Compromise Agreement: Whether Rolando Limpo is bound by the Compromise Agreement entered into solely by Security Bank and the spouses Uy.
• Liability Under the Judgment on Compromise: Whether Limpo is liable to Security Bank under the trial court’s judgment dated March 22, 1983, which was based on the Compromise Agreement to which he was not a party.
• Prescription: Whether the action against Limpo as co-maker was already barred by prescription when the complaint for revival of judgment was filed on July 22, 1992.

• Binding Effect of Compromise Agreement: Limpo was not bound by the Compromise Agreement. Under Article 1311(1) of the Civil Code, contracts take effect only between the parties, their assigns, and heirs. The compromise was executed exclusively by the Bank and the spouses Uy; Limpo did not participate, and the agreement contained no reference to him. A compromise agreement cannot bind persons who are not parties to it.
• Liability Under the Judgment on Compromise: The judgment on compromise imposed no obligation on Limpo. A court approving a compromise cannot impose a judgment different from the agreement of the parties; it must respect the autonomy of contracts and may not supply material stipulations or read into the contract words it does not contain. Because the judgment failed to mention Limpo, the omission operated as an implied absolution. Following Bopis v. Provincial Sheriff of Camarines Norte, a decision that does not declare a defendant’s liability is taken to mean that the defendant has been absolved. That declaration became final and executory upon approval of the compromise, acquiring the force of res judicata. Consequently, the Court of Appeals’ directive to continue proceedings against Limpo improperly altered a matter already settled.
• Prescription: The issue of prescription was rendered unnecessary by the determination that Limpo had been absolved from liability by the final compromise judgment.

• Relativity of Compromise Agreements — A compromise agreement operates only between the parties who executed it. Non-parties cannot be bound because there is no juridical tie or vinculum that would make them obligors. (Art. 1311[1], Civil Code.)
• Judgment Based on Compromise Cannot Exceed the Agreement — In approving a compromise, the court is confined to the interpretation of the actual agreement; it may not impose obligations beyond its terms, supply missing stipulations, or read into the contract words that are absent. The principle of autonomy of contracts must be respected.
• Compromise Judgment as Res Judicata — A compromise agreement approved by order of the court becomes immediately final and executory with the force of res judicata. It has the same effect as any other judgment.
• Implied Absolution from Silence in a Judgment — When a judgment fails to mention a defendant who was impleaded in the action, the omission is construed as an absolution of that defendant. The defendant cannot later be subjected to execution or revival proceedings on the basis of that judgment. (Bopis v. Provincial Sheriff of Camarines Norte, 121 SCRA 28.)

• “It is settled that a compromise agreement cannot bind persons who are not parties to it. … The sound reason for the exclusion of non-parties to an agreement is the absence of a vinculum or juridical tie which is the efficient cause for the establishment of an obligation.”
• “In approving a compromise agreement, no court can impose upon the parties a judgment different from their real agreement or against the very terms and conditions of the amicable settlement entered into. The principle of autonomy of contracts must be respected.”
• “…[T]he failure to mention Limpo in the judgment of the RTC of Pasig will correspondingly mean his absence of liability to the Bank. As this implied declaration became final with the approval of the Compromise Agreement, the Court of Appeals’ instructions to continue the proceedings against Limpo in Civil Case No. 62226 amount to an alteration of a matter that is already res judicata.”

• Bopis v. Provincial Sheriff of Camarines Norte, G.R. No. L-29838, March 18, 1983, 121 SCRA 28 — Followed as controlling; held that failure of a judgment to mention a defendant’s liability constitutes an absolution, and a writ of execution against that defendant is null and void.
• Banzagales v. Galman, G.R. No. 46717, May 21, 1993, 222 SCRA 350 — Cited for the rule that a compromise agreement binds only the parties to it.
• Phil. Bank of Communications v. Echiverri, G.R. No. L-41795, August 29, 1980, 99 SCRA 508 — Cited for the principle that a court cannot impose a judgment different from the parties’ compromise.
• Cuizon v. Court of Appeals, G.R. No. 102096, August 22, 1996, 260 SCRA 645 — Cited for the rule that a court cannot supply material stipulations or read words into a contract that it does not contain.
• Esguerra v. Court of Appeals, G.R. No. 119310, February 3, 1997, 267 SCRA 380 — Cited for the doctrine that a compromise approved by the court becomes immediately final and executory with the force of res judicata.
• Abarintos v. Court of Appeals, G.R. No. 113070, September 30, 1999, 315 SCRA 550 — Cited for the proposition that judicial approval imbues a compromise with the effect of a judgment.

• Article 1311(1), Civil Code — Provides that contracts take effect only between the parties, their assigns, and heirs. Applied to hold that the Compromise Agreement between the Bank and the spouses Uy could not bind Limpo, who was a non-party.

Justice Reynato S. Puno (Chairperson), Justice Angelina Sandoval-Gutierrez (on sick leave), Justice Renato C. Corona (on leave), and Justice Cancio C. Garcia.