Rizal Commercial Banking Corporation vs. Bernardino

A surety agreement that is clear and unambiguous on its face remains valid and enforceable, and the surety is solidarily liable with the principal debtor, where the alleged condition precedent — a subrogation agreement — is not reflected in the written contract and parol evidence fails to prove the parties ever agreed to such a condition. The right of subrogation of a paying surety arises by operation of law and need not be embodied in a separate written agreement for the suretyship to be binding.

Marcopper Mining Corporation (MMC) obtained an unsecured bridge loan from Rizal Commercial Banking Corporation (RCBC) in 1995 to finance mining equipment. When the long-term refinancing from EXIM Bank fell through due to a tailing spill, RCBC sought collateral, and the parties negotiated a restructuring involving assignment of MMC's Forbes Park property, release of certain mortgaged equipment, and execution of surety agreements by Bernardino, an MMC stockholder. The dispute centers on whether the parties had agreed that a subrogation agreement — under which Bernardino would acquire RCBC's rights over MMC's collateral upon payment — had to be executed before Bernardino could be held liable under the surety agreements.

In 1995, Marcopper Mining Corporation (MMC) obtained an unsecured bridge loan from Rizal Commercial Banking Corporation (RCBC) in the amount of US$13.7 Million to finance the acquisition of twelve Rig Mining Trucks and one Demag Excavator Shovel. Payment was to be sourced from a long-term loan MMC was seeking from Export-Import Bank (EXIM Bank), but EXIM Bank failed to approve the long-term loan due to a tailing spill in MMC's mining area in Marinduque, which caused the stoppage of MMC's operations. Concerned that the short-term loan was unsecured, RCBC negotiated with MMC to provide collateral. MMC yielded and mortgaged twelve units of Rig Haul Trucks and one Demag Hydraulic Excavator Shovel under a Deed of Chattel Mortgage dated April 23, 1996, and additionally pledged shares of stock under Deeds of Pledge dated August 29, 1996 and September 9, 1997. RCBC later expressed interest in substituting these collaterals with MMC's residential property in Forbes Park, which was mortgaged with the Asian Development Bank (ADB).

In a letter dated July 1, 1997, MMC proposed two options for payment of its loan: (1) initiate a foreclosure on the mortgaged assets, realizing a maximum of about US$11.6 Million with the balance relegated to unsecured obligations, or (2) involve MMC's major shareholders in a definite repayment plan consisting of the assignment of the Forbes Park property for P235 Million, payment of P71 Million over one year on a quarterly basis plus interest, and payment of the balance of P55.4 Million over two years payable quarterly. MMC encouraged RCBC to choose the second option, representing that its major shareholders had indicated willingness to support the scheme.

On July 3, 1997, representatives of MMC and RCBC met to discuss the details. RCBC signified its intention to choose Option 2 but raised a concern on accrued interest. MMC informed RCBC that Placer Dome, a major stockholder and guarantor that had acquired the mortgage on the Forbes Park property, would only release the property if RCBC released the mining equipment mortgaged to it. It was also discussed that another condition for the second option was for a stockholder of MMC to act as a surety for two promissory notes to be executed between the parties. In a letter dated July 8, 1997, MMC revised the second option to address RCBC's concern regarding accrued interest, revising the principal to US$14,327,000 which included capitalized interest. RCBC, through representatives Rojas and Santos, signed its conformity to the July 8, 1997 letter.

On August 1, 1997, MMC forwarded four documents to RCBC for signature, including a Deed of Assignment of the Forbes Park property and a Deed of Release from Mortgage to be signed by RCBC involving the release of six Rig Haul Trucks and one Demag Shovel. RCBC only signed the Deed of Assignment and returned the Deed of Release unsigned. On August 22, 1997, MMC sent RCBC the surety agreements duly executed by Bernardino, together with two promissory notes covering the remaining obligation after partial payment through the assignment of the Forbes Park property. Non-Negotiable Promissory Note No. 21-3697 was for US$2,698,485.00 payable within one year with interest at 9% per annum, and Non-Negotiable Promissory Note No. 21-3797 was for US$2,727,000.00 payable within two years without interest. The parties signed the promissory notes on August 26, 1997.

Thereafter, MMC repeatedly requested RCBC to release the mining equipment from mortgage, reminding RCBC that MR Holdings, Ltd., the successor-in-interest of ADB, agreed to release the Forbes Park property only upon assurance that RCBC would release the mining equipment. RCBC informed MMC on December 17, 1997 that the release had been approved by its Executive Committee subject to the condition that payment for the first amortization be made. MMC failed to settle the obligations which fell due on November 24, 1997, February 23, 1998, and May 25, 1998. Final demand was sent on July 1, 1998, declaring the whole obligation due and payable and giving MMC five days to settle US$5,726,660.28. Demand was also made on Bernardino, as surety, to pay the amount plus P20,685,872.25 as penalty.

On July 31, 1998, Bernardino filed a Complaint for specific performance and for declaration of nullity or unenforceability of the surety agreements against RCBC before the RTC, Branch 59, Makati City. Bernardino alleged that the surety agreements were unenforceable because the parties had agreed that a subrogation agreement — under which Bernardino would be subrogated to RCBC's rights over the collateral — was a condition precedent that RCBC failed to execute. RCBC denied that any such agreement existed and counterclaimed for payment of the principal, interest, penalties, attorney's fees, and damages. The RTC found that a subrogation agreement was a condition precedent and declared the surety agreements unenforceable, a ruling the CA affirmed.

• Unenforceability Under Article 1403: RCBC maintained that Bernardino failed to show any missing essential element that would render the surety agreements unenforceable under Article 1403 of the Civil Code, as neither the complaint nor the evidence on record supported such a claim.
• Burden of Proof: RCBC argued that Bernardino, as plaintiff asserting the affirmative of the issue, bore the burden of proving by preponderance of evidence that a subrogation agreement was a condition precedent, and that this burden never shifted to RCBC.
• Credibility of Witnesses: RCBC contended that inconsistencies in its witnesses' testimonies as to minor details and peripheral matters did not affect their credibility or the probative weight of their testimony, and that their clear recollection of the threshold legal and factual issues was what mattered.
• Literal Interpretation of Contracts: RCBC maintained that the surety agreements were clear and unambiguous on their face, and under the hornbook rule on mutuality and interpretation of contracts, their terms must be understood literally; Bernardino failed to adduce documentary evidence establishing any agreement to execute a subrogation agreement, while clear evidence on record negated such an agreement.
• Res Inter Alios Acta Rule: RCBC argued that the CA unduly relied on and unfairly imputed acts of third parties against RCBC to establish its supposed intention, in violation of Section 28, Rule 130 of the Rules of Court.
• Absence of Bad Faith: RCBC maintained that Bernardino failed to prove any specific act by RCBC constituting bad faith, which was necessary to support an award of damages, and that the presumption of good faith had not been overcome.

• Condition Precedent: Whether RCBC and Bernardino agreed that a subrogation agreement be executed as a condition precedent before Bernardino could be held liable under the surety agreements.
• Solidary Liability: Whether Bernardino, as surety, is jointly and severally liable with MMC for the obligations under the promissory notes.

• Condition Precedent: No. The parties never agreed to a subrogation agreement as a condition precedent; the surety agreements were clear and unambiguous, and parol evidence failed to establish any prior collateral agreement to that effect.
• Solidary Liability: Yes. Bernardino, as surety, is jointly and severally liable with MMC for the obligations under the promissory notes, the principal obligation of MMC having been settled with finality in a prior case and the surety's liability being direct, primary, and absolute.

• Condition Precedent: As plaintiff in the court a quo, Bernardino bore the burden of proving by preponderance of evidence that the parties had agreed to a subrogation agreement as a condition precedent. He failed to discharge this burden. The testimonies of Bernardino's own witnesses were unreliable and inconclusive. Atty. Dueñas's testimony was ambiguous and even contradicted Bernardino's claim, at one point stating "They could not have agreed upon that" and "No, Sir" when asked about subrogation of the bank's rights. Rojas's testimony, far from being evasive, was credible; his failure to recall minute details strengthened rather than weakened his credibility, and he never admitted that a subrogation agreement was discussed or agreed upon. The correspondence between the parties showed no agreement on a subrogation agreement: Bernardino had already executed the surety agreements on August 22, 1997 without any colatilla, addendum, or disclaimer about a subrogation agreement, and MMC's November 24, 1997 letter referred to the surety as "in addition to" the other collaterals — refuting Bernardino's argument that the collaterals were meant to be retained for his benefit after subrogation. The surety agreements were clear and unambiguous, containing no reference to a subrogation agreement as a condition precedent. Under the parol evidence rule, when the terms of an agreement have been reduced to writing, the writing is considered to contain all terms agreed upon, and prior or contemporaneous verbal agreements tending to vary the written terms are inadmissible. Although Bernardino did not plead any exception to the parol evidence rule, RCBC's failure to object to the parol evidence constituted a waiver of its inadmissibility. Nevertheless, even as admitted, the parol evidence failed to prove the existence of an alleged subrogation agreement. There was only a proposal and a counter-proposal that never added up to a final arrangement — no meeting of the minds occurred.

• Solidary Liability: In Rizal Commercial Banking Corporation vs. Marcopper Mining Corporation (G.R. No. 170738), the Court had already reversed the lower courts and found MMC liable for the principal amounts under Non-Negotiable Promissory Notes No. 21-3697 and 21-3797, including interest, penalties, and attorney's fees. That decision attained finality on October 30, 2009. Under Article 2047 of the Civil Code, a surety binds himself solidarily with the principal debtor, and the surety's liability to the creditor is direct, primary, and absolute. Bernardino therefore became liable for MMC's obligation upon its establishment. Bernardino's right to subrogation arises by operation of law under Article 2067 of the Civil Code, which subrogates the guarantor who pays to all rights the creditor had against the debtor; this right extends to sureties and does not require a separate written agreement. Similarly, under Article 2071, any right to demand security that Bernardino may have can only be demanded from MMC, the principal debtor, not from RCBC. Bernardino could not renege on his obligation under the claim that a prior agreement required RCBC to execute a subrogation agreement first.

• Parol Evidence Rule — When the terms of an agreement have been reduced to writing, the writing is considered to contain all the terms agreed upon, and there can be no evidence of such terms other than the contents of the written agreement between the parties and their successors-in-interest. All prior and contemporaneous agreements are deemed merged in the written document. The rule admits of exceptions: a party may present evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his pleading (a) an intrinsic ambiguity, mistake, or imperfection; (b) the failure of the written agreement to express the true intent of the parties; (c) the validity of the written agreement; or (d) the existence of other terms agreed to by the parties after execution. In this case, Bernardino did not plead any exception, and although the parol evidence was admitted due to RCBC's failure to object, it still failed to prove the existence of a subrogation agreement.

• Literal Interpretation of Contracts — When the terms of a contract are clear and unambiguous, they are to be read in their literal sense. Where there is no ambiguity in the language of a contract, there is no room for construction, only compliance. Courts cannot make for the parties better or more equitable agreements than they themselves were satisfied to make, or rewrite contracts because they operate harshly. The surety agreements contained no reference to a subrogation agreement as a condition precedent, and their clear language bound Bernardino solidarily with MMC.

• Nature of Suretyship — Under Article 2047 of the Civil Code, suretyship is a contractual relation resulting from an agreement whereby one person engages to be answerable for the debt, default, or miscarriage of another. Although the surety's obligation is in essence accessory to the principal obligation, his liability to the creditor is direct, primary, and absolute. The surety is directly and equally bound with the principal.

• Right of Subrogation by Operation of Law — Under Article 2067 of the Civil Code, the guarantor who pays is subrogated to all rights which the creditor had against the debtor. This right extends to sureties and arises by operation of law, not by contract. A separate subrogation agreement is not a prerequisite for the enforceability of the suretyship.

• Burden of Proof in Civil Cases — The party who asserts the affirmative of an issue has the onus to prove his assertion by preponderance of evidence, which is the weight, credit, and value of the aggregate evidence on either side, synonymous with the greater weight of credible evidence and meaning probability of truth. The burden to prove positive assertions never parts from the plaintiff.

• "Where there is only a proposal and a counter-proposal that did not add up to a final arrangement, there is no meeting of the minds between the parties." — This passage articulates the ratio decidendi on why no condition precedent existed: the discussions about subrogation never ripened into a binding agreement.

• "The surety agreements do not include or refer to the execution of a subrogation agreement as a condition precedent before Bernardino could be held liable. Bernardino cannot now come to court asking for the enforcement of an agreement which clearly does not appear in the written contract between him and RCBC." — This statement ties the parol evidence rule and the literal interpretation doctrine to the specific facts, explaining why the surety agreements remain unconditional.

• "Whatever is not found in the writing is understood to have been waived and abandoned." — This is the canonical formulation of the consequence of the parol evidence rule: terms not embodied in the written agreement are deemed waived, a principle frequently cited in subsequent contract disputes.

• "It is clear, therefore, that whatever right to a security Bernardino may have can only be demanded from MMC and not from RCBC." — This passage resolves the surety's remedy: under Article 2071, the surety's right to demand security runs against the principal debtor, not the creditor, foreclosing Bernardino's claim against RCBC.

• Rizal Commercial Banking Corporation vs. Marcopper Mining Corporation, G.R. No. 170738, September 12, 2008, 565 SCRA 125 — Controlling precedent. The Court had already ruled that MMC failed to prove the parties agreed for RCBC to execute a partial release of mortgage and pledge, and directed MMC to pay the amounts stipulated in the promissory notes. That decision attained finality on October 30, 2009, establishing MMC's obligation and consequently triggering Bernardino's surety liability.

• Bautista vs. Court of Appeals, G.R. No. 123655, January 19, 2000, 322 SCRA 365 — Followed. Cited for the rule that where the language of a contract is plain and unambiguous, its meaning should be determined without reference to extrinsic facts or aids, and courts cannot rewrite contracts or relieve a party from terms voluntarily consented to.

• Allied Banking Corporation vs. Cheng Yong, G.R. Nos. 151040 & 154109, October 5, 2005, 472 SCRA 101 — Followed. Cited for the formulation that when parties have reduced their agreement to writing, they are deemed to have intended the written agreement to be the sole repository of everything agreed upon, and any verbal agreement tending to vary it is inadmissible.

• Rivera vs. People, G.R. No. 138553, June 30, 2005, 462 SCRA 350 — Followed. Cited for the principle that a witness's failure to recall every detail of an occurrence may strengthen rather than weaken credibility, as it erases suspicion of coached or rehearsed testimony.

• Garcia, Jr. vs. Court of Appeals, G.R. No. 80201, November 20, 1990, 191 SCRA 493 — Followed. Cited for the definition of suretyship and the principle that the surety's liability, though accessory in essence, is direct, primary, and absolute as to the creditor.

• Article 2047, Civil Code — Defines suretyship: a person binds himself solidarily with the principal debtor, and the contract is called a suretyship. Applied to establish that Bernardino's liability as surety is direct, primary, and absolute.

• Article 2067, Civil Code — Provides that the guarantor who pays is subrogated to all rights which the creditor had against the debtor. Applied to hold that Bernardino's right to subrogation arises by operation of law and extends to sureties, requiring no separate written agreement.

• Article 2071, Civil Code — Enumerates the instances when a guarantor may proceed against the principal debtor even before having paid. Applied to hold that whatever right to security Bernardino may have can only be demanded from MMC, not from RCBC.

• Article 1403, Civil Code — Defines unenforceable contracts. Cited by RCBC to argue that Bernardino failed to show any missing essential element rendering the surety agreements unenforceable.

• Section 9, Rule 130, Rules of Court — The parol evidence rule: when the terms of an agreement have been reduced to writing, the writing is considered to contain all terms agreed upon. Applied to restrict evidence to the surety agreements and exclude Bernardino's alleged prior collateral agreement.

• Section 28, Rule 130, Rules of Court — The res inter alios acta rule: the rights of a party cannot be prejudiced by an act, declaration, or omission of another. Cited by RCBC to argue that the CA improperly imputed acts of third parties against it.

• Section 1, Rule 133, Rules of Court — Defines preponderance of evidence as the degree of proof required in civil cases. Applied to hold that Bernardino failed to meet this standard.

Brion, Peralta (Acting Chairperson), Bersamin, and Reyes, JJ., concurred.