The Supreme Court has affirmed that contractual obligations must be honored even when external factors, such as the disapproval of a loan, were not explicitly made conditions of the contract. This decision underscores the principle that parties are bound by the terms they agree to, and extraneous circumstances do not automatically rescind those obligations unless clearly stipulated in the contract.

When a Loan Falls Through: Who Pays for Broken Promises?

Dee Hwa Liong Foundation Medical Center (DHLFMC) entered into a contract to purchase medical equipment from Asiamed Supplies and Equipment Corporation. DHLFMC claimed the purchase was contingent on a loan approval from Planters Bank, which ultimately did not materialize. When DHLFMC failed to fully pay for the equipment, Asiamed sued for breach of contract. The central legal question was whether the unapproved loan excused DHLFMC from its payment obligations under the contract.

The Regional Trial Court (RTC) ruled in favor of Asiamed, finding that DHLFMC had breached the Contract of Sale by failing to pay the balance due. The Court of Appeals (CA) affirmed this decision, emphasizing that the Contract of Sale did not contain any condition regarding the loan approval from Planters Bank. The Supreme Court upheld the CA’s decision, reiterating the principle that a contract is the law between the parties and must be complied with in good faith as stated in Article 1159 of the Civil Code of the Philippines. The court emphasized that parties cannot unilaterally evade their contractual obligations unless rescission is mutually agreed upon or legally justified.

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

The petitioners argued that the contract was implicitly conditioned on the loan approval and that Asiamed was aware of this condition. However, the court found no explicit provision in the Contract of Sale supporting this claim. The court also noted that the petitioners had signed delivery invoices that stipulated interest and attorney’s fees for overdue accounts. These invoices, the court held, formed part of the overall agreement between the parties, binding DHLFMC to those additional terms. Moreover, the court did not find merit in the claim that the stipulations for interest and attorney’s fees were contracts of adhesion, as there was no proof that the stipulations were hidden or obscured.

Building on this principle, the Supreme Court addressed the liability of Anthony Dee, the individual petitioner. The Court of Appeals found that the petitioners were estopped from raising the separate juridical personality of DHLFMC as a defense for Anthony. This was due to their earlier denial that DHLFMC represented itself as a duly organized corporation. As a result, Anthony Dee was held solidarily liable with DHLFMC for the unpaid balance and other charges.

The Court also tackled the issue of the preliminary attachment of DHLFMC’s assets. While the petitioners argued that the attachment aggravated Asiamed’s unjust enrichment, the court clarified that the circumstances of the attachment did not invalidate the Contract of Sale or excuse DHLFMC’s payment obligations. Petitioners failed to provide a legal basis to reverse the lower courts’ decisions based on the attachment’s execution. The Supreme Court emphasized that courts do not favor the nullification of contracts absent clear legal grounds, such as fraud, mistake, or duress.

Furthermore, the Supreme Court upheld the Court of Appeals’ order allowing Asiamed to procure an administrator for the estate of the deceased petitioner, Anthony Dee, in accordance with Rule 3, Section 16 of the Rules of Court. This rule mandates the substitution of a deceased party with their legal representative to ensure the continuity of legal proceedings.

Section 16. Death of party; duty of counsel. – Whenever a party to a pending action dies, and the claim is not thereby extinguished, it shall be the duty of his counsel to inform the court within thirty (30) days after such death of the fact thereof and to give the name and address of his legal representative or representatives. Failure of counsel to comply with this duty shall be a ground for disciplinary action.

This case underscores the importance of clear and unambiguous contract drafting. Parties should explicitly state all conditions precedent in their agreements to avoid disputes over interpretation. Moreover, the decision reinforces the principle of contractual autonomy, affirming that courts will generally uphold the terms agreed upon by the parties, absent compelling reasons to the contrary. It also demonstrates that signing delivery invoices that specify interest and attorney’s fees can bind a party to those terms, even if they were not initially part of the original contract.

FAQs

What was the key issue in this case?	The key issue was whether Dee Hwa Liong Foundation Medical Center (DHLFMC) was obligated to pay Asiamed Supplies and Equipment Corporation the balance for purchased medical equipment, despite claiming the purchase was contingent on a loan that was not approved.
Did the court find the lack of loan approval a valid reason to rescind the contract?	No, the court found that the lack of loan approval was not a valid reason to rescind the contract, as the Contract of Sale did not contain any condition regarding the loan.
What is the significance of Article 1159 of the Civil Code in this case?	Article 1159 of the Civil Code states that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. The court cited this to emphasize that DHLFMC was bound by the terms of the Contract of Sale.
Were the interest and attorney’s fees valid?	Yes, the court upheld the validity of the interest and attorney’s fees stipulated in the delivery invoices, which were signed by DHLFMC’s representatives.
Why was Anthony Dee held solidarily liable with DHLFMC?	Anthony Dee was held solidarily liable because the petitioners denied that DHLFMC was a duly organized corporation, preventing them from using the corporation’s separate juridical personality as a defense.
Did the attachment of DHLFMC’s assets affect the validity of the contract?	No, the court clarified that the circumstances of the attachment did not affect the validity of the Contract of Sale or excuse DHLFMC’s payment obligations.
What does Rule 3, Section 16 of the Rules of Court concern?	Rule 3, Section 16 of the Rules of Court concerns the death of a party in a pending action and the duty of their counsel to inform the court and provide the name and address of the legal representative. It also allows the court to order the opposing party to procure the appointment of an administrator for the deceased’s estate if necessary.
Was the signing of delivery invoices considered binding in modifying the original agreement?	Yes, the court considered the signed delivery invoices as part of the overall agreement, thus binding DHLFMC to the additional terms regarding interest and attorney’s fees.

In conclusion, this case serves as a reminder of the binding nature of contracts and the importance of clearly defining all terms and conditions. Parties entering into agreements must ensure that all relevant contingencies are explicitly addressed in the contract to avoid future disputes. This case illustrates that courts will generally enforce the terms of a contract as written, absent compelling legal reasons to do otherwise.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Dee Hwa Liong Foundation Medical Center vs. Asiamed Supplies, G.R. No. 205638, August 23, 2017