The Supreme Court ruled that a duly executed contract, even a contract of adhesion, is binding and must be complied with in full. This means parties cannot selectively adhere to terms they find favorable while disregarding others. Even if one party merely affixes their signature to a pre-drafted agreement, they are still bound by its clear and unambiguous terms. This decision reinforces the principle that individuals must understand and accept the consequences of the contracts they enter, as courts will generally uphold the agreements as written, ensuring predictability and stability in commercial relationships.

The Rediscounted Checks and Renegotiated Risks: Did Buenaventura Secure a Loan or Guarantee a Debt?

This case revolves around Teresita I. Buenaventura’s appeal against Metropolitan Bank and Trust Company (Metrobank). Buenaventura sought to overturn the Court of Appeals’ decision, which held her liable for the amounts due under two promissory notes. The central question was whether these promissory notes represented a direct loan obligation or merely a guarantee for the payment of rediscounted checks issued by her nephew, Rene Imperial.

Buenaventura argued that the promissory notes were contracts of adhesion, claiming she merely signed them without a real opportunity to negotiate the terms. However, the Court emphasized that even if a contract is one of adhesion, it remains binding as long as its terms are clear and unambiguous. The Court cited Avon Cosmetics, Inc. v. Luna, stating:

A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying his adhesion thereto. Such contract is just as binding as ordinary contracts.

The Court found that the language of the promissory notes was indeed clear: Buenaventura explicitly promised to pay Metrobank the principal sum, along with interest and other fees. Because of this, there was no ambiguity that warranted a deviation from the literal meaning of the contract. The court is to interpret the intention of the parties should be deciphered from the language used in the contract. As declared in The Insular Life Assurance Company, Ltd. vs. Court of Appeals and Sun Brothers & Company, “[w]hen the language of the contract is explicit leaving no doubt as to the intention of the drafters thereof, the courts may not read into it any other intention that would contradict its plain import.”

Buenaventura further contended that the promissory notes were simulated and fictitious, arguing that she believed they served only as guarantees for the rediscounted checks. She invoked Article 1345 of the Civil Code, which defines the simulation of contracts. However, the Court pointed out that the burden of proving simulation lies with the party making the allegation. According to the Court, Buenaventura failed to provide convincing evidence to overcome the presumption of the validity of the contracts.

Adding to this, the issue of simulation was raised for the first time on appeal, a procedural misstep that further weakened her case. The appellate courts should adhere to the rule that issues not raised below should not be raised for the first time on appeal, as to ensure basic considerations of due process and fairness.

Buenaventura also claimed that even if the promissory notes were valid, they were intended as guarantees, making her liable only after the exhaustion of Imperial’s assets. This argument was also rejected by the Court, which emphasized that a contract of guaranty must be express and in writing. Article 2055 of the Civil Code states that “[a] guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein.”

The Court highlighted that the promissory notes did not mention any guaranty in favor of Imperial and that disclosure statements identified Buenaventura, and no other, as the borrower. The appellate court expounded the following:

A guaranty is not presumed; it must be expressed (Art. 2055, New Civil Code). The PNs provide, in clear language, that appellant is primarily liable thereunder. On the other hand, said PNs do not state that Imperial, who is not even privy thereto, is the one primarily liable and that appellant is merely a guarantor.

Moreover, the Court dismissed Buenaventura’s claim of legal subrogation, which she argued occurred when Metrobank purchased the checks from her through its rediscounting facility. Legal subrogation requires the consent of the debtor, which was absent in this case. Article 1302 of the Civil Code defines legal subrogation and what instances the same may be applicable. The RTC itself pointed out the absence of evidence showing that Imperial, the issuer of the checks, had consented to the subrogation, expressly or impliedly.

Finally, Buenaventura argued that she was misled by a bank manager into believing that the promissory notes were merely guarantees. The Court found this position unconvincing because having determined that the terms and conditions of the promissory notes were clear and unambiguous, there is no other way to be bound by such terms and conditions. As such, the contracts should bind both parties, and the validity or compliance therewith should not be left to the will of the petitioner.

The Court revised the monetary awards, finding that Metrobank had improperly imposed interest rates higher than those stipulated in the promissory notes. The court emphasized that the respondent had no legal basis for imposing rates far higher than those agreed upon and stipulated in the promissory notes. The Supreme Court emphasized that the bank failed to justify the imposition of the increased rates, breaching its duty to provide evidence supporting its claim. The stipulated interest rates of 17.532% and 14.239% per annum would be applied from the date of default until full payment. The prevailing jurisprudence shows that the respondent was entitled to recover the principal amount of P1,500,000.00 subject to the stipulated interest of 14.239%per annum from date of default until full payment; and the principal amount of P1,200,000.00 subject to the stipulated interest of 17.532%per annum from date of default until full payment.

According to Article 1169 of the Civil Code, there is delay or default from the time the obligee judicially or extrajudicially demands from the obligor the fulfillment of his or her obligation. The Court determined that the date of default would be August 3, 1998, based on Metrobank’s final demand letter and its receipt by Buenaventura’s representative. This date was critical for calculating the commencement of interest and penalties. The penalty charge of 18% per annum was warranted for being expressly stipulated in the promissory notes, and should be reckoned on the unpaid principals computed from the date of default (August 3, 1998) until fully paid. Article 2212 of the Civil Code requires that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

FAQs

What was the key issue in this case?	The central issue was whether the promissory notes executed by Buenaventura represented a direct loan obligation or merely a guarantee for her nephew’s debt. This determined her primary liability for the amounts due.
What is a contract of adhesion, and how does it apply here?	A contract of adhesion is one where one party sets the terms, and the other party simply adheres to them by signing. The Court ruled that even if the promissory notes were contracts of adhesion, they were still binding because their terms were clear and unambiguous.
What does it mean for a contract to be ‘simulated’?	A simulated contract is one that doesn’t reflect the true intentions of the parties. The Court found no convincing evidence that the promissory notes were simulated, meaning they represented a genuine agreement for a loan.
What is the difference between a guarantor and a principal debtor?	A guarantor is only liable if the principal debtor fails to pay, while a principal debtor is directly responsible for the debt. The Court held that Buenaventura was a principal debtor under the promissory notes, not a guarantor.
What is legal subrogation, and why didn’t it apply in this case?	Legal subrogation occurs when a third party pays a debt with the debtor’s consent, stepping into the creditor’s shoes. The Court found no evidence that Buenaventura’s nephew consented to Metrobank’s subrogation.
Why did the Supreme Court modify the monetary awards?	The Court found that Metrobank had improperly imposed interest rates higher than those stipulated in the promissory notes. The Court corrected the error by applying the agreed-upon interest rates.
What is a penal clause in a contract?	A penal clause is an agreement to pay a penalty if the contract is breached. The promissory notes included a penal clause, which the Court upheld, requiring Buenaventura to pay an additional percentage on the unpaid principal.
What interest rates apply after a court judgment?	The legal interest rate is 6% per annum from the finality of the judgment until full satisfaction. This applies to the interest due on the principal amount.

This case serves as a crucial reminder of the binding nature of contracts, even those presented on a “take it or leave it” basis. Individuals and businesses must carefully review and understand the terms of any agreement before signing, as courts are likely to enforce those terms as written. While the court will not simply rewrite contracts to relieve a party of its obligations, this case also emphasizes the importance of adhering to the contractual interest rates.

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: TERESITA I. BUENAVENTURA vs. METROPOLITAN BANK AND TRUST COMPANY, G.R. No. 167082, August 03, 2016