The Supreme Court ruled that signing a deed of assignment as a sign of conformity does not automatically make one liable for the obligations within that deed. This decision clarifies that unless explicitly stated, conformity signifies only an acknowledgment, not an assumption of responsibilities. This ruling protects third parties from unintended contractual liabilities, ensuring that obligations are only enforced against those who knowingly and willingly agree to them, thus upholding the principle of contractual freedom.

Signing on the Dotted Line: Does Conformity Create Liability?

International Exchange Bank (IEB) sought to hold Rockwell Land Corporation liable for the unpaid loan of Rudy S. Labos & Associates, Inc. (RSLAI), arguing that Rockwell’s conformity to a Deed of Assignment made them jointly responsible. IEB contended that when Rockwell signed the conforme portion of the Deed of Assignment, it became bound by its obligations, particularly after RSLAI defaulted on its loan. This case hinges on whether Rockwell’s signature implied an assumption of RSLAI’s liabilities or merely acknowledged the assignment of rights. The central legal question is whether a third party’s conformity to a contract equates to becoming a party to that contract with all its attendant obligations.

The Supreme Court firmly anchored its decision on the principle of relativity of contracts, as enshrined in Article 1311 of the Civil Code. This cornerstone of contract law dictates that contracts bind only the parties who enter into them, extending neither benefit nor burden to third parties who do not consent to be bound. The Court emphasized that contracts operate exclusively between the contracting parties, their assigns, and heirs, unless the rights and obligations are non-transmissible due to their nature, stipulation, or legal provision. In essence, the principle safeguards the autonomy of individuals and entities to define the scope of their obligations, preventing the imposition of unintended liabilities through contractual arrangements they did not willingly join.

Applying this principle, the Court scrutinized the Deed of Assignment and found no explicit intention to include Rockwell as a party. The deed clearly identified only RSLAI and IEB as the contracting parties. The Court underscored the importance of adhering to the written terms of the agreement. It referenced Norton Resources v. All Asia Bank, where the Supreme Court stated that,

The agreement or contract between the parties is the formal expression of the parties’ rights, duties and obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an agreement have been reduced to writing, it is considered as containing 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.

The Court held that to interpret Rockwell’s conformity as an assumption of liability would be an unwarranted expansion of the contract’s scope, forcing it into an agreement it never intended to join. The Court also referenced Gaw v. Court of Appeals, reinforcing the principle that courts cannot rewrite contracts or impose obligations not assumed by the parties, stating that,

[A] court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract of an obligation not assumed.

The Court acknowledged that Rockwell’s signature on the Deed of Assignment served a specific purpose. Under its Contract to Sell with RSLAI, Rockwell was obligated to consent to any assignment of rights by RSLAI. Section 9(e) of the Contract to Sell stipulated that RSLAI could not transfer, assign, or cede its rights without Rockwell’s express written consent. Therefore, Padilla’s signature was not intended to make Rockwell a party to the Deed but merely to fulfill its obligation under the Contract to Sell, permitting the assignment of rights between RSLAI and IEB.

IEB argued that Section 2.04 of the Deed of Assignment imposed an obligation on Rockwell, making it liable. The Court disagreed, pointing out that this section specifically obligated RSLAI, as the assignor, not to impair, reduce, or transfer the assigned property without IEB’s consent. The provision did not extend any similar obligation to Rockwell. It is crucial to note that the absence of a clear obligation on Rockwell’s part precluded holding them liable based on the Deed of Assignment.

IEB also argued that the Deed of Assignment effectively amended the Contract to Sell, incorporating Section 2.04 into it and thereby binding Rockwell. The Court rejected this argument. The primary purpose of the Deed of Assignment was to provide security for the credit line IEB extended to RSLAI, not to modify the terms of the Contract to Sell. It reiterated the importance of adhering to the clear terms of contracts, referencing The Commoner Lending Corp. v. Spouses Villanueva, wherein the court held that,

It is settled that the literal meaning shall govern when the terms of a contract are clear and leave no doubt as to the intention of the parties. The courts have no authority to alter the agreement or to make a new contract for the parties.

The Court also dismissed the argument of novation, which would have involved replacing RSLAI with IEB as the buyer in the original Contract to Sell. Novation requires either an express agreement or an irreconcilable incompatibility between the old and new obligations. The Court found no such express agreement or incompatibility. The Contract to Sell and the Deed of Assignment served distinct purposes and involved different obligations. The Deed of Assignment served as an interim security for RSLAI’s loan, indicating its nature as a form of mortgage rather than a transfer of ownership.

Furthermore, the Court addressed IEB’s claim that Rockwell breached its fiduciary duty and acted in bad faith. To establish a violation of Article 19 of the Civil Code, the Court emphasized the necessity of proving bad faith, which requires clear and convincing evidence of a dishonest purpose or moral obliquity. The Court concluded that IEB failed to provide sufficient evidence of bad faith on Rockwell’s part, thus negating any basis for liability under this argument.

Ultimately, the Court found no grounds to hold Rockwell jointly and solidarily liable with RSLAI and the spouses Labos. Solidary liability is only imposed when expressly stated or required by law or the nature of the obligation. In this case, none of these conditions were met, reinforcing the principle that contractual obligations must be clearly defined and explicitly agreed upon to be enforceable.

FAQs

What was the key issue in this case?	The central issue was whether Rockwell Land Corporation could be held liable for the debts of Rudy S. Labos & Associates, Inc. (RSLAI) simply because Rockwell signed a Deed of Assignment to which it was not a primary party.
What is the principle of relativity of contracts?	The principle of relativity of contracts states that contracts only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he or she is aware of such contract. This principle is enshrined in Article 1311 of the Civil Code.
What does it mean to sign a document ‘in conforme’?	Signing ‘in conforme’ typically indicates agreement or conformity to the contents of a document. However, it does not automatically imply that the signatory assumes the obligations outlined in the document, unless explicitly stated.
What is novation, and why was it relevant here?	Novation is the extinguishment of an obligation by creating a new one that replaces it. It was relevant because IEB argued that the Deed of Assignment novated the original Contract to Sell, making IEB the new buyer, but the court disagreed.
Did Rockwell have any obligations to consent to RSLAI’s actions?	Yes, under the Contract to Sell between Rockwell and RSLAI, Rockwell was required to give written consent before RSLAI could assign its rights to another party. This requirement is typical in real estate contracts.
What was the significance of Section 2.04 of the Deed of Assignment?	Section 2.04 outlined the obligations of RSLAI, as the assignor, not to impair or transfer the assigned property without IEB’s consent. The court noted that this section did not place any similar obligation on Rockwell.
What is required to prove ‘bad faith’ in a legal context?	Proving bad faith requires clear and convincing evidence of a dishonest purpose or moral obliquity. Bad faith is more than just bad judgment or negligence; it implies a conscious wrongdoing.
What is solidary liability, and why didn’t it apply to Rockwell?	Solidary liability means that each debtor is responsible for the entire obligation. It didn’t apply to Rockwell because solidary liability must be expressly stated or required by law or the nature of the obligation, none of which were present in this case.

This case underscores the critical importance of clearly defining the roles and responsibilities of all parties involved in contractual agreements. The ruling reaffirms the principle that conformity does not equate to liability, protecting parties from unintended contractual burdens. It highlights the need for explicit language in contracts to ensure that all obligations are understood and willingly accepted by all parties concerned.

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: International Exchange Bank vs. Rudy S. Labos and Associates, Inc., G.R. No. 206327, July 06, 2022