In Metro Concast Steel Corporation vs. Allied Bank Corporation, the Supreme Court clarified that a breach of contract by a third party does not automatically extinguish a debtor’s loan obligations to a creditor, especially when the contracts are separate and distinct. The court emphasized that obligations arising from loan transactions are independent from obligations arising from a sale of assets agreement. This means that the failure of a buyer to fulfill their obligations under a sale agreement does not excuse the seller from repaying their existing loans, unless there is a clear novation or modification of the original loan terms. This ruling reinforces the principle that debtors must fulfill their financial responsibilities regardless of external business setbacks.

Steel Mill’s Setback: Can a Failed Deal Excuse Loan Repayment?

Metro Concast Steel Corporation and its individual petitioners sought to evade their loan obligations to Allied Bank, citing a failed agreement with Peakstar Oil Corporation for the sale of scrap metal. Metro Concast argued that Peakstar’s breach of contract constituted force majeure, making it impossible for them to repay their loans. They also contended that Allied Bank, through its alleged agent Atty. Peter Saw, had effectively approved the terms of the agreement with Peakstar, thereby binding the bank to its outcome. The central legal question was whether Peakstar’s default could extinguish Metro Concast’s pre-existing debt to Allied Bank.

The Supreme Court firmly rejected Metro Concast’s arguments, underscoring the principle of independent contractual obligations. The court noted that the loan agreements between Metro Concast and Allied Bank were entirely separate from the sale agreement between Metro Concast and Peakstar. As the court stated:

Absent any showing that the terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the MoA, said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one would not depend on the existence, performance or breach of the other.

This meant that Peakstar’s failure to pay for the scrap metal did not automatically relieve Metro Concast of its responsibility to repay its loans to Allied Bank. Furthermore, the Court found insufficient evidence to prove that Atty. Saw was indeed acting as Allied Bank’s authorized agent, or that the bank had formally agreed to be bound by the terms of the sale agreement. The court clarified that for force majeure to apply, the event must be truly impossible to foresee or avoid, and it must render the fulfillment of the obligation absolutely impossible. The court referenced the case of Sicam v. Jorge:

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same.

In this context, Peakstar’s breach of contract did not qualify as force majeure. The Court emphasized that:

(a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must be free from any participation in the aggravation of the injury or loss.

The court also highlighted the legal principle that the burden of proving payment rests on the debtor. As outlined in the case of Bank of the Phil. Islands v. Sps. Royeca:

As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment. The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.

Metro Concast failed to provide sufficient evidence of payment or any legal basis for the extinguishment of its debt. Therefore, the Supreme Court affirmed the Court of Appeals’ decision, holding Metro Concast and its individual petitioners solidarily liable for the outstanding loan obligations to Allied Bank.

This case underscores the importance of fulfilling contractual obligations, regardless of external economic challenges or setbacks. It clarifies that debtors cannot use the failure of separate business ventures as an excuse to avoid repaying their debts. The ruling also reinforces the need for clear and convincing evidence when claiming force majeure or agency, and reiterates the debtor’s responsibility to prove payment.

FAQs

What was the key issue in this case?	The key issue was whether a breach of contract by a third party (Peakstar) could extinguish the loan obligations of Metro Concast to Allied Bank. The Court ruled that it could not, as the obligations were independent.
What is the principle of independent contractual obligations?	This principle means that obligations arising from separate contracts are distinct and must be fulfilled independently. The performance or breach of one contract does not automatically affect the obligations under another contract.
What is force majeure, and how does it apply in this case?	Force majeure refers to unforeseeable and unavoidable events that make it impossible to fulfill contractual obligations. The Court found that Peakstar’s breach did not qualify as force majeure because it was not impossible to foresee or avoid.
Who has the burden of proving payment of a debt?	The debtor has the burden of proving with legal certainty that the obligation has been discharged by payment. They must provide sufficient evidence to demonstrate that the debt has been satisfied.
What was the role of Atty. Peter Saw in this case?	Metro Concast claimed Atty. Saw acted as Allied Bank’s agent, binding the bank to the agreement with Peakstar. The Court found insufficient evidence to support this claim, noting Saw signed receipts on behalf of Jose Dychiao, not Allied Bank.
What is the significance of a Continuing Guaranty/Comprehensive Surety Agreement?	These agreements, executed by the individual petitioners, secured the loans in favor of Allied Bank. This made them solidarily liable for Metro Concast’s debt, meaning they could be held individually responsible for the entire amount.
What does it mean to be ‘solidarily liable’?	Solidary liability means that each debtor is individually responsible for the entire amount of the debt. The creditor can demand full payment from any one of the solidary debtors.
From what date were the interests and penalty charges reckoned?	The Court modified the Court of Appeals’ decision by reckoning the applicable interests and penalty charges from the date of the extrajudicial demand, which was December 10, 1998.

The Supreme Court’s decision in Metro Concast Steel Corporation vs. Allied Bank Corporation provides valuable guidance on the application of contract law and the responsibilities of debtors and creditors. Understanding these principles is crucial for businesses and individuals alike to navigate their financial obligations effectively.

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: Metro Concast Steel Corporation, G.R. No. 177921, December 04, 2013