The Supreme Court affirmed that Development Bank of the Philippines (DBP) was liable under its guaranty to Traders Royal Bank (TRB), even after the supplier for the imported goods changed without DBP’s express consent. DBP’s subsequent actions, such as making payments for the goods imported from the new supplier, impliedly approved the change. This ruling underscores that a guarantor’s conduct can ratify modifications to the underlying agreement, binding them to the altered terms and highlighting the importance of clearly objecting to changes in guaranteed obligations.

Letters of Credit and Guaranty: Can DBP Avoid Liability After a Supplier Switch?

In the 1980s, Phil-Asia Food Industries Corporation (Phil-Asia) secured a loan from Traders Royal Bank (TRB) through letters of credit amounting to P92,290,845.58. The purpose was to import machinery for a soya bean processing plant. Development Bank of the Philippines (DBP) issued a guaranty in favor of TRB, promising to cover the import costs up to $8,015,447.13.

Initially, the importations were to be sourced from Archer Daniels Midland Corporation. However, the supplier was changed to Emi Disc Corporation. Phil-Asia and DBP made partial payments, but a balance of P8,432,381.78 remained unpaid. TRB sued Phil-Asia and DBP to recover this amount. The case eventually involved the Privatization and Management Office (PMO), which allegedly took over DBP’s distressed assets.

DBP argued that its guaranty only covered importations from Archer Daniels Midland Corporation, not Emi Disc Corporation, and that it had not consented to the supplier change. DBP also claimed overpayment. Phil-Asia supported the overpayment claim, stating that total payments exceeded the initial loan amount and alleging novation, which is the substitution of an old contract with a new one, thereby extinguishing the old obligation. TRB refuted the overpayment claim, clarifying that some DBP payments were incorrectly credited to Phil-Asia and adjustments were needed to reflect proper interest payments.

The trial court ruled in favor of TRB, ordering Phil-Asia and DBP to jointly and severally pay the outstanding balance with interest. The Asset Privatization Trust (APT), now PMO, was absolved from liability. Both TRB and DBP appealed, leading to the Court of Appeals affirming the trial court’s decision with modifications, including increasing the interest rate. DBP then elevated the case to the Supreme Court, questioning whether its guaranty covered the Emi Disc Corporation importations, whether the letters of credit had been fully paid, and whether PMO should be liable if DBP was.

The Supreme Court emphasized that it primarily reviews questions of law, not fact. A question of fact arises when there is doubt about the truth or falsity of alleged facts, requiring a review of evidence and witness credibility. Conversely, a question of law concerns the application of law to a specific set of facts. Here, the Supreme Court determined that the issues presented by DBP were factual, necessitating an examination of the evidence already assessed by the lower courts.

Regarding the supplier change, the Supreme Court highlighted that both lower courts had found that TRB duly informed DBP of the change from Archer Daniels Midland Corporation to Emi Disc Corporation. Despite being aware of this change, DBP did not object and even made payments for the importations from Emi Disc Corporation. The Court of Appeals correctly inferred that these actions constituted an implied approval or ratification of the amendment to the letters of credit. Consequently, the Supreme Court agreed that the DBP guaranty extended to the importations from Emi Disc Corporation.

The Supreme Court affirmed the Court of Appeals’ finding that the letters of credit had not been fully paid, requiring an assessment of evidence. The appellate court referenced a letter from DBP questioning TRB’s statement of account, which TRB adequately explained. The Court of Appeals underscored that the burden of proving payment rests on the party claiming it, in this case, DBP. “As a rule, he 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 (Audion Electric Co., Inc. vs. NLRC, 308 SCRA 430). Appellant has failed its burden.”

The Court of Appeals reviewed the application of payments and concluded that DBP and Phil-Asia’s total payments were insufficient to cover the full amount availed under the letters of credit. Thus, the Supreme Court upheld this factual finding.

Finally, the Supreme Court addressed the issue of PMO’s liability, noting that it also involved a question of fact. DBP argued that APT (now PMO) assumed its liabilities under the letters of credit through Proclamation No. 50 and a deed of transfer. However, the lower courts found no evidence substantiating this claim. The Court of Appeals stated, “DBP likewise contends that APT should have been held liable for the obligations of DBP and Phil-Asia to TRB under the LCs because APT assumed the same pursuant to Proclamation No. 50 and [the] deed of transfer executed  between DBP and the national government. However, no evidence was presented to substantiate DBP’s allegation. Neither the deed of transfer nor Annex “B” thereof shows that the obligations of DBP and Phil-Asia under the LC’s were transferred to, and assumed by, APT.”

The Supreme Court reiterated that the burden of proof lies on the party asserting an affirmative defense or claiming subrogation. DBP failed to provide sufficient evidence to demonstrate that APT or PMO should be held liable for the outstanding obligations. Since the Court of Appeals concurred with the trial court’s factual findings, the Supreme Court found no reason to deviate from these conclusions. “In this case, the Court of Appeals concurred with the factual findings of the trial court.  Factual findings of the trial court which are adopted and confirmed by the Court of Appeals are final and conclusive on the Court unless the findings are not supported by the evidence on record.”

The Court emphasized its limited jurisdiction to review errors of law rather than re-evaluating evidence already assessed by the lower courts. While exceptions exist to the binding nature of the Court of Appeals’ factual findings, DBP failed to demonstrate that any of these exceptions applied in this case. Consequently, the Supreme Court denied DBP’s petition and affirmed the Court of Appeals’ decision.

FAQs

What was the key issue in this case?	The central issue was whether DBP’s guaranty covered importations from a supplier that was different from the one originally specified in the letters of credit. The court considered whether DBP’s actions impliedly approved the supplier change.
What is a letter of credit?	A letter of credit is a document issued by a bank guaranteeing payment of a buyer’s obligation to a seller, often used in international trade to ensure payment for goods.
What is a guaranty?	A guaranty is a promise to answer for the debt, default, or obligation of another person. In this case, DBP guaranteed Phil-Asia’s debt to TRB.
What does it mean to be jointly and severally liable?	Joint and several liability means that each party is independently liable for the full amount of the debt. The creditor can recover the entire debt from any one of the liable parties.
What is novation?	Novation is the substitution of an existing obligation with a new one, thereby extinguishing the old obligation. Phil-Asia argued that its debt had been extinguished through novation, but this claim was rejected.
What is the role of the Privatization and Management Office (PMO)?	The PMO is responsible for managing and privatizing government assets. In this case, it was impleaded because it allegedly acquired DBP’s distressed assets.
What is meant by ‘burden of proof’?	The burden of proof is the obligation of a party to present evidence to support their claim or defense. In this case, DBP had the burden of proving payment and that PMO should be liable.
What was the interest rate imposed?	The Court of Appeals modified the trial court’s decision to impose an interest rate of 12% per annum from the filing of the complaint until full payment.

This case clarifies that a guarantor’s actions can imply approval of changes to underlying agreements, binding them to the modified terms. Financial institutions and guarantors must closely monitor and object to any changes in guaranteed obligations to avoid unintended liabilities.

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: DEVELOPMENT BANK OF THE PHILIPPINES vs. TRADERS ROYAL BANK, G.R. No. 171982, August 18, 2010