Assignment Deeds and Third-Party Liability: When a Conforme Signature Does Not Bind

When a borrower assigns a property as collateral for a loan, the developer who originally sold that property may be asked to sign the deed of assignment. Does that signature make the developer a party to the contract, and can it be held liable if the borrower later defaults? The Supreme Court addressed this question in International Exchange Bank v. Rudy S. Labos and Associates, Inc. (G.R. No. 206327, July 6, 2022), clarifying the limits of contractual liability under Philippine law.

The Facts of the Case

Rudy S. Labos & Associates, Inc. (RSLAI) obtained a ₱10 million credit line from International Exchange Bank (IEB). As partial security, RSLAI assigned its rights over a condominium unit under a Deed of Assignment dated July 2, 2003. The deed contained a provision—Section 2.04—stating that the assignor (RSLAI) could not sell or transfer the property without the bank's written consent.

Rockwell Land Corporation, the developer that sold the unit to RSLAI under a Contract to Sell, signed the conforme portion of the Deed of Assignment. This signature was required by the Contract to Sell, which mandated the developer's express written consent before the buyer could assign its rights.

When RSLAI defaulted on its loans, IEB discovered that RSLAI had assigned the property to a third party, JHL & Sons Realty, Inc., without the bank's consent. Rockwell had allowed the transfer. IEB sued RSLAI, the spouses Labos, and Rockwell, seeking to hold all of them jointly and severally liable for the unpaid loan.

The Issue

The central question was whether Rockwell should be held liable to IEB for allowing the transfer of the assigned property without the bank's consent.

The Ruling: No Liability Without Privity

The Supreme Court denied IEB's petition and absolved Rockwell from liability. The Court applied the principle of relativity of contracts, embodied in Article 1311 of the Civil Code: contracts take effect only between the parties, their assigns, and heirs.

The Court found that the Deed of Assignment had only two parties: RSLAI (as assignor) and IEB (as bank). Rockwell was not a party to it. Its signature on the conforme portion merely signified its consent to the assignment, as required under its own Contract to Sell with RSLAI. This consent could not be construed as an assumption of liability for RSLAI's loans.

The Court also rejected IEB's argument that the Deed of Assignment amended the Contract to Sell. The deed was clear in its purpose: to serve as interim security for the loan. It was, in essence, a mortgage. No novation took place because the two contracts could stand independently.

Finally, the Court found no basis for holding Rockwell liable under Article 19 of the Civil Code (abuse of rights). IEB failed to prove bad faith on Rockwell's part by clear and convincing evidence. Since solidary liability must be expressly stated or required by law, and neither was present here, Rockwell could not be held jointly and severally liable.

Practical Takeaways

• A conforme signature is not a contract. When a third party signs a deed merely to signify consent or acknowledgment, that signature does not make it a party to the agreement or create obligations for it.
• Read the contract carefully. Courts will enforce the plain terms of a written agreement. If a party is meant to assume obligations, the contract must say so explicitly.
• Privity of contract matters. A party cannot be held liable under a contract it did not enter into, even if it was aware of the contract and acted with knowledge of it.
• Solidary liability must be express. Joint and several liability is not presumed; it must be clearly stated in the contract or required by law.
• Proving bad faith requires clear evidence. Claims under Article 19 of the Civil Code demand proof of dishonest purpose or intent to injure, not mere negligence or poor judgment.

For lenders, this case is a reminder to secure direct contractual commitments from all parties whose cooperation is essential to protecting collateral. A developer's consent to an assignment, without more, is not a guarantee of the borrower's obligations.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.