Guaranty Obligations DBP's Liability Despite Supplier Change

The Supreme Court recently clarified when a guarantor remains liable on a loan even after the borrower changes suppliers without explicit consent. In Development Bank of the Philippines v. Traders Royal Bank (G.R. No. 171982, August 18, 2010), the Court held that a guarantor's acts may constitute implied approval of changes to the principal contract, binding the guarantor to the obligation.

The Facts of the Case

In 1980, Phil-Asia Food Industries Corporation obtained a loan accommodation from Traders Royal Bank (TRB) through four letters of credit totaling P92,290,845.58. The funds were used to import machinery for a soya beans processing plant. Development Bank of the Philippines (DBP) issued a guaranty in favor of TRB, covering the importation cost to the extent of $8,015,447.13.

Phil-Asia and DBP made partial payments, leaving a balance of P8,432,381.78. When they failed to pay despite demands, TRB filed a collection case. DBP argued it was not liable because its guaranty covered only importation from Archer Daniels Midland Corporation, not from Emi Disc Corporation, and the supplier change was made without its consent.

The Issue

The central question was whether DBP remained liable under its guaranty when the supplier changed from Archer Daniels Midland Corporation to Emi Disc Corporation without DBP's explicit consent.

The Ruling

The Supreme Court denied DBP's petition, affirming the Court of Appeals' decision. The Court ruled that DBP's acts constituted implied approval and ratification of the supplier change. Specifically, DBP was duly informed of the change, did not object, and even paid TRB's letters of credit covering the importation from the new supplier.

The Court emphasized that factual findings of the trial court, when adopted and confirmed by the Court of Appeals, are final and conclusive upon the Supreme Court unless not supported by evidence. Since DBP failed to show any exception to this rule, the petition was denied.

Guarantor's Right to Indemnity

The Court also cited Articles 2066 and 2067 of the Civil Code, which provide that a guarantor who pays for the debtor must be indemnified by the latter. The indemnity comprises the total amount of the debt, legal interests from the time payment was made known to the debtor, and certain expenses. The guarantor who pays is also subrogated to all the rights the creditor had against the debtor.

Burden of Proof in Payment Claims

On the issue of whether the letters of credit had been fully paid, the Court reiterated the general rule: he who pleads payment has the burden of proving it. Even where the plaintiff must allege non-payment, the burden rests on the defendant to prove payment. DBP failed to discharge this burden, as the evidence showed payments totaled only P83,858,463.80 against the P92,290,845.58 availment, leaving the balance unpaid.

Practical Takeaways

• Guarantors should monitor changes to the principal contract. A guarantor who is informed of changes and does not object, while continuing to make payments, may be deemed to have approved those changes.
• Implied approval can bind a guarantor. Consent to modifications need not be express; conduct showing acquiescence may suffice.
• The burden of proving payment lies with the party claiming it. A debtor or guarantor asserting payment must present clear evidence to support that claim.
• Factual findings of lower courts are generally conclusive. Parties seeking Supreme Court review must demonstrate that the findings fall under recognized exceptions.
• Guarantors who pay are entitled to indemnity. Under Articles 2066 and 2067 of the Civil Code, a guarantor who pays the creditor may recover from the principal debtor.

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