Parol Evidence Rule and Commitment Fees: Norton Resources v. All Asia Bank

The Parol Evidence Rule in Contract Disputes

When parties sign a written agreement, can one side later claim that the true deal was different from what the document says? The Supreme Court's decision in Norton Resources and Development Corporation v. All Asia Bank Corporation (G.R. No. 162523, November 25, 2009) provides a clear answer: generally, no. The case is a valuable lesson on the parol evidence rule and the importance of putting every agreed term in writing.

The Facts of the Case

Norton Resources obtained a P3.8 million loan from All Asia Bank (formerly Banco Davao) to construct 160 housing units. On the same day the loan agreement was signed, the parties also executed a Memorandum of Agreement (MOA) under which Norton promised to pay a commitment/service fee of P320,000.00. The bank deducted this amount in advance from the loan proceeds.

Norton only managed to build 35 of the 160 planned units and later defaulted on the loan. The bank called on the guarantor, Home Financing Corporation (HFC), which paid most of the outstanding obligation but withheld P250,000.00. The bank sued HFC for that amount and won.

Years later, Norton filed a new case against the bank. Norton claimed that the P320,000.00 commitment fee was meant to be paid on a per-unit basis—P2,000.00 for each of the 160 units. Since only 35 units were built, Norton argued it owed only P70,000.00 and demanded the return of P250,000.00.

The Issue

The central question was whether Norton could present evidence to show that the parties' true intention regarding the commitment fee differed from what the written MOA stated. The MOA's paragraph 4 simply said Norton agreed to pay a commitment and service fee of P320,000.00, payable in two equal installments.

The Ruling

The Supreme Court denied Norton's petition and affirmed the Court of Appeals' decision in favor of the bank. The Court held that the MOA was clear and unambiguous on its face. Under Article 1370 of the Civil Code, when the terms of a contract are clear and leave no doubt about the parties' intention, the literal meaning of its stipulations shall control.

The Court applied Section 9, Rule 130 of the Revised Rules of Court—the parol evidence rule. This rule provides that when an agreement is reduced to writing, it is considered to contain all the terms agreed upon, and no evidence of other terms may be presented, subject to limited exceptions. These exceptions include intrinsic ambiguity, mistake, failure to express the true intent, invalidity, or the existence of other terms agreed upon after execution.

None of these exceptions applied. The Court noted that the subdivision plan Norton relied on to support its per-unit theory was surveyed and approved after the MOA was executed, making it impossible for that plan to have been the basis of the fee computation. The Court also observed that Norton's own witness admitted there were only 127 proposed units, not 160—undermining the per-unit computation theory.

Contracts of Adhesion

Norton also tried to argue on appeal that the MOA was a contract of adhesion. The Court refused to consider this argument because it was raised for the first time on appeal. Points of law and theories not raised before the trial court will not ordinarily be considered by a reviewing court.

Even so, the Court noted that contracts of adhesion are not invalid per se. A party who adheres to a ready-made contract is free to reject it entirely; if he adheres, he gives his consent.

Practical Takeaways

• The written contract controls. If the terms of a written agreement are clear, courts will enforce them as written. A party cannot introduce evidence to contradict or add to the written terms.
• Exceptions are narrow. The parol evidence rule allows extrinsic evidence only in specific situations—such as ambiguity, mistake, or failure to express true intent—and these must be raised properly in the pleadings.
• Timing matters. A document created after a contract was signed cannot be used to prove what the parties intended at the time of signing.
• Raise all defenses early. Arguments not raised in the trial court, such as a claim that a contract is one of adhesion, will generally be barred on appeal.
• Negotiate before signing. Once a contract is signed, courts will not rewrite it to make it more equitable for one party, even if it operates harshly.

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