SAURA IMPORT & EXPORT CO., INC., plaintiff-appellee, vs.

DEVELOPMENT
BANK OF THE PHILIPPINES, defendant-appellant. (1972)
MAKALINTAL, J.
NATURE:
Appel of CFI decision to SC
SUMMARY:
Saura Import and Export Co. (SIEC) applied for an industrial loan of 500 000
with RFC to be used in the construction of a factory for the manufacture of jute
sacks. RFC initially approved the loan which was to be secured by promissory
notes and a deed of mortgage. When SIEC requested for modification of the
terms, RFC passed a Resolution calling for the reexamination of the proposed
project. SIEC informed RFC that China Engineering, Ltd. (CEL), agreed to co-sign
the promissory notes. As a result of the reexamination, however, RFC resolved to
reduce the loan to 300 000. Later, CELs representative manifested that they
did not wish to avail of the loan anymore so RFC was constrained to consider the
loan cancelled. SIEC wrote RFC saying that if the latter would release the original
amount of 500 000, CEL would sign the promissory note. RFC agreed to loan
500 000 on the condition that the Department of Agriculture and Natural
Resources would certify that there are enough raw materials in the immediate
vicinity. SIEC later informed RFC that the Department certified a shortage of local
raw materials and asked RFC for the release of part of the loan to be used for
importing raw materials. The RFC refused to release the requested amounts.
SIEC then requested RFC to cancel the mortgage, which RFC allowed. SIEC
executed another contract of mortgage with Prudential Bank to secure a trust
receipt. SIEC eventually defaulted and was sued by Prudential. Nine years after
RFC cancelled the mortgage, SIEC filed an action for damages due to breach of
contract against the former. CFI Manila ruled in favor of SIEC. Hence, this appeal
by RFC (now DBP). The SC held that there was mutual desistance and that RFC
did not breach the contract.
DOCTRINE:
Mutual desistance is a mode of extinguishing obligations. It is derived from
the principle that since mutual agreement can create a contract, mutual
disagreement by parties can cause its extinguishment.
FACTS:
In July 1953, Petitioner Saura Import and Export Co. (SIEC) applied to the
Respondent Rehabilitation Finance Corporation (RFC), before the latters
conversion to the Development Bank of the Philippines (DBP), for an industrial
loan of 500 000 to be used as follows: 1) 250 000 for the construction of a
factory building (for the manufacture of jute sacks); 2) 240 900 to pay the
balance of the purchase price of the jute mill machinery and equipment; and
3) 9 100 as additional working capital.
o The jute mill machinery was already purchased by SIEC through a letter
of credit extended by Prudential Bank and Trust Co. (PBTC) to secure its
release without paying first the draft, SIEC executed a trust receipt in
favor of PBTC. The machinery was arrived in Davao City in July 1953.
On 7 January 1954, RFC passed Resolution 145 approving the loan. The terms
of the loan are:
o It was to be secured by a first mortgage on the factory buildings to be
constructed, the land on which such were to be built on, and the
machinery and equipment to be installed.

The 500 000 was to be used exclusively according to the

aforementioned breakdown of amounts.
o The spouses Saura, Inocencia Arellano, Aniceto Caolboy, Gregoria
Estabillo, and China Engineers, Ltd. (CEL) Shall sign the promissory
notes jointly with SIEC.
o The release shall be made at RFCs discretion, subject to the
availability of funds, and as the construction of the buildings
progresses, to be certified by an appraiser of the RFC.
On 3 January 1954, SIEC wrote to RFC requesting a modification of the terms
(although it was officially notified on 4 January 1954)
o In lieu of having CEL (which was willing to assume liability only to the
extent of its stock subscription with SIEC) sign, SIEC would put up a
bond for 123 500, which is equivalent to the formers stock
subscription
o Maria Roca would be substituted for Inocencia Arellano, having
acquired the latters shares in SIEC
On 4 February 1954, RFC approved Resolution 736 designating one of the
members of its Board of Governors to reexamine all the aspects of this
approved loan . . . with special reference as to the advisability of financing
this particular project based on present conditions obtaining in the operations
of the jute mills, and to submit his findings [. . .] at the next meeting of the
Board.
On 24 March 1954, SIEC wrote RFC that CEL had again agreed to act as
cosigner for the loan, and asked that the necessary documents be prepared in
accordance with the terms and conditions specified in Resolution 145.
o In connection with the reexamination of the project to be financed,
pursuant to Resolution 736, the parties named their respective
committees of engineers and technical men to meet with each other
and undertake the necessary studies.
According to SIEC, its appointing of its own committee should
not be taken as an acquiescence on its part to novate, or accept
new conditions to, the
agreement already entered into
[Resolution 145].
On 13 April 1954, the loan documents were signed.
o F.R. Halling, representing CEL, was one of the co-signers of the
promissory note.
o The deed of mortgage was duly registered on 17 April 1954.
However, despite the formal execution of the loan agreement, the
reexamination contemplated by Resolution 736 proceeded.
o In a meeting of the RFC Board of Governors on 10 June 1954, at which
Ramon Saura (SIECs president) was present, it was decided that the
loan should be reduced to 300 000.
o Resolution 3989 was passed, reducing the loan from 500 000 to
300 00.
On 19 June 1954, Halling wrote RFC that CEL no longer wished to avail of the
loan and therefore considered the same cancelled as far as it was concerned.
o It also wrote RFC on 2 July 1954 requesting the registration of the
mortgage be withdrawn.
In the meantime, SIEC wrote RFC requesting that the loan of 500 000 be
granted.
o RFC denied the request and added that it was constrained to consider
as cancelled the loan of 300 000 . . . in view of a notification . . . from
o

the CEL, expressing their desire to consider the loan cancelled insofar
as they are concerned.
On 24 July 1954, SIEC informed RFC that CEL will, at any time, reinstate its
signature as co-signer if the original loan of 500 000 was released.
On 17 December 1954, RFC passed Resolution 9083 restoring the loan to the
original amount of 500 000, it appearing that CEL was willing to sign the
promissory notes jointly, but with the proviso:
o In view of shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify: 1) that
the raw materials needed by SIEC to carry out its operation are
available in the immediate vicinity; and 2) that there is prospect of
increased production thereof to provide adequately for the
requirements of the factory.
The certification was required as the intention of the original approval of the
loan was to develop the manufacture of sacks on the basis of locally available
raw materials.
o SIECs reason for building the factory in Davao was for the manufacture
of bags from local raw materials.
On 21 January 1955, SIEC wrote to RFC.
o SIEC informed RFC that according to the special study made by the
Bureau of Forestry, kenaf will not be available in sufficient quantity
this year or probably even next year.
o SIEC requested assurance from RFC that the company and its
associates will be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill.
o SIEC also asked for the following releases of the loan:
250 000 for the payment of the receipt for the jute mill
machineries with PBTC (for immediate release)
182 413.91 for the purchase of materials and equipment to
enable the jute mill to operate
67 586.09 for raw materials and labor, broken down as follows:
25 000 to be released on the opening of the letter of
credit for raw jute for $ 25 000
25 000 to be released upon arrival of raw jute
16 586.09 to be released as soon as the mill is ready to
operate.
On 25 January 1955, RFC sent a reply to SIEC.
o The releases of the loan, if revived, are proposed to be made from time
to time, subject to the availability of funds.
o RFC shall be able to act upon SIECs request upon re-appraisal of the
securities offered.
o SIECs statement that it will have to rely on the importation of jute and
its request for assurance are not in line with RFCs principle in
approving the loan.
After the 25 January 1955 letter, the negotiations ceased and SIEC did not
pursue the matter further. SIEC instead requested for the cancellation of the
mortgage.
o On 17 June 1955, RFC executed the corresponding deed of cancellation
and delivered it to Ramon Saura.
o The cancellation was requested to make way for the registration of a
mortgage over the same property, this time in favor of PBTC. Under

this mortgage, SIEC had until 31 December 1954 to pay its obligation
on the trust receipt aforementioned.
SIEC failed to pay and PBTC sued the former on 15 May 1955.
On 9 January 1964, almost 9 years after the mortgage in favor of RFC was
cancelled, SIEC filed a complaint for damages before CFI Manila.
o RFCs failure to comply with its obligation to release the proceeds of
the loan prevented SIEC from completing or paying contractual
commitments it had entered into in connection with its jute mill project.
On 28 June 1965, the CFI ruled in favor of SIEC, holding that there was a
perfected contract between the parties and that RFC was guilty of breach
thereof. The CFI sentenced RFC to pay 383 343.68 as actual and
consequential damages, with legal interest, plus 5 000 as attorneys fees.
RFC (now DBP) appealed to the SC.
o SIECs cause of action has prescribed.
o There was no perfected contract.
o Assuming that there was a contract, it was SIEC who did not comply
with the terms thereof.

ISSUE:
Whether or not RFC (now DBP) is guilty of breach of contract (NO)
RATIO:
NCC 1934: An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the delivery of
the object of the contract.
The SC held that there was offer and acceptance in this case.
o The application of SIEC for a loan was approved by RFC, but this fact
alone is not enough to resolve the claim that the latter failed to fulfill
its obligation.
It should be noted that RFC entertained the loan application on the
assumption that the factory to be constructed would utilize locally grown raw
materials.
o The conditions imposed in Resolution 9083 is an implementation of the
terms of the agreement. Note that Resolution 145 provided that the
loan proceeds would be used exclusively for the purposes
aforementioned.
When SIEC wrote RFC that local jute will not be available and asked for the
release of 67 586.09 for raw materials and labor, it was a deviation of the
terms laid down in Resolution 145.
o It implied a diversion of part of the proceeds of the loan to purposes
other than those agreed upon.
SIEC was obviously in no position to comply with RFCs conditions. Thus, it
opted to request that the mortgage be cancelled.
o The action thus taken by both parties was in the nature of mutual
desistance or, what Manresa calls, mutuo disenso.
Mutual desistance is a mode of extinguishing obligations. It is derived from
the principle that since mutual agreement can create a contract, mutual
disagreement by parties can cause its extinguishment.
SIECs subsequent conduct confirms this desistance:
o It did not protest against any alleged breach of contract nor point out
that RFCs stand was legally unjustified.

o
o
o

Its request for cancellation of the mortgage carried no reservation of

whatever rights it believed it might have against RFC.
In 1962, it applied with DBP for another loan to finance a rice and corn
project, which was disapproved.
It was only in 1964 when it brought the instant action for damages.
All these circumstances demonstrate beyond doubt that the
said agreement had been extinguished by mutual desistance
and that on the initiative of [SIEC].

DISPOSITION:
Petition granted; CFI reversed.