G.R. No. L-30770. April 7, 1993.
THE CAPITAL INSURANCE & SURETY CO., INC., plaintiff-appellee, vs. CENTRAL AZUCARERA DEL DANAO, defendant-appellant.

CENTRAL AZUCARERA DEL DANAO, Third-Party, plaintiff-appellant, vs. TALISAY-SILAY MILLING CO., INC., ET AL., Third-Party, defendant-appellee.

FACTS

On March 3, 1960, an Agreement was entered into between the Philippine National Bank (PNB), Central Azucarera del Danao (CAD), Talisay-Silay Milling Co., Inc. (TSM), and J. Amado Araneta to settle pending suits and forestall PNB’s foreclosure of CAD. The Agreement involved PNB acquiring TSM’s controlling shares in CAD. To protect itself from assuming fraudulent or unknown liabilities of CAD incurred prior to the takeover, PNB insisted on including paragraphs 9 and 10 in the Agreement. Paragraph 9 stated that all obligations of CAD incurred before the agreement, in favor of trade creditors for supplies, equipment, fuel, and spare parts, outstanding in CAD’s books, must be listed and itemized, and only those approved by PNB would be considered legitimate and due for payment by CAD. Paragraph 10 stated that any obligations purporting to be of CAD but not appearing in its books nor acknowledged as in paragraph 9 shall be borne by TSM and/or Araneta.
Subsequently, Capital Insurance and Surety Co., Inc. filed a complaint against CAD for the collection of unpaid premiums amounting to P57,323.71 for insurance policies and surety bonds secured from 1954 to 1961. CAD, invoking paragraphs 9 and 10 of the Agreement, disclaimed liability, contending that TSM and/or Araneta should bear the payment. CAD then filed a third-party complaint against TSM and Araneta for indemnification. TSM and Araneta argued that the obligation for insurance premiums was not for “supplies, equipment, fuel and spare parts” as contemplated in paragraph 9, and that under paragraph 10, they were only liable for obligations not appearing in CAD’s books, which condition was not met since the premiums were recorded.
The trial court ruled in favor of Capital Insurance, ordering CAD to pay the premiums. It dismissed the third-party complaint, holding that the Agreement did not novate CAD’s obligation to Capital Insurance without the latter’s consent, and that under a literal reading of paragraph 10, TSM and Araneta were not liable because the obligation appeared in CAD’s books.

ISSUE

1. Whether Central Azucarera del Danao can invoke the March 3, 1960 Agreement to evade liability from Capital Insurance & Surety Co., Inc.
2. Whether the terms of paragraphs 9 and 10 of the March 3, 1960 Agreement make Talisay-Silay Milling Co., Inc. and/or J. Amado Araneta solidarily liable to indemnify Central Azucarera del Danao for the unpaid premiums.

RULING

1. No. As against Capital Insurance, CAD cannot invoke the March 3, 1960 Agreement as a defense to evade liability. The binding effect of a contract does not extend to those not parties to it, pursuant to Article 1311 of the Civil Code. Capital Insurance was not a party to the Agreement and cannot be prejudiced by its terms. CAD remains the debtor to Capital Insurance until payment is made.
2. Yes. The Supreme Court modified the trial court’s decision. After examining the contemporaneous and subsequent acts of the parties to ascertain their intention, the Court found that PNB insisted on paragraphs 9 and 10 to protect itself from assuming all unsettled obligations of CAD, especially fraudulent claims, given that CAD’s books were not yet turned over at the time of the Agreement. The literal interpretation by the lower court, focusing on the word “nor” in paragraph 10, would frustrate the parties’ intent. The true meaning of paragraph 10, gleaned from unrebutted testimonies, is that TSM and/or Araneta assumed liability for obligations incurred prior to the Agreement that were not approved by PNB under paragraph 9. Since the insurance premium obligation, though appearing in the books, was not among those approved by PNB under paragraph 9 (as it was not for trade creditors of supplies, etc.), TSM and Araneta are liable under paragraph 10.
DISPOSITIVE PORTION:
The judgment is AFFIRMED with modification. CAD is ordered to pay Capital Insurance the sum of P57,323.71 with legal interest from the filing of the complaint, plus P5,000.00 as attorney’s fees and costs. TSM and Araneta are solidarily liable to INDEMNIFY CAD in the same amount with legal interest from the filing of the third-party complaint.