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G.R. No.

L-62741 May 29, 1987

FILIPINAS MANUFACTURERS BANK, plaintiff-appellee, vs. EASTERN RIZAL FABRICATORS, defendant-appellant.
Emerito M. Salva & Associates for plaintiff-appellee. Eulogio E. Gatdula for defendant-appellant.

This appeal was certified by the Appellate Court to this Court, the question involved being purely legal. That question
concerned the propriety of a judgment on the pleadings.
On March 2, 1979, Filipinas Manufacturers Bank [the surviving bank after a merger with the Filipinas Bank and Trust Co.]
filed in the Court of First Instance of Rizal, Pasig branch, a complaint against Eastern Rizal Fabricators. It alleged inter
alia that defendant Eastern Rizal Fabricators had executed on July 30, 1976, a promissory note for P370,000.00
evidencing a money market loan, with interest thereon at the rate of 14% plus 2% handling fee per annum until paid;
that among the terms and conditions of said promissory note was that the interest not paid when due would be added
to and become part of the principal, the same to be computed monthly and would bear the same rate of interest as the
principal and an additional sum equivalent to 10% of the amount due as and for attorney's fees; that the note matured
on August 30, 1976; and that despite repeated demands, defendant refused to pay without any valid and legal
grounds. 1
In its answer, defendant admitted its indebtedness but interposed the special and affirmative defense that the action by
plaintiff bank was premature because the latter had agreed to forbear collection of the note at least "until arrival of the
aforesaid date [not later than 180 banking days from December 2, 1978] when defendant will be receiving payment
which will be applied to the satisfaction of defendant's indebtedness to plaintiff." 2 Defendant expected to recover about
P300,000.00 from Jose Lecaros Abel, its supplier of scrap metals,
Thereupon, plaintiff filed a motion for judgment on the pleadings on the grounds that defendant's answer admitted that
material allegations of the complaint and that it failed to tender an issue. Amplifying on its motion, plaintiff maintained
that the affirmative defense that plaintiff, through its president, had agreed to postpone the enforcement of the note is
untenable. It is contrary to the parol evidence rule which provides that when the terms of an agreement had been
reduced to writing, it is to be considered as containing all such terms and therefore there can be, as between the parties
and their successor-in-interest, no evidence of the terms of the agreement other than the contents of the writing itself. 3
Plaintiff also noted that it is "unthinkable" for the bank to have agreed to defer collection of the obligation until after
180 banking days from December 2, 1978 which is "two years and four months after the promissory note has matured."
Plaintiff stressed that it is not privy to any alleged compromise agreement between defendant and its supplier. Its main
concern is the settlement of defendant's money market loan which is long overdue.
On July 23, 1979, despite defendant's opposition, the trial court issued the challenged order granting plaintiff's motion
for judgment on the pleadings. It ordered defendant Eastern Rizal Fabricators to pay to plaintiff Filipinas Manufacturers
Bank the sum of P370,000.00 plus interest at 14% per annum and 2% as handling damages with additional 10% of the
principal obligation as attorney's fees and to pay the costs of the suit. 4
As earlier stated, defendant Eastern Rizal Fabricators appealed the judgment to the Appellate Court which in turn
certified the case to this Court on a pure question of law. 5
In its brief, defendant-appellant Eastern Rizal Fabricators argues that the lower court erred in rendering a judgement on
the pleadings because the question of whether or not appellee bank had agreed to forbear collection on the note was an
issue which required a hearing.
Appellant avers that it had borrowed P370,000.00 from plaintiff-appellee bank to make an advance payment for scrap
metals purchased from Jose Lecaros Abel. Abel failed to deliver the entire merchandise. Appellant sued Abel for the
return of the advance payment. They subsequently entered into a compromise agreement which the court approved. In
that agreement, Abel promised to pay appellant the amount due not later than 180 banking days from December 2,
1978. Appellee bank had been made aware of that compromise and in fact it agreed to forbear collection of the
promissory note until such time when appellant would receive payment which would in turn be applied to the
satisfaction of appellant's indebtedness to appellee bank. 6
On its part, appellee bank belies the existence of any agreement to defer enforcement of the loan transaction and
argues that even assuming there was such an agreement, it did not constitute a genuine defense sufficient to defeat the
The lower court, in rendering judgment on the pleadings, upheld appellee's contention that it would be a mistake to
receive evidence as to the alleged verbal understanding because it would be permitting parol evidence to alter or vary a
written contract. It will be borne in mind that appellant's claimed understanding with the appellee was purportedly
entered into after the appellant had encountered financial difficulties in paying the loan.

The lower court is in error. The parol evidence rule which prohibits the admission of oral evidence to vary or contradict a
written contract does not apply to or prohibit a subsequent modification by parol evidence. 7 In other words,
subsequent agreements to written contracts may be made orally and evidence in reference thereto does not violate the
parol evidence rule. 8
Wigmore illustrates: Where a document, for example, is executed on July 1, it may be held to embody the final and
exclusive result of negotiations before and up to the time of execution; but a transaction on August 1 must be a separate
one and therefore can never be excluded, so far as the effect of the document of July 1, is concerned. It may be that
some rule or form may make that transaction of August 1 invalid but the present rule can interpose no obstacle. 9
The reason for the rule is fundamental. The parties cannot be presumed to have intended the written instrument to
cover all their possible subsequent agreements. Moreover, parol evidence does not in any way deny that the original
agreement was that which the writing purports to express, but merely shows that the parties have exercised their right
to change or abrogate their original understanding or to make a new and independent one. It makes no difference how
soon after the execution of the written contract the parol one was made. If it was in fact subsequent and is otherwise
unobjectionable, it may be proved and enforced. 10
The inescapable conclusion therefore is that the judgment on the pleadings was improper. Appellant's defense of
forbearance indubitably raised a material issue which could not be simply brushed aside without the presentation of
evidence. Reversal of the judgment and remand of the case to the court of origin for hearing on the merits should follow
as a matter of course.
Considering however that this case has remained pending for almost a decade now, so that even the claimed
forbearance has long lapsed, there was marked reluctance among the members of the Court to remand the case to the
court below. A consensus was therefore reached to seek a more expeditious manner to resolve the case. The parties
were required to inform the Court whether or not the loan of P370,000.00, which is the subject matter of the present
dispute, was still outstanding and if no full payment has been made, to submit memoranda substantiating their
respective allegations concerning the defense of forbearance. The appellant complied and submitted its memorandum,
stating in part that it still had "an outstanding balance of P230,000.00 on its aforesaid account" with the appellee bank.
It reiterated its prayer that the judgment complained of be reversed. The appellee bank did not file its memorandum
despite notices sent to its counsel of record.
Appellee bank's unexplained inaction has left us with no other recourse but to order the appellant to discharge its debt
to the admitted amount of P230,000.00. Remanding the case to the court of origin merely to ascertain whether there
was in fact a prior agreement to defer payment on the promissory note will serve no useful purpose and will only delay
the termination of this case. By its silence we can assume that the appellee bank has no objections to the amount owing,
as acknowledged by the appellant.
WHEREFORE, the assailed judgment is hereby set aside for being inappropriate. Appellant Eastern Rizal Fabricators is
ordered to pay appellee Filipinas Manufacturers Bank the sum of P230,000.00 plus interest at 14% per annum computed
from July 30, 1976, 2% of the principal obligation as handling damages and 10% of the total amount due as attorney's
fees in full settlement of the loan in question.
This decision is immediately executory. SO ORDERED.
G.R. No. 107372 January 23, 1997
RAFAEL S. ORTAES, petitioner,

On September 30, 1982, private respondents sold to petitioner two (2) parcels of registered land in Quezon City for a
consideration of P35,000.00 and P20,000.00, respectively. The first deed of absolute sale covering Transfer Certificate of
Title (TCT) No. 258628 provides in part:
That for and in consideration of the sum of THIRTY FIVE THOUSAND (P35,000.00) PESOS, receipt of
which in full is hereby acknowledged, we have sold, transferred and conveyed, as we hereby sell, transfer
and convey, that subdivided portion of the property covered by TCT No. 258628 known as Lot No. 684G-1-B-2 in favor of RAFAEL S. ORTAEZ, of legal age, Filipino, whose marriage is under a regime of
complete separation of property, and a resident of 942 Aurora Blvd., Quezon City, his heirs or assigns. 1
while the second deed of absolute sale covering TCT. No. 243273 provides:
That for and in consideration of the sum of TWENTY THOUSAND (P20,000.00) PESOS receipt of which in
full is hereby acknowledged, we have sold, transferred and conveyed, as we hereby sell, transfer and
convey, that consolidated-subdivided portion of the property covered by TCT No. 243273 known as Lot

No. 5 in favor of RAFAEL S. ORTANEZ, of legal age, Filipino, whose marriage is under a regime of
complete separation of property, and a resident of 942 Aurora Blvd., Cubao, Quezon City his heirs or
assigns. 2
Private respondents received the payments for the above-mentioned lots, but failed to deliver the titles to petitioner.
On April 9, 1990 the latter demanded from the former the delivery of said titles. 3 Private respondents, however, refused
on the ground that the title of the first lot is in the possession of another person, 4 and petitioner's acquisition of the title
of the other lot is subject to certain conditions.
Offshoot, petitioner sued private respondents for specific performance before the RTC. In their answer with
counterclaim private respondents merely alleged the existence of the following oral conditions 5 which were never
reflected in the deeds of sale: 6
3.3.2 Title to the other property (TCT No. 243273) remains with the defendants (private respondents)
until plaintiff (petitioner) shows proof that all the following requirements have been met:
(i) Plaintiff will cause the segregation of his right of way amounting to 398 sq. m.;
(ii) Plaintiff will submit to the defendants the approved plan for the segregation;
(iii) Plaintiff will put up a strong wall between his property and that of defendants' lot to segregate his
right of way;
(iv) Plaintiff will pay the capital gains tax and all other expenses that may be incurred by reason of sale. .
During trial, private respondent Oscar Inocentes, a former judge, orally testified that the sale was subject to the above
conditions, 7 although such conditions were not incorporated in the deeds of sale. Despite petitioner's timely objections
on the ground that the introduction of said oral conditions was barred by the parol evidence rule, the lower court
nonetheless, admitted them and eventually dismissed the complaint as well as the counterclaim. On appeal, the Court of
Appeals (CA) affirmed the court a quo. Hence, this petition.
We are tasked to resolve the issue on the admissibility of parol evidence to establish the alleged oral conditionsprecedent to a contract of sale, when the deeds of sale are silent on such conditions.
The parol evidence herein introduced is inadmissible. First, private respondents' oral testimony on the alleged
conditions, coming from a party who has an interest in the outcome of the case, depending exclusively on human
memory, is not as reliable as written or documentary evidence. 8 Spoken words could be notoriously unreliable unlike a
written contract which speaks of a uniform language. 9 Thus, under the general rule in Section 9 of Rule 130 10 of the
Rules of Court, when the terms of an agreement were reduced to writing, as in this case, it is deemed to contain all the
terms agreed upon and no evidence of such terms can be admitted other than the contents thereof. 11 Considering that
the written deeds of sale were the only repository of the truth, whatever is not found in said instruments must have
been waived and abandoned by the parties. 12 Examining the deeds of sale, we cannot even make an inference that the
sale was subject to any condition. As a contract, it is the law between the parties. 13
Secondly, to buttress their argument, private respondents rely on the case of Land Settlement Development,
Co. vs.Garcia Plantation 14 where the Court ruled that a condition precedent to a contract may be established by parol
evidence. However, the material facts of that case are different from this case. In the former, the contract sought to be
enforced 15expressly stated that it is subject to an agreement containing the conditions-precedent which were proven
through parol evidence. Whereas, the deeds of sale in this case, made no reference to any pre-conditions or other
agreement. In fact, the sale is denominated as absolute in its own terms.
Third, the parol evidence herein sought to be introduced would vary, contradict or defeat the operation of a valid
instrument, 16 hence, contrary to the rule that:
The parol evidence rule forbids any addition to . . . the terms of a written instrument by testimony
purporting to show that, at or before the signing of the document, other or different terms were orally
agreed upon by the parties. 17
Although parol evidence is admissible to explain the meaning of a contract, "it cannot serve the purpose of
incorporating into the contract additional contemporaneous conditions which are not mentioned at all in the
writing unless there has been fraud or mistake." 18 No such fraud or mistake exists in this case.
Fourth, we disagree with private respondents' argument that their parol evidence is admissible under the exceptions
provided by the Rules, specifically, the alleged failure of the agreement to express the true intent of the parties. Such
exception obtains only in the following instance:
[W]here the written contract is so ambiguous or obscure in terms that the contractual intention of the
parties cannot be understood from a mere reading of the instrument. In such a case, extrinsic evidence

of the subject matter of the contract, of the relations of the parties to each other, and of the facts and
circumstances surrounding them when they entered into the contract may be received to enable the
court to make a proper, interpretation of the instrument. 19
In this case, the deeds of sale are clear, without any ambiguity, mistake or imperfection, much less obscurity or
doubt in the terms thereof.
Fifth, we are not persuaded by private respondents' contention that they "put in issue by the pleadings" the failure of
the written agreement to express the true intent of the parties. Record shows 20 that private respondents did
notexpressly plead that the deeds of sale were incomplete or that it did not reflect the
intention 21 of the buyer (petitioner) and the seller (private respondents). Such issue must be, "squarely
presented." 22Private respondents merely alleged that the sale was subject to four (4) conditions which they tried to
prove during trial by parol evidence. 23 Obviously, this cannot be done, because they did not plead any of the exceptions
mentioned in the parol evidence rule. 24 Their case is covered by the general rule that the contents of the writing are the
only repository of the terms of the agreement. Considering that private respondent Oscar Inocentes is a lawyer (and
former judge) he was "supposed to be steeped in legal knowledge and practices" and was "expected to know the
consequences" 25 of his signing a deed of absolute sale. Had he given an iota's attention to scrutinize the deeds, he
would have incorporated important stipulations that the transfer of title to said lots were conditional. 26
One last thing, assuming arguendo that the parol evidence is admissible, it should nonetheless be disbelieved as no
other evidence appears from the record to sustain the existence of the alleged conditions. Not even the other seller,
Asuncion Inocentes, was presented to testify on such conditions.
ACCORDINGLY, the appealed decision is REVERSED and the records of this case REMANDED to the trial court for proper
disposition in accordance with this ruling. SO ORDERED.

G.R. No. 165487

PEREZ, and



July 13, 2011

x ----------------------------------------------------------------------------------------x
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, assailing the
Decision[1] and Resolution[2] of the Court of Appeals dated 21 June 2004 and 24 September 2004, respectively.
These are the undisputed facts.
Nelson Santos (Santos) applied for a license with the National Food Authority (NFA) to engage in the business of
storing not more than 30,000 sacks of palay valued atP5,250,000.00 in his warehouse at Barangay Malacampa, Camiling,
Tarlac. Under Act No. 3893 or the General Bonded Warehouse Act, as amended, [3] the approval for said license was
conditioned upon posting of a cash bond, a bond secured by real estate, or a bond signed by a duly authorized bonding
company, the amount of which shall be fixed by the NFA Administrator at not less than thirty-three and one third
percent (33 1/3%) of the market value of the maximum quantity of rice to be received.
Accordingly, Country Bankers Insurance Corporation (Country Bankers) issued Warehouse Bond No.

03304 for P1,749,825.00 on 5 November 1989 and Warehouse Bond No. 02355 [5] for P749,925.00 on 13 December
1989 (1989 Bonds) through its agent, Antonio Lagman (Lagman). Santos was the bond principal, Lagman was the surety
and the Republic of the Philippines, through the NFA was the obligee. In consideration of these issuances,
corresponding Indemnity Agreements[6] were executed by Santos, as bond principal, together with Ban Lee Lim Santos

(Ban Lee Lim), Rhosemelita Reguine (Reguine) and Lagman, as co-signors. The latter bound themselves jointly and
severally liable to Country Bankers for any damages, prejudice, losses, costs, payments, advances and expenses of
whatever kind and nature, including attorneys fees and legal costs, which it may sustain as a consequence of the said
bond; to reimburse Country Bankers of whatever amount it may pay or cause to be paid or become liable to pay
thereunder; and to pay interest at the rate of 12% per annum computed and compounded monthly, as well as to pay
attorneys fees of 20% of the amount due it.[7]
Santos then secured a loan using his warehouse receipts as collateral.[8] When the loan matured, Santos
defaulted in his payment. The sacks of palay covered by the warehouse receipts were no longer found in the bonded
warehouse.[9] By virtue of the surety bonds, Country Bankers was compelled to pay P1,166,750.37.[10]
Consequently, Country Bankers filed a complaint for a sum of money docketed as Civil Case No. 95-73048
before the Regional Trial Court (RTC) of Manila. In his Answer, Lagman alleged that the 1989 Bonds were valid only for 1
year from the date of their issuance, as evidenced by receipts; that the bonds were never renewed and revived by
payment of premiums; that on 5 November 1990, Country Bankers issued Warehouse Bond No. 03515 (1990 Bond)
which was also valid for one year and that no Indemnity Agreement was executed for the purpose; and that the 1990
Bond supersedes, cancels, and renders no force and effect the 1989 Bonds.[11]
The bond principals, Santos and Ban Lee Lim, were not served with summons because they could no longer be
found.[12] The case was eventually dismissed against them without prejudice.[13] The other co-signor, Reguine, was
declared in default for failure to file her answer.[14]
On 21 September 1998, the trial court rendered judgment declaring Reguine and Lagman jointly and severally
liable to pay Country Bankers the amount of P2,400,499.87.[15] The dispositive portion of the RTC Decision[16] reads:
WHEREFORE, premises considered, judgment is hereby rendered, ordering defendants Rhomesita
[sic] Reguine and Antonio Lagman, jointly and severally liable to pay plaintiff, Country Bankers Assurance
Corporation, the amount of P2,400,499.87, with 12% interest from the date the complaint was filed until
fully satisfied plus 20% of the amount due plaintiff as and for attorneys fees and to pay the costs.
As the Court did not acquire jurisdiction over the persons of defendants Nelson Santos and Ban
Lee Lim Santos, let the case against them be DISMISSED. Defendant Antonio Lagmans counterclaim is
likewise DISMISSED, for lack of merit.[17]
In holding Lagman and Reguine solidarily liable to Country Bankers, the trial court relied on the express terms of
the Indemnity Agreement that they jointly and severally bound themselves to indemnify and make good to Country
Bankers any liability which the latter may incur on account of or arising from the execution of the bonds.[18]
The trial court rationalized that the bonds remain in force unless cancelled by the Administrator of the NFA and
cannot be unilaterally cancelled by Lagman. The trial court emphasized that for the failure of Lagman to comply with his
obligation under the Indemnity Agreements, he is likewise liable for damages as a consequence of the breach.
Lagman filed an appeal to the Court of Appeals, docketed as CA G.R. CV No. 61797. He insisted that the lifetime of
the 1989 Bonds, as well as the corresponding Indemnity Agreements was only 12 months. According to Lagman, the
1990 Bond was not pleaded in the complaint because it was not covered by an Indemnity Agreement and it superseded
the two prior bonds.[19]
On 21 June 2004, the Court of Appeals rendered the assailed Decision reversing and setting aside the Decision of
the RTC and ordering the dismissal of the complaint filed against Lagman.[20]
The appellate court held that the 1990 Bond superseded the 1989 Bonds. The appellate court observed that the
1990 Bond covers 33.3% of the market value of the palay, thereby manifesting the intention of the parties to make the
latter bond more comprehensive. Lagman was also exonerated by the appellate court from liability because he was not
a signatory to the alleged Indemnity Agreement of 5 November 1990 covering the 1990 Bond. The appellate court

rejected the argument of Country Bankers that the 1989 bonds were continuing, finding, as reason therefor, that the
receipts issued for the bonds indicate that they were effective for only one-year.
Country Bankers sought reconsideration which was denied in a Resolution dated 24 September 2004.[21]
Expectedly, Country Bankers filed the instant petition attributing two (2) errors to the Court of Appeals, to wit:

Country Bankers maintains that by the express terms of the 1989 Bonds, they shall remain in full force until
cancelled by the Administrator of the NFA. As continuing bonds, Country Bankers avers that Section 177 of the
Insurance Code applies, in that the bond may only be cancelled by the obligee, by the Insurance Commissioner or by a
competent court.
Country Bankers questions the existence of a third bond, the 1990 Bond, which allegedly cancelled the 1989
Bonds on the following grounds: First, Lagman failed to produce the original of the 1990 Bond and no basis has been laid
for the presentation of secondary evidence; Second, the issuance of the 1990 Bond was not approved and processed by
Country Bankers; Third, the NFA as bond obligee was not in possession of the 1990 Bond. Country Bankers stresses that
the cancellation of the 1989 Bonds requires the participation of the bond obligee. Ergo, the bonds remain subsisting
until cancelled by the bond obligee. Country Bankers further assert that Lagman also failed to prove that the NFA
accepted the 1990 Bond in replacement of the 1989 Bonds.
Country Bankers notes that the receipts issued for the 1989 Bonds are mere evidence of premium payments and
should not be relied on to determine the period of effectivity of the bonds. Country Bankers explains that the receipts
only represent the transactions between the bond principal and the surety, and does not involve the NFA as bond
Country Bankers calls this Courts attention to the incontestability clause contained in the Indemnity Agreements
which prohibits Lagman from questioning his liability therein.
In his Comment, Lagman raises the issue of novation by asserting that the 1989 Bonds were superseded by the
1990 Bond, which did not include Lagman as party. Therefore, Lagman argues, Country Bankers has no cause of action
against him. Lagman also reiterates that because of novation, the 1989 bonds are neither perpetual nor continuing.
Lagman anchors his defense on two (2) arguments: 1) the 1989 Bonds have expired and 2) the 1990 Bond
novates the 1989 Bonds.
The Court of Appeals held that the 1989 bonds were effective only for one (1) year, as evidenced by the receipts
on the payment of premiums.
We do not agree.
The official receipts in question serve as proof of payment of the premium for one year on each surety bond. It
does not, however, automatically mean that the surety bond is effective for only one (1) year. In fact, the effectivity of
the bond is not wholly dependent on the payment of premium. Section 177 of the Insurance Code expresses:
Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship
or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and

binding unless and until the premium therefor has been paid, except where the obligee has accepted
the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the
premium has been paid by the obligor to the surety: Provided, That if the contract of suretyship or
bond is not accepted by, or filed with the obligee, the surety shall collect only reasonable amount, not
exceeding fifty per centum of the premium due thereon as service fee plus the cost of stamps or other
taxes imposed for the issuance of the contract or bond: Provided, however, That if the non-acceptance
of the bond be due to the fault or negligence of the surety, no such service fee, stamps or taxes shall be
collected. (Emphasis supplied)

The 1989 Bonds have identical provisions and they state in very clear terms the effectivity of these bonds, viz:
NOW, THEREFORE, if the above-bounded Principal shall well and truly deliver to the depositors
PALAY received by him for STORAGE at any time that demand therefore is made, or shall pay the market
value therefore in case he is unable to return the same, then this obligation shall be null and void;
otherwise it shall remain in full force and effect and may be enforced in the manner provided by said Act
No. 3893 as amended by Republic Act No. 247 and P.D. No. 4. This bond shall remain in force until
cancelled by the Administrator of National Food Authority.[23]

This provision in the bonds is but in compliance with the second paragraph of Section 177 of the Insurance Code,
which specifies that a continuing bond, as in this case where there is no fixed expiration date, may be cancelled only by
the obligee, which is the NFA, by the Insurance Commissioner, and by the court. Thus:
In case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due
until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of
competent jurisdiction, as the case may be.
By law and by the specific contract involved in this case, the effectivity of the bond required for the obtention of a
license to engage in the business of receiving rice for storage is determined not alone by the payment of premiums but
principally by the Administrator of the NFA. From beginning to end, the Administrators brief is the enabling or disabling
The clear import of these provisions is that the surety bonds in question cannot be unilaterally cancelled by
Lagman. The same conclusion was reached by the trial court and we quote:
As there appears no record of cancellation of the Warehouse Bonds No. 03304 and No. 02355
either by the administrator of the NFA or by the Insurance Commissioner or by the Court, the
Warehouse Bonds are valid and binding and cannot be unilaterally cancelled by defendant Lagman as
general agent of the plaintiff.[24]

While the trial court did not directly rule on the existence and validity of the 1990 Bond, it upheld the 1989
Bonds as valid and binding, which could not be unilaterally cancelled by Lagman. The Court of Appeals, on the other
hand, acknowledged the 1990 Bond as having cancelled the two previous bonds by novation. Both courts however
failed to discuss their basis for rejecting or admitting the 1990 Bond, which, as we indicated, is bone to pick in this case.
Lagmans insistence on novation depends on the validity, nay, existence of the allegedly novating 1990
Bond. Country Bankers understandably impugns both. We see the point. Lagman presented a mere photocopy of the
1990 Bond. We rule as inadmissible such copy.
Under the best evidence rule, the original document must be produced whenever its contents are the subject of


The rule is encapsulated in Section 3, Rule 130 of the Rules of Court, as follow:

Sec. 3. Original document must be produced; exceptions. When the subject of inquiry is the
contents of a documents, no evidence shall be admissible other than the original document itself, except
in the following cases:
When the original has been lost or destroyed, or cannot be produced in court, without
bad faith on the part of the offeror;
When the original is in the custody or under the control of the party against whom the
evidence is offered, and the latter fails to produce it after reasonable notice;

When the original consists of numerous accounts or other documents which cannot be
examined in court without great loss of time and the fact sought to be established from them is only the
general result of the whole; and
When the original is a public record in the custody of a public officer or is recorded in a
public office.

A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the original is
unavailable.[27] Section 5, Rule 130 of the Rules of Court states:
SEC.5 When original document is unavailable. When the original document has been lost or
destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence and the
cause of its unavailability without bad faith on his part, may prove its contents by a copy, or by a recital
of its contents in some authentic document, or by the testimony of witnesses in the order stated.

Before a party is allowed to adduce secondary evidence to prove the contents of the original, the offeror must
prove the following: (1) the existence or due execution of the original; (2) the loss and destruction of the original or the
reason for its non-production in court; and (3) on the part of the offeror, the absence of bad faith to which the
unavailability of the original can be attributed. The correct order of proof is as follows: existence, execution, loss, and
In the case at bar, Lagman mentioned during the direct examination that there are actually four (4) duplicate
originals of the 1990 Bond: the first is kept by the NFA, the second is with the Loan Officer of the NFA in Tarlac, the third
is with Country Bankers and the fourth was in his possession.[29] A party must first present to the court proof of loss or
other satisfactory explanation for the non-production of the original instrument.[30] When more than one original copy
exists, it must appear that all of them have been lost, destroyed, or cannot be produced in court before secondary
evidence can be given of any one. A photocopy may not be used without accounting for the other originals.[31]
Despite knowledge of the existence and whereabouts of these duplicate originals, Lagman merely presented a
photocopy. He admitted that he kept a copy of the 1990 Bond but he could no longer produce it because he had already
severed his ties with Country Bankers. However, he did not explain why severance of ties is by itself reason enough for
the non-availability of his copy of the bond considering that, as it appears from the 1989 Bonds, Lagman himself is a
bondsman. Neither did Lagman explain why he failed to secure the original from any of the three other custodians he
mentioned in his testimony. While he apparently was able to find the original with the NFA Loan Officer, he was merely
contented with producing its photocopy. Clearly, Lagman failed to exert diligent efforts to produce the original.
Fueling further suspicion regarding the existence of the 1990 Bond is the absence of an Indemnity
Agreement. While Lagman argued that a 1990 Bond novates the 1989 Bonds, he raises the defense of non-existence of
an indemnity agreement which would conveniently exempt him from liability. The trial court deemed this defense
as indiciaof bad faith, thus:
To the observation of the Court, defendant Lagman contended that being a general agent
(which requires a much higher qualification than an ordinary agent), he is expected to have attended
seminars and workshops on general insurance wherein he is supposed to have acquired sufficient
knowledge of the general principles of insurance which he had fully practised or implemented from
experience. It somehow appears to the Courts assessment of his reneging liability of the bonds in
question, that he is still short of having really understood the principle of suretyship with reference to
the transaction of indemnity in which he is a signatory. If, as he alleged, that he is well-versed in
insurance, the Court finds no excuse for him to stand firm in denying his liability over the claim against
the bonds with indemnity provision. If he insists in not recognizing that liability, the more that this Court
is convinced that his knowledge that insurance operates under the principle of good faith is
inadequate. He missed the exception provided by Section 177 of the Insurance Code, as amended,
wherein non-payment of premium would not have the same essence in his mind that the agreements
entered into would not have full force or effect. It could be glimpsed, therefore, that the mere fact of
cancelling bonds with indemnity agreements and replacing them (absence of the same) to escape
liability clearly manifests bad faith on his part.[32] (Emphasis supplied.)

Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to speak of. Novation
is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which

extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in
place of the debtor, or by subrogating a third person in the rights of the creditor. For novation to take place, the
following requisites must concur: 1) There must be a previous valid obligation; 2) The parties concerned must agree to a
new contract; 3) The old contract must be extinguished; and 4) There must be a valid new contract.[33]
In this case, only the first element of novation exists. Indeed, there is a previous valid obligation, i.e., the 1989
Bonds. There is however neither a valid new contract nor a clear agreement between the parties to a new contract
since the very existence of the 1990 Bond has been rendered dubious. Without the new contract, the old contract is not
Implied novation necessitates a new obligation with which the old is in total incompatibility such that the old
obligation is completely superseded by the new one.[34]Quite obviously, neither can there be implied novation. In this
case, there is no new obligation.
The liability of Lagman is expressed in Indemnity Agreements executed in consideration of the 1989 Bonds which
we have considered as continuing contracts. Under both Indemnity Agreements, Lagman, as co-signor, together with
Santos, Ban Lee Lim and Reguine, bound themselves jointly and severally to Country Bankers to indemnify it for any
damage or loss sustained on the account of the execution of the bond, among others. The pertinent identical
stipulations of the Indemnity Agreements state:
INDEMNITY: To indemnify and make good to the COMPANY jointly and severally, any damages,
prejudice, loss, costs, payments advances and expenses of whatever kind and nature, including
attorneys fees and legal costs, which the COMPANY may, at any time, sustain or incur, as well as to
reimburse to said COMPANY all sums and amounts of money which the COMPANY or its representatives
shall or may pay or cause to be paid or become liable to pay, on account of or arising from the execution
of the above-mentioned BOND or any extension, renewal, alteration or substitution thereof made at the
instance of the undersigned or anyone of them.[35]

Moreover, the Indemnity Agreements also contained identical Incontestability Clauses which provide:
made by the COMPANY on account of the above-mentioned Bond, its renewals, extensions, alterations
or substitutions either in the belief that the COMPANY was obligated to make such payment or in the
belief that said payment was necessary or expedient in order to avoid greater losses or obligations for
which the COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals,
extensions, alterations, or substitutions, shall be final and shall not be disputed by the undersigned, who
hereby jointly and severally bind themselves to indemnify [Country Bankers] of any and all such
payments, as stated in the preceding clauses.
In case the COMPANY shall have paid[,] settled or compromised any liability, loss, costs,
damages, attorneys fees, expenses, claims[,] demands, suits, or judgments as above-stated, arising out
of or in connection with said bond, an itemized statement thereof, signed by an officer of the COMPANY
and other evidence to show said payment, settlement or compromise, shall be prima facie evidence of
said payment, settlement or compromise, as well as the liability of the undersigned in any and all suits
and claims against the undersigned arising out of said bond or this bond application.[36]
Lagman is bound by these Indemnity Agreements. Payments made by Country Bankers by virtue of the 1989
Bonds gave rise to Lagmans obligation to reimburse it under the Indemnity Agreements. Lagman, being a solidary
debtor, is liable for the entire obligation.
WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 61797 are SET ASIDE and the Decision dated 21 September 1998 of the RTC is hereby REINSTATED.