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,
CEL’s 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 latter’s 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.
o 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 RFC’s 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 former’s stock subscription
o Maria Roca would be substituted for Inocencia Arellano, having acquired the latter’s
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
(SIEC’s 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 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 SIEC’s 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 SIEC’s request upon re-appraisal of the securities offered.
o SIEC’s statement that it will have to rely on the importation of jute and its request for
assurance are not in line with RFC’s 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 RFC’s 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
attorney’s fees.
 RFC (now DBP) appealed to the SC.
o SIEC’s 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 RFC’s 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.
 SIEC’s subsequent conduct confirms this desistance:
o It did not protest against any alleged breach of contract nor point out that RFC’s stand
was legally unjustified.
o Its request for cancellation of the mortgage carried no reservation of whatever rights
it believed it might have against RFC.
o In 1962, it applied with DBP for another loan to finance a rice and corn project, which
was disapproved.
o 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.