EN
BANC
LA
INSULAR,
Plaintiff-Appellee,
G.
R.
No. 13307
February
3, 1919
-versus-
RAFAEL
MACHUCA
GO-TAUCO
AND MANUEL
NUBLA
CO-SIONG,
Defendants-Appellants.
D
E C I S I
O N
STREET,
J :
The plaintiff in this action,
La Insular, is a commercial partnership engaged in the manufacture of
cigars
and cigarettes in the City of Manila. On July 15, 1913, a contract was
entered into between its general agent and the two defendants, Manuel
Nubla
Co-Siong and Rafael Machuca Go-Tauco, whereby the plaintiff became
obliged
to supply cigarettes daily to Manuel Nubla Co-Siong in a quantity of
not
less than two nor more than five boxes of two thousand packages each.
The
price was fixed at P172 per box, payment to be made within the first
five
days of the month next following the successive deliveries. Manuel
Nubla
Co-Siong obligated himself as principal to pay for the cigarettes
within
said five days, while Rafael Machuca Go-Tauco bound himself as surety,
jointly and severally with Nubla, in the sum of P25,000, to satisfy an
indebtedness contracted for cigarettes thus supplied.
Pursuant to the
provisions
of this agreement, cigarettes were supplied by the plaintiff to Nubla
Co-Siong
during the years 1913 to 1916, amounting in value to nearly P350,000.
For
the cigarettes so supplied, payment was from time to time made by the
defendant
Nubla Co-Siong upon bills presented by the plaintiff.
It appears that when
the contract above-mentioned was executed, cigarettes were subject to a
specific tax of one peso for each thousand cigarettes. This tax was,
under
the law then prevailing, paid by the manufacturer, and the liability
for
said tax naturally fell in the present case upon the plaintiff. By Act
No. 2432, enacted December 23, 1914, the Philippine Legislature
increased
the specific tax on cigarettes from P1 to P1.20 per thousand
cigarettes,
and by amendatory Act No. 2445, effective from January 1, 1915, it was
declared that, as regards contracts already made for future delivery,
the
burden of the increased tax should, unless the parties should have
otherwise
agreed, be borne by the person to whom the article taxed should be
furnished.
After this provision
became effective, the plaintiff continued, as before, to pay the
internal
revenue taxes and in order to reimburse itself to the extent of the
outlay
incident to the increase in the tax added the amount of P10 per box to
the price of the cigarettes. The monthly statements thereafter
submitted
to the purchaser by the plaintiff showed this increase; and as payments
were from time to time made by Nubla, they were credited by the
plaintiff
upon account, with the result that, upon the showing of the plaintiff's
books and assuming that Nubla had been properly charged with the
increased
tax, all cigarettes delivered prior to August 1, 1916, had been fully
paid
for. During the months of August and September, however, fifty-six
cases
of cigarettes were taken by Nubla, for which no payment has been made;
and for the recovery of the amount alleged to be due for these
cigarettes
this action was instituted by the plaintiff in the Court of First
Instance
of the City of Manila. Judgment having been rendered in favor of the
plaintiff,
both defendants have appealed.
The dispute is upon
the point of liability for the increased tax imposed by Act No. 2432,
and
the amount which the plaintiff is entitled to recover from the
defendant
Nubla Co-Siong, assuming that said defendant is liable for the tax at
all,
is P10,192, the amount for which judgment was rendered against him by
the
trial court. As to the defendant Rafael Machuca Go-Tauco, the trial
court
held that, being a surety, his liability was limited to the payment of
the price stipulated in the original contract, or P172 per box, and
that
he was not liable for the additional amount of P10 per box representing
the increase in the tax. Judgment was, therefore, rendered against this
defendant, jointly and severally with his codefendant, for the sum of
P9,632
only.
As regards the
liability
of the purchaser, Nubla Co-Siong, the case is determined adversely to
his
contention by the decision of this court in Mitsui Bussan Kaisha vs.
Manila
Electric Railroad and Light Company [p. 624, post]; and upon this
branch
of the present case we are content to refer to the opinion therein as
embracing
a sufficient statement of the grounds of the decision. As against the
surety,
Rafael Machuca Go-Tauco, the case presents one or two additional
features
which require discussion.
As already noted, the
trial court held that the liability of the surety did not extend to the
reimbursement of the plaintiff for the amount paid out by it in
satisfaction
of the increased internal-revenue tax on the fifty six cases of
cigarettes
bought in August and September 1916. This defendant was, therefore,
absolved
from liability for the sum of P560, which the plaintiff had paid upon
said
cigarettes. As the plaintiff did not appeal from this judgment, the
propriety
of the action of the trial court upon this point is not now in question.
It is, however, here
contended for the surety that the Court erred in holding him liable for
any part of the indebtedness which is the basis of this action. This
contention
is based upon two distinct arguments. The first is that, supposing Act
No. 2445 to be valid, it increases from P172 to P182 per box the price
which Manuel Nubla Co-Siong was obligated to pay for the cigarettes,
which
alteration in the contract has the effect of releasing the surety. The
second is that the payments made by Nubla to the plaintiff in the
entire
period during which cigarettes were supplied under the contract in
question,
i. e., from July 15, 1913, to September 6, 1916, were sufficient fully
to satisfy the price of P172 chargeable for the cigarettes under the
contract,
and that the obligation of the surety is therefore discharged. In other
words this defendant insists that the application of the payments from
time to time made by the principal debtor should be revised and that
said
payments should be reapplied exclusively to the stipulated price of the
cigarettes, without reference to the additional P10 per case paid after
January 1, 1915, in satisfaction of the increased internal-revenue tax.
These propositions will be considered in turn.
It is undoubtedly true
that the law looks upon the contract of suretyship with a jealous eye,
and the rule is settled that the obligation of the surety cannot be
extended
by implication beyond its specified limits. Article 1827 of the Civil
Code
so declares [Uy Aloc vs. Cho Jan Ling, 27 Phil. Rep. 427]; and with
this
doctrine the common law is accordant. As was said by Justice Story in
Miller
vs. Stewart [9 Wheat., 680; 6 L. ed., 189]:
"Nothing can be
clearer,
both upon Principle and authority, than the doctrine that the liability
of a surety is not to be extended, by implication, beyond the terms of
his contract. To the extent, and in the manner, and under the
circumstances
pointed out in his obligation, he is bound, and no farther."
It is, furthermore, a well-recognized
rule of jurisprudence, applied in the case just cited, that if any
material
alteration or change in the obligation of the principal obligor is
effected
by the immediate parties to the contract, without the assent of the
surety,
the latter is discharged. Cases could be cited to this proposition
without
number, one of the most common illustrations being found in the
situation
where the creditor, or obligee, without the assent of the surety, by a
valid and binding agreement gives further time to the principal debtor
for payment or performance. As is well known, the surety is thereby
discharged.
[32 Cyc., 191].
A statement is not
infrequently found in the cases to the effect that it makes no
difference
whether the change in the obligation of the contract may be favorable
to
the surety; it is enough to release the surety that the contract was
changed
without his assent. Speaking generally, this last observation may be
accepted,
but authorities are to be found which raise a doubt as to the
universality
of such rule. Thus, in Preston vs. Huntington [67 Mich., 139], it was
held
that a surety who had obligated himself to answer for the rent reserved
in a lease at the rate of $75 per month was not discharged from the
obligation
by the circumstance that, by a valid agreement between the landlord and
his tenant [the principal obligor], the amount of the rent was reduced
$25 per month, though of course the liability of the surety was held to
be reduced to the same extent. The Court considered the reduction of
rent
as being in the nature of a release pro tanto only.
It is to be noted that
in order to effect a release of the surety, the change in the contract
must, as a general rule, be made by the principal parties to the
contract.
Indeed, no valid or effective change in the contract can, generally
speaking,
be made by any other person than the actual parties thereto. A
recognized
exception - more apparent than real - is found in cases where sureties
on official bonds have been held to be released as a result of changes
effected by the Legislature in the duration of the official term or in
the duties of the officer whose fidelity is intended to be secured by
the
bond. A line of decisions, of which Roman vs. Peters [2 Rob. (La.),
479;
38 Am. Dec., 222], is an illustration, holds that the surety is
discharged
by such change in the law. It appeared in the case just cited, that
subsequent
to the execution of the official bond of a sheriff, an Act of the
Legislature
was passed curtailing the duties and emoluments of the office. Said the
Court:
"The law is
particularly
watchful over the rights of sureties; and will not countenance any
transactions
between the parties, that shall lessen the ability of the principal to
comply with his contract, or that shall alter the rights of the
parties,
or enlarge the demand to the prejudice of the sureties. To permit
parties
to alter and modify their contracts as they please, and to hold the
sureties
answerable for the performance of such parts as were not altered, would
be transferring their responsibility, without their consent, from one
contract
to another. The contract, by the modification and alteration, becomes a
new and different contract, and one for which the sureties never became
responsible.
xxx
"These principles are
not denied by the opposite party but their application to official
bonds
given to the state by public officers is contested; and it is asserted
that any change produced in the contract by the agency of a third
person,
causing an increased responsibility of the surety will not discharge
the
latter, if the creditor has merely been inactive or passive. But we
cannot
regard the state as a stranger to this contract."
It is not necessary here
to express an opinion upon the point whether the case referred to was
or
was not correctly decided. We observe, however, that the closing words
of the passage quoted shows that the Court placed the decision on the
ground
that the State, which entity, it should be noted, is named as the
obligee
in an official bond, was a party to the contract; and when the
Legislature,
as one of the arms of the State, intervened to change the obligation,
such
change was in fact effected by the State itself.
In the case at bar
the Government of the Philippine Islands was in no sense a party to the
contract of July 15, 1913, between the plaintiff and the defendants;
and
it is readily seen that when the Legislature of these Islands increased
the internal revenue tax upon cigarettes, this was an act done by a
stranger
to the contract, and not by any person in privity therewith. The
consequence
is that, properly speaking, the legislative fiat, placing the burden of
the tax on the purchaser, did not in any wise affect the obligation of
the contract as between the parties. It was merely an external factor
which
supervening upon the situation created by the contract, made it
impossible
for the purchaser to realize the benefit which would have accrued to
him
if the seller had been required to pay the tax. Nearly all changes in
taxation
affect existing contracts in some way or other, but this does not
necessarily
change such contracts in a legal sense.
The question of the
constitutional validity of Acts Nos. 2432 and 2445 is not under
discussion
in this decision; for as will be seen by reference to Mitsui Bussan
Kaisha
us. Manila Electric Railroad and Light Company, already referred to,
that
question was effectually settled by the Act of Congress legalizing Acts
Nos. 2432 and 2445. But it is insisted that the Legislative Acts last
mentioned
so altered the obligation of the contract in question as to release the
surety, and in this connection, We think it well to refer to some of
the
American cases in which the constitutionality of such Acts as these
have
been discussed, for it is evident that if the imposition of the
increased
tax on cigarettes in the case before Us could not have had the effect,
in the absence of any action by Congress, of impairing the contract in
the constitutional sense, it must also follow that the contract was not
changed in the sense necessary to release the surety. Upon this point
We
quote, as pertinent, the following language used by the Supreme Court
of
the United States:
"Authorities from
numerous
sources are cited by the plaintiffs, but none of them show that a
lawful
tax on a new subject, or an increased tax on an old one, interferes
with
a contract or impairs its obligation, within the meaning of the
Constitution,
even though such taxation may affect particular contracts, as it may
increase
the debt of one person and lessen the security of another, or may
impose
additional burdens upon one class and release the burdens of another,
still
the tax must be paid unless prohibited by the Constitution, nor can it
be said that it impairs the obligation of any existing contract in its
true legal sense." [The North Missouri R.R. Co. vs. MaGuire, 87 U.S.,
46;
22 L. ed., 294].
It has been held by the
same high Tribunal that the imposition of a license tax on the resident
agent of a foreign manufacturing company does not impair the obligation
of the contract between the agent and his principal, although its
immediate
consequence is to make that contract less profitable to the agent.
[Kehrer
vs. Stewart, 197 U.S., 60; 49 L. ed., 663].
In Clement National
Bank vs. State of Vermont [231 U.S., 120; 68 L. ed., 148], it was held
that the obligations of existing contracts between a national bank and
its depositors were not constitutionally impaired by a tax imposed by
the
legislature of the State of Vermont upon interest bearing deposits
which
the bank was authorized to pay and charge to the depositors. In this
case
it was held, at page 140:
"It cannot be doubted
that the property being taxable, the state could provide, in order to
secure
the collection of a valid tax upon such credits, for garnishment or
trustee
process against the bank, or in effect constitute the bank its agent to
collect the tax from the individual depositors."
The
point was made in this
case that the statute levying the tax interfered with existing
contracts
between the bank and its depositors, impairing their obligations. The
court
overruled this contention and held that the statute merely imposed a
tax
upon the property of the depositors in the exercise of a power subject
to which the contracts of deposit were made. It is thus seen that all
contracts
are made subject to the taxing powers of the state and territorial
governments.
In Tanner vs. Little
[240 U.S., 369; 60 L. ed., 691], it was held that a state license tax
on
merchants using stamps, tickets, or coupons, redeemable in cash or
merchandise,
does not unconstitutionally impair the contract obligations of such
merchants
with their customers or with third parties with whom they had
contracted
for the use of such stamps or coupons before the Act levying the tax
was
passed.
In Grand Trunk Western
Railway Co. vs. Railroad Commission of Indiana [221 U.S., 400; 55 L.
ed.,
786], it was held that a contract between two intersecting railway
companies
imposing upon the junior road the duty of constructing and properly
maintaining
the physical crossing of the two roads, and providing and maintaining
semaphores,
watchmen, etc., is not constitutionally impaired by an order of the
state
railroad commission prescribing other and additional duties such as the
installation and use of an interlocking plant and apportioning between
the two companies the expense of executing the order.
In Chicago, Burlington
& Quincy Railroad Co. vs. State of Nebraska [170 U.S., 57; 42 L.
ed.,
948], it was held that a contract between a city and a railroad company
to participate in the construction of a viaduct in view of their mutual
duty to the public is not violated by a statute and ordinance
compelling
the railroad company to repair it. The court further held in this case
that the maintenance of safe viaducts over railroad tracts at important
street crossings cannot be taken out of the police power of the
legislature
by a contract between a city and a railroad company.
These authorities,
We think, clearly show that the Acts of the Legislature by which the
increased
tax on cigarettes was imposed neither impaired, in a constitutional
sense.
the obligation of the contract which is the basis of this action nor
changed
that obligation in such sense as to occasion the discharge of the
surety.
The point raised in
behalf of the surety with respect to the application of the payments
must
in our opinion be likewise resolved adversely to him. The surety is
clearly
bound by the application of the payments made by the creditor with the
assent of the principal debtor, and we entertain no doubt that when
Manuel
Nubla Co-Siong from time to time paid the bills submitted by the
plaintiff,
and which, after January 1, 1915, showed an increase of P10 per case in
the price of the cigarettes, he very well knew that this additional
amount
was due to the inclusion of the new tax paid by the plaintiff. We are
not
impressed by the suggestion contained in the appellant's brief to the
effect
that as the bills appear to have been rendered only for cigarettes
supplied,
and not for cigarettes plus the amount paid upon account of
internal-revenue
tax, the payments must therefore be applied exclusively to the price of
the cigarettes. The fundamental rights of the parties, which are
sufficiently
put in issue in the complaint and answer, are not in our opinion
affected
by the form in which the accounts were rendered nor by the circumstance
that the plaintiff's cause of action, as stated in his complaint,
purports
to be based merely upon a claim for cigarettes sold.
Our conclusion is that
there is no error in the judgment appealed from and the same is
accordingly
affirmed, with costs against the appellants. So ordered.
Arellano, C.J.,
Torres, Carson, Malcolm, Avanceña and Moir, JJ., concur.
Johnson, J.,
reserves his vote. |