Insular v. Go-Tauco
REITERATIONFacts
The Antecedents: La Insular, a cigar and cigarette manufacturer, entered into a contract with Manuel Nubla Co-Siong (principal) and Rafael Machuca Go-Tauco (surety) for the daily supply of cigarettes. The contract stipulated a price of P172 per box, with payment due within five days of the following month. Go-Tauco bound himself as surety for P25,000. Procedural History: Cigarettes were supplied from 1913 to 1916. Initially, a specific tax of P1 per thousand cigarettes was paid by the manufacturer (La Insular). By Act No. 2432 (Dec. 23, 1914) and Act No. 2445 (effective Jan. 1, 1915), the tax increased to P1.20 per thousand. The law stipulated that for future deliveries under existing contracts, the burden of the increased tax would fall on the person to whom the article was furnished, unless otherwise agreed. La Insular added P10 per box to the price to cover this increased tax. Nubla Co-Siong made payments, which, according to La Insular's books, fully covered cigarettes delivered before August 1, 1916, assuming the increased tax was charged. However, Nubla Co-Siong failed to pay for 56 cases of cigarettes delivered in August and September 1916. La Insular filed suit in the Court of First Instance of Manila. The Petition: The trial court rendered judgment in favor of La Insular. Nubla Co-Siong was held liable for P10,192, including the increased tax. Go-Tauco, as surety, was held liable only for the original contract price of P172 per box, thus being absolved from the P10 per box increase, and was held liable for P9,632 only. Both defendants appealed.
Issue(s)
Whether the surety, Rafael Machuca Go-Tauco, is released from his obligation due to the increase in the specific tax on cigarettes imposed by Acts Nos. 2432 and 2445, which increased the price of cigarettes. Whether the payments made by the principal debtor, Manuel Nubla Co-Siong, should be reapplied exclusively to the original stipulated price of P172 per box, thereby discharging the surety.
Ruling
The Supreme Court affirmed the judgment of the lower court, holding both defendants liable. The surety's liability was limited to the original contract price, but he was not discharged by the legislative increase in tax. The principal debtor was liable for the full amount, including the increased tax.
Ratio Decidendi
On the issue of the surety's liability for the increased tax and potential release due to alteration of contract: The Court held that the legislative increase in the internal revenue tax on cigarettes, imposed by Acts Nos. 2432 and 2445, did not constitute a material alteration of the contract between La Insular and Nubla Co-Siong that would release the surety, Rafael Machuca Go-Tauco. The Court reasoned that the government's act of increasing the tax was an external factor, not a change effected by the principal parties to the contract. Such legislative acts are considered to be made under the taxing power of the government, to which all contracts are subject. Citing The North Missouri R.R. Co. vs. MaGuire, the Court emphasized that a lawful tax, even if it increases the debt of one person or imposes additional burdens, does not impair the obligation of a contract in the constitutional sense, nor does it change the contract in a manner that would discharge a surety. The Court distinguished this from changes made by the parties themselves, which could release a surety. Therefore, the imposition of the increased tax did not legally alter the contract in a way that would prejudice the surety. On the issue of the application of payments: The Court resolved the surety's contention that payments made by the principal debtor should be reapplied exclusively to the original stipulated price of P172 per box, thereby discharging the surety, adversely to him. The Court found that the principal debtor, Manuel Nubla Co-Siong, made payments on bills that, after January 1, 1915, included the P10 per case increase representing the new tax. By paying these bills, Nubla Co-Siong assented to the application of his payments as presented by the creditor, La Insular. The Court stated that the surety is bound by the application of payments made by the creditor with the assent of the principal debtor. The fact that the bills were rendered for 'cigarettes supplied' and not explicitly for 'cigarettes plus tax' did not alter the fundamental rights of the parties, as the principal debtor was aware of the additional amount due to the new tax.
Main Doctrine
A legislative act increasing a tax, which is an external factor not agreed upon by the parties to a contract, does not constitute a material alteration of the contract that would release a surety, as all contracts are made subject to the taxing powers of the government.