Bank of the Philippine Islands v. Gooch
REITERATIONFacts
The Antecedents: Charles D. Gooch obtained a "credit in current account" from the Bank of the Philippine Islands (BPI) not exceeding P10,000, with an interest rate of eight percent (8%) per annum, computed upon average daily balances and payable quarterly. James R. Redfern signed a joint and several bond with Gooch for P10,000 to secure the principal and interest of the loan. Subsequently, BPI unilaterally increased the interest rate on Gooch's account to nine percent (9%) on April 12, 1920, and later to twelve percent (12%) on February 10, 1922. The bank also charged Gooch the interest monthly instead of quarterly, all without Redfern's knowledge or consent. BPI later demanded payment, which was not made, leading to the filing of the present action. Procedural History: The trial court rendered judgment in favor of BPI and against Gooch and Redfern for P8,804.35, with interest at 12% from July 17, 1922, and costs. Redfern appealed, arguing that the lower court erred in not relieving him from liability as surety due to the changes made in the principal obligation without his consent. The Petition: The defendant James R. Redfern appealed the decision, alleging that the lower court committed an error in not relieving him from liability as surety because of certain changes made in the principal obligation by the plaintiff, without his knowledge or consent.
Issue(s)
Whether the unilateral change in the interest rate by the bank, without the surety's consent, releases the surety from his obligation. Whether the change in the interest rate constituted a material alteration of the original contract that would discharge the surety.
Ruling
The Supreme Court affirmed the lower court's decision in principle but remanded the case for further proceedings to determine the exact amount due. The Court held that the changes in the interest rate, not being fraudulent and constituting a collateral agreement between the principal debtor and the bank, did not alter the original contract of the surety, thus Redfern remained liable.
Ratio Decidendi
On the issue of whether the unilateral change in the interest rate by the bank, without the surety's consent, releases the surety from his obligation: The Court held that while the general rule is that an alteration in a written contract may relieve parties from their original obligation, this is not the case when the alteration was not done fraudulently. In this instance, the change in the interest rate was not a fraudulent act but rather a collateral agreement between the bank and the principal debtor, Gooch. Gooch was not obligated to pay the extra rate but chose to do so, possibly to avoid an immediate demand for the principal. This agreement to pay an additional rate of interest was an additional burden assumed by Gooch, separate and apart from his original contract, and did not affect the original contract of the appellant, Redfern. Therefore, Redfern's liability remained unchanged. On the issue of whether the change in the interest rate constituted a material alteration of the original contract that would discharge the surety: The Court clarified that the original contract was not actually altered or changed in its fundamental terms. The bank merely notified Gooch of a new rate of interest he would have to pay. This notification and Gooch's subsequent agreement to pay the higher rate constituted a collateral agreement. The appellant's contention that this change discharged him from liability was based on the general rule regarding material alterations. However, the Court cited authorities stating that if an alteration is material but not fraudulently done, the party may still recover upon the original consideration. More importantly, the Court found that the change in interest rate was a collateral agreement, not a modification of the original contract binding the surety. The appellant's liability was tied to the original terms of the bond, which remained unaffected by the separate arrangement between the bank and Gooch regarding increased interest.
Main Doctrine
A change in the rate of interest, if not fraudulently done and constitutes a collateral agreement between the principal debtor and the creditor, does not alter the original obligation of a surety and does not relieve the surety from liability.