G.R. No. L-29587 November 28, 1975 PHILIPPINE NATIONAL BANK, petitioner, vs. LUZON SURETY CO., INC.

and THE HONORABLE COURT OF APPEALS, respondent. Medina and Magtalas for petitioner. Tolentino, Garcia, Cruz and Reyes for private respondent.

The facts as found by the Court of Appeals are as follows: ... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a sugar planter adhered to the Lopez Sugar Central Milling Company, Inc. applied for a crop loan with the plaintiff, Philippine National Bank, Exhibit A; this application was approved on 6 March, 1952 in the amount of P32,400, according to the complaint; but the document of approval has not been exhibited; at any rate, the planter Villarosa executed a Chattel Mortgage on standing crops to guarantee the crop loan, Exhibit B and as shown in Exhibits C to C-30 on various dates from 28 January, 1952 to 9 January, 1953, in consideration of periodical sums of money by him received from PNB, planter Villarosa executed these promissory notes from which will be seen that the credit line was that the original amount of P32,400 and was thus maintained up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards it was increased and promissory notes Exhibits C-10 to C-30 were based on the increased credit line; and as of 27 September, 1953 as shown in the accounts, Exhibits D and D-1, there was a balance of P63,222.78 but as of the date when the complaint was filed on 8 June, 1960, because of the interest accrued, it had reached a much higher sum; that was why due to its non-payment, plaintiff filed this complaint, as has been said, on 8 June, 1960; now the complaint sought relief not only against the planter but also against the three (3) bondsmen, Luzon Surety, Central Surety and Associated Surety because Luzon Surety had filed the bond Exhibit E dated 18 February, 1952 in the sum of P10,000; Central Surety Exhibit F dated 24 February, 1952 in the sum of P20,000 and Associated Surety the bond Exhibit G dated 11 September, 1952 in the sum of P15,000; in gist, the obligation of each of the bondsmen being to guarantee the faithful performance of the obligation of the planter with PNB; now each of the defendants in their answers raised various defenses but as far as principal defendant Augusto R. Villarosa and other defendants Central Surety and Associated Surety are concerned, their liability is no longer material because they have not appealed; and in the trial of the case, plaintiff submitted Exhibits A to J-1 and witness Romanito Brillantes; but the defense of Luzon Surety thru its witness Jose Arroyo and Exhibits 1 to 3 being 1st that the evidence of the plaintiff did not establish a cause of action to make Luzon Surety liable and 2ndly, in any case that there had been material alteration in the principal obligation, if any, guaranteed by it; ... .

ESGUERRA, J.: Petitioner Philippine National Bank seeks a review and reversal of the decision dated June 26, 1968, of the Court of Appeals in its case CA-G.R. No. 30282-R, absolving Luzon Surety Co., Inc. of its liability to said petitioner and thus reversing the decision of the Court of First Instance of Negros Occidental, the dispositive portion of which reads as follows: IN VIEW THEREOF, judgment is hereby rendered ordering defendant Augusto R. Villarosa to pay plaintiff PHILIPPINE NATIONAL BANK the sum of P81,200.00 plus accrued interest of 5% per annum on P63,222.78 from August 31, 1959; to pay 10% of said amount as attorney's fees and to pay the costs. Defendant Luzon Surety Co., Inc. is hereby ordered to pay jointly and severally with defendant Villarosa to the plaintiff the sum of P10,000.00; defendant Central Surety and Insurance Company jointly and severally with defendant Villarosa the sum of P20,000 to the plaintiff, and Associated Surety And Insurance Co. jointly and severally with defendant Villarosa the sum of P15,000.00 to the plaintiff, with the understanding that should said bonding companies pay the aforementioned amounts of their respective bonds to the plaintiff, said amounts should be deducted from the total outstanding obligation of defendant Villarosa in favor of the plaintiff. Above-quoted decision was modified in an order of the Court of First Instance dated June 5, 1961, granting petitioner Philippine National Bank (PNB) the right to recover accrued interest at the rate of 5% per annum from December 24, 1953, from the defendants bonding companies.

Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to this Court and alleged the following errors. 1. The Court of Appeals erred in the application of the law involved by invoking Article 2055 of the New Civil Code, which properly should have been the law on suretyship which are covered by Section 4, Chapter 3, Title 1, Book IV of the New Civil Code; 2. Consequently, when the Court of Appeals released the surety from liability, it committed a grave or gross misappreciation of facts amounting to an error of law; 3. The Court of Appeals erred when it held that there must have been a principal crop loan contract, guaranteed by the surety bonds; 4. The Court of Appeals erred when it released the surety from liability. The above assigned errors boil down to the single question of whether or not the Court of Appeals was justified in absolving Luzon Surety Co., Inc., from liability to petitioner Philippine National Bank. We have examined the record thoroughly and found the appealed decision to be erroneous. Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly provided as follows: xxx xxx xxx 1. That the Mortgagor does by these presents grant, cede and convey unto the Mortgagee by way of First Mortgage free from any encumbrances, all the crops of the absolute property of the Mortgagor, corresponding to the 1952-53 and subsequent yearly sugar crops agricultural season at present growing in the Hda. known as San Antonio, Washington (P) Audit 24-124 and 24-16 la and Hda. Aliwanay (non-quota land); milling with LSMC and CAD Municipality of Sagay, and Escalante, Province of Negros Occidental covered by cadastral lots no. Various of the Cadastral Survey at the Municipality of Sagay, Escalante particularly bounded and described in Transfer Certificate of Title No. Various issued by the Register of Deeds of said province. The said mortgage crops consist of all the Mortgagor's first available entire net share of the 1952-53 and subsequent yearly sugar crops

thereafter conservatively estimated at but not less than Three Thousand Four Hundred Twenty and 14/00 (3,420.14) piculs of export and domestic sugar, including whatever addition thereto, and such aids, subsidies, indemnity payments and other benefits as maybe awarded to the Mortgagor, coming from any source, governmental or otherwise. xxx xxx xxx 4. This Mortgage is executed to secure payment by the Mortgagor to the Mortgagee at the latter's office of a loan herein granted to the Mortgagor in the sum of Thirty Two Thousand Four Hundred (P32,400.00) Pesos, Philippine Currency, with interest at the rate of five per cent per annum, which loan shall be given to the Mortgagor either in lump sum or in installments as the mortgagee may determine. The Mortgagee may increase or decrease the amount of the loan as well as the installments as it may deem convenient and the Mortgagor shall submit such periodical reports on the crops mortgaged as the Mortgagee may require. In the event that the loan is increased such increase shall likewise be secured by Mortgage. This Mortgage shall also secure any other loans or advances that the Mortgagee may extend to the Mortgagor, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the account books and records of the Mortgagee. xxx xxx xxx Likewise an extract from the Surety Bond executed by and between the PNB on one hand and Augusto Villarosa and respondent Luzon Surety Company, Inc. on the other, is hereby reproduced, viz: That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety Company, Inc. a corporation duly organized and existing under and by virtue of the laws of the Philippines, as surety, are held firmly bound unto Philippine National Bank, Bacolod City, Philippines, in the sum of Ten Thousand Pesos (P10,000.00) Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns jointly and severally, firmly by these presents:

The condition of the obligation are as follows: WHEREAS, the above bounden principal, on the day of February, 1952, entered into a crop loan contract with obligee Philippine National Bank, Bacolod Branch of Bacolod City, Philippines to fully and faithfully Comply with all the terms and condition stipulated in said crop loan contract which are hereby incorporated as essential parts hereof, and principally to meet and pay from the proceeds of the sugar produced from his Hda. Antonio and Hda. Aliwanay, Escalante, Occidental Negros credit advances made by the Philippine National Bank Bacolod Branch not to exceed P32,800 as stated in said contract. Provided further that the liability under this bond shall not exceed the amount of P10,000.00 WHEREAS, said Philippine National Bank Bacolod Branch requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on his part of said crop loan contract. NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms and conditions and agreement stipulated in said crop loan contract then, this obligation shall be null and void, otherwise it shall remain in full force and effect. xxx xxx xxx The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine National Bank not merely as a guarantor but as surety-liable as a regular party to the undertaking (Castelvi de Higgins vs. Sellner 41 Phil. 142). The Court of Appeals, however, in absolving the bonding company ratiocinates that the Surety Bond executed on February 18, 1952, made specific references to a crop loan contract executed by Augusto Villarosa sometime in February 1952. And, therefore, the Chattel Mortgage, Exhibit B dated March 6, 1952, could not have been the obligations guaranteed by the surety bond. Thus the Court of Appeals stated: ... one is really at a loss to impose any liability upon Luzon Surety in the absence of the principal obligation which was a crop loan contract executed in February, 1952, and to which there was made an express reference in the surety bond, Exhibit E; let it not be overlooked further that one can secure a crop loan without

executing a Chattel Mortgage on his crops because the crop loan is the principal obligation while the Chattel Mortgage is only an ancillary and secondary contract to guarantee fulfillment of a crop loan; stated otherwise and as Luzon Surety never intervened in the execution of the Chattel Mortgage, Exhibit B, there is no way under the evidence from which it can be made to answer for liability to Augusto Villarosa under Exhibit E; ... " The Court of Appeals, to Our mind did not give credence to an otherwise significant and unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B was the only chattel mortgage executed by Augusto Villarosa evidencing the crop loan contract and upon which Luzon Surety agreed to assume liability up to the amount of P10,000 by posting the said surety bond. Moreover Article 1354 of our New Civil Code which provides: Art. 1354. Although the cause is not stated in the contract., it is presumed that it exist and is lawful, unless the debtor proves the contrary. bolster petitioner's stand. Considering too that Luzon Surety company is engaged in the business of furnishing guarantees, for a consideration, there is no reason that it should be entitled to a rule of strictissimi juris or a strained and over-strict interpretation of its undertaking. The presumption indulged in by the law in favor of guarantors was premised on the fact that guarantees were originally gratuitous obligations, which is not true at present, at least in the great majority of cases. (Aurelio Montinola vs. Alejo Gatila, et al, G.R. No L-7558, October 31, 1955). We have likewise gone over the answer of Luzon Surety Company dated June 17, 1960 (p. 73 Record on Appeal) and noted the following: xxx xxx xxx 3. Defendant LUZON admits the portion of paragraph 3 referring to the grant of P32,400 secured by a Chattel Mortgage dated March 6, 1952, copy of which is attached as Annex "A" of the complaint. xxx xxx xxx As special defenses:

8. The terms and conditions of the surety bond as well as the contract it guaranteed was materially altered and or novated without the knowledge and consent of the surety thereby releasing the latter from liability. 11. The maximum liability, if any, of defendant LUZON is P10.000.00. The principal obligation, therefore, has never been put in issue by then defendant now respondent Luzon Surety Co., Inc. On the other hand it raised as its defense the alleged material alteration of the terms and conditions of the contract as the basis of its prayer for release. Even this defense of respondent Luzon Surety Co., Inc. is untenable under the facts obtaining. As a surety, said bonding company is charged as an original promissory and is an insurer of the debt. While it is an accepted rule in our jurisdiction that an alteration of the contract is a ground for release, this alteration, We stress must be material. A cursory examination of the record shows that the alterations in the form of increases were made with the full consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel Mortgage explicitly provided for this increase(s), viz: ... the Mortgagee may increase or decrease the amount of the loan as well as the installment as it may deem convenient ... and this contract, Exhibit "B", was precisely referred to and mentioned in the Surety Bond itself. In the case of Lim Julian vs. Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718, this Court held: It has been decided in many cases that the consideration named in a mortgage for future advancements does not limit the amount for which such contract may stand as security, if from the four corners of the document, the intent to secure future indebtedness is apparent. Where, by the plain terms of the contract, such an intent is evident, it will control. ... The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would increase its liability to more than P10,000 which is the maximum of its bond. We cannot agree to this reasoning. In the cases ofTagawa vs. Aldanese, 43 Phil. 852, 859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery Co., 100 Phil. 679, 682, cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p. 772, it was held: If a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, the liability becomes more than

that in the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection. It should be noted, however, that the interest runs from the time the complaint is filed, not from the time the debt becomes due and demandable. PREMISES CONSIDERED, the judgment appealed from is reversed and set aside. In lieu thereof another is rendered reinstating the judgment of the Court of First Instance of Negros Occidental, 12th Judicial District, dated March 29, 1961, holding Luzon Surety liable for the amount of P10,000.00 with the modification that interest thereon shall be computed at the legal rate from June 8, 1960 when the complaint was filed. SO ORDERED.

petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual capacity; and (b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. G.R. No. L-47369 June 30, 1987 JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs. R & B SURETY AND INSURANCE COMPANY, INC., respondent. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements further provided: (b) INDEMNITY: TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the same to be due, demandable and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has been actually paid or not; (c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of any sum under the terms of the above-mentioned Bond, its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not. We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from the other obligors. xxx xxx xxx (e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or disbursement made by the SURETY COMPANY on

FELICIANO, J.: This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended. In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond. In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by

account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the belief that said payment was necessary in order to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and will not be disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding clauses. xxx xxx xxx When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying principally that judgment be rendered: b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and] c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of September, 1966; xxx xxx xxx Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not express the true intent

of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him. Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond. Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted in evidence. In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety, the dispositive portion of which reads as follows; Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts: On P14,000.00 from September 27, 1966; On P4,000.00 from November 28, 1966;

On P4,000.00 from December 14, 1966; On P4,000.00 from January 19, 1967; On P8,000.00 from February 13, 1967; On P4,000.00 from March 6, 1967;

2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and 3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond. We address these issues seriatim.

On P8,000.00 from June 24, 1967; On P8,000. 00 from September 14, 1967; On P8,000.00 from November 28, 1967; and On P8,000. 00 from February 26, 1968 until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems just and equitable. There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without prejudice. Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva. Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to us as one raising only questions of law. The issues we must confront in this appeal are: 1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements; WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby 1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows: WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to P800,000.00; WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO); WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds;

agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS; . . . l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the allocation of WARVETS; xxx xxx xxx 6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among the companies duly accredited to do business with the BENEFICIARY and its branches, unless said companies have been blacklisted for reasons other than those relating to the obligations subject of the herein TRUST AGREEMENT; xxx xxx xxx 9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. (emphasis supplied) There is no question that the Surety Bond has not been cancelled or fully 2 discharged by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so must the 3 supporting Indemnity Agreements. We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement.

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by 4 subrogating a third person to the rights of the creditor. Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is 5 extinguished and a new one is created in lieu thereof. If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new 6 obligation be on every point incompatible with the old one. Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one 7 must be clearly discernible. Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co8 surety. Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing 9 else) would sustain a finding of novation by implication. But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all.

What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that: [t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust Agreement, could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB. 2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety . The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND ." This part of the Agreement suggests that the indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil

Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case. The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties. There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079: [t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.(emphasis supplied) The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held, merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security. 12 In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R &

B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO. 3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violative of any public policy. 13 The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB. Summarizing, we hold that : (1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety. (2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not amount to an "extension granted to the debtor" without petitioner's consent so as to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and (3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond. WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is AFFIRMED in toto. Costs against the petitioners. SO ORDERED. Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Gancayco and Sarmiento, JJ., concur.

Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam, obtained another credit accommodation from METROBANK in 1978, which credit accommodation was fully settled before an irrevocable letter of credit was applied for and obtained by the abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-15). The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Dio as they did not sign the document denominated as "Commercial Letter of Credit and Application." Also, they were not asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor UTEFS inform them that the 1979 Letter of Credit has been opened and the Continuing Suretyships separately executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p. 28). The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products the amount of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331). Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust from the latter of the aforementioned goods from Planters Products which amounted to P815, 600.00. Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979. However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and Jacinto Uy Dio, demanding payment of the amount due. Informed of the amount due, UTEFS made partial payments to the Bank which were accepted by the latter. Answering one of the demand letters, Dio, thru counsel, denied his liability for the amount demanded and requested METROBANK to send him copies of documents showing the source of his

G.R. No. 89775 November 26, 1992 JACINTO UY DIO and NORBERTO UY, petitioners, vs. HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents. Continuing Suretyship Agreements signed by the petitioners set off this present controversy. Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 1 17724 which reversed the 2December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit entitled"Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Dio and Norberto Uy" and docketed as Civil Case No. 82-9303. They likewise challenge public respondent's Resolution of 21 August 2 1989 denying their motion for the reconsideration of the former. The impugned Decision of the Court summarizes the antecedent facts as follows: It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations (letter of credit and trust receipt accommodations) from the Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned credit accommodations Norberto Uy and Jacinto Uy Dio executed separate Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy Dio agreed to be bound up to the aggregate sum of P800,000.00.

liability. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship which he executed on February 25, 1977. As a rejoinder, Dio maintained that he cannot be held liable for the 1979 credit accommodation because it is a new obligation contracted without his participation. Besides, the 1977 credit accommodation which he guaranteed has been fully paid. Having sent the last demand letter to UTEFS, Dio and Uy and finding resort to extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer for the issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded Dio and Uy as parties-defendants. The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was returned unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address and his commercial enterprise was already nonoperational (Original Records, p. 37). On April 11, 1984, Norberto Uy and Jacinto Uy Dio (suretiesdefendant herein) filed a motion to dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation which they guaranteed in 1977 has been extinguished since it has already been paid in the same year. Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was further argued that they can not be held liable for the obligation contracted in 1979 because they are not privies thereto as it was contracted without their participation (Records, pp. 42-46). On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the terms and conditions embodied in the comprehensive suretyships separately executed by suretiesdefendants, the bank argued that sureties-movants bound themselves as solidary obligors of defendant Uy Tiam to both existing obligations and future ones. It relied on Article 2053 of the new Civil Code which provides: "A guaranty may also be given as security for future debts, the amount of which is not yet

known; . . . ." It was further asserted that the agreement was in full force and effect at the time the letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by giving notice to the bank. (Ibid., pp. 51-54). Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71). Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986 within which to file the answer, sureties-defendants filed their responsive pleading which merely rehashed the arguments in their motion to dismiss and maintained that they are entitled to the benefit of excussion (Original Records, pp. 88-93). On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy Tiam on the ground that it has no information as to the heirs or legal representatives of the latter who died sometime in December, 1986, which motion was granted on the following day (Ibid., pp. 180-182). After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads: The evidence and the pleadings, thus, pose the querry (sic): Are the defendants Jacinto Uy Dioand Norberto Uy liable for the obligation contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the Continuing Suretyships they executed on February 25, 1977? Under the admitted proven facts, the Court finds that they are not. a) When Uy and Dio executed the continuing suretyships, exhibits E and F, on February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 and this was the obligation which both obligation which both defendants guaranteed to pay. Uy Tiam paid this

1977 obligation and such payment extinguished the obligation they assumed as guarantors/sureties. b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and distinct from the obligation created in the other as evidenced by the fact that Uy Tiam had to apply anew for the 1979 transaction (Exh. A). And Dio and Uy, being strangers thereto, cannot be answerable thereunder. c) The plaintiff did not serve notice to the defendants Dio and Uy when it extended to Credit at least to inform them that the continuing suretyships they executed on February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy Tiam. d) There is no sufficient and credible showing that Dio and Uy were fully informed of the import of the Continuing Suretyships when they affixed their signatures thereon that they are thereby securing all future obligations which Uy Tiam may contract the plaintiff. On the contrary, Dio and Uy categorically testified that they signed the blank forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to the instruction of Uy Tiam, their former employer. They denied having gone to the office of the plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, 3 pp. 333-334). xxx xxx xxx In its Decision, the trial court decreed as follows: PREMISES CONSIDERED, judgment is hereby rendered:

a) dismissing the COMPLAINT against JACINTO UY DIO and NORBERTO UY; b) ordering the plaintiff to pay to Dio and Uy the amount of P6,000.00 as attorney's fees and expenses of litigation; and c) denying all other claims of the parties for want of legal and/or factual basis. SO ORDERED. (Records, p. 336)
4

From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CA-G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief: I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY 25, 1977. II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFAPPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIO AND NORBERTO UY FOR ATTORNEY'S FEES AND 5 EXPENSES OF LITIGATION. On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads: WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered: 1) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to appellant METROBANK the amount of P2,397,883.68 which represents the amount due as of July 17, 1987 inclusive of principal, interest and charges;

2) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, appellant METROBANK the accruing interest, fees and charges thereon from July 18, 1987 until the whole monetary obligation is paid; and 3) Ordering sureties-appellees Jacinto Uy Dio and Norberto Uy to pay, jointly and severally, to plaintiff P20,000.00 as attorney's fees. With costs against appellees. SO ORDERED.
6

with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on 25 February 1977. Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were automatically extinguished upon payment of the principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in 1977. They further claim that they were not advised by either METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it is posited that to extend the application of such agreements to the 1979 obligation would amount to a violation of Article 2052 of the Civil Code which expressly provides that a guaranty cannot exist without a valid obligation. Petitioners further argue that even granting, for the sake of argument, that the Continuing Suretyship Agreements still subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot be held liable for more than what they guaranteed to pay because it s axiomatic that the obligations of a surety cannot extend beyond what is stipulated in the agreement. On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations, issues and arguments adduced therein, the Comment thereon by the private respondent and the Reply thereto by the petitioners; the parties were required to submit their respective Memoranda. The issues presented for determination are quite simple:

In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding as well as future obligations; each suretyship arrangement was intended to remain in full force and effect until METROBANK would have been notified of its revocation. Since no such notice was given by the petitioners, the suretyships are deemed outstanding and hence, cover even the 1979 letter of credit issued by METROBANK in favor of Uy Tiam. Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's construction of the suretyship agreements and its ruling with respect to the extent of their liability thereunder. They argued the even if the agreements were in full force and effect when METROBANK granted Uy Tiam's application for a letter of credit in 1979, the public respondent nonetheless seriously erred in holding them liable for an amount over and above their respective face values. In its Resolution of 21 August 1989, public respondent denied the motion: . . . considering that the issues raised were substantially the same grounds utilized by the lower court in rendering judgment for defendants-appellees which We upon appeal found and resolved to be untenable, thereby reversing and setting aside said judgment and rendering another in favor of plaintiff, and no new or fresh issues have been posited to justify reversal of Our 7 decision herein, . . . . Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the obligation contracted by Uy Tiam

1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in 1977; and 2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations. Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not known at the time the guaranty is executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for 9 which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of 10 guaranty, until the expiration or termination thereof. A guaranty shall be

construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty states that the same is to secure advances to be made "from time to time" the guaranty will be construed 11 to be a continuing one. In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on such time" that the principal debtor may 12 require, have been construed to indicate a continuing guaranty. In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy provides thus: I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase or discount, or to make any loans or advances evidence or secured by any notes, bills, receivables, drafts, acceptances, checks, or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the punctual payment at maturity to the loans, advances credits and/or other obligations hereinbefore referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to the BANK by the Borrower, together with any and all expenses which may be incurred by the BANK in collecting all or any such instruments or other indebtedness or obligations herein before referred to, and/or in enforcing any rights hereunder, and the SURETY also agrees that the BANK may make or cause any and all such payments to be made strictly in accordance with the terms and provisions of any agreement(s) express or implied, which has (have) been or may hereafter be made or entered into by the Borrow in reference thereto, regardless of any law, regulation or decree, unless the same is mandatory and non-waivable in

character, nor or hereafter in effect, which might in any manner affect any of the terms or provisions of any such agreement(s) or the Bank's rights with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness; provided, however, that the liability of the SURETY hereunder shall not exceed at any one time the aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in which the obligations hereby guaranteed are payable), and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred by the BANK as 13 referred to above. Paragraph I of the Continuing Suretyship Agreement executed by petitioner Dio contains identical provisions except with respect to the guaranteed aggregate 14 principal amount which is EIGHT THOUSAND PESOS (P800,000.00). Paragraph IV of both agreements stipulate that: VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been received by the BANK that it has been revoked by the SURETY, but any such notice shall not release the SURETY, from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by the BANK, or in which the BANK may have any interest at the time of the receipt (sic) of such notice. No act or omission of any kind on the BANK'S part in the premises shall in any event affect or impair this guaranty, nor shall same (sic) be affected by any change which may arise by reason of the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such partnership of any one 15 or more new partners. The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by the public respondent: Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant to grant any application for credit accommodation (letter of credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms, each suretyship

is a continuing one which shall remain in full force and effect until the bank is notified of its revocation. xxx xxx xxx When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters Products, the continuing suretyships were in full force and effect. Hence, even if suretiesappellees did not sign the "Commercial Letter of Credit and Application, they are still liable as the credit accommodation (letter of credit/trust receipt) was covered by the said suretyships. What makes them liable thereunder is the condition which provides that the Borrower "is or may become liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as principal obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they as insurers of its obligation, 16 are liable thereunder. Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligation because the latter was not yet in existence when the agreements were executed in 1977; under Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known." Secondly, Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second paragraph of Article 2052 which reads: Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation. As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the public respondent gravely erred in finding them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for petitioner Dio and (b) P300,000.00 for petitioner Uy. The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had signed. 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. To the extent, and in the manner, and under the circumstances pointed out 17 in his obligation, he is bound, and no farther. Indeed, the Continuing Suretyship Agreements signed by petitioner Dio and petitioner Uy fix the aggregate amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as regards 18 the amount and the onerous nature of the conditions. In the case at bar, both agreements provide for liability for interest and expenses, to wit: . . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and such expenses as may be incurred 19 by the BANK referred to above. They further provide that: In the event of judicial proceedings being instituted by the BANK against the SURETY to enforce any of the terms and conditions of this undertaking, the SURETY further agrees to pay the BANK a reasonable compensation for and as attorney's fees and costs of collection, which shall not in any event be less than ten per cent (10%) of the amount due (the same to be due and payable irrespective of whether the case is settled judicially or 20 extrajudicially). Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners separately bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are pegged at not less than ten percent (10%) of the amount due. Even without such stipulations, the petitioners would, nevertheless, be liable for 21 the interest and judicial costs. Article 2055 of the Civil Code provides: Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

Interest and damages are included in the term accessories. However, such interest should run only from the date when the complaint was filed in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety & 22 Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., this Court held: Petitioner objects to the payment of interest and attorney's fees because: (1) they were not mentioned in the bond; and (2) the surety would become liable for more than the amount stated in the contract of suretyship. xxx xxx xxx The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from the surety as part of their damages, interest at the legal rate even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. The theory is that interest is allowed only by way of damages for delay upon the part of the sureties in making payment after they should have done so. In some states, the interest has been charged from the date of the interest has been charged from the date of the judgment of the appellate court. In this jurisdiction, we rather prefer to follow the general practice, which is to order that interest begin to run from the date when the complaint was filed in court, . . . Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code). In other words the surety is made to pay interest, not by reason of the contract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain payment. It should be observed that interest does not run from the time the obligation became due, but from the filing of the complaint. As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not recover attorney's fees as part of the damages they suffered by reason of the litigation. Even if the

party paid thousands of pesos to his lawyers, he could not charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566). However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in Article 2208, among them, "where the court deems it just and equitable that attorney's (sic) fees and expenses of litigation should be recovered" or "when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim." This gives the courts discretion in apportioning attorney's fees. The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission 23 penalty and bank charges." This is the same amount stated by METROBANK in its 24 Memorandum. However, in summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent states: Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987) P651,092.82 representing the principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12% per annum (5-31-82 to 7-17-87) as shown in the Statement of Account 25 (Exhibit I). Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement executed by petitioner Dio which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly covered by that of petitioner Uy which pegs his maximum liability at P300,000.00. Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing exposition, to which extent the instant petition is impressed with partial merit. WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIO and NORBERTO UY are hereby declared

liable for and are ordered to pay, up to the maximum limit only of their respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the interest due thereon at the legal rate commencing from the date of the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's fees and costs. All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are affirmed. PACIONARIA C. BAYLON, petitioner, vs. THE HONORABLE COURT OF APPEALS (Former Ninth Division) and LEONILA TOMACRUZ, respondents. DECISION GONZAGA-REYES, J.: This is a petition for review by way of certiorari under Rule 45 of the Revised [1] Rules of Court of the decision of the Court of Appeals dated November 29, 1991 in [2] CA-G.R. CV No. 27779 affirming the decision of the Regional Trial Court of Quezon City, Branch 88, dated June 14, 1990 in Civil Case No. Q-89-2483 and the Resolution of the Court of Appeals dated April 27, 1993 denying petitioner's Motion for Reconsideration. The pertinent facts, as found by the trial court and affirmed by respondent court, are briefly narrated as follows: Sometime in 1986, petitioner Pacionaria C. Baylon introduced private respondent Leonila Tomacruz, the co-manager of her husband at PLDT, to Rosita B. [3] Luanzon. Petitioner told private respondent that Luanzon has been engaged in business as a contractor for twenty years and she invited private respondent to lend Luanzon money at a monthly interest rate of five percent (5%), to be used as capital for the latter's business. Private respondent, persuaded by the assurances of petitioner that Luanzon's business was stable and by the high interest rate, agreed to lend Luanzon money in the amount of P150,000. On June 22, 1987, Luanzon issued and signed a promissory note acknowledging receipt of the P150,000 from private respondent and obliging herself to pay the former the said amount on or [4] before August 22, 1987. Petitioner signed the promissory note, affixing her signature under the word "guarantor." Luanzon also issued a postdated Solidbank check no. CA418437 dated August 22, 1987 payable to Leonila Tomacruz in the [5] amount of P150,000. Subsequently, Luanzon replaced this check with another postdated Solidbank check no. 432945 dated December 22, 1987, in favor of the [6] same payee and covering the same amount. Several checks in the amount of

P7,500 each were also issued by Luanzon and made payable to private [7] respondent. Private respondent made a written demand upon petitioner for payment, which petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a sum of money with the Regional Trial Court (RTC) of Quezon City, Branch 88, against Luanzon and petitioner herein, impleading Mariano Baylon, husband of petitioner, as an additional defendant. However, summons was never served upon Luanzon. In her answer, petitioner denied having guaranteed the payment of the promissory note issued by Luanzon. She claimed that private respondent gave Luanzon the money, not as a loan, but rather as an investment in Art Enterprises and Construction, Inc. - the construction business of Luanzon. Furthermore, petitioner avers that, granting arguendo that there was a loan and petitioner guaranteed the same, private respondent has not exhausted the property of the principal debtor nor has she resorted to all the legal remedies against the principal debtor as required by law. Finally, petitioner claims that there was an extension of the maturity date of the loan without her consent, thus releasing her from her [8] obligation. After trial on the merits, the lower court ruled in favor of private respondent. In its Decision dated June 14, 1990, it stated that The evidence and the testimonies on record clearly established a (sic) fact that the transaction between the plaintiff and defendants was a loan with five percent (5%) monthly interest and not an investment. In fact they all admitted in their testimonies that they are not given any stock certificate but only promissory notes similar to Exhibit B wherein it was clearly stated that defendant Luanzon would pay the amount of indebtedness on the date due. Postdated checks were issued simultaneously with the promissory notes to enable the plaintiff and others to withdraw their money on a certain fixed time. This shows that they were never participants in the business transaction of defendant Luanzon but were creditors. The evidences presented likewise show that plaintiff and others loan their money to defendant Luanzon because of the assurance of the monthly income of five percent (5%) of their money and that they could withdraw it anytime after the due date add to it the fact that their friend, Pacionaria Baylon, expresses her unequivocal gurarantee to the payment of the amount loaned. xxx xx xxx

WHEREFORE, premises considered, judgment is hereby rendered against the defendants Pacionaria C. Baylon and Mariano Baylon, to pay the plaintiff the sum of

P150,000.00, with interest at the legal rate from the filing of this complaint until full payment thereof, to pay the total sum of P21,000.00 as attorneys fees and costs of [9] suit. On appeal, the trial court's decision was affirmed by the Court of Appeals. Hence, this present case wherein petitioner makes the following assignment of errors I. RESPONDENT COURT ERRED IN HOLDING THAT THE PRIVATE RESPONDENT TOMACRUZ WAS A CREDITOR OF DEFENDANT LUANZON AND NOT AN INVESTOR IN THE CONSTRUCTION BUSINESS OF ART ENTERPRISES & CONSTRUCTION, INC. II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-APPELLANT BAYLON WAS A "GUARANTOR" AS APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT COURT ERRED IN RULING THAT PETITIONER-APPELLANT BAYLON IS LIABLE TO THE PRIVATE RESPONDENT BECAUSE THE LATTER HAS NOT TAKEN STEPS TO EXHAUST THE PROPERTY OF THE PRINCIPAL DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR, DEFENDANT LUANZON. III. GRANTING, WITHOUT ADMITTING THAT PETITIONER-APPELLANT BAYLON WAS A GUARANTOR UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987, THE LOWER COURT ERRED IN RESOLVING THAT SHE WAS NOT RELEASED FROM HER GUARANTY BY THE SUBSEQUENT TRANSACTIONS BETWEEN THE RESPONDENTAPPELLANT AND DEFENDANT LUANZON. At the outset, we note that petitioners claim that the factual findings of the lower court, which were affirmed by the Court of Appeals, were based on a [10] misapprehension of facts and contradicted by the evidence on records is a bare allegation and devoid of merit. As a rule, the conclusions of fact of the trial court, especially when affirmed by the Court of Appeals, are final and conclusive and [11] cannot be reviewed on appeal by the Supreme Court. Although this rule admits [12] of several exceptions, none of the exceptions are in point in the present case. The factual findings of the respondent court are borne out by the record and are based on substantial evidence. Petitioner claims that there is no loan to begin with; that private respondent gave Luanzon the amount of P150,000, not as a loan, but rather as an investment in [13] the construction project of the latter. In support of her claim, petitioner cites the use by private respondent of the words investment, dividends, and commission in her testimony before the lower court; the fact that private respondent received monthly checks from Luanzon in the amount of P7,500 from July to December, 1987, representing dividends on her investment; and the fact

that other employees of the Development Bank of the Philippines made similar [14] investments in Luanzons construction business. However, all the circumstances mentioned by petitioner cannot override the clear and unequivocal terms of the June 22, 1987 promissory note whereby Luanzon promised to pay private respondent the amount of P150,000 on or before August 22, 1987. The promissory note states as follows: June 22, 1987 To Whom It May Concern: For value received, I hereby promise to pay Mrs. LEONILA TOMACRUZ the amount of ONE HUNDRED FIFTY THOUSAND PESOS ONLY (P150,000.00) on or before August 22, 1987. The above amount is covered by _____ Check No. _____ dated August 22, 1987. (signed) ROSITA B. LUANZON GURARANTOR: (signed) PACIONARIA O. BAYLON Tel. No. 801-28-00 18 P. Mapa St., DBP Village Almanza, Las Pinas, M.M.
[15]

If the terms of a contract are clear and leave no doubt as to the intention of [16] the contracting parties, the literal meaning of its stipulation shall control. Resort to extrinsic aids and other extraneous sources are not necessary in order to ascertain the parties' intent when there is no ambiguity in the terms of the [17] agreement. Both petitioner and private respondent do not deny the due execution and authenticity of the June 22, 1987 promissory note. All of petitioner's arguments are directed at uncovering the real intention of the parties in executing the promissory note, but no amount of argumentation will change the plain import

of the terms thereof, and accordingly, no attempt to read into it any alleged [18] intention of the parties thereto may be justified. The clear terms of the promissory note establish a creditor-debtor relationship between Luanzon and private respondent. The transaction at bench is therefore a loan, not an investment. It is petitioner's contention that, even though she is held to be a guarantor under the terms of the promissory note, she is not liable because private respondent did not exhaust the property of the principal debtor and has not resorted to all the legal remedies provided by the law against the [19] debtor. Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil Code, which provides that The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. It is axiomatic that the liability of the guarantor is only subsidiary. All the properties of the principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, for obviously the exhaustion of the principals property - the benefit of which the guarantor claims - cannot even begin to take place before judgment has been [21] obtained. This rule is embodied in article 2062 of the Civil Code which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances when the action may be brought against both the [22] debtor and the principal debtor. Under the circumstances availing in the present case, we hold that it is premature for this Court to even determine whether or not petitioner is liable as a guarantor and whether she is entitled to the concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is wanting - that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is useless to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly secured by such guarantee. Although the principal debtor Luanzon was impleaded as defendant, there is nothing in the records to show that summons was served upon her. Thus, the trial court never even acquired jurisdiction over the principal debtor. We hold that private respondent must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor. IN VIEW OF THE FOREGOING, the petition is granted and the questioned Decision of the Court of Appeals dated November 29, 1991 and Resolution dated April 27, 1993 are SET ASIDE. No pronouncement as to costs.
[20]

SO ORDERED. Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.