(1)

(2) SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M.
CUENCA, respondent.

[G.R. No. 138544. October 3, 2000]

DECISION

PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor,
and every doubt is resolved in favor of the solidary debtor.The fundamental rules of fair play
require the creditor to obtain the consent of the surety to any material alteration in the principal
loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein
respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the
original agreement, absent any clear stipulation showing that the latter waived his right to be
notified thereof, or to give consent thereto. This is especially true where, as in this case,
respondent was no longer the principal officer or major stockholder of the corporate debtor at the
time the later obligations were incurred. He was thus no longer in a position to compel the debtor
to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review under Rule 45 of
the Rules of Court. Petitioner assails the December 22, 1998 Decision [1] of the Court of Appeals
(CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby amended in the sense that defendantappellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount
stated in the judgment.
Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of
merit.
In all other respect[s], the decision appealed from is AFFIRMED.[2]
Also challenged is the April 14, 1999 CA Resolution, [3] which denied petitioners Motion for
Reconsideration.

Modified by the CA was the March 6, 1997 Decision [4] of the Regional Trial Court (RTC) of
Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:
WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation
and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the
sum of P39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest
per annum until fully paid, and the sum ofP100,000.00 as attorneys fees and litigation expenses
and to pay the costs.
SO ORDERED.
The Facts
The facts are narrated by the Court of Appeals as follows:[5]
The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta.
Ines) is a corporation engaged in logging operations. It was a holder of a Timber License
Agreement issued by the Department of Environment and Natural Resources (DENR).
On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines
Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00)
to assist the latter in meeting the additional capitalization requirements of its logging operations.
The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be
effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of
the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein
the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all times;
in this connection, a Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and conditions upon
written notice to the Borrower. (Emphasis supplied.)
To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned
credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some
of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the
payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated
17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound
himself with SIMC as follows:

xxxxxxxxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client
(SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion
of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s) x x x . (Emphasis
supplied).
On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of
the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with
[Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS3599-81 for said amount (Exhibit C).
Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of
Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent]
Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No.
18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said
shares were bought by Adolfo Angala who was the highest bidder during the public auction.
Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other
loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred
[s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC
executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85
DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans
against the credit line.
Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its
loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC
accommodated appellant SIMCs request and signified its approval in a letter dated 18 February
1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior
consent of [Respondent] Cuenca, agreed to restructure the past due obligations of defendantappellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines
the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta.
Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the
indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).
It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to
[Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion

[o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the
expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the
Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p.
331), was not segregated from, but was instead lumped together with, the other loans, i.e.,
Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and
F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were
not secured by said Indemnity Agreement.
Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank,
defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March
1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
------------------TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines,
[Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31
October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said
Loan Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of
TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines
[c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the
first tranche (the First Loan) andP3,400,000.00 for the second tranche (the Second Loan) to be
applied in the manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the
Second Loan shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p.
33)
From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments
to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even
[t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at
Vol. II, pp. 38, 70 to 165)
Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner]
SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made

through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L),
respectively.
Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed
a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a
decision by the court a quo, x x x from which [Respondent] Cuenca appealed.
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement
had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly,
such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the
loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had been
executed without notice to, much less consent from, Cuenca who at the time was no longer a
stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had specified that the
credit accommodation was for a total amount of P8 million, and that its expiry date was November
30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30,
1981, and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement
was tantamount to a grant of an extension of time to the debtor without the consent of the
surety. Under Article 2079 of the Civil Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines
decided to materially alter or modify the principal obligation after the expiry date of the credit
accommodation.
Hence, this recourse to this Court.[7]
The Issues
In its Memorandum, petitioner submits the following for our consideration:[8]
A. Whether or not the Honorable Court of Appeals erred in releasing Respondent
Cuenca from liability as surety under the Indemnity Agreement for the payment of
the principal amount of twelve million two hundred thousand pesos
(P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988
and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated
interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that
Respondent Cuencas liability under the Indemnity Agreement covered
only availments on SIMCs credit line to the extent of eight million
pesos (P8,000,000.00) and made on or before 30 November 1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC
without Respondent Cuencas consent, thus extinguishing his liability
under the Indemnity Agreement pursuant to Article 2079 of the Civil
Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit
accommodation constituted a novation of the principal obligation, thus
extinguishing Respondent Cuencas liability under the indemnity
agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with
Section 11, Rule 13 of the 1997 Rules of Civil Procedure.
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989
Loan Agreement novated the original credit accommodation and Cuencas liability under the
Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give
consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the
said credit accommodation. As preliminary matters, the procedural questions raised by respondent
will also be addressed.
The Courts Ruling
The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in
merely rehashing the arguments already passed upon by the appellate court, was pro forma; that as
such, it did not toll the period for filing the present Petition for Review. [9] Consequently, the
Petition was filed out of time.[10]
We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has explained that a
movant may raise the same arguments, precisely to convince the court that its ruling was
erroneous.[11]

Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo, [12]the Court explained that a
pro forma motion had no other purpose than to gain time and to delay or impede the
proceedings. Hence, where the circumstances of a case do not show an intent on the part of the
movant merely to delay the proceedings, our Court has refused to characterize the motion as
simply pro forma. It held:
We note finally that because the doctrine relating to pro forma motions for reconsideration
impacts upon the reality and substance of the statutory right of appeal, that doctrine should be
applied reasonably, rather than literally. The right to appeal, where it exists, is an important and
valuable right. Public policy would be better served by according the appellate court an effective
opportunity to review the decision of the trial court on the merits, rather than by aborting the right
to appeal by a literal application of the procedural rules relating to pro forma motions for
reconsideration.
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing
of pleadings and other papers shall be done personally. Except with respect to papers emanating
from the court, a resort to other modes must be accompanied by a written explanation why the
service or filing was not done personally. A violation of this Rule may be cause to consider the
paper as not filed.
Respondent maintains that the present Petition for Review does not contain a sufficient
written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited
rule was mandatory, and that only when personal service or filing is not practicable may resort to
other modes be had, which must then be accompanied by a written explanation as to why personal
service or filing was not practicable to begin with.
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines
and Cuenca by registered mail in lieu of personal service due to limitations in time and
distance.[14] This explanation sufficiently shows that personal service was not practicable. In any
event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of
the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code,
which reads as follows:
ART. 1292. In order that an obligation may be extinguished by another which substitute the same,
it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other.

Novation of a contract is never presumed. It has been held that [i]n the absence of an
express agreement, novation takes place only when the old and the new obligations are
incompatible on every point.[15] Indeed, the following requisites must be established: (1) there is a
previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is
extinguished; and (4) there is a valid new contract.[16]
Petitioner contends that there was no absolute incompatibility between the old and the new
obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989
Agreement did not change the original loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were not more onerous. [17] Since the original
credit accomodation was not extinguished, it concludes that Cuenca is still liable under the
Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The
1989 Loan Agreement extinguished the obligation [18]obtained under the 1980 credit
accomodation. This is evident from its explicit provision to liquidate the principal and the
interest of the earlier indebtedness, as the following shows:
1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers
present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan
shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness.[19] (Italics supplied.)
The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement
were used to pay-off the original indebtedness serves to strengthen this ruling. [21]
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had
stipulated that the amount of loan was not to exceed P8 million,[22] the 1989 Agreement provided
that the loan was P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, positive covenants and negative
covenants not found in the earlier obligation. As an example of a positive covenant, Sta. Ines
undertook from time to time and upon request by the Lender, [to] perform such further acts
and/or execute and deliver such additional documents and writings as may be necessary or proper
to effectively carry out the provisions and purposes of this Loan Agreement. [23] Likewise, SIMC
agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter
acquired, nor would it participate in any merger or consolidation.[24]
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to
Article 1296 of the Civil Code, which provides:
ART. 1296. When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who did not give
their consent.
Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8
million original accommodation; it was not a novation.[25]
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to liquidate, not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which
had allegedly extended the originalP8 million credit facility. Hence, his obligation as a surety
should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically
states that [a]n extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. x x x. In an earlier case,[26] the Court explained the rationale
of this provision in this wise:
The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the suretys consent would deprive the surety of his right to pay the creditor and
to be immediately subrogated to the creditors remedies against the principal debtor upon the
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.
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only forP8 million, and that it was for
a period of one year ending on November 30, 1981. Petitioner objects to the appellate courts
reliance on that document, contending that it was not a binding agreement because it was not
signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the
accommodation.[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval
Memorandum in this wise:
4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a
credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in
meeting the additional capitalization requirements for its logging operations. For this purpose, the
Bank issued a Credit Approval Memorandum dated 10 November 1980.
Clearly, respondent is estopped from denying the terms and conditions of the P8 million
credit accommodation as contained in the very document it presented to the courts. Indeed, it
cannot take advantage of that document by agreeing to be bound only by those portions that are
favorable to it, while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his
consent to any modification of the credit accommodation or otherwise waived his right to be
notified of, or to give consent to, the same.[28] Respondents consent or waiver thereof is allegedly
found in the Indemnity Agreement, in which he held himself liable for the credit accommodation
including [its] substitutions, renewals, extensions, increases, amendments, conversions and

revival. It explains that the novation of the original credit accommodation by the 1989 Loan
Agreement is merely its renewal, which connotes cessation of an old contract and birth of
another one x x x.[29]
At the outset, we should emphasize that an essential alteration in the terms of the Loan
Agreement without the consent of the surety extinguishes the latters obligation. As the Court held
in National Bank v. Veraguth,[30] [i]t is fundamental in the law of suretyship that any agreement
between the creditor and the principal debtor which essentially varies the terms of the principal
contract, without the consent of the surety, will release the surety from liability.
In this case, petitioners assertion - that respondent consented to the alterations in the credit
accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced
hereunder:
Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp.,
Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit
accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the
SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing
under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila
hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS
CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges
thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and
delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and
severally with the CLIENT in favor of the BANK for the payment , upon demand and without
benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK
under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendment, conversions and revivals of the aforesaid credit
accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT
may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts,
books and records of the BANK, plus interest and expenses arising from any agreement or
agreements that may have heretofore been made, or may hereafter be executed by and between the
parties thereto, including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s), and further bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the
terms and conditions contained in the aforesaid credit accommodation(s), all of which are
incorporated herein and made part hereof by reference.
While respondent held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of theP8 million limit and the November
30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of
the original credit accommodation, without informing or getting the consent of respondent who
was solidarily liable. Taking the banks submission to the extreme, respondent (or his successors)
would be liable for loans even amounting to, say, P100 billion obtained 100 years after the
expiration of the credit accommodation, on the ground that he consented to all alterations and
extensions thereof.
Indeed, it has been held that a contract of surety cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging

the liability of the surety.[31] Likewise, the Court has ruled that it is a well-settled legal principle
that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be
resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who
caused the ambiguity.[32] In the absence of an unequivocal provision that respondent waived his
right to be notified of or to give consent to any alteration of the credit accommodation, we cannot
sustain petitioners view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the bank
did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition:
5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon
written notice to the Borrower.[33]
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was
entitled to be notified of any modification in the original loan accommodation. [34] Following the
banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but
would still be valid as to respondent to whom no notice need be given. The latters liability would
thus be more burdensome than that of the former. Such untenable theory is contrary to the
principle that a surety cannot assume an obligation more onerous than that of the principal. [35]
The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the
Court sustained a stipulation whereby the surety consented to be bound not only for the specified
period, but to any extension thereafter made, an extension x x x that could be had without his
having to be notified.
In that case, the surety agreement contained this unequivocal stipulation: It is hereby further
agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the
Company under the same terms and conditions as herein provided without the necessity of
executing another indemnity agreement for the purpose and that we hereby equally waive our
right to be notified of any renewal or extension of the bond which may be granted under this
indemnity agreement.
In the present case, there is no such express stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta.
Ines to modify or extend the original obligation without the consent of the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner
maintains that there was no need for respondent to execute another surety contract to secure the
1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately. [37] In Dino v. CA,
[38]
the Court held that 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
guaranty, until the expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of
the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981. Hence, it was a continuing
surety only in regard to loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989
Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated
P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the
loan obtained after the payment of the original one, which was covered by a continuing surety
agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically
provided that each suretyship is a continuing one which shall remain in full force and effect until
this bank is notified of its revocation. Since the bank had not been notified of such revocation, the
surety was held liable even for the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability was
confined to the 1980 credit accommodation, the amount and the expiry date of which were set
down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS (joint and solidary signature) of a major
stockholder or corporate officer, as an additional security for loans granted to corporations. There
are at least two reasons for this. First, in case of default, the creditors recourse, which is normally
limited to the corporate properties under the veil of separate corporate personality, would extend to
the personal assets of the surety. Second, such surety would be compelled to ensure that the loan
would be used for the purpose agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required
the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to
assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time,
he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a
position then to ensure the payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent,
without even informing him, smacks of negligence on the part of the bank and bad faith on that of
the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan
having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask
somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one
who was in a position to ensure the payment of the loan.Even a perfunctory attempt at credit

investigation would have revealed that respondent was no longer connected with the corporation at
the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect
an obligation that could have been secured by a fairly obtained surety. For its defeat in this
litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation
under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had
been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we
reject petitioners submission that respondent waived his right to be notified of, or to give consent
to, any modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before
the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.

(3) ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.

[G.R. No. 126490. March 31, 1998]

DECISION

REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and
severally liable with the principal debtor in case the latter defaults in the payment of the loan, is
such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a
guarantor who warrants the solvency of the debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner

Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum to be computed every 30 days from the date
thereof.[1] On four occasions after the execution of the promissory note and even after the loan
matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments were made after the last payment on September
26, 1991.[2]
Consequently, on the basis of petitioners solidary liability under the promissory note,
respondent corporation filed a complaint[3] against petitioner Palmares as the lone party-defendant,
to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim, [4] petitioner alleged that sometime in August
1990, immediately after the loan matured, she offered to settle the obligation with respondent
corporation but the latter informed her that they would try to collect from the spouses Azarraga
and that she need not worry about it; that there has already been a partial payment in the amount
of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well
as the penalty charges of 3% per month, are usurious and unconscionable; and that while she
agrees to be liable on the note but only upon default of the principal debtor, respondent
corporation acted in bad faith in suing her alone without including the Azarragas when they were
the only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution
of the trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the
liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the
defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with
primary liability.[5]
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and
the memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of
Iloilo City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing
of a separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are
primarily liable on the instrument. [6] This was based on the findings of the courta quo that the
filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the
obligation is considered a valid tender of payment sufficient to discharge a persons secondary
liability on the instrument; that petitioner, as co-maker, is only secondarily liable on the
instrument; and that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered
judgment declaring herein petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing with
interest at six percent (6%) per month computed from the date the loan was contracted
until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the
outstanding balance;

3. Attorneys fees at 25% of the total amount due per stipulations;

4. Plus costs of suit.[7]
Contrary to the findings of the trial court, respondent appellate court declared that petitioner
Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the
principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is
primarily liable on the note and hence may be sued by the creditor corporation for the entire
obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although
she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the
imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law
is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that
even if the promissory note were to be considered as a contract of adhesion, the same is not
entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he
adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore
solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not
establish Palmares solidary liability.
2. The promissory note contains provisions which establish the co-makers liability as
that of a guarantor.
3. There is no sufficient basis for concluding that Palmares liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M.B.
Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares liability is solidary, the Court of Appeals erred in strictly
imposing the interests and penalty charges on the outstanding balance of the promissory
note.
The foregoing contentions of petitioner are denied and contradicted in their material points
by respondent corporation. They are further refuted by accepted doctrines in the American
jurisdiction after which we patterned our statutory law on suretyship and guaranty. This case then
affords us the opportunity to make an extended exposition on the ramifications of these two
specialized contracts, for such guidance as may be taken therefrom in similar local controversies
in the future.
The basis of petitioner Palmares liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily
liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand
payment of the above loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to the same conditions abovecontained.[8]
Petitioner contends that the provisions of the second and third paragraph are conflicting in
that while the second paragraph seems to define her liability as that of a surety which is joint and
solidary with the principal maker, on the other hand, under the third paragraph her liability is
actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply
stated, although the second paragraph says that she is liable as a surety, the third paragraph defines
the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting
provisions in the promissory note and the rule is that clauses in the contract should be interpreted
in relation to one another and not by parts. In other words, the second paragraph should not be
taken in isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers
that she could be held liable only as a guarantor for several reasons. First, the words jointly and
severally or solidarily liable used in the second paragraph are technical and legal terms which are
not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is
likely to enter into such transactions without fully realizing the nature and extent of her
liability. On the contrary, the wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule
is that the obligation of the surety cannot be extended by implication beyond specified limits,
taking into consideration the peculiar nature of a surety agreement which holds the surety liable
despite the absence of any direct consideration received from either the principal obligor or the
creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent
M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents
thereof were never explained to her, and her only participation was to sign thereon. Thus, any
apparent ambiguity in the contract should be strictly construed against private respondent pursuant
to Art. 1377 of the Civil Code.[9]
Petitioner accordingly concludes that her liability should be deemed restricted by the clause
in the third paragraph of the promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the
principal debtors cannot be considered in default in the absence of a judicial or extrajudicial
demand. It is true that the complaint alleges the fact of demand, but the purported demand letters
were never attached to the pleadings filed by private respondent before the trial court. And, while
petitioner may have admitted in her Amended Answer that she received a demand letter from
respondent corporation sometime in 1990, the same did not effectively put her or the principal

debtors in default for the simple reason that the latter subsequently made a partial payment on the
loan in September, 1991, a fact which was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount
of P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance
of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or
unconscionable, and the obligation has been partially complied with, the court may equitably
reduce the penalty[10] on grounds of substantial justice. More importantly, respondent corporation
never refuted petitioners allegation that immediately after the loan matured, she informed said
respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages
to be paid since petitioner has shown a sincere desire for a compromise. [11]
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the
petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary
award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note
executed between the parties is a contract of adhesion, it has been the consistent holding of the
Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding
effects thereof have been upheld. The peculiar nature of such contracts necessitate a close scrutiny
of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the Court has construed
obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when justified in light of the operative facts and
surrounding circumstances.[12] The factual scenario obtaining in the case before us warrants a
liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulation shall control.[13] In the case at bar, petitioner expressly bound herself to be jointly and
severally or solidarily liable with the principal maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioners liability is that of a surety.
Her pretension that the terms jointly and severally or solidarily liable contained in the
second paragraph of her contract are technical and legal terms which could not be easily
understood by an ordinary layman like her is diametrically opposed to her manifestation in the
contract that she fully understood the contents of the promissory note and that she is fully
aware of her solidary liability with the principal maker. Petitioner admits that she voluntarily
affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to

the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence,
mere preponderance of evidence not even being adequate. Petitioners attempt to prove fraud
must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, selfserving allegations.[14]
Having entered into the contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or
as to the legal effect of the undertaking. [15] The rule that ignorance of the contents of an instrument
does not ordinarily affect the liability of one who signs it also applies to contracts of
suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no
reason for relieving her of liability.[16]
Petitioner would like to make capital of the fact that although she obligated herself to be
jointly and severally liable with the principal maker, her liability is deemed restricted by the
provisions of the third paragraph of her contract wherein she agreed that M.B. Lending
Corporation may demand payment of the above loan from me in case the principal maker, Mrs.
Merlyn Azarraga defaults in the payment of the note, which makes her contract one of guaranty
and not suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor.[17] A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that
the debtor shall pay.[18] Stated differently, a surety promises to pay the principals debt if the
principal will not pay, while a guarantor agrees that the creditor, after proceeding against the
principal, may proceed against the guarantor if the principal is unable to pay. [19] A surety binds
himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on
the other hand, does not contract that the principal will pay, but simply that he is able to do so.
[20]
In other words, a surety undertakes directly for the payment and is so responsible at once if the
principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence,
the debt cannot be made out of the principal debtor.[21]
Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and third
paragraphs of the aforequoted portion of the promissory note do not contain any other condition
for the enforcement of respondent corporations right against petitioner. It has not been shown,
either in the contract or the pleadings, that respondent corporation agreed to proceed against herein
petitioner only if and when the defaulting principal has become insolvent. A contract of
suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtors
obligation, so as to render himself directly and primarily responsible with him, and without
reference to the solvency of the principal.[22]
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the
rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or
guaranty has once been judicially determined under the rule of reasonable construction applicable
to all written contracts, then the liability of the surety, under his contract, as thus interpreted and
construed, is not to be extended beyond its strict meaning. [23] The rule, however, will apply only
after it has been definitely ascertained that the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determiningwhether a partys undertaking is that of a
surety or a guarantor.

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation
contained in the third paragraph of the controverted suretyship contract merely elucidated on and
made more specific the obligation of petitioner as generally defined in the second paragraph
thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her
liability attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. [24] Several attendant
factors in that genre lend support to our finding that petitioner is a surety. For one, when petitioner
was informed about the failure of the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her mind, she knew that she was
directly and primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of initial payment up
to the last, which were all issued in her name and of the Azarraga spouses. [25]This can only be
construed to mean that the payments made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the benefit of petitioner. The
concomitant and simultaneous compliance of petitioners obligation with that of her principals
only goes to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely
with the principal,[26] and as such is deemed an original promisor and debtor from the beginning.
[27]
This is because in suretyship there is but one contract, and the surety is bound by the same
agreement which binds the principal.[28] In essence, the contract of a surety starts with the
agreement,[29] which is precisely the situation obtaining in this case before the Court.
It will further be observed that petitioners undertaking as co-maker immediately follows the
terms and conditions stipulated between respondent corporation, as creditor, and the principal
obligors. A surety is usually bound with his principal by the same instrument, executed at the
same time and upon the same consideration; he is an original debtor, and his liability is immediate
and direct.[30] Thus, it has been held that where a written agreement on the same sheet of paper
with and immediately following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the terms of the
principal contract, the signers were sureties jointly liable with the buyer.[31] A surety usually
enters into the same obligation as that of his principal, and the signatures of both usually appear
upon the same instrument, and the same consideration usually supports the obligation for both the
principal and the surety.[32]
There is no merit in petitioners contention that the complaint was prematurely filed because
the principal debtors cannot as yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent
corporation may demand payment of the loan from her in case the principal maker defaults,
subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of
the note states that should I fail to pay in accordance with the above schedule of payment, I
hereby waive my right to notice and demand. Hence, demand by the creditor is no longer
necessary in order that delay may exist since the contract itself already expressly so declares. [33] As
a surety, petitioner is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit
against them, since the commencement of the suit is a sufficient demand. [34] On this point, it may
be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the
principals default. Inasmuch as the creditor owes no duty of active diligence to take care of the
interest of the surety, his mere failure to voluntarily give information to the surety of the default of
the principal cannot have the effect of discharging the surety. The surety is bound to take notice of
the principals default and to perform the obligation. He cannot complain that the creditor has not
notified him in the absence of a special agreement to that effect in the contract of suretyship.[35]
The alleged failure of respondent corporation to prove the fact of demand on the principal
debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of
a statutory or contractual requirement, it is not necessary that payment or performance of his
obligation be first demanded of the principal, especially where demand would have been useless;
nor is it a requisite, before proceeding against the sureties, that the principal be called on to
account.[36] The underlying principle therefor is that a suretyship is a direct contract to pay the debt
of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as
default is made, without any demand upon the principal whatsoever or any notice of default. [37] As
an original promisor and debtor from the beginning, he is held ordinarily to know every default of
his principal.[38]
Petitioner questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who benefited from the
proceeds of the loan. What petitioner is trying to imply is that the creditor, herein respondent
corporation, should have proceeded first against the principal before suing on her obligation as
surety. We disagree.
A creditors right to proceed against the surety exists independently of his right to proceed
against the principal.[39] Under Article 1216 of the Civil Code, the creditor may proceed against
any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that
if the obligation is joint and several, the creditor has the right to proceed even against the surety
alone.[40] Since, generally, it is not necessary for a creditor to proceed against a principal in order to
hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same
as that of the principal, then as soon as the principal is in default, the surety is likewise in default,
and may be sued immediately and before any proceedings are had against the principal.[41]Perforce,
in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is
primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the
principal for reimbursement, the surety cannot at law, unless permitted by statute and in the
absence of any agreement limiting the application of the security, require the creditor or obligee,
before proceeding against the surety, to resort to and exhaust his remedies against the principal,
particularly where both principal and surety are equally bound.[42]
We agree with respondent corporation that its mere failure to immediately sue petitioner on
her obligation does not release her from liability. Where a creditor refrains from proceeding
against the principal, the surety is not exonerated. In other words, mere want of diligence or
forbearance does not affect the creditors rights vis--vis the surety, unless the surety requires him
by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does
not discharge the surety whether given at the principals request or without it, and whether it is
yielded by the creditor through sympathy or from an inclination to favor the principal, or is only

the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls
due does not discharge the surety, even if such delay continues until the principal becomes
insolvent.[43] And, in the absence of proof of resultant injury, a surety is not discharged by the
creditors mere statement that the creditor will not look to the surety,[44] or that he need not trouble
himself.[45] The consequences of the delay, such as the subsequent insolvency of the principal, [46] or
the fact that the remedies against the principal may be lost by lapse of time, are immaterial. [47]
The raison dtre for the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time. [48] At any rate, if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and
become subrogated to all the rights and remedies of the creditor.[49]
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by
the creditor without change in the time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the surety. [50] In order to constitute an
extension discharging the surety, it should appear that the extension was for a definite period,
pursuant to an enforceable agreement between the principal and the creditor, and that it was made
without the consent of the surety or with a reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders him in, enforcing the principal
contract within the period during which he could otherwise have enforced it, and which precludes
the surety from paying the debt.[51]
None of these elements are present in the instant case. Verily, the mere fact that respondent
corporation gave the principal debtors an extended period of time within which to comply with
their obligation did not effectively absolve herein petitioner from the consequences of her
undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been
discharged by some act of the creditor,[52] herein respondent corporation, failing in which we
cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and
penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that respondent corporation intentionally
delayed the collection of the loan in order that the interests and penalty charges would
accumulate. The statement, likewise traversed by said respondent, is misleading.
In an affidavit[53] executed by petitioner, which was attached to her petition, she stated,
among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarragas loan
has been released and that she has not paid the same upon its maturity. I received a
telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and
of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea
Azarraga. At the same time, I offered to pay MB Lending the outstanding balance of
the principal obligation should he fail to collect from Merlyn and Osmea
Azarraga. Mr. Banusing advised me not to worry because he will try to collect first
from Merlyn and Osmea Azarraga.

10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing
who reminded that the loan of Merlyn and Osmea Azarraga, together with interest and
penalties thereon, has not been paid. Since I had no available funds at that time, I
offered to pay MB Lending by delivering to them a parcel of land which I own. Mr.
Banusings secretary, however, refused my offer for the reason that they are not
interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against
me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed
against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to
pay the outstanding balance of the principal obligation of Merlyn Azarraga in the
amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus,
counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay
the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea
Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in
order to effectively discharge her from liability. There are a number of circumstances which
conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment
from petitioner. It was petitioner who initially requested that the creditor try to
collect from her principal first, and she offered to pay only in case the creditor fails
to collect. The delay, if any, was occasioned by the fact that respondent corporation
merely acquiesced to the request of petitioner. At any rate, there was here no actual
offer of payment to speak of but only a commitment to pay if the principal does not
pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land
which she owned. Respondent corporation was acting well within its rights when it
refused to accept the offer. The debtor of a thing cannot compel the creditor to
receive a different one, although the latter may be of the same value, or more
valuable than that which is due. [54] The obligee is entitled to demand fulfillment of
the obligation or performance as stipulated. A change of the object of the obligation
would constitute novation requiring the express consent of the parties.[55]
3. After the complaint was filed against her, petitioner reiterated her offer to pay the
outstanding balance of the obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be blamed for refusing the
amount being offered because it fell way below the amount it had computed, based
on the stipulated interests and penalty charges, as owing and due from herein
petitioner. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered,

as the case may be. [56] In other words, the prestation must be fulfilled completely. A
person entering into a contract has a right to insist on its performance in all
particulars.[57]
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay
because the moment the latter accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection, then the obligation shall be deemed fully
complied with.[58]Precisely, this is what respondent corporation wanted to avoid when it
continually refused to settle with petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month
and attorneys fees equivalent to 25% of the total amount due are highly inequitable and
unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00
had already been paid even before the filing of the present case. Article 1229 of the Civil Code
provides that the court shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. And, even if there has been no performance, the
penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B.
Lending Corporation, and which is substantially on all fours with the one at bar, we decided to
eliminate altogether the penalty interest for being excessive and unwarranted under the following
rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the
economic impact of the penalty interest of three percent (3%) per month on total amount
due but unpaid should be equitably reduced. The purpose for which the penalty interest
is intended - that is, to punish the obligor - will have been sufficiently served by the
effects of compounded interest. Under the exceptional circumstances in the case at bar,
e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was
made on due date; and the heavy (albeit still lawful) regular compensatory interest, the
penalty interest stipulated in the parties promissory note is iniquitous and
unconscionable and may be equitably reduced further by eliminating such penalty
interest altogether.[59]
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be
eliminated.
Finally, with respect to the award of attorneys fees, this Court has previously ruled that even
with an agreement thereon between the parties, the court may nevertheless reduce such attorneys
fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable.
[60]
To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals
or public policy.[61] The grant of attorneys fees equivalent to 25% of the total amount due is, in our
opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the
extent of the work involved in this simple action for collection of a sum of money. We, therefore,
hold that the amount of P10,000.00 as and for attorneys fee would be sufficient in this case.[62]

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the

MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of
attorneys fees is reduced to P10,000.00.
SO ORDERED.

(4) E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS, CONSOLIDATED BANK
AND
TRUST
CORPORATION,
and
SPOUSES
RAUL and
ELEA R.
CLAVERIA, respondents.

[G.R. No. 113931. May 6, 1998]

DECISION

MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the decision [1] of the Court of
Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila,
Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as the Resolution [2] dated
February 15, 1994 denying the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers,"
applied for a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK)
in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos (P2, 875,000.00) to
finance the purchase of two (2) maritime barges and one tugboat [3] which would be used in their
molasses business. The loan was granted subject to the condition that respondent spouses execute
a chattel mortgage over the three (3) vessels to be acquired and that a continuing guarantee be
executed by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc. in favor of
SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a chattel
mortgage and a Continuing Guaranty[4] were executed.

Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence,
on January 31,1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of
preliminary attachment, against respondents spouses and petitioner. The case was docketed as
Civil Case No. 91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the
loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that
it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure
to register the chattel mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because
petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
"After a careful consideration of the matter on hand, the Court finds the ground of the motion to
dismiss without merit. The document referred to as 'Continuing Guaranty' dated August 21,1985
(Exh. 7) states as follows:
'For and in consideration of any existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your discretion, at any other manner, to,
or at the request or for the account of the borrower, x x x '
"The provisions of the document are clear, plain and explicit.
"Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document
is 'Continuing Guaranty', the Court's interpretation is not limited to the title alone but to the
contents and intention of the parties more specifically if the language is clear and positive. The
obligation of the defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply
as it is only for those acting as guarantor. In fact, in the letter of January 31, 1986 of the
defendants (spouses and Zobel) to the plaintiff it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by the bank inasmuch as the said loan is covered
by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition of the guaranty. In its letter, it
said that because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is
rendered unnecessary and redundant.
"With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the
proper government agency, i.e. with the Office of the Collector of Customs or with the Register of
Deeds makes the obligation a guaranty, the same merits a scant consideration and could not be
taken by this Court as the basis of the extinguishment of the obligation of the defendant
corporation to the plaintiff as surety. The chattel mortgage is an additional security and should not
be considered as payment of the debt in case of failure of payment. The same is true with the
failure to register, extinction of the liability would not lie.
"WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered
to file its answer to the complaint within ten (10) days from receipt of a copy of this Order." [5]

Petitioner moved for reconsideration but was denied on April 26,1993.[6]

Thereafter, petitioner questioned said Orders before the respondent Court of Appeals,
through a petition for certiorari, alleging that the trial court committed grave abuse of discretion in
denying the motion to dismiss.
On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive portion
of which reads:
"WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in
issuing the herein assailed orders, We hereby DISMISS the petition."
A motion for reconsideration filed by petitioner was denied for lack of merit on February
15,1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals
erred in its finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors,
even though they be solidary, are released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter," is not
applicable to petitioner; (2) that petitioner's obligation to respondent SOLIDBANK under the
continuing guaranty is that of a surety; and (3) that the failure of respondent SOLIDBANK to
register the chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty"
obligated itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. [7] A
contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in
case the latter does not pay the debt.[8]
Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety is
usually bound with his principal by the same instrument, executed at the same time, and on the
same consideration. He is an original promissor and debtor from the beginning, and is held,
ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the
mere indulgence of the creditor to the principal, or by want of notice of the default of the
principal, no matter how much he may be injured thereby. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is
usually entered into before or after that of the principal, and is often supported on a separate
consideration from that supporting the contract of the principal. The original contract of his
principal is not his contract, and he is not bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal.[9]
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.[10]

Based on the aforementioned definitions, it appears that the contract executed by petitioner in
favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety.
The terms of the contract categorically obligates petitioner as "surety" to induce SOLIDBANK to
extend credit to respondent spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business
address x x x (hereinafter called the Borrower), for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your 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 purchase or discount, or to
make any loans or advances evidenced or secured by any notes, bills receivable, drafts,
acceptances, checks or other instruments or evidences of indebtedness x x upon which the
Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the undersigned
agrees to guarantee, and does hereby guarantee, the punctual payment, at maturity or upon
demand, to you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other indebtedness of every kind
which is now or may hereafter become due or owing to you by the Borrower,together with any
and all expenses which may be incurred by you in collecting all or any such instruments or other
indebtedness or obligations hereinbefore referred to, and or in enforcing any rights hereunder, and
also to make or cause any and all such payments to be made strictly in accordance with the terms
and provisions of any agreement (g), express or implied, which has (have) been or may hereafter
be made or entered into by the Borrower in reference thereto, regardless of any law, regulation or
decree, now or hereafter in effect which might in any manner affect any of the terms or provisions
of any such agreements(s) or your right 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; x x x " (Italics Ours)
One need not look too deeply at the contract to determine the nature of the undertaking and
the intention of the parties. The contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor. It
bound itself jointly and severally to the obligation with the respondent spouses. In fact,
SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses' properties
before it can hold petitioner liable for the obligation. This can be gleaned from a reading of the
stipulations in the contract, to wit:
'x x x If default be made in the payment of any of the instruments, indebtedness or other
obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned
should die, dissolve, fail in business, or become insolvent, x x x , or if any funds or other
property of the Borrower, or of the undersigned which may be or come into your possession
or control or that of any third party acting in your behalf as aforesaid should be attached of
distrained, or should be or become subject to any mandatory order of court or other legal
process, then, or any time after the happening of any such event any or all of the instruments
of indebtedness or other obligations hereby guaranteed shall, at your option become (for the
purpose of this guaranty) due and payable by the undersigned forthwith without demand of
notice, and full power and authority are hereby given you, in your discretion, to sell, assign and
deliver all or any part of the property upon which you may then have a lien hereunder at any
broker's board, or at public or private sale at your option, either for cash or for credit or for future
delivery without assumption by you of credit risk, and without either the demand, advertisement

or notice of any kind, all of which are hereby expressly waived. At any sale hereunder, you may, at
your option, purchase the whole or any part of the property so sold, free from any right of
redemption on the part of the undersigned, all such rights being also hereby waived and
released. In case of any sale and other disposition of any of the property aforesaid, after
deducting all costs and expenses of every kind for care, safekeeping, collection, sale, delivery
or otherwise, you may apply the residue of the proceeds of the sale and other disposition
thereof, to the payment or reduction, either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned whether or not except for
disagreement such liabilities or obligations would then be due, making proper allowance or
interest on the obligations and liabilities not otherwise then due, and returning the overplus,
if any, to the undersigned; all without prejudice to your rights as against the undersigned
with respect to any and all amounts which may be or remain unpaid on any of the
obligations or liabilities aforesaid at any time (s)"
xxx

xxx

xxx

'Should the Borrower at this or at any future time furnish, or should be heretofore have
furnished, another surety or sureties to guarantee the payment of his obligations to you, the
undersigned hereby expressly waives all benefits to which the undersigned might be entitled
under the provisions of Article 1837 of the Civil Code (beneficio division), the liability of the
undersigned under any and all circumstances being joint and several;" (Italics Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an intention to be bound by a primary or
independent obligation.[11]As aptly observed by the trial court, the interpretation of a contract is not
limited to the title alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon
by petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association vs.
Guinhawa,[12] we have ruled that Article 2080 of the New Civil Code does not apply where the
liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the
chattel mortgage did not release petitioner from the obligation. In the Continuing Guaranty
executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the
existence of any collateral. It even released SOLIDBANK from any fault or negligence that may
impair the contract. The pertinent portions of the contract so provides:
"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this
guaranty, irrespective of the existence, value or condition of any collateral, and
notwithstanding any such change, exchange, settlement, compromise, surrender, release, sale,
application, renewal or extension, and notwithstanding also that all obligations of the Borrower to
you outstanding and unpaid at any time (s) may exceed the aggregate principal sum herein above
prescribed.
'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall
have been received by you that it has been revoked by the undersigned, but any such notice shall

not be released the undersigned from any liability as to any instruments, loans, advances or other
obligations hereby guaranteed, which may be held by you, or in which you may have any interest,
at the time of the receipt of such notice. No act or omission of any kind on your part in the
premises shall in any event affect or impair this guaranty, nor shall same be affected by any
change which may arise by reason of the death of the undersigned, of any partner (s) of the
undersigned, or of the Borrower, or of the accession to any such partnership of any one or more
new partners." (Italics supplied)
In fine, we find the petition to be without merit as no reversible error was committed by
respondent Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED.
Costs against the petitioner.
SO ORDERED.

(5) INTERNATIONAL FINANCE

G.R. No. 160324

CORPORATION,
Petitioner,

- versus -

Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,*
Corona,
Carpio Morales, and
Garcia, JJ

IMPERIAL TEXTILE MILLS,

Promulgated:
INC.,**
Respondent.
November 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
DECISION
PANGANIBAN, J.:

The terms of a contract govern the rights and obligations of the contracting parties. When the
obligor undertakes to be jointly and severally liable, it means that the obligation is solidary. If
solidary liability was instituted to guarantee a principal obligation, the law deems the contract to
be one of suretyship.
The creditor in the present Petition was able to show convincingly that, although
denominated as a Guarantee Agreement, the Contract was actually a surety. Notwithstanding
the use of the words guarantee and guarantor, the subject Contract was indeed a surety,
because its terms were clear and left no doubt as to the intention of the parties.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, assailing the
February 28, 2002 Decision[2] and September 30, 2003 Resolution[3] of the Court of Appeals (CA)
in CA-GR CV No. 58471. The challenged Decision disposed as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED.
decision of the trial court is MODIFIED to read as follows:

The

1.
Philippine Polyamide Industrial Corporation is ORDERED to
pay [Petitioner] International Finance Corporation, the following amounts:

(a)

US$2,833,967.00 with accrued interests as

provided in the Loan Agreement;

(b)

Interest of 12% per annum on accrued

interest, which shall be counted from the
date of filing of the instant action up to the
actual payment;

(c)

P73,340.00 as attorneys fees;

(d)

Costs of suit.

2.
The guarantor Imperial Textile Mills, Inc. together with
Grandtex is HELD secondarily liable to pay the amount herein adjudged to
[Petitioner] International Finance Corporation.[4]
The assailed Resolution denied both parties respective Motions for Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
On December 17, 1974, [Petitioner] International Finance Corporation
(IFC) and [Respondent] Philippine Polyamide Industrial Corporation (PPIC)
entered into a loan agreement wherein IFC extended to PPIC a loan of
US$7,000,000.00, payable in sixteen (16) semi-annual installments of
US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with interest
at the rate of 10% per annum on the principal amount of the loan advanced and
outstanding from time to time. The interest shall be paid in US dollars semiannually on June 1 and December 1 in each year and interest for any period less
than a year shall accrue and be pro-rated on the basis of a 360-day year of
twelve 30-day months.
On December 17, 1974, a Guarantee Agreement was executed with x
x x Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation
(Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to guarantee
PPICs obligations under the loan agreement.
PPIC paid the installments due on June 1, 1977, December 1, 1977
and June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and
December 1, 1979 were rescheduled as requested by PPIC. Despite the
rescheduling of the installment payments, however, PPIC defaulted. Hence, on
April 1, 1985, IFC served a written notice of default to PPIC demanding the
latter to pay the outstanding principal loan and all its accrued interests. Despite
such notice, PPIC failed to pay the loan and its interests.
By virtue of PPICs failure to pay, IFC, together with DBP, applied for
the extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPIC, located at
Calamba, Laguna, with the regional sheriff of Calamba, Laguna. On July 30,
1985, the deputy sheriff of Calamba, Laguna issued a notice of extrajudicial
sale. IFC and DBP were the only bidders during the auction sale. IFCs bid was
for P99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing
exchange rate of P18.9084 = US$1.00). The outstanding loan, however,

amounted to US$8,083,967.00 thus leaving a balance of US$2,833,967.00.

PPIC failed to pay the remaining balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of
PPIC, to pay the outstanding balance. However, despite the demand made by
IFC, the outstanding balance remained unpaid.
Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of
Manila against PPIC and ITM for the payment of the outstanding balance plus
interests and attorneys fees.
The trial court held PPIC liable for the payment of the outstanding
loan plus interests. It also ordered PPIC to pay IFC its claimed attorneys fees.
However, the trial court relieved ITM of its obligation as guarantor. Hence, the
trial court dismissed IFCs complaint against ITM.
x x x

x x x

x x x

Thus, apropos the decision dismissing the complaint against ITM, IFC
appealed [to the CA].[5]

Ruling of the Court of Appeals

The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any
obligation to IFC. According to the appellate court, ITM bound itself under the Guarantee
Agreement to pay PPICs obligation upon default. [6] ITM was not discharged from its obligation as
guarantor when PPIC mortgaged the latters properties to IFC.[7] The CA, however, held that ITMs
liability as a guarantor would arise only if and when PPIC could not pay. Since PPICs inability to
comply with its obligation was not sufficiently established, ITM could not immediately be made to
assume the liability.[8]
The September 30, 2003 Resolution of the CA denied reconsideration. [9] Hence, this
Petition.[10]
The Issues
Petitioner states the issues in this wise:
I.

Whether or not ITM and Grandtex[11] are sureties and therefore, jointly and
severally liable with PPIC, for the payment of the loan.

II.

Whether or not the Petition raises a question of law.

III.

Whether or not the Petition raises a theory not raised in the lower
court.[12]

The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the
payment of the loan.
The Courts Ruling

The Petition is meritorious.

Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan Agreement
dated December 17, 1974, between IFC and PPIC; [13] and (2) the Guarantee Agreement dated
December 17, 1974, between ITM and Grandtex, on the one hand, and IFC on the other.[14]
IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs
obligations proceeding from the Loan Agreement.[15] For its part, ITM asserts that, by the terms of
the Guarantee Agreement, it was merely a guarantor [16] and not a surety. Moreover, any ambiguity
in the Agreement should be construed against IFC -- the party that drafted it.[17]
Language of the
Contract
The premise of the Guarantee Agreement is found in its preambular clause, which reads:
Whereas,
(A)

By an Agreement of even date herewith between IFC and PHILIPPINE

POLYAMIDE INDUSTRIAL CORPORATION (herein called the
Company), which agreement is herein called the Loan Agreement, IFC
agrees to extend to the Company a loan (herein called the Loan) of
seven million dollars ($7,000,000) on the terms therein set forth,
including a provision that all or part of the Loan may be disbursed in a
currency other than dollars, but only on condition that the Guarantors
agree to guarantee the obligations of the Company in respect of the
Loan as hereinafter provided.

(B)

The Guarantors, in order to induce IFC to enter into the Loan Agreement,
and in consideration of IFC entering into said Agreement, have agreed
so to guarantee such obligations of the Company.[18]

The obligations of the guarantors are meticulously expressed in the following provision:
Section 2.01. The Guarantors jointly and severally, irrevocably,
absolutely and unconditionally guarantee, as primary obligors and not as
sureties merely, the due and punctual payment of the principal of, and interest
and commitment charge on, the Loan, and the principal of, and interest on, the
Notes, whether at stated maturity or upon prematuring, all as set forth in the
Loan Agreement and in the Notes.[19]
The Agreement uses guarantee and guarantors, prompting ITM to base its argument
on those words.[20] This Court is not convinced that the use of the two words limits the Contract to
a mere guaranty. The specific stipulations in the Contract show otherwise.
Solidary Liability

Agreed to by ITM
While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was jointly and severally liable. To put emphasis on the nature of that liability, the
Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations
meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily [21] liable with PPIC for the latters
obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC
and could not be deemed merely secondarily liable.

Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs
liability commenced only when it guaranteed PPICs obligation. It became a surety when it bound
itself solidarily with the principal obligor. Thus, the applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds
himself to the creditor to fulfill the obligation of the principal in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract shall be called suretyship.[22]

The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on Joint
and Solidary Obligations. Relevant to this case is Article 1216, which states:
The creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The demand made against one of them shall
not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected.

Pursuant to this provision, petitioner (as creditor) was justified in taking action directly
against respondent.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of the Guarantee Agreement.
When qualified by the term jointly and severally, the use of the word guarantor to refer to a
surety does not violate the law.[23] As Article 2047 provides, a suretyship is created when a
guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement
-- as primary obligor and not merely as surety -- stresses that ITM is being placed on the same
level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as
a suretyship.
The use of the word guarantee does not ipso facto make the contract one of guaranty.[24]
This Court has recognized that the word is frequently employed in business transactions to
describe the intention to be bound by a primary or an independent obligation. [25] The very terms of
a contract govern the obligations of the parties or the extent of the obligors liability. Thus, this
Court has ruled in favor of suretyship, even though contracts were denominated as a Guarantors
Undertaking [26] or a Continuing Guaranty.[27]
Contracts have the force of law between the parties, [28] who are free to stipulate any
matter not contrary to law, morals, good customs, public order or public policy. [29] None of these
circumstances are present, much less alleged by respondent. Hence, this Court cannot give a
different meaning to the plain language of the Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the premise provided in the
Whereas clause of the Guarantee Agreement. The execution of the Agreement was a condition
precedent for the approval of PPICs loan from IFC. Consistent with the position of IFC as
creditor was its requirement of a higher degree of liability from ITM in case PPIC committed a
breach. ITM agreed with the stipulation in Section 2.01 and is now estopped from feigning

ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of
the contract are clear and there is no doubt as to the intention of the parties. [30]
We note that the CA denied solidary liability, on the theory that the parties would not
have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor. [31]
The appellate court opined that ITMs undertaking was collateral to and distinct from the Loan
Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a
collateral to a principal obligation.[32] Although a surety contract is secondary to the principal
obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a
regular party to the undertaking.[33] A surety becomes liable to the debt and duty of the principal
obligor even without possessing a direct or personal interest in the obligations constituted by the
latter.[34]
ITMs Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA erred in declaring the
former secondarily liable.[35] A surety is considered in law to be on the same footing as the
principal debtor in relation to whatever is adjudged against the latter. [36] Evidently, the dispositive
portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in
favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities allegedly justifying the
denial of the present Petition. Before the trial court and the CA, IFC had allegedly instituted
different arguments that effectively changed the corporations theory on appeal, in violation of this
Courts previous pronouncements.[37] ITM further claims that the main issue in the present case is
a question of fact that is not cognizable by this Court.[38]
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal

Petitioners arguments before the trial court (that ITM was a primary obligor) and
before the CA (that ITM was a surety) were related and intertwined in the action to enforce the
solidary liability of ITM under the Guarantee Agreement. We emphasize that the terms primary
obligor and surety were premised on the same stipulations in Section 2.01 of the Agreement.
Besides, both terms had the same legal consequences. There was therefore effectively no change
of theory on appeal. At any rate, ITM failed to show to this Court a disparity between IFCs
allegations in the trial court and those in the CA. Bare allegations without proof deserve no
credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition for Review, [39] the
Court has recognized exceptions,[40]one of which applies to the present case. The assailed
Decision was based on a misapprehension of facts, [41] which particularly related to certain
stipulations in the Guarantee Agreement -- stipulations that had not been disputed by the parties.

This circumstance compelled the Court to review the Contract firsthand and to make its own
findings and conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and
Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety to
Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance
Corporation the same amounts adjudged against PPIC in the assailed Decision. No costs.
SO ORDERED.

(6) PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners, vs.
COURT OF APPEALS and TRADERS ROYAL BANK, respondents.

G.R. No. 142381. October 15, 2003]

DECISION
CARPIO, J.:

The Case
This is a petition for review on certiorari[1] to annul the Decision[2] dated 16 July 1999 of the
Court of Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17 February
2000 denying the motion for reconsideration. The Court of Appeals affirmed with modification

the
Decision[3] dated 31
August
1992 rendered
by
Branch
113
of
the Regional Trial Court of Pasay City (trial court). The trial courts Decision declared petitioner
Alfredo Ching (Ching) liable to respondent Traders Royal Bank (TRB) for the payment of the
credit accommodations extended to Philippine Blooming Mills, Inc. (PBM).

Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1.

P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106;[4]

2.

P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113;[5] and

3.

P3,500,000 under the trust loan covered by a notarized Promissory Note.[6]

Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate
officer, Ching signed a Deed of Suretyship dated 21 July 1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL
BANK, its successors and assigns, the due and punctual payment by the following individuals
and/or companies/firms, hereinafter called the DEBTOR(S), of such amounts whether due or not,
as indicated opposite their respective names, to wit:
NAME OF DEBTOR(S)
PHIL. BLOOMING MILLS CORP.

AMOUNT OF OBLIGATION
TEN MILLION PESOS
(P 10,000,000.00)

owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all
notes, drafts, overdrafts and other credit obligations of every kind and nature contracted/incurred
by said DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said
indebtedness herein secured at maturity, I/We, jointly and severally, agree and engage to the
CREDITOR, its successors and assigns, the prompt payment, without demand or notice from said
CREDITOR, of such notes, drafts, overdrafts and other credit obligations on which the
DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR,
together with all interests, penalty and other bank charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to
be performed under any contracts, evidencing indebtedness/obligations and any supplements,
amendments, charges or modifications made thereto, including but not limited to, the due and
punctual payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment,
demand, protest and notice of dishonor of any and all such instruments, loans, advances, credits,
or other indebtedness or obligations hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not
contingent upon the pursuit by the CREDITOR, its successors or assigns, of whatever remedies it
or they may have against the DEBTOR(S) or the securities or liens it or they may possess; and
I/WE hereby agree to be and remain bound upon this suretyship, irrespective of the existence,

value or condition of any collateral, and notwithstanding also that all obligations of the
DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate principal sum
herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as
attorneys fees a sum equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal
and interest) then unpaid, exclusive of all costs or expenses for collection allowed by law.
[7] (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching
in his capacity as Senior Vice President of PBM. Ching later accomplished and delivered to TRB
trust receipts, which acknowledged receipt in trust for TRB of the merchandise subject of the
letters of credit. Under the trust receipts, PBM had the right to sell the merchandise for cash with
the obligation to turn over the entire proceeds of the sale to TRB as payment of PBMs
indebtedness. Letter of Credit No. 479 AD, covered by Trust Receipt No. 106, has a face value of
US$591,043, while Letter of Credit No. 563 AD, covered by Trust Receipt No. 113, has a face
value of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts shall bear interest at
the rate of __ per centum ( __%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and
severally undertake and agree to pay on demand on the said BANK, all sums and
amounts of money which said BANK may call upon them to pay arising out of,
pertaining to, and/or in any manner connected with this receipt. In case it is
necessary to collect the draft covered by the Trust Receipt by or through an
attorney-at-law, the undersigned hereby further agree(s) to pay an additional of 10%
of the total amount due on the draft as attorneys fees, exclusive of all costs, fees
and other expenses of collection but shall in no case be less
than P200.00[8] (Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as comaker in the notarized Promissory Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to
pay the TRADERS ROYAL BANK or order, at its Office in 4 th Floor, Kanlaon Towers Bldg.,
Roxas Blvd., Pasay City, the sum of Pesos: THREE MILLION FIVE HUNDRED THOUSAND
ONLY (P3,500,000.00), Philippine Currency, with the interest rate of Eighteen Percent (18%) per
annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an
additional amount equivalent to two per cent (2%) of the principal sum per annum, as penalty
and collection charges in the form of liquidated damages until fully paid, and the further sum of
ten percent (10%) thereof in full, without any deduction, as and for attorneys fees whether
actually incurred or not, exclusive of costs and other judicial/extrajudicial expenses; moreover,
I/We jointly and severally, further empower and authorize the TRADERS ROYAL BANK at its
option, and without notice to set off or to apply to the payment of this note any and all funds,
which may be in its hands on deposit or otherwise belonging to anyone or all of us, and to hold as
security therefor any real or personal property which may be in its possession or control by virtue
of any other contract.[9] (Emphasis supplied)

PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD)
for P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD)
for P1,191,137.13. PBM also defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the
Securities and Exchange Commission (SEC), docketed as SEC Case No. 2250. [10] The petition
sought to suspend payment of PBMs obligations and prayed that the SEC allow PBM to continue
its normal business operations free from the interference of its creditors. One of the listed
creditors of PBM was TRB.[11]
On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the
rehabilitation receivership of Kalaw, Escaler and Associates.[12]
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership,
TRB filed with the trial court a complaint for collection against PBM and Ching. TRB asked the
trial court to order defendants to pay solidarily the following amounts:
(1)

P6,612,132.74 exclusive of interests, penalties, and bank charges

[representing its indebtedness arising from the letters of credit issued to its various
suppliers];

(2)

P4,831,361.11, exclusive of interests, penalties, and other bank charges [due

and owing from the trust loan of 27 April 1981 evidenced by a promissory note];

(3)

P783,300.00 exclusive of interests, penalties, and other bank charges [due

and owing from the money market loan of 1 April 1981 evidenced by a promissory
note];

(4)

To order defendant Ching to pay P10,000,000.00 under the Deed of

Suretyship in the event plaintiff can not recover the full amount of PBMs
indebtedness from the latter;

(5)
(6)

The sum equivalent to 10% of the total sum due as and for attorneys fees;
Such other amounts that may be proven by the plaintiff during the trial, by
way of damages and expenses for litigation.[13]

On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that
the SEC had already placed PBM under receivership. [14] The trial court thus dismissed the
complaint against PBM.[15]
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that
the trial court had no jurisdiction over the subject matter of the case. PBM and Ching invoked the
assumption of jurisdiction by the SEC over all of PBMs assets and liabilities. [16]
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued
in his personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension
of payments is not binding on TRB; and (3) Presidential Decree No. 1758 (PD No. 1758),
[17] which Ching relied on to support his assertion that all claims against PBM are suspended, does
not apply to Ching as the decree regulates corporate activities only.[18]
In its order dated 15 August 1983,[19] the trial court denied the motion to dismiss with respect
to Ching and affirmed its dismissal of the case with respect to PBM. The trial court stressed that
TRB was holding Ching liable under the Deed of Suretyship. As Chings obligation was solidary,
the trial court ruled that TRB could proceed against Ching as surety upon default of the principal
debtor PBM. The trial court also held that PD No. 1758 applied only to corporations, partnerships
and associations and not to individuals.
Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition for
Certiorari and Prohibition[20] before the Court of Appeals. The appellate court granted Chings

petition and ordered the dismissal of the case. The appellate court ruled that the SEC assumed
jurisdiction over Ching and PBM to the exclusion of courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals Decision [21] before this Court. In Traders Royal Bank v.
Court of Appeals,[22] this Court upheld TRB and ruled that Ching was merely a nominal party in
SEC Case No. 2250. Creditors may sue individual sureties of debtor corporations, like Ching, in a
separate proceeding before regular courts despite the pendency of a case before the SEC involving
the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation
co-maker of PBM. He claimed that the SEC had already issued a decision [23] approving a revised
rehabilitation plan for PBMs creditors, and that PBM obtained the credit accommodations for
corporate purposes that did not redound to his personal benefit. He further claimed that even as a
surety, he has the right to the defenses personal to PBM. Thus, his liability as surety would attach
only if, after the implementation of payments scheduled under the rehabilitation plan, there would
remain a balance of PBMs debt to TRB. [24] Although Ching admitted PBMs availment of the
credit accommodations, he did not show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and by the
SEC-appointed receiver.[25] Thus, the trial court had to resolve the following remaining issues:
1. How much exactly is the corporate defendants outstanding obligation to the
plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how much?[26]
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department
of TRB, and Ms. Carla Pecson, manager of the International Department of TRB, as
witnesses. Both witnesses testified to the following:
1.

The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBMs
liabilities to TRB up to P10,000,000;[27]

2.

The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479
AD for US$591,043, and the actual availment by PBM of the full proceeds of the credit
accommodation;[28]
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563
AD for US$156,000, and the actual availment by PBM of the full proceeds of the credit
accommodation;[29] and
4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory Note
dated 27 April 1981 wherein Ching bound himself solidarily with PBM;[30] and
5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31 October 1991.[31]

Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the
Human Resources Department of TRB, as witness. Ching sought to establish that TRBs Board of
Directors adopted a resolution fixing the PBM account at an amount lower than what TRB wanted
to collect from Ching. The trial court allowed Atty. Aranda to testify over TRBs manifestation that
the Answer failed to plead the subject matter of his testimony. Atty. Aranda produced TRB Board
Resolution No. 5935, series of 1990, which contained the minutes of the special meeting of TRBs
Board of Directors held on 8 June 1990.[32] In the resolution, the Board of Directors advised
TRBs Management not to release Alfredo Ching from his JSS liability to the bank. [33] The
resolution also stated the following:
a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006
which shall be applied directly to the account (as remitted per hereto attached
schedule). The amount of P1.373 million shall be considered as full payment of
PBMs account. (The receiver is amenable to this alternative)

The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon

approval of the above and conforme to PISCOR and PBM. Subsequent deposits
shall start on the 3rd year and annually thereafter (every June 30th of the year)
until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and
demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain
outstanding in the books of the Bank. Said balance will equal the deposits to be
remitted to the Bank for a period of 17 years.[34]
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never
complied with or implemented. Not only was there no initial deposit of P150,000 as required in
the resolution, TRB also disapproved the document prepared by the receiver, which would have
released Ching from his suretyship.[35]

The Ruling of the Trial Court

The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of
Suretyship. The trial court explained:
[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of
the Philippine Blooming Mills. Indisputably, under the Deed of Suretyship defendant Ching
unconditionally agreed to assume PBMs liability to the plaintiff in the event PBM defaulted in the
payment of the said obligation in addition to whatever penalties, expenses and bank charges that
may occur by reason of default. Clear enough, under the Deed of Suretyship (Exh. J), defendant
Ching bound himself jointly and severally with PBM in the payment of the latters obligation to
the plaintiff. The obligation being solidary, the plaintiff Bank can hold Ching liable upon default
of the principal debtor. This is explicitly provided in Article 1216 of the New Civil Code already
quoted above.[36]
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff
bank in the amount of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY
THREE THOUSAND FIVE HUNDRED FIFTY EIGHT & 16/100) as of October 31, 1991, and to
pay the legal interest thereon from such date until it is fully paid. To pay plaintiff 5% of the entire
amount by way of attorneys fees.
SO ORDERED.[37]

The Ruling of the Court of Appeals

On appeal, Ching stated that as surety and solidary debtor, he should benefit from the
changed nature of the obligation as provided in Article 1222 of the Civil Code, which reads:
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal to him, or
pertain to his own share. With respect to those which personally belong to the others, he may
avail himself thereof only as regards that part of the debt for which the latter are responsible.

Ching claimed that his liability should likewise be reduced since the equitable apportionment
of PBMs remaining assets among its creditors under the rehabilitation proceedings would have
the effect of reducing PBMs liability. He also claimed that the amount for which he was being
held liable was excessive. He contended that the outstanding principal balance, as stated in TRB
Board Resolution No. 5893-1990, was only P5,650,749.09.[38] Ching also contended that he was
not liable for interest, as the loan documents did not stipulate the interest rate, pursuant to Article
1956 of the Civil Code.[39] Finally, Ching asserted that the Deed of Suretyship executed on 21 July
1977 could not guarantee obligations incurred after its execution.[40]
TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the case
for decision.[41]
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM under
rehabilitation receivership, and if in the affirmative, for how much.[42]
The Court of Appeals resolved the first two questions in favor of TRB. The appellate court
stated:
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts,
Undertaking, Deed of Surety, and the 3.5 Million Peso Promissory Note upon which TRBs action
rested. He is, therefore, presumed to be liable unless he presents evidence showing payment,
partially or in full, of these obligations (Investment and Underwriting Corporation of the
Philippines v. Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching can answer separately
for the obligations of debtor PBM (Rizal Banking Corporation v. Court of Appeals, Philippine
Blooming Mills, Inc., and Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal Bank v.
Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788 [1989]).
Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation since the
rehabilitation receivers are limited to the existing assets of the corporation. [43]
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect
to the amount of liability of defendant Alfredo Ching which is lowered from P19,333,558.16
to P15,773,708.78 with legal interest of 12% per annum until it is fully paid.
SO ORDERED.[44]
The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.
Hence, this petition.

Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT
PETITIONER ALFREDO CHING WAS LIABLE FOR OBLIGATIONS

CONTRACTED BY PBM LONG AFTER THE EXECUTION OF THE DEED OF

SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT
THE PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS DESPITE
THE FACT THAT PRIVATE RESPONDENT HAD PREVENTED THEIR
FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND
PETITIONER ALFREDO CHING LIABLE FOR P15,773,708.78 WITH LEGAL
INTEREST AT 12% PER ANNUM UNTIL FULLY PAID DESPITE THE FACT
THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM, WHICH
WAS APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION,
PRIVATE RESPONDENT IS ONLY ENTITLED TO P1,373,415.00.[45]
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for
obligations not yet in existence at the time of its execution. Specifically, Ching maintained that the
Deed of Suretyship could not answer for debts contracted by PBM in 1980 and 1981. Ching
contended that no accessory contract of suretyship could arise without an existing principal
contract of loan. Ching likewise argued that TRB could no longer claim on the trust receipts
because TRB had already taken the properties subject of the trust receipts. Ching likewise
maintained that his obligation as surety could not exceed the P1,373,415 apportioned to PBM
under the SEC-approved rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues not
brought before the trial court. Furthermore, TRB pointed out that Ching never presented PBMs
rehabilitation plan before the trial court. TRB also stated that the Supreme Court ruling
in Traders Royal Bank v. Court of Appeals [46] constitutes res judicata between the
parties. Therefore, TRB could proceed against Ching separately from PBM to enforce in full
Chings liability as surety.[47]

The Ruling of the Court

The petition has no merit.
The case before us is an offshoot of the trial courts denial of Chings motion to have the case
dismissed against him. The petition is a thinly veiled attempt to make this Court reconsider its
decision in the prior case of Traders Royal Bank v. Court of Appeals.[48] This Court has already
resolved the issue of Chings separate liability as a surety despite the rehabilitation proceedings
before the SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could
not assume jurisdiction over his person and properties. The Securities and Exchange Commission
was empowered, as rehabilitation receiver, to take custody and control of the assets and properties
of PBM only, for the SEC has jurisdiction over corporations only [and] not over private
individuals, except stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of
P.D. 1758). Being a nominal party in SEC Case No. 2250, Chings properties were not included in
the rehabilitation receivership that the SEC constituted to take custody of PBMs
assets. Therefore,the petitioner bank was not barred from filing a suit against Ching, as a
surety for PBM. An anomalous situation would arise if individual sureties for debtor corporations
may escape liability by simply co-filing with the corporation a petition for suspension of payments
in the SEC whose jurisdiction is limited only to corporations and their corporate assets.
xxx

Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by
Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its individual
stockholders and members. Being an officer or stockholder of a corporation does not make ones
property the property also of the corporation, for they are separate entities (Adelio Cruz vs.
Quiterio Dalisay, 152 SCRA 482).
Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC
jurisdiction over his person or property, for jurisdiction does not depend on the consent or acts of
the parties but upon express provision of law (Tolentino vs. Social Security System, 138 SCRA
428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety of the
credit accommodations TRB extended to PBM. The decision amounts to res judicata[49] which
bars Ching from raising the same issue again. Hence, the only question that remains is the amount
of Chings liability. Nevertheless, we shall resolve the issues Ching has raised in his attempt to
escape liability under his surety.

Whether Ching is liable for obligations PBM contracted after execution of the Deed of
Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after the
execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed
itself, referring to amounts PBM may now be indebted or may hereafter become indebted to
TRB.
The law expressly allows a suretyship for future debts. Article 2053 of the Civil Code
provides:
A guaranty may also be given as security for future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the debt is liquidated. A conditional obligation
may also be secured. (Emphasis supplied)
Furthermore, this Court has ruled in Dio v. Court of Appeals[50] that:
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which
may not be known at the time the guaranty is executed. 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 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 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 states that the

guaranty is to secure advances to be made from time to time, it will be construed 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, 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 require, have been construed to indicate a continuing guaranty.

Whether Chings liability is limited

to the amount stated in PBMs rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount stated
in PBMs rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of the
Civil Code which reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal to him, or
pertain to his own share. With respect to those which personally belong to the others, he may
avail himself thereof only as regards that part of the debt for which the latter are responsible.
In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of
the loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of the
surety. Thus, Ching cannot use PBMs failure to pay in full as justification for his own reduced
liability to TRB. As surety, Ching agreed to pay in full PBMs loan in case PBM fails to pay in
full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the entire
amount of PBMs loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those
which may subsequently be directed against the others, so long as the debt has not
been fully collected. (Emphasis supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This
resolution states that PBMs outstanding loans may be reduced toP1.373 million subject to certain
conditions like the payment of P150,000 initial payment.[51] The resolution also states that TRB
should not release Chings solidary liability under his surety. The resolution even directs TRBs
management to study Chings criminal liability under the trust documents.[52]
Chings own witness testified that Resolution No. 5935 was never implemented. For one,
PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected the
document that PBMs receiver presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his
suretyship.
Chings attempts to have this Court review the factual issues of the case are improper. It is
not a function of the Supreme Court to assess and evaluate again the evidence, testimonial and
evidentiary, adduced by the parties particularly where the findings of both the trial court and the
appellate court coincide on the matter.[53]

Whether Ching is liable for the trust receipts

Ching is still liable for the amounts stated in the letters of credit covered by the trust
receipts. Other than his bare allegations, Ching has not shown proof of payment or settlement
with TRB. Atty. Vicente Aranda, TRBs corporate secretary and First Vice President of its Human
Resource Management Department, testified that the conditions in the TRB board resolution
presented by Ching were not met or implemented, thus:
ATTY. AZURA
Q

Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I
refer you to condition or step No. 1, which reads: a) Accept the P1.373 million
deposits remitted over a period of 17 years or until 2006 which shall be applied
directly to the account (as remitted per hereto attached schedule). The amount
of P1.373 million shall be considered as full payment of PBMs account. (The
receiver is amenable to this alternative.) The initial deposit/remittance which
amounts to P150,000.00 shall be remitted upon approval of the above and
conforme of PISCOR [xxx] and PBM. Subsequent deposits shall start on the
3rd year and annually thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and
demandable. Now Mr. Witness, would you be in a position to inform [the court] if
these conditions listed in item (a) in Resolution No. 5935, series of 1990, were
implemented or met?

Yes. I know for a fact that the conditions, more particularly the initial
deposit/remittance in the amount of P150,000.00 which have to be done with
approval was not remitted or met.

Will you clarify your answer. Would you be in a position to inform the court if
those conditions were met? Because your initial answer was yes.

Yes sir, I am in a position to state that these conditions were not met.

Let me refer you to the condition listed as item (b) of the same resolution which I
read and quote: Write off immediately P4.278 million. The balance ofP1.373
million to remain outstanding in the books of the bank. Said balance will be
remitted to the Bank for a period of 17 years. Mr. Witness, would you be in a
position to inform the court if the bank implemented that particular condition?

In the implementation of this settlement the receiver prepared a document for

approval and conformity of the bank. The said document would in effect release
the suretyship of Alfredo Ching and for that reason the bank refused or denied
fixing its conformity and approval with the court.
xxx

ATTY. ATIENZA ON REDIRECT EXAMINATION

Q

Mr. Witness you stated that the reason why the plaintiff bank did not implement
these conditionalities [sic] was because the former defendant corporation
requested that the suretyship of Alfredo Ching be released, is that correct?

I did not say that. I said that in effect the document prepared by the lawyer of the
receiver xxx the bank would release the suretyship of Alfredo Ching, that is why
the bank is not amenable to such a document.

Despite this approved resolution the bank, because of said requirement or

conformity did not seek to implement these conditionalities [sic]?

Yes sir because the conditions imposed by the board is not being followed in that
document because it was the condition of the board that the suretyship should not
be released but the document being presented to the bank for signature and

conformity in effect if signed would release the suretyship. So it would be a

violation with the approval of the board so the bank did not sign the conformity.[54]
Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust
receipts when TRB, together with other creditor banks, took hold of PBMs inventories, including
the goods covered by the trust receipts. Ching asserts that this act of TRB released him from
liability under the suretyship. Ching forgets that he executed, on behalf of PBM, separate
Undertakings for each trust receipt expressly granting to TRB the right to take possession of the
goods at any time to protect TRBs interests. TRB may exercise such right without waiving its
right to collect the full amount of the loan to PBM. The Undertakings also provide that any
suspension of payment or any assignment by PBM for the benefit of creditors renders the loan due
and demandable. Thus, the separate Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust and take
possession of said merchandise with the right to sell and dispose of the same
under such terms and conditions it may deem best, or of the proceeds of such of
the same as may then have been sold, wherever the said merchandise or proceeds
may then be found and all the provisions of the Trust Receipt shall apply to and be
deemed to include said above-mentioned merchandise if the same shall have been
made up or used in the manufacture of any other goods, or merchandise, and the
said BANK shall have the same rights and remedies against the said merchandise in
its manufactured state, or the product of said manufacture as it would have had in
the event that such merchandise had remained [in] its original state and irrespective
of the fact that other and different merchandise is used in completing such
manufacture. In the event of any suspension, or failure or assignment for the
benefit of creditors on the part of the undersigned or of the non-fulfillment of any
obligation, or of the non-payment at maturity of any acceptance made under said
credit, or any other credit issued by the said BANK on account of the undersigned
or of the non-payment of any indebtedness on the part of the undersigned to the
said BANK, all obligations, acceptances, indebtedness and liabilities whatsoever
shall thereupon without notice mature and become due and payable and the
BANK may avail of the remedies provided herein.[55] (Emphasis supplied)
Presidential Decree No. 115 (PD No. 115), otherwise known as the Trust Receipts Law,
expressly allows TRB to take possession of the goods covered by the trust receipts. Thus, Section
of 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the
sale of the goods, documents or instruments released under a trust receipt to the entrustee to the
extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the
goods, documents or instruments in case of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt provided such are not contrary to the provisions of this
Decree.
The entruster may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom at any time upon default or failure of
the entrustee to comply with any of the terms and conditions of the trust receipt or any other
agreement between the entruster and the entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to the entrustee of the intention to
sell, and may, not less than five days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the entruster may, at a public sale, become
a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the
payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the entrustees
indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency. Notice of sale shall be deemed sufficiently given if in writing, and

either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last
known business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and
Ching remained liable for the entire amount of the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Chings credit obligations with TRB,
Chings liability is what the Deed of Suretyship stipulates, plus the applicable interest and
penalties. The trust receipts, as well as the Letter of Undertaking dated 16 April 1980[56] executed
by PBM, stipulate in writing the payment of interest without specifying the rate. In such a case,
the applicable interest rate shall be the legal rate, which is now 12% per annum. [57] This is in
accordance with Central Bank Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise
known as the Usury Law, the Monetary Board, in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve per cent (12%) per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for
18% interest per annum plus 2% penalty interest per annum in case of default. This stipulated
interest should continue to run until full payment of the P3,500,000 trust loan. In addition, the
accrued interest on all the credit accommodations should earn legal interest from the date of filing
of the complaint pursuant to Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point.
The trial court found and the appellate court affirmed that the outstanding principal amounts
as of the filing of the complaint with the trial court on 13 May 1983 were P959,611.96 under Trust
Receipt No. 106, P1,191,137.13 under Trust Receipt No. 113, and P3,500,000 for the trust
loan. As extracted from TRBs Statement of Account as of 31 October 1991, [58] the accrued
interest on the trust receipts and the trust loan as of the filing of the complaint on 13 May 1983
were P311,387.51[59] under Trust Receipt No. 106, P338,739.81[60] under Trust Receipt No. 113,
and P1,287,616.44[61] under the trust loan. The penalty interest on the trust loan amounted
to P137,315.07.[62] Ching did not rebut this Statement of Account which TRB presented during
trial.
Thus, the following is the summary of Chings liability under the suretyship as of 13 May
1983, the date of filing of TRBs complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
Outstanding Principal
P
959,611.96
Accrued Interest (12% per annum)
311,387.51
2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)
Outstanding Principal
P 1,191,137.13
Accrued Interest (12% per annum)
338,739.82
3. On the Trust Loan (Promissory Note)
Outstanding Principal
Accrued Interest (18% per annum)
Accrued Penalty Interest (2% per annum)

P 3,500,000.00
1,287,616.44
137,315.07

WHEREFORE,
we AFFIRM the
decision
of
the
Court
of
Appeals
with MODIFICATION. Petitioner Alfredo Ching shall pay respondent Traders Royal Bank the
following (1) on the credit accommodations under the trust receipts, the total principal amount
of P2,150,749.09 with legal interest at 12% per annum from 14 May 1983 until full payment; (2)
on the trust loan evidenced by the Promissory Note, the principal sum of P3,500,000 with 20%
interest per annum from 14 May 1983 until full payment; (3) on the total accrued interest as of 13
May 1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until full
payment. Petitioner Alfredo Ching shall also pay attorneys fees to respondent Traders Royal
Bank equivalent to 5% of the total principal and interest.
SO ORDERED.

(7) SALVADOR P. ESCAO

G. R. No. 151953

and MARIO M. SILOS,

Petitioners,
Present:
- versus -

RAFAEL ORTIGAS, JR.,

QUISUMBING,
Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.

Respondent.
Promulgated:
June 29, 2007
x---------------------------------------------------------------------------------x
DECISION
TINGA, J.:

The main contention raised in this petition is that petitioners are not under obligation to
reimburse respondent, a claim that can be easily debunked. The more perplexing question is
whether this obligation to repay is solidary, as contended by respondent and the lower courts, or
merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines (PDCP) [1] entered
into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make
available and lend to Falcon the amount of US$320,000.00, for specific purposes and subject to
certain terms and conditions.[2] On the same day, three stockholders-officers of Falcon, namely:
respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T. Scholey executed an
Assumption of Solidary Liability whereby they agreed to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment of the loan contracted by Falcon
with PDCP.[3] In the meantime, two separate guaranties were executed to guarantee the payment of
the same loan by other stockholders and officers of Falcon, acting in their personal and individual
capacities. One Guaranty[4] was executed by petitioner Salvador Escao (Escao), while the
other[5] by petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo
(Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and
Joseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey,
Inductivo and the heirs of then already deceased George T. Scholey assigned their shares of stock
in Falcon to Escao, Silos and Matti.[6] Part of the consideration that induced the sale of stock was
a desire by Ortigas, et al., to relieve themselves of all liability arising from their previous joint and
several undertakings with Falcon, including those related to the loan with PDCP. Thus, an
Undertaking dated 11 June 1982 was executed by the concerned parties, [7] namely: with Escao,
Silos and Matti identified in the document as SURETIES, on one hand, and Ortigas, Inductivo
and the Scholeys as OBLIGORS, on the other. The Undertaking reads in part:
3.

That whether or not SURETIES are able to immediately cause PDCP and
PAIC to release OBLIGORS from their said guarantees [sic], SURETIES
hereby irrevocably agree and undertake to assume all of OBLIGORs
said guarantees [sic] to PDCP and PAIC under the following terms and
conditions:
a. Upon receipt by any of [the] OBLIGORS of any
demand from PDCP and/or PAIC for the payment of
FALCONs obligations with it, any of [the] OBLIGORS shall
immediately inform SURETIES thereof so that the latter can
timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against
any and/or all of OBLIGORS for collection of said loans

and/or credit facilities, SURETIES agree to defend

OBLIGORS at their own expense, without prejudice to any
and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief in respect
to any of the claims of PDCP and/or PAIC; and
c.
In the event that any of [the] OBLIGORS is for any
reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees
which may be due from FALCON arising out of, or in connection with, their
said guarantees[sic].[8]
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by
PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to further
secure the loan. However, Falcon subsequently defaulted in its payments. After PDCP foreclosed
on the chattel mortgage, there remained a subsisting deficiency of P5,031,004.07, which Falcon
did not satisfy despite demand.[9]
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum
of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos,
Silverio and Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas
filed together with his answer a cross-claim against his co-defendants Falcon, Escao and Silos,
and also manifested his intent to file a third-party complaint against the Scholeys and Matti. [10] The
cross-claim lodged against Escao and Silos was predicated on the 1982 Undertaking, wherein
they agreed to assume the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come
to terms with PDCP was Escao, who in December of 1993, entered into a compromise agreement
whereby he agreed to pay the bank P1,000,000.00. In exchange, PDCP waived or assigned in
favor of Escao one-third (1/3) of its entire claim in the complaint against all of the other
defendants in the case.[11] The compromise agreement was approved by the RTC in a
Judgment[12] dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement [13] with
PDCP, allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to
pay PDCP P1,300,000.00 as full satisfaction of the PDCPs claim against Ortigas, [14] in
exchange for PDCPs release of Ortigas from any liability or claim arising from the Falcon loan
agreement, and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he
agreed to pay P500,000.00 in exchange for PDCPs waiver of its claims against him.[15]
In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escao, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint
against Matti and Silos,[16] while he maintained his cross-claim against Escao. In 1995, Ortigas
filed a motion for Summary Judgment in his favor against Escao, Silos and Matti. On 5 October
1995, the RTC issued the Summary Judgment, ordering Escao, Silos and Matti to pay
Ortigas, jointly and severally, the amount of P1,300,000.00, as well as P20,000.00 in attorneys
fees.[17]The trial court ratiocinated that none of the third-party defendants disputed the 1982
Undertaking, and that the mere denials of defendants with respect to non-compliance of Ortigas
of the terms and conditions of the Undertaking, unaccompanied by any substantial fact which
would be admissible in evidence at a hearing, are not sufficient to raise genuine issues of fact

necessary to defeat a motion for summary judgment, even if such facts were raised in the
pleadings.[18] In an Order dated 7 March 1996, the trial court denied the motion for
reconsideration of the Summary Judgment and awarded Ortigas legal interest of 12% per annum
to be computed from 28 February 1994.[19]
From the Summary Judgment, recourse was had by way of appeal to the Court of
Appeals. Escao and Silos appealed jointly while Matti appealed by his lonesome. In a
Decision[20] dated 23 January 2002, the Court of Appeals dismissed the appeals and affirmed the
Summary Judgment. The appellate court found that the RTC did not err in rendering the summary
judgment since the three appellants did not effectively deny their execution of the 1982
Undertaking. The special defenses that were raised, payment and excussion, were characterized
by the Court of Appeals as appear[ing] to be merely sham in the light of the pleadings and
supporting documents and affidavits.[21] Thus, it was concluded that there was no genuine issue
that would still require the rigors of trial, and that the appealed judgment was decided on the bases
of the undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and Silos. [22] Two main issues are
raised. First, petitioners dispute that they are liable to Ortigas on the basis of the 1982
Undertaking, a document which they do not disavow and have in fact annexed to their petition.
Second, on the assumption that they are liable to Ortigas under the 1982 Undertaking, petitioners
argue that they are jointly liable only, and not solidarily. Further assuming that they are liable,
petitioners also submit that they are not liable for interest and if at all, the proper interest rate is
6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their memorandum
before the Court, the appropriateness of the summary judgment as a relief favorable to Ortigas.
Under Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if
the pleadings, supporting affidavits, depositions and admissions on file show that, except as to the
amount of damages, there is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. Petitioner have not attempted to demonstrate before us
that there existed a genuine issue as to any material fact that would preclude summary
judgment. Thus, we affirm with ease the common rulings of the lower courts that summary
judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held liable
to Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An examination of the
document reveals several clauses that make it clear that the agreement was brought forth by the
desire of Ortigas, Inductivo and the Scholeys to be released from their liability under the loan
agreement which release was, in turn, part of the consideration for the assignment of their shares
in Falcon to petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself
with Falcon for the payment of the loan with PDCP, and that amongst the consideration for
OBLIGORS and/or their principals aforesaid selling is SURETIES relieving OBLIGORS of any
and all liability arising from their said joint and several undertakings with FALCON. [23] Most
crucial is the clause in Paragraph 3 of the Undertaking wherein petitioners irrevocably agree and
undertake to assume all of OBLIGORs said guarantees [sic] to PDCP x x x under the following
terms and conditions.[24]
At the same time, it is clear that the assumption by petitioners of Ortigass guarantees
[sic] to PDCP is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to
(c) of Paragraph 3. First, upon receipt by any of OBLIGORS of any demand from PDCP for the
payment of Falcons obligations with it, any of OBLIGORS was to immediately inform
SURETIES thereof so that the latter can timely take appropriate measures. Second, should any
and/or all of OBLIGORS be impleaded by PDCP in a suit for collection of its loan, SURETIES
agree[d] to defend OBLIGORS at their own expense, without prejudice to any and/or all of
OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogation or other
relief[25] in respect to any of the claims of PDCP. Third, if any of the OBLIGORS is for any

reason made to pay any amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such payment.[26]
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not
made to pay PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP
the amount of P1.3 Million as an amicable settlement of the claims posed by the bank against him.
However, the subject clause in paragraph 3(c) actually reads [i]n the event that any of
OBLIGORS is for any reason made to pay any amount to PDCP x x x[27] As pointed out by
Ortigas, the phrase for any reason reasonably includes any extra-judicial settlement of obligation
such as what Ortigas had undertaken to pay to PDCP, as it is indeed obvious that the phrase was
incorporated in the clause to render the eventual payment adverted to therein unlimited and
unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made
clear that the right of Ortigas to seek reimbursement accrued only after he had delivered payment
to PDCP as a consequence of a final and executory judgment. On the contrary, the clear intent of
the Undertaking was for petitioners and Matti to relieve the burden on Ortigas and his fellow
OBLIGORS as soon as possible, and not only after Ortigas had been subjected to a final and
executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts to cause PDCP x x
x to within a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP
x x x[28] In the event that Ortigas and his fellow OBLIGORS could not be released from their
guaranties, paragraph 2 commits petitioners and Matti to cause the Board of Directors of Falcon to
make a call on its stockholders for the payment of their unpaid subscriptions and to pledge or
assign such payments to Ortigas, et al., as security for whatever amounts the latter may be held
liable under their guaranties. In addition, paragraph 1 also makes clear that nothing in the
Undertaking shall prevent OBLIGORS, or any one of them, from themselves negotiating with
PDCP x x x for the release of their said guarantees [sic].[29]
There is no argument to support petitioners position on the import of the phrase made to
pay in the Undertaking, other than an unduly literalist reading that is clearly inconsistent with the
thrust of the document. Under the Civil Code, the various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that sense which may result from all of them
taken jointly.[30] Likewise applicable is the provision that if some stipulation of any contract
should admit of several meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.[31] As a means to effect the general intent of the document to relieve
Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that holds sway with
this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set
in paragraph 3, as they claim. Following the general assertion in the petition that Ortigas violated
the terms of the Undertaking, petitioners add that Ortigas paid PDCP BANK the amount ofP1.3
million without petitioners ESCANO and SILOSs knowledge and consent. [32] Paragraph 3(a) of
the Undertaking does impose a requirement that any of the OBLIGORS shall immediately
inform SURETIES if they received any demand for payment of FALCONs obligations to
PDCP, but that requirement is reasoned so that the [SURETIES] can timely take appropriate
measures[33] presumably to settle the obligation without having to burden the OBLIGORS. This
notice requirement in paragraph 3(a) is markedly way off from the suggestion of petitioners that
Ortigas, after already having been impleaded as a defendant in the collection suit, was obliged
under the 1982 Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas are similarly
weak.

Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that
Ortigas had, in his answer, denied any liability to PDCP and had alleged that he signed the
Assumption of Solidary Liability not in his personal capacity, but as an officer of Falcon.
However, such position, according to petitioners, could not be justified since Ortigas later
voluntarily paid PDCP the amount of P1.3 Million. Such circumstances, according to petitioners,
amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The Partial
Compromise Agreement between PDCP and Ortigas expressly stipulated that Ortigass offer to
pay PDCP was conditioned without [Ortigass] admitting liability to plaintiff PDCP Banks
complaint, and to terminate and dismiss the said case as against Ortigas solely. [34] Petitioners
profess it is unthinkable for Ortigas to have voluntarily paid PDCP without admitting his
liability,[35] yet such contention based on assumption cannot supersede the literal terms of the
Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had already
assigned his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did
pursue a judicial claim against Ortigas notwithstanding the Undertaking he executed with
petitioners. Not being a party to such Undertaking, PDCP was not precluded by a contract from
pursuing its claim against Ortigas based on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress
through a settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly
states that nothing herein shall prevent OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of their said guarantees [sic]. [36] Simply put, the
Undertaking did not bar Ortigas from pursuing his own settlement with PDCP. Neither did the
Undertaking bar Ortigas from recovering from petitioners whatever amount he may have paid
PDCP through his own settlement. The stipulation that if Ortigas was for any reason made to pay
any amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s within
seven (7) calendar days from such payment [37] makes it clear that petitioners remain liable to
reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the
assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas,
claiming that the Undertaking did not provide for express solidarity. They cite Article 1207 of the
New Civil Code, which states in part that [t]here is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for
the Undertaking, as the language used in the agreement clearly shows that it is a surety
agreement[38] between the obligors (Ortigas group) and the sureties (Escao group). Ortigas points
out that the Undertaking uses the word SURETIES although the document, in describing the
parties. It is further contended that the principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners are solidarily liable because the total loan
obligation can not be paid or settled to free or release the OBLIGORS if one or any of the
SURETIES default from their obligation in the Undertaking.[39]
In case, there is a concurrence of two or more creditors or of two or more debtors in one and
the same obligation, Article 1207 of the Civil Code states that among them, [t]here is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. Article 1210 supplies further caution against the broad
interpretation of solidarity by providing: The indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply indivisibility.

These Civil Code provisions establish that in case of concurrence of two or more creditors
or of two or more debtors in one and the same obligation, and in the absence of express and
indubitable terms characterizing the obligation as solidary, the presumption is that the obligation is
only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed solidary
in character to prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed to
bind themselves jointly and severally in their obligations to the Ortigas group, or any such terms
to that effect. Hence, such obligation established in the Undertaking is presumed only to be joint.
Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to overcome
the presumption of jointness of obligations. We rule and so hold that he failed to discharge such
burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified
themselves in the Undertaking as SURETIES, a term repeated no less than thirteen (13) times in
the document. Ortigas claims that such manner of identification sufficiently establishes that the
obligation of petitioners to him was joint and solidary in nature.
The term surety has a specific meaning under our Civil Code. Article 2047 provides the
statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship. [Emphasis supplied][40]
As provided in Article 2047 in a surety agreement the surety undertakes to be bound
solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract as it
presupposes the existence of a principal contract. It appears that Ortigass argument rests solely on
the solidary nature of the obligation of the surety under Article 2047. In tandem with the
nomenclature SURETIES accorded to petitioners and Matti in the Undertaking, however, this
argument can only be viable if the obligations established in the Undertaking do partake of
the nature of a suretyship as defined under Article 2047 in the first place. That clearly is not the
case here, notwithstanding the use of the nomenclature SURETIES in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the
surety is solidarily bound by way of an ancillary obligation of segregate identity from the
obligation between the principal debtor and the creditor. The suretyship does bind the surety to the
creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the
credit in lieu of proceeding against the principal debtor for the same obligation. [41] At the same
time, there is also a legal tie created between the surety and the principal debtor to which the
creditor is not privy or party to. The moment the surety fully answers to the creditor for the
obligation created by the principal debtor, such obligation is extinguished. [42] At the same time, the
surety may seek reimbursement from the principal debtor for the amount paid, for the surety does
in fact become subrogated to all the rights and remedies of the creditor. [43]
Note that Article 2047 itself specifically calls for the application of the provisions on joint
and solidary obligations to suretyship contracts. [44] Article 1217 of the Civil Code thus comes into
play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of
suretyship) in favor of the one who paid (i.e., the surety).[45] However, a significant distinction still
lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies
that the creditor can compel any one of the joint and several debtors or the surety alone to answer

for the entirety of the principal debt. The difference lies in the respective faculties of the joint and
several debtor and the surety to seek reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and
a fiador in solidum (surety). The latter, outside of the liability he assumes to
pay the debt before the property of the principal debtor has been
exhausted, retains all the other rights, actions and benefits which pertain to
him by reason of the fiansa; while a solidary co-debtor has no other rights
than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of
the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the
contract of suretyship. The civil law suretyship is, accordingly, nearly
synonymous with the common law guaranty; and the civil law relationship
existing between the co-debtors liable in solidum is similar to the common law
suretyship.[46]
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor
who effected the payment to the creditor may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. Such solidary debtor will
not be able to recover from the co-debtors the full amount already paid to the creditor, because the
right to recovery extends only to the proportional share of the other co-debtors, and not as to the
particular proportional share of the solidary debtor who already paid. In contrast, even as the
surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the
creditor has the right to recover the full amount paid, and not just any proportional share, from the
principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions
and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the
surety.
What is the source of this right to full reimbursement by the surety? We find the right
under Article 2066 of the Civil Code, which assures that [t]he guarantor who pays for a debtor
must be indemnified by the latter, such indemnity comprising of, among others, the total amount
of the debt.[47] Further, Article 2067 of the Civil Code likewise establishes that [t]he guarantor
who pays is subrogated by virtue thereof to all the rights which the creditor had against the
debtor.[48]
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the qualifier in Article 2047 that the
provisions on joint and several obligations should apply to sureties. We reject that argument, and
instead adopt Dr. Tolentinos observation that [t]he reference in the second paragraph of [Article
2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations,
however, does not mean that suretyship is withdrawn from the applicable provisions governing
guaranty.[49] For if that were not the implication, there would be no material difference between
the surety as defined under Article 2047 and the joint and several debtors, for both classes of
obligors would be governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and granted to
the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047.
These rights granted to the surety who pays materially differ from those granted under Article
1217 to the solidary debtor who pays, since the indemnification that pertains to the latter
extends only [to] the share which corresponds to each [co-debtor]. It is for this reason that the

Court cannot accord the conclusion that because petitioners are identified in the Undertaking as
SURETIES, they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general
presumption favoring joint liability, the Court would have to be satisfied that among the
petitioners and Matti, there is one or some of them who stand as the principal debtor to Ortigas
and another as surety who has the right to full reimbursement from the principal debtor or debtors.
No suggestion is made by the parties that such is the case, and certainly the Undertaking is not
revelatory of such intention. If the Court were to give full fruition to the use of the term
SURETIES as conclusive indication of the existence of a surety agreement that in turn gives rise
to a solidary obligation to pay Ortigas, the necessary implication would be to lay down a
corresponding set of rights and obligations as between the SURETIES which petitioners and
Matti did not clearly intend.
It is not impossible that as between Escao, Silos and Matti, there was an agreement
whereby in the event that Ortigas were to seek reimbursement from them per the terms of the
Undertaking, one of them was to act as surety and to pay Ortigas in full, subject to his right to full
reimbursement from the other two obligors. In such case, there would have been, in fact, a surety
agreement which evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an
agreement, it does not appear on the record. More consequentially, no such intention is reflected in
the Undertaking itself, the very document that creates the conditional obligation that petitioners
and Matti reimburse Ortigas should he be made to pay PDCP. The mere utilization of the term
SURETIES could not work to such effect, especially as it does not appear who exactly is the
principal debtor whose obligation is assured or guaranteed by the surety.
Ortigas further argues that the nature of the Undertaking requires solidary obligation of
the Sureties, since the Undertaking expressly seeks to reliev[e] obligors of any and all liability
arising from their said joint and several undertaking with [F]alcon, and for the sureties to
irrevocably agree and undertake to assume all of obligors said guarantees to PDCP. [50] We do not
doubt that a finding of solidary liability among the petitioners works to the benefit of Ortigas in
the facilitation of these goals, yet the Undertaking itself contains no stipulation or clause that
establishes petitioners obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas
do not by themselves establish that the nature of the obligation requires solidarity. Even if the
liability of petitioners and Matti were adjudged as merely joint, the full relief and reimbursement
of Ortigas arising from his payment to PDCP would still be accomplished through the complete
execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the Undertaking
contained no such stipulation for attorneys fees, and that the situation did not fall under the
instances under Article 2208 of the Civil Code where attorneys fees are recoverable in the
absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his
being impleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means to
obtain the release of Ortigas and the Scholeys from their previous obligations as sureties of
Falcon, especially considering that they were already divesting their shares in the corporation.
Specific provisions in the Undertaking obligate petitioners to work for the release of Ortigas from
his surety agreements with Falcon. Specific provisions likewise mandate the immediate repayment
of Ortigas should he still be made to pay PDCP by reason of the guaranty agreements from which
he was ostensibly to be released through the efforts of petitioners. None of these provisions were
complied with by petitioners, and Article 2208(2) precisely allows for the recovery of attorneys
fees [w]hen the defendants act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest.

Finally, petitioners claim that they should not be liable for interest since the Undertaking
does not contain any stipulation for interest, and assuming that they are liable, that the rate of
interest should not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals [51] set forth the
rules with respect to the manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which
time quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.[52]
Since what was the constituted in the Undertaking consisted of a payment in a sum of
money, the rate of interest thereon shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand. The interest rate imposed by the RTC is thus proper. However,
the computation should be reckoned from judicial or extrajudicial demand. Per records, there is no

indication that Ortigas made any extrajudicial demand to petitioners and Matti after he paid PDCP,
but on 14 March 1994, Ortigas made a judicial demand when he filed a Third-Party Complaint
praying that petitioners and Matti be made to reimburse him for the payments made to PDCP. It is
the filing of this Third Party Complaint on 14 March 1994 that should be considered as the date of
judicial demand from which the computation of interest should be reckoned. [53] Since the RTC held
that interest should be computed from 28 February 1994, the appropriate redefinition should be
made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial
Court dated 5 October 1995 is MODIFIED bydeclaring that petitioners and Joseph M. Matti are
only jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr. in the amount
ofP1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is MODIFIED in that
the legal interest of 12% per annum on the amount of P1,300,000.00 is to be computed from 14
March 1994, the date of judicial demand, and not from 28 February 1994 as directed in the Order
of the lower court. The assailed rulings are affirmed in all other respects. Costs against petitioners.
SO ORDERED.