ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendantappellee, and
FIDELITY & SURETY COMPANY OF
THE PHILIPPINE ISLANDS, defendantappellant
Ross and Laurence and Wolfson &
Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San
Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17,
1916, one Romulo Machetti, by a written
agreement undertook to construct a building
on Calle Rosario in the city of Manila for the
Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the
agreement was that the contractor should
obtain the "guarantee" of the Fidelity and
Surety Company of the Philippine Islands to
the amount of P128,800 and the following
endorsement in the English language appears
upon the contract:
MANILA, July 15, 1916.
For value received we hereby
guarantee compliance with the
terms and conditions as
outlined in the above contract.

FIDELITY AND SURETY

COMPANY
OF
THE
PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the
supervision of architects representing the
Hospicio de San Jose and, as the work
progressed, payments were made to him from
time to time upon the recommendation of the
architects, until the entire contract price, with
the exception of the sum of the P4,978.08,
was paid. Subsequently it was found that the
work had not been carried out in accordance
with the specifications which formed part of
the contract and that the workmanship was
not of the standard required, and the Hospicio
de San Jose therefore answered the complaint
and presented a counterclaim for damages for
the partial noncompliance with the terms of
the agreement abovementioned, in the total
sum of P71,350. After issue was thus joined,
Machetti, on petition of his creditors, was, on
February 27, 1918, declared insolvent and on
March 4, 1918, an order was entered
suspending the proceeding in the present case
in accordance with section 60 of the
Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29,
1919, filed a motion asking that the Fidelity
and Surety Company be made crossdefendant to the exclusion of Machetti and
that the proceedings be continued as to said
company, but still remain suspended as to

Machetti. This motion was granted and on

February 7, 1920, the Hospicio filed a
complaint against the Fidelity and Surety
Company asking for a judgement for P12,800
against the company upon its guaranty. After
trial, the Court of First Instance rendered
judgment against the Fidelity and Surety
Company for P12,800 in accordance with the
complaint. The case is now before this court
upon appeal by the Fidelity and Surety
Company form said judgment.
As will be seen, the original action which
Machetti was the plaintiff and the Hospicio
de San Jose defendant, has been converted
into an action in which the Hospicio de San
Jose is plaintiff and the Fidelity and Surety
Company, the original plaintiff's guarantor, is
the defendant, Machetti having been
practically eliminated from the case.
But in this instance the guarantor's case is
even stronger than that of an ordinary surety.
The contract of guaranty is written in the
English language and the terms employed
must of course be given the signification
which ordinarily attaches to them in that
language. In English the term "guarantor"
implies an undertaking of guaranty, as
distinguished from suretyship. It is very true
that notwithstanding the use of the words
"guarantee" or "guaranty" circumstances may
be shown which convert the contract into one
of suretyship but such circumstances do not
exist in the present case; on the contrary it
appear affirmatively that the contract is the
guarantor's separate undertaking in which the
1

principal does not join, that its rests on a

separate consideration moving from the
principal and that although it is written in
continuation of the contract for the
construction of the building, it is a collateral
undertaking separate and distinct from the
latter. All of these circumstances are
distinguishing features of contracts of
guaranty.
Now, while a surety undertakes to pay if the
principal does not pay, the guarantor only
binds himself to pay if the principal cannot
pay. The one is the insurer of the debt, the
other an insurer of the solvency of the debtor.
(Saint vs. Wheeler & Wilson Mfg. Co., 95
Ala., 362; Campbell, vs. Sherman, 151 Pa.
St., 70; Castellvi de Higgins and
Higgins vs. Sellner,
41
Phil.,
142;
;U.S. vs. Varadero de la Quinta, 40 Phil., 48.)
This latter liability is what the Fidelity and
Surety Company assumed in the present case.
The undertaking is perhaps not exactly that of
a fianza under the Civil Code, but is a
perfectly valid contract and must be given the
legal effect if ordinarily carries. The Fidelity
and Surety Company having bound itself to
pay only the event its principal, Machetti,
cannot pay it follows that it cannot be
compelled to pay until it is shown that
Machetti is unable to pay. Such ability may
be proven by the return of a writ of execution
unsatisfied or by other means, but is not
sufficiently established by the mere fact that
he has been declared insolvent in insolvency
proceedings under our statutes, in which the
extent of the insolvent's inability to pay is not

determined until the final liquidation of his

estate.
The judgment appealed from is therefore
reversed without costs and without prejudice
to such right of action as the crosscomplainant, the Hospicio de San Jose, may
have after exhausting its remedy against the
plaintiff Machetti. So ordered.

JN DEVELOPMENT CORPORATION vs. PHILIPPINE EXPORT

AND FOREIGN LOAN GUARANTEE CORPORATION
FACTS:
Petitioner JN Development Corporation and Traders Royal
Bank entered into an agreement that the latter would extend
to JN an Export Packing Credit Line for Two Million Pesos. The
loan was covered by several securities, including a real estate
mortgage and a letter of guarantee from respondent
Philippine Export and Foreign Loan Guarantee
Corporation, covering seventy percent (70%) of the
credit line. With PhilGuarantee issuing a guarantee in
favor of TRB. For failure of petitioner JN to pay upon
maturity, PhilGuarantee was made to pay. When JN failed to
reimburse the latter, respondent PhilGuarantee filed a
Complaint for collection of money and damages against herein
petitioners.
The RTC dismissed PhilGuarantees Complaint as
well as the counterclaim of petitioners. It ruled that petitioners
are not liable to reimburse PhilGuarantee what it had paid to
TRB since the latter was able to foreclose the real estate
mortgage executed by JN, thus extinguishing petitioners
obligation. According to the RTC, the failure of TRB to sue JN
for the recovery of the loan precludes PhilGuarantee from
seeking recoupment from what it paid to TRB.
Thus,
PhilGuarantees payment to TRB amounts to a waiver of its
right under Art. 2058 of the Civil Code.
ISSUE:
WON petitioner is still liable to indemnify the guarantor
despite the latter seemingly waiving its right to excussion?
HELD:
Yes. The Court held that PhilGuarantees waiver of the
right of excussion cannot prevent it from demanding
reimbursement from petitioners. The law clearly requires the
debtor to indemnify the guarantor what the latter has
paid.Under a contract of guarantee, the guarantor binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. The guarantor
who pays for a debtor, in turn, must be indemnified by
the latter.However, the guarantor cannot be compelled
to pay the creditor unless the latter has exhausted all
the property of the debtor and resorted to all the legal
remedies against the debtor. This is what is otherwise

known as the benefit of excussion.

Towers Assurance Corp vs Ororama

Supermarket
G.R. No. L-45848. November 9, 1977.
Facts
See Hong, the proprietor of Ororama
Supermart in Cagayan de Oro City, sued the
spouses Ernesto Ong and Conching Ong in
the Court of First Instance of Misamis
Oriental for the collection of the sum of
P58,400 plus litigation expenses and
attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary
attachment. The lower court issued an order
of attachment. The deputy sheriff attached the
properties of the Ong spouses in Valencia,
Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed
on March 11, 1976 a counterbond in the
amount of P58,400 with Towers Assurance
Corporation as surety. In that undertaking,
the Ong spouses and Towers Assurance
Corporation bound themselves to pay
solidarily to See Hong the sum of P58,400.
RTC: rendered a decision, ordering not only
the Ong spouses but also their surety, Towers
Assurance Corporation, to pay solidarily to
See Hong the sum of P58,400. The court also
ordered the Ong spouses to pay P10,000 as
litigation expenses and attorney's fees.
2

Ernesto Ong manifested that he did not want

to appeal. Towers Assurance Corporation
filed the instant petition for certiorari where it
assails the decision and writ of execution.
Issue(s)
Whether the lower court acted with grave
abuse of discretion when it issued a writ of
execution.
Ruling
We hold that the lower court acted with grave
abuse of discretion in issuing a writ of
execution against the surety without first
giving it an opportunity to be heard as
required in Rule 57 of the Rules of Court
which provides:
"SEC. 17. When execution returned
unsatisfied, recovers had upon
bond. If the execution be
returned unsatisfied in whole or in
part, the surety or sureties on any
counterbond given pursuant to the
provisions of this rule to secure the
payment of the judgment shall
become
charged
on
such
counterbond, and bound to pay to
the judgment creditor upon demand,
the amount due under the judgment,
which amount may be recovered
from such surety or sureties after
notice and summary hearing in the
action."
Under section 17, in order that the judgment
creditor might recover from the surety on the
counterbond, it is necessary (1) that execution
be first issued against the principal debtor and
that such execution was returned unsatisfied

in whole or in part; (2) that the creditor made

a demand upon the surety for the satisfaction
of the judgment, and (3) that the surety be
given notice and a summary hearing in the
same action as to his liability for the
judgment under his counterbond.
The first requisite mentioned above is not
applicable to this case because Towers
Assurance Corporation assumed a solidary
liability for the satisfaction of the judgment.
A surety is not entitled to the exhaustion of
the properties of the principal debtor.
Finman General Assurance Corp. v. Salik, et
al.
G.R. No. 84084, August 20, 1990
Facts:
Abdulgani Salik et al., private
respondents, allegedly applied with Pan
Pacific Overseas Recruiting Services, Inc.
(hereinafter referred to as Pan Pacific) on
April 22, 1987 and were assured employment
abroad by a certain Mrs. Normita Egil. In
consideration thereof, they allegedly paid fees
totalling P30, 000.00. But despite numerous
assurances of employment abroad given by
Celia Arandia and Mrs. Egil, they were not
employed.
Accordingly, they filed a joint complaint
with the Philippine Overseas Employment
Administration (herein referred to as POEA)
against Pan Pacific for Violation of Articles
32 and 34(a) of the Labor Code, as amended,
with claims for refund of a total amount of
P30, 000.00.

The POEA motu proprio impleaded and

summoned herein petitioner surety Finman
General Assurance Corporation (hereinafter
referred to as Finman), in the latter's capacity
as Pan Pacific's bonding company.
Summons were served upon both Pan
Pacific and Finman, but they failed to answer.
On October 9, 1987, a hearing was called,
but only the private respondents appeared.
Despite being deemed in default for failing to
answer, both Finman and Pan Pacific were
still notified of the scheduled hearing. Again
they failed to appear. Thus, ex-parte
proceedings ensued.
Herein petitioner, Finman, in an answer
which was not timely filed, alleged, among
others, that herein private respondents do not
have a valid cause of action against it; that
Finman is not privy to any transaction
undertaken by Pan Pacific with herein private
respondents; that herein private respondents
claims are barred by the statute of frauds and
by the fact that they executed a waiver.
On March 18, 1988, the Honorable
Franklin M. Drilon, then the Secretary of
Labor
and
Employment,
upon the
recommendation of the POEA hearing officer,
issued an Order directing both Finman and
Pan Pacific to pay jointly and severally the
claims of respondents.
In view thereof, the license of Pan
Pacific
Overseas
Recruiting
Services is hereby cancelled,
effective immediately.
A motion for reconsideration having been
denied, herein petitioner Finman instituted the
instant petition for certiorari.
3

Issues:
1. Whether or not the Honorable
Administrator and the Honorable
Secretary of Labor acted with grave
abuse of discretion amounting to lack
of jurisdiction in motu proprio
impleading Finman as co-respondent
of Pan Pacific in the present case
which was filed by Abdulgani Salik,
et al.
2. Whether or not the honorable
Secretary of Labor acted without or in
excess of jurisdiction in directing
Finman to pay jointly and severally
with Pan Pacific the claims of private
respondents on the basis of the
suretyship agreement.
Held:
The honorable Administrator and the
honorable Secretary of Labor acted
within its jurisdiction. The nature of
Finman's obligation under the
suretyship agreement makes it privy
to the proceedings against its principal
(Pan Pacific). As such Finman is
bound, in the absence of collusion, by
a judgment against its principal even
though it was not a party to the
proceedings.
Petitioner Finman and Pan Pacific entered
into a suretyship agreement, with the former
agreeing that the bond is conditioned upon
the true and faithful performance and
observance of the bonded principal (Pan
1.

Pacific) of its duties and obligations. It was

also understood that under the suretyship
agreement, herein petitioner undertook itself
to be jointly and severally liable for all claims
arising from recruitment violation of Pan
Pacific, in keeping with Section 4, Rule V,
Book I of the Implementing Rules of the
Labor Code.
In Government of the Philippines v.
Tizon (20 SCRA 1182 [1967]), this Court
ruled that where the surety bound itself
solidarily with the principal obligor, the
former is so dependent on the principal debtor
"that the surety is considered in law as being
the same party as the debtor in relation to
whatever is adjudged touching the obligation
of the latter." Applying the foregoing
principles to the case at bar, it can be very
well said that even if herein Finman was not
impleaded in the instant case, still it
(petitioner) can be held jointly and severally
liable for all claims arising from recruitment
violation of Pan Pacific. Moreover, as
correctly stated by the Solicitor General,
private respondents have a legal claim against
Pan Pacific and its insurer for the placement
and processing fees they paid, so much so
that in order to provide a complete relief to
private respondents, petitioner had to be
impleaded in the case.

The records of the case reveal that herein

Finman filed a motion for reconsideration of
the adverse decision dated March 18, 1988 of
respondent Secretary of Labor. In the said
motion for reconsideration, no jurisdictional
challenge was made (Ibid., p. 22). It was only
when it filed this petition that it assailed the
jurisdiction of the respondent Secretary of
Labor, and that of the POEA. But then, it was
too late. Estoppel had barred herein petitioner
from raising the issue, regardless of its merits
(Akay Printing Press v. Minister of Labor and
Employment, 140 SCRA 381 [1985]).
Moreover, well-settled is the rule that
findings of facts of the respondent Secretary
are generally accorded great weight unless
there was grave abuse of discretion or lack of
jurisdiction in arriving at such findings,
which is not present in the case at bar.
Hence, Finman's contention that POEA's
and respondent Secretary's actions in
impleading and directing herein petitioner to
pay jointly and severally with Pan Pacific the
claims of private respondents constitute a
grave abuse of discretion amounting to lack
of jurisdiction has no basis.
Premises considered, the questioned
Orders of respondent Secretary of Labor are
hereby affirmed.

The honorable Secretary of Labor

acted within its jurisdiction in
directing Finman to pay jointly and
severally with Pan Pacific the claims
of private respondents on the basis of
the suretyship agreement.

But certainly, the surety is entitled to be,

heard before an execution can be issued
against him since he is not a party in the
case involving his principal. Notice and
hearing constitute the essence of procedural
due process.

2.

SECOND DIVISION

[G.R. No. 151060. August 31, 2005]

JN DEVELOPMENT CORPORATION,
and SPS. RODRIGO and LEONOR
STA.
ANA, petitioners,
vs. PHILIPPINE EXPORT AND
FOREIGN LOAN GUARANTEE
CORPORATION, respondent.
DECISION
TINGA, J.:
Facts: Petitioner JN Development
Corporation (JN) and Traders Royal Bank
(TRB) entered into an agreement whereby
TRB would extend to JN an Export Packing
Credit Line for Two Million Pesos
(P2,000,000.00). The loan was covered by
several securities, including a real estate
mortgage and a letter of guarantee from
respondent Philippine Export and Foreign
Loan Guarantee Corporation (PhilGuarantee),
now Trade and Investment Development
Corporation of the Philippines, covering
seventy percent (70%) of the credit line.
PhilGuarantee issued a guarantee in favor
of TRB, & JN..

It appears that JN failed to pay the loan

to TRB upon its maturity; thus, on 8 October
1980 TRB requested PhilGuarantee to make
good its guarantee. PhilGuarantee informed
JN about the call made by TRB, and inquired
about the action of JN to settle the loan.
Having received no response from JN, on
10 March 1981 PhilGuarantee paid TRB
(P934,824.34). Subsequently, PhilGuarantee
made several demands on JN, but the latter
failed to pay.

PhilGuarantee thus filed a Complaint for

collection of money and damages against
herein petitioners.
RTC
dismissed
PhilGuarantees Complaint as well as the
counterclaim of petitioners. It ruled that
petitioners are not liable to reimburse
PhilGuarantee what it had paid to TRB.
Crucial to this holding was the courts
finding:

that TRB was able to foreclose

the real estate mortgage executed
by JN, thus extinguishing
petitioners obligation.
there was no showing that after
the said foreclosure, TRB had
demanded
from
JN
any
deficiency or the payment of the
difference between the proceeds
of the foreclosure sale and the
actual loan. In addition, the RTC
held that since PhilGuarantees
guarantee was good for only one
year from 17 December 1979, or

until 17 December 1980, and

since it was not renewed after the
expiry
of
said
period,
PhilGuarantee had no more legal
duty to pay TRB on 10 March
1981.
According to the RTC, the failure
of TRB to sue JN for the recovery
of
the
loan
precludes
PhilGuarantee from seeking
recoupment from the spouses Sta.
Ana and Cruz (parties who
promised
repayment
to
PhilGuarantees) what it paid to
TRB.
Thus,
PhilGuarantees
payment to TRB amounts to a
waiver of its right under Art. 2058
of the Civil Code

Aggrieved by the RTC Decision,

PhilGuarantee appealed to the CA. CA
reversed the RTC and ordered petitioners to
pay PhilGuarantee (P934,624.34), plus
service charge and interest.

CA held that the RTCs finding

that the loan was extinguished by
virtue of the foreclosure sale of
the mortgaged property had no
factual support and that such
finding is negated by the
testimony that JN did not receive
any notice of foreclosure from
PhilGuarantee or from TRB.
The CA also ruled that JNs
obligation had become due and
demandable within the one-year
period of effectivity of the
5

guarantee; thus, PhilGuarantees

payment to TRB conformed with
its guarantee, although the
payment itself was effected one
year after the maturity date of the
loan.

Interpreting Art. 2058 of the Civil

Code, the
appellate
court
explained that while the provision
states that the guarantor cannot be
compelled to pay unless the
properties of the debtor are
exhausted, the guarantor is not
precluded from waiving the
benefit of excussion and paying
the obligation altogether.

JN Devt sought reconsideration of

the Decision and prayed for the admission of
documents evidencing the foreclosure of the
real estate mortgage, but the motion for
reconsideration was denied by the CA for
lack of merit (foreclosure sale per se is not
proof of petitioners payment of the loan to
PhilGuarantee)
PhilGuarantee maintains that the date of
default, not the actual date of payment,
determines the liability of the guarantor and
that having paid TRB when the loan became
due, they should be indemnified. It argues
that, contrary to JNs claim, there could be no
waiver of its right to excussion more explicit
than its act of payment to TRB very
directly. Besides, the right to excussion is for
the benefit of the guarantor and is not a
defense for the debtor to raise and use to

evade liability.
Issue: W/N PhilGuarantee (guarantor)
should be indemnified for the payment it
made despite the banks (TRB creditor)
failure to sue the principal debtor JN?
Held: The Court finds for PhilGuarantee.
Under a contract of guarantee, the
guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in
case the latter should fail to do so. The
guarantor who pays for a debtor, in turn, must
be indemnified by the latter. However, the
guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor and resorted to all the
legal remedies against the debtor. This is
what is otherwise known as the benefit of
excussion.
It is clear that excussion may only be
invoked after legal remedies against the
principal debtor have been expanded. Thus, it
was held that the creditor must first obtain a
judgment against the principal debtor before
assuming to run after the alleged guarantor,
for obviously the exhaustion of the principals
property cannot even begin to take place
before judgment has been obtained. The law
imposes conditions precedent for the
invocation of the defense. Thus, in order
that the guarantor may make use of the
benefit of excussion, he must set it up
against the creditor upon the latters
demand for payment and point out to the

creditor available property of the debtor

within the Philippines sufficient to cover
the amount of the debt. (excussion is
guarantors defense against creditor- exhaust
principal debtors property first before
demanding payment from me)
While a guarantor enjoys the benefit
of excussion, nothing prevents him from
paying the obligation once demand is made
on him. Excussion, after all, is a right granted
to him by law and as such he may opt to
make use of it or waive it. PhilGuarantees
waiver of the right of excussion cannot
prevent it from demanding reimbursement
from petitioners. The law clearly requires the
debtor to indemnify the guarantor what the
latter has paid.
Petitioners claim that PhilGuarantee had
no more obligation to pay TRB because of the
alleged expiration of the contract of guarantee
is untenable.
The guarantee was only up to 17
December 1980. JNs obligation with TRB fell
due on 30 June 1980, and demand on
PhilGuarantee was made by TRB on 08
October 1980. That payment was actually
made only on 10 March 1981 does not take it
out of the terms of the guarantee. What is
controlling is that default and demand on
PhilGuarantee had taken place while the
guarantee was still in force.
There is likewise no merit in petitioners
claim that PhilGuarantees failure to give its
express consent to the alleged extensions
granted by TRB to JN had extinguished the
6

guarantee. The requirement that the guarantor

should consent to any extension granted by
the creditor to the debtor under Art. 2079 is
for the benefit of the guarantor. As such, it is
likewise waivable by the guarantor. Thus,
even assuming that extensions were indeed
granted by TRB to JN, PhilGuarantee could
have opted to waive the need for consent to
such extensions. Indeed, a guarantor is not
precluded from waiving his right to be
notified of or to give his consent to
extensions obtained by the debtor. Such
waiver is not contrary to public policy as it is
purely personal and does not affect public
interest. In the instant case, PhilGuarantees
waiver can be inferred from its actual
payment to TRB after the latters demand,
despite
JNs
failure
to
pay
the
renewal/guarantee fee as indicated in the
guarantee.
For the above reasons, there is no basis
for petitioners claim that PhilGuarantee was a
mere volunteer payor and had no legal
obligation to pay TRB. The law does not
prohibit the payment by a guarantor on his
own volition, heedless of the benefit of
excussion. In fact, it recognizes the right of a
guarantor to recover what it has paid, even if
payment was made before the debt becomes
due, or if made without notice to the debtor,
subject of course to some conditions.
Petitioners invocation of our ruling
in Willex Plastic Industries, Corp. v. Court of
Appeals is misplaced, if not irrelevant. In the
said case, the guarantor claimed that it could
not be proceeded against without first

exhausting all of the properties of the debtor.

The Court, finding that there was an express
renunciation of the benefit of excussion in the
contract of guarantee, ruled against the
guarantor.
The cited case finds no application in the
case a quo. PhilGuarantee is not invoking
the benefit of excussion. It cannot be
overemphasized that excussion is a right
granted to the guarantor and, therefore, only
he may invoke it at his discretion.
The benefit of excussion, as well as the
requirement of consent to extensions of
payment, is a protective device pertaining to
and conferred on the guarantor. These may
be invoked by the guarantor against the
creditor as defenses to bar the
unwarranted
enforcement
of
the
guarantee. However, PhilGuarantee did
not avail of these defenses when it paid its
obligation according to the tenor of the
guarantee once demand was made on it.
What is peculiar in the instant case is that
petitioner, the principal debtors themselves,
are muddling the issues and raising the same
defenses against the guarantor, which only the
guarantor may invoke against the creditor, to
avoid payment of their own obligation to the
guarantor. The Court cannot countenance
their self-seeking desire to be exonerated
from the duty to reimburse PhilGuarantee
after it had paid TRB on their behalf and to
unjustly enrich themselves at the expense of
PhilGuarantee.
WHEREFORE,
the
consolidated
petitions are DENIED. The Decision of the

Court of Appeals in CA-G.R. CV No. 61318

is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
.
TUPAZ vs. COURT OF APPEALS (2001)

Signing as corporate representative, can it

hold you personally liable for the debt you are
signing for in behalf of the company in a
commercial credit transaction? Not if it's
stipulated.
Facts:
Jose
C.
Tupaz
IV
VP
for
Operations and Petronila
C.
Tupaz
VP/Treasurer of EL
ORO
Engraver
Corporation, entered into a contract with
the AFP - Armed Forces Of The
Philippines to supply the latter with survival
7

bolos.
To finance the purchase of the raw materials
for the survival bolos, Jose Tupaz and
Petronila Tupaz on behalf of EL ORO
Corporation, applied with respondent
bank BPI - Bank of the Philippine Islands for
2 commercial Letters of Credit. The LCs
were in favor of El Oro Corporations
suppliers, TANCHAOCO
Manufacturing
Incorporated.
Simultaneous with the issuance of the LCs,
the 2 Tupazes (sama yata pakinggan) Jose
Tupaz
and
Petronila
Tupaz..
,
(okay) petitioners hereto signed TRUST
RECEIPTS in favor of respondent bank BPI.
Now here comes the issue. Jose C. Tupaz IV
signed, in his personal capacity, a trust
receipt corresponding to a Letter of Credit for
P564,871.
The problem was, petitioners did not comply
with their undertaking under the TRUST
RECEIPTS. Respondent bank naturally made
several demands for payments but EL ORO
Corporation made partial payments only.
So as a consequence, respondent bank BPI
sent final demand letters to EL ORO
Corporation where EL ORO replied that it
could not fully pay its debt because the AFP
(Armed Forces of the Philippines) had
delayed paying for the survival bolos.
Issue:

Did Petitioners herein stated bind themselves

personally with regard to the company debt
herein described when they signed the Trust
Receipts?
Held:
A
CORPORATE
REPRESENTATIVE
signing as a solidary guarantee as corporate
representative did not undertake to guarantee
personally the payment of the corporations
debts.
In the aforementioned trust receipt,
petitioners signed below its clause as officers
of El Oro Corporation. Thus, under petitioner
Petronila Tupazs signature are the words
Vice-PresTreasurer and under petitioner
Jose Tupazs signature are the words VicePresOperations. By so signing that trust
receipt, PETITIONERS DID NOT BIND
THEMSELVES PERSONALLY LIABLE
FOR
EL
ORO
CORPORATIONS
OBLIGATION.
In Ong v. Court of Appeals, a corporate
representative signed a solidary guarantee
clause in two trust receipts in his capacity as
corporate representative. There, the Court
held that the corporate representative did not
undertake to guarantee personally the
payment of the corporations debts.
A corporation, being a juridical entity, may
act only through its directors, officers, and
employees. Debts incurred by these

individuals, acting as such corporate agents,

are not theirs but the direct liability of the
corporation they represent.
As an exception, directors or officers
are personally liable for the corporations
debts only if they so contractually agree or
stipulate.

Tupaz v. CA
G.R. No. 145578
Nov. 18, 2005
J. Carpio
petition
Jose C. Tupaz IV and Petronila Tupaz
ers
respond
CA, and BPI
ents
summar
Jose and Petronila, officers of El Oro, signed
y
trust receipts in behalf of the company, and
in favor of BPI. They were not able to fulfill
their obligations under the trust receipts.
BPI filed estafa charges against them. They
were acquitted but were held solidarily
liable with El Oro in the payment of the
debt to BPI.
Held: Jose and Petronilla are not liable
under one trust receipt because they
signed it in their capacities as officers of
the corporation. But, Jose is liable for the
other trust receipt because he signed it in
his personal capacity. However, his liability
is not solidary with El Oro; he is liable only
as guarantor. The solidary guaranty clause
makes guarantors signing the trust receipt
solidarily liable with each other; it does not
operate to make them solidarily liable with
the company. But, the suit against Jose still
stands because excussion is not a prerequisite to secure judgment against a
guarantor. In fact, excussion can be waived
facts of the case
~ Jose and Petronila Tupaz were Vice-President for Operations
and Vice-President/Treasurer, respectively, of El Oro
Corporation. El Oro Corporation had a contract with the PH
Army to supply the latter with survival bolos
~ To finance the purchases of the raw materials for the bolos,
the petitioners (on behalf of El Oro) applied with BPI for 2
commercial letters of credit. The letters of credit were in favor
of El Oros suppliers, Tanchaoco Incorporated and Maresco
Corporation. >>> BPI granted the application and issued the
letters of credit for P564,871.05 and P294,000.00 to
Tanchaoco Incorporated and Maresco Corporation respectively.
~ Simultaneous with the issuance of the letters of credit, the
petitioners signed trust receipts in favor of BPI:
a)
Jose signed in his personal capacity a trust

receipt corresponding for the first letter of

credit, binding himself to sell the goods and to
remit the proceeds to BPI, if sold, or to return
the goods, if not sold, on or before 29
December 1981.
b)
Both petitioners signed in their capacities as
officers of El Oro a trust receipt covering the
second letter of credit to remit proceeds/return
goods by 8 December 1981.
~ Tanchauco Incorporated and Maresco Corp. complied with
their obligation and delivered the raw materials to El Oro. BPI
then paid the 2 corporations P564, 871.05 and P294,000
accordingly.
~ However, petitioners did not comply with their
undertakings under the trust receipts. >>> BPI made
several demands for payment but El Oro made partial
payments only. Final demand letters were then sent but El Oro
replied that it could not fully pay its debt because the AFP had
delayed in their payment for the bolos.
~ BPI charged petitioners with estafa under Sec. 13 of
the Trust Receipts Law.
RTC: petitioners acquitted based on reasonable doubt.
However, they are solidarily liable with El Oro for the
balance of the principal debt under the trust receipts.
CA: affirmed RTC. The trust receipts clearly showed the terms
that the petitioners signed the same as surety for the
corporation and that they bound themselves directly and
immediately liable in case of default without need of demand.

Under the trust receipt dated 30 September 1981, petitioner

Jose Tupaz waived excussion when he agreed that his liability
in [the] guaranty shall be DIRECT AND IMMEDIATE, without any
need whatsoever on xxx [the] part [of respondent bank] to
take any steps or exhaust any legal remedies xxx. The clear
import of this stipulation is that petitioner Jose Tupaz waived
the benefit of excussion under his guarantee.

The solidary guaranty clause makes

guarantors signing the trust receipt solidarily
liable with each other; it does not operate to
make them solidarily liable with the
company.
As guarantor, petitioner Jose Tupaz is liable for El Oro
Corporations principal debt and other accessory liabilities (as
stipulated in the trust receipt and as provided by law) under
the trust receipt dated 30 September 1981. That trust receipt
(and the trust receipt dated 9 October 1981) provided for
payment of attorneys fees equivalent to 10% of the total
amount due and an interest at the rate of 7% per annum, or
at such other rate as the bank may fix, from the date due until
paid xxx.

issue
What is the nature of liability of petitioners?
ratio
To the Bank of the Philippine Islands
In
consideration
of
your
releasing
to
under the terms of this Trust Receipt
the goods described herein, I/We, jointly and severally, agree
and promise to pay to you, on demand, whatever sum or sums
of money which you may call upon me/us to pay to you,
arising out of, pertaining to, and/or in any way connected with,
this Trust Receipt, in the event of default and/or non-fulfillment
in any respect of this undertaking on the part of the said
. I/we further agree that my/our
liability in this guarantee shall be DIRECT AND IMMEDIATE,
without any need whatsoever on your part to take any steps or
exhaust any legal remedies that you may have against the
said
.
Before
making
demand upon me/us. (Underlining supplied; capitalization in
the original)
Jose is personally liable. However, not solidary as lower
courts said but only as guarantor.
However, respondent banks suit against petitioner Jose Tupaz
stands despite the Courts finding that he is liable as
guarantor only. First, excussion is not a pre-requisite to secure
judgment against a guarantor. The guarantor can still demand
deferment of the execution of the judgment against him until
after the assets of the principal debtor shall have been
exhausted. Second, the benefit of excussion may be waived.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9353

May 21, 1957

MANILA SURETY AND FIDELITY,

INC., plaintiff-appellant,
vs.
BATU
CONSTRUCTION
AND
COMPANY, CARLOS N. BAQUIRAN,
GONZALO P. AMBOY and ANDRES
TUNAC, defendants-appellees.

De Santos and Herrera for appellant.

Bienvenido C. Castro and Ruiz, Ruiz, Ruiz
and Ruiz for appellees.
PADILLA, J.:
In a complaint filed in the Court of First
Instance of Manila, the plaintiff, a domestic
corporation engaged in the bonding business,
hereafter called the company, alleges that the
Batu Construction & Company, a partnership
the members of which are the other three
defendants, requested it to post, as it did, a
surety bond for P8,812 in favor of the
Government of the Philippines to secure the
faithful Performance of the construction of
the Bacarra Bridge, Project PR-72 (3), in
Ilocos
Norte, undertaken by the partnership, as
stipulated in a construction on contract
entered into on 11 July 1950 by and between
the partnership and the Government of the
Philippines, on condition that the defendants
would "indemnify the COMPANY for any
damage, loss, costs, or charges, or expenses
of whatever kind and nature, including
counsel or attorney's fees, which the
COMPANY may, at any time, sustain or
incur, as a consequence of having become
surety upon the above mentioned bond; said
attorney's fees shall not be less than fifteen
(15%) per cent of the total amount claimed in
any action which the COMPANY may
institute against the undersigned (the
defendants except Andres Tunac) in Court,"
and that "Said indemnity shall be paid to the
COMPANY as soon as it has become liable
9

for the payment of any amount, under the

above-mentioned bond, whether or not it shall
have paid such sum or sums of money, or any
part thereof," as stipulated in a contract
executed on 8 July 1950 (Exhibit B); that on
30 May 1951 because of the unsatisfactory
progress of the work on the bridge, the
Director of Public Works, with the approval
of the Secretary of Public Works and
Communications, annulled, the construction
contract referred to and notified the plaintiff
Company that the Government would hold it
(the Company) liable for any amount incurred
by the Government for the completion of the
bridge, in excess of the contract price
(Exhibit D); that on 19 December 1951
(should be 23 November 1951), Ricardo
Fernandez and 105 other persons brought an
action in the Justice of the Peace Court of
Laoag, Ilocos Norte, against the partnership,
the individual partners and the herein plaintiff
Company for the collection of unpaid wages
amounting to P5,960.10, lawful interests
thereon and costs (Exhibit E); that the
defendants are in imminent danger of
becoming insolvent, and are removing and
disposing, or about to remove and dispose, of
their properties with intent to defraud their
creditors, particularly the plaintiff Company;
and that the latter has no other sufficient
security to protect its rights against the
defendants. Upon these allegations, the
plaintiff prays that, upon the approval of a
bond and on the strength of the allegations of
the verified complaint, a writ attachment be
issued and levied upon the properties of the
defendants; and that after hearing, judgment

be rendered " ordering the defendants to

deliver to the plaintiff such sufficient security
as shall protect plaintiff from the any
proceedings by the creditors on the Surety
Bond aforementioned and from the danger of
insolvency of the defendants; and to allow
costs to the herein plaintiff," and " for such
other measures of relief as may be proper and
just in the premises." Attached to the
complaint are a verification and affidavit of
attachment; and copies of the surety bond
marked Annex A; of the indemnity contract
marked Annex B; and of the letter of the
Acting Director of Public Works to the
plaintiff dated 30 May 1951, marked Annex
C.
Andres Tunac admits in his answer the
allegations in paragraphs 1, 2, 3 and 4 of the
complaint, but denies the allegations in
paragraphs 5, 6, 7, 8 and 9 of the complaint,
because he has never promised to put up an
indemnity bond in favor of the plaintiff nor
has he ever entered into any indemnity
agreement with it; because the partnership or
the Batu Construction & Company was
fulfilling its obligations in accordance with
the terms of the construction contract;
because the Republic of the Philippines,
through the Director of Public, Works, had no
authority to annul the contract at its own
initiative; because the Justice of the Peace
court of Laoag, Ilocos Norte had no
jurisdiction to hear and decide a case for
collection of P5,960.10; and because the
defendants were not in imminent danger of
insolvency, neither did they remove or

dispose of their properties with intent to

defraud their creditors. By way of affirmative
defenses, he alleges that the signing by Carlos
N. Baquiran of the indemnity agreement for
and in behalf of the partnership Batu
Construction & Company did not bind the
latter to the plaintiff and as the partnership is
not bound, he (Andres Tunac), as a member
thereof, is also not bound; that he not being a
party to the said agreement, the plaintiff has
no cause of action against him; that in the
event the partnership is bound by the
indemnity agreement he invokes his right of
exhaustion of the property of the partnership
before the plaintiff may proceed against his
property. And as a counterclaim he alleges
that the plaintiff brought the action against
him maliciously and in bad faith for the
purpose of annoying him and damaging his
professional reputation, he having a
flourishing and successful practice as
engineer in Ilocos Norte, thereby compelling
him to defend himself; that to secure the
issuance of a writ of attachment the plaintiff
made false representations; and that the
issuance of the writ upon such false
representations of the plaintiff caused him
damages in the sum of P10,000 including
expenses of litigation and attorney's fees.
Upon the foregoing he prays that the
complaint be dismissed as to him and the
defendant Batu Construction & Company,
with costs against the plaintiff; that the latter
be ordered to pay him the sum of P10,000;
and that he be granted such other remedies as
may be just, equitable and proper.
10

Gonzalo P. Amboy denies in his answer the

allegations of the complaint, except those that
may be deemed admitted in the special
defenses, and alleges that he is not in
imminent danger of insolvency and is not
removing and disposing or about to remove
and dispose of his properties, because he has
no property; that has been no liquidation of
the expenses incurred in the construction of
the Bacarra Bridge, Project PR-72(3) to
determine whether there would be a balance
of the contract price which may be applied to
pay the claim for unpaid wages of Ricardo
Fernandez et al. sought to be collected in civil
case No. 198 of the Justice of the Peace Court
of Laoag, Ilocos Norte, and not until after
such liquidation shall have been made could
his liability and that of his co-defendants be
determined and fixed; that if after proper
liquidation's there be a deficit of the contract
price the defendants are willing to pay the
claim for unpaid wages of Ricardo Fernandez
et al. Upon these allegations he prays that the
issuance of the writ of attachment prayed for
by the plaintiff be held in abeyance until after
civil case No. 198 of the Justice of the Peace
Court of Laoag, Ilocos Norte, shall have been
disposed of.
Carlos N. Baquiran admits in his answer the
allegations in paragraphs 1, 2, 3,4, 5, 6, and
11 of the complaint but alleges that he has no
sufficient knowledge to form a belief as to the
truth of the claim of Ricardo Fernandez et al.
set forth in paragraph 7 of the complaint, for
there has never been a liquidation between
the defendants and the Bureau of Public

Works. He further denies specifically

paragraphs 8, 9 and 10 of the complaint. By
way of special defenses he alleges that there
has been no liquidation by and between the
defendants and the Bureau of Public Works
on Project PR-72(3) to determine whether the
total amount spent for the construction of the
bridge exceeded the contract price; that after
the determination of the respective liabilities
of the parties in civil case No. 198 of the
Justice of the Peace Court of Laoag, Ilocos
Norte, if any there be against the defendants
herein, and such liability could not be paid
out of the balance of the contract price of
Project PR-72(3), the defendants are ready
and willing to assume their respective
responsibilities. Upon these allegations he
prays that the complaint of the plaintiff be
dismissed; that the issuance of the writ of
attachment prayed for be denied; and that he
be granted such other relief as may be just
and equitable, with costs against the plaintiff.
At the hearing, the plaintiff presented its
evidence. After the plaintiff had rested its
case, defendant Gonzalo P. Amboy moved for
the dismissal of the complaint, on the ground
that the remedy provided for in the last
paragraph of article 2071 of the new Civil
Code may be availed of by the guarantor only
and not by a surety.
Acting upon this motion to dismiss the trial
court made the following findings:
. . . That on July 8, 1950, the defendant Batu
Construction & Company, as principal, and

the plaintiff Manila Surety & Fidelity Co.

Inc., as surety, executed a surety bond for the
sum of P8,812.00 to insure faithful
performance of the former's obligation as
contractor for the construction of the Bacarra
Bridge, Project PR-72 (No. 3) Ilocos Norte
Province. On the same date, July 8,1950, the
Batu Construction & Company and the
defendants Carlos N. Baquiran and Gonzales
P. Amboy executed an indemnity agreement
to protect the Manila Surety & Fidelity Co.
Inc.., against damage, loss or expenses which
it may sustain as a consequence of the surety
bond executed by it jointly with Batu
Construction & Company.
On or about May 30, 1951, the plaintiff
received a notice from the Director of Public
Works (Exhibit B) annulling its contract with
the Government for the construction of the
Bacarra Bridge because of its failure to make
satisfactory progress in the execution of the
works, with the warning that ,any amount
spent by the Government in the continuation
of the work, in excess of the contract price,
will be charged against the surety bond
furnished by the plaintiff. It also appears that
a complaint by the laborers in said project of
the Batu Construction & Company was filed
against it and the Manila Surety and Fidelity
Co., Inc., for unpaid wages amounting to
P5,960.10.
and, being of the opinion that the provisions
of article 2071 of the new Civil Code may be
availed of by a guarantor only and not by a
11

surety the complaint, with costs against the

plaintiff.
From this order the plaintiff Company has
appealed to this Court, because it proposes to
raise only a question of law.
After the order dismissing the complaint had
been entered, on 16 and 20 July 1953, the
defendants Gonzalo P. Amboy and Andres
Tunac moved for leave to prove damages they
allegedly suffered as a result of the
attachment levied upon their properties. On
15 August 1953 the Court heard the evidence
on damages. On 23 September 1953 the
Court found and held that the defendant
Gonzalo P. Amboy is entitled to recover from
the plaintiff damages equivalent to 6 per cent
interest per annum on the sum of P35 in
possession of the Provincial Treasurer of
Ilocos Norte, which was garnished pursuant
to the writ of attachment, from the date of
garnishment until its charge; but the claims
for damages of Andres Tunac and Gonzalo P.
Amboy allegedly suffered by them in their
business, moral damages and attorney's fees
were without basis in law and in fact. Hence
their recovery was denied. The Court
dissolved the writ of attachment. From this
last order only the plaintiff Company has
appealed.
The main question to determine is whether
the last paragraph of article 2071 of the new
Civil Code taken from article 1843 of the old
Civil Code may be availed of by a surety.

A guarantor is the insurer of the solvency of

the debtor; a surety is an insurer of the debt.
A guarantor binds himself to pay if the
principal is unable to pay; a surety undertakes
to pay if the principal does not pay.1 The
reason which could be invoked for the nonavailability to a surety of the provisions of the
last paragraph of article 2071 of the new Civil
Code would be the fact that guaranty like
commodatum2 is gratuitous. But guaranty
could also be for a price or consideration as
provided for in article 2048. So, even if there
should be a consideration or price paid to a
guarantor for him to insure the performance
of an obligation by the principal debtor, the
provisions of article 2071 would still be
available to the guarantor. In suretyship the
surety becomes liable to the creditor without
the benefit of the principal debtor's exclusion
of his properties, for he (the surety) maybe
sued independently. So, he is an insurer of the
debt and as such he has assumed or
undertaken a responsibility or obligation
greater or more onerous than that of
guarantor. Such being the case, the provisions
of article 2071, under guaranty, are applicable
and available to a surety. The reference in
article 2047 to, the provisions of Section 4,
Chapter 3, Title 1, Book IV of the new Civil
Code, on solidary or several obligations, does
not mean that suretyship which is a solidary
obligation is withdrawn from the applicable
provisions governing guaranty.
The plaintiff's cause of action does not fall
under paragraph 2 of article 2071 of the new
Civil Code, because there is no proof of the

defendants' insolvency. The fact that the

contract was annulled because of lack of
progress in the construction of the bridge is
no proof of such insolvency. It does not fall
under paragraph 3, because the defendants
have not bound themselves to relieve the
plaintiff from the guaranty within a specified
period which already has expired, because the
surety bond does not fix any period of time
and the indemnity agreement stipulates one
year extendible or renewable until the bond
be completely cancelled by the person or
entity in whose behalf the bond was executed
or by a Court of competent jurisdiction. It
does not come under paragraph 4, because the
debt has not become demandable by reason of
the expiration of the period for payment. It
does not come under paragraph 5 because of
the lapse of 10 years, when the principal
obligation has no period for its maturity, etc.,
for 10 years have not yet elapsed. It does not
fall under paragraph 6, because there is no
proof that "there are reasonable grounds to
fear that the principal debtor intends to
abscond." It does not come under paragraph
7, because the defendants, as principal
debtors, are not in imminent danger of
becoming insolvent, there being no proof to
that effect.
But the plaintiff's cause of action comes
under paragraph 1 of article 2071 of the new
Civil Code, because the action brought by
Ricardo Fernandez and 105 persons in the
Justice of the Peace Court of Laoag, province
of Ilocos Norte, for the collection of unpaid
wages amounting to P5,960.10, is in
12

connection with the construction of the

Bacarra Bridge, Project PR-72 (3),
undertaken by the Batu Construction &
Company, and one of the defendants therein
is the herein plaintiff, the Manila Surety and
Fidelity Co., Inc., and paragraph 1 of article
2071 of the new Civil Code provides that the
guarantor, even before having paid, may
proceed against the principal debtor "to
obtain release from the guaranty, or to
demand a security that shall protect him from
any proceedings by the creditor or from the
danger of insolvency of the debtor, when he
(the guarantor) is sued for payment. It does
not provide that the guarantor be sued by the
creditor for the payment of the debt. It simply
provides that the guarantor of surety be sued
for the payment of an amount for which the
surety bond was put up to secure the
fulfillment of the obligation undertaken by
the principal debtor. So, the suit filed by
Ricardo Fernandez and 105 persons in the
Justice of the Peace Court of Laoag, province
of Ilocos Norte, for the collection of unpaid
wages earned in connection with the work
done by them in the construction of the
Bacarra Bridge, Project PR-72(3), is a suit for
the payment of an amount for which the
surety bond was put up or posted to secure
the faithful performance of the obligation
undertaken by the principal debtors (the
defendants) in favor of the creditor, the
Government of the Philippines.
The order appealed from dismissing the
complaint is reversed and set aside, and the
case remanded to the court below for

determination of the amount of security that

would protect the plaintiff Company from any
proceedings by the creditor or from the
danger of insolvency of the defendants, the
principal debtors, and direction to the
defendants to put up such amount of security
as may be established by competent evidence,
without pronouncement as to costs.
The writ of attachment having been issued
improvidently because, although there is an
allegation in the verified complaint that the
defendants were in imminent danger of
insolvency and that they were removing or
disposing, or about to remove or dispose, of
their properties, with intent to defraud their
creditors, particularly the plaintiff Company,
still such allegation was not proved, the fact
that a complaint had been filed against the
defendants and the plaintiff Company in the
Justice of the Peace Court of Laoag, Ilocos
Norte, for the collection of an amount for
unpaid wages of the plaintiffs therein who
claimed to have worked in the construction of
the bridge, being insufficient to prove it, and
because the relief prayed for in the complaint
for security that shall protect it from any
proceedings by the creditor and from the
danger of the defendants becoming insolvent
is inconsistent with the state of insolvency of
the defendants or their being in imminent
danger of insolvency, the order awarding 6
per cent on the sum of P35 in possession of
the Provincial Treasurer owned by the
defendant Gonzalo P. Amboy garnished by
virtue of the writ of attachment, from the date
of the garnishment until its discharge, and

denying recovery of the amounts of damages

claimed to have been suffered by the
defendants, is affirmed, the defendants not
having appealed therefrom.
Bengzon, Montemayor, Reyes, A., Bautista
Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Endencia and Felix, JJ., concur.

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

E.

ZOBEL, INC., petitioner, vs. THE

COURT
OF
APPEALS,
CONSOLIDATED BANK AND
TRUST CORPORATION, and
SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.

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.
13

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
14

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
15

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
hereinbeforereferred 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 bedue, 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
16

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.

VILLA SI VS. GARCIA G.R. No. 190106 January 15, 2014

Facts: Villasi engaged the services of

respondent Fil-Garcia Construction, Inc.
(FGCI) to construct a seven-storey
condominium building located Cubao,
Quezon City. For failure of Villasi to fully
pay the contract price despite several
demands, FGCI initiated a suit for
collection of sum of money. Villasi filed an
answer specifically denying the material
allegations of the complaint. Contending
that FGCI has no cause of action against
her, Villasi averred that she delivered the
total amount of P7,490,325.10 to FGCI but
the latter accomplished only 28% of the
project.To enforce her right as prevailing
17

party, Villasi filed a Motion for Execution.

To satisfy the judgment, the sheriff levied
on a building located Kalayaan Avenue,
Quezon City. While the building was
declared for taxation purposes in the name
of FGCI, the lots in which it was erected
were registered in the names of the Spouses
Garcia. The Spouses Garcia argued that
the building covered by the levy was
mistakenly assessed by the City Assessor in
the name of FGCI and that it could not be
levied upon not being owned by the
judgment debtor.
Issue: Whether the general rule on accession
can be applied in the case at bar
Ruling: While it is a horn-book doctrine
that
the
accessory
follows
the
principal, that is, the ownership of the
property gives the right by accession to
everything which is produced thereby, or
which is incorporated or attached thereto,
either naturally or artificially, such rule is
not without exception. In cases where there
is a clear and convincing evidence to prove
that the principal and the accessory are not
owned by one and the same person or
entity, the presumption shall not be applied
and the actual ownership shall be upheld.
When there are factual and evidentiary
evidence to prove that the building and the
lot on which it stands are owned by
different persons, they shall be treated
separately. As such, the building or the lot,
as the case may be, can be made liable to
answer for the obligation of its respective
owner.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 42829

September 30, 1935

RADIO CORPORATION OF THE

PHILIPPINES, plaintiff-appellee,
vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and
MANUEL ROA, appellants.
M.H. de Joya and Juan de Borja for
appellants.
Barrera and Reyes for appellee.
GODDARD, J.:
This is an appeal from decision of the Court
of First Instance of the City of Manila the
dispositive part of which reads:
In view of all the foregoing, judgment is
hereby rendered in favor of the plaintiff
Radio Corporation of the Philippines and
against the defendants Jesus R. Roa, Ramon
Chavez, Andes Roa and Manuel Roa: (a)
Ordering the defendant Jesus R. Roa to pay
the plaintiff the sum of P22,935, plus P99.64,
with legal interest thereon from the date of
the filing of the complaint until fully paid: (b)
that upon failure of the defendant Jesus Roa
to pay the said sum indicated, the chattel
described in the second cause of action shall

be sold at public auction to be applied to the

satisfaction of the amount of this judgment;
(c) that the defendants Jesus R. Roa, Ramon
Chavez, Andres Roa and Manuel Roa pay
jointly and severally to the plaintiff the
amount of P10,000; (d) and that Jesus R. Roa
pay to the plaintiff the amount equivalent to
10 per cent of P22,935, as attorney's fees, and
that all the defendants in this case pay the
costs of this action.
The defendants Ramon Chavez, Andres Roa
and Manuel Roa have appealed from the
judgment against them for P10,00 and costs.
These appellants make the following
assignments of error:
1. The court below erred in not finding that
the balance of the total indebtedness became
immediately due and demandable upon the
failure of the defendant Jesus R. Roa to pay
any installment on his note.
2. The court below erred in not finding that
defendant Jesus R. Roa defaulted in the
payment of the installment due on February
27,1932, and that plaintiff corporation gave
him an extension of time for the payment of
said installment.
3. The court below erred in not finding that
the extension of time given to defendant Jesus
R. Roa for the payment of an overdue
installment served as a release of defendant
sureties from liability on all the subsequent
installments.
18

4. The court below erred in not finding that

the sureties were discharged from their bond
when the plaintiff authorized Jesus R. Roa to
remove the photophone equipment from
Cagayan, Misamis Oriental, to Silay,
Occidental Negros, without the knowledge or
consent of said sureties.
5. The court below erred in condemning
Ramon Chavez, Andres Roa and Manuel Roa
to pay jointly and severally the sum of
P10,000 to the Radio Corporation of the
Philippines.
The defendant Jesus R. Roa became indebted
to the Philippine Theatrical Enterprises, Inc.,
in the sum of P28,400 payable in seventy-one
equal monthly installments at the rate of P400
a month commencing thirty days after
December 11, 1931, with five days grace
monthly until complete payment of said sum.
On that same date the Philippine Theatrical
Enterprises, Inc., assigned all its right and
interest in that contract to the Radio
Corporation of the Philippines.
The paragraph of that contract in which the
accelerating clause appears reads as follows:
In case the vendee-mortgagor fails to make
any of the payments as hereinbefore
provided, the whole amount remaining
unpaid under this mortgage shall immediately
become due and payable and this mortgage
on the property herein mentioned as well as
the Luzon Surety Bond may be foreclosed by
the vendor-mortgagee; and, in such case, the

vendee-mortgager further agrees to pay the

vendor- mortgagee an additional sum
equivalent to 25 per cent of the principal due
unpaid as costs, expenses and liquidated
damages, which said sum, shall be added to
the principal sum for which this mortgage is
given as security, and shall become a part,
thereof.
On March 15, 1932, Erlanger & Galinger,
Inc., acting in its capacity as attorney-in-fact
of the Radio Corporation of the Philippines
wrote the following letter (Exhibit 13) to the
principal debtor Jesus R. Roa:
Mr. JESUS R. ROA
Cagayan, Oriental Misamis
Attention of Mrs. Amparo Chavez de
Roa
DEAR SIR: We acknowledge with thanks the
receipt of your letter of March 9th together
with your remittance of P200 for which we
enclose receipt No. 7558. We are applying
this amount to the balance of your January
installment.
We have no objection to the extension
requested by you to pay the February
installment by the first week of April. We
would, however, urge you to make every
efforts to bring the account up-to date as we
are given very little discretion by the RCP in
giving extension of payment.

Very truly yours,

RADIO CORP. OF THE PHIL.
By: ERLANGER & GALINGER, INC.
(Sgd.) H.N. SALET
Vice-President
Under the above assignments of error the
principal question to be decided is whether or
not the extension granted in the above copied
letter by the plaintiff, without the consent of
the guarantors, the herein appellants,
extinguishes the latter's liability not only as to
the installments due at that time, as held by
the trial court, but also as to the whole
amount of their obligation. Articles 1851 of
the Civil Code reads as follows:
ART. 1851. An extension grated to the debtor
by the creditor, without the consent of the
guarantor, extinguishes the latter's liability.
This court has held that mere delay in suing
for the collection of the does not release the
sureties. (Sons of I. de la Rama vs. Estate of
Benedicto, 5 Phil., 512; Banco Espaol
Filipino vs. Donaldson Sim & Co., 5 Phil.,
418; Manzano vs. Tan Suanco, 13 Phil., 183;
Hongkong
&
Shanghai
Baking
Corporation vs. Aldecoa & Co., 30 Phil.,
255.) In the case of Villa vs. Garcia
Bosque (49 Phil., 126, 134, 135), this court
stated:
. . . The rule that an extension of time granted
to the debtor by the creditor, without the
19

consent of the sureties, extinguishes the

latter's liability is common both to Spanish
jurisprudence and the common law; and it is
well settled in English and American
jurisprudence that where a surety is liable for
different payments, such as installments of
rent, or upon a series of promissory notes, an
extension of time as to one or more will not
affect the liability of the surety for the
others. . . .
There is one stipulation in the contract
(Exhibit A) which, at first blush, suggests a
doubt as to the propriety of applying the
doctrine above stated to the case before us.
We refer to clause (f) which declares that the
non-fulfillment on the part of the debtors of
the stipulation with respect to the payment of
any installment of the indebtedness, with
interest, will give to the creditor the right to
treat and declare all of said installments as
immediately due. If the stipulation had been
to the effect that the failure to pay any
installment when due would ipso facto cause
the other installments to fall due at once, it
might be plausibly contended that after
default of the payment of one installment the
act of the creditor in extending the time as to
such installment would interfere with the
right of the surety to exercise his legal rights
against the debtor, and that the surety would
in such case be discharged by the extension of
time, in conformity with article 1851 and
1852 of the Civil Code. But it will be noted
that in the contract now under consideration
the stipulation is not that the maturity of the
latter
installments
shall
be ipso

facto accelerated by default in the payment of

a prior installment, but only that it shall give
the creditor a right treat the subsequent
installments as due; and in this case it does
not appear that the creditor has exercised this
election. On the contrary, this action was not
instituted until after all of the installments had
fallen due in conformity with original
contract. It results that the stipulation
contained in paragraph (f) does not effect the
application of the doctrine above enunciated
to the case before us.
The stipulation in the contract under
consideration, copied above, is to the effect
that upon failure to pay any installment when
due the other installments ipso facto become
due and payable. In view of of the fact that
under the express provision of the contract,
quoted above, the whole unpaid balance
automatically becomes due and payable upon
failure to pay one installment, the act of the
plaintiff in extending the payment of the
installment corresponding to February, 1932,
to April, 1932, without the consent of the
guarantors, constituted in fact an extension of
the payment of the whole amount of the
indebtedness, as by that extension the
plaintiff could not have filed an action for the
collection of the whole amount until after
April, 1932. Therefore appellants' contention
that after default of the payment of one
installment the act of the herein creditor in
extending the time of payment discharges
them as guarantors in conformity with articles
1851 and 1852 of the Civil Code is correct.

It is a familiar rule that if a creditor, by

positive contract with the principal debtor,
and without the consent of the surety, extends
the time of payment, he thereby discharges
the surety. . . . The time of payment may be
quite as important a consideration to the
surety as the amount he has promised
conditionally to pay. . . .Again, a surety has
the right, on payment of the debt, to be
subrogated to all the rights of the creditor, and
to proceed at once to collect it from the
principal; but if the creditor has tied own
hands from proceeding promptly, by
extending the time of collection, the hands of
the surety will equally be bound; and before
they are loosed, by the expiration of the
extended credit, the principal debtor may
have become insolvent and the right of
subrogation rendered worthless. It should be
observed, however, that it is really
unimportant whewther the extension given
has actually proved prejudicial to the surety
or not. The rule stated is quite independent of
the event, and the fact that the principal is
insolvent or that the extension granted
promised to be beneficial to the surety would
give no right to the creditor to change the
terms of the contract without the knowledge
or consent of the surety. Nor does it matter for
how short a period the time of payment may
be extended. The principle is the same
whether the time is long or short. The creditor
must be in such a situation that when the
surety comes to be substituted in his place by
paying the debt, he may have an immediate
right of action against the principal. The
suspension of the right to sue for a month, or
20

even a day, is as effectual to release the surety

as a year or two years. (21 R.C.L., 10181020.)

EN BANC

Plaintiff's contention that the enforcement of

the accelerating clause is potestative on the
part of the obligee, and not self-executing, is
clearly untenable from a simple reading of the
clause copied above. What is potestative on
the part of the obligee is the foreclosure of the
mortgage and not the accelerating clause.

RADIO CORPORATION OF THE

PHILIPPINES, plaintiff-appellee,
vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and
MANUEL ROA, appellants.

Plaintiff-appellee contends that there was no

consideration for the extension granted the
principal debtor. Article 1277 of the Civil
Code provides that "even though the
consideration should be expressed in the
contract, it shall be presumed that a
consideration exists and that it is licit, unless
the debtor proves the contrary." It was
incumbent upon the plaintiff to prove that
there was no valid consideration for the
extension granted.
In view of the forgoing the judgment of the
trial court is reversed as to the appellants
Ramon Chavez, Andres Roa and Manuel Roa,
without costs.

Republic of the Philippines

SUPREME COURT
Manila

G.R. No. 42829

September 30, 1935

M.H. de Joya and Juan de Borja for

appellants.
Barrera and Reyes for appellee.
GODDARD, J.:
This is an appeal from decision of the Court
of First Instance of the City of Manila the
dispositive part of which reads:
In view of all the foregoing, judgment is
hereby rendered in favor of the plaintiff
Radio Corporation of the Philippines and
against the defendants Jesus R. Roa, Ramon
Chavez, Andes Roa and Manuel Roa: (a)
Ordering the defendant Jesus R. Roa to pay
the plaintiff the sum of P22,935, plus P99.64,
with legal interest thereon from the date of
the filing of the complaint until fully paid: (b)
that upon failure of the defendant Jesus Roa
to pay the said sum indicated, the chattel
described in the second cause of action shall
be sold at public auction to be applied to the
satisfaction of the amount of this judgment;
(c) that the defendants Jesus R. Roa, Ramon
Chavez, Andres Roa and Manuel Roa pay

jointly and severally to the plaintiff the

amount of P10,000; (d) and that Jesus R. Roa
pay to the plaintiff the amount equivalent to
10 per cent of P22,935, as attorney's fees, and
that all the defendants in this case pay the
costs of this action.
The defendants Ramon Chavez, Andres Roa
and Manuel Roa have appealed from the
judgment against them for P10,00 and costs.
These appellants make the following
assignments of error:
1. The court below erred in not finding that
the balance of the total indebtedness became
immediately due and demandable upon the
failure of the defendant Jesus R. Roa to pay
any installment on his note.
2. The court below erred in not finding that
defendant Jesus R. Roa defaulted in the
payment of the installment due on February
27,1932, and that plaintiff corporation gave
him an extension of time for the payment of
said installment.
3. The court below erred in not finding that
the extension of time given to defendant Jesus
R. Roa for the payment of an overdue
installment served as a release of defendant
sureties from liability on all the subsequent
installments.
4. The court below erred in not finding that
the sureties were discharged from their bond
when the plaintiff authorized Jesus R. Roa to
remove the photophone equipment from
21

Cagayan, Misamis Oriental, to Silay,

Occidental Negros, without the knowledge or
consent of said sureties.
5. The court below erred in condemning
Ramon Chavez, Andres Roa and Manuel Roa
to pay jointly and severally the sum of
P10,000 to the Radio Corporation of the
Philippines.
The defendant Jesus R. Roa became indebted
to the Philippine Theatrical Enterprises, Inc.,
in the sum of P28,400 payable in seventy-one
equal monthly installments at the rate of P400
a month commencing thirty days after
December 11, 1931, with five days grace
monthly until complete payment of said sum.
On that same date the Philippine Theatrical
Enterprises, Inc., assigned all its right and
interest in that contract to the Radio
Corporation of the Philippines.
The paragraph of that contract in which the
accelerating clause appears reads as follows:
In case the vendee-mortgagor fails to make
any of the payments as hereinbefore
provided, the whole amount remaining
unpaid under this mortgage shall immediately
become due and payable and this mortgage
on the property herein mentioned as well as
the Luzon Surety Bond may be foreclosed by
the vendor-mortgagee; and, in such case, the
vendee-mortgager further agrees to pay the
vendor- mortgagee an additional sum
equivalent to 25 per cent of the principal due
unpaid as costs, expenses and liquidated

damages, which said sum, shall be added to

the principal sum for which this mortgage is
given as security, and shall become a part,
thereof.
On March 15, 1932, Erlanger & Galinger,
Inc., acting in its capacity as attorney-in-fact
of the Radio Corporation of the Philippines
wrote the following letter (Exhibit 13) to the
principal debtor Jesus R. Roa:
Mr. JESUS R. ROA
Cagayan, Oriental Misamis
Attention of Mrs. Amparo Chavez de
Roa
DEAR SIR: We acknowledge with thanks the
receipt of your letter of March 9th together
with your remittance of P200 for which we
enclose receipt No. 7558. We are applying
this amount to the balance of your January
installment.

(Sgd.) H.N. SALET

Vice-President
Under the above assignments of error the
principal question to be decided is whether or
not the extension granted in the above copied
letter by the plaintiff, without the consent of
the guarantors, the herein appellants,
extinguishes the latter's liability not only as to
the installments due at that time, as held by
the trial court, but also as to the whole
amount of their obligation. Articles 1851 of
the Civil Code reads as follows:
ART. 1851. An extension grated to the debtor
by the creditor, without the consent of the
guarantor, extinguishes the latter's liability.

We have no objection to the extension

requested by you to pay the February
installment by the first week of April. We
would, however, urge you to make every
efforts to bring the account up-to date as we
are given very little discretion by the RCP in
giving extension of payment.

This court has held that mere delay in suing

for the collection of the does not release the
sureties. (Sons of I. de la Rama vs. Estate of
Benedicto, 5 Phil., 512; Banco Espaol
Filipino vs. Donaldson Sim & Co., 5 Phil.,
418; Manzano vs. Tan Suanco, 13 Phil., 183;
Hongkong
&
Shanghai
Baking
Corporation vs. Aldecoa & Co., 30 Phil.,
255.) In the case of Villa vs. Garcia
Bosque (49 Phil., 126, 134, 135), this court
stated:

Very truly yours,

RADIO CORP. OF THE PHIL.
By: ERLANGER & GALINGER, INC.

. . . The rule that an extension of time granted

to the debtor by the creditor, without the
consent of the sureties, extinguishes the
latter's liability is common both to Spanish
jurisprudence and the common law; and it is
22

well settled in English and American

jurisprudence that where a surety is liable for
different payments, such as installments of
rent, or upon a series of promissory notes, an
extension of time as to one or more will not
affect the liability of the surety for the
others. . . .
There is one stipulation in the contract
(Exhibit A) which, at first blush, suggests a
doubt as to the propriety of applying the
doctrine above stated to the case before us.
We refer to clause (f) which declares that the
non-fulfillment on the part of the debtors of
the stipulation with respect to the payment of
any installment of the indebtedness, with
interest, will give to the creditor the right to
treat and declare all of said installments as
immediately due. If the stipulation had been
to the effect that the failure to pay any
installment when due would ipso facto cause
the other installments to fall due at once, it
might be plausibly contended that after
default of the payment of one installment the
act of the creditor in extending the time as to
such installment would interfere with the
right of the surety to exercise his legal rights
against the debtor, and that the surety would
in such case be discharged by the extension of
time, in conformity with article 1851 and
1852 of the Civil Code. But it will be noted
that in the contract now under consideration
the stipulation is not that the maturity of the
latter
installments
shall
be ipso
facto accelerated by default in the payment of
a prior installment, but only that it shall give
the creditor a right treat the subsequent

installments as due; and in this case it does

not appear that the creditor has exercised this
election. On the contrary, this action was not
instituted until after all of the installments had
fallen due in conformity with original
contract. It results that the stipulation
contained in paragraph (f) does not effect the
application of the doctrine above enunciated
to the case before us.
The stipulation in the contract under
consideration, copied above, is to the effect
that upon failure to pay any installment when
due the other installments ipso facto become
due and payable. In view of of the fact that
under the express provision of the contract,
quoted above, the whole unpaid balance
automatically becomes due and payable upon
failure to pay one installment, the act of the
plaintiff in extending the payment of the
installment corresponding to February, 1932,
to April, 1932, without the consent of the
guarantors, constituted in fact an extension of
the payment of the whole amount of the
indebtedness, as by that extension the
plaintiff could not have filed an action for the
collection of the whole amount until after
April, 1932. Therefore appellants' contention
that after default of the payment of one
installment the act of the herein creditor in
extending the time of payment discharges
them as guarantors in conformity with articles
1851 and 1852 of the Civil Code is correct.
It is a familiar rule that if a creditor, by
positive contract with the principal debtor,
and without the consent of the surety, extends

the time of payment, he thereby discharges

the surety. . . . The time of payment may be
quite as important a consideration to the
surety as the amount he has promised
conditionally to pay. . . .Again, a surety has
the right, on payment of the debt, to be
subrogated to all the rights of the creditor, and
to proceed at once to collect it from the
principal; but if the creditor has tied own
hands from proceeding promptly, by
extending the time of collection, the hands of
the surety will equally be bound; and before
they are loosed, by the expiration of the
extended credit, the principal debtor may
have become insolvent and the right of
subrogation rendered worthless. It should be
observed, however, that it is really
unimportant whewther the extension given
has actually proved prejudicial to the surety
or not. The rule stated is quite independent of
the event, and the fact that the principal is
insolvent or that the extension granted
promised to be beneficial to the surety would
give no right to the creditor to change the
terms of the contract without the knowledge
or consent of the surety. Nor does it matter for
how short a period the time of payment may
be extended. The principle is the same
whether the time is long or short. The creditor
must be in such a situation that when the
surety comes to be substituted in his place by
paying the debt, he may have an immediate
right of action against the principal. The
suspension of the right to sue for a month, or
even a day, is as effectual to release the surety
as a year or two years. (21 R.C.L., 10181020.)
23

Plaintiff's contention that the enforcement of

the accelerating clause is potestative on the
part of the obligee, and not self-executing, is
clearly untenable from a simple reading of the
clause copied above. What is potestative on
the part of the obligee is the foreclosure of the
mortgage and not the accelerating clause.
Plaintiff-appellee contends that there was no
consideration for the extension granted the
principal debtor. Article 1277 of the Civil
Code provides that "even though the
consideration should be expressed in the
contract, it shall be presumed that a
consideration exists and that it is licit, unless
the debtor proves the contrary." It was
incumbent upon the plaintiff to prove that
there was no valid consideration for the
extension granted.
In view of the forgoing the judgment of the
trial court is reversed as to the appellants
Ramon Chavez, Andres Roa and Manuel Roa,
without costs.

G.R. No. 108957

June 14, 1993

PRUDENTIAL BANK, petitioner,

vs.
THE COURT OF APPEALS, AURORA
CRUZ, respondents.
Monique Q. Ignacio for petitioner.

Eduardo C. Tutaan for private respondent.

prepared a Debit Memo for the amount of

P196,122.88 to cover the re-investment of
P200,000.00 minus the prepaid interest of
P3,877.02. 5

CRUZ, J.:
We deal here with another controversy
involving the integrity of a bank.
The complaint in this case arose when private
respondent Aurora F.
Cruz, * with her sister as co-depositor,
invested P200,000.00 in Central Bank bills
with the Prudential Bank at its branch in
Quezon Avenue, Quezon City, on June 23,
1986. The placement was for 63 days at
13.75% annual interest. For this purpose, the
amount of P196,122.88 was withdrawn from
the depositors' Savings Account No. 2546 and
applied to the investment. The difference of
P3,877.07 represented the pre-paid interest.
The transaction was evidenced by a
Confirmation of Sale 1 delivered to Cruz two
days later, together with a Debit Memo 2 in the
amount withdrawn and applied to the
confirmed sale. These documents were issued
by Susan Quimbo, the employee of the bank
to whom Cruz was referred and who was
apparently in charge of such transactions. 3
Upon maturity of the placement on August
25, 1986, Cruz returned to the bank to "rollover" or renew her investment. Quimbo, who
again attended to her, prepared a Credit
Memo 4 crediting the amount of P200,000.00
in Cruz's savings account passbook. She also

This time, Cruz was asked to sign a

Withdrawal
Slip 6 for
P196,122.98,
representing the amount to be re-invested
after deduction of the prepaid interest.
Quimbo explained this was a new
requirement of the bank. Several days later,
Cruz received another Confirmation of
Sale 7 and a copy of the Debit Memo. 8
On October 27, 1986, Cruz returned to the
bank and sought to withdraw her
P200,000.00. After verification of her
records, however, she was informed that the
investment appeared to have been already
withdrawn by her on August 25, 1986. There
was no copy on file of the Confirmation of
Sale and the Debit Memo allegedly issued to
her by Quimbo. Quimbo herself was not
available for questioning as she had not been
reporting for the past week. Shocked by this
information, Cruz became hysterical and
burst into tears. The branch manager, Roman
Santos, assured her that he would look into
the matter. 9
Every day thereafter, Cruz went to the bank to
inquire about her request to withdraw her
investment. She received no definite answer,
not even to the letter she wrote the bank
which
was
received
by
Santos
10
himself. Finally, Cruz sent the bank a
demand letter dated November 12, 1986 for
24

the amount of P200,000.00 plus interest. 11 In

a reply dated November 20, 1986, the bank's
Vice President Lauro J. Jocson said that there
appeared to be an anomaly
and requested Cruz to defer court action as
they
hoped
to
settle
the
matter
amicably. 12 Increasingly worried, Cruz sent
another letter reiterating her demand. 13 This
time the reply of the bank was unequivocal
and negative. She was told that her request
had to be denied because she had already
withdrawn the amount she was claiming. 14
Cruz's reaction was to file a complaint for
breach of contract against Prudential Bank in
the Regional Trial Court of Quezon City. She
demanded the return of her money with
interest, plus damages and attorney's fees. In
its answer, the bank denied liability, insisting
that Cruz had withdrawn her investment. The
bank also instituted a third-party complaint
against Quimbo, who did not file an answer
and was declared in default. 15 The bank,
however, did not present any evidence against
her.
After trial, Judge Rodolfo A. Ortiz rendered
judgment in favor of the plaintiffs and
disposed as follows:
ACCORDINGLY, judgment is hereby
rendered ordering the defendant/third-party
plaintiff to pay to the plaintiffs the following
amounts:

1. P200,000.00, plus interest thereon at the

rate of 13.75% per annum from October 27,
1986, until fully paid;
2. P30,000.00, as moral damages;

of the bank. The petitioner denies her claim

and points to the Withdrawal Slip, which it
says Cruz has not denied having signed. It
also contends that the Confirmation of Sale
and the Debit Memo are fake and should not
have been given credence by the lower courts.

3. P20,000.00, as exemplary damages; and

4. P25,000.00, as reasonable attorney's fees.
The counterclaim and the third-party
complaint of the defendant/third-party
plaintiff are dismissed.
With costs against the defendant/third-party
plaintiff.
The decision was affirmed in toto on appeal
to the respondent court.
The judgment of the Court of Appeals 16 is
now faulted in this petition, mainly on the
ground that the bank should not have been
found liable for a quasi-delict when it was
sued for breach of contract.
The petition shall fail. The petitioner is
quibbling. It appears to be merely
temporizing to delay enforcement of the
liability clearly established against it.
The basic issues are factual. The private
respondent claims she has not yet collected
her investment of P200,000.00 and has
submitted in proof of their contention the
Confirmation of Sale and the Debit Memo
issued to her by Quimbo on the official forms

The findings of the trial court on these issues

have been affirmed by the respondent court
and we see no reason to disturb them. The
petitioner has not shown that they have been
reached arbitrarily or in disregard of the
evidence of record. On the contrary, we find
substantial basis for the conclusion that the
private respondents signed the Withdrawal
Slip only as part of the bank's new procedure
of re-investment. She did not actually receive
the amount indicated therein, which she was
made to understand was being re-invested in
her name. The bank itself so assured her in
the Confirmation of Sale and the Debit Memo
later issued to her by Quimbo.
Especially persuasive are the following
observations of the trial court: 17
What is more, it could not be that plaintiff
Aurora F. Cruz withdrew only the amount of
P196,122.98 from their savings account, if
her only intention was to make such a
withdrawal. For, if, indeed, it was the desire
of the plaintiffs to withdraw their money from
the defendant/third-party plaintiff, they could
have withdrawn an amount in round figures.
Certainly, it is unbelievable that their
withdrawal was in the irregular amount of
P196,122.98 if they really received it. On the
25

contrary, this amount, which is the price of

the Central Bank bills rolled over, indicates
that, as claimed by plaintiff Aurora F. Cruz,
she did not receive this money, but it was left
by her with the defendant/third-party plaintiff
in order to buy Central Bank bills placement
for another sixty-three (63) days, for which
she signed a withdrawal slip at the instance of
third-party defendant Susan Quimbo who told
her that it was a new bank requirement for the
roll-over of a matured placement which she
trustingly believed.
Indeed, the bank has not explained the
remarkable coincidence that the amount
indicated in the withdrawal slip is exactly the
same amount Cruz was re-investing after
deducting therefrom the pre-paid interest.
The bank has also not, succeeded in
impugning
the
authenticity
of
the
Confirmation of Sale and the Debit Memo
which were made on its official, forms. These
are admittedly not available to the general
public or even its depositors and are handled
only by its personnel. Even assuming that
they were not signed by its authorized
officials, as it claims, there was no obligation
on the part of Cruz to verify their authority
because she had the right to presume it. The
documents had been issued in the office of
the bank itself and by its own employees with
whom she had previously dealt. Such
dealings had not been questioned before,
much leas invalidated. There was absolutely
no reason why she should not have accepted

their authority to act on behalf of their

employer.

reasonably attributed to the non-performance

of the obligation, . . .

It is also worthy of note and wonder

that although the bank impleaded Quimbo in
a third-party complaint, it did not pursue its
suit even when she failed to answer and was
declared in default. The bank did not
introduce evidence against her although it
could have done so under the rules. No less
remarkably, it did not call on her to testify on
its behalf, considering that under the
circumstances claimed by it, she would have
been the best witness to show that Cruz had
actually
withdrawn
her
P200,000.00
placement. Instead, the bank chose to rely on
its other employees whose testimony was less
direct and categorical than the testimony
Quimbo could have given.

xxx xxx xxx

We do not find that the Court of Appeals held

the bank liable on a quasi-delict. The
argument of the petitioner on this issue is
pallid, to say the least, consisting as it does
only of the observation that the article cited
by the respondent court on the agent's liability
falls under the heading in the Civil Code
on quasi-delicts. On the other hand, the
respondent court clearly declared that:
The defendant/third-party plaintiff being
liable for the return of the P200,000.00
placement of the plaintiffs, the extent of the
liability of the defendant/third-party plaintiff
for damages resultant thereof, which is
contractual, is for all damages which may be

Because of the bad faith of the

defendant/third-party plaintiff in its breach of
its contract with the plaintiffs, the latter are,
therefore, entitled to an award of moral
damages . . . (Emphasis supplied)
There is no question that the petitioner was
made liable for its failure or refusal to deliver
to Cruz the amount she had deposited with it
and which she had a right to withdraw upon
its
maturity.
That
investment
was
acknowledged by its own employees, who
had the apparent authority to do so and so
could legally bind it by its acts vis-a-vis Cruz.
Whatever might have happened to the
investment whether it was lost or stolen by
whoever was not the concern of the
depositor. It was the concern of the bank.
As far as Cruz was concerned, she had the
right to withdraw her P200,000.00 placement
when it matured pursuant to the terms of her
investment as acknowledged and reflected in
the Confirmation of Sale. The failure of the
bank to deliver the amount to her pursuant to
the Confirmation of Sale constituted its
breach of their contract, for which it should
be held liable.
The liability of the principal for the acts of
the agent is not even debatable. Law and
26

jurisprudence are clearly and absolutely

against the petitioner.
Such liability dates back to the Roman Law
maxim, Qui per alium facit per seipsum
facere videtur. "He who does a thing by an
agent is considered as doing it himself." This
rule is affirmed by the Civil Code thus:
Art. 1910. The principal must comply with all
the obligations which the agent may have
contracted within the scope of his authority.
Art. 1911. Even when the agent has exceeded
his authority, the principal is solidarily liable
with the agent if the former allowed the latter
to act as though he had full powers.
Conformably, we have declared in countless
decisions that the principal is liable for
obligations contracted by the agent. The
agent's apparent representation yields to the
principal's true representation and the contract
is considered as entered into between the
principal and the third person. 18
A bank is liable for wrongful acts of its
officers done in the interests of the bank or in
the course of dealings of the officers in their
representative capacity but not for acts
outside the scope of their authority. (9 c.q.s.
p. 417) A bank holding out its officers and
agent as worthy of confidence will not be
permitted to profit by the frauds they may
thus be enabled to perpetrate in the apparent
scope of their employment; nor will it be
permitted to shirk its responsibility for such

frauds, even though no benefit may accrue to

the bank therefrom (10 Am Jur 2d, p. 114).
Accordingly, a banking corporation is liable
to innocent third persons where the
representation is made in the course of its
business by an agent acting within the general
scope of his authority even though, in the
particular case, the agent is secretly abusing
his authority and attempting to perpetrate a
fraud upon his principal or some other
person, for his own ultimate benefit
(McIntosh v. Dakota Trust Co., 52 ND 752,
204 NW 818, 40 ALR 1021.)

bank is absolving not only itself but also, in

effect and by extension, the disappeared
Quimbo who apparently has much to explain.

Application of these principles in especially

necessary because banks have a fiduciary
relationship with the public and their stability
depends on the confidence of the people in
their honesty and efficiency. Such faith will
be eroded where banks do not exercise strict
care in the selection and supervision of its
employees, resulting in prejudice to their
depositors.

Cruz naturally suffered anxious moments and

mental anguish over the loss of the
investment. The amount of P200,000.00 is
not small even by present standards. By
unjustly withholding it from her on the
unproved defense that she had already
withdrawn it, the bank violated the trust she
had reposed in it and thus subjected itself to
further liability for moral and exemplary
damages.

It would appear from the facts established in

the case before us that the petitioner was less
than eager to present Quimbo at the trial or
even to establish her liability although it
made the initial effort which it did not
pursue to hold her answerable in the thirdparty complaint. What ever happened to her
does not appear in the record. Her absence
from the proceedings feeds the suspicion of
her possible misdeed, which the bank seems
to have studiously ignored by its insistence
that the missing money had been actually
withdrawn by Cruz. By such insistence, the

We agree with the lower courts that the

petitioner acted in bad faith in denying Cruz
the obligation she was claiming against it. It
was obvious that an irregularity had been
committed by the bank's personnel, but
instead of repairing the injury to Cruz by
immediately restoring her money to her, it
sought to gloss over the anomaly in its own
operations.

If a person dealing with a bank does not read

the fine print in the contract, it is because
he trusts the bank and relies on its integrity.
The ordinary customer applying for a loan or
even making a deposit (and so himself
extending the loan to the bank) does not
bother with the red tape requirements and the
finicky conditions in the documents he signs.
His feeling is that he does not have to be wary
of the bank because it will deal with him
fairly and there is no reason to suspect its
27

motives. This is an attitude the bank must

justify.
While this is not to say that bank regulations
are meaningless or have no binding effect,
they should, however, not be used for
covering up the fault of bank employees
when they blunder or, worse, intentionally
cheat him. The misdeeds of such employees
must be readily acknowledged and rectified
without delay. The bank must always act in
good faith. The ordinary customer does not
feel the need for a lawyer by his side every
time he deals with a bank because he is
certain that it is not a predator or a potential
adversary. The bank should show that there is
really no reason for any apprehension
because it truly deserves his faith in it.
WHEREFORE, the petition is DENIED and
the appealed decision is AFFIRMED, with
costs against the petitioner. It is so ordered.

G.R. No. L

-41795

August 30, 1935

J.W. SHANNON and MRS. J.W.

SHANNON, plaintiffs-appellees,
vs.
THE
PHILIPPINE
LUMBER
&
TRANSPORTATION CO., INC., and E.E.
ELSER, defendants.
E.E. ELSER, appellant.

Gibbs and McDonough for appellant.

DeWitt, Perkins and Ponce Enrile for
appellees.
IMPERIAL, J.:
On March 1, 1926, the Philippine Lumber &
Transportation Co., Inc., obtained a loan of
P12,000 from Mrs. J.W. Shannon and
executed a note promising to pay the said
sum to the creditor or to her husband, J.W.
Shannon, on or before March 1, 1927, with
interest at 10 per cent per annum, payable
monthly and in advance on the first day of
each month. The obligation with its terms was
secured, jointly and severally, by Walter E.
Jones and E.E. Elser who signed the note.
This note was ratified before the notary
public, Juan L. Diaz, in the City of Manila, on
March 22, 1926. The principal was not paid
on its due date or thereafter, but the stipulated
interest up to October, 1929, inclusive, was
paid. Walter E. Jones died on November 24,
1929, and the plaintiffs filed a claim and
recovered from his estate P1,062 in part
payment of occurred interest due.
On August 1, 1927, while the principal
obligation was pending payment, J.W.
Shannon obtained a loan of P1,000 from
Walter E. Jones; on April 9, 1928, he obtained
another loan of P2,000, and on April 28,
1928, he made Jones pay on his account a
certain bill of exchange drawn upon him in
the sum of P1,656, making Shannon's total
loan from Jones P4,656. Both agreed that this
amount should be paid at the rate of P125 a

month, with 10 per cent interest per annum,

failing which, Jones was authorized to retain
and apply to the monthly payments whatever
amounts he might have belonging to Shannon
or to his wife. Jones did not receive monthly
payments from Shannon under this
agreement, but instead he deducted them
from the monthly interest which, on the other
hand,
the
Philippine
Lumber
&
Transportation Co., Inc., of which he was the
president, was bound to pay. These operations
were entered in the books of said corporation.
As the Philippine Lumber & Transportation
Co., Inc., and its sureties had not paid the
principal and the stipulated interest from
November 1, 1929, the Shannons brought suit
against the debtor corporation and the surety,
E.E. Elser, for the recovery of said amounts.
The Philippine Lumber & Transportation Co.,
Inc., neither appeared nor answered the
complaint, and it was declared in default.
Neither did it intervene nor defend itself at
the trial. E.E. Elser appealed from the
judgment ordering the Philippine Lumber &
Transportation Co., Inc., to pay to the plaintiff
the sum of P12,000 with interest at 10 per
cent annum from November 1, 1929, minus
the sum of P1,062 which had been recovered
from the estate of the deceased Walter E.
Jones, plus another 10 per cent as attorney's
fees, and the costs, and likewise requiring the
said E.E. Elser to pay to the plaintiffs onehalf of all the aforesaid sums of money,
except attorney's fees, which the Philippine
Lumber & Transportation Co., Inc., should
fail to pay.
28

The appellant argues that the judgment is

erroneous: in not holding that after the note
became due, the plaintiffs had received from
the Philippine Lumber & Transportation Co.,
Inc., payments in advance of the stipulated
interest for a relatively long period of time,
and that, consequently, said plaintiffs, as
creditors, extended the period fixed for the
payment of the principal without his consent;
in not permitting him to adduce evidence on
his defense of laches whereby he attempted to
show that in 1927 and 1928 the principal
debtor had property and money with which to
pay its entire obligation; in not holding that
the plaintiffs were guilty of unreasonable
delay in bringing their action, thereby causing
him damages, and in not absolving him from
the complaint.
The first assigned error relates to the loans
made by Jones to Shannon up to the amount
of P4,656. The appellant contends that these
loans were in truth payments in advance of
the stipulated interest which the principal
debtor had to pay monthly and which had the
effect of extending the stated period for the
payment of the indebtedness, thereby
relieving him of his obligation as surety under
article 1851 of the Civil Code, because his
consent was not first obtained; and in support
of his contention cites the decision of this
court in Banco Espaol Filipino vs.
Donaldson Sim & Co. (5 Phil., 418). The
facts, as we find them, do not support the
contention. It indisputably appears that those
amounts of money were obtained by Shannon
not as payments in advance of the interest

which the principal debtor was bound to pay,

but as independent loans which Jones granted
to him. The only connection of these loans
with the interest of the indebtedness of the
Philippine Lumber & Transportation Co.,
Inc., consisted in the agreement between
Jones and Shannon to the effect that in case
the latter should fail to pay the monthly
interest, the former was authorized to deduct
it from any amount which he might have at
his disposal belonging to Shannon or to his
wife. As, on the other hand, Jones was the
president of the principal debtor, and the
latter had to pay monthly interest on its
indebtedness, Jones deducted monthly from
this last interest that which Shannon failed to
pay. It is therefore, evident that neither the
provisions of article 1851 of the Civil Code
nor the doctrine on the matter enunciated in
the Banco Espaol Filipino case is squarely in
point.
The appellant attempted to prove at the trial
that the plaintiffs had been guilty of laches
and had brought their action against him
tardily, because in 1927 and 1928 the
principal debtor had sufficient property and
money with which it could have fully paid its
obligation, and in so acting the plaintiffs
caused him damages. This kind of evidence
was timely objected to, and the objection was
sustained by the court. This ruling is the
subject of the second and third assigned
errors. We hold that the judgment is not
erroneous on these grounds. True, the
plaintiffs let pass some years from the
maturity of the note before bringing the

action for the recovery of its amount. But we

hold that the delay does not constitute laches
in the sense that it had the effect of releasing
both the principal debtor and its sureties from
their obligations, nor did it occasion loss of
rights and privileges of such moment as to
give rise to the discharge of the obligation
contracted by the appellant. In the aforecited
Banco Espaol Filipino case, in ruling upon a
similar question, we said: "The decision en
casacion of the Supreme Court of Spain is
jurisprudence properly interpreting the
Spanish Civil Code. The following doctrine is
laid down in the judgment of March 22, 1901:
`The court which pronounced sentence in this
case has not violated article 1851 of the Civil
Code, because the mere circumstance that the
creditor does not demand the compliance with
the obligation immediately upon the same
becoming due, and that he more or less delays
his action, does not mean or reveal an
intention to grant an extension to the debtor,
as according to article 1847 the obligation of
the surety extinguishes at the same time as
that of the debtor, and for the same causes as
the other obligations. ...' Deferring the filing
of the action does not imply a change in the
efficacy of the contract or liability of any kind
on the part of the debtor. It is merely, without
demonstration or proof to the contrary,
respite, waiting, courtesy, leniency, passivity,
inaction. It does not constitute novation,
because this must be express. It does not
engender liability, because on the part of the
creditor such can not arise except from delay,
and for this class of delay interpellation on
the part of the party who considers himself
29

injured thereby is necessary. In order that this

waiting or inaction, of itself beneficial to the
parties obligated, can be interpreted as
injurious to any of them, it is altogether
necessary that this be represented by means
of a protest or interpellation against the delay.
Without action of this kind it continues to be
what it is merely a failure of the creditor to
act, which it itself does not create liability. It
can not do so, as we see in the
aforesaid sentencia de casacion. `.... In
accordance with the provisions of number 4
of article 1843, the surety, even before
payment, may proceed against the principal
debtor when the debt has become demandable
because the term in which it should have been
paid has expired.' In view of this action,
which is a protection against the risk of
possible insolvency on the part of the
principal debtor, it is very clearly seen that
the law does not even grant the surety the
right to sue the creditor for delay, as
protection against the risks of possible
insolvency on the part of the debtor; but in
view of the efficacy of the action of the
contract against the surety, beginning with the
date when the obligation becomes due, his
vigilance must be exercised rather against the
principal debtor." (5 Phil., 422, 423.)
In Clark vs. Sellner (42 Phil., 384), this court
had occasion to reiterate the same doctrine as
follows: "The trial judge took into account the
fact that at the time of the maturity of the
note, the collateral security given to guarantee
the payment was worth more than what was
due on the note, but is depreciated to such an

extent that, at the time of the institution of

this action, it was entirely valueless. And
taking this circumstance, together with the
fact that this case was not commenced until
after the lapse of four years from the date on
which the payment fell due, and with the
further fact that the defendant had not
received any part of the amount mentioned in
the note, he was of the opinion, and so
decided, that the defendant could not be held
liable. The theory of the judge a quo was that
the plaintiff's failure to enforce the guaranty
for the payment of the debt, and his delay in
instituting this action constitute laches, which
had the effect of extinguishing his right of
action. We see no sufficient ground for
applying such a theory to the case before us.
As stated, the defendant's position being, as it
is, that of a joint surety, he may, at any time
after the maturity of the note, make payment,
thus subrogating himself in the place of the
creditor with the right to enforce the guaranty
against the other signers of the note for the
reimbursement of what he is entitled to
recover from them. The mere delay of the
creditor in enforcing the guaranty has not by
any means impaired his action against the
defendant. It should not be lost sight of that
the defendant's signature on the note is an
assurance to the creditor that the collateral
guaranty will remain good, and that
otherwise, he, the defendant, will be
personally responsible for the payment. True,
that if the creditor had done any act whereby
the guaranty was impaired in its value, or
discharged, such an act would have wholly or
partially released the surety; but it must be

borne in mind that it is a recognized doctrine

in the matter of suretyship that with respect to
the surety, the creditor is under no obligation
to display any diligence in the enforcement of
his rights as a creditor. His mere inaction,
indulgence, passiveness, or delay in
proceeding against the principal debtor, or the
fact that he did not enforce the guaranty or
apply on the payment of such funds as were
available, constitute no defense at all for the
surety, unless the contract expressly requires
diligence and promptness on the part of the
creditor, which is not the case in the present
action. There is in some decisions a tendency
toward holding that the creditor's laches may
discharge the surety, meaning by laches a
negligent forbearance. This theory, however,
is not generally accepted and the courts
almost universally consider it essentially
inconsistent with the relation of the parties to
the note. (21 R.C.L., 1032-1034.)"
And in Ibaez de Aldecoa vs. Hongkong &
Shanghai Banking Corporation (42 Phil.,
1000; 246 U.S., 627; 62 Law. ed., 907), the
Supreme Court of the United States in
affirming a decision of this court on the same
legal question, said: "The appellant Isabel
Palet assigns as error that the Supreme Court
failed to hold (1) that her liability as surety of
Aldecoa and Company had been extinguished
in accordance with the provisions of article
1851 of the Civil Code, which provides that
`the extension granted to a debtor by the
creditor, without the consent of the surety,
extinguishes the security.' (2) Refused to
order for her benefit that the property of the
30

company should be exhausted before resort

be had to her property for satisfaction of the
bank's claim. It will be observe at once that
the defense have some dependence upon
questions of fact upon which the two courts
below concurred. From article 1851 of the
Civil Code, abstractly considered, nothing
can be deduced. Both the trial and supreme
courts held that `the mere failure to bring an
action upon a credit, as soon as the same or
any part of it matures, does not constitute an
extension of the term of the obligation.' And it
was further held that the extension, to
produce the extinction of the liability, `must
be based on some new agreement by which
the creditor deprives himself of the right to
immediately enforce the claim.' This
interpretation of the local courts of the local
law we defer to. The construction, moreover,
expresses the rule that obtains in other
jurisdictions."
The last ground of the remedy requires no
extended
consideration.
Under
the
conclusions we have arrived at, it is evident
that the judgment is not erroneous is not
absolving the appellant.
The plaintiffs suggest in their brief that we
amend the appealed judgment by ordering the
appellant to pay one-half of the attorney's fees
which the principal debtor should fail to pay.
We are of the opinion that the contention is
untenable because the plaintiffs did not
appeal from the judgment but accepted and
abided by it.

In view of the foregoing, the appealed

judgment is affirmed, with the costs of this
instance to the appellant. So ordered.

G.R. No. L-47369

JOSEPH COCHINGYAN, JR. and JOSE
K. VILLANUEVA, petitioners,
vs.
R & B SURETY AND INSURANCE
COMPANY, INC., respondent.

FELICIANO, J.:
This case was certified to us by the Court of
Appeals in its resolution dated 11 November
1977 as one involving only questions of law
and, therefore, falling within the exclusive
appellate jurisdiction of this Court under
Section 17, Republic Act 296, as amended.
In November 1963, Pacific Agricultural
Suppliers, Inc. (PAGRICO) applied for and
was granted an increase in its line of credit
from P400,000.00 to P800,000.00 (the
"Principal Obligation"), with the Philippine
National Bank (PNB). To secure PNB's
approval, PAGRICO had to give a good and
sufficient bond in the amount of P400,000.00,
representing the increment in its line of
credit, to secure its faithful compliance with
the terms and conditions under which its line

of credit was increased. In compliance with

this requirement, PAGRICO submitted Surety
Bond No. 4765, issued by the respondent R &
B Surety and Insurance Co., Inc. (R & B
Surety") in the specified amount in favor of
the PNB. Under the terms of the Surety Bond,
PAGRICO and R & B Surety bound
themselves jointly and severally to comply
with the "terms and conditions of the advance
line [of credit] established by the [PNB]."
PNB had the right under the Surety Bond to
proceed directly against R & B Surety
"without the necessity of first exhausting the
assets" of the principal obligor, PAGRICO.
The Surety Bond also provided that R & B
Surety's liability was not to be limited to the
principal sum of P400,000.00, but would also
include "accrued interest" on the said amount
"plus all expenses, charges or other legal
costs incident to collection of the obligation
[of R & B Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance
of the Surety Bond, two Identical indemnity
agreements were entered into with R & B
Surety: (a) one agreement dated 23 December
1963 was executed by the Catholic Church
Mart (CCM) and by petitioner Joseph
Cochingyan, Jr, the latter signed not only as
President of CCM but also in his personal and
individual capacity; and (b) another
agreement dated 24 December 1963 was
executed by PAGRICO, Pacific Copra Export
Inc. (PACOCO), Jose K. Villanueva and Liu
Tua Ben Mr. Villanueva signed both as
Manager of PAGRICO and in his personal
and individual capacity; Mr. Liu signed both
31

as President of PACOCO and in his

individual and personal capacity.
Under both indemnity agreements, the
indemnitors bound themselves jointly and
severally to R & B Surety to pay an annual
premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set
forth in said SURETY BOND for a period
beginning ... until the same is CANCELLED
and/or DISCHARGED." The Indemnity
Agreements further provided:
(b) INDEMNITY: TO indemnify the
SURETY COMPANY for any damage,
prejudice, loss, costs, payments, advances and
expenses of whatever kind and nature,
including [of] attorney's fees, which the
CORPORATION may, at any time, become
liable for, sustain or incur as consequence of
having executed the above mentioned Bond,
its renewals, extensions or substitutions and
said attorney's fees [shall] not be less than
twenty [20%] per cent of the total amount
claimed by the CORPORATION in each
action, the same to be due, demandable and
payable, irrespective of whether the case is
settled judicially or extrajudicially and
whether the amount has been actually paid or
not;
(c) MATURITY OF OUR OBLIGATIONS
AS CONTRACTED HEREWITH: The
said indemnities will be paid to the
CORPORATION as soon as demand is
received from the Creditor or upon receipt of
Court order or as soon as it becomes liable to

make payment of any sum under the terms of

the above-mentioned Bond, its renewals,
extensions, modifications or substitutions,
whether the said sum or sums or part thereof,
have been actually paid or not.
We authorize the SURETY COMPANY, to
accept in any case and at its entire discretion,
from any of us, payments on account of the
pending obligations, and to grant extension to
any of us, to liquidate said obligations,
without necessity of previous knowledge of
[or] consent from the other obligors.
xxx

xxx

xxx

(e) INCONTESTABILITY OF PAYMENTS

MADE BY THE COMPANY. Any
payment or disbursement made by the
SURETY COMPANY on account of the
above-mentioned Bonds, its renewals,
extensions or substitutions, either in the belief
that the SURETY COMPANY was
obligate[d] to make such payment or in the
belief that said payment was necessary in
order to avoid greater losses or obligations for
which the SURETY COMPANY might be
liable by virtue of the terms of the abovementioned Bond, its renewals, extensions or
substitutions, shall be final and will not be
disputed by the undersigned, who jointly and
severally bind themselves to indemnify the
SURETY COMPANY of any and all such
payments as stated in the preceding clauses.
xxx

xxx

xxx

When PAGRICO failed to comply with its

Principal Obligation to the PNB, the PNB
demanded payment from R & B Surety of the
sum of P400,000.00, the full amount of the
Principal Obligation. R & B Surety made a
series of payments to PNB by virtue of that
demand totalling P70,000.00 evidenced by
detailed vouchers and receipts.
R & B Surety in turn sent formal demand
letters to petitioners Joseph Cochingyan, Jr.
and Jose K. Villanueva for reimbursement of
the payments made by it to the PNB and for a
discharge of its liability to the PNB under the
Surety Bond. When petitioners failed to heed
its demands, R & B Surety brought suit
against Joseph Cochingyan, Jr., Jose K.
Villanueva and Liu Tua Ben in the Court of
First Instance of Manila, praying principally
that judgment be rendered:
b. Ordering defendants to pay jointly and
severally, unto the plaintiff, the sum of
P20,412.20 representing the unpaid premiums
for Surety Bond No. 4765 from 1965 up to
1968, and the additional amount of P5,103.05
yearly until the Surety Bond No. 4765 is
discharged, with interest thereon at the rate of
12% per annum; [and]
c. Ordering the defendants to pay jointly and
severally, unto the plaintiff the sum of
P400,000.00 representing the total amount of
the Surety Bond No. 4765 with interest
thereon at the rate of 12% per annum on the
amount of P70,000.00 which had been paid to
32

the Phil. National Bank already, the interest to

begin from the month of September, 1966;
xxx

xxx

xxx

Petitioner Joseph Cochingyan, Jr. in his

answer maintained that the Indemnity
Agreement he executed in favor of R & B
Surety: (i) did not express the true intent of
the parties thereto in that he had been asked
by R & B Surety to execute the Indemnity
Agreement merely in order to make it appear
that R & B Surety had complied with the
requirements of the PNB that credit lines be
secured; (ii) was executed so that R & B
Surety could show that it was complying with
the regulations of the Insurance Commission
concerning bonding companies; (iii) that R &
B Surety had assured him that the execution
of the agreement was a mere formality and
that he was to be considered a stranger to the
transaction between the PNB and R & B
Surety; and (iv) that R & B Surety was
estopped from enforcing the Indemnity
Agreement as against him.
Petitioner Jose K. Villanueva claimed in his
answer that. (i) he had executed the
Indemnity Agreement in favor of R & B
Surety only "for accommodation purposes"
and that it did not express their true intention;
(ii) that the Principal Obligation of PAGRICO
to the PNB secured by the Surety Bond had
already been assumed by CCM by virtue of a
Trust Agreement entered into with the PNB,
where CCM represented by Joseph
Cochingyan, Jr. undertook to pay the

Principal Obligation of PAGRICO to the

PNB; (iii) that his obligation under the
Indemnity
Agreement
was
thereby
extinguished by novation arising from the
change of debtor under the Principal
Obligation; and (iv) that the filing of the
complaint was premature, considering that R
& B Surety filed the case against him as
indemnitor although the PNB had not yet
proceeded against R & B Surety to enforce
the latter's liability under the Surety Bond.

On P4,000.00 from November 28, 1966;

Petitioner Cochingyan, however, did not

present any evidence at all to support his
asserted defenses. Petitioner Villanueva did
not submit any evidence either on his
"accommodation" defense. The trial court
was therefore constrained to decide the case
on the basis alone of the terms of the Trust
Agreement and other documents submitted in
evidence.

On P8,000. 00 from September 14, 1967;

In due time, the Court of First Instance of

Manila, Branch 24 1 rendered a decision in
favor of R & B Surety, the dispositive portion
of which reads as follows;
Premises considered, judgment is hereby
rendered: (a) ordering the defendants Joseph
Cochingyan, Jr. and Jose K. Villanueva to
pay, jointly and severally, unto the plaintiff
the sum of 400,000,00, representing the total
amount of their liability on Surety Bond No.
4765, and interest at the rate of 6% per
annum on the following amounts:

On P4,000.00 from December 14, 1966;

On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;

On P8,000.00 from November 28, 1967; and

On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said
defendants to pay, jointly and severally, unto
the plaintiff the sum of P20,412.00 as the
unpaid premiums for Surety Bond No. 4765,
with legal interest thereon from the filing of
plaintiff's complaint on August 1, 1968 until
fully paid, and the further sum of P4,000.00
as and for attorney's fees and expenses of
litigation which this Court deems just and
equitable.
There being no showing the summons was
duly served upon the defendant Liu Tua Ben
who has filed no answer in this case,
plaintiff's complaint is hereby dismissed as
against defendant Liu Tua Ben without
prejudice.

On P14,000.00 from September 27, 1966;

33

Costs against the defendants Joseph

Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial
court, the petitioners took this appeal to the
Court of Appeals which, as already noted,
certified the case to us as one raising only
questions of law.
The issues we must confront in this appeal
are:
1. whether or not the Trust Agreement had
extinguished, by novation, the obligation of R
& B Surety to the PNB under the Surety
Bond which, in turn, extinguished the
obligations of the petitioners under the
Indemnity Agreements;
2. whether the Trust Agreement extended the
term of the Surety Bond so as to release
petitioners from their obligation as
indemnitors thereof as they did not give their
consent to the execution of the Trust
Agreement; and
3. whether or not the filing of this complaint
was premature since the PNB had not yet
filed a suit against R & B Surety for the
forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both
petitioners in their separate briefs, was
executed on 28 December 1965 (two years
after the Surety Bond and the Indemnity

Agreements were executed) between: (1) Jose

and Susana Cochingyan, Sr., doing business
under the name and style of the Catholic
Church Mart, represented by Joseph
Cochingyan, Jr., as Trustor[s]; (2) Tomas
Besa, a PNB official, as Trustee; and (3) the
PNB as beneficiary. The Trust Agreement
provided, in pertinent part, as follows:
WHEREAS, the TRUSTOR has guaranteed a
bond in the amount of P400,000.00 issued by
the R & B Surety and Insurance Co. (R & B)
at the instance of Pacific Agricultural
Suppliers, Inc. (PAGRICO) on December 21,
1963, in favor of the BENEFICIARY in
connection with the application of PAGRICO
for an advance line of P400,000.00 to
P800,000.00;
WHEREAS, the TRUSTOR has also
guaranteed a bond issued by the Consolacion
Insurance
&
Surety
Co.,
Inc.
(CONSOLACION) in the amount of
P900,000.00 in favor of the BENEFICIARY
to secure certain credit facilities extended by
the BENEFICIARY to the Pacific Copra
Export Co., Inc. (PACOCO);
WHEREAS,
the
PAGRICO and
the PACOCO have defaulted in the payment
of their respective obligations in favor of the
BENEFICIARY guaranteed by the bonds
issued by the R & B and the
CONSOLACION, respectively,
and
by
reason of said default, the BENEFICIARY
has demanded compliance by the R & B and

the CONSOLACION of their respective

obligations under the aforesaid bonds;
WHEREAS, the TRUSTOR is,
therefore,
bound to comply with his obligation under
the indemnity agreements aforementioned
executed by him in favor of R & B and the
CONSOLACION, respectively and in order
to forestall impending suits by the
BENEFICIARY against said companies, he is
willing as he hereby agrees to pay the
obligations of said companies in favor of the
BENEFICIARY in the total amount of
P1,300,000 without interest from the net
profits arising from the procurement of
reparations consumer goods made thru the
allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints
Atty. TOMAS BESA as TRUSTEE for the
purpose of paying to the BENEFICIARY
Philippine National Bank in the manner stated
hereunder, the obligations of the R & B under
the R & B Bond No. G-4765 for P400,000.00
dated December 23, 1963, and of the
CONSOLACION under The Consolacion
Bond No. G-5938 of June 3, 1964 for
P900,000.00 or the total amount of
P1,300,000.00 without interest from the net
profits arising from the procurement of
reparations consumer goods under the
Memorandum of Settlement and Deeds of
Assignment of February 2, 1959 through the
allocation of WARVETS;
xxx

xxx

xxx
34

6. THE BENEFICIARY agrees to hold in

abeyance any action to enforce its claims
against R & B and CONSOLACION, subject
of the bond mentioned above. In the
meantime that this TRUST AGREEMENT is
being implemented, the BENEFICIARY
hereby agrees to forthwith reinstate the R &
B and the CONSOLACION as among the
companies duly accredited to do business
with the BENEFICIARY and its branches,
unless said companies have been blacklisted
for reasons other than those relating to the
obligations subject of the herein TRUST
AGREEMENT;
xxx

xxx

xxx

9. This agreement shall not in any manner

release the R & B and CONSOLACION from
their respective liabilities under the bonds
mentioned above. (emphasis supplied)
There is no question that the Surety Bond has
not been cancelled or fully discharged 2 by
payment of the Principal Obligation. Unless,
therefore, the Surety Bond has been
extinguished by another means, it must still
subsist. And so must the supporting
Indemnity Agreements. 3
We are unable to sustain petitioners' claim
that the Surety Bond and their respective
obligations under the Indemnity Agreements
were extinguished by novation brought about
by the subsequent execution of the Trust
Agreement.

Novation is the extinguishment of an

obligation by the substitution or change of the
obligation by a subsequent one which
terminates it, either by changing its object or
principal conditions, or by substituting a new
debtor in place of the old one, or by
subrogating a third person to the rights of the
creditor. 4 Novation through a change of the
object or principal conditions of an existing
obligation is referred to as objective (or real)
novation. Novation by the change of either
the person of the debtor or of the creditor is
described as subjective (or personal)
novation. Novation may also be both
objective and subjective (mixed) at the same
time. In both objective and subjective
novation, a dual purpose is achieved-an
obligation is extinguished and a new one is
created in lieu thereof.5

a third person. It is essential that the old

debtor be released from the obligation, and
the third person or new debtor take his place
in the new relation. If the old debtor is not
released, no novation occurs and the third
person who has assumed the obligation of the
debtor becomes merely a co-debtor or surety
or a co-surety. 8

If objective novation is to take place, it is

imperative that the new obligation expressly
declare that the old obligation is thereby
extinguished, or that the new obligation be on
every point incompatible with the old
one. 6 Novation is never presumed: it must be
established either by the discharge of the old
debt by the express terms of the new
agreement, or by the acts of the parties whose
intention to dissolve the old obligation as a
consideration of the emergence of the new
one must be clearly discernible. 7

Neither can the petitioners anchor their

defense on implied novation. Absent an
unequivocal declaration of extinguishment of
a pre-existing obligation, a showing of
complete incompatibility between the old and
the new obligation (and nothing else) would
sustain a finding of novation by
implication. 9 But where, as in this case, the
parties to the new obligation expressly
recognize the continuing existence and
validity of the old one, where, in other words,
the parties expressly negated the lapsing of
the old obligation, there can be no novation.
The issue of implied novation is not reached
at all.

Again, if subjective novation by a change in

the person of the debtor is to occur, it is not
enough that the juridical relation between the
parties to the original contract is extended to

Applying the above principles to the instant

case, it is at once evident that the Trust
Agreement does not expressly terminate the
obligation of R & B Surety under the Surety
Bond. On the contrary, the Trust Agreement
expressly provides for the continuing
subsistence of that obligation by stipulating
that "[the Trust Agreement] shall not in any
manner release" R & B Surety from its
obligation under the Surety Bond.

35

What the trust agreement did was, at most,

merely to bring in another person or personsthe Trustor[s]-to assume the same obligation
that R & B Surety was bound to perform
under the Surety Bond. It is not unusual in
business for a stranger to a contract to assume
obligations thereunder; a contract of
suretyship or guarantee is the classical
example. The precise legal effect is the
increase of the number of persons liable to
the obligee, and not the extinguishment of the
liability of the first debtor. 10 Thus,
in Magdalena Estates vs. Rodriguez, 11 we
held that:
[t]he mere fact that the creditor receives a
guaranty or accepts payments from a third
person who has agreed to assume the
obligation, when there is no agreement that
the first debtor shall be released from
responsibility, does not constitute a novation,
and the creditor can still enforce the
obligation against the original debtor.
In the present case, we note that the
Trustor under the Trust Agreement, the
CCM, was already previously bound to R &
B Surety under its Indemnity Agreement.
Under the Trust Agreement, the Trustor also
became directly liable to the PNB. So far as
the PNB was concerned, the effect of the
Trust Agreement was that where there had
been
only two,
there
would
now
be three obligors directly and solidarily
bound in favor of the PNB: PAGRICO, R &
B Surety and the Trustor. And the PNB could
proceed against any of the three, in any order

or sequence. Clearly, PNB never intended to

release, and never did release, R & B Surety.
Thus, R & B Surety, which was not a party to
the Trust Agreement, could not have intended
to release any of its own indemnitors simply
because one of those indemnitors, the Trustor
under the Trust Agreement, became also
directly liable to the PNB.
2. We turn to the contention of petitioner Jose
K. Villanueva that his obligation as
indemnitor under the 24 December 1963
Indemnity Agreement with R & B Surety was
extinguished when the PNB agreed in the
Trust Agreement "to hold in abeyance any
action to enforce its claims against R & B
Surety .
The Indemnity Agreement speaks of the
several indemnitors "apply[ing] jointly and
severally (in solidum) to the R & B Surety]
to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB]
in the sum of [P400,000.00] for the faithful
compliance of the terms and conditions set
forth in said SURETY BOND ." This part
of the Agreement suggests that the
indemnitors (including the petitioners) would
become co-sureties on the Security Bond in
favor of PNB. The record, however, is bereft
of any indication that the petitionersindemnitors ever in fact became co-sureties
of R & B Surety vis-a-vis the PNB. The
petitioners, so far as the record goes,
remained simply indemnitors bound to R & B
Surety but not to PNB, such that PNB could
not have directly demanded payment of the

Principal Obligation from the petitioners.

Thus, we do not see how Article 2079 of the
Civil Code-which provides in part that "[a]n
extension granted to the debtor by the
creditor without the consent of the guarantor
extinguishes the guaranty" could apply in the
instant case.
The petitioner-indemnitors are, as, it were,
second-tier parties so far as the PNB was
concerned and any extension of time granted
by PNB to any of the first-tier obligators
(PAGRICO, R &B Surety and the trustors[s])
could not prejudice the second-tier parties.
There is no other reason why petitioner
Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to
hold in abeyance any action to enforce its
claims" against R & B Surety did not extend
the maturity of R & B Surety's obligation
under the Surety Bond. The Principal
Obligation had in fact already matured, along
with that of R &B Surety, by the time the
Trust Agreement was entered into. Petitioner's
Obligation had in fact already matured, for
those obligations were to amture "as soon as
[R & B Surety] became liable to make
payment of any sum under the terms of the
[Surety Bond] whether the said sum or
sums or part thereof have been actually paid
or not." Thus, the situation was that precisely
envisaged in Article 2079:
[t]he mere failure on the part of the creditor
to demand payment after the debt has become
36

due does not of itself constitute any extension

of the referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an
extension of time given to the principal
debtor by the creditor without the surety of
his right to pay the creditor and to be
immediately subrogated to the creditor's
remedies against the principal debtor upon
the original maturity date. The surety is said
to be entitled to protect himself against the
principal debtor upon the orginal maturity
date. The surety is said to be entitled to
protect himself against the contingency of the
principal debtor or the indemnitors becoming
insolvent during the extended period. The
underlying rationale is not present in the
instant case. As this Court has held,
merely delay or negligence in proceeding
against the principal will not discharge a
surety unless there is between the creditor
and the principal debtor a valid and binding
agreement therefor, one which tends to
prejudice [the surety] or to deprive it of the
power of obtaining indemnity by presenting a
legal objection for the time, to the
prosecution of an action on the original
security.12
In the instant case, there was nothing to
prevent the petitioners from tendering
payment, if they were so minded, to PNB of
the matured obligation on behalf of R & B
Surety and thereupon becoming subrogated to
such remedies as R & B Surety may have
against PAGRICO.

3. The last issue can be disposed of quicjly,

Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B
Surety to recover from petitioners even
before R & B Surety shall have paid the PNB.
We have previously held similar indemnity
clauses to be enforceable and not violative of
any public policy. 13

(2) The undertaking of the PNB to 'hold in

abeyance any action to enforce its claim"
against R & B Surety did not amount to an
"extension granted to the debtor" without
petitioner's consent so as to release
petitioner's from their undertaking as
indemnitors of R & B Surety under the
INdemnity Agreements; and

The petitioners lose sight of the fact that the

Indemnity Agreements are contracts of
indemnification not only against actual loss
but against liability as well. 14 While in a
contract of indemnity against loss as
indemnitor will not be liable until the person
to be indemnified makes payment or sustains
loss, in a contract of indemnity against
liability, as in this case, the indemnitor's
liability arises as soon as the liability of the
person to be indemnified has arisen without
regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was
entitled to proceed against petitioners not
only for the partial payments already made
but for the full amount owed by PAGRICO to
the PNB.

(3) Petitioner's are indemnitors of R & B

Surety against both payments to and liability
for payments to the PNB. The present suit is
therefore not premature despite the fact that
the PNB has not instituted any action against
R & B Surety for the collection of its matured
obligation under the Surety Bond.
WHEREFORE, the petitioner's appeal is
DENIED for the lack of merit and the
decision of the trial court is AFFIRMED in
toto. Costs against the petitioners.
SO ORDERED.

FIRST DIVISION

Summarizing, we hold that :

(1) The Surety Bond was not novated by the
Trust Agreement. Both agreements can coexist. The Trust Agreement merely furnished
to PNB another party obligor to the Principal
Obligation in addition to PAGRICO and R &
B Surety.

STRONGHOLD INSURANCE G.R. No. 147561

COMPANY,INC.,
Petitioner, Present:
Panganiban, CJ,
Chairman,
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ
37

REPUBLIC-ASAHI GLASS Promulgated:

CORPORATION,
Respondent. June 22, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- --- -- -- -- -- x

DECISION
PANGANIBAN, CJ:
A

surety companys liability under the

performance bond it issues is solidary. The
death of the principal obligor does not, as a
rule, extinguish the obligation and the
solidary nature of that liability.
The Case
Before us is a Petition for Review under Rule
45 of the Rules of Court, seeking to reverse the
March 13, 2001 Decision of the Court of
Appeals (CA) in CA-GR CV No. 41630. The
assailed Decision disposed as follows:
[1]

[2]

WHEREFORE, the
Order
dated January
28,
1993 issued by the lower court
is REVERSED and SET
ASIDE. Let the records of the
instant
case
be REMANDED to the lower
court for the reception of
evidence of all parties.
[3]

The Facts
The facts of the case are narrated by the CA
in this wise:
On May
24,
1989,
[respondent] Republic-Asahi
Glass Corporation (RepublicAsahi) entered into a contract
with x x x Jose D. Santos, Jr.,
the
proprietor
of
JDS
Construction (JDS), for the
construction of roadways and
a drainage system in RepublicAsahis compound in Barrio
Pinagbuhatan, Pasig City,
where [respondent] was to pay
x x x JDS five million three
hundred
thousand
pesos
(P5,300,000.00) inclusive of
value added tax for said
construction,
which
was
supposed to be completed
within a period of two hundred
forty (240) days beginning
May 8, 1989. In order to
guarantee the faithful and
satisfactory performance of its
undertakings x x x JDS, shall
post a performance bond of
seven hundred ninety five
thousand
pesos
(P795,000.00). x x x JDS
executed, jointly and severally
with [petitioner] Stronghold
Insurance Co., Inc. (SICI)

Performance Bond No. SICI25849/g(13)9769.

On
May
23,
1989,
[respondent] paid to x x x JDS
seven hundred ninety five
thousand pesos (P795,000.00)
by way of downpayment.
Two progress billings dated
August
14,
1989
and
September 15, 1989, for the
total amount of two hundred
seventy four thousand six
hundred twenty one pesos and
one centavo (P274,621.01)
were submitted by x x x JDS
to [respondent], which the
latter
paid. According
to
[respondent],
these
two
progress billings accounted for
only 7.301% of the work
supposed to be undertaken by
x x x JDS under the terms of
the contract.
Several
times
prior
to
November
of
1989,
[respondents] engineers called
the attention of x x x JDS to
the alleged alarmingly slow
pace of the construction,
which resulted in the fear that
the construction will not be
finished within the stipulated
240-day period. However, said
38

reminders went unheeded by x

x x JDS.
On November 24, 1989,
dissatisfied with the progress
of the work undertaken by x x
x JDS, [respondent] RepublicAsahi extrajudicially rescinded
the contract pursuant to Article
XIII of said contract, and
wrote a letter to x x x JDS
informing the latter of such
rescission. Such
rescission,
according to Article XV of the
contract shall not be construed
as a waiver of [respondents]
right to recover damages from
x x x JDS and the latters
sureties.
[Respondent] alleged that, as a
result of x x x JDSs failure to
comply with the provisions of
the contract, which resulted in
the said contracts rescission, it
had to hire another contractor
to finish the project, for which
it incurred an additional
expense of three million two
hundred fifty six thousand,
eight hundred seventy four
pesos (P3,256,874.00).
On January
6,
1990,
[respondent] sent a letter to
[petitioner] SICI filing its
claim under the bond for not

less
than P795,000.00. On March
22, 1991, [respondent] again
sent another letter reiterating
its demand for payment under
the aforementioned bond. Both
letters
allegedly
went
unheeded.
[Respondent] then filed [a]
complaint against x x x JDS
and SICI. It sought from x x x
JDS
payment
of P3,256,874.00 representing
the
additional
expenses
incurred by [respondent] for
the completion of the project
using another contractor, and
from x x x JDS and SICI,
jointly and severally, payment
of P750,000.00 as damages in
accordance
with
the
performance bond; exemplary
damages in the amount
of P100,000.00 and attorneys
fees in the amount of at
least P100,000.00.
According to the Sheriffs
Return dated June 14, 1991,
submitted to the lower court
by Deputy Sheriff Rene R.
Salvador, summons were duly
served on defendant-appellee
SICI. However, x x x Jose
D. Santos, Jr. died the previous
year (1990), and x x x JDS

Construction was no longer at

its address at 2nd Floor, Room
208-A, San Buena Bldg. Cor.
Pioneer St., Pasig, Metro
Manila, and its whereabouts
were unknown.
On July 10, 1991, [petitioner]
SICI filed its answer, alleging
that the [respondents] money
claims against [petitioner and
JDS] have been extinguished
by the death of Jose D. Santos,
Jr. Even if this were not the
case, [petitioner] SICI had
been released from its liability
under the performance bond
because
there
was
no
liquidation, with the active
participation
and/or
involvement,
pursuant
to
procedural due process, of
herein surety and contractor
Jose D. Santos, Jr., hence,
there was no ascertainment of
the corresponding liabilities of
Santos and SICI under the
performance bond. At this
point in time, said liquidation
was impossible because of the
death of Santos, who as such
can no longer participate in
any liquidation. The unilateral
liquidation on the party (sic) of
[respondent] of the work
accomplishments did not bind
SICI for being violative of
39

procedural due process. The

claim of [respondent] for the
forfeiture of the performance
bond
in
the
amount
of P795,000.00 had no factual
and legal basis, as payment of
said bond was conditioned on
the payment of damages which
[respondent] may sustain in
the event x x x JDS failed to
complete
the
contracted
works.[Respondent] can no
longer prove its claim for
damages in view of the death
of Santos. SICI
was
not
informed by [respondent] of
the death of Santos. SICI was
not informed by [respondent]
of the unilateral rescission of
its contract with JDS, thus
SICI was deprived of its right
to protect its interests as surety
under the performance bond,
and therefore it was released
from all liability. SICI was
likewise denied due process
when it was not notified of
plaintiff-appellants process of
determining and fixing the
amount to be spent in the
completion of the unfinished
project. The
procedure
contained in Article XV of the
contract is against public
policy in that it denies SICI
the right to procedural due
process. Finally, SICI alleged

that [respondent] deviated

from the terms and conditions
of the contract without the
written consent of SICI, thus
the latter was released from all
liability. SICI also prayed for
the award of P59,750.00 as
attorneys fees, and P5,000.00
as litigation expenses.
On August 16, 1991, the lower
court
issued
an
order
dismissing the complaint of
[respondent] against x x x JDS
and SICI, on the ground that
the claim against JDS did not
survive the death of its sole
proprietor, Jose D. Santos,
Jr. The dispositive portion of
the [O]rder reads as follows:
ACCORDING
LY,
the
complaint
against
the
defendants Jose
D. Santos, Jr.,
doing business
under trade and
style,
JDS
Construction
and Stronghold
Insurance
Company, Inc.
is
ordered
DISMISSED.

SO
ORDERED.
On September
4,
1991,
[respondent] filed a Motion for
Reconsideration
seeking
reconsideration of the lower
courts August 16, 1991 order
dismissing
its
complaint. [Petitioner]
SICI
field its Comment and/or
Opposition to the Motion for
Reconsideration. On October
15, 1991, the lower court
issued
an
Order,
the
dispositive portion of which
reads as follows:
WHEREFORE,
premises
considered, the
Motion
for
Reconsideratio
n is hereby
given
due
course. The
Order dated 16
August
1991 for
the
dismissal of the
case
against
Stronghold
Insurance
Company, Inc.,
is reconsidered
and
hereby
reinstated
40

(sic). However,
the case against
defendant Jose
D. Santos, Jr.
(deceased)
remains
undisturbed.
Motion
for
Preliminary
hearing
and
Manifestation
with
Motion
filed
by
[Stronghold]
Insurance
Company Inc.,
are set for
hearing
on November 7,
1991 at 2:00
oclock in
the
afternoon.
SO
ORDERED.
On June 4, 1992, [petitioner]
SICI filed its Memorandum
for Bondsman/Defendant SICI
(Re: Effect of Death of
defendant Jose D. Santos, Jr.)
reiterating its prayer for the
dismissal of [respondents]
complaint.

On January 28, 1993, the

lower court issued the assailed
Order reconsidering its Order
dated October 15, 1991, and
ordered the case, insofar as
SICI
is
concerned,
dismissed. [Respondent] filed
its motion for reconsideration
which was opposed by
[petitioner] SICI. On April 16,
1993, the lower court denied
[respondents]
motion
for
reconsideration. x x x.
[4]

Ruling of the Court of Appeals

The CA ruled that SICIs obligation under the
surety agreement was not extinguished by the
death of Jose D. Santos, Jr. Consequently,
Republic-Asahi could still go after SICI for
the bond.
The appellate court also found that the lower
court had erred in pronouncing that the
performance of the Contract in question had
become impossible by respondents act of
rescission. The Contract was rescinded
because of the dissatisfaction of respondent
with the slow pace of work and pursuant to
Article XIII of its Contract with JDS.
The CA ruled that [p]erformance of the
[C]ontract was impossible, not because of
[respondents] fault, but because of the fault of
JDS Construction and Jose D. Santos, Jr. for

failure on their part to make satisfactory

progress on the project, which amounted to
non-performance of the same. x x x
[P]ursuant to the [S]urety [C]ontract, SICI is
liable for the non-performance of said
[C]ontract on the part of JDS Construction.
[5]

Hence, this Petition.

[6]

Issue
Petitioner states the issue for the Courts
consideration in the following manner:
Death
is
a
defense
of Santos heirs
which
Stronghold could also adopt as
its defense against obligees
claim.
[7]

More precisely, the issue is whether

petitioners liability under the performance
bond was automatically extinguished by the
death of Santos, the principal.

The Courts Ruling

The Petition has no merit.
Sole Issue:
Effect of Death on the Suretys Liability
41

Petitioner contends that the death of Santos,

the bond principal, extinguished his liability
under the surety bond. Consequently, it says,
it is automatically released from any liability
under the bond.
As a general rule, the death of either
the creditor or the debtor does not extinguish
the obligation. Obligations are transmissible
to the heirs, except when the transmission is
prevented by the law, the stipulations of the
parties, or the nature of the obligation. Only
obligations that are personal or are
identified with the persons themselves are
extinguished by death.
[8]

[9]

[10]

[11]

Section 5 of Rule 86 of the Rules of

Court expressly allows the prosecution of
money claims arising from a contract against
the estate of a deceased debtor. Evidently,
those claims are not actually extinguished.
What is extinguished is only the
obligees action or suit filed before the court,
which is not then acting as a probate court.
[12]

[13]

[14]

In the present case, whatever

monetary liabilities or obligations Santos had
under his contracts with respondent were not
intransmissible by their nature, by stipulation,
or by provision of law. Hence, his death did
not result in the extinguishment of those
obligations or liabilities, which merely passed
on to his estate. Death is not a defense that
he or his estate can set up to wipe out the
obligations
under
the
performance
bond. Consequently, petitioner as surety
[15]

cannot use his death to escape its monetary

obligation under its performance bond.
The liability of petitioner is contractual in
nature, because it executed a performance
bond worded as follows:
KNOW ALL MEN
BY
THESE
PRESENTS:
That
we,
JDS
CONSTRUCTION of 208-A
San
Buena
Building,
contractor, of Shaw Blvd.,
Pasig, MM Philippines, as
principal
and
the
STRONGHOLD
INSURANCE
COMPANY,
INC. a corporation duly
organized and existing under
and by virtue of the laws of the
Philippines with head office at
Makati, as Surety, are held and
firmly bound unto the
REPUBLIC ASAHI GLASS
CORPORATION and to any
individual, firm, partnership,
corporation or association
supplying the principal with
labor or materials in the penal
sum of SEVEN HUNDRED
NINETY FIVE THOUSAND
(P795,000.00),
Philippine
Currency, for the payment of
which sum, well and truly to
be made, we bind ourselves,

our
heirs,
executors,
administrators, successors and
assigns, jointly and severally,
firmly by these presents.
The
CONDITIONS
OF THIS OBLIGATION are
as follows;
WHEREAS
the
above
bounden principal on the ___
day of __________, 19__
entered into a contract with the
REPUBLIC ASAHI GLASS
CORPORATION represented
by _________________, to
fully and faithfully. Comply
with the site preparation works
road and drainage system of
Philippine Float Plant at
Pinagbuhatan, Pasig,
Metro
Manila.
WHEREAS, the liability of the
Surety Company under this
bond shall in no case exceed
the sum of PESOS SEVEN
HUNDRED NINETY FIVE
THOUSAND (P795,000.00)
Philippine Currency, inclusive
of interest, attorneys fee, and
other damages, and shall not
be liable for any advances of
the obligee to the principal.
WHEREAS, said contract
requires the said principal to
give a good and sufficient
42

bond in the above-stated sum

to secure the full and faithfull
performance on its part of said
contract, and the satisfaction
of obligations for materials
used and labor employed upon
the work;
NOW THEREFORE, if the
principal shall perform well
and truly and fulfill all the
undertakings,
covenants,
terms,
conditions,
and
agreements of said contract
during the original term of said
contract and any extension
thereof that may be granted by
the obligee, with notice to the
surety and during the life of
any guaranty required under
the contract, and shall also
perform well and truly and
fulfill all the undertakings,
covenants, terms, conditions,
and agreements of any and all
duly authorized modifications
of said contract that may
hereinafter be made, without
notice to the surety except
when such modifications
increase the contract price; and
such principal contractor or his
or its sub-contractors shall
promptly make payment to
any
individual,
firm,
partnership, corporation or
association supplying the

principal of its sub-contractors

with labor and materials in the
prosecution of the work
provided for in the said
contract, then, this obligation
shall be null and void;
otherwise it shall remain in
full force and effect. Any
extension of the period of time
which may be granted by the
obligee to the contractor shall
be considered as given, and
any modifications of said
contract shall be considered as
authorized, with the express
consent of the Surety.
The right of any individual,
firm, partnership, corporation
or association supplying the
contractor with labor or
materials for the prosecution
of the work hereinbefore
stated, to institute action on
the penal bond, pursuant to the
provision of Act No. 3688, is
hereby
acknowledge
and
confirmed.
[16]

As a surety, petitioner is solidarily liable

with Santos in accordance with the Civil
Code, which provides as follows:
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.
[17]

x x xx x xx x
x
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.
Elucidating on these provisions, the Court
in Garcia v. Court of Appeals stated thus:
[18]

x x x. The suretys obligation

is not an original and direct
one for the performance of
his own act, but merely
43

accessory or collateral to the

obligation contracted by the
principal. Nevertheless,
although the contract of a
surety
is
in
essence
secondary only to a valid
principal obligation, his
liability to the creditor or
promisee of the principal is
said to be direct, primary and
absolute; in other words, he
is directly and equally bound
with the principal. x x x.
[19]

Under the law and jurisprudence, respondent

may sue, separately or together, the principal
debtor and the petitioner herein, in view of
the solidary nature of their liability. The death
of the principal debtor will not work to
convert, decrease or nullify the substantive
right of the solidary creditor. Evidently,
despite the death of the principal debtor,
respondent may still sue petitioner alone, in
accordance with the solidary nature of the
latters liability under the performance bond.
WHEREFORE,
the
Petition
is DENIED and the Decision of the Court of
Appeals AFFIRMED. Costs
against
petitioner.
SO ORDERED.

44