F. Gilat Satellite vs.

UCPB (2014)

Summary Cases:

Gilat Satellite Networks Ltd., vs. United Coconut Planters Bank (UCPB) General Insurance Co., Inc.

Subject:

Liability of a surety on the principal contract is direct, primary and absolute; The existence of
asuretyship agreement does not give the surety the right to intervene in the principal contract,
hence,surety cannot invoke the arbitration clause between the parties in the principal contract;
Interest, as aform of indemnity, may be awarded to a creditor in case of inexcusable delay incurred by
a debtor in thepayment of his obligation

Facts:

One Virtual placed with Gilat Satellite Network (Gilat) a purchase order for various
telecommunicationsequipment, promising to pay portions of the price according to a payment
schedule. To ensure theprompt payment, it obtained a surety bond from defendant UCPB General
Insurance Co., Inc. (UCPB) infavor of GilatOne Virtual failed to pay Gilat twice, prompting Gilat to write
the surety UCPB two demand letters for payment. However, UCPB failed to settle the amount.Gilat
filed a complaint against UCPB. The RTC, ruling in favor of Gilat, found that Gilat has alreadycomplied
with its end of the obligation, i.e. delivery and installation of the purchased equipments.Demand
notwithstanding, One Virtual and UCPB, as surety, failed to settle the obligation. The lower court
reasoned that UCPB, as surety, bound itself to pay in accordance with the Payment Milestones.This
obligation was not made dependent on any condition outside the terms and conditions of the
SuretyBond and Payment Milestones.However, the RTC denied Gilats claim for interest on the premise
that the interest shall only accruewhen the delay or refusal to pay the principal obligation is without
any justifiable cause. Here, UCPBfailed to pay its surety obligation because of the advice of its principal
(One Virtual) not to pay. The RTCthen obligated UCPB to pay Gilat the principal debt (US $1.2 Million)
under the Surety Bond, with legalinterest at the rate of 12% per annum computed from the time the
judgment becomes final and executory,plus attorneys fees and litigation expenses.The Court of
Appeals (CA) dismissed the appeal of UCPB based on lack of jurisdiction. It ruled that
in"enforcing a surety contract, the complementary-contracts-construed-together doctrine findsapplica
tion." In this case, the CA considered the arbitration clause contained in the Purchase
Agreement(principal contract) between Gilat and One Virtual as applicable and binding on the parties
to thesuretyship agreement (accessory contract). Hence, the trial courts Decision was vacated. Gilat
and OneVirtual were ordered to proceed to arbitration.

Held :Liability of a surety on the principal contract is direct, primary and absolute

1. The failure of One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner Gilat
gave the latter an immediate right to pursue UCPB as the surety.

2. In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the
principal debtor. This undertaking makes a suretyagreement an ancillary contract, as it presupposes
the existence of a principal contract. Nevertheless, although the contract of asurety is in essence
secondary only to a valid principal obligation, its liability to the creditor or "promise" of the principal is
said to be direct, primary and absolute; in other words, a surety isdirectly and equally bound with the
principal. He becomes liable for the debt and duty of theprincipal obligor, even without possessing a
direct or personal interest in the obligationsconstituted by the latter.
3. Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion. Itmay in
fact be sued separately or together with the principal debtor.

4. Sureties do not insure the solvency of the debtor, but rather the debt itself. They arecontracted
precisely to mitigate risks of non-performance on the part of the obligor. Thisresponsibility necessarily
places a surety on the same level as that of the principal debtor. Theeffect is that the creditor is given
the right to directly proceed against either principal debtor or surety. This is the reason why excussion
cannot be invoked. To require the creditor to proceed toarbitration would render the very essence of
suretyship nugatory and diminish its value incommerce. (See Palmares v. Court of Appeals) The
existence of a suretyship agreement does not give the surety the right to intervene in theprincipal
contract, hence, surety cannot invoke the arbitration clause between the parties in theprincipal
contract

5. UCPBs claim that the Purchase Agreement, being the principal contract to which theSuretyship
Agreement is accessory, must take precedence over arbitration as the preferredmode of settling
disputes, cannot be sustained.

6. The acceptance of a surety agreement does not change in any material way the
creditorsrelationship with the principal debtor nor does it make the surety an active party to the
principalcreditor-debtor relationship. In other words, the acceptance [of the surety agreement] does
notgive the surety the right to intervene in the principal contract. The suretys role arises only uponthe
debtors default, at which time, it can be directly held liable by the creditor for payment as asolidary
obligor. Hence, the surety remains a stranger to the Purchase Agreement. (SeeStronghold Insurance
Co. Inc. v. Tokyu Construction Co. Ltd.)

7. UCPB cannot invoke in its favor the arbitration clause in the Purchase Agreement, because itis not a
party to that contract. An arbitration agreement being contractual in nature, it is bindingonly on the
parties thereto, as well as their assigns and heirs.

8. Section 24 of Republic Act No. 9285 is clear in stating that a referral to arbitration may onlytake
place "if at least one party so requests not later than the pre-trial conference, or upon therequest of
both parties thereafter." UCPB has not presented evidence to show that either Gilat or One Virtual
submitted its contesting claim for arbitration.Interest, by way of damages or indemnity, may be
awarded to a creditor in case of inexcusabledelay incurred by a debtor in the payment of his obligation

9. Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money,
and the debtor incurs a delay, the indemnity for damages, there being no stipulation tothe contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation,the legal interest."

10. Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply. Delay, as used in Article 1169,
issynonymous with default or mora, which means delay in the fulfilment of obligations. It is
thenonfulfillment of an obligation with respect to time.11. In order for the debtor (in this case, the
surety) to be in default, it is necessary that thefollowing requisites be present:(1) that the obligation be
demandable and already liquidated;(2) that the debtor delays performance; and(3) that the creditor
requires the performance judicially or extrajudicially.12. If a surety, upon demand, fails to pay, it can
be held liable for interest, even if in thus paying,its liability becomes more than the principal
obligation. The increased liability is not because of the contract, but because of the default and the
necessity of judicial collection.13. For delay to merit interest, it must be inexcusable in nature14. In
culpa contractual x x x the mere proof of the existence of the contract and the failure of itscompliance
justify, prima facie, a corresponding right of relief. xxx A breach upon the contractconfers upon the
injured party a valid cause for recovering that which may have been lost or suffered. The remedy
serves to preserve the interests of the promisee that may include his "expectation interest," which is
his interest in having the benefit of his bargain by being put in asgood a position as he would have
been in had the contract been performed, or his "reliance interest," which is his interest in being
reimbursed for loss caused by reliance on the contract bybeing put in as good a position as he would
have been in had the contract not been made; or his "restitution interest," which is his interest in
having restored to him any benefit that he hasconferred on the other party. Indeed, agreements can
accomplish little, either for their makers or for society, unless they are made the basis for action. The
effect of every infraction is to create anew duty, that is, to make recompense to the one who has been
injured by the failure of another to observe his contractual obligation unless he can show extenuating
circumstances, like proof of his exercise of due diligence x x x or of the attendance of fortuitous event,
to excuse him fromhis ensuing liability.

(See Guanio v. Makati-Shangri-la Hotel)

15. Records are bereft of proof to show that UCPBs delay was indeed justified by thecircumstances
that is, One Virtuals advice regarding Gilats alleged breach of obligations.

16. As to the issue of when interest must accrue, our Civil Code is explicit in stating that itaccrues from
the time judicial or extrajudicial demand is made on the surety. This ruling is inaccordance with the
provisions of Article 1169 of the Civil Code and of the settled rule that wherethere has been an extra-
judicial demand before an action for performance was filed, interest onthe amount due begins to run,
not from the date of the filing of the complaint, but from the dateof that extra-judicial demand. Interest
must start to run from the time petitioner sent its firstdemand letter (5 June 2000), because the
obligation was already due and demandable at that time.

17. Petitioner is rewarded legal interest at the rate of 6% per annum from 5 June 2000, its firstdate of
extra judicial demand, until the satisfaction of the debt.

18. "When the obligation is breached, and it consists in the payment of a sum of money, i.e., aloan or
forbearance of money, the interest due should be that which may have been stipulated inwriting.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to becomputed from default, i.e.,
from judicial or extrajudicial demand under and subject to theprovisions of Article 1169 of the Civil
Code. x x x When the judgment of the court awarding a sumof money becomes final and executory,
the rate of legal interes...shall be 6% per annum fromsuch finality until its satisfaction, this interim
period being deemed to be by then an equivalent toa forbearance of credit." (See Nacar v. Gallery
Frames, modifying Eastern Shipping Lines v. CA)

G. Willex Plastic, Inc. v. CA, International Corporate Bank (1996)

Doctrine: It is never necessary that a guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal

Facts:

?1978: Inter-Resin took out a loan from Manila Bank. As additional security,Inter-Resin and Investment
Underwriting (IUCP) executed a Continuing SuretyAgreement stating that they are liable to Manila
Bank solidarily for the loan taken out byInter-Resin

?1979: Inter-Resin and Willex Plastic executed a Continuing Guarantee for the loanwhich Inter-Resin
obtained from Investment Underwriting to the extent of P5M.

?1981: Investment Underwriting (IUCP) paid Manila Bank P4M to satisfy Inter-Resins1978 Obligation

?Investment Underwriting (IUCP) then demanded payment of the P4M from both Inter-Resin and
WillexoInter-Resin paid IUCP P600K from the proceeds of its fire insurance
?Willex denied obligation, it alleged that it is only a guarantor of the principal, hence itsliability was
only secondary to the principal and that it did not receive consideration norbenefit from the contract
between the bank and Inter-Resin.

?Willex insisted that IUCP should pursue Inter-Resin and apply to the loan the assets ofthe latter first
before going after it.?Willex further alleged that it is guarantor of a loan to Manila Bank and not to
Interbank,hence the Continuing Guaranty cannot be retroactive applied as contracts of
suretyshipcontemplates future dealing.

ISSUE: WON Willex is liable as guarantor for the loans obtained by Inter-Resin toIUCP? Yes

HELD:

?Intent is controlling: clear from the evidence that the Continuing Guarantee executed by Willex with
Inter-Resin would cover sums obtained (in the past retroactive) and/or to beobtained by Inter-Resin
Industrial from Interbank -?Although a contract of suretyship is ordinarily not to be construed as
retrospective, inthe end the intention of the parties as revealed by the evidence is controlling apply it
tothe 1978 loan.

?Guarantor or surety is bound by the same consideration that makes the contracteffective
between the principal parties thereto. . . . It is never necessary that a guarantoror surety should
receive any part or benefit, if such there be, accruing to his principal.

H. Rizal Commercial Banking Corp. vs. Arro

Rizal Commercial Banking Corporation, petitioner, vs. Hon. Jose P. Arro, Judge of the Court of
FirstInstance of Davao, and Residoro Chua, respondents.

Date: 31 July 1982 Ponente: De Castro, J.

Facts:

Private respondent Residoro Chua, with Enrique Go, Sr., executed a comprehensive
suretyagreement to guaranty, above all, any existing or future indebtedness of Davao
AgriculturalIndustries Corporation (Daicor), and/or induce the bank at any time or from time to time to
makeloans or advances or to extend credit to said Daicor, provided that the liability shall not exceed
ayany time Php100,000.00.

A promissory note for Php100,000.00 (for additional capital to the charcoal buy and sell and
theactivated carbon importation business) was issued in favor of petitioner RCBC payable a monthafter
execution. This was signed by Go in his personal capacity and in behalf of
Daicor.Respondent Chua did not sign in said promissory note.

As the note was not paid despite demands, RCBC filed a complaint for a sum of money
againstDaicor, Go and Chua.

The complaint against Chua was dismissed upon his motion, alleging that the complaint states
nocause of action against him as he was not a signatory to the note and hence he cannot be
heldliable. This was so despite RCBCs opposition, invoking the comprehensive surety agreementwhich
it holds to cover not just the note in question but also every other indebtedness that Daicormay incur
from petitioner bank.

RCBC moved for reconsideration of the dismissal but to no avail. Hence, this petition.

Issue: WON respondent Chua may be held liable with Go and Daicor under the promissory note, even
ifhe was not a signatory to it, in light of the provisions of the comprehensive surety
agreementwherein he bound himself with Go and Daicor, as solidary debtors, to pay existing and
future debtsof said corporation.

Held: Yes, he may be held liable. Order dismissing the complaint against respondent Chua reversed
andset aside. Case remanded to court of origin with instruction to set aside motion to dismiss and
torequire defendant Chua to answer the complaint.

Ratio:

The comprehensive surety agreement executed by Chua and Go, as president and
generalmanager, respectively, of Daicor, was to cover existing as well as future obligations which
Daicormay incur with RCBC. This was only subject to the proviso that their liability shall not exceed
atany one time the aggregate principal amount of Php100,000.00. (Par.1 of said agreement).

The agreement was executed to induce petitioner Bank to grant any application for a loan
Daicorwould request for. According to said agreement, the guaranty is continuing and shall remain in
fullforce or effect until the bank is notified of its termination.

During the time the loan under the promissory note was incurred, the agreement was still in
fullforce and effect and is thus covered by the latter agreement. Thus, even if Chua did not sign
thepromissory note, he is still liable by virtue of the surety agreement. The only condition necessaryfor
him to be liable under the agreement was that Daicor is or may become liable as maker,endorser,
acceptor or otherwise.

The comprehensive surety agreement signed by Go and Chua was as an accessory

obligationdependent upon the principal obligation, i.e., the loan obtained by Daicor as evidenced by
thepromissory note.

The surety agreement unequivocally shows that it was executed to guarantee future debts thatmay
be incurred by Daicor with petitioner, as allowed under NCC Art.2053: A guaranty may alsobe given as
security for future debts, the amount of which is not yet known; there can be no claimagainst the
guarantor until the debt is liquidated. A conditional obligation may also be secured.
I.
 J. In Dino v. CA, the Court held that a continuing guaranty is one which covers all transactions, including those
arising in the future, which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit
accommodation:
1. that the obligation should not exceed P8 million, and
2. that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in
regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million.

In Dino, the surety Agreement specifically provided that each suretyship is a continuing one which shall remain in
full force and effect until this bank is notified of its revocation. Since the bank had not been notified of such
revocation, the surety was held liable even for the subsequent obligations of the principal borrower.

Furthermore, this Court has ruled in Dio v. CA:

Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at
the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or
suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a
future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked.
It is prospective in its operation and is generally intended to provide security with respect to future transactions
within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes
liable.
Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof.
How : A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period;
especially if the right to recall the guaranty is expressly reserved. Hence, where the contract states that the guaranty
is to secure advances to be made from time to time, it will be construed to be a continuing one.