b.
Should suit be impleaded by PDCP and/or PAIC against any
PART VII. GUARANTY AND SURETYSHIP
G.R. No. 151953 June 29, 2007
SALVADOR P. ESCAO and MARIO M. SILOS, petitioner,
vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are
not under obligation to reimburse respondent, a claim that can
be easily debunked. The more perplexing question is whether
this obligation to repay is solidary, as contended by respondent
and the lower courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the
Philippines (PDCP)1 entered into a loan agreement with Falcon
Minerals, Inc. (Falcon) whereby PDCP agreed to make available
and lend to Falcon the amount of US$320,000.00, for specific
purposes and subject to certain terms and conditions. 2 On the
same day, three stockholders-officers of Falcon, namely:
respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and
George T. Scholey executed an Assumption of Solidary Liability
whereby they agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment"
of the loan contracted by Falcon with PDCP.3 In the meantime,
two separate guaranties were executed to guarantee the
payment of the same loan by other stockholders and officers of
Falcon, acting in their personal and individual capacities. One
Guaranty4 was executed by petitioner Salvador Escao
(Escao), while the other5 by petitioner Mario M. Silos (Silos),
Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and
Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of
Falcon to Escao, Silos and Joseph M. Matti (Matti). Thus,
contracts were executed whereby Ortigas, George A. Scholey,
Inductivo and the heirs of then already deceased George T.
Scholey assigned their shares of stock in Falcon to Escao,
Silos and Matti.6 Part of the consideration that induced the sale
of stock was a desire by Ortigas, et al., to relieve themselves of
all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan
with PDCP. Thus, an Undertaking dated 11 June 1982 was
executed by the concerned parties,7 namely: with Escao, Silos
and Matti identified in the document as "SURETIES," on one
hand, and Ortigas, Inductivo and the Scholeys as "OBLIGORS,"
on the other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause
PDCP and PAIC to release OBLIGORS from their said
guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs said guarantees [sic] to
PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from
PDCP and/or PAIC for the payment of FALCONs obligations
with it, any of [the] OBLIGORS shall immediately inform
SURETIES thereof so that the latter can timely take appropriate
measures;
and/or all of OBLIGORS for collection of said loans and/or credit
facilities, SURETIES agree to defend OBLIGORS at their own
expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims of
PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason
made to pay any amount to PDCP and/or PAIC, SURETIES
shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all
fees which may be due from FALCON arising out of, or in
connection with, their said guarantees[sic].8
Falcon eventually availed of the sum of US$178,655.59 from the
credit line extended by PDCP. It would also execute a Deed of
Chattel Mortgage over its personal properties to further secure
the loan. However, Falcon subsequently defaulted in its
payments. After PDCP foreclosed on the chattel mortgage,
there remained a subsisting deficiency of P5,031,004.07, which
Falcon did not satisfy despite demand.9
On 28 April 1989, in order to recover the indebtedness, PDCP
filed a complaint for sum of money with the Regional Trial Court
of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio
and Inductivo. The case was docketed as Civil Case No. 89-
5128. For his part, Ortigas filed together with his answer a cross-
claim against his co-defendants Falcon, Escao and Silos, and
also manifested his intent to file a third-party complaint against
the Scholeys and Matti.10 The cross-claim lodged against
Escao and Silos was predicated on the 1982 Undertaking,
wherein they agreed to assume the liabilities of Ortigas with
respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with
PDCP. The first to come to terms with PDCP was Escao, who
in December of 1993, entered into a compromise agreement
whereby he agreed to pay the bank P1,000,000.00. In
exchange, PDCP waived or assigned in favor of Escao one-
third (1/3) of its entire claim in the complaint against all of the
other defendants in the case.11 The compromise agreement was
approved by the RTC in a Judgment12 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own
compromise agreement13 with PDCP, allegedly without the
knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed
to pay PDCP P1,300,000.00 as "full satisfaction of the PDCPs
claim against Ortigas,"14 in exchange for PDCPs release of
Ortigas from any liability or claim arising from the Falcon loan
agreement, and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise
Agreement whereby he agreed to pay P500,000.00 in exchange
for PDCPs waiver of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas
pursued his claims against Escao, Silos and Matti, on the basis
of the 1982 Undertaking. He initiated a third-party complaint
against Matti and Silos,16 while he maintained his cross-claim
against Escao. In 1995, Ortigas filed a motion for Summary
Judgment in his favor against Escao, Silos and Matti. On 5
October 1995, the RTC issued the Summary Judgment,
ordering Escao, Silos and Matti to pay Ortigas, jointly and
1
severally, the amount of P1,300,000.00, as well as P20,000.00
in attorneys fees.17 The trial court ratiocinated that none of the
third-party defendants disputed the 1982 Undertaking, and that
"the mere denials of defendants with respect to non-compliance
of Ortigas of the terms and conditions of the Undertaking,
unaccompanied by any substantial fact which would be
admissible in evidence at a hearing, are not sufficient to raise
genuine issues of fact necessary to defeat a motion for summary
judgment, even if such facts were raised in the pleadings." 18 In
an Order dated 7 March 1996, the trial court denied the motion
for reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed from 28
February 1994.19
From the Summary Judgment, recourse was had by way of
appeal to the Court of Appeals. Escao and Silos appealed
jointly while Matti appealed by his lonesome. In a
Decision20 dated 23 January 2002, the Court of Appeals
dismissed the appeals and affirmed the Summary Judgment.
The appellate court found that the RTC did not err in rendering
the summary judgment since the three appellants did not
effectively deny their execution of the 1982 Undertaking. The
special defenses that were raised, "payment and excussion,"
were characterized by the Court of Appeals as "appear[ing] to
be merely sham in the light of the pleadings and supporting
documents and affidavits."21 Thus, it was concluded that there
was no genuine issue that would still require the rigors of trial,
and that the appealed judgment was decided on the bases of
the undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and
Silos.22 Two main issues are raised. First, petitioners dispute
that they are liable to Ortigas on the basis of the 1982
Undertaking, a document which they do not disavow and have
in fact annexed to their petition. Second, on the assumption that
they are liable to Ortigas under the 1982 Undertaking,
petitioners argue that they are jointly liable only, and not
solidarily. Further assuming that they are liable, petitioners also
submit that they are not liable for interest and if at all, the proper
interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their
petition or their memorandum before the Court, the
appropriateness of the summary judgment as a relief favorable
to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil
Procedure, summary judgment may avail if the pleadings,
supporting affidavits, depositions and admissions on file show
that, except as to the amount of damages, there is no genuine
issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law. Petitioner have not attempted
to demonstrate before us that there existed a genuine issue as
to any material fact that would preclude summary judgment.
Thus, we affirm with ease the common rulings of the lower
courts that summary judgment is an appropriate recourse in this
case.
The vital issue actually raised before us is whether petitioners
were correctly held liable to Ortigas on the basis of the 1982
Undertaking in this Summary Judgment. An examination of the
document reveals several clauses that make it clear that the
agreement was brought forth by the desire of Ortigas, Inductivo
and the Scholeys to be released from their liability under the loan
agreement which release was, in turn, part of the consideration
for the assignment of their shares in Falcon to petitioners and
Matti. The whereas clauses manifest that Ortigas had bound
himself with Falcon for the payment of the loan with PDCP, and
that "amongst the consideration for OBLIGORS and/or their
principals aforesaid selling is SURETIES relieving OBLIGORS
of any and all liability arising from their said joint and several
undertakings with FALCON."23 Most crucial is the clause in
Paragraph 3 of the Undertaking wherein petitioners "irrevocably
agree and undertake to assume all of OBLIGORs said
guarantees [sic] to PDCP x x x under the following terms and
conditions."24
At the same time, it is clear that the assumption by petitioners of
Ortigass "guarantees" [sic] to PDCP is governed by stipulated
terms and conditions as set forth in sub-paragraphs (a) to (c) of
Paragraph 3. First, upon receipt by "any of OBLIGORS" of any
demand from PDCP for the payment of Falcons obligations with
it, "any of OBLIGORS" was to immediately inform "SURETIES"
thereof so that the latter can timely take appropriate measures.
Second, should "any and/or all of OBLIGORS" be impleaded by
PDCP in a suit for collection of its loan, "SURETIES agree[d] to
defend OBLIGORS at their own expense, without prejudice to
any and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief" 25 in respect
to any of the claims of PDCP. Third, if any of the "OBLIGORS is
for any reason made to pay any amount to [PDCP], SURETIES
[were to] reimburse OBLIGORS for said amount/s within seven
(7) calendar days from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the
Undertaking, Ortigas was not "made to pay" PDCP the amount
now sought to be reimbursed, as Ortigas voluntarily paid PDCP
the amount of P1.3 Million as an amicable settlement of the
claims posed by the bank against him. However, the subject
clause in paragraph 3(c) actually reads "[i]n the event that any
of OBLIGORS is for any reason made to pay any amount to
PDCP x x x"27 As pointed out by Ortigas, the phrase "for any
reason" reasonably includes any extra-judicial settlement of
obligation such as what Ortigas had undertaken to pay to PDCP,
as it is indeed obvious that the phrase was incorporated in the
clause to render the eventual payment adverted to therein
unlimited and unqualified.
The interpretation posed by petitioners would have held water
had the Undertaking made clear that the right of Ortigas to seek
reimbursement accrued only after he had delivered payment to
PDCP as a consequence of a final and executory judgment. On
the contrary, the clear intent of the Undertaking was for
petitioners and Matti to relieve the burden on Ortigas and his
fellow "OBLIGORS" as soon as possible, and not only after
Ortigas had been subjected to a final and executory adverse
judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all
efforts to cause PDCP x x x to within a reasonable time release
all the OBLIGORS x x x from their guarantees [sic] to PDCP x x
x"28 In the event that Ortigas and his fellow "OBLIGORS" could
not be released from their guaranties, paragraph 2 commits
petitioners and Matti to cause the Board of Directors of Falcon
to make a call on its stockholders for the payment of their unpaid
subscriptions and to pledge or assign such payments to Ortigas,
et al., as security for whatever amounts the latter may be held
liable under their guaranties. In addition, paragraph 1 also
makes clear that nothing in the Undertaking "shall prevent
OBLIGORS, or any one of them, from themselves negotiating
with PDCP x x x for the release of their said guarantees [sic]."29
There is no argument to support petitioners position on the
import of the phrase "made to pay" in the Undertaking, other
than an unduly literalist reading that is clearly inconsistent with
the thrust of the document. Under the Civil Code, the various
stipulations of a contract shall be interpreted together, attributing
2
to the doubtful ones that sense which may result from all of them
taken jointly.30 Likewise applicable is the provision that if some
stipulation of any contract should admit of several meanings, it
shall be understood as bearing
that import which is most adequate to render it effectual.31 As a
means to effect the general intent of the document to relieve
Ortigas from liability to PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of
the other conditions set in paragraph 3, as they claim. Following
the general assertion in the petition that Ortigas violated the
terms of the Undertaking, petitioners add that Ortigas "paid
PDCP BANK the amount of P1.3 million without petitioners
ESCANO and SILOSs knowledge and consent." 32 Paragraph
3(a) of the Undertaking does impose a requirement that any of
the "OBLIGORS" shall immediately inform "SURETIES" if they
received any demand for payment of FALCONs obligations to
PDCP, but that requirement is reasoned "so that the
[SURETIES] can timely take appropriate
measures"33 presumably to settle the obligation without having
to burden the "OBLIGORS." This notice requirement in
paragraph 3(a) is markedly way off from the suggestion of
petitioners that Ortigas, after already having been impleaded as
a defendant in the collection suit, was obliged under the 1982
Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability
to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the
first place. They note that Ortigas had, in his answer, denied any
liability to PDCP and had alleged that he signed the Assumption
of Solidary Liability not in his personal capacity, but as an officer
of Falcon. However, such position, according to petitioners,
could not be justified since Ortigas later voluntarily paid PDCP
the amount of P1.3 Million. Such circumstances, according to
petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are
still erroneous. The Partial Compromise Agreement between
PDCP and Ortigas expressly stipulated that Ortigass offer to
pay PDCP was conditioned "without [Ortigass] admitting liability
to plaintiff PDCP Banks complaint, and to terminate and dismiss
the said case as against Ortigas solely." 34 Petitioners profess it
is "unthinkable" for Ortigas to have voluntarily paid PDCP
without admitting his liability,35 yet such contention based on
assumption cannot supersede the literal terms of the Partial
Compromise Agreement.
Petitioners further observe that Ortigas made the payment to
PDCP after he had already assigned his obligation to petitioners
through the 1982 Undertaking. Yet the fact is PDCP did pursue
a judicial claim against Ortigas notwithstanding the Undertaking
he executed with petitioners. Not being a party to such
Undertaking, PDCP was not precluded by a contract from
pursuing its claim against Ortigas based on the original
Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from
relieving his distress through a settlement with the creditor bank.
Indeed, paragraph 1 of the Undertaking expressly states that
"nothing herein shall prevent OBLIGORS, or any one of them,
from themselves negotiating with PDCP x x x for the release of
their said guarantees [sic]."36 Simply put, the Undertaking did
not bar Ortigas from pursuing his own settlement with PDCP.
Neither did the Undertaking bar Ortigas from recovering from
petitioners whatever amount he may have paid PDCP through
his own settlement. The stipulation that if Ortigas was "for any
reason made to pay any amount to PDCP[,] x x x SURETIES
shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment"37 makes it clear that
petitioners remain liable to reimburse Ortigas for the sums he
paid PDCP.
We now turn to the set of arguments posed by petitioners, in the
alternative, that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not
solidarily, liable to Ortigas, claiming that the Undertaking did not
provide for express solidarity. They cite Article 1207 of the New
Civil Code, which states in part that "[t]here is a solidary liability
only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly
and severally liable for the Undertaking, as the language used
in the agreement "clearly shows that it is a surety
agreement"38 between the obligors (Ortigas group) and the
sureties (Escao group). Ortigas points out that the Undertaking
uses the word "SURETIES" although the document, in
describing the parties. It is further contended that the principal
objective of the parties in executing the Undertaking cannot be
attained unless petitioners are solidarily liable "because the total
loan obligation can not be paid or settled to free or release the
OBLIGORS if one or any of the SURETIES default from their
obligation in the Undertaking."39
In case, there is a concurrence of two or more creditors or of two
or more debtors in one and the same obligation, Article 1207 of
the Civil Code states that among them, "[t]here is a solidary
liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity." Article
1210 supplies further caution against the broad interpretation of
solidarity by providing: "The indivisibility of an obligation does
not necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility."
These Civil Code provisions establish that in case of
concurrence of two or more creditors or of two or more debtors
in one and the same obligation, and in the absence of express
and indubitable terms characterizing the obligation as solidary,
the presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the obligation
is indeed solidary in character to prove such fact with a
preponderance of evidence.
The Undertaking does not contain any express stipulation that
the petitioners agreed "to bind themselves jointly and severally"
in their obligations to the Ortigas group, or any such terms to
that effect. Hence, such obligation established in the
Undertaking is presumed only to be joint. Ortigas, as the party
alleging that the obligation is in fact solidary, bears the burden
to overcome the presumption of jointness of obligations. We rule
and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners
and Matti identified themselves in the Undertaking as
"SURETIES", a term repeated no less than thirteen (13) times
in the document. Ortigas claims that such manner of
identification sufficiently establishes that the obligation of
petitioners to him was joint and solidary in nature.
3
The term "surety" has a specific meaning under our Civil Code.
Article 2047 provides the statutory definition of a surety
agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
[Emphasis supplied]40
As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor. Thus,
a surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigass
argument rests solely on the solidary nature of the obligation of
the surety under Article 2047. In tandem with the nomenclature
"SURETIES" accorded to petitioners and Matti in the
Undertaking, however, this argument can only be viable if the
obligations established in the
Undertaking do partake of the nature of a suretyship as defined
under Article 2047 in the first place. That clearly is not the case
here, notwithstanding the use of the nomenclature "SURETIES"
in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a
principal debtor to whom the surety is solidarily bound by way of
an ancillary obligation of segregate identity from the obligation
between the principal debtor and the creditor. The suretyship
does bind the surety to the creditor, inasmuch as the latter is
vested with the right to proceed against the former to collect the
credit in lieu of proceeding against the principal debtor for the
same obligation.41 At the same time, there is also a legal tie
created between the surety and the principal debtor to which the
creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal
debtor, such obligation is extinguished.42 At the same time, the
surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact "become subrogated to
all the rights and remedies of the creditor." 43
Note that Article 2047 itself specifically calls for the application
of the provisions on joint and solidary obligations to suretyship
contracts.44 Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who
paid (i.e., the surety).45However, a significant distinction still lies
between a joint and several debtor, on one hand, and a surety
on the other. Solidarity signifies that the creditor can compel any
one of the joint and several debtors or the surety alone to answer
for the entirety of the principal debt. The difference lies in the
respective faculties of the joint and several debtor and the surety
to seek reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-
debtor and a surety:
A guarantor who binds himself in solidum with the principal
debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and purposes. There
is a difference between a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the liability he assumes
to pay the debt before the property of the principal debtor has
been exhausted, retains all the other rights, actions and benefits
which pertain to him by reason of the fiansa; while a solidary co-
debtor has no other rights than those bestowed upon him in
Section 4, Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent
to the contract of suretyship. The civil law suretyship is,
accordingly, nearly synonymous with the common law guaranty;
and the civil law relationship existing between the co-debtors
liable in solidum is similar to the common law suretyship. 46
In the case of joint and several debtors, Article 1217 makes plain
that the solidary debtor who effected the payment to the creditor
"may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already
made." Such solidary debtor will not be able to recover from the
co-debtors the full amount already paid to the creditor, because
the right to recovery extends only to the proportional share of
the other co-debtors, and not as to the particular proportional
share of the solidary debtor who already paid. In contrast, even
as the surety is solidarily bound with the principal debtor to the
creditor, the surety who does pay the creditor has the right to
recover the full amount paid, and not just any proportional share,
from the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and benefits
which pertain to the surety by reason of the subsidiary obligation
assumed by the surety.
What is the source of this right to full reimbursement by the
surety? We find the right under Article 2066 of the Civil Code,
which assures that "[t]he guarantor who pays for a debtor must
be indemnified by the latter," such indemnity comprising of,
among others, "the total amount of the debt."47 Further, Article
2067 of the Civil Code likewise establishes that "[t]he guarantor
who pays is subrogated by virtue thereof to all the rights which
the creditor had against the debtor."48
Articles 2066 and 2067 explicitly pertain to guarantors, and one
might argue that the provisions should not extend to sureties,
especially in light of the qualifier in Article 2047 that the
provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr.
Tolentinos observation that "[t]he reference in the second
paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations,
however, does not mean that suretyship is withdrawn from the
applicable provisions governing guaranty." 49 For if that were not
the implication, there would be no material difference between
the surety as defined under Article 2047 and the joint and
several debtors, for both classes of obligors would be governed
by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and
2067 extend as well to sureties as defined under Article 2047.
These rights granted to the surety who pays materially differ
from those granted under Article 1217 to the solidary debtor who
pays, since the "indemnification" that pertains to the latter
extends "only [to] the share which corresponds to each [co-
debtor]." It is for this reason that the Court cannot accord the
conclusion that because petitioners are identified in the
Undertaking as "SURETIES," they are consequently joint and
severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light
of the general presumption favoring joint liability, the Court
4
would have to be satisfied that among the petitioners and Matti,
there is one or some of them who stand as the principal debtor
to Ortigas and another as surety who has the right to full
reimbursement from the principal debtor or debtors. No
suggestion is made by the parties that such is the case, and
certainly the Undertaking is not revelatory of such intention. If
the Court were to give full fruition to the use of the term "sureties"
as conclusive indication of the existence of a surety agreement
that in turn gives rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a corresponding set
of rights and obligations as between the "SURETIES" which
petitioners and Matti did not clearly intend.
It is not impossible that as between Escao, Silos and Matti,
there was an agreement whereby in the event that Ortigas were
to seek reimbursement from them per the terms of the
Undertaking, one of them was to act as surety and to pay Ortigas
in full, subject to his right to full reimbursement from the other
two obligors. In such case, there would have been, in fact, a
surety agreement which evinces a solidary obligation in favor of
Ortigas. Yet if there was indeed such an agreement, it does not
appear on the record. More consequentially, no such intention
is reflected in the Undertaking itself, the very document that
creates the conditional obligation that petitioners and Matti
reimburse Ortigas should he be made to pay PDCP. The mere
utilization of the term "SURETIES" could not work to such effect,
especially as it does not appear who exactly is the principal
debtor whose obligation is "assured" or "guaranteed" by the
surety.
Ortigas further argues that the nature of the Undertaking
requires "solidary obligation of the Sureties," since the
Undertaking expressly seeks to "reliev[e] obligors of any and all
liability arising from their said joint and several undertaking with
[F]alcon," and for the "sureties" to "irrevocably agree and
undertake to assume all of obligors said guarantees to
PDCP."50 We do not doubt that a finding of solidary liability
among the petitioners works to the benefit of Ortigas in the
facilitation of these goals, yet the Undertaking itself contains no
stipulation or clause that establishes petitioners obligation to
Ortigas as solidary. Moreover, the aims adverted to by Ortigas
do not by themselves establish that the nature of the obligation
requires solidarity. Even if the liability of petitioners and Matti
were adjudged as merely joint, the full relief and reimbursement
of Ortigas arising from his payment to PDCP would still be
accomplished through the complete execution of such a
judgment.
Petitioners further claim that they are not liable for attorneys
fees since the Undertaking contained no such stipulation for
attorneys fees, and that the situation did not fall under the
instances under Article 2208 of the Civil Code where attorneys
fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the
petitioners led to his being impleaded in the suit filed by PDCP.
The Undertaking was precisely executed as a means to obtain
the release of Ortigas and the Scholeys from their previous
obligations as sureties of Falcon, especially considering that
they were already divesting their shares in the corporation.
Specific provisions in the Undertaking obligate petitioners to
work for the release of Ortigas from his surety agreements with
Falcon. Specific provisions likewise mandate the immediate
repayment of Ortigas should he still be made to pay PDCP by
reason of the guaranty agreements from which he was
ostensibly to be released through the efforts of petitioners. None
of these provisions were complied with by petitioners, and Article
2208(2) precisely allows for the recovery of attorneys fees
"[w]hen the defendants act or omission has compelled the
plaintiff to litigate with third persons or to incur expenses to
protect his interest."
Finally, petitioners claim that they should not be liable for interest
since the Undertaking does not contain any stipulation for
interest, and assuming that they are liable, that the rate of
interest should not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals51 set forth the rules with respect to the manner of
computing legal interest:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept
of actual and compensatory damages, the rate of interest, as
well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.52
Since what was the constituted in the Undertaking consisted of
a payment in a sum of money, the rate of interest thereon shall
be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand. The interest rate imposed by the
RTC is thus proper. However, the computation should be
reckoned from judicial or extrajudicial demand. Per records,
there is no indication that Ortigas made any extrajudicial
demand to petitioners and Matti after he paid PDCP, but on 14
March 1994, Ortigas made a judicial demand when he filed a
5
Third-Party Complaint praying that petitioners and Matti be
made to reimburse him for the payments made to PDCP. It is
the filing of this Third Party Complaint on 14 March 1994 that
should be considered as the date of judicial demand from which
the computation of interest should be reckoned. 53 Since the
RTC held that interest should be computed from 28 February
1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order
of the Regional Trial Court dated 5 October 1995 is modified by
declaring that petitioners and Joseph M. Matti are only jointly
liable, not jointly and severally, to respondent Rafael Ortigas, Jr.
in the amount of P1,300,000.00. The Order of the Regional Trial
Court dated 7 March 1996 is MODIFIED in that the legal interest
of 12% per annum on the amount of P1,300,000.00 is to be
computed from 14 March 1994, the date of judicial demand, and
not from 28 February 1994 as directed in the Order of the lower
court. The assailed rulings are affirmed in all other respects.
Costs against petitioners.
SO ORDERED.
G.R. No. 187116 October 18, 2010
ASSET BUILDERS CORPORATION, Petitioner,
vs.
STRONGHOLD INSURANCE COMPANY,
INCORPORATED, Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari under Rule 45 of the 1997
Rules of Civil Procedure assails the February 27, 2009
Decision1 of the Regional Trial Court, Pasig City, Branch
71 (RTC), in Civil Case No. 71034, ordering defendant Lucky
Star to pay petitioner Asset Builders Corporation the sum
of P575,000.00 with damages, but absolving respondent
Stronghold Insurance Company, Incorporated (Stronghold) of
any liability on its Surety Bond and Performance Bond.
THE FACTS
On April 28, 2006, Asset Builders Corporation (ABC) entered
into an agreement with Lucky Star Drilling & Construction
Corporation (Lucky Star) as part of the completion of its project
to construct the ACG Commercial Complex on "NHA Avenue
corner Olalia Street, Barangay Dela Paz, Antipolo City." 2 As can
be gleaned from the "Purchase Order," 3 Lucky Star was to
supply labor, materials, tools, and equipment including technical
supervision to drill one (1) exploratory production well on the
project site. The total contract price for the said project
was P1,150,000.00. The salient terms and conditions of said
agreement are as follows:
i. Lump sum price--------PHP1,150,000.00;
ii. 50% downpayment---upon submission of surety
bond in an equivalent amount and performance bond
equivalent to 30 % of contract amount;
iii. Completion date-----60 calendar days;
iv. Penalty----2/10 of 1% of total contract amount for
every day of delay;
v. Terms---50% down payment to be released after
submission of bonds;
vi. RetentionSubject to 10% retention to be released
after the project is accepted by the owner;
To guarantee faithful compliance with their agreement, Lucky
Star engaged respondent Stronghold which issued two (2)
bonds in favor of petitioner. The first, SURETY BOND G(16) No.
141558, dated May 9, 2006, covers the sum of P575,000.004 or
the required downpayment for the drilling work. The full text of
the surety bond is herein quoted:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION CORP.,
168 ACACIA St., Octagon Industrial Estate Subd., Pasig City as
principal, and STRONGHOLD INSURANCE COMPANY, INC.,
a corporation duly organized and existing under and by virtue of
laws of the Philippines, as surety, are held and firmly bound unto
ASSET BUILDERS CORPORATION to the sum of Pesos FIVE
HUNDRED SEVENTY FIVE THOUSAND ONLY (P575,000.00)
Philippine Currency, for the payment of which, 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:
To fully and faithfully guarantee the repayment to be done
through deductions from periodic billings of the advance
payment made or to be made by the Obligee to the Principal in
connection with the supply of labor, materials, tools and
equipment including technical supervision to drill one (1)
exploratory production well located at NIA Ave. cor. Olalia St.,
Brgy. dela Paz, Antipolo City. This bond is callable on demand.
The liability of the surety company upon determination under
this bond shall in no case exceed the penal sum of PESOS:
FIVE HUNDRED SEVENTY FIVE THOUSAND (P575,000.00)
only, Philippine Currency.
WHEREAS, the Obligee requires said principal to give a good
and sufficient bond in the above stated sum to secure the full
and faithful performance on his part of said undertakings.
NOW, THEREFORE, if the above bounden principal shall in all
respects duly and fully observe and perform all and singular the
aforesaid [co]-venants, conditions and agreements to the true
intent and meaning thereof, then this obligation shall be null and
void, otherwise to remain in full force and effect.
Liability of surety on this bond will expire on May 09, 2007 and
said bond will be cancelled five DAYS after its expiration, unless
surety is notified of and existing obligations hereunder.
x x x5
6
With respect to the second contract, PERFORMANCE BOND
G(13) No. 115388, dated May 09, 2006, it covers the sum
of P345,000.00.6 Thus:
KNOW ALL MEN BY THESE PRESENTS:
That we, LUCKY STAR DRILLING & CONSTRUCTION of 168
Acacia St., Octagon Indl., contractor, of Estate, Sub., Pasig City
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
ASSET BUILDERS CORPORATION and to any individual, firm,
partnership, corporation or association supplying the principal
with labor or materials in the penal sum of THREE HUNDRED
FORTY FIVE THOUSAND ONLY (P345,000.00), 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 ASSET
BUILDERS CORPORATION represented by
_________________, to fully and faithfully.
Comply with the supply of labor, materials, tools and equipment
including technical supervision to drill one (1) exploratory
production well located at NIA Ave. cor. Olalia St., Brgy. Dela
Paz, Antipolo City. This bond is callable on demand.
WHEREAS, the liability of the Surety Company under this bond
shall in no case exceed the sum of PESOS THREE HUNDRED
FORTY FIVE THOUSAND ONLY (P345,000.00) 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 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. x x x
On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2%
withholding tax) as advance payment, representing 50% of the
contract price.7 Lucky Star, thereafter, commenced the drilling
work. By July 18, 2006, just a few days before the agreed
completion date of 60 calendar days, Lucky Star managed to
accomplish only ten (10) % of the drilling work. On the same
date, petitioner sent a demand letter to Lucky Star for the
immediate completion of the drilling work8 with a threat to cancel
the agreement and forfeit the bonds should it still fail to complete
said project within the agreed period.
On August 3, 2006, ABC sent a Notice of Rescission of Contract
with Demand for Damages to Lucky Star.9Pertinent portions of
said notice read:
Pursuant to paragraph 1 of the Terms and Conditions of the
service contract, notice is hereby made on you of the rescission
of the contract and accordingly demand is hereby made on you,
within seven (7) days from receipt hereof:
(1) to refund the down payment of PHP563,500.00,
plus legal interest thereon;
(2) to pay liquidated damages equivalent to 2/10 of 1%
of the contract price for every day of delay, or a total of
PHP138,000.00;
(3) to pay the amount guaranteed by your performance
bond in the amount of PHP345,000.00;
(4) to pay PHP150,000.00 in other consequential
damages;
(5) to pay exemplary damages in the amount of
PHP150,000.00;
(6) to vacate the project site, together with all your men
and equipment.
Should you refuse to comply with our demand within the above
period, we shall be constrained to sue you in court, in which
event we shall demand payment of attorneys fees in the amount
of at least PHP100,000.0.
On August 16, 2006, ABC sent a Notice of Claim for payment to
Stronghold to make good its obligation under its bonds.10
Despite notice, ABC did not receive any reply either from Lucky
Star or Stronghold, prompting it to file its Complaint for
Rescission with Damages against both before the RTC11 on
November 21, 2006.
In its "Answer (with Complusory Counterclaim and Cross-
Claim)," dated January 24, 2007, Stronghold denied any liability
arguing that ABC had not shown any proof that it made an
7
advance payment of 50% of the contract price of the project. It
further averred that ABCs rescission of its contract with Lucky
Star virtually revoked the claims against the two bonds and
absolved them from further liability.12
Lucky Star, on the other hand, failed to file a responsive pleading
within the prescribed period and, thus, was declared in default
by the RTC in its Order dated August 24, 2007.13
On February 27, 2009, the RTC rendered the assailed decision
ordering Lucky Star to pay ABC but absolving Stronghold from
liability.14 Relevant parts of the decision, including the decretal
portion, read:
On the liability of defendant Stronghold Insurance, the Court
rules on the negative.
The surety bond and performance bond executed by defendants
Lucky Star and Stronghold Insurance are in the nature of
accessory contracts which depend for its existence upon
another contract. Thus, when the agreement (Exhibit A)
between the plaintiff and defendant Asset Builders was
rescinded, the surety and performance bond were automatically
cancelled.
WHEREFORE, in view of the foregoing, judgment is hereby
rendered in favor of the plaintiff and against defendant Lucky
Star Drilling & Construction, ordering the latter as follows:
1. to pay plaintiff in the amount of PHP575,000.00 as
actual damages plus legal interest from the filing of the
complaint;
2. to pay plaintiff in the amount of PHP100,000.00 as
liquidated damages;
3. to pay plaintiff in the amount of PHP50,000.00 as
exemplary damages;
4. to pay plaintiff in the amount of PHP 50,000.00 as
attorneys fees;
5. to pay the costs of the suit.
Defendant Stronghold Insurance Company, Inc.s compulsory
counterclaim and cross-claim are dismissed.15
Hence, this petition.
Petitioner ABC prays for the reversal of the challenged decision
based on the following
GROUNDS
A. The Lower Court seriously erred and
unjustly ACTED ARBITRARILY with
manifest bias and grave abuse of
discretion, CONTRARY to applicable
laws and established jurisprudence in declaring
the "automatic CANCELLATION" of respondent
Strongholds Surety Bond and Performance Bond,
because:
(a) Despite rescission, there exists a
continuing VALID PRINCIPAL
OBLIGATION guaranteed by
Respondents Bonds, arising out of the
Contractors DEFAULT and Non-
performance.
(b) Upon breach by its
Principal/contractor, the LIABILITIES of
Respondents bonds had
already ACCRUED, automatically
attached, and had become
already DIRECT,
PRIMARY and ABSOLUTE,even
before Petitioners legitimate exercise of
its option under Art. 1191 of the New Civil
Code.
(c) Rescission does NOT AFFECT the
liabilities of the Respondent Stronghold as
its LIABILITIESon its subject bonds have
already
become INTERWOVEN and INSEPARABL
E with the liabilities of its Principal, the
Contractor Lucky Star.
B. With the Lower Courts completely erroneous
ruling on the liabilities of Respondents bonds, the
Lower Court equally ERRED with manifest bias
and grave abuse, in its FAILURE to comply with the
"duty of court" to make a finding of "unreasonable
denial or withholding" by Respondent Stronghold
or Petitioners claims and impose upon the
Respondent the penalties provided for under
Section 241 and 244 of the Insurance Code.16
Essentially, the primary issue is whether or not respondent
insurance company, as surety, can be held liable under its
bonds.
The Court rules in the affirmative.
Respondent, along with its principal, Lucky Star, bound itself to
the petitioner when it executed in its favor surety and
performance bonds. The contents of the said contracts clearly
establish that the parties entered into a surety agreement as
defined under Article 2047 of the New Civil Code. Thus:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
[Emphasis supplied]
As provided in Article 2047, the surety undertakes to be bound
solidarily with the principal obligor. That undertaking makes a
surety agreement an ancillary contract as it presupposes the
existence of a principal contract. Although the contract of a
surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of
another although it possesses no direct or personal interest over
the obligations nor does it receive any benefit therefrom.17 Let it
be stressed that notwithstanding the fact that the surety contract
8
is secondary to the principal obligation, the surety assumes progress in the drilling work and its failure to complete it in due
liability as a regular party to the undertaking.18 time amount to non-performance of its obligation.

Stronghold Insurance Company, Inc. v. Republic-Asahi Glass In fine, respondent should be answerable to petitioner on
Corporation,19 reiterating the ruling in Garcia v. Court of account of Lucky Stars non-performance of its obligation as
Appeals,20 expounds on the nature of the suretys liability: guaranteed by the performance bond.

X x x. The suretys obligation is not an original and direct one for Finally, Article 121722 of the New Civil Code acknowledges the
the performance of his own act, but merely accessory or right of reimbursement from a co-debtor (the principal co-debtor,
collateral to the obligation contracted by the in case of suretyship) in favor of the one who paid (the surety).
principal. Nevertheless, although the contract of a surety is in Thus, respondent is entitled to reimbursement from Lucky Star
essence secondary only to a valid principal obligation, his for the amount it may be required to pay petitioner arising from
liability to the creditor or promisee of the principal is said its bonds.
to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal. WHEREFORE, the February 27, 2009 Decision of the Regional
Trial Court, Pasig City, Branch 71, is AFFIRMED with
Suretyship, in essence, contains two types of relationship the MODIFICATION. Respondent Stronghold Insurance is hereby
principal relationship between the obligee (petitioner) and the declared jointly and severally liable with Lucky Star for the
obligor (Lucky Star), and the accessory surety relationship payment of P575,000.00 and the payment of P345,000.00 on
between the principal (Lucky Star) and the surety (respondent). the basis of its performance bond.
In this arrangement, the obligee accepts the suretys solidary
undertaking to pay if the obligor does not pay. Such acceptance, SO ORDERED.
however, does not change in any material way the obligees
relationship with the principal obligor. Neither does it make the
surety an active party to the principal obligee-obligor [G.R. No. 15825. November 5, 1920. ]
relationship. Thus, the acceptance does not give the surety the
right to intervene in the principal contract. The suretys role CARMEN CASTELLVI DE HIGGINS and HORACE L.
arises only upon the obligors default, at which time, it can be HIGGINS, Plaintiffs-Appellants, v. GEORGE C.
directly held liable by the obligee for payment as a solidary SELLNER, Defendant-Appellee.
obligor.211avvphi1
Wolfson, Wolfson & Schwarzkopf for Appellants.
In the case at bench, when Lucky Star failed to finish the drilling
Williams & Ferrier for Appellee.
work within the agreed time frame despite petitioners demand
for completion, it was already in delay. Due to this default, Lucky
SYLLABUS
Stars liability attached and, as a necessary consequence,
respondents liability under the surety agreement arose.
1. CONTRACTS; SURETY AND GUARANTY; COMPARATIVE
JURISPRUDENCE CIVIL CODE TRANSLATION IN ENGLISH;
Undeniably, when Lucky Star reneged on its undertaking with FIANZA, TRANSLATION IN ENGLISH. In the original
the petitioner and further failed to return the P575,000.00 Spanish of the Civil Code now in force in the Philippine Islands,
downpayment that was already advanced to it, respondent, as Title XIV of Book IV is entitled "De la Fianza." The Spanish word
surety, became solidarily bound with Lucky Star for the "ficrnza" is translated in the Washington and Walton editions of
repayment of the said amount to petitioner. The clause, "this the Civil Code "security." "Fianza" appears in the Fisher
bond is callable on demand," strongly speaks of respondents translation as "suretyship."cralaw virtua1aw library
primary and direct responsibility to the petitioner.1avvphil
2. ID.; ID.; ID.; ID.; "FIADOR," TRANSLATION IN ENGLISH.
Accordingly, after liability has attached to the principal, the The Spanish word "fiador" is found in all of the English
obligee or, in this case, the petitioner, can exercise the right to translations of the Civil Code as "surety."cralaw virtua1aw library
proceed against Lucky Star or respondent or both. Article 1216
of the New Civil Code states: 3. ID.; ID.; ID.; ID.; SURETYSHIP AND GUARANTY IN THE
CIVIL LAW. The law of guaranty is not treated of by that name
The creditor may proceed against any one of the solidary in the Civil Code, although indirect reference to the same is
debtors or some or all of them simultaneously. The demand made in the Code of Commerce.
made against one of them shall not be an obstacle to those
which may subsequently be directed against the others, so long 4. ID.; ID.; ID.; ID.; ID. In terminology at least, no distinction
as the debt has not been fully collected. is made in the Civil Code between the obligation of a surety and
that of a guarantor.

Contrary to the trial courts ruling, respondent insurance 5. ID.; ID.; ID.; ID.; ID. The substantive law of the Philippines
company was not automatically released from any liability when although having a civil law origin, can be supplemented by a
petitioner resorted to the rescission of the principal contract for reference to the precepts of the law merchant.
failure of the other party to perform its undertaking. Precisely,
the liability of the surety arising from the surety contracts comes 6. ID.; ID.; ID.; DIFFERENCES UNDER AMERICAN LAW. A
to life upon the solidary obligors default. It should be surety and a guarantor are alike in that each promises to answer
emphasized that petitioner had to choose rescission in order to for the debt or default of another.
prevent further loss that may arise from the delay of the progress
of the project. Without a doubt, Lucky Stars unsatisfactory 7. ID.; ID.; ID.; ID. A surety and a guarantor are unlike in that
the surety assumes liability as a regular party to the undertaking,

9
while the liability of the guarantor depends upon an independent
agreement to pay the obligation if the primary payor fails to do
so. A surety is charged as an original promissor; the
engagement of the guarantor is a collateral undertaking. The
obligation of the surety is primary; the obligation of the guarantor
is secondary.
8 ID. ID.; ID.; ID.; CIVIL CODE PROVISIONS COMPARED
WITH AMERICAN DOCTRINE. What the first portion of
article 1822 of the Civil Code provides is somewhat akin to the
contract of guaranty, while what is last provided is practically
equivalent to the contract of suretyship.
9. ID.; ID.; ID.; ID.; ID. When, in subsequent articles found in
section 1 of chapter II of the title concerning fianza of the Civil
Code, the Code speaks of the effects of suretyship between
surety and creditor, it has, in comparison with the common law,
the effect of guaranty between guarantor and creditor.
10 ID.; ID.; ID.; ID.; ID. The civil law suretyship is nearly
synonymous with the common law guaranty; and the civil law
relation existing between codebtors liable in solidum is similar to
the common law suretyship.
11. ID.; ID.; INSTANT CASE. The defendant George C.
Sellner wrote to John T. Macleod, agent of the plaintiff, Mrs.
Horace L. Higgins, on May 31, 1915, a letter of the following
tenor: "Dear Sir: I hereby obligate and bind myself, my heirs,
successors and assigns that if the promissory note executed the
29th day of May, 1915 by the Reystone Mining Co., W. I. Clarke,
and John Maye, jointly and severally, in your favor and due six
months after date for P10,000 is not fully paid at maturity with
interest, I will, within fifteen days after notice of such default, pay
you in cash the sum of P10,000 and interest upon your
surrendering to me the three thousand shares of stock of the
Keystone Mining Co. held by you as security for the payment of
said note." Held: That defendant Sellner is a guarantor within the
meaning of the provisions of the Civil Code.
DECISION
MALCOLM, J. :
This is an action brought by plaintiffs to recover from defendant
from of P10.000. The brief decision of the trial court held that the
suit was premature, and absolved the defendant from the
complaint, with the costs against the plaintiffs.
The basis of plaintiffs action is a letter written by defendant
George C. Sellner to John T. Macleod, agent for Mrs. Horace L.
Higgins, on May 31, 1915, of the following
tenor:jgc:chanrobles.com.ph
"DEAR SIR: I hereby obligate and bind myself, my heirs
successors and assigns that if the promissory note executed the
29th day of May 1915 by the Keystone Mining Co W. H. Clarke,
and John Maye, jointly and severally, in your favor and due six
months after date for P10,000 is not fully paid at maturity with
interest, I will, within fifteen days after notice of such default, pay
you in cash the sum of P10,000 and interest upon your
surrendering to me the three thousand shares of stock of the
Keystone Mining Co. held by you as security for the payment of
said note.
"Respectfully,
(Sgd.) "GEO. C. SELLNER."cralaw virtua1aw library
Counsel for both parties agree that the only point at issue is the
determination of defendants status in the transaction referred
to. Plaintiffs contend that he is a surety; defendant contends that
he is a guarantor. Plaintiffs also admit that if defendant is a
guarantor, articles 1830, 1831, and 1834 of the Civil Code
govern.
In the original Spanish of the Civil Code now in force in the
Philippine Islands, Title XIV of Book IV is entitled "De la Fuenza."
The Spanish word "fianza" is translated in the Washington and
Walton editions of the Civil Code as "security." "Fianza" appears
in the Fisher translation as "suretyship." The Spanish word
"fador" is found in all of the English translations of the Civil Code
as "surety." The law of guaranty is not treated of by that name
in the Civil Code, although indirect reference to the same is
made in the Code of Commerce. In terminology at least, no
distinction is made in the Civil Code between the obligation of a
surety and that of a guarantor.
As has been done in the State of Louisiana, where, like in the
Philippines, the substantive law has a civil law origin, we feel
free to supplement the statutory law by a reference to the
precepts of the law merchant.
The points-of difference between a surety and a guarantor are
familiar to American authorities. A surety and a guarantor are
alike in that each promises to answer for the debt or default of
another. A surety and a guarantor are unlike in that the surety
assumes liability as a regular party to the undertaking, while the
liability of the guarantor depends upon an independent
agreement to pay the obligation if the primary payor fails to do
so. A surety is charged as an original promissor; the
engagement of the guarantor is a collateral undertaking. The
obligation of the surety is primary; the obligation of the guarantor
is secondary. (See U. S. v. Varadero de la Quinta [1919], 40
Phil., 48; Lachman v. Block [1894], 46 La. Ann., 649; Bedford v.
Kelley [1913], 173 Mich., 492; Brandt, on Suretyship and
Guaranty, sec. 1, cited approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according
to article 1822 "By fianza (security or suretyship) one person
binds himself to pay or perform for a third person in case the
latter should fail to do so." But "If the surety binds himself in
solidum with the principal debtor, the provisions of Section
fourth, Chapter third, Title first, shall be applicable." What the
first portion of the cited article provides is, consequently, seen
to be somewhat akin to the contract of guaranty, while what is
last provided is practically equivalent to the contract of
suretyship. When in subsequent articles found in section 1 of
Chapter II of the title concerning fianza, the Code speaks of the
effects of Suretyship between surety and creditor, it has, in
comparison with the common law, the effect of guaranty
between guarantor and creditor. The civil law suretyship is,
accordingly, nearly synonymous with the common law guaranty;
and the civil law relationship existing between codebtors le in
solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was
simply that of a guarantor, or, to be more precise, of the fiador
whose responsibility is fixed in the Civil Code. The letter of Mr.
Sellner recites that if the promissory note is not paid at maturity,
then, within fifteen days after notice of such default and upon
surrender to him if the three thousand shares of Keystone
Mining Company stock, he will assume responsibility. Sellner is
not bound with the principals by the same instrument executed
at the same time and on the same consideration, but his
responsibility is a secondary one found in an independent
10
collateral agreement. Neither is Sellner jointly and severally
liable with the principal debtors.
With particular reference, therefore, to appellants assignments
of error, we hold that defendant Sellner is a guarantor within the
meaning of the provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces
this conclusion. The note executed by the Key stone Mining
Company matured on November 29, 1916. Interest on the note
was not accepted by the makers until September 30, 1916.
When the note became due, it is admitted that the shares of
stock used as collateral security were selling at par; that is, they
were worth P30,000. Notice that the note had not been paid was
not given to the defendant until just about three years, after it
matured and when the Keystone Mining Company stock was
worthless. Defendant, consequently, through the laches of
plaintiff, has lost possible chance to recoup, through the sale of
the stock, any amount which he might be compelled to pay as a
surety or guarantor. The "indulgence," as this word is used in
the law of guaranty, of the creditors of the principal, as
evidenced by the acceptance of interest, and by failure promptly
to notify the guarantor, may thus have served to discharge the
guarantor.
For quite different reasons, which, nevertheless, arrive at the
same result, judgment is affirmed, with costs of this instance
against the appellants. So ordered.
G.R. No. L-16666 April 10, 1922
ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE
ISLANDS, defendant-appellant
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 cross-
defendant 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 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
11
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 cross-
complainant, the Hospicio de San Jose, may have after
exhausting its remedy against the plaintiff Machetti. So ordered.

12

PART VII. GUARANTY AND SURETYSHIP (CONTINUATION)
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds
herself to be jointly and severally liable with the principal debtor
in case the latter defaults in the payment of the loan, is such
undertaking of the former deemed to be that of a surety as an
insurer of the debt, or of a guarantor who warrants the solvency
of the debtor?
Pursuant to a promissory note dated March 13, 1990, private
respondent M.B. Lending Corporation extended a loan to the
spouses Osmea and Merlyn Azarraga, together with petitioner
Estrella Palmares, in the amount of P30,000.00 payable on or
before May 12, 1990, with compounded interest at the rate of
6% per annum to be computed every 30 days from the date
thereof.1 On four occasions after the execution of the promissory
note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00,
thereby leaving a balance of P13,700.00. No payments were
made after the last payment on September 26, 1991.2
Consequently, on the basis of petitioner's solidary liability under
the promissory note, respondent corporation filed a
complaint3 against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal debtors, allegedly by
reason of the insolvency of the latter.
In her Amended Answer with Counterclaim,4 petitioner alleged
that sometime in August 1990, immediately after the loan
matured, she offered to settle the obligation with respondent
corporation but the latter informed her that they would try to
collect from the spouses Azarraga and that she need not worry
about it; that there has already been a partial payment in the
amount of P17,010.00; that the interest of 6% per month
compounded at the same rate per month, as well as the penalty
charges of 3% per month, are usurious and unconscionable;
and that while she agrees to be liable on the note but only upon
default of the principal debtor, respondent corporation acted in
bad faith in suing her alone without including the Azarragas
when they were the only ones who benefited from the proceeds
of the loan.
During the pre-trial conference, the parties submitted the
following issues for the resolution of the trial court: (1) what the
rate of interest, penalty and damages should be; (2) whether the
liability of the defendant (herein petitioner) is primary or
subsidiary; and (3) whether the defendant Estrella Palmares is
only a guarantor with a subsidiary liability and not a co-maker
with primary liability.5
Thereafter, the parties agreed to submit the case for decision
based on the pleadings filed and the memoranda to be
submitted by them. On November 26, 1992, the Regional Trial
Court of Iloilo City, Branch 23, rendered judgment dismissing the
complaint without prejudice to the filing of a separate action for
a sum of money against the spouses Osmea and Merlyn
Azarraga who are primarily liable on the instrument. 6 This was
based on the findings of the court a quo that the filing of the
complaint against herein petitioner Estrella Palmares, to the
exclusion of the Azarraga spouses, amounted to a discharge of
a prior party; that the offer made by petitioner to pay the
obligation is considered a valid tender of payment sufficient to
discharge a person's secondary liability on the instrument; as
co-maker, is only secondarily liable on the instrument; and that
the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision
of the trial court, and rendered judgment declaring herein
petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding
balance still due and owing with interest at six percent
(6%) per month computed from the date the loan was
contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three
percent (3%) per month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per
stipulations;
4. Plus costs of suit.7
Contrary to the findings of the trial court, respondent appellate
court declared that petitioner Palmares is a surety since she
bound herself to be jointly and severally or solidarily liable with
the principal debtors, the Azarraga spouses, when she signed
as a co-maker. As such, petitioner is primarily liable on the note
and hence may be sued by the creditor corporation for the entire
obligation. It also adverted to the fact that petitioner admitted her
liability in her Answer although she claims that the Azarraga
spouses should have been impleaded. Respondent court
ordered the imposition of the stipulated 6% interest and 3%
penalty charges on the ground that the Usury Law is no longer
enforceable pursuant to Central Bank Circular No. 905. Finally,
it rationalized that even if the promissory note were to be
considered as a contract of adhesion, the same is not entirely
prohibited because the one who adheres to the contract is free
to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted
that:
A. The Court of Appeals erred in ruling that Palmares
acted as surety and is therefore solidarily liable to pay
the promissory note.
1. The terms of the promissory note are vague. Its
conflicting provisions do not establish Palmares'
solidary liability.
2. The promissory note contains provisions which
establish the co-maker's liability as that of a guarantor.
3. There is no sufficient basis for concluding that
Palmares' liability is solidary.
13
 4. The promissory note is a contract of adhesion and
should be construed against M. B. Lending
Corporation.
5. Palmares cannot be compelled to pay the loan at this
point.
B. Assuming that Palmares' liability is solidary, the
Court of Appeals erred in strictly imposing the interests
and penalty charges on the outstanding balance of the
promissory note.
The foregoing contentions of petitioner are denied and
contradicted in their material points by respondent corporation.
They are further refuted by accepted doctrines in the American
jurisdiction after which we patterned our statutory law on surety
and guaranty. This case then affords us the opportunity to make
an extended exposition on the ramifications of these two
specialized contracts, for such guidance as may be taken
therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory
note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the
above-quoted loan, have fully understood the contents
of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly
and severally or solidarily liable with the above
principal maker of this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above
loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to
the same conditions above-contained.8
Petitioner contends that the provisions of the second and third
paragraph are conflicting in that while the second paragraph
seems to define her liability as that of a surety which is joint and
solidary with the principal maker, on the other hand, under the
third paragraph her liability is actually that of a mere guarantor
because she bound herself to fulfill the obligation only in case
the principal debtor should fail to do so, which is the essence of
a contract of guaranty. More simply stated, although the second
paragraph says that she is liable as a surety, the third paragraph
defines the nature of her liability as that of a guarantor.
According to petitioner, these are two conflicting provisions in
the promissory note and the rule is that clauses in the contract
should be interpreted in relation to one another and not by parts.
In other words, the second paragraph should not be taken in
isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as
a guarantor for several reasons. First, the words "jointly and
severally or solidarily liable" used in the second paragraph are
technical and legal terms which are not fully appreciated by an
ordinary layman like herein petitioner, a 65-year old housewife
who is likely to enter into such transactions without fully realizing
the nature and extent of her liability. On the contrary, the
wordings used in the third paragraph are easier to
comprehend. Second, the law looks upon the contract of
suretyship with a jealous eye and the rule is that the obligation
of the surety cannot be extended by implication beyond
specified limits, taking into consideration the peculiar nature of
a surety agreement which holds the surety liable despite the
absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a
contract of adhesion since it was prepared by respondent M.B.
Lending Corporation. The note was brought to petitioner partially
filled up, the contents thereof were never explained to her, and
her only participation was to sign thereon. Thus, any apparent
ambiguity in the contract should be strictly construed against
private respondent pursuant to Art. 1377 of the Civil Code. 9
Petitioner accordingly concludes that her liability should be
deemed restricted by the clause in the third paragraph of the
promissory note to be that of a guarantor.
Moreover, petitioner submits that she cannot as yet be
compelled to pay the loan because the principal debtors cannot
be considered in default in the absence of a judicial or
extrajudicial demand. It is true that the complaint alleges the fact
of demand, but the purported demand letters were never
attached to the pleadings filed by private respondent before the
trial court. And, while petitioner may have admitted in her
Amended Answer that she received a demand letter from
respondent corporation sometime in 1990, the same did not
effectively put her or the principal debtors in default for the
simple reason that the latter subsequently made a partial
payment on the loan in September, 1991, a fact which was never
controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in
awarding the amount of P2,745,483.39 in favor of private
respondent when, in truth and in fact, the outstanding balance
of the loan is only P13,700.00. Where the interest charged on
the loan is exorbitant, iniquitous or unconscionable, and the
obligation has been partially complied with, the court may
equitably reduce the penalty10 on grounds of substantial justice.
More importantly, respondent corporation never refuted
petitioner's allegation that immediately after the loan matured,
she informed said respondent of her desire to settle the
obligation. The court should, therefore, mitigate the damages to
be paid since petitioner has shown a sincere desire for a
compromise.11
After a judicious evaluation of the arguments of the parties, we
are constrained to dismiss the petition for lack of merit, but to
except therefrom the issue anent the propriety of the monetary
award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even
assuming arguendo that the promissory note executed between
the parties is a contract of adhesion, it has been the consistent
holding of the Court that contracts of adhesion are not invalid per
se and that on numerous occasions the binding effects thereof
have been upheld. The peculiar nature of such contracts
necessitate a close scrutiny of the factual milieu to which the
provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such
contracts, the Court has construed obscurities and ambiguities
in the restrictive provisions of contracts of adhesion strictly albeit
not unreasonably against the drafter thereof when justified in
light of the operative facts and surrounding
circumstances.12 The factual scenario obtaining in the case
before us warrants a liberal application of the rule in favor of
respondent corporation.
14
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor
binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do
so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract
is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the
terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulation shall control.13 In the case at bar, petitioner expressly
bound herself to be jointly and severally or solidarily liable with
the principal maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner's liability is that of
a surety.
Her pretension that the terms "jointly and severally or solidarily
liable" contained in the second paragraph of her contract are
technical and legal terms which could not be easily understood
by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the
contents" of the promissory note and that she is "fully aware" of
her solidary liability with the principal maker. Petitioner admits
that she voluntarily affixed her signature thereto; ergo, she
cannot now be heard to claim otherwise. Any reference to the
existence of fraud is unavailing. Fraud must be established by
clear and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's attempt to prove
fraud must, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.14
Having entered into the contract with full knowledge of its terms
and conditions, petitioner is estopped to assert that she did so
under a misapprehension or in ignorance of their legal effect, or
as to the legal effect of the undertaking.15 The rule that
ignorance of the contents of an instrument does not ordinarily
affect the liability of one who signs it also applies to contracts of
suretyship. And the mistake of a surety as to the legal effect of
her obligation is ordinarily no reason for relieving her of liability.16
Petitioner would like to make capital of the fact that although she
obligated herself to be jointly and severally liable with the
principal maker, her liability is deemed restricted by the
provisions of the third paragraph of her contract wherein she
agreed "that M.B. Lending Corporation may demand payment of
the above loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note," which makes her
contract one of guaranty and not suretyship. The purported
discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an
insurer of the solvency of the debtor. 17 A suretyship is an
undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. 18 Stated differently, a
surety promises to pay the principal's debt if the principal will not
pay, while a guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the guarantor if the
principal is unable to pay.19 A surety binds himself to perform if
the principal does not, without regard to his ability to do so. A
guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. 20 In other words, a
surety undertakes directly for the payment and is so responsible
at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot
be made out of the principal debtor.21
Quintessentially, the undertaking to pay upon default of the
principal debtor does not automatically remove it from the ambit
of a contract of suretyship. The second and third paragraphs of
the aforequoted portion of the promissory note do not contain
any other condition for the enforcement of respondent
corporation's right against petitioner. It has not been shown,
either in the contract or the pleadings, that respondent
corporation agreed to proceed against herein petitioner only if
and when the defaulting principal has become insolvent. A
contract of suretyship, to repeat, is that wherein one lends his
credit by joining in the principal debtor's obligation, so as to
render himself directly and primarily responsible with him, and
without reference to the solvency of the principal.22
In a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds
that when the meaning of a contract of indemnity or guaranty
has once been judicially determined under the rule of
reasonable construction applicable to all written contracts, then
the liability of the surety, under his contract, as thus interpreted
and construed, is not to be extended beyond its strict
meaning.23 The rule, however, will apply only after it has been
definitely ascertained that the contract is one of suretyship and
not a contract of guaranty. It cannot be used as an aid in
determining whether a party's undertaking is that of a surety or
a guarantor.
Prescinding from these jurisprudential authorities, there can be
no doubt that the stipulation contained in the third paragraph of
the controverted suretyship contract merely elucidated on and
made more specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly, the theory
advanced by petitioner, that she is merely a guarantor because
her liability attaches only upon default of the principal debtor,
must necessarily fail for being incongruent with the judicial
pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of
the contracting parties, their contemporaneous and subsequent
acts shall also be principally considered. 24 Several attendant
factors in that genre lend support to our finding that petitioner is
a surety. For one, when petitioner was informed about the failure
of the principal debtor to pay the loan, she immediately offered
to settle the account with respondent corporation. Obviously, in
her mind, she knew that she was directly and primarily liable
upon default of her principal. For another, and this is most
revealing, petitioner presented the receipts of the payments
already made, from the time of initial payment up to the last,
which were all issued in her name and of the Azarraga
spouses.25 This can only be construed to mean that the
payments made by the principal debtors were considered by
respondent corporation as creditable directly upon the account
and inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's obligation with that of
her principals only goes to show that, from the very start,
petitioner considered herself equally bound by the contract of
the principal makers.
In this regard, we need only to reiterate the rule that a surety is
bound equally and absolutely with the principal, 26and as such is
deemed an original promisor and debtor from the
beginning.27 This is because in suretyship there is but one
contract, and the surety is bound by the same agreement which
15
binds the principal.28 In essence, the contract of a surety starts
with the agreement,29 which is precisely the situation obtaining
in this case before the Court.
It will further be observed that petitioner's undertaking as co-
maker immediately follows the terms and conditions stipulated
between respondent corporation, as creditor, and the principal
obligors. A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same
consideration; he is an original debtor, and his liability is
immediate and direct.30 Thus, it has been held that where a
written agreement on the same sheet of paper with and
immediately following the principal contract between the buyer
and seller is executed simultaneously therewith, providing that
the signers of the agreement agreed to the terms of the principal
contract, the signers were "sureties" jointly liable with the
buyer.31 A surety usually enters into the same obligation as that
of his principal, and the signatures of both usually appear upon
the same instrument, and the same consideration usually
supports the obligation for both the principal and the surety.32
There is no merit in petitioner's contention that the complaint
was prematurely filed because the principal debtors cannot as
yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation.
Petitioner has agreed that respondent corporation may demand
payment of the loan from her in case the principal maker
defaults, subject to the same conditions expressed in the
promissory note. Significantly, paragraph (G) of the note states
that "should I fail to pay in accordance with the above schedule
of payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in order
that delay may exist since the contract itself already expressly
so declares.33 As a surety, petitioner is equally bound by such
waiver.
Even if it were otherwise, demand on the sureties is not
necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand. 34 On this
point, it may be worth mentioning that a surety is not even
entitled, as a matter of right, to be given notice of the principal's
default. Inasmuch as the creditor owes no duty of active
diligence to take care of the interest of the surety, his mere
failure to voluntarily give information to the surety of the default
of the principal cannot have the effect of discharging the surety.
The surety is bound to take notice of the principal's default and
to perform the obligation. He cannot complain that the creditor
has not notified
him in the absence of a special agreement to that effect in the
contract of suretyship.35
The alleged failure of respondent corporation to prove the fact
of demand on the principal debtors, by not attaching copies
thereof to its pleadings, is likewise immaterial. In the absence of
a statutory or contractual requirement, it is not necessary that
payment or performance of his obligation be first demanded of
the principal, especially where demand would have been
useless; nor is it a requisite, before proceeding against the
sureties, that the principal be called on to account.36 The
underlying principle therefor is that a suretyship is a direct
contract to pay the debt of another. A surety is liable as much as
his principal is liable, and absolutely liable as soon as default is
made, without any demand upon the principal whatsoever or
any notice of default.37 As an original promisor and debtor from
the beginning, he is held ordinarily to know every default of his
principal.38
Petitioner questions the propriety of the filing of a complaint
solely against her to the exclusion of the principal debtors who
allegedly were the only ones who benefited from the proceeds
of the loan. What petitioner is trying to imply is that the creditor,
herein respondent corporation, should have proceeded first
against the principal before suing on her obligation as surety.
We disagree.
A creditor's right to proceed against the surety exists
independently of his right to proceed against the
principal.39Under Article 1216 of the Civil Code, the creditor may
proceed against any one of the solidary debtors or some or all
of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to
proceed even against the surety alone.40 Since, generally, it is
not necessary for the creditor to proceed against a principal in
order to hold the surety liable, where, by the terms of the
contract, the obligation of the surety is the same that of the
principal, then soon as the principal is in default, the surety is
likewise in default, and may be sued immediately and before any
proceedings are had against the principal. 41 Perforce, in
accordance with the rule that, in the absence of statute or
agreement otherwise, a surety is primarily liable, and with the
rule that his proper remedy is to pay the debt and pursue the
principal for reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any agreement
limiting the application of the security, require the creditor or
obligee, before proceeding against the surety, to resort to and
exhaust his remedies against the principal, particularly where
both principal and surety are equally bound.42
We agree with respondent corporation that its mere failure to
immediately sue petitioner on her obligation does not release
her from liability. Where a creditor refrains from proceeding
against the principal, the surety is not exonerated. In other
words, mere want of diligence or forbearance does not affect the
creditor's rights vis-a-vis the surety, unless the surety requires
him by appropriate notice to sue on the obligation. Such
gratuitous indulgence of the principal does not discharge the
surety whether given at the principal's request or without it, and
whether it is yielded by the creditor through sympathy or from an
inclination to favor the principal, or is only the result of
passiveness. The neglect of the creditor to sue the principal at
the time the debt falls due does not discharge the surety, even
if such delay continues until the principal becomes
insolvent.43 And, in the absence of proof of resultant injury, a
surety is not discharged by the creditor's mere statement that
the creditor will not look to the surety,44 or that he need not
trouble himself.45 The consequences of the delay, such as the
subsequent insolvency of the principal,46 or the fact that the
remedies against the principal may be lost by lapse of time, are
immaterial.47
The raison d'tre for the rule is that there is nothing to prevent
the creditor from proceeding against the principal at any
time.48 At any rate, if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of his principal,
he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor.49
It may not be amiss to add that leniency shown to a debtor in
default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the
surety.50 In order to constitute an extension discharging the
surety, it should appear that the extension was for a definite
period, pursuant to an enforceable agreement between the
principal and the creditor, and that it was made without the
16
consent of the surety or with a reservation of rights with respect
to him. The contract must be one which precludes the creditor
from, or at least hinders him in, enforcing the principal contract
within the period during which he could otherwise have enforced
it, and which precludes the surety from paying the debt.51
None of these elements are present in the instant case. Verily,
the mere fact that respondent corporation gave the principal
debtors an extended period of time within which to comply with
their obligation did not effectively absolve here in petitioner from
the consequences of her undertaking. Besides, the burden is on
the surety, herein petitioner, to show that she has been
discharged by some act of the creditor, 52 herein respondent
corporation, failing in which we cannot grant the relief prayed
for.
As a final issue, petitioner claims that assuming that her liability
is solidary, the interests and penalty charges on the outstanding
balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that
respondent corporation intentionally delayed the collection of
the loan in order that the interests and penalty charges would
accumulate. The statement, likewise traversed by said
respondent, is misleading.
In an affidavit53 executed by petitioner, which was attached to
her petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn
that Merlyn Azarraga's loan has been released and that
she has not paid the same upon its maturity. I received
a telephone call from Mr. Augusto Banusing of MB
Lending informing me of this fact and of my liability
arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from
Merlyn and Osmea Azarraga. At the same time, I
offered to pay MB Lending the outstanding balance of
the principal obligation should he fail to collect from
Merlyn and Osmea Azarraga. Mr. Banusing advised
me not to worry because he will try to collect first from
Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from
the secretary of Mr. Banusing who reminded that the
loan of Merlyn and Osmea Azarraga, together with
interest and penalties thereon, has not been paid.
Since I had no available funds at that time, I offered to
pay MB Lending by delivering to them a parcel of land
which I own. Mr. Banusing's secretary, however,
refused my offer for the reason that they are not
interested in real estate.
11. In March 1992, I received a copy of the summons
and of the complaint filed against me by MB Lending
before the RTC-Iloilo. After learning that a complaint
was filed against me, I instructed Sheila Gatia to go to
MB Lending and reiterate my first offer to pay the
outstanding balance of the principal obligation of
Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing
who referred her to Atty. Venus, counsel of MB
Lending.
13. Atty. Venus informed Ms. Gatia that he will consult
Mr. Banusing if my offer to pay the outstanding balance
of the principal obligation loan (sic) of Merlyn and
Osmea Azarraga is acceptable. Later, Atty. Venus
informed Ms. Gatia that my offer is not acceptable to
Mr. Banusing.
The purported offer to pay made by petitioner can not be
deemed sufficient and substantial in order to effectively
discharge her from liability. There are a number of
circumstances which conjointly inveigh against her aforesaid
theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. It was petitioner who
initially requested that the creditor try to collect from her principal
first, and she offered to pay only in case the creditor fails to
collect. The delay, if any, was occasioned by the fact that
respondent corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual offer of payment
to speak of but only a commitment to pay if the principal does
not pay.
2. Petitioner made a second attempt to settle the obligation by
offering a parcel of land which she owned. Respondent
corporation was acting well within its rights when it refused to
accept the offer. The debtor of a thing cannot compel the creditor
to receive a different one, although the latter may be of the same
value, or more valuable than that which is due.54 The obligee is
entitled to demand fulfillment of the obligation or performance as
stipulated. A change of the object of the obligation would
constitute novation requiring the express consent of the
parties.55
3. After the complaint was filed against her, petitioner reiterated
her offer to pay the outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise rejected.
Again, respondent corporation cannot be blamed for refusing
the amount being offered because it fell way below the amount
it had computed, based on the stipulated interests and penalty
charges, as owing and due from herein petitioner. A debt shall
not be understood to have been paid unless the thing or service
in which the obligation consists has been completely delivered
or rendered, as the case may be.56 In other words, the prestation
must be fulfilled completely. A person entering into a contract
has a right to insist on its performance in all particulars.57
Petitioner cannot compel respondent corporation to accept the
amount she is willing to pay because the moment the latter
accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection,
then the obligation shall be deemed fully complied
with.58 Precisely, this is what respondent corporation wanted to
avoid when it continually refused to settle with petitioner at less
than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the
penalty charge of 3% per month and attorney's fees equivalent
to 25% of the total amount due are highly inequitable and
unreasonable.
It must be remembered that from the principal loan of
P30,000.00, the amount of P16,300.00 had already been paid
even before the filing of the present case. Article 1229 of the
Civil Code provides that the court shall equitably reduce the
penalty when the principal obligation has been partly or
irregularly complied with by the debtor. And, even if there has
17
been no performance, the penalty may also be reduced if it is
iniquitous or leonine.
In a case previously decided by this Court which likewise
involved private respondent M.B. Lending Corporation, and
which is substantially on all fours with the one at bar, we decided
to eliminate altogether the penalty interest for being excessive
and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the
Court of Appeals that the economic impact of the
penalty interest of three percent (3 %) per month on
total amount due but unpaid should be equitably
reduced. The purpose for which the penalty interest is
intended that is, to punish the obligor will have
been sufficiently served by the effects of compounded
interest. Under the exceptional circumstances in the
case at bar, e.g., the original amount loaned was only
P15,000.00; partial payment of P8,600.00 was made
on due date; and the heavy (albeit still lawful) regular
compensatory interest, the penalty interest stipulated
in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further
by eliminating such penalty interest altogether.59
Accordingly, the penalty interest of 3% per month being imposed
on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court
has previously ruled that even with an agreement thereon
between the parties, the court may nevertheless reduce such
attorney's fees fixed in the contract when the amount thereof
appears to be unconscionable or unreasonable.60 To that end, it
is not even necessary to show, as in other contracts, that it is
contrary to morals or public policy.61 The grant of attorney's fees
equivalent to 25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal unpaid
amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore,
hold that the amount of P10,000.00 as and for attorney's fee
would be sufficient in this case.62
WHEREFORE, the judgment appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the penalty
interest of 3% per month is hereby deleted and the award of
attorney's fees is reduced to P10,000.00.
SO ORDERED.
G.R. No. 189563 April 7, 2014
GILAT SATELLITE NETWORKS, LTD., Petitioner,
vs.
UNITED COCONUT PLANTERS BANK GENERAL
INSURANCE CO., INC., Respondent.
DECISION
SERENO, CJ:
This is an appeal via a Petition for Review on Certiorari1 filed 6
November 2009 assailing the Decision2 and Resolution3 of the
Court of Appeals (CA) in CA-G.R. CV No. 89263, which
reversed the Decision4 of the Regional Trial Court (RTC),
Branch 141, Makati City in Civil Case No. 02-461, ordering
respondent to pay petitioner a sum of money.
The antecedent facts, as culled from the CA, are as follows:
On September 15, 1999, One Virtual placed with GILAT a
purchase order for various telecommunications equipment (sic),
accessories, spares, services and software, at a total purchase
price of Two Million One Hundred Twenty Eight Thousand Two
Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase
price for the goods delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in accordance with the
payment schedule dated 22 November 1999. To ensure the
prompt payment of this amount, it obtained defendant UCPB
General Insurance Co., Inc.s surety bond dated 3 December
1999, in favor of GILAT.
During the period between [sic] September 1999 and June
2000, GILAT shipped and delivered to One Virtual the
purchased products and equipment, as evidenced by airway
bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of the
equipment (including the software components for which
payment was secured by the surety bond, was shipped by
GILAT and duly received by One Virtual. Under an endorsement
dated December 23, 1999 (Exhibit "E"), the surety issued, with
One Virtuals conformity, an amendment to the surety bond,
Annex "A" thereof, correcting its expiry date from May 30, 2001
to July 30, 2001.
One Virtual failed to pay GILAT the amount of Four Hundred
Thousand Dollars (US$400,000.00) on the due date of May 30,
2000 in accordance with the payment schedule attached as
Annex "A" to the surety bond, prompting GILAT to write the
surety defendant UCPB on June 5, 2000, a demand letter
(Exhibit "G") for payment of the said amount of US$400,000.00.
No part of the amount set forth in this demand has been paid to
date by either One Virtual or defendant UCPB. One Virtual
likewise failed to pay on the succeeding payment instalment
date of 30 November 2000 as set out in Annex "A" of the surety
bond, prompting GILAT to send a second demand letter dated
January 24, 2001, for the payment of the full amount of
US$1,200,000.00 guaranteed under the surety bond, plus
interests and expenses (Exhibits "H") and which letter was
received by the defendant surety on January 25, 2001.
However, defendant UCPB failed to settle the amount of
US$1,200,000.00 or a part thereof, hence, the instant
complaint."5 (Emphases in the original)
On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a
Complaint6 against respondent UCPB General Insurance Co.,
Inc., to recover the amounts supposedly covered by the surety
bond, plus interests and expenses. After due hearing, the RTC
rendered its Decision,7 the dispositive portion of which is herein
quoted:
WHEREFORE, premises considered, the Court hereby renders
judgment for the plaintiff, and against the defendant, ordering,
to wit:
1. The defendant surety to pay the plaintiff the amount
of One Million Two Hundred Thousand Dollars
(US$1,200,000.00) representing the principal debt
under the Surety Bond, with legal interest thereon at
the rate of 12% per annum computed from the time the
judgment becomes final and executory until the
obligation is fully settled; and
18
 2. The defendant surety to pay the plaintiff the amount
of Forty Four Thousand Four Dollars and Four Cents
(US$44,004.04) representing attorneys fees and
litigation expenses.
Accordingly, defendants counterclaim is hereby dismissed for
want of merit.
SO ORDERED. (Emphasis in the original)
In so ruling, the RTC reasoned that there is "no dispute that
plaintiff [petitioner] delivered all the subject equipments [sic] and
the same was installed. Even with the delivery and installation
made, One Virtual failed to pay any of the payments agreed
upon. Demand notwithstanding, defendant failed and refused
and continued to fail and refused to settle the obligation." 8
Considering that its liability was indeed that of a surety, as
"spelled out in the Surety Bond executed by and between One
Virtual as Principal, UCPB as Surety and GILAT as
Creditor/Bond Obligee,"9 respondent agreed and 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 Surety Bond and Payment Milestones. 10
Insofar as the interests were concerned, the RTC denied
petitioners claim on the premise that while a surety can be held
liable for interest even if it becomes more onerous than the
principal obligation, the surety shall only accrue when the delay
or refusal to pay the principal obligation is without any justifiable
cause.11 Here, respondent failed to pay its surety obligation
because of the advice of its principal (One Virtual) not to
pay.12 The RTC then obligated respondent to pay petitioner the
amount of USD1,200,000.00 representing the principal debt
under the Surety Bond, with legal interest at the rate of 12% per
annum computed from the time the judgment becomes final and
executory, and USD44,004.04 representing attorneys fees and
litigation expenses.
On 18 October 2007, respondent appealed to the CA. 13 The
appellate court rendered a Decision14 in the following manner:
WHEREFORE, this appealed case is DISMISSED for lack of
jurisdiction. The trial courts Decision dated December 28, 2006
is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd.,
and One Virtual are ordered to proceed to arbitration, the
outcome of which shall necessary bind the parties, including the
surety, defendant-appellant United Coconut Planters Bank
General Insurance Co., Inc.
SO ORDERED. (Emphasis in the original)
The CA ruled that in "enforcing a surety contract, the
complementary-contracts-construed-together doctrine finds
application." According to this doctrine, the accessory contract
must be construed with the principal agreement. 15In this case,
the appellate court considered the Purchase Agreement entered
into between petitioner and One Virtual as the principal
contract,16 whose stipulations are also binding on the parties to
the suretyship.17 Bearing in mind the arbitration clause
contained in the Purchase Agreement18 and pursuant to the
policy of the courts to encourage alternative dispute resolution
methods,19 the trial courts Decision was vacated; petitioner and
One Virtual were ordered to proceed to arbitration.
On 9 September 2008, petitioner filed a Motion for
Reconsideration with Motion for Oral Argument. The motion was
denied for lack of merit in a Resolution20 issued by the CA on 16
September 2009.
Hence, the instant Petition.
On 31 August 2010, respondent filed a Comment21 on the
Petition for Review. On 24 November 2010, petitioner filed a
Reply.22
ISSUES
From the foregoing, we reduce the issues to the following:
1. Whether or not the CA erred in dismissing the case
and ordering petitioner and One Virtual to arbitrate; and
2. Whether or not petitioner is entitled to legal interest
due to the delay in the fulfilment by respondent of its
obligation under the Suretyship Agreement.
THE COURTS RULING
The existence of a suretyship agreement does not give the
surety the right to intervene in the principal contract, nor can an
arbitration clause between the buyer and the seller be invoked
by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate that no court can
compel arbitration, unless a party entitled to it applies for this
relief.23 This referral, however, can only be demanded by one
who is a party to the arbitration agreement.24 Considering that
neither petitioner nor One Virtual has asked for a referral, there
is no basis for the CAs order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code 25 clearly
provide that the creditor may proceed against the surety without
having first sued the principal debtor.26 Even the Surety
Agreement itself states that respondent becomes liable upon
"mere failure of the Principal to make such prompt
payment."27 Thus, petitioner should not be ordered to make a
separate claim against One Virtual (via arbitration) before
proceeding against respondent.28
On the other hand, respondent maintains that a surety contract
is merely an accessory contract, which cannot exist without a
valid obligation.29 Thus, the surety may avail itself of all the
defenses available to the principal debtor and inherent in the
debt30 that is, the right to invoke the arbitration clause in the
Purchase Agreement.
We agree with petitioner.
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 surety agreement an ancillary contract, as
it presupposes the existence of a principal
contract.31 Nevertheless, although the contract of a surety 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 is directly and
equally bound with the principal.32 He becomes liable for the
debt and duty of the principal obligor, even without possessing
19
a direct or personal interest in the obligations constituted by the
latter.33Thus, a surety is not entitled to a separate notice of
default or to the benefit of excussion.34 It may in fact be sued
separately or together with the principal debtor.35
After a thorough examination of the pieces of evidence
presented by both parties,36 the RTC found that petitioner had
delivered all the goods to One Virtual and installed them.
Despite these compliances, One Virtual still failed to pay its
obligation,37 triggering respondents liability to petitioner as the
formers surety.1wphi1 In other words, the failure of One
Virtual, as the principal debtor, to fulfill its monetary obligation to
petitioner gave the latter an immediate right to pursue
respondent as the surety.
Consequently, we cannot sustain respondents claim that the
Purchase Agreement, being the principal contract to which the
Suretyship Agreement is accessory, must take precedence over
arbitration as the preferred mode of settling disputes.
First, we have held in Stronghold Insurance Co. Inc. v. Tokyu
Construction Co. Ltd.,38 that "[the] acceptance [of a surety
agreement], however, does not change in any material way the
creditors relationship with the principal debtor nor does it make
the surety an active party to the principal creditor-debtor
relationship. In other words, the acceptance does not give the
surety the right to intervene in the principal contract. The suretys
role arises only upon the debtors default, at which time, it can
be directly held liable by the creditor for payment as a solidary
obligor." Hence, the surety remains a stranger to the Purchase
Agreement. We agree with petitioner that respondent cannot
invoke in its favor the arbitration clause in the Purchase
Agreement, because it is not a party to that contract. 39 An
arbitration agreement being contractual in nature, 40 it is binding
only on the parties thereto, as well as their assigns and heirs.41
Second, Section 24 of Republic Act No. 928542 is clear in stating
that a referral to arbitration may only take place "if at least one
party so requests not later than the pre-trial conference, or upon
the request of both parties thereafter." Respondent has not
presented even an iota of evidence to show that either petitioner
or One Virtual submitted its contesting claim for arbitration.
Third, sureties do not insure the solvency of the debtor, but
rather the debt itself.43 They are contracted precisely to mitigate
risks of non-performance on the part of the obligor. This
responsibility necessarily places a surety on the same level as
that of the principal debtor.44 The effect 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.45 To require the creditor to proceed to arbitration would
render the very essence of suretyship nugatory and diminish its
value in commerce. At any rate, as we have held in Palmares v.
Court of Appeals,46 "if the surety is dissatisfied with the degree
of activity displayed by the creditor in the pursuit of his principal,
he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor."
Interest, as a form of indemnity, may be awarded to a creditor
for the delay incurred by a debtor in the payment of the latters
obligation, provided that the delay is inexcusable.
Anent the issue of interests, petitioner alleges that it deserves to
be paid legal interest of 12% per annum from the time of its first
demand on respondent on 5 June 2000 or at most, from the
second demand on 24 January 2001 because of the latters
delay in discharging its monetary obligation. 47 Citing Article
1169 of the Civil Code, petitioner insists that the delay started to
run from the time it demanded the fulfilment of respondents
obligation under the suretyship contract. Significantly,
respondent does not contest this point, but instead argues that
it is only liable for legal interest of 6% per annum from the date
of petitioners last demand on 24 January 2001.
In rejecting petitioners position, the RTC stated that interests
may only accrue when the delay or the refusal of a party to pay
is without any justifiable cause.48 In this case, respondents
failure to heed the demand was due to the advice of One Virtual
that petitioner allegedly breached its undertakings as stated in
the Purchase Agreement.49The CA, however, made no
pronouncement on this matter.
We sustain petitioner.
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 to the
contrary, shall be the payment of the interest agreed upon, and
in the absence of stipulation, the legal interest."
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.50 Delay, as used in Article 1169, is
synonymous with default or mora, which means delay in the
fulfilment of obligations.51 It is the nonfulfillment of an obligation
with respect to time.52 In order for the debtor (in this case, the
surety) to be in default, it is necessary that the following
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.53
Having held that 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.54 The increased liability is not
because of the contract, but because of the default and the
necessity of judicial collection.55
However, for delay to merit interest, it must be inexcusable in
nature. In Guanio v. Makati-Shangri-la Hotel,56 citing RCPI v.
Verchez,57 we held thus:
In culpa contractual x x x the mere proof of the existence of the
contract and the failure of its compliance justify, prima facie, a
corresponding right of relief. The law, recognizing the obligatory
force of contracts, will not permit a party to be set free from
liability for any kind of misperformance of the contractual
undertaking or a contravention of the tenor thereof. A breach
upon the contract confers 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 promissee that
may include his "expectation interest," which is his interest in
having the benefit of his bargain by being put in as good 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 by being
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 has
conferred 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 a new duty, that is, to make RECOMPENSE to the
one who has been injured by the failure of another to observe
20
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 from his
ensuing liability. (Emphasis ours)
We agree with petitioner that records are bereft of proof to show
that respondents delay was indeed justified by the
circumstances that is, One Virtuals advice regarding
petitioners alleged breach of obligations. The lower courts
Decision itself belied this contention when it said that "plaintiff is
not disputing that it did not complete commissioning work on one
of the two systems because One Virtual at that time is already
in default and has not paid GILAT."58 Assuming arguendo that
the commissioning work was not completed, respondent has no
one to blame but its principal, One Virtual; if only it had paid its
obligation on time, petitioner would not have been forced to stop
operations. Moreover, the deposition of Mr. Erez Antebi, vice
president of Gilat, repeatedly stated that petitioner had delivered
all equipment, including the licensed software; and that the
equipment had been installed and in fact, gone into
operation.59 Notwithstanding these compliances, respondent
still failed to pay.
As to the issue of when interest must accrue, our Civil Code is
explicit in stating that it accrues from the time judicial or
extrajudicial demand is made on the surety. This ruling is in
accordance with the provisions of Article 1169 of the Civil Code
and of the settled rule that where there has been an extra-
judicial demand before an action for performance was filed,
interest on the amount due begins to run, not from the date of
the filing of the complaint, but from the date of that extra-judicial
demand.60 Considering that respondent failed to pay its
obligation on 30 May 2000 in accordance with the Purchase
Agreement, and that the extrajudicial demand of petitioner was
sent on 5 June 2000,61 we agree with the latter that interest must
start to run from the time petitioner sent its first demand letter (5
June 2000), because the obligation was already due and
demandable at that time.
With regard to the interest rate to be imposed, we take cue from
Nacar v. Gallery Frames,62 which modified the guidelines
established in Eastern Shipping Lines v. CA63 in relation to
Bangko Sentral-Monetary Board Circular No. 799 (Series of
2013), to wit:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded.1wphi1 In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
xxxx
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a
forbearance of credit.
Applying the above-discussed concepts and in the absence of
an agreement as to interests, we are hereby compelled to award
petitioner legal interest at the rate of 6% per annum from 5 June
2000, its first date of extra judicial demand, until the satisfaction
of the debt in accordance with the revised guidelines enunciated
in Nacar.
WHEREFORE, the Petition for Review on Certiorari is hereby
GRANTED. The assailed Decision and Resolution of the Court
of Appeals in CA-G.R. CV No. 89263 are REVERSED. The
Decision of the Regional Trial Court, Branch 141, Makati City is
REINSTATED, with MODIFICATION insofar as the award of
legal interest is concerned. Respondent is hereby ordered to
pay legal interest at the rate of 6% per annum from 5 June 2000
until the satisfaction of its obligation under the Suretyship
Contract and Purchase Agreement.
SO ORDERED.
G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL
CORPORATE BANK, respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision 1 of the
Court of Appeals in C.A.-G.R. CV No. 19094, affirming the
decision of the Regional Trial Court of the National Capital
Judicial Region, Branch XLV, Manila, which ordered petitioner
Willex Plastic Industries Corporation and the Inter-Resin
Industrial Corporation, jointly and severally, to pay private
respondent International Corporate Bank certain sums of
money, and the appellate court's resolution of October 17, 1989
denying petitioner's motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a
letter of credit with the Manila Banking Corporation. To secure
payment of the credit accomodation, Inter-Resin Industrial and
the Investment and Underwriting Corporation of the Philippines
(IUCP) executed two documents, both entitled "Continuing
Surety Agreement" and dated December 1, 1978, whereby they
bound themselves solidarily to pay Manilabank "obligations of
every kind, on which the [Inter-Resin Industrial] may now be
indebted or hereafter become indebted to the [Manilabank]."
The two agreements (Exhs. J and K) are the same in all
respects, except as to the limit of liability of the surety, the first
surety agreement being limited to US$333,830.00, while the
second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex
Plastic Industries Corp., executed a "Continuing Guaranty" in
favor of IUCP whereby "For and in consideration of the sum or
sums obtained and/or to be obtained by Inter-Resin Industrial
Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic
jointly and severally guaranteed "the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S .
. . to the extent of the aggregate principal sum of FIVE MILLION
PESOS (P5,000,000.00) Philippine Currency and such
interests, charges and penalties as hereafter may be specified."
21
On January 7, 1981, following demand upon it, IUCP paid to
Manilabank the sum of P4,334,280.61 representing Inter-Resin
Industrial's outstanding obligation. (Exh. M-1) On February 23
and 24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and
Willex Plastic the payment of what it (IUCP) had paid to
Manilabank. As neither one of the sureties paid, Atrium filed this
case in the court below against Inter-Resin Industrial and Willex
Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which
had in turn succeeded Atrium, the sum of P687,600.00
representing the proceeds of its fire insurance policy for the
destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing
Guaranty" was intended to secure payment to Atrium of the
amount of P4,334,280.61 which the latter had paid to
Manilabank. It claimed, however, that it had already fully paid its
obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations
of the complaint and interposed the following Special Affirmative
Defenses:
(a) Assuming arguendo that main defendant
is indebted to plaintiff, the former's liability is
extinguished due to the accidental fire that
destroyed its premises, which liability is
covered by sufficient insurance assigned to
plaintiff;
(b) Again, assuming arguendo, that the main
defendant is indebted to plaintiff, its account
is now very much lesser than those stated in
the complaint because of some payments
made by the former;
(c) The complaint states no cause of action
against WILLEX;
(d) WLLLEX is only a guarantor of the
principal obliger, and thus, its liability is only
secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate
remedy in pursuing its claim against the
principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the
action. The case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial
to have waived the right to present evidence for its failure to
appear at the hearing despite due notice. On the other hand,
Willex Plastic rested its case without presenting any evidence.
Thereafter Interbank and Willex Plastic submitted their
respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering
Inter-Resin Industrial and Willex Plastic jointly and severally to
pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their
indebtedness to the plaintiff, with interest of
17% per annumfrom August 11, 1982, when
Inter-Resin Industrial paid P687,500.00 to the
plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 178 of
the amount due; and
(c) Attorney's fees and expenses of litigation
equivalent to 208 of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of
Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial
presented a "Motion to Conduct Hearing and to Receive
Evidence to Resolve Factual Issues and to Defer Filing of the
Appellant's Brief." After its motion was denied, Inter-Resin
Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision
affirming the ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be
allowed to present evidence to show that Inter-Resin Industrial
had already paid its obligation to Interbank, but its motion was
denied on December 6, 1991:
The motion is denied for lack of merit. We
denied defendant-appellant Inter-Resin
Industrial's motion for reception of evidence
because the situation or situations in which
we could exercise the power under BP 129
did not exist. Movant here has not presented
any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the
decision of February 22, 1991 and the resolution of December
6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing
Guaranty" signed on April 2, 1979 petitioner Willex Plastic may
be held jointly and severally liable with Inter-Resin Industrial for
the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's
predecessor-in-interest, Atrium Capital, to Manilabank pursuant
to the "Continuing Surety Agreements" made on December 1,
1978. In denying liability to Interbank for the amount, Willex
Plastic argues that under the "Continuing Guaranty," its liability
is for sums obtained by Inter-Resin Industrial from Interbank, not
for sums paid by the latter to Manilabank for the account of Inter-
Resin Industrial. In support of this contention Willex Plastic cites
the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained
and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter
referred to as the DEBTOR/S, from
you and/or your principal/s as may be
evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally
22
 and unconditionally guarantee unto you
and/or your principal/s, successor/s and
assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the
DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of
the aggregate principal sum of FIVE MILLION
PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and
penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked
is the fact that evidence aliunde was introduced in the trial court
to explain that it was actually to secure payment to Interbank
(formerly IUCP) of amounts paid by the latter to Manilabank that
the "Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest, Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of
the credit accommodation granted to
defendant IRIC [Inter-Resin Industrial] by
Manilabank, the plaintiff required defendant
IRIC [Inter-Resin Industrial] to execute a
chattel mortgage in its favor and a Continuing
Guaranty which was signed by the other
defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation
although it claimed that it had already paid its obligation in its
entirety. On the other hand, Willex Plastic, while denying the
allegation in question, merely did so "for lack of knowledge or
information of the same." But, at the hearing of the case on
September 16, 1986, when asked by the trial judge whether
Willex Plastic had not filed a crossclaim against Inter-Resin
Industrial, Willex Plastic's counsel replied in the negative and
manifested that "the plaintiff in this case [Interbank] is the
guarantor and my client [Willex Plastic] only signed as a
guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the
"Continuing Guaranty" had been made to guarantee payment of
amounts made by it to Manilabank and not of any sums given
by it as loan to Inter-Resin Industrial. Interbank's witness
testified under cross examination by counsel for Willex Plastic
that Willex "guaranteed the exposure/of whatever exposure of
ACP [Atrium Capital] will later be made because of the
guarantee to Manila Banking Corporation." 3
It has been held that explanatory evidence may be received to
show the circumstances under which a document has been
made and to what debt it relates. 4 At all events, Willex Plastic
cannot now claim that its liability is limited to any amount which
Interbank, as creditor, might give directly to Inter-Resin
Industrial as debtor because, by failing to object to the parol
evidence presented, Willex Plastic waived the protection of the
parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the
guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to
execute a chattel mortgage in its favor and a Continuing
Guaranty which was signed by the defendant Willex Plastic
Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact
that "to secure the guarantee undertaken by plaintiff-appellee
[Interbank] of the credit accommodation granted to Inter-Resin
Industrial by Manilabank, plaintiff-appellee required defendant-
appellants to sign a Continuing Guaranty." These factual
findings of the trial court and of the Court of Appeals are binding
on us not only because of the rule that on appeal to the Supreme
Court such findings are entitled to great weight and respect but
also because our own examination of the record of the trial court
confirms these findings of the two courts. 7
Nor does the record show any other transaction under which
Inter-Resin Industrial may have obtained sums of money from
Interbank. It can reasonably be assumed that Inter-Resin
Industrial and Willex Plastic intended to indemnify Interbank for
amounts which it may have paid Manilabank on behalf of Inter-
Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic
admitted that it was "to secure the aforesaid guarantee, that
INTERBANK required principal debtor IRIC [Inter-Resin
Industrial] to execute a chattel mortgage in its favor, and so a
"Continuing Guaranty" was executed on April 2, 1979 by
WILLEX PLASTIC INDUSTRIES CORPORATION (WILLEX for
brevity) in favor of INTERBANK for and in consideration of the
loan obtained by IRIC [Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being
an accessory contract, cannot legally exist because of the
absence of a valid principal obligation. 8 Its contention is based
on the fact that it is not a party either to the "Continuing Surety
Agreement" or to the loan agreement between Manilabank and
Interbank Industrial.
Put in another way the consideration necessary to support a
surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For
a "guarantor or surety is bound by the same consideration that
makes the contract effective between the principal parties
thereto. It is never necessary that a guarantor or surety should
receive any part or benefit, if such there be, accruing to his
principal." 9 In an analogous case, 10 this Court held:
At the time the loan of P100,000.00 was
obtained from petitioner by Daicor, for the
purpose of having an additional capital for
buying and selling coco-shell charcoal and
importation of activated carbon, the
comprehensive surety agreement was
admittedly in full force and effect. The loan
was, therefore, covered by the said
agreement, and private respondent, even if
he did not sign the promissory note, is liable
by virtue of the surety agreement. The only
condition that would make him liable
thereunder is that the Borrower "is or may
become liable as maker, endorser, acceptor
or otherwise." There is no doubt that Daicor is
liable on the promissory note evidencing the
indebtedness.
The surety agreement which was earlier
signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it
being dependent upon a principal one which,
in this case is the loan obtained by Daicor as
evidenced by a promissory note.
23
[3] Willex Plastic contends that the "Continuing Guaranty"
cannot be retroactivelt applied so as to secure payments made
by Interbank under the two "Continuing Surety Agreements."
Willex Plastic invokes the ruling in El Vencedor
v. Canlas 11 and Dio v. Court of Appeals 12 in support of its
contention that a contract of suretyship or guaranty should be
applied prospectively.
The cases cited are, however, distinguishable from the present
case. In El Vencedor v. Canlas we held that a contract of
suretyship "is not retrospective and no liability attaches for
defaults occurring before it is entered into unless an intent to be
so liable is indicated." There we found nothing in the contract to
show that the paries intended the surety bonds to answer for the
debts contracted previous to the execution of the bonds. In
contrast, in this case, the parties to the "Continuing Guaranty"
clearly provided that the guaranty would cover
"sums obtained and/or to be obtained" by Inter-Resin Industrial
from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was
whether the sureties could be held liable for an obligation
contracted after the execution of the continuing surety
agreement. It was held that by its very nature a continuing
suretyship contemplates a future course of dealing. "It is
prospective in its operation and is generallyintended to provide
security with respect to future transactions." By no means,
however, was it meant in that case that in all instances a contrast
of guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands
v. Foerster, 13 although a contract of suretyship is ordinarily not
to be construed as retrospective, in the end the intention of the
parties as revealed by the evidence is controlling. What was said
there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is
erroneous. It is very true that bonds or other
contracts of suretyship are ordinarily not to be
construed as retrospective, but that rule must
yield to the intention of the contracting parties
as revealed by the evidence, and does not
interfere with the use of the ordinary tests and
canons of interpretation which apply in regard
to other contracts.
In the present case the circumstances so
clearly indicate that the bond given by
Echevarria was intended to cover all of the
indebtedness of the Arrocera upon its current
account with the plaintiff Bank that we cannot
possibly adopt the view of the court below in
regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded
against without first exhausting all property of Inter-Resin
Industrial. Willex Plastic thus claims the benefit of excussion.
The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced
it;
(2) If he has bound himself solidarily with the
debtor;
The pertinent portion of the "Continuing Guaranty" executed by
Willex Plastic and Inter-Resin Industrial in favor of IUCP (now
Interbank) reads:
If default be made in the payment of the
NOTE/s herein guaranteed you and/or your
principal/s may directly proceed against
Me/Us without first proceeding against and
exhausting DEBTOR/s propertiesin the same
manner as if all such liabilities constituted
My/Our direct and primary obligations.
(emphasis supplied)
This stipulation embodies an express renunciation of the right of
excussion. In addition, Willex Plastic bound itself solidarily liable
with Inter-Resin Industrial under the same agreement:
For and in consideration of the sums obtained
and/or to be obtained by INTER-RESIN
INDUSTRIAL CORPORATION, hereinafter
referred to as the DEBTOR/S, from you
and/or your principal/s as may be evidenced
by promissory note/s, checks, bills
receivable/s and/or other evidence/s of
indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally
and unconditionally guarantee unto
you and/or your principal/s, successor/s and
assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the
DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of
the aggregate principal sum of FIVE MILLION
PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and
penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already
paid its indebtedness to Interbank and that Willex Plastic should
have been allowed by the Court of Appeals to adduce evidence
to prove this. Suffice it to say that Inter-Resin Industrial had been
given generous opportunity to present its evidence but it failed
to make use of the same. On the otherhand, Willex Plastic
rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on
January 29, 1987, but because of its failure to appear on that
date, the hearing was reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear.
Upon motion of Willex Plastic, the hearings on March 12 and 26,
1987 were cancelled and "reset for the last time" on April 2 and
30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear.
Accordingly the trial court issued the following order:
Considering that, as shown by the records,
the Court had exerted every earnest effort to
cause the service of notice or subpoena on
the defendant Inter-Resin Industrial but to no
avail, even with the assistance of the
defendant Willex the defendant Inter-Resin
Industrial is hereby deemed to have waived
the right to present its evidence.
24
 On the other hand, Willex Plastic announced it was
resting its case without presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court
reconsidered its order and set the hearing anew on July 23,
1987. But Inter-Resin Industrial again moved for the
postponement of the hearing be postponed to August 11, 1987.
The hearing was, therefore, reset on September 8 and 22, 1987
but the hearings were reset on October 13, 1987, this time upon
motion of Interbank. To give Interbank time to comment on a
motion filed by Inter-Resin Industrial, the reception of evidence
for Inter-Resin Industrial was again reset on November 17, 26
and December 11, 1987. However, Inter-Resin Industrial again
moved for the postponement of the hearing. Accordingly the
hearing was reset on November 26 and December 11, 1987,
with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was
reset on January 22, 1988 and February 5, 1988 upon motion of
its counsel. As Inter-Resin Industrial still failed to present its
evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its
evidence, however, the hearing was postponed to March 4,
1988. Again Inter-Resin Industrial's counsel did not appear. The
trial court, therefore, finally declared Inter-Resin Industrial to
have waived the right to present its evidence. On the other hand,
Willex Plastic, as before, manifested that it was not presenting
evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic
that it be given the opportunity of showing that Inter-Resin
Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED, with costs against the petitioner.
SO ORDERED.
G.R. No. L-49401 July 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance
of Davao, and RESIDORO CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.
DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge
dated October 6, 1978 and November 7, 1978 in Civil Case No.
11-154 of the Court of First Instance of Davao, which granted
the motion filed by private respondent to dismiss the complaint
of petitioner for a sum of money, on the ground that the
complaint states no cause of action as against private
respondent.
After the petition had been filed, petitioner, on December 14,
1978 mailed a manifestation and motion requesting the special
civil action for certiorari be treated as a petition for review. 1 Said
manifestation and motion was noted in the resolution of January
10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique
Go, Sr. executed a comprehensive surety agreements 3 to
guaranty among others, any existing indebtedness of Davao
Agricultural Industries Corporation (referred to therein as
Borrower, and as Daicor in this decision), and/or induce the bank
at any time or from time to time thereafter, to make loans or
advances or to extend credit in other manner to, or at the
request, or for the account of the Borrower, either with or without
security, and/or to purchase on discount, or to make any loans
or advances evidenced or secured by any notes, bills,
receivables, drafts, acceptances, checks or other evidences of
indebtedness (all hereinafter called "instruments") upon which
the Borrower is or may become liable, provided that the liability
shall not exceed at any one time the aggregate principal sum of
P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of
P100,000.00 was issued in favor of petitioner payable on June
13, 1977. Said note was signed by Enrique Go, Sr. in his
personal capacity and in behalf of Daicor. The promissory note
was not fully paid despite repeated demands; hence, on June
30, 1978, petitioner filed a complaint for a sum of money against
Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss
dated September 23, 1978 was filed by respondent Residoro
Chua on the ground that the complaint states no cause of action
as against him. 5 It was alleged in the motion that he can not be
held liable under the promissory note because it was only
Enrique Go, Sr. who signed the same in behalf of Daicor and in
his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged
that by virtue of the execution of the comprehensive surety
agreement, private respondent is liable because said agreement
covers not merely the promissory note subject of the complaint,
but is continuing; and it encompasses every other indebtedness
the Borrower may, from time to time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision
granting private respondent's motion to dismiss the
complaint. 7 Petitioner filed a motion for reconsideration dated
October 12, 1978 and on November 7, 1978 respondent court
issued an order denying the said motion. 8
The sole issue resolved by respondent court was the
interpretation of the comprehensive surety agreement,
particularly in reference to the indebtedness evidenced by the
promissory note involved in the instant case, said
comprehensive surety agreement having been signed by
Enrique Go, Sr. and private respondent, binding themselves as
solidary debtors of said corporation not only to existing
obligations but to future ones. Respondent court said that
corollary to that agreement must be another instrument
evidencing the obligation in a form of a promissory note or any
other evidence of indebtedness without which the said
agreement serves no purpose; that since the promissory notes,
which is primarily the basis of the cause of action of petitioner,
is not signed by private respondent, the latter can not be liable
thereon.
Contesting the aforecited decision and order of respondent
judge, the present petition was filed before this Court assigning
the following as errors committed by respondent court:
25
 1. That the respondent court erred in
dismissing the complaint against Chua simply
on the reasons that 'Chua is not a signatory to
the promissory note" of April 29, 1977, or that
Chua could not be held liable on the note
under the provisions of the comprehensive
surety agreement of October 29, 1976; and/or
2. That the respondent court erred in
interpreting the provisions of the
Comprehensive Surety Agreement towards
the conclusion that respondent Chua is not
liable on the promissory note because said
note is not conformable to the
Comprehensive Surety Agreement; and/or
3. That the respondent court erred in ordering
that there is no cause of action against
respondent Chua in the petitioner's complaint.
The main issue involved in this case is whether private
respondent is liable to pay the obligation evidence by the
promissory note dated April 29,1977 which he did not sign, in
the light of the provisions of the comprehensive surety
agreement which petitioner and private respondent had earlier
executed on October 19, 1976.
We find for the petitioner. The comprehensive surety agreement
was jointly executed by Residoro Chua and Enrique Go, Sr.,
President and General Manager, respectively of Daicor, on
October 19, 1976 to cover existing as well as future obligations
which Daicor may incur with the petitioner bank, subject only to
the proviso that their liability shall not exceed at any one time
the aggregate principal sum of P100,000.00. Thus, paragraph I
of the agreement provides:
For and in consideration of any existing
indebtedness to you of Davao Agricultural
Industries Corporation with principal place of
business and postal address at 530 J. P.
Cabaguio Ave., Davao City (hereinafter called
the "Borrower), and/or 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
he request or for the account of the Borrower,
either with or without security, and/or to
purchase or discount or to make any loans or
advances evidenced or secured by any notes,
bills, receivables, drafts, acceptances, checks
or other instruments or evidences of
indebtedness (all hereinafter called
"instruments") upon which the Borrower is or
may become liable as maker, endorser,
acceptor, or otherwise) the undersigned
agrees to guarantee, and does hereby
guarantee in joint and several capacity, the
punctual payment at maturity 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 an such instruments or other
indebtedness or obligations hereinbefore
referred to ..., provided, however, that the
liability of the undersigned shag not exceed at
any one time the aggregate principal sum of
P100,000.00 ...
The agreement was executed obviously to induce petitioner to
grant any application for a loan Daicor may desire to obtain from
petitioner bank. The guaranty is a continuing one which shall
remain in full force and effect until the bank is notified of its
termination.
This is a continuing guaranty and shall remain
in fun force and effect until written notice shall
have been received by you that it has been
revoked by the undersigned, ... 9
At the time the loan of P100,000.00 was obtained from petitioner
by Daicor, for the purpose of having an additional capital for
buying and selling coco-shell charcoal and importation of
activated carbon, 10 the comprehensive surety agreement was
admittedly in full force and effect. The loan was, therefore,
covered by the said agreement, and private respondent, even if
he did not sign the promisory note, is liable by virtue of the surety
agreement. The only condition that would make him liable
thereunder is that the Borrower "is or may become liable as
maker, endorser, acceptor or otherwise". There is no doubt that
Daicor is liable on the promissory note evidencing the
indebtedness.
The surety agreement which was earlier signed by Enrique Go,
Sr. and private respondent, is an accessory obligation, it being
dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note. What
obviously induced petitioner bank to grant the loan was the
surety agreement whereby Go and Chua bound themselves
solidarily to guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can be clearly seen
that the surety agreement was executed to guarantee future
debts which Daicor may incur with petitioner, as is legally
allowable under the Civil Code. Thus
Article 2053. A guaranty may also be given
as security for future debts, the amount of
which is not yet known; there can be no claim
against the guarantor until the debt is
liquidated. A conditional obligation may also
be secured.
In view of the foregoing, the decision (which should have been
a mere "order"), dismissing the complaint is reversed and set
side. The case is remanded to the court of origin with
instructions to set aside the motion to dismiss, and to require
defendant Residoro Chua to answer the complaint after which
the case shall proceed as provided by the Rules of Court. No
costs.
SO ORDERED.
G.R. No. 80078 May 18, 1993
ATOK FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, SANYU CHEMICAL CORPORATION,
DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO
BERMUNDO and LEOPOLDO HALILI, respondents.
26
Syquia Law Offices for petitioner.
Batino, Angala, Allaga & Zara Law Offices for private
respondents.
FELICIANO, J.:
Atok Finance Corporation ("Atok Finance") asks us to review
and set aside the Decision of the Court of Appeals which
reversed a decision of the trial court ordering private
respondents to pay jointly and severally to petitioner Atok
Finance certain sums of money.
On 27 July 1979, private respondents Sanyu Chemical
corporation ("Sanyu Chemical") as principal and Sanyu Trading
Corporation ("Sanyu Trading") along with individual private
stockholders of Sanyu Chemical, namely, private respondent
spouses Danilo E. Halili and Pablico Bermundo as sureties,
executed in the continuing Suretyship Agreement in favor of
Atok Finance as creditor. Under this Agreement, Sanyu Trading
and the individual private respondents who were officers and
stockholders of Sanyu Chemical did:
(1) For valuable and/or other
consideration . . ., jointly and severally
unconditionally guarantee to ATOK FINANCE
CORPORATION (hereinafter called
Creditor), the full, faithful and prompt payment
and discharge of any and all indebtedness of
[Sanyu Chemical] . . . (hereinafter called
Principal) to the Creditor. The
word "indebtedness" is used herein in its
most comprehensive sense and includes any
and all advances, debts, obligations and
liabilities of Principal or any one or more of
them, here[to]fore, now or hereafter made,
incurred or created, whether voluntary or
involuntary and however arising, whether
direct or acquired by the Creditor by
assignment or succession, whether due or
not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined
and whether the Principal may be may be
liable individually of jointly with others,
or whether recovery upon such indebtedness
may be or hereafter become barred by any
statute of limitations, or whether such
indebtedness may be or otherwise
become unenforceable. 1 (Emphasis
supplied)
Other relevant provisions of the Continuing Suretyship
Agreement follow:
(2) This is a continuing suretyship relating to
any indebtedness, including that arising
under successive transactions which shall
either continue the indebtedness from time to
time or renew it after it has been satisfied.
This suretyship is binding upon the heirs,
successors, executors, administrators and
assigns of the surety, and the benefits hereof
shall extend to and include the successors
and assigns of the Creditor.
(3) The obligations hereunder are joint and
several and independent of the obligations of
the Principal. A separate action or actions
may be prosecuted against the Principal and
whether or not the Principal be joined in any
such action or actions.
xxx xxx xxx.
(6) In addition to liens upon, and rights of set-
off against the moneys, securities or other
property of the Surety given to the Creditor by
law, the Creditor shall have the lien upon and
a right of self-off against all moneys,
securities, and other property of the Surety
now and hereafter in the possession of the
Creditor; and every such lien or right of self-
off may be exercised without need of
demands upon or notice to the Surety. No lien
or right of set-off shall be deemed to have
been waived by any act, omission or conduct
on the part of the Creditor, or by any neglect
to exercise such right of set-off or to enforce
such lien, or by any delay in so doing, and
every right of set-off or lien shall continue in
full force and effect until such right of set-off
of lien is specifically waived or released by an
instrument in writing executed by the Creditor.
(7) Any indebtedness of the Principal now or
hereafter held by the Surety is hereby
subordinated to the indebtedness of the
Principal to the Creditor; and if the Creditor so
requests, such indebtedness of the Principal
of the Surety shall be collected, enforced and
shall be paid over to the Creditor and shall be
paid over to the Creditor and shall be paid
over to the Creditor on account of the
indebtedness of the Principal to the Creditor
but without reducing or affecting in any
manner the liability of the Surety under the
provisions of this suretyship.
xxx xxx xxx 2
(Emphases supplied)
On 27 November 1981, Sanyu Chemical assigned its trade
receivables outstanding as of 27 November 1981 with a total
face value of P125,871.00, to Atok Finance in consideration of
receipt from Atok Finance of the amount of P105,000.00. The
assigned receivables carried a standard term of thirty (30) days;
it appeared, however, that the standard commercial practice
was to grant an extension up to one hundred twenty (120) days
without penalties. The relevant portions of this Deed of
Assignment read as follows:
1. FOR VALUE RECEIVED, the ASSIGNOR does
hereby SELL, TRANSFER and ASSIGN all his/its
rights, title and interest in the contracts, receivables,
accounts, notes, leases, deeds of sale with reservation
of title, invoices, mortgages, checks, negotiable
instruments and evidences of indebtedness listed in
the schedule forming part hereinafter called "Contract"
or "Contracts."
27
2. To induce the ASSIGNEE to purchase the above
Contracts, the ASSIGNOR does hereby
certify, warrant and represent that :
(a). He/It is the sole owner of the assigned Contracts
free and clear of claims of any other party except the
herein ASSIGNEE and has the right to transfer
absolute title thereto the ASSIGNEE;
(b). Each assigned Contract is bonafide and the
amount owing and to become due on each contract is
correctly stated upon the schedule or other evidences
of the Contract delivered pursuant thereto;
(c). Each assigned Contract arises out of the sale of
merchandise/s which had been delivered and/or
services which have been rendered and none of the
Contract is now, nor will at any time become,
contingent upon the fulfillment of any contract or
condition whatsoever, or subject to any defense, offset
or counterclaim;
(d). No assigned Contract is represented by any note
or other evidence of indebtness or other security
document except such as may have been endorsed,
assigned and delivered by the ASSIGNOR to the
ASSIGNEE simultaneously with the assignment of
such Contract;
(e). No agreement has been made, or will be made,
with any debtor for any deduction discount or return of
merchandise, except as may be specifically noted at
the time of the assignment of the Contract;
(f). None of the terms or provisions of the assigned
Contracts have been amended, modified or waived;
(g). The debtor/s under the assigned Contract/s are
solvent and his/its/their failure to pay the assigned
Contracts and/or any installment thereon upon maturity
thereof shall be conclusively considered as a violation
of this warranty; and
(h). Each assigned Contract is a valid obligation of the
buyer of the merchandise and/or service rendered
under the Contract And that no Contract is overdue.
The foregoing warranties and representations
are in addition to those provided for in the
Negotiable Instruments Law and other
applicable laws. Any violation thereof shall
render the ASSIGNOR immediately and
unconditionally liable to pay the ASSIGNEE
jointly and severally with the debtors under
the assigned contracts, the amounts due
thereon.
xxx xxx xxx
4. The ASSIGNOR shall without
compensation or cost, collect and receive in
trust for the ASSIGNEE all payments made
upon the assigned contracts and shall remit to
the ASSIGNEE all collections on the said
Contracts as follows :
P5,450.00 due on January
2, 1982 on every 15th day
(semi-monthly) until
November 1, 1982.
P110,550.00 balloon
payment after 12
months. 3 (Emphasis
supplied)
Later, additional trade receivables were assigned by Sanyu
Chemical to Atok Finance with a total face value of P100,378.45.
On 13 January 1984, Atok Finance commenced action against
Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and
Leopoldo Halili before the Regional Trial Court of Manila to
collect the sum of P120,240.00 plus penalty charges amounting
to P0.03 for every peso due and payable for each month starting
from 1 September 1983. Atok Finance alleged that Sanyu
Chemical had failed to collect and remit the amount due under
the trade receivables.
Sanyu Chemical and the individual private respondents sought
dismissal of Atok's claim upon the ground that such claim had
prescribed under Article 1629 of the Civil Code and for lack of
cause of action. The private respondents contended that the
Continuing Suretyship Agreement, being an accessory contract,
was null and void since, at the time of its execution, Sanyu
Chemical had no pre-existing obligation due to Atok Finance.
At the trial, Sanyu Chemical and the individual private
respondents failed to present any evidence on their behalf,
although the individual private respondents submitted a
memorandum in support of their argument. After trial, on 1 April
1985, the trial court rendered a decision in favor of Atok Finance.
The dispositive portion of this decision reads as follows:
ACCORDINGLY, judgment is hereby
rendered in favor of the plaintiff ATOK
FINANCE CORPORATION; and against the
defendants SANYU CHEMICAL
CORPORATION, DANILO E. ARRIETA,
NENITA B. ARRIETA, PABLITO
BERMUNDO and LEOPOLDO HALILI,
ordering the said defendants, jointly and
severally, to pay the plaintiff:
(1) P120,240.00 plus P0.03 for each peso for
each month from September 1, 1983 until the
whole amount is fully paid;
(2) P50,000.00 as attorney's fees; and
(3) To pay the costs.
SO ORDERED. 4
Private respondents went on appeal before the then
Intermediate Appellate Court ("IAC"), and the appeal was there
docketed as AC-G.R. No. 07005-CV. The case was raffled to
the Third Civil Cases Division of the IAC. In a resolution dated
21 March 1986, that Division dismissed the appeal upon the
ground of abandonment, since the private respondents had
failed to file their appeal brief notwithstanding receipt of the
notice to do so. On 4 June 1986, entry of judgment was made
28
by the Clerk of Court of the IAC. Accordingly, Atok Finance went
before the trial court and sought a writ of execution to enforce
the decision of the trial court of 1 April 1985. The trial court
issued a writ of execution on 23 July 1986. 5 Petitioner alleged
that the writ of execution was served on private respondents. 6
However, on 27 August 1986, private respondents filed a
Petition for Relief from Judgment before the Court of Appeals.
This Petition was raffled off to the 15th Division of the Court of
Appeals. In that Petition, private respondents claimed that their
failure to file their appeal brief was due to excusable negligence,
that is, that their previous counsel had entrusted the preparation
and filing of the brief to one of his associates, which associate,
however, had unexpectedly resigned from the law firm without
returning the records of cases he had been handling, including
the appeal of private respondents. Atok Finance opposed the
Petition for Relief arguing that no valid ground existed for setting
aside the resolution of the Third Division of the then IAC.
The 15th Division of the Court of Appeals nonetheless granted
the Petition for Relief from Judgment "in the paramount interest
of justice," 7 set aside the resolution of the Third Civil Cases
Division of the then IAC, and gave private respondents a non-
extendible period of fifteen (15) days within which to file their
appeal brief. Private respondents did file their appeal brief.
The 15th Division, on 18 August 1987, rendered a Decision on
the merits of the appeal, and reversed and set aside the decision
of the trial court and entered a new judgment dismissing the
complaint of Atok Finance, ordering it to pay private respondents
P3,000.00 as attorney's fees and to pay the costs.
Atok Finance moved to set aside the decision of the 15th
Division of the Court of Appeals, inviting attention to the
resolution of the IAC's Third Civil Cases Division of 21 March
1986 originally dismissing private respondent's appeal for
abandonment thereof. In a resolution dated 18 August 1987, the
15th Division denied Atok Finance's motion stating that it had
granted the Petition for Relief from Judgment and given private
respondents herein fifteen (15) days within which to file an
appeal brief, while Atok Finance did not file an appellee's brief,
and that its decision was arrived at "on the basis of appellant's
brief and the original records of the appeal case."
In the present Petition for Review, Atok Finance assigns the
following as errors on the part of the Court of Appeals in
rendering its decision of 18 August 1987:
(1) that it had erred in ruling that a continuing
suretyship agreement cannot be effected to
secure future debts;
(2) that it had erred in ruling that the
continuing suretyship agreement was null and
void for lack of consideration without any
evidence whatsoever [being] adduced by
private respondents;
(3) that it had erred in granting the Petition for
Relief from Judgment while execution
proceedings [were] on-going on the trial
court. 8 (Emphasis in the original)
As a preliminary matter, we note that a Division of the Court of
Appeals is co-equal with any other Division of the same court.
Accordingly, a Division of the Court of Appeals has no authority
to consider and grant a petition for relief from a judgment
rendered by another Division of the same court. In the case at
bar, however, we must note that an intervening event had
occurred between the resolution of 21 March 1986 of the Third
Civil Cases Division of the IAC dismissing private respondents'
appeal and the 30 September 1986 order of the 15th Division of
the Court of Appeals granting the Petition for Relief from
Judgment. On 28 July 1986, the old Intermediate Appellate
Court went out of existence and a new court, the Court of
Appeals, came into being, was organized and commenced
functioning. 9 This event, and the probability that some
confusion may have accompanied the period of transition from
the IAC to the Court of Appeals, lead us to believe that the defect
here involved should be disregarded as being of secondary
importance. At the same time, nothing in this decision should be
read as impliedly holding that a petition from relief judgment is
available in respect of a decision rendered by the Court of
Appeals; this issue is best reserved for determination in some
future cases where it shall have been adequately argued by the
parties.
We turn, therefore, to a consideration of the first substantive
issue addressed by the Court of Appeals in rendering its
Decision on the merits of the appeal: whether the individual
private respondents may be held solidarily liable with Sanyu
Chemical under the provisions of the Continuing Suretyship
Agreement, or whether that Agreement must be held null and
void as having been executed without consideration and without
a pre-existing principal obligation to sustain it.
The Court of Appeals held on this first issue as follows:
It is the contention of private appellants that
the suretyship agreement is null and void
because it is not in consonance with the laws
on guaranty and security. The said agreement
was entered into by the parties two years
before the Deed of Assignment was
executed. Thus, allegedly, it ran counter to
the provision that guaranty cannot exist
independently because by nature it is merely
an accessory contract. The law on guaranty is
applicable to surety to some extent Manila
Surety and Fidelity Co. v.Baxter Construction
& Co., 53 O.G. 8836; and, Arran v. Manila
Fidelity & Surety Co., 53 O.G. 7247.
We find merit in this contention.
Although obligations arising from contracts
have the force of law between the contracting
parties, (Article 1159 of the Civil Code) this
does not mean that the law is inferior to it; the
terms of the contract could not be enforces if
not valid. So, even if, as in this case, the
agreement was for a continuing suretyship to
include obligations enumerated in paragraph
2 of the agreement, the same could not be
enforced. First, because this contract, just like
guaranty, cannot exist without a valid
obligation (Art. 2052, Civil Code);
and, second, although it may be given as
security for future debt (Art. 2053, C.C.), the
obligation contemplated in the case at bar
cannot be considered "future debt" as
envisioned by this law.
29
 There is no proof that when the suretyship
agreement was entered into, there was a pre-
existing obligation which served the principal
obligation between the parties.
Furthermore, the "future debts" alluded to in
Article 2053 refer to debts already existing at
the time of the constitution of the agreement
but the amount thereof is unknown, unlike in
the case at bar where the obligation was
acquired two years after the
agreement. 10 (Emphasis supplied).
We consider that the Court of Appeals here was in serious error.
It is true that a serious guaranty or a suretyship agreement is an
accessory contract in the sense that it is entered into for the
purpose of securing the performance of another obligation which
is denominated as the principal obligation. It is also true that
Article 2052 of the Civil Code states that "a guarantee cannot
exist without a valid obligation." This legal proposition is not,
however, like most legal principles, to be read in an absolute and
literal manner and carried to the limit of its logic. This is clear
from Article 2052 of the Civil Code itself:
Art. 2052. A guaranty cannot exist without a
valid obligation.
Nevertheless, a guaranty may be constituted
to guarantee the performance of a voidable or
an unenforceable contract. It may also
guaranty a natural obligation." (Emphasis
supplied).
Moreover, Article 2053 of the Civil Code states:
Art. 2053. A guaranty may also be given as
security for future debts, the amount of which
is not yet known; there can be no claim
against the guarantor until the debt is
liquidated. A conditional obligation may also
be secured. (Emphasis supplied)
The Court of Appeals apparently overlooked our caselaw
interpreting Articles 2052 and 2053 of the Civil Code. In National
Rice and Corn Corporation (NARIC) v. Jose A. Fojas and Alto
Surety Co., Inc., 11 the private respondents assailed the decision
of the trial court holding them liable under certain surety bonds
filed by private respondent Fojas and issued by private
respondent Alto Surety Co. in favor of petitioner NARIC, upon
the ground that those surety bonds were null and void "there
being no principal obligation to be secured by said bonds." In
affirming the decision of the trial court, this Court, speaking
through Mr. Justice J.B.L. Reyes, made short shrift of the private
respondents' doctrinaire argument:
Under his third assignment of error,
appellant Fojas questions the validity of the
additional bonds(Exhs. D and D-1) on the
theory that when they were executed, the
principal obligation referred to in said bonds
had not yet been entered into, as no copy
thereof was attached to the deeds of
suretyship. This defense is untenable,
because in its complaint the NARIC averred,
and the appellant did not deny that these
bonds were posted to secure the additional
credit that Fojas has applied for, and the
credit increase over his original contract was
sufficient consideration for the bonds. That
the latter were signed and filed before the
additional credit was extended by the NARIC
is no ground for complaint. Article 1825 of the
Civil Code of 1889, in force in 1948, expressly
recognized that "a guaranty may also be
given as security for future debts the amount
of which is not yet known." (Emphasis
supplied)
In Rizal Commercial Banking Corporation v. Arro, 12 the Court
was confronted again with the same issue, that is, whether
private respondent was liable to pay a promissory note dated 29
April 1977 executed by the principal debtor in the light of the
provisions of a comprehensive surety agreement which
petitioner bank and the private respondent had earlier entered
into on 19 October 1976. Under the comprehensive surety
agreement, the private respondents had bound themselves as
solidary debtors of the Diacor Corporation not only in respect of
existing obligations but also in respect of future ones. In holding
private respondent surety (Residoro Chua) liable under the
comprehensive surety agreement, the Court said:
The surety agreement which was earlier
signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it
being dependent upon a principal one, which,
in this case is the loan obtained by Daicor as
evidenced by a promissory note. What
obviously induced petitioner bank to grant the
loan was the surety agreement whereby Go
and Chua bound themselves solidarily to
guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can
be clearly seen that the surety agreement
was executed to guarantee future debts which
Daicor may incur with petitioner, as is legally
allowable under the Civil Code. Thus
Article 2053. A
guarantee may also be
given as security for future
debts, the amount of which
is not yet known; there can
be no claim against the
guarantor until the debt is
liquidated. A conditional
obligation may also be
secured. 13 (Emphasis
supplied)
It is clear to us that the Rizal Commercial Banking
Corporation and the NARIC cases rejected the distinction which
the Court of Appeals in the case at bar sought to make with
respect to Article 2053, that is, that the "future debts" referred to
in that Article relate to "debts already existing at the time of the
constitution of the agreement but the amount [of which] is
unknown," and not to debts not yet incurred and existing at that
time. Of course, a surety is not bound under any particular
principal obligation until that principal obligation is born. But
there is no theoretical or doctrinal difficulty inherent in saying
that the suretyship agreement itself is valid and binding even
before the principal obligation intended to be secured thereby is
born, any more that there would be in saying that obligations
which are subject to a condition precedent are valid and binding
before the occurrence of the condition precedent. 14
30
Comprehensive or continuing surety agreements are in fact debts in favor of the assignor which were later
quite commonm place in present day financial and commercial assigned to the assignee. The debt alluded to
practice. A bank or a financing company which anticipates in the law, is not the debt incurred by the
entering into a series of credit transactions with a particular assignor to the assignee as contended by the
company, commonly requires the projected principal debtor to appellant.
execute a continuing surety agreement along with its sureties.
By executing such an agreement, the principal places itself in a Applying the said law to the case at bar, the
position to enter into the projected series of transactions with its records disclose that none of the assigned
creditor; with such surety agreement, there would be no need to receivables had matured on November 27,
execute a separate surety contract or bond for each financing or 1981 when the Deed of Assignment was
credit accommodation extended to the principal debtor. As we executed. The oldest debt then existing was
understand it, this is precisely what happened in the case at bar. that contracted on November 3, 1981 and the
latest was contracted on December 4, 1981.
We turn to the second substantive issue, that is, whether private
respondents are liable under the Deed of Assignment which Each of the invoices assigned to the assignee
they, along with the principal debtor Sanyu Chemical, executed contained a term of 30 days (Exhibits B-3-A to
in favor of petitioner, on the receivables thereby assigned. 5 and extended by the notation which
appeared in the "Schedule of Assigned
The contention of Sanyu Chemical was that Atok Finance had Receivables" which states that the ". . . the
no cause of action under the Deed of Assignment for the reason terms stated on our invoices were normally
that Sanyu Chemical's warranty of the debtors' solvency had extended up to a period of 120 days
ceased. In submitting this contention, Sanyu Chemical relied on . . ." (Exhibit B-2). Considering the terms in
Article 1629 of the Civil Code which reads as follows: the invoices plus the ordinary practice of the
company, thus, the assigned debts matured
Art. 1629. In case the assignor in good faith between April 3, 1982 to May 4, 1982. The
should have made himself responsible for the assignor's warranty for debtor's warranty, in
solvency of the debtor, and the contracting this case, would then be from the maturity
parties should not have agreed upon the period up to April 3, 1983 or May 4, 1983 to
duration of the liability, it shall last for one year cover all of the receivables in the invoices.
only, from the time of the assignment if the
period had already expired. The letter of demand executed by appellee
was dated August 29, 1983 (Exhibit D) and
If the credit should be payable within a term the complaint was filed on January 13,
or period which has not yet expired, the 1984. Both dates were beyond the warranty
liability shall cease one year after maturity. period.

Once more, the Court of Appeals upheld the contention of In effect, therefore, company-appellant was
private respondents and held that Sanyu Chemical was free right when it claimed that appellee had no
from liability under the Deed of Assignment. The Court of cause of action against it or had lost its cause
Appeals said: of
action. 15 (Emphasis supplied)

. . . Article 1629 provides for the duration of

assignor's warranty of debtor's solvency Once again, however, we consider that the Court of Appeals
depending on whether there was a period was in reversible error in so concluding. The relevant provision
agreed upon for the existence of such of the Deed of Assignment may be quoted again in this
warranty, analyzing the law thus: connection:

(1) if there is a period (or length of time) 2. To induce the ASSIGNEE [Atok Finance] to
agreed upon, then for such period; purchase the above contracts, the
ASSIGNOR [Sanyu Chemical] does hereby
certify, warrant and represent that . . .
(2) if no period (or length of time) was agreed
upon, then:
(g) the debtor/s under the
assigned contract/s are
(a) one year from solvent and
assignment if debt was his/its/their failure to pay
due at the time of the the assigned contract/s
assignment and/or any installment
thereon upon maturity
(b) one year from maturity thereof shall be
if debt was not yet due at conclusively considered as
the time of the a violation of this warranty;
assignment.. and . . .

The debt referred to in this law is the debt The foregoing warranties
under the assigned contract or the original and representations are in

31
 addition to those provided
for in the Negotiable
Instruments Law and other
applicable laws. Any
violation thereof shall
render the ASSIGNOR
immediately and
unconditionally liable to
pay the ASSIGNEE jointly
and severally with the
debtors under the assigned
contracts, the amounts due
thereon.
xxx xxx xxx
(Emphasis supplied)
It may be stressed as a preliminary matter that the Deed of
Assignment was valid and binding upon Sanyu Chemical.
Assignment of receivables is a commonplace commercial
transaction today. It is an activity or operation that permits the
assignee to monetize or realize the value of the receivables
before the maturity thereof. In other words, Sanyu Chemical
received from Atok Finance the value of its trade receivables it
had assigned; Sanyu Chemical obviously benefitted from the
assignment. The payments due in the first instance from the
trade debtors of Sanyu Chemical would represent the return of
the investment which Atok Finance had made when it paid
Sanyu Chemical the transfer value of such receivables.
Article 1629 of the Civil Code invoked by private respondents
and accepted by the Court of Appeals is not, in the case at bar,
material. The liability of Sanyu Chemical to Atok Finance
rests not on the breach of the warranty of solvency; the liability
of Sanyu Chemical was not ex lege (ex Article 1629) but
rather ex contractu. Under the Deed of Assignment, the effect of
non-payment by the original trade debtors was breach of
warranty of solvency by Sanyu Chemical, resulting in turn in the
assumption of solidary liability by the assignor under the
receivables assigned. In other words, the assignor Sanyu
Chemical becomes a solidary debtor under the terms of the
receivables covered and transferred by virtue of the Deed of
Assignment. And because assignor Sanyu Chemical became,
under the terms of the Deed of Assignment, solidary obligor
under each of the assigned receivables, the other private
respondents (the Arrieta spouses, Pablito Bermundo and
Leopoldo Halili), became solidarily liable for that obligation of
Sanyu Chemical, by virtue of the operation of the Continuing
Suretyship Agreement. Put a little differently, the obligations of
individual private respondent officers and stockholders of Sanyu
Chemical under the Continuing Suretyship Agreement, were
activated by the resulting obligations of Sanyu Chemical as
solidary obligor under each of the assigned receivables by virtue
of the operation of the Deed of Assignment. That solidary liability
of Sanyu Chemical is not subject to the limiting period set out in
Article 1629 of the Civil Code.
It follows that at the time the original complaint was filed by Atok
Finance in the trial court, it had a valid and enforceable cause of
action against Sanyu Chemical and the other private
respondents. We also agree with the Court of Appeals that the
original obligors under the receivables assigned to Atok Finance
remain liable under the terms of such receivables.
WHEREFORE, for all the foregoing, the Petition for Review is
hereby GRANTED DUE COURSE, and the Decision of the
Court of Appeals dated 18 August 1987 and its Resolution dated
30 September 1987 are hereby REVERSED and SET ASIDE. A
new judgment is hereby entered REINSTATING the Decision of
the trial court in Civil Case No. 84-22198 dated 1 April 1985,
except only that, in the exercise of this Court's discretionary
authority equitably to mitigate the penalty clause attached to the
Deed of Assignment, that penalty is hereby reduced to eighteen
percent (18%) per annum (instead of P0.03 for every peso
monthly [or 36% per annum]). As so modified, the Decision of
the trial court is hereby AFFIRMED. Costs against private
respondents.
SO ORDERED.
G.R. No. 89775 November 26, 1992
JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK
AND TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners set
off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-
G.R. CV No. 17724 1 which reversed the 2 December 1987
Decision of Branch 45 of the Regional Trial Court (RTC) of
Manila in a collection suit entitled "Metropolitan Bank and Trust
Company vs. Uy Tiam, doing business under the name of "UY
TIAM ENTERPRISES & FREIGHT SERVICES," Jacinto Uy
Dio and Norberto Uy" and docketed as Civil Case No. 82-9303.
They likewise challenge public respondent's Resolution of 21
August 1989 2 denying their motion for the reconsideration of the
former.
The impugned Decision of the Court summarizes the
antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises
and Freight Services (hereinafter referred to
as UTEFS), thru its representative Uy Tiam,
applied for and obtained credit
accommodations (letter of credit and trust
receipt accommodations) from the
Metropolitan Bank and Trust Company
(hereinafter referred to as METROBANK) in
the sum of P700,000.00 (Original Records, p.
333). To secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy
Dio executed separate Continuing
Suretyships (Exhibits "E" and "F"
respectively), dated 25 February 1977, in
favor of the latter. Under the aforesaid
agreements, Norberto Uy agreed to pay
METROBANK any indebtedness of UTEFS
up to the aggregate sum of P300,000.00 while
Jacinto Uy Dio agreed to be bound up to the
aggregate sum of P800,000.00.
Having paid the obligation under the above
letter of credit in 1977, UTEFS, through Uy
32
Tiam, obtained another credit
accommodation from METROBANK in 1978,
which credit accommodation was fully settled
before an irrevocable letter of credit was
applied for and obtained by the
abovementioned business entity in 1979
(September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-
309, dated March 30, 1979, in the sum of
P815, 600.00, covered UTEFS' purchase of
"8,000 Bags Planters Urea and 4,000 Bags
Planters 21-0-0." It was applied for and obtain
by UTEFS without the participation of
Norberto Uy and Jacinto Uy Dio as they did
not sign the document denominated as
"Commercial Letter of Credit and Application."
Also, they were not asked to execute any
suretyship to guarantee its payment. Neither
did METROBANK nor UTEFS inform them
that the 1979 Letter of Credit has been
opened and the Continuing Suretyships
separately executed in February, 1977 shall
guarantee its payment (Appellees brief, pp. 2-
3; rollo, p. 28).
The 1979 letter of credit (Exhibit "B") was
negotiated. METROBANK paid Planters
Products the amount of P815,600.00 which
payment was covered by a Bill of Exchange
(Exhibit "C"), dated 4 June 1979, in favor of
(Original Records, p. 331).
Pursuant to the above commercial
transaction, UTEFS executed and delivered
to METROBANK and Trust Receipt (Exh.
"D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter
of the aforementioned goods from Planters
Products which amounted to P815, 600.00.
Being the entrusted, the former agreed to
deliver to METROBANK the entrusted goods
in the event of non-sale or, if sold, the
proceeds of the sale thereof, on or before
September 2, 1979.
However, UTEFS did not acquiesce to the
obligatory stipulations in the trust receipt. As
a consequence, METROBANK sent letters to
the said principal obligor and its sureties,
Norberto Uy and Jacinto Uy Dio, demanding
payment of the amount due. Informed of the
amount due, UTEFS made partial payments
to the Bank which were accepted by the latter.
Answering one of the demand letters, Dio,
thru counsel, denied his liability for the
amount demanded and requested
METROBANK to send him copies of
documents showing the source of his liability.
In its reply, the bank informed him that the
source of his liability is the Continuing
Suretyship which he executed on February
25, 1977.
As a rejoinder, Dio maintained that he
cannot be held liable for the 1979 credit
accommodation because it is a new obligation
contracted without his participation. Besides,
the 1977 credit accommodation which he
guaranteed has been fully paid.
Having sent the last demand letter to UTEFS,
Dio and Uy and finding resort to extrajudicial
remedies to be futile, METROBANK filed a
complaint for collection of a sum of money
(P613,339.32, as of January 31, 1982,
inclusive of interest, commission penalty and
bank charges) with a prayer for the issuance
of a writ of preliminary attachment, against Uy
Tiam, representative of UTEFS and
impleaded Dio and Uy as parties-
defendants.
The court issued an order, dated 29 July
1983, granting the attachment writ, which writ
was returned unserved and unsatisfied as
defendant Uy Tiam was nowhere to be found
at his given address and his commercial
enterprise was already non-operational
(Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto
Uy Dio (sureties-defendant herein) filed a
motion to dismiss the complaint on the ground
of lack of cause of action. They maintained
that the obligation which they guaranteed in
1977 has been extinguished since it has
already been paid in the same year.
Accordingly, the Continuing Suretyships
executed in 1977 cannot be availed of to
secure Uy Tiam's Letter of Credit obtained in
1979 because a guaranty cannot exist without
a valid obligation. It was further argued that
they can not be held liable for the obligation
contracted in 1979 because they are not
privies thereto as it was contracted without
their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its
opposition to the motion to dismiss. Invoking
the terms and conditions embodied in the
comprehensive suretyships separately
executed by sureties-defendants, the bank
argued that sureties-movants bound
themselves as solidary obligors of defendant
Uy Tiam to both existing obligations and
future ones. It relied on Article 2053 of the
new Civil Code which provides: "A guaranty
may also be given as security for future debts,
the amount of which is not yet known; . . . ." It
was further asserted that the agreement was
in full force and effect at the time the letter of
credit was obtained in 1979 as sureties-
defendants did not exercise their right to
revoke it by giving notice to the bank. (Ibid.,
pp. 51-54).
Meanwhile, the resolution of the aforecited
motion to dismiss was held in abeyance
pending the introduction of evidence by the
parties as per order dated February 21, 1986
(Ibid., p. 71).
33
 Having been granted a period of fifteen (15)
days from receipt of the order dated March 7,
1986 within which to file the answer, sureties-
defendants filed their responsive pleading
which merely rehashed the arguments in their
motion to dismiss and maintained that they
are entitled to the benefit of excussion
(Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion
to dismiss the complaint against defendant Uy
Tiam on the ground that it has no information
as to the heirs or legal representatives of the
latter who died sometime in December, 1986,
which motion was granted on the following
day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its
judgment, a portion of which reads:
The evidence and the pleadings, thus, pose
the querry (sic):
Are the defendants Jacinto Uy Dioand Norberto Uy
liable for the obligation contracted by Uy Tiam under
the Letter of Credit (Exh. B) issued on March 30, 1987
by virtue of the Continuing Suretyships they executed
on February 25, 1977?
Under the admitted proven facts, the Court finds that
they are not.
a) When Uy and Dio executed the continuing
suretyships, exhibits E and F, on February 25, 1977,
Uy Tiam was obligated to the plaintiff in the amount of
P700,000.00 and this was the obligation which both
obligation which both defendants guaranteed to pay.
Uy Tiam paid this 1977 obligation and such
payment extinguished the obligation they assumed as
guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from
the 1977 Letter of Credit which covered the 1977
account of Uy Tiam. Thus, the obligation under either
is apart and distinct from the obligation created in the
other as evidenced by the fact that Uy Tiam had to
apply anew for the 1979 transaction (Exh. A). And Dio
and Uy, being strangers thereto, cannot be answerable
thereunder.
c) The plaintiff did not serve notice to the defendants
Dio and Uy when it extended to Credit at least to
inform them that the continuing suretyships they
executed on February 25, 1977 will be considered by
the plaintiff to secure the 1979 transaction of Uy Tiam.
d) There is no sufficient and credible showing that Dio
and Uy were fully informed of the import of the
Continuing Suretyships when they affixed their
signatures thereon that they are thereby securing all
future obligations which Uy Tiam may contract the
plaintiff. On the contrary, Dio and Uy categorically
testified that they signed the blank forms in the office
of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in
obedience to the instruction of Uy Tiam, their former
employer. They denied having gone to the office of the
plaintiff to subscribe to the documents (October 1,
1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8,
13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is
hereby rendered:
a) dismissing the COMPLAINT against
JACINTO UY DIO and NORBERTO UY;
b) ordering the plaintiff to pay to Dio and Uy
the amount of P6,000.00 as attorney's fees
and expenses of litigation; and
c) denying all other claims of the parties for
want of legal and/or factual basis.
SO ORDERED. (Records, p. 336) 4
From the said Decision, the private respondent appealed to the
Court of Appeals. The case was docketed as CA-G.R. CV No.
17724. In support thereof, it made the following assignment of
errors in its Brief:
I. THE LOWER COURT SERIOUSLY
ERRED IN NOT FINDING AND HOLDING
THAT DEFENDANTS-APPELLEES
JACINTO UY DIO AND NORBERTO UY
ARE SOLIDARILY LIABLE TO PLAINTIFF-
APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE
LETTER OF CREDIT ISSUED ON MARCH
30, 1979 BY VIRTUE OF THE CONTINUING
SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.
II. THE LOWER COURT ERRED IN
HOLDING THAT PLAINTIFF-APPELLANT IS
ANSWERABLE TO DEFENDANTS-
APPELLEES JACINTO UY DIO AND
NORBERTO UY FOR ATTORNEY'S FEES
AND EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed
Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the
judgment appealed from is hereby
REVERSED AND SET, ASIDE. In lieu
thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy
Dio and Norberto Uy to pay, jointly and
severally, to appellant METROBANK the
amount of P2,397,883.68 which represents
the amount due as of July 17, 1987 inclusive
of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy
Dio and Norberto Uy to pay, jointly and
34
 severally, appellant METROBANK the
accruing interest, fees and charges thereon
from July 18, 1987 until the whole monetary
obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy
Dio and Norberto Uy to pay, jointly and
severally, to plaintiff P20,000.00 as attorney's
fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter
METROBANK), public respondent held that the Continuing
Suretyship Agreements separately executed by the petitioners
in 1977 were intended to guarantee payment of Uy Tiam's
outstanding as well as future obligations; each suretyship
arrangement was intended to remain in full force and effect until
METROBANK would have been notified of its revocation. Since
no such notice was given by the petitioners, the suretyships are
deemed outstanding and hence, cover even the 1979 letter of
credit issued by METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision.
They questioned the public respondent's construction of the
suretyship agreements and its ruling with respect to the extent
of their liability thereunder. They argued the even if the
agreements were in full force and effect when METROBANK
granted Uy Tiam's application for a letter of credit in 1979, the
public respondent nonetheless seriously erred in holding them
liable for an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied
the motion:
. . . considering that the issues raised were
substantially the same grounds utilized by the
lower court in rendering judgment for
defendants-appellees which We upon appeal
found and resolved to be untenable, thereby
reversing and setting aside said judgment and
rendering another in favor of plaintiff, and no
new or fresh issues have been posited to
justify reversal of Our decision herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether
or not the petitioners may be held liable as sureties for the
obligation contracted by Uy Tiam with METROBANK on 30 May
1979 under and by virtue of the Continuing Suretyship
Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the
Continuing Suretyship Agreements were automatically
extinguished upon payment of the principal obligation secured
thereby, i.e., the letter of credit obtained by Uy Tiam in 1977.
They further claim that they were not advised by either
METROBANK or Uy Tiam that the Continuing Suretyship
Agreements would stand as security for the 1979 obligation.
Moreover, it is posited that to extend the application of such
agreements to the 1979 obligation would amount to a violation
of Article 2052 of the Civil Code which expressly provides that a
guaranty cannot exist without a valid obligation. Petitioners
further argue that even granting, for the sake of argument, that
the Continuing Suretyship Agreements still subsisted and
thereby also secured the 1979 obligations incurred by Uy Tiam,
they cannot be held liable for more than what they guaranteed
to pay because it s axiomatic that the obligations of a surety
cannot extend beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to
the petition after considering the allegations, issues and
arguments adduced therein, the Comment thereon by the
private respondent and the Reply thereto by the petitioners; the
parties were required to submit their respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties
for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing
Suretyship Agreements they separately
signed in 1977; and
2. On the assumption that they are, what is
the extent of their liabilities for said 1979
obligations.
Under the Civil Code, a guaranty may be given to secure even
future debts, the amount of which may not known at the time the
guaranty is
executed. 8 This is the basis for contracts denominated as
continuing guaranty or suretyship. A continuing guaranty is one
which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until revoked. It
is prospective in its operation and is generally intended to
provide security with respect to future transactions within certain
limits, and contemplates a succession of liabilities, for which, as
they accrue, the guarantor becomes liable. 9 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. 10 A guaranty shall be
construed as continuing when by the terms thereof it is evident
that the object is to give a standing credit to the principal debtor
to be used from time to time either indefinitely or until a certain
period, especially if the right to recall the guaranty is expressly
reserved. Hence, where the contract of guaranty states that the
same is to secure advances to be made "from time to time" the
guaranty will be construed to be a continuing one. 11
In other jurisdictions, it has been held that the use of particular
words and expressions such as payment of "any debt," "any
indebtedness," "any deficiency," or "any sum," or the guaranty
of "any transaction" or money to be furnished the principal
debtor "at any time," or "on such time" that the principal debtor
may require, have been construed to indicate a continuing
guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the
suretyship agreement executed by petitioner Uy provides thus:
I. For and in consideration of any existing
indebtedness to the BANK of UY TIAM
(hereinafter called the "Borrower"), for the
payment of which the SURETY is now
obligated to the BANK, either as guarantor or
otherwise, and/or in order to induce the
BANK, in its discretion, at any time or from
time to time hereafter, to make loans or
35
 advances or to extend credit in any other
manner to, or at the request, or for the
account of the Borrower, either with or without
security, and/or to purchase or discount, or to
make any loans or advances evidence or
secured by any notes, bills, receivables,
drafts, acceptances, checks, or other
instruments or evidences of indebtedness (all
hereinafter called "instruments") upon which
the Borrower is or may become liable as
maker, endorser, acceptor, or otherwise,
the SURETY agrees to guarantee, and does
hereby guarantee, the punctual payment at
maturity to the loans, advances credits and/or
other obligations hereinbefore referred to, and
also any and all other indebtedness of every
kind which is now or may hereafter become
due or owing to the BANK by the Borrower,
together with any and all expenses which may
be incurred by the BANK in collecting all or
any such instruments or other indebtedness
or obligations herein before referred to, and/or
in enforcing any rights hereunder, and the
SURETY also agrees that the BANK may
make or cause any and all such payments to
be made strictly in accordance with the terms
and provisions of any agreement(s) express
or implied, which has (have) been or may
hereafter be made or entered into by the
Borrow in reference thereto, regardless of any
law, regulation or decree, unless the same is
mandatory and non-waivable in character, nor
or hereafter in effect, which might in any
manner affect any of the terms or provisions
of any such agreement(s) or the Bank's rights
with respect thereto as against the Borrower,
or cause or permit to be invoked any
alteration in the time, amount or manner of
payment by the Borrower of any such
instruments, obligations or indebtedness;
provided, however, that the liability of the
SURETY hereunder shall not exceed at any
one time the aggregate principal sum of
PESOS: THREE HUNDRED THOUSAND
ONLY (P300,000.00) (irrespective of the
currenc(ies) in which the obligations hereby
guaranteed are payable), and such interest as
may accrue thereon either before or after any
maturity(ies) thereof and such expenses as
may be incurred by the BANK as referred to
above. 13
Paragraph I of the Continuing Suretyship Agreement executed
by petitioner Dio contains identical provisions except with
respect to the guaranteed aggregate principal amount which is
EIGHT THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall
remain in full force and effect until written
notice shall have been received by the BANK
that it has been revoked by the SURETY, but
any such notice shall not release the
SURETY, from any liability as to any
instruments, loans, advances or other
obligations hereby guaranteed, which may be
held by the BANK, or in which the BANK may
have any interest at the time of the receipt
(sic) of such notice. No act or omission of any
kind on the BANK'S part in the premises shall
in any event affect or impair this guaranty, nor
shall same (sic) be affected by any change
which may arise by reason of the death of the
SURETY, or of any partner(s) of the
SURETY, or of the Borrower, or of the
accession to any such partnership of any one
or more new partners. 15
The foregoing stipulations unequivocally reveal that the
suretyship agreement in the case at bar are continuing in nature.
Petitioners do not deny this; in fact, they candidly admitted it.
Neither have they denied the fact that they had not revoked the
suretyship agreements. Accordingly, as correctly held by the
public respondent:
Undoubtedly, the purpose of the execution of
the Continuing Suretyships was to induce
appellant to grant any application for credit
accommodation (letter of credit/trust receipt)
UTEFS may desire to obtain from appellant
bank. By its terms, each suretyship is a
continuing one which shall remain in full force
and effect until the bank is notified of its
revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-
Loc-309 was obtained from appellant bank,
for the purpose of obtaining goods (covered
by a trust receipt) from Planters Products, the
continuing suretyships were in full force and
effect. Hence, even if sureties-appellees did
not sign the "Commercial Letter of Credit and
Application, they are still liable as the credit
accommodation (letter of credit/trust receipt)
was covered by the said suretyships. What
makes them liable thereunder is the condition
which provides that the Borrower "is or may
become liable as maker, endorser, acceptor
or otherwise." And since UTEFS which (sic)
was liable as principal obligor for having failed
to fulfill the obligatory stipulations in the trust
receipt, they as insurers of its obligation, are
liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship
Agreements cannot be made applicable to the 1979 obligation
because the latter was not yet in existence when the
agreements were executed in 1977; under Article 2052 of the
Civil Code, a guaranty "cannot exist without a valid obligation."
We cannot agree. First of all, the succeeding article provides
that "[a] guaranty may also be given as security for future debts,
the amount of which is not yet known." Secondly, Article 2052
speaks about a valid obligation, as distinguished from a void
obligation, and not an existing or current obligation. This
distinction is made clearer in the second paragraph of Article
2052 which reads:
Nevertheless, a guaranty may be constituted
to guarantee the performance of a voidable or
an unenforceable contract. It may also
guarantee a natural obligation.
36
As to the amount of their liability under the Continuing
Suretyship Agreements, petitioners contend that the public
respondent gravely erred in finding them liable for more than the
amount specified in their respective agreements, to wit: (a)
P800,000.00 for petitioner Dio and (b) P300,000.00 for
petitioner Uy.
The limit of the petitioners respective liabilities must be
determined from the suretyship agreement each had signed. It
is undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication
beyond its specified limits. To the extent, and in the manner, and
under the circumstances pointed out in his obligation, he is
bound, and no farther. 17
Indeed, the Continuing Suretyship Agreements signed by
petitioner Dio and petitioner Uy fix the aggregate amount of
their liability, at any given time, at P800,000.00 and
P300,000.00, respectively. The law is clear that a guarantor may
bond himself for less, but not for more than the principal debtor,
both as regards the amount and the onerous nature of the
conditions. 18 In the case at bar, both agreements provide for
liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon
either before or after any maturity(ies) thereof
and such expenses as may be incurred by the
BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being
instituted by the BANK against the SURETY
to enforce any of the terms and conditions of
this undertaking, the SURETY further agrees
to pay the BANK a reasonable compensation
for and as attorney's fees and costs of
collection, which shall not in any event be less
than ten per cent (10%) of the amount due
(the same to be due and payable irrespective
of whether the case is settled judicially or
extrajudicially). 20
Thus, by express mandate of the Continuing
Suretyship Agreements which they had signed,
petitioners separately bound themselves to pay
interest, expenses, attorney's fees and costs. The last
two items are pegged at not less than ten percent
(10%) of the amount due.
Even without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial costs. Article
2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must
be express and cannot extend to more than
what is stipulated therein.
If it be simple or indefinite, it shall comprise
not only the principal obligation, but also all its
accessories, including the judicial costs,
provided with respect to the latter, that the
guarantor shall only be liable for those costs
incurred after he has been judicially required
to pay.
Interest and damages are included in the
term accessories. However, such interest should run
only from the date when the complaint was filed in
court. Even attorney's fees may be imposed whenever
appropriate, pursuant to Article 2208 of the Civil Code.
Thus, in Plaridel Surety & Insurance Co.,
Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court
held:
Petitioner objects to the payment of interest
and attorney's fees because: (1) they were
not mentioned in the bond; and (2) the surety
would become liable for more than the
amount stated in the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because
as far back as the year 1922 this Court held
in Tagawa vs. Aldanese, 43 Phil. 852, that
creditors suing on a suretyship bond may
recover from the surety as part of their
damages, interest at the legal rate even if the
surety would thereby become liable to pay
more than the total amount stipulated in the
bond. The theory is that interest is allowed
only by way of damages for delay upon the
part of the sureties in making payment after
they should have done so. In some states, the
interest has been charged from the date of the
interest has been charged from the date of the
judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the
general practice, which is to order that interest
begin to run from the date when the complaint
was filed in court, . . .
Such theory aligned with sec. 510 of the Code
of Civil Procedure which was subsequently
recognized in the Rules of Court (Rule 53,
section 6) and with Article 1108 of the Civil
Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay
interest, not by reason of the contract, but by
reason of its failure to pay when demanded
and for having compelled the plaintiff to resort
to the courts to obtain payment. It should be
observed that interest does not run from the
time the obligation became due, but from
the filing of the complaint.
As to attorney's fees. Before the enactment of
the New Civil Code, successful litigants could
not recover attorney's fees as part of the
damages they suffered by reason of the
litigation. Even if the party paid thousands of
pesos to his lawyers, he could not charge the
amount to his opponent (Tan Ti vs. Alvear, 26
Phil. 566).
However the New Civil Code permits recovery
of attorney's fees in eleven cases enumerated
in Article 2208, among them, "where the court
deems it just and equitable that attorney's
(sic) fees and expenses of litigation should be
recovered" or "when the defendant acted in
37
 gross and evident bad faith in refusing to
satisfy the plaintiff's plainly valid, just and
demandable claim." This gives the courts
discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion
of the principal obligation of Uy Tiam to MERTOBANK under
Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March
1979. In referring to the last demand letter to Mr. Uy Tiam and
the complaint filed in Civil Case No. 82-9303, the public
respondent mentions the amount of "P613,339.32, as of
January 31, 1982, inclusive of interest commission penalty and
bank charges." 23This is the same amount stated by
METROBANK in its Memorandum. 24 However, in summarizing
Uy Tiam's outstanding obligation as of 17 July 1987, public
respondent states:
Hence, they are jointly and severally liable to
appellant METROBANK of UTEFS'
outstanding obligation in the sum of
P2,397,883.68 (as of July 17, 1987)
P651,092.82 representing the principal
amount, P825,133.54, for past due interest
(5-31-82 to 7-17-87) and P921,657.32, for
penalty charges at 12% per annum (5-31-82
to 7-17-87) as shown in the Statement of
Account (Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is
obvious that on that date, the outstanding principal
obligation of Uy Tiam, secured by the petitioners'
Continuing Suretyship Agreements, was less than
P613,339.32. Such amount may be fully covered by
the Continuing Suretyship Agreement executed by
petitioner Dio which stipulates an aggregate principal
sum of not exceeding P800,000.00, and partly covered
by that of petitioner Uy which pegs his maximum
liability at P300,000.00.
Consequently, the judgment of the public respondent shall have
to be modified to conform to the foregoing exposition, to which
extent the instant petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar
as the challenged decision has to be modified with respect to
the extend of petitioners' liability. As modified, petitioners
JACINTO UY DIO and NORBERTO UY are hereby declared
liable for and are ordered to pay, up to the maximum limit only
of their respective Continuing Suretyship Agreement, the
remaining unpaid balance of the principal obligation of UY TIAM
or UY TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March
1979, together with the interest due thereon at the legal rate
commencing from the date of the filing of the complaint in Civil
Case No. 82-9303 with Branch 45 of the Regional Trial Court of
Manila, as well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged
decision not inconsistent with the above are affirmed.
SO ORDERED.
G.R. No. 112191 February 7, 1997
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR
L. RODRIGUEZA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and FILINVEST
CREDIT CORPORATION, respondents.
PANGANIBAN, J.:
To fund their acquisition of new vehicles (which are later retailed
or resold to the general public), car dealers normally enter into
wholesale automotive financing schemes whereby vehicles are
delivered by the manufacturer or assembler on the strength of
trust receipts or drafts executed by the car dealers, which are
backed up by sureties. These trust receipts or drafts are then
assigned and/or discounted by the manufacturer to/with
financing companies, which assume payment of the vehicles but
with the corresponding right to collect such payment from the
car dealers and/or the sureties. In this manner, car dealers are
able to secure delivery of their stock-in-trade without having to
pay cash therefor; manufacturers get paid without any
receivables/collection problems; and financing companies earn
their margins with the assurance of payment not only from the
dealers but also from the sureties. When the vehicles are
eventually resold, the car dealers are supposed to pay the
financing companies and the business goes merrily on.
However, in the event the car dealer defaults in paying the
financing company, may the surety escape liability on the legal
ground that the obligations were incurred subsequent to the
execution of the surety contract?
This is the principal legal question raised in this petition for
review (under Rule 45 of the Rules of Court) seeking to set aside
the Decision 1 of the Court of Appeals (Tenth
Division) 2 promulgated on September 30, 1993 in CA G.R. CV
No. 09136 which affirmed in toto the decision 3 of the Regional
Trial Court of Manila Branch 11 4 in Civil Case No. 83-21994,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiff and against the
defendants, by ordering the latter to pay,
jointly and severally, the plaintiff the following
amounts:
1. The sum of P1,348,033.89, plus interest
thereon at the rate of P922.53 per day starting
April 1, 1985 until the said principal amount is
fully paid;
2. The amount of P50,000.00 as attorney's
fees and another P50,000.00 as liquidated
damages; and
3. That the defendants, although spared from
paying exemplary damages, are further
ordered to pay, in solidum, the costs of this
suit.
Plaintiff therein was the financing company and the defendants
the car dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L. G. Chua and Petitioner
Edgar Lee Rodrigueza ("Petitioner Rodrigueza") each executed
38
an undated "Surety Undertaking" 5 whereunder they "absolutely,
unconditionally and solidarily guarantee(d)" to Respondent
Filinvest Credit Corporation ("Respondent Filinvest") and its
affiliated and subsidiary companies the "full, faithful and prompt
performance, payment and discharge of any and all obligations
and agreements" of Fortune Motors (Phils.) Corporation
("Petitioner Fortune") "under or with respect to any and all such
contracts and any and all other agreements (whether by way of
guaranty or otherwise)" of the latter with Filinvest and its
affiliated and subsidiary companies "now in force or hereafter
made."
The following year or on April 6 5, 1982, Petitioner Fortune,
Respondent Filinvest and Canlubang Automotive Resources
Corporation ("CARCO") entered into an "Automotive Wholesale
Financing Agreement" 7 ("Financing Agreement") under which
CARCO will deliver motor vehicles to Fortune for the purpose of
resale in the latter's ordinary course of business; Fortune, in
turn, will execute trust receipts over said vehicles and accept
drafts drawn by CARCO, which will discount the same together
with the trust receipts and invoices and assign them in favor of
Respondent Filinvest, which will pay the motor vehicles for
Fortune. Under the same agreement, Petitioner Fortune, as
trustee of the motor vehicles, was to report and remit proceeds
of any sale for cash or on terms to Respondent Filinvest
immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by
CARCO to Fortune, and trust receipts covered by demand drafts
and deeds of assignment were executed in favor of Respondent
Filinvest. However, when the demand drafts matured, not all the
proceeds of the vehicles which Petitioner Fortune had sold were
remitted to Respondent Filinvest. Fortune likewise failed to turn
over to Filinvest several unsold motor vehicles covered by the
trust receipts. Thus, Filinvest through counsel, sent a demand
letter 8 dated December 12, 1983 to Fortune for the payment of
its unsettled account in the amount of P1,302,811.00. Filinvest
sent similar demand letters 9 separately to Chua and
Rodrigueza as sureties. Despite said demands, the amount was
not paid. Hence, Filinvest filed in the Regional Trial Court of
Manila a complaint for a sum of money with preliminary
attachment against Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court declared
that there was no factual issue to be resolved except for the
correct balance of defendants' account with Filinvest as agreed
upon by the parties during pre-trial. 10 Subsequently, Filinvest
presented testimonial and documentary evidence. Defendants
(petitioners herein), instead of presenting their evidence, filed a
"Motion for Judgment on Demurrer to Evidence" 11 anchored
principally on the ground that the Surety Undertakings were null
and void because, at the time they were executed, there was no
principal obligation existing. The trial court denied the motion
and scheduled the case for reception of defendants' evidence.
On two scheduled dates, however, defendants failed to present
their evidence, prompting the court to deem them to have
waived their right to present evidence. On December 17, 1985,
the trial court rendered its decision earlier cited ordering
Fortune, Chua and Rodrigueza to pay Filinvest, jointly and
severally, the sum of P1,348,033.83 plus interest at the rate of
P922.53 per day from April 1, 1985 until fully paid, P50,000.00
in attorney's fees, another P50,000.00 in liquidated damages
and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court
of Appeals (Tenth Division) which affirmed in toto the trial court's
decision. Hence, this recourse.
Issues
Petitioners assign the following errors in the appealed Decision:
1. that the Court of Appeals erred in declaring
that surety can exist even if there was no
existing indebtedness at the time of its
execution.
2. that the Court of Appeals erred when it
declared that there was no novation.
3. that the Court of Appeals erred when it
declared, that the evidence was sufficient to
prove the amount of the claim. 12
Petitioners argue that future debts which can be guaranteed
under Article 2053 of the Civil Code refer only to "debts existing
at the time of the constitution of the guaranty but the amount
thereof is unknown," and that a guaranty being an accessory
obligation cannot exist without a principal obligation. Petitioners
claim that the surety undertakings cannot be made to cover the
Financing Agreement executed by Fortune, Filinvest and
CARCO since the latter contract was not yet in existence when
said surety contracts were entered into.
Petitioners further aver that the Financing Agreement would
effect a novation of the surety contracts since it changed the
principal terms of the surety contracts and imposed additional
and onerous obligations upon the sureties.
Lastly, petitioners claim that no accounting of the payments
made by Petitioner Fortune to Respondent Filinvest was done
by the latter. Hence, there could be no way by which the sureties
can ascertain the correct amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes "estoppel (by
pleadings or by judicial admission)" upon petitioners when in
their "Motion to Discharge Attachment," they admitted their
liability as sureties thus:
Defendants Chua and Rodrigueza could not
have perpetrated fraud because they are only
sureties of defendant Fortune Motors . . .;
. . . The defendants (referring to Rodrigueza
and Chua) are not parties to the trust receipts
agreements since they are ONLY sureties.
. . . 13
In rejecting the arguments of petitioners and in holding that they
(Fortune and the sureties) were jointly and solidarily liable to
Filinvest, the trial court declared:
As to the alleged non-existence of a principal
obligation when the surety agreement was
signed, it is enought (sic) to state that a
guaranty may also be given as security for
future debts, the amount of which is not
known (Art. 2053, New Civil Code). In the
case of NARIC vs. Fojas, L-11517,
promulgated April 10, 1958, it was ruled that
a bond posted to secure additional credit that
the principal debtor had applied for, is not void
just because the said bond was signed and
39
filed before the additional credit was extended
by the creditor. The obligation of the sureties
on future obligations of Fortune is apparent
from a proviso under the Surety Undertakings
marked Exhs. B and C that the sureties agree
with the plaintiff as follows:
In consideration of your
entering into an
arrangement with the party
(Fortune) named above, . .
. by which you may
purchase or otherwise
require from, and or enter
into with obligor . . . trust
receipt . . . arising out of
wholesale and/or retail
transactions by or with
obligor, the undersigned . .
. absolutely,
unconditionally, and
solidarily guarantee to you
. . . the full, faithful and
prompt performance,
payment and discharge of
any and all obligations . . .
of obligor under and with
respect to any and all such
contracts and any and all
agreements (whether by
way of guaranty or
otherwise) of obligor with
you . . . now in force or
hereafter made. (Emphasis
supplied).
On the matter of novation, this has already
been ruled upon when this Court denied
defendants' Motion to dismiss on the
argument that what happened was really an
assignment of credit, and not a novation of
contract, which does not require the consent
of the debtors. The fact of knowledge is
enough. Besides, as explained by the plaintiff,
the mother or the principal contract was the
Financing Agreement, whereas the trust
receipts, the sight drafts, as well as the Deeds
of assignment were only collaterals or
accidental modifications which do not
extinguish the original contract by way of
novation. This proposition holds true even if
the subsequent agreement would provide for
more onerous terms for, at any rate, it is the
principal or mother contract that is to be
followed. When the changes refer to
secondary agreements and not to the object
or principal conditions of the contract, there is
no novation; such changes will produce
modifications of incidental facts, but will not
extinguish the original obligation (Tolentino,
Commentaries on Jurisprudence of the Civil
Code of the Philippines, 1973 Edition, Vol. IV,
page 367; cited in plaintiff's Memorandum of
September 6, 1985, p. 3).
On the evidence adduced by the plaintiff to
show the status of defendants' accounts,
which took into consideration payments by
defendants made after the filing of the case, it
is enough to state that a statement was
carefully prepared showing a balance of the
principal obligation plus interest totalling
P1,348,033.89 as of March 31, 1985 (Exh.
M). This accounting has not been traversed
nor contradicted by defendants although they
had the opportunity to do so. Likewise, there
was absolute silence on the part of
defendants as to the correctness of the
previous statement of account made as of
December 16, 1983 (referring to Exh. I), but
more important, however, is that defendants
received demand letters from the plaintiff
stating that, as of December 1983 (Exhs. J, K
and L), this total amount of obligation was
P1,302,811,00, and yet defendants were not
heard to have responded to said demand
letters, let alone have taken any exception
thereto. There is such a thing as evidence by
silence (Sec. 23, Rule 130, Revised Rules of
Court). 14
The Court of Appeals, affirming the above decision of the trial
court, further explained:
. . . In the case at bar, the surety undertakings
in question unequivocally state that Chua and
Rodrigueza "absolutely, unconditionally and
solidarily guarantee" to Filinvest the "full,
faithful and prompt performance, payment
and discharge of any and all obligations and
agreements" of Fortune "under or with
respect to any and all such contracts and any
and all other agreements (whether by way of
guaranty or otherwise)" of the latter with
Filinvest in force at the time of the execution
of the "Surety Undertakings" or made
thereafter. Indeed, if Chua and Rodrigueza
did not intend to guarantee all of Fortune's
future obligation with Filinvest, then they
should have expressly stated in their
respective surety undertakings exactly what
said surety agreements guaranteed or to
which obligations of Fortune the same were
intended to apply. For another, if Chua and
Rodrigueza truly believed that the surety
undertakings they executed should not cover
Fortune's obligations under the AWFA, then
why did they not inform Filinvest of such fact
when the latter sent them the aforementioned
demand letters (Exhs. 'K' and 'L') urging them
to pay Fortune's liability under the AWFA.
Instead, quite uncharacteristic of persons who
have just been asked to pay an obligation to
which they believe they are not liable, Chua
and Rodrigueza elected or chose not to
answer said demand letters. Then, too,
considering that appellant Chua is the
corporate president of Fortune and a
signatory to the AWFA, he should have simply
had it stated in the AWFA or in a separate
document that the "Surety Undertakings" do
not cover Fortune's obligations in the
aforementioned AWFA, trust receipts or
demand drafts.
40
 Appellants argue that it was unfair for Filinvest
to have executed the AWFA only after two (2)
years from the date of the "Surety
undertakings" because Chua and Rodrigueza
were thereby made to wait for said number of
years just to know what kind of obligation they
had to guarantee.
The argument cannot hold water. In the first
place, the "Surety Undertakings" did not
provide that after a period of time the same
will lose its force and effect. In the second
place, if Chua and Rodrigueza did not want to
guarantee the obligations of Fortune under
the AWFA, trust receipts and demand drafts,
then why did they not simply terminate the
'Surety Undertakings' by serving ten (10) days
written notice to Filinvest as expressly
allowed in said surety agreements. It is highly
plausible that the reason why the 'Surety
Undertakings' were not terminated was
because the execution of the same was part
of the consideration why Filinvest and
CARCO agreed to enter into the AWFA with
Fortune. 15
The Court's Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance
Corporation vs. Court of Appeals 16 which reiterated our rulings
in National Rice and Corn Corporation (NARIC) vs. Court of
Appeals 17 and Rizal Commercial Banking Corporation
vs. Arro. 18 In Atok Finance, Sanyu Chemical as principal, and
Sanyu Trading along with individual private stockholders of
Sanyu Chemical, namely, spouses Daniel and Nenita Arrieta,
Leopoldo Halili and Pablito Bermundo, as sureties, executed a
continuing suretyship agreement in favor of Atok Finance as
creditor. Under the agreement, Sanyu Trading and the individual
private stockholders and officers of Sanyu Chemical "jointly and
severally unconditionally guarantee(d) to Atok Finance
Corporation (hereinafter called Creditor), the full, faithful and
prompt payment and discharge of any and all indebtedness of
[Sanyu Chemical] . . . to the Creditor." Subsequently, Sanyu
Chemical assigned its trade receivables outstanding with a total
face value of P125,871.00 to Atok Finance in consideration of
receipt of the amount of P105,000.00. Later, additional trade
receivables with a total face value of P100,378.45 were also
assigned. Due to nonpayment upon maturity, Atok
Finance commenced action against Sanyu Chemical, the Arrieta
spouses, Bermundo and Halili to collect the sum of P120,240.00
plus penalty charges due and payable. The individual private
respondents contended that the continuing suretyship
agreement, being an accessory contract, was null and void
since, at the time of its execution, Sanyu Chemical had no pre-
existing obligation due to Atok Finance. The trial court rendered
a decision in favor of Atok Finance and ordered defendants to
pay, jointly and severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the
trial court and dismissed the complaint on the ground that there
was "no proof that when the suretyship agreement was entered
into, there was a pre-existing obligation which served as the
principal obligation between the parties. Furthermore, the 'future
debts' alluded to in Article 2053 refer to debts already existing at
the time of the constitution of the agreement but the amount
thereof is unknown, unlike in the case at bar where the obligation
was acquired two years after the agreement."
We ruled then that the appellate court was in serious error. The
distinction which said court sought to make with respect to
Article 2053 (that "future debts" referred to therein relate to
"debts already existing at the time of the constitution of the
agreement but the amount [of which] is unknown" and not to
debts not yet incurred and existing at that time) has previously
been rejected, citing the RCBC and NARIC cases. We further
said:
. . . Of course, a surety is not bound under any
particular principal obligation until that
principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in
saying that the suretyship agreement itself is
valid and binding even before the principal
obligation intended to be secured thereby is
born, any more than there would be in saying
that obligations which are subject to a
condition precedent are valid and binding
before the occurrence of the condition
precedent.
Comprehensive or continuing surety
agreements are in fact quite commonplace in
present day financial and commercial
practice. A bank or financing company which
anticipates entering into a series of credit
transactions with a particular company,
commonly requires the projected principal
debtor to execute a continuing surety
agreement along with its sureties. By
executing such an agreement, the principal
places itself in a position to enter into the
projected series of transactions with its
creditor; with such suretyship agreement,
there would be no need to execute a separate
surety contract or bond for each financing or
credit accommodation extended to the
principal debtor.
In Dino vs. Court of Appeals, 19 we again had occasion to
discourse on continuing guaranty/suretyship thus:
. . . A continuing guaranty is one which is not
limited to a single transaction, but which
contemplates a future course of dealing,
covering a series of transactions, generally for
an indefinite time or until revoked. It is
prospective in its operation and is generally
intended to provide security with respect to
future transactions within certain limits, and
contemplates a succession of liabilities, for
which, as they accrue, the guarantor
becomes liable. Otherwise stated, a
continuing guaranty is one which covers all
transactions, including those arising in the
future, which are within the description or
contemplation of the contract, of guaranty,
until the expiration or termination thereof. A
guaranty shall be construed as continuing
when by the terms thereof it is evident that the
41
 object is to give a standing credit to the
principal debtor to be used from time to time
either indefinitely or until a certain period;
especially if the right to recall the guaranty is
expressly reserved. Hence, where the
contract of guaranty states that the same is to
secure advances to be made 'from time to
time' the guaranty will be construed to be a
continuing one.
In other jurisdictions, it has been held that the
use of particular words and expressions such
as payment of "any debt," "any
indebtedness," "any deficiency," or "any
sum," or the guaranty of "any transaction" or
money to be furnished the principal debtor "at
any time," or "on such time" that the principal
debtor may require, have been construed to
indicate a continuing guaranty. 20
We have no reason to depart from our uniform ruling in the
above-cited cases. The facts of the instant case bring us to no
other conclusion than that the surety undertakings executed by
Chua and Rodrigueza were continuing guaranties or suretyships
covering all future obligations of Fortune Motors (Phils.)
Corporation with Filinvest Credit Corporation. This is evident
from the written contract itself which contained the words
"absolutely, unconditionally and solidarily guarantee(d)" to
Respondent Filinvest and its affiliated and subsidiary companies
the "full, faithful and prompt performance, payment and
discharge of any and all obligations and agreements" of
Petitioner Fortune "under or with respect to any and all such
contracts and any and all other agreements (whether by way of
guaranty or otherwise)" of the latter with Filinvest and its
affiliated and subsidiary companies "now in force or hereafter
made."
Moreover, Petitioner Rodrigueza and Joseph Chua knew
exactly where they stood at the time they executed their
respective surety undertakings in favor of Fortune. As stated in
the petition:
Before the execution of the new agreement,
Edgar L. Rodrigueza and Joseph Chua were
required to sign blank surety agreements,
without informing them how much amount
they would be liable as sureties.
However, because of the desire of petitioners,
Chua and Rodrigueza to have the cars
delivered to petitioner. Fortune, they signed
the blank promissory notes. 21 (emphasis
supplied)
It is obvious from the foregoing that Rodrigueza and Chua were
fully aware of the business of Fortune, an automobile dealer;
Chua being the corporate president of Fortune and even a
signatory to the Financial Agreement with Filinvest. 22 Both
sureties knew the purpose of the surety undertaking which they
signed and they must have had an estimate of the amount
involved at that time. Their undertaking by way of the surety
contracts was critical in enabling Fortune to acquire credit facility
from Filinvest and to procure cars for resale, which was the
business of Fortune. Respondent Filinvest, for its part, relied on
the surety contracts when it agreed to be the assignee of
CARCO with respect to the liabilities of Fortune with CARCO.
After benefiting therefrom, petitioners cannot now impugn the
validity of the surety contracts on the ground that there was no
preexisting obligation to be guaranteed at the time said surety
contracts were executed. They cannot resort to equity to escape
liability for their voluntary acts, and to heap injustice to Filinvest,
which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of
petitioners, Filinvest was made to believe that it can collect from
Chua and/or Rodrigueza in case of Fortune's default. Filinvest
relied upon the surety contracts when it demanded payment
from the sureties of the unsettled liabilities of Fortune. A refusal
to enforce said surety contracts would virtually sanction the
perpetration of fraud or injustice. 23
Second Issue: No Novation
Neither do we find merit in the averment of petitioners that the
Financing Agreement contained onerous obligations not
contemplated in the surety undertakings, thus changing the
principal terms thereof and effecting a novation.
We have ruled previously that there are only two ways to effect
novation and thereby extinguish an obligation. First, novation
must be explicitly stated and declared in unequivocal terms.
Novation is never presumed. Second, the old and new
obligations must be incompatible on every point. The test of
incompatibility is whether the two obligations can stand together,
each one having its independent existence. If they cannot, they
are incompatible and the latter obligation novates the
first. 24 Novation must be established either by the express
terms of the new agreement or by the acts of the parties clearly
demonstrating the intent to dissolve the old obligation as a
consideration for the emergence of the new one. The will to
novate, whether totally or partially, must appear by express
agreement of the parties, or by their acts which are too clear and
unequivocal to be mistaken. 25
Under the surety undertakings however, the obligation of the
sureties referred to absolutely, unconditionally and solidarily
guaranteeing the full, faithful and prompt performance, payment
and discharge of all obligations of Petitioner Fortune with
respect to any and all contracts and other agreements with
Respondent Filinvest in force at that time or thereafter made.
There were to qualifications, conditions or reservations stated
therein as to the extent of the suretyship. The Financing
Agreement, on the other hand, merely detailed the obligations
of Fortune to CARCO (succeeded by Filinvest as assignee). The
allegation of novation by petitioners is, therefore, misplaced.
There is no incompatibility of obligations to speak of in the two
contracts. They can stand together without conflict.
Furthermore, the parties have not performed any explicit and
unequivocal act to manifest their agreement or intention to
novate their contract. Neither did the sureties object to the
Financing Agreement nor try to avoid liability thereunder at the
time of its execution. As aptly discussed by the Court of Appeals:
. . . For another, if Chua and Rodrigueza truly
believed that the surety undertakings they
executed should not cover Fortune's
obligations under the AWFA (Financing
Agreement), then why did they not inform
Filinvest of such fact when the latter sent
them the aforementioned demand letters
(Exhs. "K" and "L") urging them to pay
Fortune's liability under the AWFA. Instead,
quite uncharacteristic of persons who have
just been asked to pay an obligation to which
42
 they are not liable, Chua and Rodrigueza
elected or chose not to answer said demand
letters. Then, too, considering that appellant
Chua is the corporate president of Fortune
and a signatory to the AWFA, he should have
simply had it stated in the AWFA or in a
separate document that the 'Surety
Undertakings' do not cover Fortune's
obligations in the aforementioned AWFA,
trust receipts or demand drafts. 26
Third Issue: Amount of Claim Substantiated
The contest on the correct amount of the liability of petitioners is
a purely factual issue. It is an oft repeated maxim that the
jurisdiction of this Court in cases brought before it from the Court
of Appeals under Rule 45 of the Rules of Court is limited to
reviewing or revising errors of law. It is not the function of this
Court to analyze or weigh evidence all over again unless there
is a showing that the findings of the lower court are totally devoid
of support or are glaringly erroneous as to constitute serious
abuse of discretion. Factual findings of the Court of Appeals are
conclusive on the parties and carry even more weight when said
court affirms the factual findings of the trial court. 27
In the case at bar, the findings of the trial court and the Court of
Appeals with respect to the assigned error are based on
substantial evidence which were not refuted with contrary proof
by petitioners. Hence, there is no necessity to depart from the
above judicial dictum.
WHEREFORE, premises considered, the petition is DENIED
and the assailed Decision of the Court of Appeals concurring
with the decision of the trial court is hereby AFFIRMED. Costs
against petitioners.
SO ORDERED.
G.R. No. 135462 December 7, 2001
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),
PALAWAN LUMBER MANUFACTURING
CORPORATION, petitioners,
vs.
BA FINANCE CORPORATION, respondent.
PARDO, J.:
The Case
The case is a petition to set aside the decision 1 of the Court of
Appeals, the dispositive portion of which reads:
"WHEREFORE, premises considered, the appealed
Decision (as amended by that Order of July 22, 1992)
of the lower court in Civil Case No. 21944 is hereby
AFFIRMED with the MODIFICATION that defendant-
appellee South City Homes, Inc. is hereby ordered to
pay, jointly and severally, with Fortune Motors
Corporation, Palawan Lumber Manufacturing
Corporation and Joseph L. G. Chua, the outstanding
amounts due under the six (6) drafts and trust receipts,
with interest thereon at the legal rate from the date of
filing of this case until said amounts shall have been
fully paid, as follows:
Date of Draft Amount Due
Balance
July 26, P244,269.00 P198,659.52
1983
July 27, 967,765.50 324,767.41
1983
July 28, 1,138,941.00 1,138,941.00
1983
August 2, 244,269.00 244,269.00
1983
August 5, 275,079.00 275,079.60
1983
August 8, 475,046.10 475,046.10
1983
and the attorney's fees and costs of suit.
"SO ORDERED."2
The Facts
The facts, as found by the Court of Appeals, are as follows:
"The present controversy relates to the rights of an
assignee (financing company) of drafts and trust
receipts backed up by sureties, in the event of default
by the debtor (car dealer) to whom the assignor creditor
(car manufacturer) sold and delivered motor vehicles
for resale. A consistent ruling on these cases is hereby
reiterated: that a surety may secure obligations
incurred subsequent to the execution of the surety
contract.
"Prior to the transactions covered by the subject drafts
and trust receipts, defendant-appellant Fortune Motors
Corporation (Phils.) has been availing of the credit
facilities of plaintiff-appellant BA Finance Corporation.
On January 17, 1983, Joseph L. G. Chua, President of
Fortune Motors Corporation, executed in favor of
plaintiff-appellant a Continuing Suretyship Agreement,
in which he "jointly and severally unconditionally"
guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness" of Fortune
Motors Corporation to BA Finance Corporation (Folder
of Exhibits, pp. 21-22).
"On February 3, 1983, Palawan Lumber Manufacturing
Corporation represented by Joseph L.G. Chua, George
D. Tan, Edgar C. Rodrigueza and Joselito C. Baltazar,
executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement in which, said corporation
"jointly and severally unconditionally" guaranteed the
"full, faithful and prompt payment and discharge of any
and all indebtedness of Fortune Motors Corporation to
BA Finance Corporation (Folder of Exhibits, pp. 19-20).
On the same date, South City Homes, Inc. represented
by Edgar C. Rodrigueza and Aurelio F. Tablante,
likewise executed a Continuing Suretyship Agreement
in which said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to BA
Finance Corporation (Folder of Exhibits, pp. 17-18).
43
"Subsequently, Canlubang Automotive Resources
Corporation (CARCO) drew six (6) Drafts in its own
favor, payable thirty (30) days after sight, charged to
the account of Fortune Motors Corporation, as follows:
Date of Draft Amount
July 26, 1983 P244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10
"(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).
"Fortune Motors Corporation thereafter executed trust
receipts covering the motor vehicles delivered to it by
CARCO under which it agreed to remit to the Entruster
(CARCO) the proceeds of any sale and immediately
surrender the remaining unsold vehicles (Folder of
Exhibits, pp. 2, 5, 7-A, 9, 12 and 15). The drafts and
trust receipts were assigned to plaintiff-appellant,
under Deeds of Assignment executed by CARCO
(Folder of Exhibits, pp. 3, 6, 7-B, 10, 13 and 16).
"Upon failure of the defendant-appellant Fortune
Motors Corporation to pay the amounts due under the
drafts and to remit the proceeds of motor vehicles sold
or to return those remaining unsold in accordance with
the terms of the trust receipt agreements, BA Finance
Corporation sent demand letter to Edgar C.
Rodrigueza, South City Homes, Inc., Aurelio Tablante,
Palawan Lumber Manufacturing Corporation, Joseph
L. G. Chua, George D. Tan and Joselito C. Baltazar
(Folder of Exhibits, pp. 29-37). Since the defendants-
appellants failed to settle their outstanding account
with plaintiff-appellant, the latter filed on December 22,
1983 a complaint for a sum of money with prayer for
preliminary attachment, with the Regional Trial Court of
Manila, Branch 1, which was docketed as Civil Case
No. 83-21944 (Record, pp. 1-12). Plaintiff-appellant
filed a surety bond in the amount of P3,391,546.56 and
accordingly, Judge Rosalio C. Segundo ordered the
issuance of a writ of preliminary attachment on January
3, 1984 (Record, pp. 37-47). Defendants Fortune
Motors Corporation, South City Homes, Inc., Edgar C.
Rodrigueza, Aurelio F. Tablante, Palawan Lumber
Manufacturing Corporation, Joseph L. G. Chua,
George D. Tan and Joselito C. Baltazar filed a Motion
to Discharge Attachment, which was opposed by
plaintiff-appellant (Record, pp. 49-56). In an Order
dated January 11, 1984, Judge Segundo dissolved the
writ of attachment except as against defendant Fortune
Motors Corporation and set the said incident for
hearing (Record, p. 57). On January 19, 1984, the
defendants filed a Motion to Dismiss. Therein, they
alleged that conventional subrogation effected a
novation without the consent of the debtor (Fortune
Motors Corporation) and thereby extinguished the
latter's liability; that pursuant to the trust receipt
transaction, it was premature under P. D. No. 115 to
immediately file a complaint for a sum of money as the
remedy of the entruster is an action for specific
performance; that the suretyship agreements are null
and void for having been entered into without an
existing principal obligation; and that being such
sureties does not make them solidary debtors (Record,
pp. 58-64).
"After due hearing, the court denied the motion to
discharge attachment with respect to defendant
Fortune Motors Corporation as well as the motion to
dismiss by the defendants (Record, pp. 68 and 87). In
their Answer, defendants stressed that their obligations
to the creditor (CARCO) was extinguished by the
assignment of the drafts and trust receipts to plaintiff-
appellant without their knowledge and consent, and
pursuant to legal provision on conventional
subrogation a novation was effected, thereby
extinguishing the liability of the sureties; that plaintiff-
appellant failed to immediately demand the return of
the goods under the trust receipt agreements or
exercise the courses of action by the entruster as
provided for under P. D. No. 115; and that at the time
the suretyship agreements were entered into, there
were no principal obligations, thus rendering them null
and void. A counterclaim for the award of actual, moral
and exemplary damages was prayed for by defendants
(Record, pp. 91-110).
"During the pre-trial, efforts to reach a compromise was
not successful, and in view of the retirement of Judge
Rosalio C. Segundo of RTC Manila, Branch 1, the case
was-re-raffled off to Branch XXXIII, presided over by
Judge Felix V. Barbers (Record, pp. 155-160).
"Fortune Motors Corporation filed a motion to lift the
writ of attachment covering three (3) vehicles
described in the Third-Party Claim filed with the Office
of Deputy Sheriff Jorge C. Victorino (RTC, Branch 1)
by Fortune Equipment, Inc. which was opposed by
plaintiff-appellant (Record, pp. 173-181). On June 15,
1984, Deputy Sheriff Jorge C. Victorino issued a
"Notice of Levy Upon Personal Properties Pursuant to
Order of Attachment" which was duly served on
defendant Fortune Motors Corporation (Record, pp.
191-199). In an Order dated April 28, 1986, the court a
quo denied the motion to lift the writ of attachment on
three (3) vehicles described in the Third-Party Claim
filed by Fortune Equipment Inc. (Record, p. 207). On
motion of their respective counsel, the trial court
granted the parties time to sit down and appraise the
machineries and spare parts owned by defendant
Fortune Motors Corporation which are now in the
possession of plaintiff corporation by virtue of the
attachment. A series of conferences was allowed by
the court, as means toward possible compromise
agreement. In an Order dated June 2, 1987, the case
was returned to Branch I, now presided over by Judge
Rebecca G. Salvador (Record, p. 237). The pre-trial
period was terminated and the case was set for trial on
the merits (Record, p. 259).
"Acting on the motion to sell levied properties filed by
defendant George D. Tan, the trial court ordered the
public sale of the attached properties (Record, p. 406).
The court likewise allowed the complaint-in-
intervention filed by Fortune Equipment Inc. and South
Fortune Motors Corporation who claimed ownership of
four (4) vehicles earlier seized and attached (Record,
p. 471-475). Plaintiff corporation admitted the
allegations contained in the complaint-in-intervention
only with respect to one truck so attached but denied
44
the rest of intervenors' allegations (Record, pp. 479-
482). Thereafter, the parties submitted their respective
pre-trial briefs on the complaint-in-intervention, and
after the submission of evidence thereon, the case was
submitted for decision (Record, pp. 573-577).
"On November 25, 1991, the lower court rendered its
judgment, the dispositive portion of which reads as
follows:
"WHEREFORE, judgment is hereby rendered:
"1. Ordering defendants Fortune Motors, Palawan
Lumber Manufacturing Corporation and Joseph Chua,
jointly and severally to pay the plaintiff on the July 27,
1983 Draft, the sum of P324,767.41 with the interest
thereon at the legal rate from the date of filing of this
case, December 21, 1983 until the amount shall have
been fully paid;
"2. Ordering defendants Fortune Motors, Palawan
Manufacturing Corporation and Joseph Chua jointly
and severally to pay to the plaintiff on the July 26, 1983
Draft, the sum of P198,659.52 with interest thereon at
the legal rate from the date of filing of this case, until
the amount shall have been fully paid;
"3. Ordering defendant Fortune Motors, Palawan
Manufacturing Corporation and Joseph Chua jointly
and severally to pay to the plaintiff on the July 28, 1983
Draft the sum of P1,138,941.00 with interest thereon at
the legal rate from the date of filing of this case, until
the amount shall have been fully paid;
"4. Ordering defendants Fortune Motors, Palawan
Lumber Manufacturing Corporation and Joseph Chua
jointly and severally to pay to the plaintiff on the August
2, 1983 Draft, the sum of P244,269.00 with interest
thereon at the legal rate from the date of filing of this
case, until the amount shall have been fully paid;
"5. Ordering defendants Fortune Motors, Palawan
Lumber Manufacturing Corporation and Joseph Chua
jointly and severally to pay to the plaintiff on the August
5, 1983 Draft the sum of P275,079.60 with interest
thereon at the legal rate from the date of the filing of
this case, until the amount shall have been fully paid;
"6. Ordering defendants Fortune Motors, Palawan
Lumber Manufacturing Corporation and Joseph Chua
jointly and severally to pay to the plaintiff on the August
8, 1983 Draft the sum of P475,046.10 with interest
thereon at legal rate from the date of the filing of this
case, until the amount shall been fully paid;
"7. Ordering defendant Fortune Motors, Palawan
Lumber Manufacturing Corporation and Joseph Chua
jointly and severally to pay the sum of P300,000.00 as
attorney's fees and the costs of this suit;
"8. Dismissing plaintiff's complaint against South City
Homes, Aurelio Tablante, Joselito Baltazar, George
Tan and Edgar Rodrigueza and the latter's
counterclaim for lack of basis;
"9. Ordering Deputy Sheriff Jorge Victorino to return to
Intervenor Fortune Equipment the Mitsubishi Truck
Canter with Motor No. 310913 and Chassis No.
513234;
"10. Dismissing the complaint-in-intervention in so far
as the three other vehicles mentioned in the complaint-
in-intervention are concerned for lack of cause of
action;
"11. Dismissing the complaint-in-intervention against
Fortune Motor for lack of basis; and
"12. Ordering the parties-in-intervention to bear their
respective damages, attorneys fees and the costs of
the suit.
"Upon execution, the sheriff may cause the judgment
to be satisfied out of the properties attached with the
exception of one (1) unit Mitsubishi Truck Canter with
Motor No. 310913 and Chassis No. 513234, if they be
sufficient for that purpose. The officer shall make a
return in writing to the court of his proceedings.
Whenever the judgment shall have been paid, the
officer, upon reasonable demand must return to the
judgment debtor the attached properties remaining in
his hand, and any of the proceeds of the properties not
applied to the judgment.
"SO ORDERED.
"On two (2) separate motions for reconsideration, one
filed by plaintiffs-intervenors dated December 18, 1991
and the other by plaintiff dated December 26, 1991, the
trial court issued an Order dated July 22, 1992
amending its Decision dated November 25, 1991.
Specifically, said Order amended paragraphs 9 and 10
thereof and deleted the last paragraph of the said
Decision.
"Paragraphs 9 and 10 now read:
"9. Ordering Deputy Sheriff Jorge C. Victorino
to return to Intervenor Fortune Equipment,
Inc. the Mitsubishi Truck Canter with Motor
No. 310913 and Chassis No.
513234; Mitsubishi Truck Canter with Motor
No. 4D30-313012 and Chassis No. 513696,
and Fuso Truck with Motor No. 006769 and
Chassis No. 20756, and to Intervenor South
Fortune Motors Corporation the Cimaron
Jeepney with Plate No. NET-849;
"10. Ordering the plaintiff, in the event the
motor vehicles could no longer be returned to
pay the estimated value thereof i.e.,
P750,000.00 for the three trucks, and
P5,000.00 for the Cimaron Jeepney, to the
plaintiffs-intervenors.
"x x x" (Records, pp. 664-665)
"Plaintiffs BA Finance Corporation, defendants Fortune
Motors Corp. (Phils.) and Palawan Lumber
Manufacturing Corporation, and intervenors Fortune
45
 Equipment and South Fortune Motors, interposed the
present appeal and filed their respective Briefs." 3
On September 8, 1998, the Court of Appeals promulgated a
decision, the dispositive portion of which is quoted in the
opening paragraph of this decision.
Hence, this appeal.4
The Issues
The issues presented are: (1) whether the suretyship agreement
is valid; (2) whether there was a novation of the obligation so as
to extinguish the liability of the sureties; and (3) whether
respondent BAFC has a valid cause of action for a sum of
money following the drafts and trust receipts transactions. 5
The Court's Ruling
On the first issue, petitioners assert that the suretyship
agreement they signed is void because there was no principal
obligation at the time of signing as the principal obligation was
signed six (6) months later. The Civil Code, however, allows a
suretyship agreement to secure future loans even if the amount
is not yet known.
Article 2053 of the Civil Code provides that:
"Art. 2053. A guaranty may also be given as security
for future debts, the amount of which is not yet known.
x x x"
In Fortune Motors (Phils.) Corporation v. Court of Appeals,6 we
held:
"To fund their acquisition of new vehicles (which are
later retailed or resold to the general public), car
dealers normally enter into wholesale automotive
financing schemes whereby vehicles are delivered by
the manufacturer or assembler on the strength of trust
receipts or drafts executed by the car dealers, which
are backed up by sureties. These trust receipts or
drafts are then assigned and/or discounted by the
manufacturer to/with financing companies, which
assume payment of the vehicles but with the
corresponding right to collect such payment from the
car dealers and/or the sureties. In this manner, car
dealers are able to secure delivery of their stock-in-
trade without having to pay cash therefor;
manufacturers get paid without any
receivables/collection problems; and financing
companies earn their margins with the assurance of
payment not only from the dealers but also from the
sureties. When the vehicles are eventually resold, the
car dealers are supposed to pay the financing
companies and the business goes merrily on.
However, in the event the car dealer defaults in paying
the financing company, may the surety escape liability
on the legal ground that the obligations were incurred
subsequent to the execution of the surety contract?
"x x x Of course, a surety is not bound under any
particular principal obligation until that principal
obligation is born. But there is no theoretical or
doctrinal difficulty inherent in saying that the suretyship
agreement itself is valid and binding even before the
principal obligation intended to be secured thereby is
born, any more than there would be in saying that
obligations which are subject to a condition precedent
are valid and binding before the occurrence of the
condition precedent.
"Comprehensive or continuing surety agreements are
in fact quite commonplace in present day financial and
commercial practice. A bank or financing company
which anticipates entering into a series of credit
transactions with a particular company, commonly
requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By
executing such an agreement, the principal places
itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a
separate surety contract or bond for each financing or
credit accommodation extended to the principal
debtor."
Petitioners next posit (second issue) that a novation, as a result
of the assignment of the drafts and trust receipts by the creditor
(CARCO) in favor of respondent BAFC without the consent of
the principal debtor (Fortune Motors), extinguished their
liabilities.
An assignment of credit is an agreement by virtue of
which the owner of a credit, known as the assignor, by
a legal cause, such as sale, dacion en pago, exchange
or donation, and without the consent of the debtor,
transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could
enforce it against the debtor.7 As a consequence, the
third party steps into the shoes of the original creditor
as subrogee of the latter. Petitioners' obligations were
not extinguished. Thus:
"x x x Moreover, in assignment, the debtor's consent is
not essential for the validity of the assignment (Art.
1624 in relation to Art. 1475, Civil Code), his knowledge
thereof affecting only the validity of the payment he
might make (Article 1626, Civil Code).
"Article 1626 also shows that payment of an obligation
which is already existing does not depend on the
consent of the debtor. It, in effect, mandates that such
payment of the existing obligation shall already be
made to the new creditor from the time the debtor
acquires knowledge of the assignment of the
obligation.
"The law is clear that the debtor had the obligation to
pay and should have paid from the date of notice
whether or not he consented.
"We have ruled in Sison & Sison vs. Yap Tico and
Avancea, 37 Phil. 587 [1918] that definitely, consent
is not necessary in order that assignment may fully
produce legal effects. Hence, the duty to pay does not
depend on the consent of the debtor. Otherwise, all
creditors would be prevented from assigning their
credits because of the possibility of the debtor's refusal
to give consent.
46
 "What the law requires in an assignment of credit is not
the consent of the debtor but merely notice to him. A
creditor may, therefore, validly assign his credit and its
accessories without the debtor's consent (National
Investment and Development Co. v. De Los Angeles,
40 SCRA 489 [1971]. The purpose of the notice is only
to inform that debtor from the date of the assignment,
payment should be made to the assignee and not to
the original creditor."8
Petitioners finally posit (third issue) that as an entruster,
respondent BAFC must first demand the return of the unsold
vehicles from Fortune Motors Corporation, pursuant to the terms
of the trust receipts. Having failed to do so, petitioners had no
cause of action whatsoever against Fortune Motors Corporation
and the action for collection of sum of money was, therefore,
premature. A trust receipt is a security transaction intended to
aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the
merchandise imported or purchased.9 In the event of default by
the entrustee on his obligations under the trust receipt
agreement, it is not absolutely necessary that the entruster
cancel the trust and take possession of the goods to be able to
enforce his rights thereunder. We ruled:
"x x x Significantly, the law uses the word "may" in
granting to the entruster the right to cancel the trust and
take possession of the goods. Consequently, petitioner
has the discretion to avail of such right or seek any
alternative action, such as a third party claim or a
separate civil action which it deems best to protect its
right, at any time upon default or failure of the entrustee
to comply with any of the terms and conditions of the
trust agreement."10
G.R. No. 72275 November 13, 1991
PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO
REGALA, JR., respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.
MEDIALDEA, J.:p
This is a petition for review on certiorari of the decision (pp 21-
31, Rollo) of the Intermediate Appellate Court (now Court of
Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the
decision of the trial court against herein private respondent
Roberto Regala, Jr., one of the defendants in the case for sum
of money filed by Pacific Banking Corporation.
The facts of the case as adopted by the respondent appellant
court from herein petitioner's brief before said court are as
follows:
On October 24, 1975, defendant Celia Syjuco
Regala (hereinafter referred to as Celia
Regala for brevity), applied for and obtained
from the plaintiff the issuance and use of
Pacificard credit card (Exhs. "A", "A-l",), under
the Terms and Conditions Governing the
Issuance and Use of Pacificard (Exh. "B" and
hereinafter referred to as Terms and
Conditions), a copy of which was issued to
and received by the said defendant on the
date of the application and expressly agreed
that the use of the Pacificard is governed by
said Terms and Conditions. On the same
date, the defendant-appelant Robert Regala,
Jr., spouse of defendant Celia Regala,
executed a "Guarantor's Undertaking" (Exh.
"A-1-a") in favor of the appellee Bank,
whereby the latter agreed "jointly and
severally of Celia Aurora Syjuco Regala, to
pay the Pacific Banking Corporation upon
demand, any and all indebtedness,
obligations, charges or liabilities due and
incurred by said Celia Aurora Syjuco Regala
with the use of the Pacificard, or renewals
thereof, issued in her favor by the Pacific
Banking Corporation". It was also agreed that
"any changes of or novation in the terms and
conditions in connection with the issuance or
use of the Pacificard, or any extension of time
to pay such obligations, charges or liabilities
shall not in any manner release me/us from
responsibility hereunder, it being understood
that I fully agree to such charges, novation or
extension, and that this understanding is a
continuing one and shall subsist and bind me
until the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation
has contracted with accredited business
establishments to honor purchases of goods
and/or services by Pacificard holders and the
cost thereof to be advanced by the plaintiff-
appellee for the account of the defendant
cardholder, and the latter undertook to pay
any statements of account rendered by the
plaintiff-appellee for the advances thus made
within thirty (30) days from the date of the
statement, provided that any overdue account
shall earn interest at the rate of 14% per
annum from date of default.
The defendant Celia Regala, as such
Pacificard holder, had purchased goods
and/or services on credit (Exh. "C", "C-l" to
"C-112") under her Pacificard, for which the
plaintiff advanced the cost amounting to
P92,803.98 at the time of the filing of the
complaint.
In view of defendant Celia Regala's failure to
settle her account for the purchases made
thru the use of the Pacificard, a written
demand (Exh. "D") was sent to the latter and
also to the defendant Roberto Regala, Jr.
(Exh. " ") under his "Guarantor's
Undertaking."
47
 A complaint was subsequently filed in Court
for defendant's (sic) repeated failure to settle
their obligation. Defendant Celia Regala was
declared in default for her failure to file her
answer within the reglementary period.
Defendant-appellant Roberto Regala, Jr., on
the other hand, filed his Answer with
Counterclaim admitting his execution of the
"Guarantor's Understanding", "but with the
understanding that his liability would be
limited to P2,000.00 per month."
In view of the solidary nature of the liability of
the parties, the presentation of evidence ex-
parte as against the defendant Celia Regala
was jointly held with the trial of the case as
against defendant Roberto Regala.
After the presentation of plaintiff's testimonial
and documentary evidence, fire struck the
City Hall of Manila, including the court where
the instant case was pending, as well as all its
records.
Upon plaintiff-appellee's petition for
reconstitution, the records of the instant case
were duly reconstituted. Thereafter, the case
was set for pre-trial conference with respect
to the defendant-appellant Roberto Regala on
plaintiff-appellee's motion, after furnishing the
latter a copy of the same. No opposition
thereto having been interposed by defendant-
appellant, the trial court set the case for pre-
trial conference. Neither did said defendant-
appellant nor his counsel appear on the date
scheduled by the trial court for said
conference despite due notice.
Consequently, plaintiff-appellee moved that
the defendant-appellant Roberto Regala he
declared as in default and that it be allowed to
present its evidence ex-parte, which motion
was granted. On July 21, 1983, plaintiff-
appellee presented its evidence ex-parte.
(pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December 5,
1983, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment
for the plaintiff and against the defendants
condemning the latter, jointly and severally, to
pay said plaintiff the amount of P92,803.98,
with interest thereon at 14% per annum,
compounded annually, from the time of
demand on November 17, 1978 until said
principal amount is fully paid; plus 15% of the
principal obligation as and for attorney's fees
and expense of suit; and the costs.
The counterclaim of defendant Roberto
Regala, Jr. is dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to
the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered
judgment modifying the decision of the trial court. Private
respondent Roberto Regala, Jr. was made liable only to the
extent of the monthly credit limit granted to Celia Regala, i.e., at
P2,000.00 a month and only for the advances made during the
one year period of the card's effectivity counted from October
29, 1975 up to October 29, 1976. The dispositive portion of the
decision states:
WHEREFORE, the judgment of the trial court
dated December 5, 1983 is modified only as
to appellant Roberto Regala, Jr., so as to
make him liable only for the purchases made
by defendant Celia Aurora Syjuco Regala with
the use of the Pacificard from October 29,
1975 up to October 29, 1976 up to the amount
of P2,000.00 per month only, with interest
from the filing of the complaint up to the
payment at the rate of 14% per annum without
pronouncement as to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking
Corporation which the respondent appellate court denied for
lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The
petitioner contends that while the appellate court correctly
recognized Celia Regala's obligation to Pacific Banking Corp.
for the purchases of goods and services with the use of a
Pacificard credit card in the total amount of P92,803.98 with 14%
interest per annum, it erred in limiting private respondent
Roberto Regala, Jr.'s liability only for purchases made by Celia
Regala with the use of the card from October 29, 1975 up to
October 29, 1976 up to the amount of P2,000.00 per month with
14% interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking" which
private respondent Roberto Regala, Jr. signed in favor of Pacific
Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly
and severally with Celia Syjuco Regala to pay
the Pacific Banking Corporation upon
demand any and all indebtedness,
obligations, charges or liabilities due and
incurred by said Celia Syjuco Regala with the
use of the Pacificard or renewals thereof
issued in his favor by the Pacific Banking
Corporation. Any changes of or Novation in
the terms and conditions in connection with
the issuance or use of said Pacificard, or any
extension of time to pay such obligations,
charges or liabilities shall not in any manner
release me/us from the responsibility
hereunder, it being understood that the
undertaking is a continuing one and shall
subsist and bind me/us until all the liabilities
of the said Celia Syjuco Regala have been
fully satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although
denominated "Guarantor's Undertaking," was in substance a
contract of surety. As distinguished from a contract of guaranty
where the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor only in case the latter should
48
fail to do so, in a contract of suretyship, the surety binds himself
solidarily with the principal debtor (Art. 2047, Civil Code of the
Philippines).
We need not look elsewhere to determine the nature and extent
of private respondent Roberto Regala, Jr.'s undertaking. As a
surety he bound himself jointly and severally with the debtor
Celia Regala "to pay the Pacific Banking Corporation upon
demand, any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the
use of Pacificard or renewals thereof issued in (her) favor by
Pacific Banking Corporation." This undertaking was also
provided as a condition in the issuance of the Pacificard to Celia
Regala, thus:
5. A Pacificard is issued to a Pacificard-holder
against the joint and several signature of a
third party and as such, the Pacificard holder
and the guarantor assume joint and several
liabilities for any and all amount arising out of
the use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights of
the guarantor are not thereby lost by the guarantor becoming
liable solidarily and therefore a surety." It further ruled that
although the surety's liability is like that of a joint and several
debtor, it does not make him the debtor but still the guarantor (or
the surety), relying on the case of Government of the Philippines
v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182.
Consequently, Article 2054 of the Civil Code providing for a
limited liability on the part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor
may bind himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of
the conditions. 2 It is likewise not disputed by the parties that the
credit limit granted to Celia Regala was P2,000.00 per month
and that Celia Regala succeeded in using the card beyond the
original period of its effectivity, October 29, 1979. We do not
agree however, that Roberto Jr.'s liability should be limited to
that extent. Private respondent Roberto Regala, Jr., as surety of
his wife, expressly bound himself up to the extent of the debtor's
(Celia) indebtedness likewise expressly waiving any "discharge
in case of any change or novation of the terms and conditions in
connection with the issuance of the Pacificard credit
card." Roberto, in fact, made his commitment as a surety a
continuing one, binding upon himself until all the liabilities of
Celia Regala have been fully paid. All these were clear under
the "Guarantor's Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms
and conditions in connection with the
issuance or use of said Pacificard, or any
extension of time to pay such obligations,
charges or liabilities shall not in any manner
release me/us from the responsibility
hereunder, it being understood that the
undertaking is a continuing one and shall
subsist and bind me/us until all the liabilities
of the said Celia Syjuco Regala have been
fully satisfied or paid. (p. 12, supra; emphasis
supplied)
Private respondent Roberto Regala, Jr. had been made aware
by the terms of the undertaking of future changes in the terms
and conditions governing the issuance of the credit card to his
wife and that, notwithstanding, he voluntarily agreed to be bound
as a surety. As in guaranty, a surety may secure additional and
future debts of the principal debtor the amount of which is not
yet known (see Article 2053, supra).
The application by respondent court of the ruling in Government
v. Tizon, supra is misplaced. It was held in that case that:
. . . although the defendants bound
themselves in solidum, the liability of the
Surety under its bond would arise only if its
co-defendants, the principal obligor, should
fail to comply with the contract. To paraphrase
the ruling in the case of Municipality of Orion
vs. Concha, the liability of the Surety is
"consequent upon the liability" of Tizon, or "so
dependent on that of 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"; or the liabilities of the two
defendants herein "are so interwoven and
dependent as to be inseparable." Changing
the expression, if the defendants are held
liable, their liability to pay the plaintiff would
be solidary, but the nature of the Surety's
undertaking is such that it does not incur
liability unless and until the principal debtor is
held liable.
A guarantor or surety does not incur liability unless the principal
debtor is held liable. It is in this sense that a surety, although
solidarily liable with the principal debtor, is different from the
debtor. It does not mean, however, that the surety cannot be
held liable to the same extent as the principal debtor. The nature
and extent of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of suretyship(see
PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned
decision of respondent appellate court is SET ASIDE and the
decision of the trial court is REINSTATED.
SO ORDERED.
G.R. No. 136780 August 16, 2001
JEANETTE D. MOLINO, petitioner,
vs.
SECURITY DINERS INTERNATIONAL
CORPORATION, respondent.
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the decision of
the Court of Appeals dated September 28, 1998 1which held
petitioner liable as surety for the outstanding credit card debts
of Danilo Alto with herein respondent corporation.
The decision of the Court of Appeals satisfactorily sums up the
facts that led to the filing of this case:
The Security Diners International Corporation ("SDIC')
operates a credit card system under the name of
Diners Club through which it extends credit
accommodation to its cardholders for the purchase of
49
goods and payment of services from its member
establishments to be reimbursed later on by the
cardholder upon proper billing. There are two types of
credit cards issued: one, the Regular (Local) Card
which entitles the cardholder to purchase goods and
pay services from member establishments in an
amount not exceeding P10,000.00; and two, the
Diamond (Edition) Card which entitles the cardholder
to purchase goods and pay services from member
establishments in unlimited amounts. One of the
requirements for the issuance of either of these cards
is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular
(Local) Card with SDIC. He got as his surety his own
sister-in-law Jeanette Molino Alto. Thus, Danilo signed
the printed application form (Exhibit 'A') and Jeanette
signed the Surety Undertaking (Exhibit 'A-5"). Attached
to the Application Form was an Agreement (Use of
Diners' Club Card), paragraph 16 of which reads:
16. SURETY. The cardholder shall furnish
an adequate surety or sureties acceptable to
Security Diners who shall be jointly and
severally liable with the cardholder to pay
Security Diners all the obligations and
charges incurred and credit extended on the
basis of the card. In the event the
surety/sureties furnished the cardholder are
discharged the cardholder must furnish a new
surety or sureties acceptable to Security
Diners within thirty (30) days. Otherwise the
cardholder's privileges shall be automatically
terminated in accordance with Section 11
hereof."
The Surety Undertaking signed by Jeanette states:
"I/WE, the undersigned, bind
myself/ourselves jointly and severally with Mr.
Danilo Alto to pay SECURITY DINERS
INTERNATIONAL CORPORATION,
hereinafter referred to as 'Security Diners' all
the obligations and charges including but not
limited to fees, interest, attorney's fees and all
other costs incurred by him/her in connection
with the use of the DINERS CLUB CARD in
accordance with the terms and conditions
governing the issuance and use of the Diners
Club Card. Any change or novation in the
agreement or any extension of time granted
by SECURITY DINERS to pay such
obligations, charges and fees, shall not
release me/us from this Surety Undertaking, it
being understood that said undertaking is a
continuing one and shall subsist and bind
me/us until all such obligations, charges and
fees have been fully paid and satisfied.
It is understood that the indication of a credit
limit to the cardholder shall not relieve me/us
of liability for charges and all other amounts
voluntarily incurred by the cardholder in
excess of the credit limit.
On the basis of the completed and signed Application
Form and Surety Undertaking, the SDIC issued to
Danilo Diners Card No. 36510293216-0006. The latter
used this card and initially paid his obligations to SDIC.
On February 8, 1988, Danilo wrote SDIC a letter
(Exhibit "B") requesting it to upgrade his Regular
(Local) Diners Club Card to a Diamond (Edition) one.
As a requirement of SDIC, Danilo secured from
Jeanette her approval. The latter obliged and so on
March 2, 1988, she signed a Note (Exhibit 'C') which
states:
"This certifies that I, Jeanette D. Molino,
approve of the request of Danilo and Gloria
Alto with Card No. 3651-203216 0006 and
3651-203412-5007 to upgrade their card from
regular to diamond edition."
Danilo's request was granted and he was issued a
Diamond (Edition) Diners Club Card. He used this card
and made purchases (Exhibits "D", "D-1" to "D-7") from
member establishments. On October 1, 1988 Danilo
had incurred credit charged plus appropriate interest
and service charges in the aggregate amount of
P166,408.31. He defaulted in the payment of this
obligation.
SDIC demanded of Danilo and Jeanette to pay said
obligation but they did not pay. So, on November 9,
1988, SDIC filed an action to collect said indebtedness
against Danilo and Jeanette. This was docketed in the
Regional Trial Court of Makati, Branch 145 as Civil
Case No. 88-2381 x x x2
Defendant Danilo Alto failed to file an Answer, and during the
pre-trial conference respondent moved to have the complaint
dismissed against him, without prejudice to a subsequent re-
filing. Petitioner was left as the lone defendant, sued in her
capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed with
the RTC, petitioner claimed that her liability under the Surety
Undertaking was limited to P10,000.00 and that she did not
expressly and categorically agree to act as surety for Danilo in
an amount higher than P10,000.00.3 By way of counterclaim,
she asked for moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision
dismissing the complaint for failure of respondent to prove its
case by a preponderance of the evidence. It found that while
petitioner clearly bound herself as surety under the terms of
Danilo Alto's Regular Diners Club Card, there was no evidence
that after the card had been upgraded to Diamond (Edition)
petitioner consented or agreed to act as surety for Danilo.
Exhibit "C" or Exhibit "1", inter alia, which was a note bearing
petitioner's signature certifying to her approval of Danilo's
request to have his card upgraded should be read simply as a
statement of and objection to his request for upgrading, and not
as an assumption of liability for the debts that Danilo may later
owe through the said card.4 The trial court also took note of the
testimony of Alfredo Vicente, an officer of respondent, who
opined that the consent to be bound as surety to an upgraded
card should be categorical5 and not in a simple "no objection"
form.
The trial court went on further to state that petitioner was not
liable for any amount, not even for P10,000.00 which is the
maximum credit limit for Regular Diners Club Cards, since at the
time of the upgrading Danilo had no outstanding credit card
50
debts.6 This is evident from the fact that Danilo's request for
upgrading was approved, since one of the requirements for the
approval of a request for the upgrading of a credit card from
Regular to Diamond is that the applicant must have paid all his
billings for the last three months prior to his request.
Hence, the trial court disposed of the case with these
pronouncements:
WHEREFORE, judgment is rendered dismissing the
complaint against defendant Jeanette D. Molino-Alto
for failure of the plaintiff to prove its case by a clear
preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED.7
The Court of Appeals found contrary to the lower court, and
declared that the Surety Undertaking signed by petitioner when
Danilo Alto first applied for a Regular Diners Club Card clearly
applied to the unpaid purchases of Danilo Alto under the
Diamond card. In holding thus, the Court of Appeals referred to
the terms of the said Surety Undertaking, which stated that any
change or novation in the agreement on the use of the Diners
Club card does not release the surety from his obligations, it
being understood that the undertaking is a continuing one which
subsists until all obligations and charges under the subject credit
card are paid and satisfied. It also cited Pacific Banking
Corporation vs. Intermediate Appellate Court,8 a 1991 decision
which held the surety liable to the extent of the credit
cardholder's indebtedness, under the clear terms of the
Guarantor's Undertaking that the surety signed with the credit
card company.
The Court of Appeals further declared that it was erroneous of
the trial court to conclude that petitioner was completely relieved
of liability under Danilo Alto's credit card since the Surety
Undertaking she signed remained valid and enforceable even
after the upgrading of the said card; besides, petitioner herself
admitted that she was liable to the extent of P10,000.00.
Additionally, the Court of Appeals reduced the attorney's fees
(stipulated in the Agreement for the Use of Diners Club Card)
from 25% to 10% of the amount due, judging this to be a more
reasonable rate under the circumstances.
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, the appealed Decision is REVERSED
and one is rendered ordering defendant-appellee
Jeanette D. Molino-Alto to pay plaintiff-appellant
Security Diners Intentional, Inc. the following:
1. The sum of P166,408.31 plus interest of 3% per
annum and 2% per month from November 9, 1988 until
the obligation is fully paid;
2. The amount equivalent to 10% of the obligation
mentioned in the preceding paragraph as attorneys
fees; and
3. Costs.
SO ORDERED.9
Petitioner's motion for reconsideration of the above decision was
denied for lack of merit on December 1, 1998. Hence, the
petition before us, which assigns the following errors:
I.
The material findings of the Court of Appeals, which
are contrary to those of the lower court are erroneous.
II.
The findings of the Court of Appeals are conflicting
and/or without citation of specific evidence on which
they are based.
III.
The Court of Appeals erred in disregarding the
applicable legal principle established by this Honorable
Court that, unlike in ordinary solidary debtors, the
surety does not incur liability unless the principal debtor
is held liable.10
Petitioner posits that she did not expressly give her consent to
be bound as surety under the upgraded card. She points out that
the note she signed, marked as Exhibit "C", registering her
approval of the request of Danilo Alto to upgrade his card,
renders the Surety Undertaking she signed under the terms of
the previous card "without probative value, immaterial and
irrelevant as it covers only the liability of the surety in the use of
the regular credit card by the principal debtor x x x. 11 " She
argues further that because the principal debtor, Danilo Alto,
was not held liable, having been dropped as a defendant, she
could not be said to have incurred liability as surety.
The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under the
Diamond card revolves around the effect of the upgrading by
Danilo Alto of his card. Was the upgrading a novation of the
original agreement governing the use of Danilo Alto's first credit
card, as to extinguish that obligation and the Surety Undertaking
which was simply accessory to it?
Novation, as a mode of extinguishing obligations, may be done
in two ways: by explicit declaration, or by material incompatibility
(implied novation). As we stated in Fortune Motors vs. Court of
Appeals, supra:
x x x The test of incompatibility is whether the two
obligations can stand together, each one having its
independent existence. If they cannot, they are
incompatible and the latter obligation novates the first.
Novation must be established either by the express
terms of the new agreement or by the acts of the
parties clearly demonstrating the intent to dissolve the
old obligation as a consideration for the emergence of
the new one. The will to novate, whether totally or
partially, must appear by express agreement of the
51
 parties, or by their acts which are too clear or
unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the
original agreement covering the first credit card issued to Danilo
Alto, basically since it was committed with the intent of canceling
and replacing the said card. However, the novation did not serve
to release petitioner from her surety obligations because in the
Surety Undertaking she expressly waived discharge in case of
change or novation in the agreement governing the use of the
first credit card.
The nature and extent of petitioner's obligations are set out in
clear and unmistakable terms in the Surety Undertaking. Thus:
1. She bound herself jointly and severally with Danilo Alto to pay
SDIC all obligations and charges in the use of the Diners Club
Card, including fees, interest, attorney's fees, and costs;
2. She declared that "any change or novation in the Agreement
or any extension of time granted by SECURITY DINERS to pay
such obligation, charges, and fees, shall not release (her) from
this Surety Undertaking";
3. "(S)aid undertaking is a continuous one and shall subsist and
bind (her) until all such obligations, charges and fees have been
fully paid and satisfied"; and
4. "The indication of a credit limit to the cardholder shall not
relieve (her) of liability for charges and all other amounts
voluntarily incurred by the cardholder in excess of said credit
limit."12
We cannot give any additional meaning to the plain language of
the subject undertaking. The extent of a surety's liability is
determined by the language of the suretyship contract or bond
itself.13 Article 1370 of the Civil Code provides: "If the terms of
contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall
control."
This case is no different from Pacific Banking Corporation vs.
IAC, supra, correctly applied by the Court of Appeals, which
involved a Guarantor's Undertaking (although thus
denominated, it was in substance a contract of surety signed by
the husband for the credit card application of his wife. Like
herein petitioner, the husband also argued that his liability
should be limited to the credit limit allowed under his wife's card
but the Court declared him liable to the full extent of his wife's
indebtedness. Thus:
We need not look elsewhere to determine the nature
and extent of private respondent Roberto Regala, Jr.'s
undertaking. As a surety he bound himself jointly and
severally with the debtor Celia Regala "to pay the
Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due
and incurred by said Celia Syjuco Regala with the use
of Pacificard or renewals thereof issued in (her) favor
by Pacific Banking Corporation. x x x.
xxx xxx xxx
It is likewise not disputed by the parties that the credit
limit granted to Celia Regala was P2,000.00 per month
and that Celia Regala succeeded in using the card
beyond the original period of its effectivity, October 29,
1979. We do not agree, however, that Roberto Jr.'s
liability should be limited to that extent. Private
respondent Roberto Regala, Jr., as surety of his
wife, expressly bound himself up to the extent of the
debtor's (Celia's) indebtedness likewise expressly
waiving any "discharge in case of any change or
novation of the terms and conditions in connection with
the issuance of the Pacificard credit card." Roberto, in
fact, made his commitment as a surety a continuing
one, binding upon himself until all the liabilities of Celia
Regala have been fully paid. All these were clear under
the "Guarantor's Undertaking" Roberto signed, thus:
"x x x Any changes of or novation in the terms
and conditions in connection with the
issuance or use of said Pacificard, or any
extension of time to pay such obligations,
charges or liabilities shall not in any manner
release me/us from the responsibility
hereunder, it being understood that the
undertaking is a continuing one and shall
subsist and bind me/us until all the liabilities
of the said Celia Syjuco Regala have been
fully satisfied or paid." (italics supplied)
As a last-ditch measure, petitioner asseverates that, being
merely a surety, a pronouncement should first be made
declaring the principal debtor liable before she herself can be
proceeded against. The argument, which is hinged upon the
dropping of Danilo as defendant in the complaint, is bereft of
merit.
The Surety Undertaking expressly provides that petitioner's
liability is solidary. A 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, and their liabilities are
interwoven as to be inseparable.14 Although the contract of a
surety is in essence secondary only to a valid principal
obligation, his liability to the creditor is direct, primary and
absolute; he becomes liable for the debt and duty of another
although he possesses no direct or personal interest over the
obligations nor does he receive any benefit therefrom. 15 There
being no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation shared
solidarily by petitioner, respondent was certainly within its rights
to proceed singly against petitioner, as surety and solidary
debtor, without prejudice to any action it may later file against
Danilo Alto, until the obligation is fully satisfied. This is so
provided under Article 1216 of the Civil Code:
The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously.
The demand made against one of them shall not be an
obstacle to those which may be subsequently directed
against the others, so long as the debt has not been
fully collected.
Petitioner is a graduate of business administration, and
possesses considerable work experience in several banks. She
knew the full import and consequence of the Surety Undertaking
that she executed. She had the option to withdraw her
suretyship when Danilo upgraded his card to one that permitted
unlimited purchases, but instead she approved the upgrading.
While we commiserate in the financial predicament she now
faces, it is also evident that the liability she incurred is only the
52
legitimate consequence of an undertaking that she freely and
CORPORA [PURCHAS CREDIT
intelligently obliged to. Prospective sureties to credit card
TION ED LINE] LINE
applicants would be well-advised to study carefully the terms of
the agreements prepared by the credit card companies before
giving their consent, and pay heed to speculations that could owing to the said ASIANBANK CORPORATION,
lead to onerous effects, like in the present case where the credit hereafter called the CREDITOR, as evidenced by all
applied for was limitless. At the same time, it bears articulating notes, drafts, overdrafts and other [credit] obligations
that although courts in appropriate cases may equitably reduce of every kind and nature contracted/incurred by said
the award for penalty as provided under such suretyship DEBTOR(S) in favor of said CREDITOR.
agreements if the same is iniquitous or unconscionable,16 we
are unable to give relief to petitioner by way of reducing the
amount of the principal liability as surety under the In case of default by any and/or all of the DEBTOR(S)
circumstances of this case. to pay the whole part of said
indebt nbsp nbsp nbsp nbsp
erein secured at maturity, I/WE BR
WHEREFORE, the petition is dismissed for lack of merit The vs.
decision of the Court of Appeals is AFFIRMED in all respects. and severally agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, x x x of
SO ORDERED. such notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the
G.R. No. 172041 December 18, 2008
CREDITOR, together with all interests, penalty and
other bank charges as may accrue thereon x x x.
GATEWAY ELECTRONICS CORPORATION and GERONIMO
B. DELOS REYES, JR., petitioners,
I/WE further warrant the due and faithful performance
vs.
by the DEBTOR(S) of all obligations to be performed
ASIANBANK CORPORATION, respondent.
under any contracts evidencing
indebtedness/obligations and any supplements,
DECISION amendments, changes or modifications made thereto,
including but not limited to, the due and punctual
VELASCO, JR., J.: payment by the said DEBTOR(S).

This petition for review under Rule 45 seeks to nullify and set MY/OUR liability on this Deed of Suretyship shall be
aside the Decision1 dated October 28, 2005 of the Court of solidary, direct and immediate and not contingent upon
Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution2 of the pursuit by the CREDITOR x x x of whatever
March 17, 2006 denying petitioners motion for reconsideration. remedies it or they may have against the DEBTOR(S)
or the securities or liens it or they may possess; and
I/WE hereby agree to be and remain bound upon this
The Facts
suretyship, x x x and notwithstanding also that all
obligations of the DEBTOR(S) to you outstanding and
Petitioner Gateway Electronics Corporation (Gateway) is a unpaid at any time may exceed the aggregate principal
domestic corporation that used to be engaged in the semi- sum hereinabove stated.3
conductor business. During the period material, petitioner
Geronimo B. delos Reyes, Jr. was its president and one Andrew
Later developments saw Asianbank extending to Gateway
delos Reyes its executive vice-president.
several export packing loans in the total aggregate amount of
USD 1,700,883.48. This loan package was later consolidated
On July 23, 1996, Geronimo and Andrew executed separate but with Dollar Promissory Note (PN) No. FCD-0599-27494 for the
almost identical deeds of suretyship for Gateway in favor of amount of USD 1,700,883.48 and secured by a chattel
respondent Asianbank Corporation (Asianbank), pertinently mortgage over Gateways equipment for USD 2 million.
providing:
Gateway initially made payments on its loan obligations, but
I/We Geronimo B. de los Reyes, Jr. x x x warrant to the eventually defaulted. Upon Gateways request, Asianbank
ASIANBANK CORPORATION, x x x due and punctual extended the maturity dates of the loan several times. These
payment by the following individuals/companies/firms, extensions bore the conformity of three of Gateways officers,
hereinafter called the DEBTOR(S), of such amounts among them Andrew.
whether due or not, as indicated opposite their
respective names, to wit:
On July 15 and 30, 1999, Gateway issued two Philippine
Commercial International Bank checks for the amounts of USD
NAME OF AMOUNT 40,000 and USD 20,000, respectively, as payment for its
DEBTOR(S OF arrearages and interests for the periods June 30 and July 30,
) OBLIGATIO 1999; but both checks were dishonored for insufficiency of
N funds. Asianbanks demands for payment made upon Gateway
and its sureties went unheeded. As of November 23, 1999,
GATEWAY *P10,000,0 *US$3,000,0 Gateways obligation to Asianbank, inclusive of principal,
ELECTRO 00.00 00.00 interest, and penalties, totaled USD 2,235,452.17.
NICS *DOMESTI *OMNIBUS
C BILLS

53
Thus, on December 15, 1999, Asianbank filed with the Regional
Trial Court (RTC) in Makati City a complaint for a sum of money
against Gateway, Geronimo, and Andrew. The complaint, as
later amended, was eventually raffled to Branch 60 of the court
and docketed as Civil Case No. 99-2102 entitled Asian Bank
Corporation v. Gateway Electronics Corporation, Geronimo B.
De Los Reyes, Jr. and Andrew S. De Los Reyes.
In its answer to the amended complaint, Gateway traced the
cause of its financial difficulties, described the steps it had taken
to address its mounting problem, and faulted Asianbank for
trying to undermine its efforts toward recovery.
Andrew also filed an answer alleging, among other things, that
the deed of suretyship he executed covering the PhP 10 million-
Domestic Bills Purchased Line and the USD 3 million-Omnibus
Credit Line did not include PN No. FCD-0599-2749, the payment
of which was extended several times without his consent.
Geronimo, on the other hand, alleged that the subject deed of
suretyship, assuming the authenticity of his signature on it, was
signed without his wifes consent and should, thus, be
considered as a mere continuing offer. Like Andrew, Geronimo
argued that he ought to be relieved of his liability under the
surety agreement inasmuch as he too never consented to the
repeated loan maturity date extensions given by Asianbank to
Gateway.
After due hearing, the RTC rendered judgment dated October 7,
20035 in favor of Gateway, the dispositive portion of which
states:
WHEREFORE then, in view of the foregoing, judgment
is rendered holding defendants Gateway Electronics
Corporation, Geronimo De Los Reyes and Andrew De
Los Reyes jointly and severally liable to pay the plaintiff
the following:
a) The sum of $2,235,452.17 United States
Currency with interest to be added on at the
prevailing market rate over a given thirty day
London Interbank Offered Rate (LIBOR) plus
a spread of 5.5358 percent or ten and
[45,455/100,000] percent per annum for the
first 35 days and every thirty days beginning
November 23, 1999 until fully paid;
b) a penalty charge after November 23, 1999
of two percent (2%) per month until fully paid;
c) attorneys fees of twenty percent (20%) of
the total amount due and unpaid; and
d) costs of the suit.
SO ORDERED.
Thereafter, Gateway, Geronimo, and Andrew appealed to the
CA, their recourse docketed as CA-G.R. CV No. 80734.
Following the filing of its and Geronimos joint appellants brief,
Gateway filed on November 10, 2004 a petition for voluntary
insolvency6 with the RTC in Imus, Cavite, Branch 22, docketed
as SEC Case No. 037-04, in which Asianbank was listed in the
attached Schedule of Obligations as one of the creditors. On
March 16, 2005, Metrobank, as successor-in-interest of
Asianbank, via a Notice of Creditors Claim, prayed that it be
allowed to participate in the Gatewayss creditors meeting.
In its Decision dated October 28, 2005, the CA affirmed the
decision of the Makati City RTC. In time, Gateway and Geronimo
interposed a motion for reconsideration. This was followed by a
Supplemental Motion for Reconsideration dated January 20,
2006, stating that in SEC Case No. 037-04, the RTC in Imus,
Cavite had issued an Order dated December 2, 2004, declaring
Gateway insolvent and directing all its creditors to appear before
the court on a certain date for the purpose of choosing among
themselves the assignee of Gateways estate which the courts
sheriff has meanwhile placed in custodia legis.7 Gateway and
Geronimo thus prayed that the assailed decision of the Makati
City RTC be set aside, the insolvency court having acquired
exclusive jurisdiction over the properties of Gateway by virtue of
Section 60 of Act No. 1956, without prejudice to Asianbank
pursuing its claim in the insolvency proceedings.
In its March 17, 2006 Resolution, however, the CA denied the
motion for reconsideration and its supplement.
Hence, Gateway and Geronimo filed this petition anchored on
the following grounds:
I
The [CA] erred in disregarding the established rule that
an action commenced by a creditor against a judicially
declared insolvent for the recovery of his claim should
be dismissed and referred to the insolvency court.
Where, therefore, as in this case, petitioner GEC
[referring to Gateway] has been declared insolvent x x
x, respondent Asianbanks claim for the payment of
GECs loans should be ventilated before the insolvency
court x x x.
II
The [CA] erred in admitting as evidence the Deed of
Surety purportedly signed by petitioner GBR [referring
to Geronimo] despite the unexplained failure of
respondent Asianbank to present the originals of the
Deed of Surety during the trial.
III
The [CA] erred in holding that the repeated extensions
granted by respondent Asianbank to GEC without
notice to and the express consent of petitioner GBR did
not discharge petitioner GBR from his liabilities as
surety GEC in that:
A. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty.
B. The [CA] interpreted the supposed Deed of Surety
of petitioner GBR as "too comprehensive and all
encompassing as to amount to absurdity."
C. The repeated extensions granted by Asianbank to
GEC prevented petitioner GBR from exercising his
right of subrogation under Article 2080 of the Civil
54
 Code. As such, petitioner GBR should be released
from his obligations as surety of GEC.
IV
It is a well-settled rule that when a bank deviates from
normal banking practice in a transaction and sustains
injury as a result thereof, the bank is deemed to have
assumed the risk and no right of payment accrues to
the latter against any party to the transaction. By
repeatedly extending the period for the payment of
GECs obligations and granting GEC other loans after
the suretyship agreement despite GECs default and in
failing to foreclose the chattel mortgage constituted as
security for GECs loan contrary to normal banking
practices, Asianbank failed to exercise reasonable
caution for its own protection and assumed the risk of
non-payment through its own acts, and thus has no
right to proceed against petitioner GBR as surety for
the payment of GECs loans.
V "upon the granting of [the] order" of insolvency is the succeeding
In Agcaoili v. GSIS, this Honorable Court had occasion
to state that in determining the precise relief to give, the
court will "balance the equities" or the respective
interests of the parties and take into account the
relative hardship that one relief or another may
occasion to them. Upon a balancing of interests of both
petitioner GBR and respondent Asianbank, greater and
irreparable harm and injury would be suffered by
petitioner GBR than respondent Asianbank if the
assailed Decision and Resolution of the [CA] would be
upheld x x x. This Honorable Court x x x should thus
exercise its equity jurisdiction in the instant case to the
end that it may render complete justice to both parties
and declare petitioner GBR as released and
discharged from any liability in respect of respondent
Asianbanks claims.8
The Ruling of the Court
Gateway May Be Discharged from Liability But Not
Geronimo
Gateway, having been declared insolvent, argues that
jurisdiction over all claims against all of its properties and assets
properly pertains to the insolvency court. Accordingly, Gateway
adds, citing Sec. 60 of Act No. 1956,9 as amended, or
the Insolvency Law, any pending action against its properties
and assets must be dismissed, the claimant relegated to the
insolvency proceedings for the claimants relief.
The contention, as formulated, is in a qualified sense
meritorious. Under Sec. 18 of Act No. 1956, as couched, the
issuance of an order declaring the petitioner insolvent after the
insolvency court finds the corresponding petition for insolvency
to be meritorious shall stay all pending civil actions against the
petitioners property. For reference, said Sec. 18, setting forth
the effects and contents of a voluntary insolvency
order,10 pertinently provides:
Section 18. Upon receiving and filing said petition,
schedule, and inventory, the court x x x shall make an
order declaring the petitioner insolvent, and directing
the sheriff of the province or city in which the petition is
filed to take possession of, and safely keep, until the
appointment of a receiver or assignee, all the deeds,
vouchers, books of account, papers, notes, bonds,
bills, and securities of the debtor and all his real and
personal property, estate and effects x x x. Said order
shall further forbid the payment to the creditor of any
debts due to him and the delivery to the debtor, or to
any person for him, of any property belonging to him,
and the transfer of any property by him, and shall
further appoint a time and place for a meeting of the
creditors to choose an assignee of the estate. Said
order shall [be published] x x x. Upon the granting of
said order, all civil proceedings pending against
the said insolvent shall be stayed. When a receiver
is appointed, or an assignee chosen, as provided in
this Act, the sheriff shall thereupon deliver to such
receiver or assignee, as the case may be all the
property, assets, and belongings of the insolvent which
have come into his possession x x x. (Emphasis
supplied.)
Complementing Sec. 18 which appropriately comes into play
Sec. 60 which properly applies to the period "after the
commencement of proceedings in insolvency." The two
provisions may be harmonized as follows: Upon the filing of the
petition for insolvency, pending civil actions against the property
of the petitioner are not ipso facto stayed, but the insolvent may
apply with the court in which the actions are pending for a stay
of the actions against the insolvents property. If the court grants
such application, pending civil actions against the petitioners
property shall be stayed; otherwise, they shall continue. Once
an order of insolvency nevertheless issues, all civil proceedings
against the petitioners property are, by statutory command,
automatically stayed. Sec. 60 is reproduced below:
SECTION 60. Creditors proving claims cannot sue;
Stay of action.No creditor, proving his debt or claim,
shall be allowed to maintain any suit therefor against
the debtor, but shall be deemed to have waived all right
of action and suit against him, and all proceedings
already commenced, or any unsatisfied judgment
already obtained thereon, shall be deemed to be
discharged and surrendered thereby; and after the
debtors discharge, upon proper application and proof
to the court having jurisdiction, all such proceedings
shall be, dismissed, and such unsatisfied judgments
satisfied of record: Provided, x x x. A creditor proving
his debt or claim shall not be held to have waived his
right of action or suit against the debtor when a
discharge has have been refused or the proceedings
have been determined to the without a discharge. No
creditor whose debt is provable under this Act
shall be allowed, after the commencement of
proceedings in insolvency, to prosecute to final
judgment any action therefor against the debtor
until the question of the debtors discharge shall
have been determined, and any such suit
proceeding shall, upon the application of the
debtor or of any creditor, or the assignee, be
stayed to await the determination of the court on
the question of discharge: Provided, That if the
amount due the creditor is in dispute, the suit, by
leave of the court in insolvency, may proceed to
judgment for purpose of ascertaining the amount
due, which amount, when adjudged, may be allowed
in the insolvency proceedings, but execution shall be
stayed aforesaid. (Emphasis supplied.)
55
Applying the aforequoted provisions, it can rightfully be said that
the issuance of the insolvency order of December 2, 2004 had
the effect of automatically staying the civil action for a sum of
money filed by Asianbank against Gateway. In net effect, the
proceedings before the CA in CA-G.R. CV No. 80734, but only
insofar as the claim against Gateway was concerned, was, or
ought to have been, suspended after December 2, 2004,
Asianbank having been duly notified of and in fact was a
participant in the insolvency proceedings. The Court of course
takes stock of the proviso in Sec. 60 of Act No. 1956 which in a
way provided the CA with a justifying tool to continue and to
proceed to judgment in CA-G.R. CV No. 80734, but only for the
purpose of ascertaining the amount due from Gateway. At any
event, on the postulate that jurisdiction over the properties of the
insolvent-declared Gateway lies with the insolvency court,
execution of the CA insolvency judgment against Gateway can
only be pursued before the insolvency court. Asianbank, no less,
tends to agree to this conclusion when it stated: "[E]ven it if is
assumed that the declaration of insolvency of petitioner
Gateway can be taken cognizance of, such fact does relieve
petitioner Geronimo and/or Andrew delos Reyes from
performing their obligations based on the Deeds of Suretyship x
x x."11
Geronimo, however, is a different story.
Asianbank argues that the stay of the collection suit against
Gateway is without bearing on the liability of Geronimo as a
surety, adding that claims against a surety may proceed
independently from that against the principal debtor. Pursuing
the point, Asianbank avers that Geronimo may not invoke the
insolvency of Gateway as a defense to evade liability.
Geronimo counters with the argument that his liability as a surety
cannot be separated from Gateways liability. As surety, he
continues, he is entitled to avail himself of all the defenses
pertaining to Gateway, including its insolvency, suggesting that
if Gateway is eventually released from what it owes Asianbank,
he, too, should also be so relieved.
Geronimos above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code, which
states:
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.
The Courts disquisition in Palmares v. Court of Appeals on
suretyship is instructive, thus:
A surety is an insurer of the debt, whereas a guarantor
is an insurer of the solvency of the debtor. A suretyship
is an undertaking that the debt shall be paid x x
x. Stated differently, a surety promises to pay the
principals debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety
binds himself to perform if the principal does not,
without regard to his ability to do so. x x x In other
words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor
makes default x x x.
xxxx
A creditors right to proceed against the surety
exists independently of his right to proceed
against the principal. Under Article 1216 of the Civil
Code, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously.
The rule, therefore, is that if the obligation is joint
and several, the creditor has the right to proceed
even against the surety alone. Since, generally, it is
not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety is the
same as that of the principal, then soon as the principal
is in default, the surety is likewise in default, and may
be sued immediately and before any proceedings are
had against the principal. Perforce, x x x a surety is
primarily liable, and with the rule that his proper remedy
is to pay the debt and pursue the principal for
reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any
agreement limiting the application of the security,
require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his
remedies against the principal, particularly where both
principal and surety are equally bound.12
Clearly, Asianbanks right to collect payment for the full amount
from Geronimo, as surety, exists independently of its right
against Gateway as principal debtor;13 it could thus proceed
against one of them or file separate actions against them to
recover the principal debt covered by the deed on suretyship,
subject to the rule prohibiting double recovery from the same
cause.14 This legal postulate becomes all the more cogent in
case of an insolvency situation where, as here, the insolvency
court is bereft of jurisdiction over the sureties of the principal
debtor. As Asianbank aptly points out, a suit against the surety,
insofar as the suretys solidary liability is concerned, is not
affected by an insolvency proceeding instituted by or against the
principal debtor. The same principle holds true with respect to
the surety of a corporation in distress which is subject of a
rehabilitation proceeding before the Securities and Exchange
Commission (SEC). As we held in Commercial Banking
Corporation v. CA, a surety of the distressed corporation can be
sued separately to enforce his liability as such, notwithstanding
an SEC order declaring the former under a state of suspension
of payment.15
Geronimo also states that, as things stand, his liability, as
compared to that of Gateway, is contextually more onerous and
burdensome, precluded as he is from seeking recourse against
the insolvent corporation. From this premise, Geronimo claims
that since Gateway cannot, owing to the order of insolvency, be
made to pay its obligation, he, too, being just a surety, cannot
also be made to pay, obviously having in mind Art. 2054 of the
Civil Code, as follows:
A guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount
and the onerous nature of the conditions.
56
 Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor.
The Court is not convinced. The above article enunciates the
rule that the obligation of a guarantor may be less, but cannot
be more than the obligation of the principal debtor. The rule,
however, cannot plausibly be stretched to mean that a guarantor
or surety is freed from liability as such guarantor or surety in the
event the principal debtor becomes insolvent or is unable to pay
the obligation. This interpretation would defeat the very essence
of a suretyship contract which, by definition, refers to an
agreement whereunder one person, the surety, engages to be
answerable for the debt, default, or miscarriage of another
known as the principal.16 Geronimos position that a surety
cannot be made to pay when the principal is unable to pay is
clearly specious and must be rejected.
The CA Did Not Err in Admitting
the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA erred
in admitting the Deed of Suretyship purportedly signed by him,
given that Asianbank failed to present its original copy.
This contention is bereft of merit.
As may be noted, paragraph 6 of Asianbanks complaint alleged
the following:
6. The loan was secured by the Deeds of Suretyship
dated July 23, 1996 that were executed by defendants
Geronimo B. De Los Reyes, Jr. and Andrew S. De Los
Reyes. Attached as Annexes "B" and "C," respectively,
are photocopies of the Deeds of Suretyship executed
by defendants Geronimo B. De Los Reyes, Jr. and
Andrew S. De Los Reyes. Subsequently, a chattel
mortgage over defendant Gateways equipment for $2
million, United States currency, was executed.17
Geronimo traversed in his answer the foregoing allegation in the
following wise: "2.5. Paragraph 6 is denied, subject to the
special and affirmative defenses and allegations hereinafter set
forth."
The ensuing special and affirmative defenses were raised in
Gateways answer:
15. Granting even that [Geronimo] signed the Deed of
Suretyship, his wife x x x had not given her consent
thereto. Accordingly, the security created by the
suretyship shall be construed only as a continuing offer
on the part of [Geronimo] and plaintiff and may only be
perfected as a binding contract upon acceptance by
Mrs. Delos Reyes. x x x
17. Moreover, assuming, gratia argumenti, that
[Geronimo] may be bound by the suretyship
agreement, there is no showing that he has consented
to the repeated extensions made by plaintiff in favor of
GEC or to a waiver of notice of such extensions. It
should be pointed out that Mr. Geronimo delos Reyes
executed the suretyship agreement in his personal
capacity and not in his capacity as Chairman of the
Board of GEC. His consent, insofar as the continuing
application of the suretyship agreement to GECs
obligations in view of the repeated extension extended
by plaintiff [is concerned], is therefore necessary.
Obviously, plaintiff cannot now hold him liable as a
surety to GECs obligations.18
The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8,
the procedure should a suit or defense is predicated on a written
document, thus:
Sec. 7. Action or defense based on document.
Whenever an action or defense is based upon a written
instrument or document, the substance of such
instrument or document shall be set forth in the
pleading, and the original or a copy thereof shall be
attached to the pleading as an exhibit, which shall
be deemed to be a part of the pleading, or said copy
may with like effect be set forth in the pleading.
Sec. 8. How to contest such documents.When an
action or defense is founded upon a written instrument,
copied in or attached to the corresponding pleading as
provided in the preceding section, the genuineness
and due execution of the instrument shall be
deemed admitted unless the adverse party, under
oath, specifically denies them, and sets forth what
he claims to be the facts; but the requirement of an
oath does not apply when the adverse party does not
appear to be a party to the instrument or when
compliance with an order for an inspection of the
original instrument is refused. (Emphasis supplied.)
Given the above perspective, Asianbank, by attaching a
photocopy of the Deed of Suretyship to its underlying complaint,
hewed to the requirements of the above twin provisions.
Asianbank, thus, effectively alleged the due execution and
genuineness of the said deed. From that point, Geronimo, if he
intended to contest the surety deed, should have specifically
denied the due execution and genuineness of the deed in the
manner provided by Sec. 10, Rule 8 of the Rules of Court, thus:
Sec. 10. Specific denial.A defendant must specify
each material allegation of fact the truth of which
he does not admit and, whenever practicable, shall
set forth the substance of the matters upon which
he relies to support his denial. Where a defendant
desires to deny only a part of an averment, he shall
specify so much of it as is true and material and shall
deny only the remainder. Where a defendant is without
knowledge or information sufficient to form a belief as
to the truth of a material averment made in the
complaint, he shall so state, and this shall have the
effect of a denial. (Emphasis supplied.)
In the instant case, Geronimo should have categorically stated
that he did not execute the Deed of Suretyship and that the
signature appearing on it was not his or was falsified. His
Answer does not, however, contain any such statement.
Necessarily then, Geronimo had not specifically denied, and,
thus, is deemed to have admitted, the genuineness and due
execution of the deed in question. In this regard, Sec. 11, Rule
8 of the Rules of Court states:
Sec. 11. Allegations not specifically denied deemed
admitted.Material averment in the complaint, other
than those as to the amount of unliquidated damages,
shall be deemed admitted when not specifically denied.
xxx
57
Owing to Geronimos virtual admission of the genuineness and
due execution of the deed of suretyship, Asianbank, contrary to
the view of Gateway and Geronimo, need not present the
original of the deed during the hearings of the case. Sec. 4, Rule
129 of the Rules says so:
Sec. 4. Judicial admissions.An admission, verbal or
written, made by the party in the course of the
proceedings in the same case, does not require
proof. The admission may be contradicted only by
showing that it was made through palpable mistake or
that no such admission was made. (Emphasis
supplied.)
Geronimo Is Liable for PN No. FCD-0599-2749
under His Deed of Suretyship
This brings us to the third ground which involves the issue of the
coverage of the suretyship. Preliminarily, an overview on the
process of taking out loans should first be made. Generally,
especially for large loans, banks first approve a line or facility out
of which a client may avail itself of loans in the form of
promissory notes without need of further processing and/or
approval every time a draw down is made. In the instant case,
Asianbank approved in favor of Gateway the PhP 10 million-
Domestic Bills Purchased Line and the USD 3 million-Omnibus
Credit Line. Asianbank approved these credit lines which were
covered by a chattel mortgage as well as the deeds of
suretyship, such that loans extended from these lines would
already be secured and pre-approved. In other words, these
facilities are not financial obligations yet. Asianbank did not yet
lend out any money to Gateway with the approval of these lines.
The loan transaction occurred or the principal obligation, as
secured by a surety agreement, was born after the execution of
loan documents, such as PN No. FCD-0599-2749.
Geronimo now excepts from the ruling that the deed of
suretyship he executed covered PN No. FCD-0599-2749 which
embodied several export packing loans issued by Asianbank to
Gateway. He claims that the deed only secured the PhP 10
million-Domestic Bills Purchased Line and the USD 3 million-
Omnibus Credit Line. Geronimo describes as absurd the notion
that a deed of suretyship would secure a loan obligation
contracted three (3) years after the execution of the surety deed.
Geronimos thesis that the deed in question cannot be accorded
prospective application is erroneous. To be sure, the provisions
of the subject deed of suretyship indicate a continuing
suretyship. In Fortune Motors (Phils.) v. Court of Appeals,19 the
Court, citing cases, defined and upheld the validity of a
continuing suretyship in this wise:
"x x x Of course, a surety is not bound under any
particular principal obligation until that principal
obligation is born. But there is no theoretical or
doctrinal difficulty inherent in saying that the suretyship
agreement itself is valid and binding even before the
principal obligation intended to be secured thereby is
born, any more than there would be in saying that
obligations which are subject to a condition precedent
are valid and binding before the occurrence of the
condition precedent.
Comprehensive or continuing surety agreements
are in fact quite commonplace in present day
financial and commercial practice. A bank or
financing company which anticipates entering into
a series of credit transactions with a particular
company, commonly requires the projected
principal debtor to execute a continuing surety
agreement along with its sureties. By executing
such an agreement, the principal places itself in a
position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a
separate surety contract or bond for each
financing or credit accommodation extended to the
principal debtor."20
In Dio vs. Court of Appeals,21 we again had occasion
to discourse on continuing guaranty/suretyship thus:
"x x x A continuing guaranty is one which is not limited
to a single transaction, but which contemplates a future
course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to
provide security with respect to future transactions
within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable. Otherwise stated, a continuing
guaranty is one which covers all transactions, including
those arising in the future, which are within the
description or contemplation of the contract, of
guaranty, until the expiration or termination thereof. A
guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from
time to time either indefinitely or until a certain period x
x x.
In other jurisdictions, it has been held that the use of
particular words and expressions such as payment of
any debt, any indebtedness, any deficiency, or any
sum, or the guaranty of any transaction or money to
be furnished the principal debtor at any time, or on
such time that the principal debtor may require, have
been construed to indicate a continuing guaranty."
(Emphasis supplied.)
By its nature, a continuing suretyship covers current and future
loans, provided that, with respect to future loan transactions,
they are, to borrow from Dio, as cited above, "within the
description or contemplation of the contract of guaranty." The
Deed of Suretyship Geronimo signed envisaged a continuing
suretyship when, by the express terms of the deed, he
warranted payment of the PhP 10 million-Domestic Bills
Purchased Line and the USD 3 million-Omnibus Credit Line, as
evidenced by:
x x x notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and
other bank charges as may accrue thereon and all
expenses which may be incurred by the latter in
collecting any or all such instruments.22
Evidently, under the deed of suretyship, Geronimo undertook to
secure all obligations obtained under the Domestic Bills
Purchased Line and Omnibus Credit Line, without any
specification as to the period of the loan.
58
Geronimos application of Garcia v. Court of Appeals, a case
covering two separate loans, denominated as SWAP
Loan and Export Loan, is quite misplaced. There, the Court
ruled that the continuing suretyship only covered the SWAP
Loan as it was only this loan that was referred to in the
continuing suretyship. The Court wrote in Garcia:
Particular attention must be paid to the statement
appearing on the face of the Indemnity [Suretyship]
Agreement x x x "evidenced by those certain loan
documents dated April 20, 1982" x x x. From this
statement, it is clear that the Indemnity Agreement
refers only to the loan document of April 20, 1982 which
is the SWAP loan. It did not include the EXPORT loan.
Hence, petitioner cannot be held answerable for the
EXPORT loan.23 (Emphasis supplied.)
The Indemnity Agreement in Garcia specifically identified loan
documents evidencing obligations of the debtor that the
agreement was intended to secure. In the present case,
however, the suretyship Geronimo assumed did not limit itself to
a specific loan document to the exclusion of another. The
suretyship document merely mentioned the Domestic Bills
Purchased Line and Omnibus Credit Line as evidenced by "all
notes, drafts x x x contracted/incurred by [Gateway] in favor of
[Asianbank]."24 As explained earlier, such credit facilities are not
loans by themselves. Thus, the Deed of Suretyship was
intended to secure future loans for which these facilities were
opened in the first place.
Lest it be overlooked, both the trial and appellate courts found
the Omnibus Credit Line referred to in the Deed of Suretyship
as covering the export packing credit loans Asianbank extended
to Gateway. We agree with this factual determination. By the
very use of the term "omnibus," and in practice, an omnibus
credit line refers to a credit facility whence a borrower may avail
of various kinds of credit loans. Defined as such, an omnibus
line is broad enough to refer to or cover an export packing credit
loan.
Geronimos allegation that an export packing credit loan is
separate and distinct from an omnibus credit line is but a bare
and self-serving assertion bereft of any factual or legal basis.
One who alleges something must prove it: a mere allegation is
not evidence.25 Geronimo has not discharged his burden of
proof. His contention cannot be given any weight.
As a final and major ground for his release as surety, Geronimo
alleges that Asianbank repeatedly extended the maturity dates
of the obligations of Gateway without his knowledge and
consent. Pressing this point, he avers that, contrary to the
findings of the CA, he did not waive his right to notice of
extensions of Gateways obligations.
Such contention is unacceptable as it glosses over the fact that
the waiver to be notified of extensions is embedded in surety
document itself, built in the ensuing provision:
In case of default by any and/or all of the DEBTOR(S)
to pay the whole part of said indebtedness herein
secured at maturity, I/WE jointly and severally, agree
and engage to the CREDITOR, its successors and
assigns, the prompt payment, without demand or
notice from said CREDITOR of such notes, drafts,
overdrafts and other credit obligations on which
the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR,
together with all interests, penalty and other bank
charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or
all such instruments.26 (Emphasis supplied.)
In light of the above provision, Geronimo verily waived his right
to notice of the maturity of notes, drafts, overdraft, and other
credit obligations for which Gateway shall become indebted.
This waiver necessarily includes new agreements resulting from
the novation of previous agreements due to changes in their
maturity dates.
Additionally, Geronimos lament about losing his right to
subrogation is erroneous. He argues that by virtue of the order
of insolvency issued by the insolvency court, title and right to
possession to all the properties and assets of Gateway were
vested upon Gateways assignee in accordance with Sec. 32 of
the Insolvency Law.
The transfer of Gateways property to the insolvency assignee,
if this be the case, does not negate Geronimos right of
subrogation, for such right may be had or exercised in the
insolvency proceedings. The possibility that he may only recover
a portion of the amount he is liable to pay is the risk he assumed
as a surety of Gateway. Such loss does not, however, render
ineffectual, let alone invalidate, his suretyship.
Geronimos other arguments to escape liability are puerile and
really partake more of a plea for liberality. They need not detain
us long. In gist, Geronimo argues: first, that he is a gratuitous
surety of Gateway; second, Asianbank deviated from normal
banking practice, such as when it extended the period for
payment of Gateways obligation and when it opted not to
foreclose the chattel mortgage constituted as guarantee of
Gateways loan obligation; and third, implementing the appealed
CAs decision would cause him great harm and injury.
Anent the first argument, suffice it to state that Geronimo was
then the president of Gateway and, as such, was benefited,
albeit perhaps indirectly, by the loan thus granted by Asianbank.
And as we said in Security Pacific Assurance Corporation, the
surety is liable for the debt of another although the surety
possesses no direct or personal interest over the obligation nor
does the surety receive any benefit from it.27
Whether or not Asianbank really deviated from normal banking
practice by extending the period for Gateway to comply with its
loan obligation or by not going after the chattel mortgage
adverted to is really of no moment. Banks are primarily in the
business of extending loans and earn income from their lending
operations by way of service and interest charges. This is why
Asianbank opted to give Gateway ample opportunity to pay its
obligations instead of foreclosing the chattel mortgage and in the
process holding on to assets of which the bank has really no
direct use.
The following excerpts from Palmares are in point:
We agree with respondent corporation that its mere
failure to immediately sue petitioner on her obligation
does not release her from liability. Where a creditor
refrains from proceeding against the principal, the
surety is not exonerated. In other words, mere want of
diligence or forbearance does not affect the creditors
rights vis--vis the surety, unless the surety requires
him by appropriate notice to sue on the obligation.
59
 Such gratuitous indulgence of the principal does not
discharge the surety whether given at the principals
request or without it, and whether it is yielded by the
creditor through sympathy or from an inclination to
favor the principal x x x. The neglect of the creditor to
sue the principal at the time the debt falls due does not
discharge the surety, even if such delay continues until
the principal becomes insolvent. And, in the absence of
proof of resultant injury, a surety is not discharged by
the creditors mere statement that the creditor will not
look to the surety, or that he need not trouble
himself. The consequences of the delay, such as the
subsequent insolvency of the principal, or the fact that
the remedies against the principal may be lost by lapse
of time, are immaterial.28
The Courts Equity Jurisdiction
Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him from
any liability arising from Asianbanks claims if what he terms as
"complete justice" is to be served. He cites, as supporting
reference, Agcaoili v. GSIS,29 presenting in the same breath the
following arguments: first, the Deed of Suretyship is a gratuitous
contract from which he did not benefit; second, Asianbank
assured him that the deed would not be enforced against
him; third, the enforcement of the judgment of the CA would
reduce Geronimo and his family to a life of penury; and fourth,
Geronimo would be unable to exercise his right of subrogation,
Gateway having already been declared as insolvent.
The first and last arguments have already been addressed and
found to be without merit. The second argument is a matter of
defense which has remained unproved and even belied by
Asianbank by its filing of the complaint. We see no need to
further belabor any of them.
As regards the third allegation, suffice it to state that the
predicament Geronimo finds himself in is his very own doing.
His misfortune is but the result of the implementation of a bona
fide contract he freely executed, the terms of which he is
presumed to have thoroughly examined. He was not at all
compelled to act as surety; he had a choice. It may be more
offensive to public policy or good customs if he be allowed to go
back on his undertaking under the surety contract. The Court
cannot be a party to the contracts impairment and relieve a
surety from the effects of an unwise but nonetheless a valid
surety contract.
WHEREFORE, the instant petition is hereby DENIED. The
appealed Decision dated October 28, 2005 of the CA and its
March 17, 2006 Resolution in CA-G.R. CV No. 80734 are
hereby AFFIRMED with the modification that any claim of
Asianbank or its successor-in-interest against Gateway, if any,
arising from the judgment in this suit shall be pursued before the
RTC, Branch 22 in Imus, Cavite as the insolvency court.
Costs against petitioners.
SO ORDERED
G.R. No. 138544 October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,
vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly
construed against the creditor, and every doubt is resolved in
favor of the solidary debtor. The fundamental rules of fair play
require the creditor to obtain the consent of the surety to any
material alteration in the principal loan agreement, or at least to
notify it thereof. Hence, petitioner bank cannot hold herein
respondent liable for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent
any clear stipulation showing that the latter waived his right to
be notified thereof, or to give consent thereto. This is especially
true where, as in this case, respondent was no longer the
principal officer or major stockholder of the corporate debtor at
the time the later obligations were incurred. He was thus no
longer in a position to compel the debtor to pay the creditor and
had no more reason to bind himself anew to the subsequent
obligations.
The Case
This is the main principle used in denying the present Petition
for Review under Rule 45 of the Rules of Court. Petitioner
assails the December 22, 1998 Decision1 of the Court of
Appeals (CA) in CA-GR CV No. 56203, the dispositive portion
of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby
amended in the sense that defendant-appellant Rodolfo M.
Cuenca [herein respondent] is RELEASED from liability to pay
any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim
is hereby DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from
is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution, 3 which
denied petitioners Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision4 of the
Regional Trial Court (RTC) of Makati City (Branch 66) in Civil
Case No. 93-1925, which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering
defendants Sta. Ines Melale Corporation and Rodolfo M.
Cuenca to pay, jointly and severally, plaintiff Security Bank &
Trust Company the sum of P39,129,124.73 representing the
balance of the loan as of May 10, 1994 plus 12% interest per
annum until fully paid, and the sum of P100,000.00 as attorneys
fees and litigation expenses and to pay the costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows: 5
60
"The antecedent material and relevant facts are that defendant-
appellant Sta. Ines Melale (Sta. Ines) is a corporation engaged
in logging operations. It was a holder of a Timber License
Agreement issued by the Department of Environment and
Natural Resources (DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co.
granted appellant Sta. Ines Melale Corporation [SIMC] a credit
line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to
assist the latter in meeting the additional capitalization
requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that
the P8M Credit Loan Facility shall be effective until 30
November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or
inventories (except logs) valued at 200% of the lines plus JSS
of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing
the borrowings, indicating therein the companys duly authorized
signatory/ies;
3. Reasonable/compensating deposit balances in current
account shall be maintained at all times; in this connection, a
Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the
aforementioned terms and conditions upon written notice to the
Borrower. (Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant
SIMC from the above-mentioned credit line, SIMC executed a
Chattel Mortgage dated 23 December 1980 (Exhibit A) over
some of its machinery and equipment in favor of [Petitioner]
SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity
Agreement dated 17 December 1980 (Exhibit B) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with
SIMC as follows:
xxx xxx xxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and
severally with the client (SIMC) in favor of the bank for the
payment, upon demand and without the benefit of excussion of
whatever amount x x x the client may be indebted to the bank x
x x by virtue of aforesaid credit accommodation(s) including
the substitutions, renewals, extensions, increases,
amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x . (Emphasis supplied).
"On 26 November 1981, four (4) days prior to the expiration of
the period of effectivity of the P8M-Credit Loan Facility,
appellant SIMC made a first drawdown from its credit line with
[Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred
[t]housand [p]esos (P6,100,000.00). To cover said drawdown,
SIMC duly executed promissory Note No. TD/TLS-3599-81 for
said amount (Exhibit C).
"Sometime in 1985, [Respondent] Cuenca resigned as
President and Chairman of the Board of Directors of defendant-
appellant Sta. Ines. Subsequently, the shareholdings of
[Respondent] Cuenca in defendant-appellant Sta. Ines were
sold at a public auction relative to Civil Case No. 18021 entitled
Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M.
Cuenca. Said shares were bought by Adolfo Angala who was
the highest bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit
line and obtained six (6) other loan[s] from [Petitioner] SBTC in
the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-
[n]ine [t]housand [n]ineteen and 50/100 [p]esos
(P6,369,019.50). Accordingly, SIMC executed Promissory
Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85,
DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the
amounts of the abovementioned additional loans against the
credit line.
"Appellant SIMC, however, encountered difficulty6 in making the
amortization payments on its loans and requested [Petitioner]
SBTC for a complete restructuring of its indebtedness. SBTC
accommodated appellant SIMCs request and signified its
approval in a letter dated 18 February 1988 (Exhibit G) wherein
SBTC and defendant-appellant Sta. Ines, without notice to or the
prior consent of [Respondent] Cuenca, agreed to restructure the
past due obligations of defendant-appellant Sta. Ines.
[Petitioner] Security Bank agreed to extend to defendant-
appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred
[t]housand [p]esos (P8,800,000.00), to be applied to liquidate
the principal portion of defendant-appellant Sta. Ines[] total
outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1
of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca,
Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred
[t]housand [p]esos (P3,400,000.00), to be applied to liquidate
the past due interest and penalty portion of the indebtedness of
defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf.
Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca,
Expediente, at Vol. II, p. 33 to 34).
"It should be pointed out that in restructuring defendant-
appellant Sta. Ines obligations to [Petitioner] Security Bank,
Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00),
which was the only loan incurred prior to the expiration of the
P8M-Credit Loan Facility on 30 November 1981 and the only
one covered by the Indemnity Agreement dated 19 December
1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not
segregated from, but was instead lumped together with, the
other loans, i.e., Promissory Notes Nos. DLS/74/12/86,
DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F,
Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-
appellant Sta. Ines which were not secured by said Indemnity
Agreement.
"Pursuant to the agreement to restructure its past due
obligations to [Petitioner] Security Bank, defendant-appellant
Sta. Ines thus executed the following promissory notes, both
dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
61

RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
TOTAL P12,200,000.00
(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).
"To formalize their agreement to restructure the loan obligations
of defendant-appellant Sta. Ines, [Petitioner] Security Bank and
defendant-appellant Sta. Ines executed a Loan Agreement
dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol.
I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated
31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower
in the aggregate amount of TWELVE MILLION TWO HUNDRED
THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency
(the Loan). The loan shall be released in two (2) tranches
of P8,800,000.00 for the first tranche (the First Loan)
and P3,400,000.00 for the second tranche (the Second Loan)
to be applied in the manner and for the purpose stipulated
hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the
principal portion of the Borrowers present total outstanding
indebtedness to the Lender (the indebtedness) while the
Second Loan shall be applied to liquidatethe past due interest
and penalty portion of the Indebtedness. (Underscoring
supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p.
33)
"From 08 April 1988 to 02 December 1988, defendant-appellant
Sta. Ines made further payments to [Petitioner] Security Bank in
the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even
[t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up
to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured
loan obligations to [Petitioner] SBTC despite demands made
upon appellant SIMC and CUENCA, the last of which were
made through separate letters dated 5 June 1991 (Exhibit K)
and 27 June 1991 (Exhibit L), respectively.
"Appellants individually and collectively refused to pay the
[Petitioner] SBTC. Thus, SBTC filed a complaint for collection of
sum of money on 14 June 1993, resulting after trial on the merits
in a decision by the court a quo, x x x from which [Respondent]
Cuenca appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that
the 1989 Loan Agreement had novated the 1980 credit
accommodation earlier granted by the bank to Sta. Ines.
Accordingly, such novation extinguished the Indemnity
Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself
solidarily liable for the payment of the loans secured by that
credit accommodation. It noted that the 1989 Loan Agreement
had been executed without notice to, much less consent from,
Cuenca who at the time was no longer a stockholder of the
corporation.
The appellate court also noted that the Credit Approval
Memorandum had specified that the credit accommodation was
for a total amount of P8 million, and that its expiry date was
November 30, 1981. Hence, it ruled that Cuenca was liable only
for loans obtained prior to November 30, 1981, and only for an
amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under
the 1989 Loan Agreement was tantamount to a grant of an
extension of time to the debtor without the consent of the surety.
Under Article 2079 of the Civil Code, such extension
extinguished the surety.
The CA also opined that the surety was entitled to notice, in case
the bank and Sta. Ines decided to materially alter or modify the
principal obligation after the expiry date of the credit
accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our
consideration:8
"A. Whether or not the Honorable Court of Appeals erred in
releasing Respondent Cuenca from liability as surety under the
Indemnity Agreement for the payment of the principal amount of
twelve million two hundred thousand pesos (P12,200,000.00)
under Promissory Note No. RL/74/596/88 dated 9 March 1988
and Promissory Note No. RL/74/597/88 dated 9 March 1988,
plus stipulated interests, penalties and other charges due
thereon;
i. Whether or not the Honorable Court of
Appeals erred in ruling that Respondent
Cuencas liability under the Indemnity
Agreement covered only availments on
SIMCs credit line to the extent of eight million
pesos (P8,000,000.00) and made on or
before 30 November 1981;
ii. Whether or not the Honorable Court of
Appeals erred in ruling that the restructuring
of SIMCs indebtedness under the P8 million
credit accommodation was tantamount to an
extension granted to SIMC without
Respondent Cuencas consent, thus
extinguishing his liability under the Indemnity
Agreement pursuant to Article 2079 of the
Civil Code;
iii. Whether or not the Honorable Court of
appeals erred in ruling that the restructuring
of SIMCs indebtedness under the P8 million
credit accommodation constituted a novation
of the principal obligation, thus extinguishing
Respondent Cuencas liability under the
indemnity agreement;
B. Whether or not Respondent Cuencas liability under the
Indemnity Agreement was extinguished by the payments made
by SIMC;
62
C. Whether or not petitioners Motion for Reconsideration was
pro-forma;
D. Whether or not service of the Petition by registered mail
sufficiently complied with Section 11, Rule 13 of the 1997 Rules
of Civil Procedure."
Distilling the foregoing, the Court will resolve the following
issues: (a) whether the 1989 Loan Agreement novated the
original credit accommodation and Cuencas liability under the
Indemnity Agreement; and (b) whether Cuenca waived his right
to be notified of and to give consent to any substitution, renewal,
extension, increase, amendment, conversion or revival of the
said credit accommodation. As preliminary matters, the
procedural questions raised by respondent will also be
addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for
Reconsideration of the CA Decision, in merely rehashing the
arguments already passed upon by the appellate court, was pro
forma; that as such, it did not toll the period for filing the present
Petition for Review.9 Consequently, the Petition was filed out of
time.10
We disagree. A motion for reconsideration is not pro forma just
because it reiterated the arguments earlier passed upon and
rejected by the appellate court. The Court has explained that a
movant may raise the same arguments, precisely to convince
the court that its ruling was erroneous.11
Moreover, there is no clear showing of intent on the part of
petitioner to delay the proceedings. In Marikina Valley
Development Corporation v. Flojo,12 the Court explained that a
pro forma motion had no other purpose than to gain time and to
delay or impede the proceedings. Hence, "where the
circumstances of a case do not show an intent on the part of the
movant merely to delay the proceedings, our Court has refused
to characterize the motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma
motions for reconsideration impacts upon the reality and
substance of the statutory right of appeal, that doctrine should
be applied reasonably, rather than literally. The right to appeal,
where it exists, is an important and valuable right. Public policy
would be better served by according the appellate court an
effective opportunity to review the decision of the trial court on
the merits, rather than by aborting the right to appeal by a literal
application of the procedural rules relating to pro forma motions
for reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as
follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever
practicable, the service and filing of pleadings and other papers
shall be done personally. Except with respect to papers
emanating from the court, a resort to other modes must be
accompanied by a written explanation why the service or filing
was not done personally. A violation of this Rule may be cause
to consider the paper as not filed."
Respondent maintains that the present Petition for Review does
not contain a sufficient written explanation why it was served by
registered mail.
We do not think so. The Court held in Solar Entertainment v.
Ricafort13 that the aforecited rule was mandatory, and that "only
when personal service or filing is not practicable may resort to
other modes be had, which must then be accompanied by a
written explanation as to why personal service or filing was not
practicable to begin with."
In this case, the Petition does state that it was served on the
respective counsels of Sta. Ines and Cuenca "by registered mail
in lieu of personal service due to limitations in time and
distance."14 This explanation sufficiently shows that personal
service was not practicable. In any event, we find no adequate
reason to reject the contention of petitioner and thereby deprive
it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to
Article 1292 of the Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that
"[i]n the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on
every point."15 Indeed, the following requisites must be
established: (1) there is a previous valid obligation; (2) the
parties concerned agree to a new contract; (3) the old contract
is extinguished; and (4) there is a valid new contract. 16
Petitioner contends that there was no absolute incompatibility
between the old and the new obligations, and that the latter did
not extinguish the earlier one. It further argues that the 1989
Agreement did not change the original loan in respect to the
parties involved or the obligations incurred. It adds that the terms
of the 1989 Contract were "not more onerous."17 Since the
original credit accomodation was not extinguished, it concludes
that Cuenca is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation
are present in this case. The 1989 Loan Agreement
extinguished the obligation18 obtained under the 1980 credit
accomodation. This is evident from its explicit provision to
"liquidate" the principal and the interest of the earlier
indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the
principal portion of the Borrowers present total outstanding
Indebtedness to the Lender (the "Indebtedness") while the
Second Loan shall be applied to liquidatethe past due interest
and penalty portion of the Indebtedness."19 (Italics supplied.)
63
The testimony of an officer20 of the bank that the proceeds of the
1989 Loan Agreement were used "to pay-off" the original
indebtedness serves to strengthen this ruling. 21
Furthermore, several incompatibilities between the 1989
Agreement and the 1980 original obligation demonstrate that the
two cannot coexist. While the 1980 credit accommodation had
stipulated that the amount of loan was not to exceed P8
million,22 the 1989 Agreement provided that the loan was P12.2
million. The periods for payment were also different.
Likewise, the later contract contained conditions, "positive
covenants" and "negative covenants" not found in the earlier
obligation. As an example of a positive covenant, Sta. Ines
undertook "from time to time and upon request by the Lender,
[to] perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or
proper to effectively carry out the provisions and purposes of this
Loan Agreement."23Likewise, SIMC agreed that it would not
create any mortgage or encumbrance on any asset owned or
hereafter acquired, nor would it participate in any merger or
consolidation.24
Since the 1989 Loan Agreement had extinguished the original
credit accommodation, the Indemnity Agreement, an accessory
obligation, was necessarily extinguished also, pursuant to
Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in
consequence of a novation, accessory obligations may subsist
only insofar as they may benefit third persons who did not give
their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere
renewal or extension of the P8 million original accommodation;
it was not a novation.25
This argument must be rejected. To begin with, the 1989 Loan
Agreement expressly stipulated that its purpose was to
"liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to
the 1989 Loan Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his obligation as a surety
should be deemed extinguished, pursuant to Article 2079 of the
Civil Code, which specifically states that "[a]n extension granted
to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. x x x." In an earlier case, 26 the Court
explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time
given to the principal debtor by the creditor without the suretys
consent would deprive the surety of his right to pay the creditor
and to be immediately subrogated to the creditors remedies
against the principal debtor upon the maturity date. The surety
is said to be entitled to protect himself against the contingency
of the principal debtor or the indemnitors becoming insolvent
during the extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of
the Credit Approval Memorandum in holding that the credit
accommodation was only for P8 million, and that it was for a
period of one year ending on November 30, 1981. Petitioner
objects to the appellate courts reliance on that document,
contending that it was not a binding agreement because it was
not signed by the parties. It adds that it was merely for its internal
use.
We disagree. It was petitioner itself which presented the said
document to prove the accommodation. Attached to the
Complaint as Annex A was a copy thereof "evidencing the
accommodation."27 Moreover, in its Petition before this Court, it
alluded to the Credit Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation
("SIMC") was granted by the Bank a credit line in the aggregate
amount of Eight Million Pesos (P8,000,000.00) to assist SIMC
in meeting the additional capitalization requirements for its
logging operations. For this purpose, the Bank issued a Credit
Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and
conditions of the P8 million credit accommodation as contained
in the very document it presented to the courts. Indeed, it cannot
take advantage of that document by agreeing to be bound only
by those portions that are favorable to it, while denying those
that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent
Cuenca "impliedly gave his consent to any modification of the
credit accommodation or otherwise waived his right to be
notified of, or to give consent to, the same." 28 Respondents
consent or waiver thereof is allegedly found in the Indemnity
Agreement, in which he held himself liable for the "credit
accommodation including [its] substitutions, renewals,
extensions, increases, amendments, conversions and revival."
It explains that the novation of the original credit accommodation
by the 1989 Loan Agreement is merely its "renewal," which
"connotes cessation of an old contract and birth of another one
x x x."29
At the outset, we should emphasize that an essential alteration
in the terms of the Loan Agreement without the consent of the
surety extinguishes the latters obligation. As the Court held
in National Bank v. Veraguth,30 "[i]t is fundamental in the law of
suretyship that any agreement between the creditor and the
principal debtor which essentially varies the terms of the
principal contract, without the consent of the surety, will release
the surety from liability."
In this case, petitioners assertion - that respondent consented
to the alterations in the credit accommodation -- finds no support
in the text of the Indemnity Agreement, which is reproduced
hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta.
Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia
Avenue Ext., Makati Metro Manila for and in consideration of the
credit accommodation in the total amount of eight million pesos
(P8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing
under and by virtue of the laws of the Philippine, 6778 Ayala
Avenue, Makati, Metro Manila hereinafter referred to as the
BANK in favor of STA. INES MELALE FOREST PRODUCTS
CORP., x x x ---- hereinafter referred to as the CLIENT, with the
stipulated interests and charges thereon, evidenced by
that/those certain PROMISSORY NOTE[(S)], made, executed
64
and delivered by the CLIENT in favor of the BANK
hereby bind(s) himself/themselves jointly and severally with the
CLIENT in favor of the BANK for the payment , upon demand
and without benefit of excussion of whatever amount or amounts
the CLIENT may be indebted to the BANK under and by virtue
of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendment,
conversions and revivals of the aforesaid credit
accommodation(s),as well as of the amount or amounts of such
other obligations that the CLIENT may owe the BANK, whether
direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and
expenses arising from any agreement or agreements that may
have heretofore been made, or may hereafter be executed by
and between the parties thereto, including the substitutions,
renewals, extensions, increases, amendments, conversions
and revivals of the aforesaid credit accommodation(s), and
further bind(s) himself/themselves with the CLIENT in favor of
the BANK for the faithful compliance of all the terms and
conditions contained in the aforesaid credit accommodation(s),
all of which are incorporated herein and made part hereof by
reference."
While respondent held himself liable for the credit
accommodation or any modification thereof, such clause should
be understood in the context of the P8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines
any license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of
respondent who was solidarily liable. Taking the banks
submission to the extreme, respondent (or his successors)
would be liable for loans even amounting to, say, P100 billion
obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all
alterations and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend
to more than what is stipulated. It is strictly construed against
the creditor, every doubt being resolved against enlarging the
liability of the surety."31 Likewise, the Court has ruled that "it is a
well-settled legal principle that if there is any doubt on the terms
and conditions of the surety agreement, the doubt should be
resolved in favor of the surety x x x. Ambiguous contracts are
construed against the party who caused the ambiguity." 32 In the
absence of an unequivocal provision that respondent waived his
right to be notified of or to give consent to any alteration of the
credit accommodation, we cannot sustain petitioners view that
there was such a waiver.
It should also be observed that the Credit Approval
Memorandum clearly shows that the bank did not have absolute
authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the
borrower, pursuant to this condition:
"5. The Bank reserves the right to amend any of the
aforementioned terms and conditions upon written notice to the
Borrower."33
We reject petitioners submission that only Sta. Ines as the
borrower, not respondent, was entitled to be notified of any
modification in the original loan accommodation. 34 Following the
banks reasoning, such modification would not be valid as to Sta.
Ines if no notice were given; but would still be valid as to
respondent to whom no notice need be given. The latters
liability would thus be more burdensome than that of the former.
Such untenable theory is contrary to the principle that a surety
cannot assume an obligation more onerous than that of the
principal.35
The present controversy must be distinguished from Philamgen
v. Mutuc,36 in which the Court sustained a stipulation whereby
the surety consented to be bound not only for the specified
period, "but to any extension thereafter made, an extension x x
x that could be had without his having to be notified."
In that case, the surety agreement contained this unequivocal
stipulation: "It is hereby further agreed that in case of any
extension of renewal of the bond, we equally bind ourselves to
the Company under the same terms and conditions as herein
provided without the necessity of executing another indemnity
agreement for the purpose and that we hereby equally waive our
right to be notified of any renewal or extension of the bond which
may be granted under this indemnity agreement."
In the present case, there is no such express
stipulation.1wphi1 At most, the alleged basis of respondents
waiver is vague and uncertain. It confers no clear authorization
on the bank or Sta. Ines to modify or extend the original
obligation without the consent of the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of
a continuing surety, petitioner maintains that there was no need
for respondent to execute another surety contract to secure the
1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a
continuing surety does not authorize the bank to extend the
scope of the principal obligation inordinately.37 In Dino v.
CA,38 the Court held that "a continuing guaranty is one which
covers all transactions, including those arising in the
future, which are within the description or contemplation of the
contract of guaranty, until the expiration or termination thereof."
To repeat, in the present case, the Indemnity Agreement was
subject to the two limitations of the credit accommodation: (1)
that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30,
1981. Hence, it was a continuing surety only in regard to loans
obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan
of P6.1 million obtained on November 26, 1991. It did not secure
the subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could
not have guaranteed the 1989 Loan Agreement, which was
executed after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court
found the surety liable for the loan obtained after the payment of
the original one, which was covered by a continuing surety
agreement. At the risk of being repetitious, we hold that in Dino,
the surety Agreement specifically provided that "each suretyship
is a continuing one which shall remain in full force and effect until
this bank is notified of its revocation." Since the bank had not
been notified of such revocation, the surety was held liable even
for the subsequent obligations of the principal borrower.
65
No similar provision is found in the present case. On the
contrary, respondents liability was confined to the 1980 credit
accommodation, the amount and the expiry date of which were
set down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and
solidary signature") of a major stockholder or corporate officer,
as an additional security for loans granted to corporations. There
are at least two reasons for this. First, in case of default, the
creditors recourse, which is normally limited to the corporate
properties under the veil of separate corporate personality,
would extend to the personal assets of the surety. Second, such
surety would be compelled to ensure that the loan would be
used for the purpose agreed upon, and that it would be paid by
the corporation.
Following this practice, it was therefore logical and reasonable
for the bank to have required the JSS of respondent, who was
the chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic,
however, for the bank or Sta. Ines to assume that he would still
agree to act as surety in the 1989 Loan Agreement, because at
that time, he was no longer an officer or a stockholder of the
debtor-corporation. Verily, he was not in a position then to
ensure the payment of the obligation. Neither did he have any
reason to bind himself further to a bigger and more onerous
obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for
the surety of respondent, without even informing him, smacks of
negligence on the part of the bank and bad faith on that of the
principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the
spirit of fair play should have impelled Sta. Ines to ask somebody
else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank
to insist on the JSS of one who was in a position to ensure the
payment of the loan. Even a perfunctory attempt at credit
investigation would have revealed that respondent was no
longer connected with the corporation at the time. As it is, the
bank is now relying on an unclear Indemnity Agreement in order
to collect an obligation that could have been secured by a fairly
obtained surety. For its defeat in this litigation, the bank has only
itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by
novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which had
been an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioners submission
that respondent waived his right to be notified of, or to give
consent to, any modification or extension of the 1980 credit
accommodation.
In this light, we find no more need to resolve the issue of whether
the loan obtained before the expiry date of the credit
accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. L-29139 November 15, 1974
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.
ALCANTARA, plaintiffs-appellants,
vs.
ESTEBAN PICZON and SOSING-LOBOS & CO.,
INC., defendants-appellees.
Vicente C. Santos for plaintiffs-appellants.
Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co.,
Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.
BARREDO, J.:p
Appeal from the decision of the Court of First Instance of Samar
in its Civil Case No. 5156, entitled Consuelo P. Piczon, et al. vs.
Esteban Piczon, et al., sentencing defendants-appellees,
Sosing Lobos and Co., Inc., as principal, and Esteban Piczon,
as guarantor, to pay plaintiffs-appellants "the sum of P12,500.00
with 12% interest from August 6, 1964 until said principal
amount of P12,500.00 shall have been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held on
August 22, 1967, the trial court issued the following order:
"When this case was called for pre-trial,
plaintiffs and defendants through their
lawyers, appeared and entered into the
following agreement:
1. That defendants admit the due execution of
Annexes "A" and "B" of the complaint;
2. That consequently defendant Sosing-
Lobos and Co., Inc. binds itself to the plaintiffs
for P12,500.00, the same to be paid on or
before October 31, 1967 together with the
interest that this court may determine.
That the issues in this case are legal ones
namely:
(a) Will the payment of twelve per cent
interest of P12,500.00 commence to run from
August 6, 1964 when plaintiffs made the first
demand or from August 29, 1956 when the
obligation becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a
guarantor or a surety?
That the parties are hereby required to file
their respective memorandum if they so
desire on or before September 15, 1967 to
discuss the legal issues and therewith the
66
 case will be considered submitted for
decision.
WHEREFORE, the instant case is hereby
considered submitted based on the aforesaid
facts agreed upon and upon submission of
the parties of their respective memorandum
on or before September 15, 1967.
SO ORDERED. 1 (Record on Appeal pp. 28-
30.)
Annex "A", the actionable document of appellants reads thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE
PRESENTS:
That I, ESTEBAN PICZON, of legal age,
married, Filipino, and resident of and with
postal address in the municipality of
Catbalogan, Province of Samar, Philippines,
in my capacity as the President of the
corporation known as the "SOSING-LOBOS
and CO., INC.," as controlling stockholder,
and at the same time as guarantor for the
same, do by these presents contract a loan of
Twelve Thousand Five Hundred Pesos
(P12,500.00), Philippine Currency, the receipt
of which is hereby acknowledged, from the
"Piczon and Co., Inc." another corporation,
the main offices of the two corporations being
in Catbalogan, Samar, for which I undertake,
bind and agree to use the loan as surety cash
deposit for registration with the Securities and
Exchange Commission of the incorporation
papers relative to the "Sosing-Lobos and Co.,
Inc.," and to return or pay the same amount
with Twelve Per Cent (12%) interest per
annum, commencing from the date of
execution hereof, to the "Piczon and Co., Inc.,
as soon as the said incorporation papers are
duly registered and the Certificate of
Incorporation issued by the aforesaid
Commission.
IN WITNESS WHEREOF, I hereunto signed
my name in Catbalogan, Samar, Philippines,
this 28th day of September, 1956.
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor
aforequoted, appellants assign the following alleged errors:
I to perform.
THE TRIAL COURT ERRED IN ORDERING
THE PAYMENT OF 12% INTEREST ON THE
PRINCIPAL OF P12,500.00 FROM AUGUST
6, 1964, ONLY, INSTEAD OF FROM
SEPTEMBER 28, 1956, WHEN ANNEX "A"
WAS DULY EXECUTED.
II
THE TRIAL COURT ERRED IN
CONSIDERING DEFENDANT ESTEBAN
PICZON AS GUARANTOR ONLY AND NOT
AS SURETY.
III
THE TRIAL COURT ERRED IN NOT
ADJUDICATING DAMAGES IN FAVOR OF
THE PLAINTIFFS-APPELLANTS.
(Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of
requiring appellees to pay interest at 12% only from August 6,
1964, the trial court should have adhered to the terms of the
agreement which plainly provides that Esteban Piczon had
obligated Sosing-Lobos and Co., Inc. and himself to "return or
pay (to Piczon and Co., Inc.) the same amount (P12,500.00)
with Twelve Per Cent (12%) interest per annum commencing
from the date of the execution hereof", Annex A, which was on
September 28, 1956. Under Article 2209 of the Civil Code "(i)f
the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum." In the case at bar, the
"interest agreed upon" by the parties in Annex A was to
commence from the execution of said document.
Appellees' contention that the reference in Article 2209 to delay
incurred by the debtor which can serve as the basis for liability
for interest is to that defined in Article 1169 of the Civil Code
reading thus:
Those obliged to deliver or to do something
incur in delay from the time the obligee
judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not
be necessary in order that delay may exist:
(1) When the obligation or the law expressly
so declares; or
(2) When from the nature and the
circumstances of the obligation it appears that
the designation of the time when the thing is
to be delivered or the service is to be rendered
was a controlling motive for the establishment
of the contract; or
(3) When demand would be useless, as when
the obligor has rendered it beyond his power
In reciprocal obligations, neither party incurs
in delay if the other does not comply or is not
ready to comply in a proper manner with what
is incumbent upon him. From the moment one
of the parties fulfills his obligation, delay by
the other begins.
67
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held
that the article cited by appellees (which was Article 1100 of the
Old Civil Code read in relation to Art. 1101) is applicable only
when the obligation is to do something other than the payment
of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado,
104 Phil. 920, the Court squarely ruled that if the contract
stipulates from what time interest will be counted, said stipulated
time controls, and, therefore interest is payable from such time,
and not from the date of the filing of the complaint (at p. 925).
Were that not the law, there would be no basis for the provision
of Article 2212 of the Civil Code providing that "(I)nterest due
shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point."
Incidentally, appellants would have been entitled to the benefit
of this article, had they not failed to plead the same in their
complaint. Their prayer for it in their brief is much too late.
Appellees had no opportunity to meet the issue squarely at the
pre-trial.
As regards the other two assignments of error, appellants' pose
cannot be sustained. Under the terms of the contract, Annex A,
Esteban Piczon expressly bound himself only as guarantor, and
there are no circumstances in the record from which it can be
deduced that his liability could be that of a surety. A guaranty
must be express, (Article 2055, Civil Code) and it would be
violative of the law to consider a party to be bound as a surety
when the very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms
of the pre-trial order, appellants accepted the express
assumption of liability by Sosing-Lobos & Co., Inc. for the
payment of the obligation in question, thereby modifying their
original posture that inasmuch as that corporation did not exist
yet at the time of the agreement, Piczon necessarily must have
bound himself as insurer.
As already explained earlier, appellants' prayer for payment of
legal interest upon interest due from the filing of the complaint
can no longer be entertained, the same not having been made
an issue in the pleadings in the court below. We do not believe
that such a substantial matter can be deemed included in a
general prayer for "any other relief just and equitable in the
premises", especially when, as in this case, the pre-trial order
does not mention it in the enumeration of the issues to be
resolved by the court.
PREMISES CONSIDERED, the judgment of the trial court is
modified so as to make appellees liable for the stipulated interest
of 12% per annum from September 28, 1956, instead of August
6, 1964. In all other respects, said judgment is affirmed. Costs
against appellees.
G.R. No. 94566 July 3, 1992
BA FINANCE CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and TRADERS ROYAL
BANK, respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the
respondent appellate court which reversed the ruling of the trial
court dismissing the case against petitioner.
The antecedent facts are as follows:
On December 17, 1980, Renato Gaytano, doing business under
the name Gebbs International, applied for and was granted a
loan with respondent Traders Royal Bank in the amount of
P60,000.00. As security for the payment of said loan, the
Gaytano spouses executed a deed of suretyship whereby they
agreed to pay jointly and severally to respondent bank the
amount of the loan including interests, penalty and other bank
charges.
In a letter dated December 5, 1980 addressed to respondent
bank, Philip Wong as credit administrator of BA Finance
Corporation for and in behalf of the latter, undertook to
guarantee the loan of the Gaytano spouses. The letter reads:
This is in reference to the application of
Gebbs International for a twenty-five (25)
month term loan of 60,000.00 with your Bank.
In this connection, please be advised that we
unconditionally guarantee full payment in
peso value the said accommodation (sic)
upon non-payment by subject up to a
maximum amount of P60,000.00.
Hoping this would meet your requirement and
expedite the early processing of their
application.
Thank you.(p. 12, Rollo)
Partial payments were made on the loan leaving an unpaid
balance in the amount of P85,807.25. Since the Gaytano
spouses refused to pay their obligation, respondent bank filed
with the trial court complaint for sum of money against the
Gaytano spouses and petitioner corporation as alternative
defendant.
The Gaytano spouses did not present evidence for their
defense. Petitioner corporation, on the other hand, raised the
defense of lack of authority of its credit administrator to bind the
corporation.
On December 12, 1988, the trial court rendered a decision the
dispositive portion of which states:
IN VIEW OF THE FOREGOING, judgment is
hereby rendered in favor of plaintiff and
against defendants/Gaytano spouses,
ordering the latter to jointly and severally pay
the plaintiff the following:
1) EIGHTY FIVE THOUSAND EIGHT
HUNDRED SEVEN AND 25/100
(P85,807.25), representing the total unpaid
balance with accumulated interests, penalties
and bank charges as of September 22, 1987,
plus interests, penalties and bank charges
thereafter until the whole obligation shall have
been fully paid.
2) Attorney's fees at the stipulated rate of ten
(10%) percent computed from the total
obligation; and
68
 3) The costs of suit.
The dismissal of the case against defendant
BA Finance Corporation is hereby ordered
without pronouncement as to cost.
SO ORDERED. (p. 31, Rollo)
Not satisfied with the decision, respondent bank appealed with
the Court of Appeals. On March 13, 1990, respondent appellate
court rendered judgment modifying the decision of the trial court
as follows:
In view of the foregoing, the judgment is
hereby rendered ordering the defendants
Gaytano spouses and alternative defendant
BA Finance Corporation, jointly and severally,
to pay the plaintiff the amount of P85,807.25
as of September 8, 1987, including interests,
penalties and other back (sic) charges
thereon, until the full obligation shall have
been fully paid. No pronouncement as to
costs.
SO ORDERED. (p. 27 Rollo)
Hence this petition was filed with the petitioner assigning the
following errors committed by respondent appellate court:
1. THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN RULING THAT
PETITIONER IS JOINTLY AND SEVERALLY
LIABLE WITH GAYTANO SPOUSES
DESPITE ITS FINDINGS THAT THE
LETTER GUARANTY (EXH. "C") IS
"INVALID AT ITS INCEPTION";
2. THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN RULING THAT THE
PETITIONER WAS GUILTY OF ESTOPPEL
DESPITE THE FACT THAT IT NEVER
KNEW OF SUCH ALLEGED LETTER-
GUARANTY;
3. THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN NOT RULING THAT
SUCH LETTER GUARANTY (EXHIBIT "C")
BEING PATENTLY ULTRA VIRES, IS
UNENFORCEABLE;
4. THE HONORABLE COURT OF APPEALS
ERRED IN NOT AWARDING RELIEF ON
PETITIONER'S COUNTERCLAIM
(p. 10, Rollo).
Since the issues are interrelated, it would be well to discuss
them jointly.
Petitioner contends that the letter guaranty is ultra vires, and
therefore unenforceable; that said letter-guaranty was issued by
an employee of petitioner corporation beyond the scope of his
authority since the petitioner itself is not even empowered by its
articles of incorporation and by-laws to issue guaranties.
Petitioner also submits that it is not guilty of estoppel to make it
liable under the letter-guaranty because petitioner had no
knowledge or notice of such letter-guaranty; that the allegation
of Philip Wong, credit administrator, that there was an audit was
not supported by evidence of any audit report or record of such
transaction in the office files.
We find the petitioner's contentions meritorious. It is a settled
rule that persons dealing with an assumed agent, whether the
assumed agency be a general or special one are bound at their
peril, if they would hold the principal liable, to ascertain not only
the fact of agency but also the nature and extent of authority,
and in case either is controverted, the burden of proof is upon
them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19).
Hence, the burden is on respondent bank to satisfactorily prove
that the credit administrator with whom they transacted acted
within the authority given to him by his principal, petitioner
corporation. The only evidence presented by respondent bank
was the testimony of Philip Wong, credit administrator, who
testified that he had authority to issue guarantees as can be
deduced from the wording of the memorandum given to him by
petitioner corporation on his lending authority. The said
memorandum which allegedly authorized Wong not only to
approve and grant loans but also to enter into contracts of
guaranty in behalf of the corporation, partly reads:
To: Philip H. Wong, SAM
Credit Administrator
From: Hospicio B. Bayona, Jr., VP and
Head of Credit Administration
Re: Lending Authority
I am pleased to delegate to you in your
capacity as Credit Administrator the following
lending limits:
a) P650,000.00 Secured
Loans
b) P550,000.00
Supported Loans
c) P350,000.00 Truck
Loans/Contracts/Leases
d) P350,000.00 Auto
Loan Contracts/Leases
e) P350,000.00
Appliance Loan Contracts
f) P350,000.00
Unsecured Loans
Total loans and/or credits [combination of (a)
thru (f) extended to any one borrower
including parents, affiliates and/or
subsidiaries, should not exceed P750,000.00.
In exercising the limits aforementioned, both
direct and contingent commitments to the
borrower(s) should be considered.
All loans must be within the Company's
established lending guideline and policies.
xxx xxx xxx
LEVELS OF APPROVAL
69
 All transactions in excess of any branch's limit
must be recommended to you through the
Official Credit Report for approval. If the
transaction exceeds your limit, you must
concur in application before submitting it to
the Vice President, Credit Administration for
approval or concurrence.
. . . (pp. 62-63, Rollo) (Emphasis ours)
Although Wong was clearly authorized to approve loans even
up to P350,000.00 without any security requirement, which is far
above the amount subject of the guaranty in the amount of
P60,000.00, nothing in the said memorandum expressly vests
on the credit administrator power to issue guarantees. We
cannot agree with respondent's contention that the phrase
"contingent commitment" set forth in the memorandum means
guarantees. It has been held that a power of attorney or authority
of an agent should not be inferred from the use of vague or
general words. Guaranty is not presumed, it must be expressed
and cannot be extended beyond its specified limits (Director v.
Sing Juco, 53 Phil. 205). In one case, where it appears that a
wife gave her husband power of attorney to loan money, this
Court ruled that such fact did not authorize him to make her
liable as a surety for the payment of the debt of a third person
(Bank of Philippine Islands v. Coster, 47 Phil. 594).
The sole allegation of the credit administrator in the absence of
any other proof that he is authorized to bind petitioner in a
contract of guaranty with third persons should not be given
weight. The representation of one who acts as agent cannot by
itself serve as proof of his authority to act as agent or of the
extent of his authority as agent (Velasco v. La Urbana, 58 Phil.
681). Wong's testimony that he had entered into similar
transactions of guaranty in the past for and in behalf of the
petitioner, lacks credence due to his failure to show documents
or records of the alleged past transactions. The actuation of
Wong in claiming and testifying that he has the authority is
understandable. He would naturally take steps to save himself
from personal liability for damages to respondent bank
considering that he had exceeded his authority. The rule is clear
that an agent who exceeds his authority is personally liable for
damages (National Power Corporation v. National
Merchandising Corporation, Nos. L-33819 and
L-33897, October 23, 1982, 117 SCRA 789).
Anent the conclusion of respondent appellate court that
petitioner is estopped from alleging lack of authority due to its
failure to cancel or disallow the guaranty, We find that the said
conclusion has no basis in fact. Respondent bank had not
shown any evidence aside from the testimony of the credit
administrator that the disputed transaction of guaranty was in
fact entered into the official records or files of petitioner
corporation, which will show notice or knowledge on the latter's
part and its consequent ratification of the said transaction. In the
absence of clear proof, it would be unfair to hold petitioner
corporation guilty of estoppel in allowing its credit administrator
to act as though the latter had power to guarantee.
ACCORDINGLY, the petition is GRANTED and the assailed
decision of the respondent appellate court dated March 13, 1990
is hereby REVERSED and SET ASIDE and another one is
rendered dismissing the complaint for sum of money against BA
Finance Corporation.
SO ORDERED.
G.R. No. 185945 December 05, 2012
FIDELIZA J. AGLIBOT, Petitioner,
vs.
INGERSOL L. SANTIA, Respondent.
DECISION
REYES, J.:
Before the Court is a Petition for Review on Certiorari under
Rule 45 of the 1997 Rules of Civil Procedure seeking to annul
and set aside the Decision1 dated March I 8, 2008 of the Court
of Appeals (CA) in CA-G.R. SP No. 100021, which reversed the
Decision2 dated April 3, 2007 of the Regional Trial Court (RTC)
of Dagupan City, Branch 40, in Criminal Case Nos. 2006-0559-
D to 2006-0569-D and entered a new judgment. The fallo reads
as follows:
WHEREFORE, the instant petition is GRANTED and the
assailed Joint Decision dated April 3, 2007 of the RTC of
Dagupan City, Branch 40, and its Order dated June 12, 2007
are REVERSED AND SET ASIDE and a new one is entered
ordering private respondent Fideliza J. Aglibot to pay petitioner
the total amount of P3,000,000.00 with 12% interest per annum
from the filing of the Informations until the finality of this
Decision, the sum of which, inclusive of interest, shall be subject
thereafter to 12% annual interest until fully paid.
SO ORDERED.3
On December 23, 2008, the appellate court denied herein
petitioners motion for reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia
(Santia) loaned the amount of P2,500,000.00 to Pacific Lending
& Capital Corporation (PLCC), through its Manager, petitioner
Fideliza J. Aglibot (Aglibot). The loan was evidenced by a
Promissory Note dated July 1, 2003, issued by Aglibot in behalf
of PLCC, payable in one year subject to interest at 24% per
annum. Allegedly as a guaranty or security for the payment of
the note, Aglibot also issued and delivered to Santia eleven (11)
post-dated personal checks drawn from her own demand
account maintained at Metrobank, Camiling Branch. Aglibot is a
major stockholder of PLCC, with headquarters at 27 Casimiro
Townhouse, Casimiro Avenue, Zapote, Las Pias, Metro
Manila, where most of the stockholders also reside. 4
Upon presentment of the aforesaid checks for payment, they
were dishonored by the bank for having been drawn against
insufficient funds or closed account. Santia thus demanded
payment from PLCC and Aglibot of the face value of the checks,
but neither of them heeded his demand. Consequently, eleven
(11) Informations for violation of Batas Pambansa Bilang 22
(B.P. 22), corresponding to the number of dishonored checks,
were filed against Aglibot before the Municipal Trial Court in
Cities (MTCC), Dagupan City, Branch 3, docketed as Criminal
Case Nos. 47664 to 47674. Each Information, except as to the
amount, number and date of the checks, and the reason for the
dishonor, uniformly alleged, as follows:
That sometime in the month of September, 2003 in the City of
Dagupan, Philippines and within the jurisdiction of this
70
Honorable Court, the above-named accused, FIDELIZA J.
AGLIBOT, did then and there, willfully, unlawfully and criminally,
draw, issue and deliver to one Engr. Ingersol L. Santia, a
METROBANK Check No. 0006766, Camiling Tarlac Branch,
postdated November 1, 2003, in the amount of P50,000.00,
Philippine Currency, payable to and in payment of an obligation
with the complainant, although the said accused knew fully well
that she did not have sufficient funds in or credit with the said
bank for the payment of such check in full upon its presentment,
such that when the said check was presented to the drawee
bank for payment within ninety (90) days from the date thereof,
the same was dishonored for reason "DAIF", and returned to the
complainant, and despite notice of dishonor, accused failed
and/or refused to pay and/or make good the amount of said
check within five (5) days banking days [sic], to the damage and
prejudice of one Engr. Ingersol L. Santia in the aforesaid amount
of P50,000.00 and other consequential damages.5
Aglibot, in her counter-affidavit, admitted that she did obtain a
loan from Santia, but claimed that she did so in behalf of PLCC;
that before granting the loan, Santia demanded and obtained
from her a security for the repayment thereof in the form of the
aforesaid checks, but with the understanding that upon
remittance in cash of the face amount of the checks, Santia
would correspondingly return to her each check so paid; but
despite having already paid the said checks, Santia refused to
return them to her, although he gave her assurance that he
would not deposit them; that in breach of his promise, Santia
deposited her checks, resulting in their dishonor; that she did not
receive any notice of dishonor of the checks; that for want of
notice, she could not be held criminally liable under B.P. 22 over
the said checks; and that the reason Santia filed the criminal
cases against her was because she refused to agree to his
demand for higher interest.
On August 18, 2006, the MTCC in its Joint Decision decreed as
follows:
WHEREFORE, in view of the foregoing, the accused, FIDELIZA
J. AGLIBOT, is hereby ACQUITTED of all counts of the crime
of violation of the bouncing checks law on reasonable doubt.
However, the said accused is ordered to pay the private
complainant the sum of P3,000,000.00 representing the total
face value of the eleven checks plus interest of 12% per annum
from the filing of the cases on November 2, 2004 until fully paid,
attorneys fees of P30,000.00 as well as the cost of suit.
SO ORDERED.6
On appeal, the RTC rendered a Decision dated April 3, 2007 in
Criminal Case Nos. 2006-0559-D to 2006-0569-D, which further
absolved Aglibot of any civil liability towards Santia, to wit:
WHEREFORE, premises considered, the Joint Decision of the
court a quo regarding the civil aspect of these cases is reversed
and set aside and a new one is entered dismissing the said civil
aspect on the ground of failure to fulfill, a condition precedent of
exhausting all means to collect from the principal debtor.
SO ORDERED.7
Santias motion for reconsideration was denied in the RTCs
Order dated June 12, 2007.8 On petition for review to the CA
docketed as CA-G.R. SP No. 100021, Santia interposed the
following assignment of errors, to wit:
"In brushing aside the law and jurisprudence on the matter, the
Regional Trial Court seriously erred:
1. In reversing the joint decision of the trial court by
dismissing the civil aspect of these cases;
2. In concluding that it is the Pacific Lending and
Capital Corporation and not the private respondent
which is principally responsible for the amount of the
checks being claimed by the petitioner;
3. In finding that the petitioner failed to exhaust all
available legal remedies against the principal debtor
Pacific Lending and Capital Corporation;
4. In finding that the private respondent is a mere
guarantor and not an accommodation party, and thus,
cannot be compelled to pay the petitioner unless all
legal remedies against the Pacific Lending and Capital
Corporation have been exhausted by the petitioner;
5. In denying the motion for reconsideration filed by the
petitioner."9
In its now assailed decision, the appellate court rejected the
RTCs dismissal of the civil aspect of the aforesaid B.P. 22 cases
based on the ground it cited, which is that the "failure to fulfill a
condition precedent of exhausting all means to collect from the
principal debtor." The appellate court held that since Aglibots
acquittal by the MTCC in Criminal Case Nos. 47664 to 47674
was upon a reasonable doubt10 on whether the prosecution was
able to satisfactorily establish that she did receive a notice of
dishonor, a requisite to hold her criminally liable under B.P. 22,
her acquittal did not operate to bar Santias recovery of civil
indemnity.
It is axiomatic that the "extinction of penal action does not carry
with it the eradication of civil liability, unless the extinction
proceeds from a declaration in the final judgment that the fact
from which the civil liability might arise did not exist. Acquittal will
not bar a civil action in the following cases: (1) where the
acquittal is based on reasonable doubt as only preponderance
of evidence is required in civil cases; (2) where the court
declared the accuseds liability is not criminal but only civil in
nature[;] and (3) where the civil liability does not arise from or is
not based upon the criminal act of which the accused was
acquitted."11 (Citation omitted)
The CA therefore ordered Aglibot to personally pay
Santia P3,000,000.00 with interest at 12% per annum, from the
filing of the Informations until the finality of its decision.
Thereafter, the sum due, to be compounded with the accrued
interest, will in turn be subject to annual interest of 12% from the
finality of its judgment until full payment. It thus modified the
MTCC judgment, which simply imposed a straight interest of
12% per annum from the filing of the cases on November 2,
2004 until the P3,000,000.00 due is fully paid, plus attorneys
fees of P30,000.00 and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it was error for the
appellate court to adjudge her personally liable for issuing her
own eleven (11) post-dated checks to Santia, since she did so
in behalf of her employer, PLCC, the true borrower and
beneficiary of the loan. Still maintaining that she was a mere
71
guarantor of the said debt of PLCC when she agreed to issue
her own checks, Aglibot insists that Santia failed to exhaust all
means to collect the debt from PLCC, the principal debtor, and
therefore he cannot now be permitted to go after her subsidiary
liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit of excussion
The RTC in its decision held that, "It is obvious, from the face of
the Promissory Note x x x that the accused-appellant signed the
same on behalf of PLCC as Manager thereof and nowhere does
it appear therein that she signed as an accommodation
party."12 The RTC further ruled that what Aglibot agreed to do
by issuing her personal checks was merely to guarantee the
indebtedness of PLCC. So now petitioner Aglibot reasserts that
as a guarantor she must be accorded the benefit of excussion
prior exhaustion of the property of the debtor as provided
under Article 2058 of the Civil Code, to wit:
Art. 2058. The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor,
and has resorted to all the legal remedies against the debtor.
It is settled that the liability of the guarantor is only subsidiary,
and all the properties of the principal debtor, the PLCC in this
case, must first be exhausted before the guarantor may be held
answerable for the debt.13 Thus, the creditor may hold the
guarantor liable only after judgment has been obtained against
the principal debtor and the latter is unable to pay, "for obviously
the exhaustion of the principals property the benefit of which writing. Thus, the form required under the Statute is for
the guarantor claims cannot even begin to take place before
judgment has been obtained."14 This rule is contained in Article
206215 of the Civil Code, which provides that the action brought
by the creditor must be filed against the principal debtor alone,
except in some instances mentioned in Article 2059 16 when the
action may be brought against both the guarantor and the
principal debtor.
The Court must, however, reject Aglibots claim as a mere
guarantor of the indebtedness of PLCC to Santia for want of
proof, in view of Article 1403(2) of the Civil Code, embodying the
Statute of Frauds, which provides:
Art. 1403. The following contracts are unenforceable, unless
they are ratified:
xxxx
(2) Those that do not comply with the Statute of Frauds as set
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be
performed within a year from the making thereof;
b) A special promise to answer for the debt, default, or
miscarriage of another;
c) An agreement made in consideration of marriage,
other than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of
such goods and chattels, or the evidences, or some of
them, or such things in action, or pay at the time some
part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his
sales book, at the time of the sale, of the amount and
kind of property sold, terms of sale, price, names of
purchasers and person on whose account the sale is
made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than
one year, or for the sale of real property or of an interest
therein;
f) A representation to the credit of a third person. (Italics
ours)
Under the above provision, concerning a guaranty agreement,
which is a promise to answer for the debt or default of
another,17 the law clearly requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified,18 although under Article 135819 of
the Civil Code, a contract of guaranty does not have to appear
in a public document.20 Contracts are generally obligatory in
whatever form they may have been entered into, provided all the
essential requisites for their validity are present, and the Statute
of Frauds simply provides the method by which the contracts
enumerated in Article 1403(2) may be proved, but it does not
declare them invalid just because they are not reduced to
convenience or evidentiary purposes only.21
On the other hand, Article 2055 of the Civil Code also provides
that a guaranty is not presumed, but must be express, and
cannot extend to more than what is stipulated therein. This is the
obvious rationale why a contract of guarantee is unenforceable
unless made in writing or evidenced by some writing. For as
pointed out by Santia, Aglibot has not shown any proof, such as
a contract, a secretarys certificate or a board resolution, nor
even a note or memorandum thereof, whereby it was agreed
that she would issue her personal checks in behalf of the
company to guarantee the payment of its debt to Santia.
Certainly, there is nothing shown in the Promissory Note signed
by Aglibot herself remotely containing an agreement between
her and PLCC resembling her guaranteeing its debt to Santia.
And neither is there a showing that PLCC thereafter ratified her
act of "guaranteeing" its indebtedness by issuing her own
checks to Santia.
Thus did the CA reject the RTCs ruling that Aglibot was a mere
guarantor of the indebtedness of PLCC, and as such could not
"be compelled to pay [Santia], unless the latter has exhausted
all the property of PLCC, and has resorted to all the legal
remedies against PLCC x x x." 22
Aglibot is an accommodation party and therefore liable to
Santia
Section 185 of the Negotiable Instruments Law defines a check
as "a bill of exchange drawn on a bank payable on demand,"
while Section 126 of the said law defines a bill of exchange as
72
"an unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer."
The appellate court ruled that by issuing her own post-dated
checks, Aglibot thereby bound herself personally and solidarily
to pay Santia, and dismissed her claim that she issued her said
checks in her official capacity as PLCCs manager merely to
guarantee the investment of Santia. It noted that she could have
issued PLCCs checks, but instead she chose to issue her own
checks, drawn against her personal account with Metrobank. It
concluded that Aglibot intended to personally assume the
repayment of the loan, pointing out that in her Counter-Affidavit,
she even admitted that she was personally indebted to Santia,
and only raised payment as her defense, a clear admission of
her liability for the said loan.
The appellate court refused to give credence to Aglibots claim
that she had an understanding with Santia that the checks would
not be presented to the bank for payment, but were to be
returned to her once she had made cash payments for their face
values on maturity. It noted that Aglibot failed to present any
proof that she had indeed paid cash on the above checks as she
claimed. This is precisely why Santia decided to deposit the
checks in order to obtain payment of his loan.
The facts below present a clear situation where Aglibot, as the
manager of PLCC, agreed to accommodate its loan to Santia by
issuing her own post-dated checks in payment thereof. She is
what the Negotiable Instruments Law calls an accommodation
party.23 Concerning the liability of an accommodation party,
Section 29 of the said law provides:
Sec. 29. Liability of an accommodation party. An
accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
As elaborated in The Phil. Bank of Commerce v. Aruego:24
An accommodation party is one who has signed the instrument
as maker, drawer, indorser, without receiving value therefor and
for the purpose of lending his name to some other person. Such
person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the
instrument knew him to be only an accommodation party. In
lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends
his name to enable the accommodated party to obtain credit or
to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto
because he wants to accommodate another. x x x. 25 (Citation
omitted)
The relation between an accommodation party and the party
accommodated is, in effect, one of principal and surety the
accommodation party being the surety. It is a settled rule that a
surety is bound equally and absolutely with the principal and is
deemed an original promisor and debtor from the beginning. The
liability is immediate and direct.26 It is not a valid defense that
the accommodation party did not receive any valuable
consideration when he executed the instrument; nor is it correct
to say that the holder for value is not a holder in due course
merely because at the time he acquired the instrument, he knew
that the indorser was only an accommodation party.271wphi1
Moreover, it was held in Aruego that unlike in a contract of
suretyship, the liability of the accommodation party remains not
only primary but also unconditional to a holder for value, such
that even if the accommodated party receives an extension of
the period for payment without the consent of the
accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as
far as a holder for value is concerned, he is a solidary co-debtor.
The mere fact, then, that Aglibot issued her own checks to
Santia made her personally liable to the latter on her checks
without the need for Santia to first go after PLCC for the payment
of its loan.28 It would have been otherwise had it been shown
that Aglibot was a mere guarantor, except that since checks
were issued ostensibly in payment for the loan, the provisions of
the Negotiable Instruments Law must take primacy in
application.
WHEREFORE, premises considered, the Petition for Review
on Certiorari is DENIED and the Decision dated March 18, 2008
of the Court of Appeals in CA-G.R. SP No. I 00021 is
hereby AFFIRMED.
SO ORDERED.
G.R. No. L-47495 August 14, 1941
THE TEXAS COMPANY (PHIL.), INC., petitioner,
vs.
TOMAS ALONSO, respondent.
C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso
were sued by the Texas Company (P.I.), Inc. in the Court of First
Instance of Cebu for the recovery of the sum of P629, unpaid
balance of the account of Leonora S. Bantug in connection with
the agency contract with the Texas Company for the faithful
performance of which Tomas Alonso signed the following:
For value received, we jointly and severally do hereby
bind ourselves and each of us, in solidum, with Leonor
S. Bantug the agent named in the within and foregoing
agreement, for full and complete performance of same
hereby waiving notice of non-performance by or
demand upon said agent, and the consent to any and
all extensions of time for performance. Liability under
this undertaking, however, shall not exceed the sum of
P2,000, Philippine currency.
Witness the hand and seal of the undersigned affixed
in the presence of two witness, this 12th day of August,
1929.
Leonor S. Bantug was declared in default as a result of her
failure to appear or answer, but Tomas Alonso filed an answer
setting up a general denial and the special defenses that Leonor
S. Bantug made him believe that he was merely a co-security of
73
one Vicente Palanca and he was never notified of the
acceptance of his bond by the Texas Company. After trial, the
Court of First Instance of Cebu rendered judgment on July 10,
1973, which was amended on February 1, 1938, sentencing
Leonor S. Bantug and Tomas Alonso to pay jointly and severally
to the Texas Company the sum of P629, with interest at the rate
of six per cent (6%) from the date of filing of the complaint, and
with proportional costs. Upon appeal by Tomas Alonso, the
Court of Appeals modified the judgment of the Court of First
Instance of Cebu in the sense that Leonor S. Bantug was held
solely liable for the payment of the aforesaid sum of P629 to the
Texas Company, with the consequent absolution of Tomas
Alonso. This case is now before us on petition for review
by certiorari of the decision of the Court of Appeals. It is
contended by the petitioner that the Court of Appeals erred in
holding that there was merely an offer of guaranty on the part of
the respondent, Tomas Alonso, and that the latter cannot be
held liable thereunder because he was never notified by the
Texas Company of its acceptance.
The Court of Appeals has placed reliance upon our decision
in National Bank vs. Garcia (47 Phil., 662), while the petitioner
invokes the case of National Bank vs. Escueta, (50 Phil., 991).
In the first case, it was held that there was merely an offer to
give bond and, as there was no acceptance of the offer, this
court refused to give effect to the bond. In the second case, the
sureties were held liable under their surety agreement which
was found to have been accepted by the creditor, and it was
therein ruled that an acceptance need not always be express or
in writing. For the purpose of this decision, it is not indispensable
for us to invoke one or the other case above cited. The Court of
Appeals found as a fact, and this is conclusive in this instance,
that the bond in question was executed at the request of the
petitioner by virtue of the following clause of the agency contract:
Additional Security. The Agent shall whenever
requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond,
conditioned upon the Agent's faithful performance of
this contract, in such individuals of firms as joint and
several sureties as shall be satisfactory to the
Company.
In view of the foregoing clause which should be the law between
the parties, it is obvious that, before a bond is accepted by the
petitioner, it has to be in such form and amount and with such
sureties as shall be satisfactory hereto; in other words, the bond
is subject to petitioner's approval. The logical implication arising
from this requirement is that, if the petitioner is satisfied with any
such bond, notice of its acceptance or approval should
necessarily be given to the property party in interest, namely,
the surety or guarantor. In this connection, we are likewise
bound by the finding of the Court of Appeals that there is no
evidence in this case tending to show that the respondent,
Tomas Alonso, ever had knowledge of any act on the part of
petitioner amounting to an implied acceptance, so as to justify
the application of our decision in National Bank vs. Escueta (50
Phil., 991).
While unnecessary to this decision, we choose to add a few
words explanatory of the rule regarding the necessity of
acceptance in case of bonds. Where there is merely an offer of,
or proposition for, a guaranty, or merely a conditional guaranty
in the sense that it requires action by the creditor before the
obligation becomes fixed, it does not become a binding
obligation until it is accepted and, unless there is a waiver of
notice of such acceptance is given to, or acquired by, the
guarantor, or until he has notice or knowledge that the creditor
has performed the conditions and intends to act upon the
guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21,
p. 901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not
necessarily be express or in writing, but may be indicated by
acts amounting to acceptance. (National Bank vs. Escueta, 50
Phil., 991.) Where, upon the other hand, the transaction is not
merely an offer of guaranty but amounts to direct or
unconditional promise of guaranty, unless notice of acceptance
is made a condition of the guaranty, all that is necessary to make
the promise binding is that the promise should act upon it, and
notice of acceptance is not necessary (28 C. J., sec. 25, p. 904;
24 Am. Jur., sec 37, p. 899), the reason being that the contract
of guaranty is unilateral (Visayan Surety and Insurance
Corporation vs. Laperal, G.R. No. 46515, promulgated June 14,
1940).
The decision appealed from will be, as the same is hereby,
affirmed, with costs of this instance against the petitioner. So
ordered.
G.R. No. 127261 September 7, 2001
VISAYAN SURETY & INSURANCE
CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SPOUSES JUN
BARTOLOME+ and SUSAN BARTOLOME and DOMINADOR
V. IBAJAN+, respondents.
PARDO, J.:
The Case
The case is a petition to review and set aside a decision 1 of the
Court of Appeals affirming that of the Regional Trial Court,
Bian, Laguna, Branch 24, holding the surety liable to the
intervenor in lieu of the principal on a replevin bond.
The Facts
The facts, as found by the Court of Appeals,2 are as follows:
On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe
Ibajan filed with the Regional Trial Court, Laguna, Bian a
complaint against spouses Jun and Susan Bartolome, for
replevin to recover from them the possession of an Isuzu
jeepney, with damages. Plaintiffs Ibajan alleged that they were
the owners of an Isuzu jeepney which was forcibly and
unlawfully taken by defendants Jun and Susan Bartolome on
December 8, 1992, while parked at their residence.
On February 8, 1993, plaintiffs filed a replevin bond through
petitioner Visayan Surety & Insurance Corporation. The contract
of surety provided thus:
"WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan
and the VISAYAN SURETY & INSURANCE CORP., of
Cebu, Cebu, with branch office at Manila, jointly and
severally bind ourselves in the sum of Three Hundred
Thousand Pesos (P300,000.00) for the return of the
property to the defendant, if the return thereof be
adjudged, and for the payment to the defendant of such
74
 sum as he/she may recover from the plaintiff in the
action."3
On February 8, 1993, the trial court granted issuance of a writ of
replevin directing the sheriff to take the Isuzu jeepney into his
custody. Consequently, on February 22, 1993, Sheriff Arnel
Magat seized the subject vehicle and turned over the same to
plaintiff spouses Ibajan.4
On February 15, 1993, the spouses Bartolome filed with the trial
court a motion to quash the writ of replevin and to order the
return of the jeepney to them.
On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo
Ibajan, filed with the trial court a motion for leave of court to
intervene, stating that he has a right superior to the plaintiffs over
the ownership and possession of the subject vehicle.
On June 1, 1993, the trial court granted the motion to intervene.
On August 8, 1993, the trial court issued an order granting the
motion to quash the writ of replevin and ordering plaintiff Mila
Ibajan to return the subject jeepney to the intervenor Dominador
Ibajan.5
On August 31, 1993, the trial court ordered the issuance of a writ
of replevin directing the sheriff to take into his custody the
subject motor vehicle and to deliver the same to the intervenor
who was the registered owner.6
On September 1, 1993, the trial court issued a writ of replevin in
favor of intervenor Dominador Ibajan but it was returned
unsatisfied.
On March 7, 1994, intervenor Dominador Ibajan filed with the
trial court a motion/application for judgment against plaintiffs
bond.
On June 6, 1994, the trial court rendered judgement the
dispositive portion of which reads:
"WHEREFORE, in the light of the foregoing premises,
judgment is hereby rendered in favor of Dominador
Ibajan and against Mila Ibajan and the Visayan Surety
and Insurance Corporation ordering them to pay the
former jointly and severally the value of the subject
jeepney in the amount of P150,000.00 and such other
damages as may be proved by Dominador Ibajan plus
costs."7
On June 28, 1994, Visayan Surety and Insurance Corporation
and Mila Ibajan filed with the trial court their respective motions
for reconsideration.
On August 16, 1994, the trial court denied both motions.
On November 24, 1995, Visayan Surety and Insurance
Corporation (hereafter Visayan Surety) appealed the decision to
the Court of Appeals.8
On August 30, 1996, the Court of Appeals promulgated its
decision affirming the judgment of the trial court.9 On September
19, 1996, petitioner filed a motion for reconsideration. 10 On
December 2, 1996, the Court of Appeals denied the motion for
reconsideration for lack of merit.11
Hence, this petition.12
The Issue
The issue in this case is whether the surety is liable to an
intervenor on a replevin bond posted by petitioner in favor of
respondents.13
Respondent Dominador Ibajan asserts that as intervenor, he
assumed the personality of the original defendants in relation to
the plaintiffs bond for the issuance of a writ of replevin.
Petitioner Visayan Surety contends that it is not liable to the
intervenor, Dominador Ibajan, because the intervention of the
intervenor makes him a party to the suit, but not a beneficiary to
the plaintiffs bond. The intervenor was not a party to the contract
of surety, hence, he was not bound by the contract.
The Courts Ruling
The petition is meritorious.
An intervenor is a person, not originally impleaded in a
proceeding, who has legal interest in the matter in litigation, or
in the success of either of the parties, or an interest against both,
or is so situated as to be adversely affected by a distribution or
other disposition of property in the custody of the court or of an
officer thereof.14
May an intervenor be considered a party to a contract of surety
which he did not sign and which was executed by plaintiffs and
defendants?
It is a basic principle in law that contracts can bind only the
parties who had entered into it; it cannot favor or prejudice a
third person.15 Contracts take effect between the parties, their
assigns, and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law.16
A contract of surety is an agreement where a party called the
surety guarantees the performance by another party called the
principal or obligor of an obligation or undertaking in favor of a
third person called the obligee.17Specifically, suretyship is a
contractual relation resulting from an agreement whereby one
person, the surety, engages to be answerable for the debt,
default or miscarriage of another, known as the principal. 18
The obligation of a surety cannot be extended by implication
beyond its specified limits.19 "When a surety executes a bond, it
does not guarantee that the plaintiffs cause of action is
meritorious, and that it will be responsible for all the costs that
may be adjudicated against its principal in case the action fails.
The extent of a suretys liability is determined only by the clause
of the contract of suretyship."20 A contract of surety is not
presumed; it cannot extend to more than what is stipulated. 21
Since the obligation of the surety cannot be extended by
implication, it follows that the surety cannot be held liable to the
intervenor when the relationship and obligation of the surety is
limited to the defendants specified in the contract of surety.
75
WHEREFORE, the Court REVERSES and sets aside the
decision of the Court of Appeals in CA-G. R. CV No. 49094. The
Court rules that petitioner Visayan Surety & Insurance
Corporation is not liable under the replevin bond to the
intervenor, respondent Dominador V. Ibajan.1wphi1.nt
No costs.
SO ORDERED.
[G.R. No. L-8437. November 28, 1956.]
ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY CO., INC.,
claimant-Appellant.
DECISION
REYES, J. B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court of First
Instance of Rizal, presided by Judge Hermogenes Caluag, dismissing
its claim against the Estate of K. H. Hemady (Special Proceeding No.
Q-293) for failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the Estate based on
twenty different indemnity agreements, or counter bonds, each
subscribed by a distinct principal and by the deceased K. H. Hemady,
a surety solidary guarantor) in all of them, in consideration of the
Luzon Surety Co.s of having guaranteed, the various principals in
favor of different creditors. The twenty counterbonds, or indemnity
agreements, all contained the following
stipulations:chanroblesvirtuallawlibrary
Premiums. As consideration for this suretyship, the undersigned
jointly and severally, agree to pay the COMPANY the sum of
________________ (P______) pesos, Philippines Currency, in
advance as premium there of for every __________ months or
fractions thereof, this ________ or any renewal or substitution
thereof is in effect.
Indemnity. The undersigned, jointly and severally, agree at all
times to indemnify the COMPANY and keep it indemnified and hold
and save it harmless from and against any and all damages, losses,
costs, stamps, taxes, penalties, charges, and expenses of whatsoever
kind and nature which the COMPANY shall or may, at any time sustain
or incur in consequence of having become surety upon this bond or
any extension, renewal, substitution or alteration thereof made at the
instance of the undersigned or any of them or any order executed on
behalf of the undersigned or any of them; chan
roblesvirtualawlibraryand to pay, reimburse and make good to the
COMPANY, its successors and assigns, all sums and amount of money
which it or its representatives shall pay or cause to be paid, or become
liable to pay, on account of the undersigned or any of them, of
whatsoever kind and nature, including 15% of the amount involved in
the litigation or other matters growing out of or connected therewith
for counsel or attorneys fees, but in no case less than P25. It is hereby
further agreed that in case of extension or renewal of this ________
we equally bind ourselves for the payment thereof under the same
terms and conditions as above mentioned without the necessity of
executing another indemnity agreement for the purpose and that we
hereby equally waive our right to be notified of any renewal or
extension of this ________ which may be granted under this
indemnity agreement.
Interest on amount paid by the Company. Any and all sums of
money so paid by the company shall bear interest at the rate of
12% per annum which interest, if not paid, will be accummulated and
added to the capital quarterly order to earn the same interests as the
capital and the total sum thereof, the capital and interest, shall be
paid to the COMPANY as soon as the COMPANY shall have become
liable therefore, whether it shall have paid out such sums of money
or any part thereof or not.
xxx xxx xxx
Waiver. It is hereby agreed upon by and between the undersigned
that any question which may arise between them by reason of this
document and which has to be submitted for decision to Courts of
Justice shall be brought before the Court of competent jurisdiction in
the City of Manila, waiving for this purpose any other venue. Our right
to be notified of the acceptance and approval of this indemnity
agreement is hereby likewise waived.
xxx xxx xxx
Our Liability Hereunder. It shall not be necessary for the COMPANY
to bring suit against the principal upon his default, or to exhaust the
property of the principal, but the liability hereunder of the
undersigned indemnitor shall be jointly and severally, a primary one,
the same as that of the principal, and shall be exigible immediately
upon the occurrence of such default. (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of
the value of the twenty bonds it had executed in consideration of the
counterbonds, and further asked for judgment for the unpaid
premiums and documentary stamps affixed to the bonds, with 12 per
cent interest thereon.
Before answer was filed, and upon motion of the administratrix of
Hemadys estate, the lower court, by order of September 23, 1953,
dismissed the claims of Luzon Surety Co., on two
grounds:chanroblesvirtuallawlibrary (1) that the premiums due and
cost of documentary stamps were not contemplated under the
indemnity agreements to be a part of the undertaking of the
guarantor (Hemady), since they were not liabilities incurred after the
execution of the counterbonds; chan roblesvirtualawlibraryand (2)
that whatever losses may occur after Hemadys death, are not
chargeable to his estate, because upon his death he ceased to be
guarantor.
Taking up the latter point first, since it is the one more far reaching in
effects, the reasoning of the court below ran as
follows:chanroblesvirtuallawlibrary
The administratrix further contends that upon the death of Hemady,
his liability as a guarantor terminated, and therefore, in the absence
of a showing that a loss or damage was suffered, the claim cannot be
considered contingent. This Court believes that there is merit in this
contention and finds support in Article 2046 of the new Civil Code. It
should be noted that a new requirement has been added for a person
to qualify as a guarantor, that is:chanroblesvirtuallawlibrary integrity.
As correctly pointed out by the Administratrix, integrity is something
purely personal and is not transmissible. Upon the death of Hemady,
his integrity was not transmitted to his estate or successors.
Whatever loss therefore, may occur after Hemadys death, are not
chargeable to his estate because upon his death he ceased to be a
guarantor.
Another clear and strong indication that the surety company has
exclusively relied on the personality, character, honesty and integrity
of the now deceased K. H. Hemady, was the fact that in the printed
form of the indemnity agreement there is a paragraph entitled
Security by way of first mortgage, which was expressly waived and
76
renounced by the security company. The security company has not
demanded from K. H. Hemady to comply with this requirement of
giving security by way of first mortgage. In the supporting papers of
the claim presented by Luzon Surety Company, no real property was
mentioned in the list of properties mortgaged which appears at the
back of the indemnity agreement. (Rec. App., pp. 407-408).
We find this reasoning untenable. Under the present Civil Code
(Article 1311), as well as under the Civil Code of 1889 (Article 1257),
the rule is that
Contracts take effect only as between the parties, their assigns and
heirs, except in the case where the rights and obligations arising from
the contract are not transmissible by their nature, or by stipulation or
by provision of law.
While in our successional system the responsibility of the heirs for the
debts of their decedent cannot exceed the value of the inheritance
they receive from him, the principle remains intact that these heirs
succeed not only to the rights of the deceased but also to his
obligations. Articles 774 and 776 of the New Civil Code (and Articles
659 and 661 of the preceding one) expressly so provide, thereby
confirming Article 1311 already quoted.
ART. 774. Succession is a mode of acquisition by virtue of which
the property, rights and obligations to the extent of the value of the
inheritance, of a person are transmitted through his death to another
or others either by his will or by operation of law.
ART. 776. The inheritance includes all the property, rights and
obligations of a person which are not extinguished by his death.
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court
ruled:chanroblesvirtuallawlibrary
Under the Civil Code the heirs, by virtue of the rights of succession
are subrogated to all the rights and obligations of the deceased
(Article 661) and cannot be regarded as third parties with respect to
a contract to which the deceased was a party, touching the estate of
the deceased (Barrios vs. Dolor, 2 Phil. 44).
xxx xxx xxx
The principle on which these decisions rest is not affected by the
provisions of the new Code of Civil Procedure, and, in accordance with
that principle, the heirs of a deceased person cannot be held to be
third persons in relation to any contracts touching the real estate of
their decedent which comes in to their hands by right of
inheritance; chan roblesvirtualawlibrarythey take such property
subject to all the obligations resting thereon in the hands of him from
whom they derive their rights.
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de
Guzman vs. Salak, 91 Phil., 265).
The binding effect of contracts upon the heirs of the deceased party
is not altered by the provision in our Rules of Court that money debts
of a deceased must be liquidated and paid from his estate before the
residue is distributed among said heirs (Rule 89). The reason is that
whatever payment is thus made from the estate is ultimately a
payment by the heirs and distributees, since the amount of the paid
claim in fact diminishes or reduces the shares that the heirs would
have been entitled to receive.
Under our law, therefore, the general rule is that a partys contractual
rights and obligations are transmissible to the successors. The rule is
a consequence of the progressive depersonalization of patrimonial
rights and duties that, as observed by Victorio Polacco, has
characterized the history of these institutions. From the Roman
concept of a relation from person to person, the obligation has
evolved into a relation from patrimony to patrimony, with the
persons occupying only a representative position, barring those rare
cases where the obligation is strictly personal, i.e., is contracted
intuitu personae, in consideration of its performance by a specific
person and by no other. The transition is marked by the
disappearance of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the
obligation of the surety or guarantor does not warrant the conclusion
that his peculiar individual qualities are contemplated as a principal
inducement for the contract. What did the creditor Luzon Surety Co.
expect of K. H. Hemady when it accepted the latter as surety in the
counterbonds? Nothing but the reimbursement of the moneys that
the Luzon Surety Co. might have to disburse on account of the
obligations of the principal debtors. This reimbursement is a payment
of a sum of money, resulting from an obligation to give; chan
roblesvirtualawlibraryand to the Luzon Surety Co., it was indifferent
that the reimbursement should be made by Hemady himself or by
some one else in his behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by
stipulation of the parties. Being exceptional and contrary to the
general rule, this intransmissibility should not be easily implied, but
must be expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are non-
transferable.
(b) Intransmisibilidad por pacto. Lo general es la transmisibilidad
de darechos y obligaciones; chan roblesvirtualawlibraryle excepcion,
la intransmisibilidad. Mientras nada se diga en contrario impera el
principio de la transmision, como elemento natural a toda relacion
juridica, salvo las personalisimas. Asi, para la no transmision, es
menester el pacto expreso, porque si no, lo convenido entre partes
trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre
ellos recaen los efectos de los vinculos juridicos creados por sus
antecesores, y para evitarlo, si asi se quiere, es indespensable
convension terminante en tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir ms all de las
personas que les dieron vida, y a ejercer presion sobre los sucesores
de esa persona; chan roblesvirtualawlibrarycuando no se quiera esto,
se impone una estipulacion limitativa expresamente de la
transmisibilidad o de cuyos tirminos claramente se deduzca la
concresion del concreto a las mismas personas que lo otorgon.
(Scaevola, Codigo Civil, Tomo XX, p. 541-542) (Emphasis supplied.)
Because under the law (Article 1311), a person who enters into a
contract is deemed to have contracted for himself and his heirs and
assigns, it is unnecessary for him to expressly stipulate to that
effect; chan roblesvirtualawlibraryhence, his failure to do so is no sign
that he intended his bargain to terminate upon his death. Similarly,
that the Luzon Surety Co., did not require bondsman Hemady to
execute a mortgage indicates nothing more than the companys faith
and confidence in the financial stability of the surety, but not that his
obligation was strictly personal.
The third exception to the transmissibility of obligations under Article
1311 exists when they are not transmissible by operation of law.
The provision makes reference to those cases where the law
expresses that the rights or obligations are extinguished by death, as
is the case in legal support (Article 300), parental authority (Article
327), usufruct (Article 603), contracts for a piece of work (Article
1726), partnership (Article 1830 and agency (Article 1919). By
contract, the articles of the Civil Code that regulate guaranty or
suretyship (Articles 2047 to 2084) contain no provision that the
77
guaranty is extinguished upon the death of the guarantor or the
surety.
The lower court sought to infer such a limitation from Art. 2056, to
the effect that one who is obliged to furnish a guarantor must
present a person who possesses integrity, capacity to bind himself,
and sufficient property to answer for the obligation which he
guarantees. It will be noted, however, that the law requires these
qualities to be present only at the time of the perfection of the
contract of guaranty. It is self-evident that once the contract has
become perfected and binding, the supervening incapacity of the
guarantor would not operate to exonerate him of the eventual
liability he has contracted; chan roblesvirtualawlibraryand if that be
true of his capacity to bind himself, it should also be true of his
integrity, which is a quality mentioned in the article alongside the
capacity.
The foregoing concept is confirmed by the next Article 2057, that runs
as follows:chanroblesvirtuallawlibrary
ART. 2057. If the guarantor should be convicted in first instance
of a crime involving dishonesty or should become insolvent, the
creditor may demand another who has all the qualifications required
in the preceding article. The case is excepted where the creditor has
required and stipulated that a specified person should be guarantor.
From this article it should be immediately apparent that the
supervening dishonesty of the guarantor (that is to say, the
disappearance of his integrity after he has become bound) does not
terminate the contract but merely entitles the creditor to demand a
replacement of the guarantor. But the step remains optional in the
creditor:chanroblesvirtuallawlibrary it is his right, not his duty; chan
roblesvirtualawlibraryhe may waive it if he chooses, and hold the
guarantor to his bargain. Hence Article 2057 of the present Civil Code
is incompatible with the trial courts stand that the requirement of
integrity in the guarantor or surety makes the latters undertaking
strictly personal, so linked to his individuality that the guaranty
automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of
Luzon Surety Co. not being rendered intransmissible due to the
nature of the undertaking, nor by the stipulations of the contracts
themselves, nor by provision of law, his eventual liability thereunder
necessarily passed upon his death to his heirs. The contracts,
therefore, give rise to contingent claims provable against his estate
under section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan
roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
The most common example of the contigent claim is that which
arises when a person is bound as surety or guarantor for a principal
who is insolvent or dead. Under the ordinary contract of suretyship
the surety has no claim whatever against his principal until he himself
pays something by way of satisfaction upon the obligation which is
secured. When he does this, there instantly arises in favor of the
surety the right to compel the principal to exonerate the surety. But
until the surety has contributed something to the payment of the
debt, or has performed the secured obligation in whole or in part, he
has no right of action against anybody no claim that could be
reduced to judgment. (May vs. Vann, 15 Pla., 553; chan
roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan
roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves
vs. Pulliam, 7 Baxt. [Tenn.], 119; chan roblesvirtualawlibraryErnst vs.
Nou, 63 Wis., 134.)
For Defendant administratrix it is averred that the above doctrine
refers to a case where the surety files claims against the estate of the
principal debtor; chan roblesvirtualawlibraryand it is urged that the
rule does not apply to the case before us, where the late Hemady was
a surety, not a principal debtor. The argument evinces a superficial
view of the relations between parties. If under the Gaskell ruling, the
Luzon Surety Co., as guarantor, could file a contingent claim against
the estate of the principal debtors if the latter should die, there is
absolutely no reason why it could not file such a claim against the
estate of Hemady, since Hemady is a solidary co-debtor of his
principals. What the Luzon Surety Co. may claim from the estate of a
principal debtor it may equally claim from the estate of Hemady,
since, in view of the existing solidarity, the latter does not even enjoy
the benefit of exhaustion of the assets of the principal debtor.
The foregoing ruling is of course without prejudice to the remedies of
the administratrix against the principal debtors under Articles 2071
and 2067 of the New Civil Code.
Our conclusion is that the solidary guarantors liability is not
extinguished by his death, and that in such event, the Luzon Surety
Co., had the right to file against the estate a contingent claim for
reimbursement. It becomes unnecessary now to discuss the estates
liability for premiums and stamp taxes, because irrespective of the
solution to this question, the Luzon Suretys claim did state a cause of
action, and its dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the records are
ordered remanded to the court of origin, with instructions to proceed
in accordance with law. Costs against the Administratrix- Appellee. SO
ORDERED.
G.R. No. 203133 February 18, 2015
YULIM INTERNATIONAL COMPANY LTD., JAMES YU,
JONATHAN YU, and ALMERICK TIENG LIM, Petitioners,
vs.
INTERNATIONAL EXCHANGE BANK (now Union Bank of
the Philippines), Respondent.
DECISION
REYES, J.:
In the assailed Decision1 dated February 1, 2012 in CA-G.R. CV
No. 95522, the Court of Appeals (CA) modified the
Decision2 dated December 21, 2009 of the Regional Trial Court
(RTC) of Makati City, Branch 145, in Civil Case No. 02-749,
holding that James Yu (James), Jonathan Yu (Jonathan) and
Almerick Tieng Lim (Almerick), who were capitalist partners in
Yulim International Company Ltd. (Yulim), collectively called as
the petitioners, were jointly and severally liable with Yulim for its
loan obligations with respondent International Exchange Bank
(iBank).
The Facts
On June 2, 2000, iBank, a commercial bank, granted Yulim, a
domestic partnership, a credit facility in the form of an Omnibus
Loan Line for P5,000,000.00, as evidenced by a Credit
Agreement3 which was secured by a Chattel Mortgage 4 over
Yulims inventories in its merchandise warehouse at 106 4th
Street, 9th Avenue, Caloocan City. As further guarantee, the
partners, namely, James, Jonathan and Almerick, executed a
Continuing Surety Agreement5 in favor of iBank.
78
Yulim availed of its aforesaid credit facility with iBank, as follows: The counterclaims of defendants against plaintiff iBank are
hereby DISMISSED for insufficiency of evidence.

Promissor Date of
Face Value PN Date SO ORDERED.15
y Note No. Maturity

21100058 P1,298,926. 10/26/20 01/29/200 Thus, the RTC ordered Yulim alone to pay iBank the amount
52 00 00 1 of P4,246,310.00, plus interest at 16.50% per annum from
February 28, 2002 until fully paid, plus costs of suit, and
21100060 1,152,963.0 11/18/20 02/05/200 dismissed the complaint against petitioners James, Jonathan
26 0 00 1 and Almerick, stating that there was no iota of evidence that the
loan proceeds benefited their families.16
21100063 12/04/20 03/12/200
499,890.00
44 00 1
The petitioners moved for reconsideration on January 12,
21100065 12/18/20 04/23/200 2010;17 iBank on January 19, 2010 likewise filed a motion for
798,010.00 partial reconsideration.18 In its Joint Order19 dated March 8,
57 00 1
2010, the RTC denied both motions.
21101001 01/11/20 05/07/200
496,521.00
89 01 16 Ruling of the CA

The above promissory notes (PN) were later consolidated under
a single promissory note, PN No. SADDK001014188,
for P4,246,310.00, to mature on February 28, 2002. 7 Yulim
defaulted on the said note. On April 5, 2002, iBank sent demand
letters to Yulim, through its President, James, and through
Almerick,8 but without success. iBank then filed a Complaint for
Sum of Money with Replevin9 against Yulim and its sureties. On
August 8, 2002, the Court granted the application for a writ of
replevin. Pursuant to the Sheriffs Certificate of Sale dated
November 7, 2002,10 the items seized from Yulims warehouse
were worth only P140,000.00, not P500,000.00 as the
petitioners have insisted.11
On October 2, 2002, the petitioners moved to dismiss the
complaint insisting that their loan had been fully paid after they
assigned to iBank their Condominium Unit No. 141, with parking
space, at 20 Landsbergh Place in Tomas Morato Avenue,
Quezon City.12 They claimed that while the pre-selling value of
the condominium unit was P3.3 Million, its market value has
since risen to 5.5 Million.13 The RTC, however, did not entertain
the motion to dismiss for non-compliance with Rule 15 of the
Rules of Court.
On May 16, 2006, the petitioners filed their Answer reiterating
that they have paid their loan by way of assignment of a
condominium unit to iBank, as well as insisting that iBanks
penalties and charges were exorbitant, oppressive and
unconscionable.14
On March 23, 2010, Yulim filed a Notice of Partial Appeal,
followed on March 30, 2010 by iBank with a Notice of Appeal.
Yulim interposed the following as errors of the court a quo:
I. THE LOWER COURT ERRED IN ORDERING
[YULIM] TO PAY [iBANK] THE AMOUNT
OF P4,246,310.00 WITH INTEREST AT 16.5% PER
ANNUMFROM FEBRUARY 28, 2002 UNTIL FULLY
PAID.
II. THE LOWER COURT ERRED IN NOT ORDERING
[iBANK] TO PAY ATTORNEYS FEES, MORAL
DAMAGES AND EXEMPLARY DAMAGES.20
For its part, iBank raised the following as errors of the RTC:
I. THE TRIAL COURT ERRED IN NOT HOLDING
INDIVIDUAL [PETITIONERS JAMES, JONATHAN
AND ALMERICK] SOLIDARILY LIABLE WITH [YULIM]
ON THE BASIS OF THE CONTINUING SURETYSHIP
AGREEMENT EXECUTED BY THEM.
II. THE TRIAL COURT ERRED IN NOT HOLDING ALL
THE [PETITIONERS] LIABLE FOR PENALTY
CHARGES UNDER THE CREDIT AGREEMENT AND
PROMISSORY NOTES SUED UPON.

Ruling of the RTC
After trial on the merits, the RTC rendered judgment on
December 21, 2009, the dispositive portion of which reads, as
follows:
WHEREFORE, in view of the foregoing considerations, the
Court finds the individual defendants James Yu, Jonathan Yu
and Almerick Tieng Lim, not liable to the plaintiff, iBank, hence
the complaint against them is hereby DISMISSED for
insufficiency of evidence, without pronouncement as to cost.
This court, however, finds defendant corporation Yulim
International Company Ltd. liable; and it hereby orders
defendant corporation to pay plaintiff the sum of P4,246,310.00
with interest at 16.50% per annum from February 28, 2002 until
fully paid plus cost of suit.
III. THE TRIAL COURT ERRED IN NOT HOLDING
[THE PETITIONERS] LIABLE TO [iBANK] FOR
ATTORNEYS FEES AND INDIVIDUAL
[PETITIONERS] JOINTLY AND SEVERALLY LIABLE
WITH [YULIM] FOR COSTS OF SUIT INCURRED BY
[iBANK] IN ORDER TO PROTECT ITS RIGHTS.21
Chiefly, the factual issue on appeal to the CA, raised by
petitioners James, Jonathan and Almerick, was whether Yulims
loans have in fact been extinguished with the execution of a
Deed of Assignment of their condominium unit in favor of iBank,
while the corollary legal issue, raised by iBank, was whether
they should be held solidarily liable with Yulim for its loans and
other obligations to iBank.
The CA ruled that the petitioners failed to prove that they have
already paid Yulims consolidated loan obligations totaling

79
4,246,310.00, for which it issued to iBank PN No.
SADDK001014188 for the said amount. It held that the
existence of a debt having been established, the burden to prove
with legal certainty that it has been extinguished by payment
devolves upon the debtors who have offered such defense. The
CA found the records bereft of any evidence to show that Yulim
had fully settled its obligation to iBank, further stating that the
so-called assignment by Yulim of its condominium unit to iBank
was nothing but a mere temporary arrangement to provide
security for its loan pending the subsequent execution of a real
estate mortgage. Specifically, the CA found nothing in the Deed
of Assignment which could signify that iBank had accepted the
said property as full payment of the petitioners loan. The CA
cited Manila Banking Corporation v. Teodoro, Jr.22 which held
that an assignment to guarantee an obligation is in effect a
mortgage and not an absolute conveyance of title which confers
ownership on the assignee.
Concerning the solidary liability of petitioners James, Jonathan
and Almerick, the CA disagreed with the trial courts ruling that
it must first be shown that the proceeds of the loan redounded
to the benefit of the family of the individual petitioners before
they can be held liable. Article 161 of the Civil Code and Article
121 of the Family Code cited by the RTC apply only where the
liability is sought to be enforced against the conjugal partnership
itself. In this case, regardless of whether the loan benefited the
family of the individual petitioners, they signed as sureties, and
iBank sought to enforce the loan obligation against them as
sureties of Yulim.
Thus, the appellate court granted the appeal of iBank, and
denied that of the petitioners, as follows:
WHEREFORE, the foregoing considered, [iBanks] appeal is
PARTLY GRANTED while [the petitioners] appeal is DENIED.
Accordingly, the appealed decision is hereby MODIFIED in that
[petitioners] James Yu, Jonathan Yu and A[l]merick Tieng Lim
are hereby held jointly and severally liable with defendant-
appellant Yulim for the payment of the monetary awards. The
rest of the assailed decision is AFFIRMED.
SO ORDERED.23
Petition for Review to the Supreme Court
In the instant petition, the following assigned errors are before
this Court:
1. The CA erred in ordering petitioners James,
Jonathan and Almerick jointly and severally liable with
petitioner Yulim to pay iBank the amount
of P4,246,310.00 with interest at 16.5% per annum
from February 28, 2002 until fully paid.
2. The CA erred in not ordering iBank to pay the
petitioners moral damages, exemplary damages, and
attorneys fees.24
The petitioners insist that they have paid their loan to iBank.
They maintain that the letter of iBank to them dated May 4, 2001,
which "expressly stipulated that the petitioners shall execute a
Deed of Assignment over one condominium unit No. 141, 3rd
Floor and a parking slot located at 20 Landsbergh Place, Tomas
Morato Avenue, Quezon City," was with the understanding that
the Deed of Assignment, which they in fact executed, delivering
also to iBank all the pertinent supporting documents, would
serve to totally extinguish their loan obligation to iBank. In
particular, the petitioners state that it was their understanding
that upon approval by iBank of their Deed of Assignment, the
same "shall be considered as full and final payment of the
petitioners obligation." They further assert that iBanks May 4,
2001 letter expressly carried the said approval.
The petitioner invoked Article1255 of the Civil Code, on payment
by cession, which provides: Art. 1255. The debtor may cede or
assign his property to his creditors in payment of his debts. This
cession, unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net proceeds of the
thing assigned. The agreements which, on the effect of the
cession, are made between the debtor and his creditors shall be
governed by special laws. Ruling of the Court
The petition is bereft of merit.
Firstly, the individual petitioners do not deny that they executed
the Continuing Surety Agreement, wherein they "jointly and
severally with the PRINCIPAL [Yulim], hereby unconditionally
and irrevocably guarantee full and complete payment when due,
whether at stated maturity, by acceleration, or otherwise, of any
and all credit accommodations that have been granted" to Yulim
by iBank, including interest, fees, penalty and other
charges.25Under Article 2047 of the Civil Code, these words are
said to describe a contract of suretyship. It states: 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.
In a contract of suretyship, one lends his credit by joining in the
principal debtors obligation so as to render himself directly and
primarily responsible with him without reference to the solvency
of the principal.26 According to the above Article, if a person
binds himself solidarily with the principal debtor, the provisions
of Articles 1207 to 1222, or Section 4, Chapter 3, Title I, Book IV
of the Civil Code on joint and solidary obligations, shall be
observed. Thus, where there is a concurrence of two or more
creditors or of two or more debtors in one and the same
obligation, Article 1207 provides that among them, "[t]here is a
solidary liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity."
"A 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, and their liabilities are interwoven as to be
inseparable."27 And it is well settled that when the obligor or
obligors undertake to be "jointly and severally" liable, it means
that the obligation is solidary,28 as in this case. There can be no
mistaking the same import of Article I of the Continuing Surety
Agreement executed by the individual petitioners:
ARTICLE I
LIABILITIES OF SURETIES
SECTION 1.01. The SURETIES, jointly and severally
with the PRINCIPAL, hereby unconditionally and
irrevocably guarantee full and complete payment when
due, whether at stated maturity, by acceleration, or
otherwise, of any and all credit accommodations that
have been granted or may be granted, renewed and/or
80
 extended by the BANK to the PRINCIPAL. The liability
of the SURETIES shall not be limited to the maximum
principal amount of FIVE MILLION PESOS
(P5,000,000.00) but shall include interest, fees, penalty
and other charges due thereon.
SECTION 1.02. This INSTRUMENT is a guarantee of
payment and not merely of collection and is intended
to be a perfect and continuing indemnity in favor of the
BANK for the amounts and to the extent stated above.
The liability of the SURETIES shall be direct, immediate and not
contingent upon the pursuit of the BANK of whatever remedies
it may have against the PRINCIPAL of the other securities for
the Accommodation.29
Thereunder, in addition to binding themselves "jointly and
severally" with Yulim to "unconditionally and irrevocably
guarantee full and complete payment" of any and all credit
accommodations that have been granted to Yulim, the
petitioners further warrant that their liability as sureties "shall be
direct, immediate and not contingent upon the pursuit [by] the
BANK of whatever remedies it may have against the
PRINCIPAL of other securities." There can thus be no doubt that
the individual petitioners have bound themselves to be solidarily
liable with Yulim for the payment of its loan with iBank.
As regards the petitioners contention that iBank in its letter
dated May 4, 2001 had "accepted/approved" the assignment of
its condominium unit in Tomas Morato Avenue as full and final
payment of their various loan obligations, the Court is far from
persuaded. On the contrary, what the letter accepted was only
the collaterals provided for the loans, as well as the
consolidation of the petitioners various PNs under one PN for
their aggregate amount of P4,246,310.00. The letter goes on to
spell out the terms of the new PN, such as, that its expiry would
be February 28, 2002 or a term of 360 days, that interest would
be due every 90 days, and that the rate would be based on the
91-day Treasury Bill rate or other market reference.
Nowhere can it be remotely construed that the letter even
intimates an understanding by iBank that the Deed of
Assignment would serve to extinguish the petitioners loan.
Otherwise, there would have been no need for iBank to mention
therein the three "collaterals" or "supports" provided by the
petitioners, namely, the Deed of Assignment, the Chattel
Mortgage and the Continuing Surety Agreement executed by
the individual petitioners. In fact, Section 2.01 of the Deed of
Assignment expressly acknowledges that it is a mere "interim
security for the repayment of any loan granted and those that
may be granted in the future by the BANK to the ASSIGNOR
and/or the BORROWER, for compliance with the terms and
conditions of the relevant credit and/or loan documents
thereof."30 The condominium unit, then, is a mere temporary
security, not a payment to settle their promissory notes. 31
Even more unmistakably, Section 2.02 of the Deed of
Assignment provides that as soon as title to the condominium
unit is issued in its name, Yulim shall "immediately execute the
necessary Deed of Real Estate Mortgage in favor of the BANK
to secure the loan obligations of the ASSIGNOR and/or the
BORROWER."32 This is a plain and direct acknowledgement
that the parties really intended to merely constitute a real estate
mortgage over the property.1wphi1 In fact, the Deed of
Assignment expressly states, by way of a resolutory condition
concerning the purpose or use of the Deed of Assignment, that
after the petitioners have delivered or caused the delivery of
their title to iBank, the Deed of Assignment shall then become
null and void. Shorn of its legal efficacy as an interim security,
the Deed of Assignment would then become functus officio once
title to the condominium unit has been delivered to iBank. This
is so because the petitioners would then execute a Deed of Real
Estate Mortgage over the property in favor of iBank as security
for their loan obligations.
Respondent iBank certainly does not share the petitioners
interpretation of its May 4,2001 letter. Joy Valerie Gatdula,
Senior Bank Officer of iBank and the Vice President of iBanks
Commercial Banking Group, declared in her testimony that the
purpose of the Deed of Assignment was merely to serve as
collateral for their loan:
Q: And during the time that the defendant[,] James Yu[,] was
negotiating with your bank, [is it] not a fact that the defendant
offered to you a [condominium] unit so that that will constitute
full payment of his obligation?
A: No maam. It was not offered that way. It was offered as
security or collateral to pay the outstanding loans. But the
premise is, that he will pay x x x in cash. So, that property was
offered as a security or collateral.
Q: That was your position?
A: That was the agreement and that was how the document was
signed. It was worded out[.]
xxxx
Q: Do you remember if a real estate mortgage was executed
over this property that was being assigned to the plaintiff?
A: To my recollection, none at all.
Q: Madam Witness, this Deed of Assignment was considered as
full payment by the plaintiff bank, what document was executed
by the plaintiff bank?
A: It should have been a Dacion en Pago.
Q: Was there such document executed in this account?
A: None.33
To stress, the assignment being in its essence a mortgage, it
was but a security and not a satisfaction of the petitioners
indebtedness.34 Article 125535 of the Civil Code invoked by the
petitioners contemplates the existence of two or more creditors
and involves the assignment of the entire debtors property, not
a dacion en pago.36Under Article 1245 of the Civil Code,
"[d]ationin payment, whereby property is alienated to the creditor
in satisfaction of a debt in money, shall be governed by the law
on sales." Nowhere in the Deed of Assignment can it be
remotely said that a sale of the condominium unit was
contemplated by the parties, the consideration for which would
consist of the amount of outstanding loan due to iBank from the
petitioners.
WHEREFORE, premises considered, the petition is DENIED.
SO ORDERED.
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