Guaranty Cases

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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 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.
(Sgd.) ESTEBAN PICZON
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor aforequoted, appellants assign the following alleged
errors:
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 to perform.
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.
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.

SUPREME COURT
Manila
EN BANC
G.R. No. 34642 September 24, 1931
FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,

vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.

Jacinto E. Evidente for appellees.
STREET, J.:
This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with
whom is joined her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from Guillermo
Severino and Enrique Echaus, the latter in the character of guarantor for the former. Upon hearing he cause the
trial court gave judgment in favor of the plaintiffs to recover the sum of P20,000 with lawful from November
15, 1929, the date of the filing of the complaint, with costs. But it was declared that execution of this judgment
should issue first against the property of Guillermo Severino, and if no property should be found belonging to
said defendant sufficient to satisfy the judgment in whole or in part, execution for the remainder should be
issued against the property of Enrique Echaus as guarantor. From this judgment the defendant Echaus appealed,
but his principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former
resident of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left considerable
property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on the one part,
and other heirs of the deceased on the other part. In order to make an end of this litigation a compromise was
effected by which Guillermo Severino, a son of Melecio Severino, took over the property pertaining to the
estate of his father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino.
This sum of money was made payable, first, P40,000 in cash upon the execution of the document of
compromise, and the balance in three several payments of P20,000 at the end of one year; two years, and three
years respectively. To this contract the appellant Enrique Echaus affixed his name as guarantor. The first
payment of P40,000 was made on July 11, 1924, the date when the contract of compromise was executed; and
of this amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet
unpaid, Fabiola Severino is entitled to the sum of P20,000.
It appears that at the time of the compromise agreement above-mentioned was executed Fabiola Severino had
not yet been judicially recognized as the natural daughter of Melecio Severino, and it was stipulated that the
last P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva should retained
on deposit until the definite status of Fabiola Severino as natural daughter of Melecio Severino should be
established. The judicial decree to this effect was entered in the Court of First Instance of Occidental Negros on
June 16, 1925, and as the money which was contemplated to be held in suspense has never in fact been paid to
the parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of
moment.
The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff;
and the only defense worth noting in this decision is the assertion on the part of Enrique Echaus that he
received nothing for affixing his signature as guarantor to the contract which is the subject of suit and that in
effect the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal
of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas
Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to
support the promise on the part of Guillermo Severino to pay the sum of money stipulated in the contract which
is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never
necessary that the guarantor or surety should receive any part of the benefit, if such there be, accruing to his
principal. But the true consideration of this contract was the detriment suffered by the plaintiffs in the former
action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the
principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will be affirmed, with costs against the
appellant. So ordered.

SUPREME COURT
Manila
SECOND DIVISION
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:
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
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.
PNB vs. CA, Luzon Surety Co.

Facts: Estanislao Depusoy, and the Republic of the Philippines, represented by the Director of PublicWorks,
entered into a building contract, for the construction of the GSTS building at Arroceros
Street,M a n i l a , D e p u s o y t o f u r n i s h a l l m a t e r i a l s , l a b o r, p l a n s , a n d s u p p l i e s n e e d e d i n t h
e c o n s t r u c t i o n . Depusoy applied for credit accommodation with the plaintiff. This was
approved by the Board of Directors in various resolutions subject to the conditions that he would
assign all payments to bereceived from the Bureau of Public Works of the GSIS to the bank,
furnish a surety bond, and thesurety to deposit P10,000.00 to the plaintiff. The
total accommodation granted to Depusoy wasP100,000.00. This was later extended by another
P10,000.00 and P25,000.00, but in no case shouldthe loan exceed P100,000.00. In compliance with
these conditions, Depusoy executed a Deed of A s s i g n m e n t o f a l l m o n e y t o b e r e c e i v e d b y
h i m f r o m t h e G S I S t o P N B . D e p u s o y d e f a u l t e d i n h i s building contract with the Bureau of
Public Works, and sometime in September, 1957, the Bureau of Public Works rescinded its contract with
Dernisoy. No furher amounts were thereafter paid by the GSISto lie plaintiff bank. The amount of
the loan of Depusoy which remains unpaid, including interest, isover P100,000.00. Demands for
payment were made upon Depusoy and Luzon, and as no payment was made, therefore herein
petitioner filed with the trial court a complaint against Estanislao Depusoyand private respondent Luzon Surety
Co. Inc. (LSCI).
Issue: WON Luzon Surety is liable
Held: the bonds executed by private respondent LSCI were to guarantee the faithful performance of Depusoy of
his obligation under the Deed of Assignment and not to guarantee payment of the loans or the debt of Depusoy
to petitioner to the extent of P100,000.00. Besides, even if there had been any doubt on the terms and
conditions of the surety agreement, the doubt should be resolved in favor of the surety. As concretely put in
Article 2056 of the Civil Code, "A guaranty is not presumed, it must beex-pressed and cannot extend to more
than what is stipulated therein." LSCI is liable to the full extent thereof, such liability is strictly limited to that
assumed by its terms."

SUPREME COURT
Manila
THIRD DIVISION
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 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).
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 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 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
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.
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 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."23 This 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.
SECOND DIVISION[G.R. No. 126490. March 31, 1998]

ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.D E C I S I O N
REGALADO, J.:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable
with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former
deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the
debtor?
Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation
extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the
amount of P30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per
annum to be computed every 30 days from the date thereof. [1] On four occasions after the execution of the
promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total
of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last payment on
September 26, 1991.[2]
Consequently, on the basis of petitioners solidary liability under the promissory note, respondent
corporation filed a complaint[3] against petitioner Palmares as the lone party-defendant, to the exclusion of the
principal debtors, allegedly by reason of the insolvency of the latter.
In her Amended Answer with Counterclaim, [4] petitioner alleged that sometime in August 1990,
immediately after the loan matured, she offered to settle the obligation with respondent corporation but the
latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about
it; that there has already been a partial payment in the amount of P17,010.00; that the interest of 6% per month
compounded at the same rate per month, as well as the penalty charges of 3% per month, are usurious and
unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor,
respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were
the only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the trial
court: (1) what the rate of interest, penalty and damages should be; (2) whether the liability of the defendant
(herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor
with a subsidiary liability and not a co-maker with primary liability.[5]
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the
memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch
23, rendered judgment dismissing the complaint without prejudice to the filing of a separate action for a sum of
money against the spouses Osmea and Merlyn Azarraga who are primarily liable on the instrument. [6] This was
based on the findings of the 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
persons secondary liability on the instrument; that petitioner, as co-maker, is only secondarily liable on the
instrument; and that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment
declaring herein petitioner Palmares liable to pay respondent corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six
percent (6%) per month computed from the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding
balance;
3. Attorneys fees at 25% of the total amount due per stipulations;
4. Plus costs of suit.[7]
Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a
surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the
Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence
may be sued by the creditor corporation for the entire obligation. It also adverted to the fact that petitioner
admitted her liability in her Answer although she claims that the Azarraga spouses should have been
impleaded. Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on
the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not
entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he
gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable
to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares
solidary liability.
2. The promissory note contains provisions which establish the co-makers liability as that of a
guarantor.
3. There is no sufficient basis for concluding that Palmares liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against M.B. Lending
Corporation.
5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares liability is solidary, the Court of Appeals erred in strictly imposing the
interests and penalty charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by respondent
corporation. They are further refuted by accepted doctrines in the American jurisdiction after which we
patterned our statutory law on suretyship and guaranty. This case then affords us the opportunity to make an
extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken
therefrom in similar local controversies in the future.
The basis of petitioner Palmares liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the
contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the
above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above
loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note
subject to the same conditions 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 penalty [10] on grounds of
substantial justice. More importantly, respondent corporation never refuted petitioners allegation that
immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The
court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a
compromise.[11]
After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for
lack of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein
respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed
between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of
adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been
upheld. The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the
provisions are intended to apply. Hence, just as consistently and unhesitatingly, but without categorically
invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of
contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the
operative facts and surrounding circumstances.[12] The factual scenario obtaining in the case before us warrants
a liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. [13] In the
case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal
maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioners liability is that
of a surety.
Her pretension that the terms jointly and severally or solidarily liable contained in the second paragraph of
her contract are technical and legal terms which could not be easily understood by an ordinary layman like her
is diametrically opposed to her manifestation in the contract that she fully understood the contents of the
promissory note and that she is fully aware of her solidary liability with the principal maker. Petitioner admits
that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any
reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence,
mere preponderance of evidence not even being adequate. Petitioners attempt to prove fraud must, therefore,
fail as it was evidenced only by her own uncorroborated and, expectedly, 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 principals debt if the principal will not pay, while a guarantor
agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the
principal is unable to pay.[19] A surety binds himself to perform if the principal does not, without regard to his
ability to do so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he
is able to do so.[20]In other words, a surety undertakes directly for the payment and is so responsible at once if
the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt
cannot be made out of the principal debtor.[21]
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove
it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the
promissory note do not contain any other condition for the enforcement of respondent corporations right against
petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to
proceed against herein petitioner only if and when the defaulting principal has become insolvent. A contract of
suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtors obligation, so as to
render himself directly and primarily responsible with him, and without reference to the solvency of the
principal.[22]
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule
on strictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been
judicially determined under the rule of reasonable construction applicable to all written contracts, then the
liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its
strict meaning.[23] The rule, however, will apply only after it has been definitely ascertained that the contract is
one of suretyship and not a contract of guaranty. It cannot be used as an aid in determining whether a partys
undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in
the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the
obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced
by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal
debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall also be principally considered. [24] Several attendant factors in that
genre lend support to our finding that petitioner is a surety. For one, when petitioner was informed about the
failure of the principal debtor to pay the loan, she immediately offered to settle the account with respondent
corporation. Obviously, in her mind, she knew that she was directly and primarily liable upon default of her
principal. For another, and this is most revealing, petitioner presented the receipts of the payments already
made, from the time of initial payment up to the last, which were all issued in her name and of the Azarraga
spouses.[25] This can only be construed to mean that the payments made by the principal debtors were
considered by respondent corporation as creditable directly upon the account and inuring to the benefit of
petitioner. The concomitant and simultaneous compliance of petitioners obligation with that of her principals
only goes to show that, from the very start, petitioner considered herself equally bound by the contract of the
principal makers.
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the
principal,[26] and as such is deemed an original promisor and debtor from the beginning. [27] This is because in
suretyship there is but one contract, and the surety is bound by the same agreement which binds the principal.
[28]
In essence, the contract of a surety starts with the agreement,[29] which is precisely the situation obtaining in
this case before the Court.
It will further be observed that petitioners undertaking as co-maker immediately follows the terms and
conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually
bound with his principal by the same instrument, executed at the same time and upon the same consideration;
he is an original debtor, and his liability is immediate and direct. [30] Thus, it has been held that where a written
agreement on the same sheet of paper with and immediately following the principal contract between the buyer
and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms
of the principal contract, the signers were sureties jointly liable with the buyer. [31] A surety usually enters into
the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument,
and the same consideration usually supports the obligation for both the principal and the surety.[32]
There is no merit in petitioners contention that the complaint was prematurely filed because the principal
debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by
respondent corporation. Petitioner has agreed that respondent corporation may demand payment of the loan
from her in case the principal maker defaults, subject to the same conditions expressed in the promissory
note. Significantly, paragraph (G) of the note states that should I fail to pay in accordance with the above
schedule of payment, I hereby waive my right to notice and demand. Hence, demand by the creditor is no
longer necessary in order that delay may exist since the contract itself already expressly so declares. [33] As a
surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since
the commencement of the suit is a sufficient demand.[34]On this point, it may be worth mentioning that a surety
is not even entitled, as a matter of right, to be given notice of the principals default. Inasmuch as the creditor
owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give
information to the surety of the default of the principal cannot have the effect of discharging the surety. The
surety is bound to take notice of the principals default and to perform the obligation. He cannot complain that
the creditor has not notified him in the absence of a special agreement to that effect in the contract of
suretyship.[35]
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not
attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual
requirement, it is not necessary that payment or performance of his obligation be first demanded of the
principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the
sureties, that the principal be called on to account.[36] The underlying principle therefor is that a suretyship is a
direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely
liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default.
[37]
As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his
principal.[38]
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the
principal debtors who allegedly were the only ones who benefited from the proceeds of the loan. What
petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first
against the principal before suing on her obligation as surety. We disagree.
A creditors right to proceed against the surety exists independently of his right to proceed against the
principal.[39] Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several,
the creditor has the right to proceed even against the surety alone. [40] Since, generally, it is not necessary for a
creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the
obligation of the surety is the same as that of the principal, then as soon as the principal is in default, the surety
is likewise in default, and may be sued immediately and before any proceedings are had against the principal.
[41]
Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is
primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for
reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement
limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to
resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally
bound.[42]
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation
does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is
not exonerated. In other words, mere want of diligence or forbearance does not affect the creditors rights vis--
vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous
indulgence of the principal does not discharge the surety whether given at the principals request or without it,
and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is
only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does
not discharge the surety, even if such delay continues until the principal becomes insolvent. [43] And, in the
absence of proof of resultant injury, a surety is not discharged by the creditors mere statement that the creditor
will not look to the surety,[44] or that he need not trouble himself.[45] The consequences of the delay, such as the
subsequent insolvency of the principal,[46] or the fact that the remedies against the principal may be lost by lapse
of time, are immaterial.[47]
The raison dtre for the rule is that there is nothing to prevent the creditor from proceeding against the
principal at any time.[48] At any rate, if the surety is dissatisfied with the degree of activity displayed by the
creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and
remedies of the creditor.[49]
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor
without change in the time when the debt might be demanded, does not constitute an extension of the time of
payment, which would release the surety.[50] In order to constitute an extension discharging the surety, it should
appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal
and the creditor, and that it was made without the consent of the surety or with a reservation of rights with
respect to him. The contract must be one which precludes the creditor from, or at least hinders him in,
enforcing the principal contract within the period during which he could otherwise have enforced it, and which
precludes the surety from paying the debt.[51]
None of these elements are present in the instant case. Verily, the mere fact that respondent corporation
gave the principal debtors an extended period of time within which to comply with their obligation did not
effectively absolve herein petitioner from the consequences of her undertaking. Besides, the burden is on the
surety, herein petitioner, to show that she has been discharged by some act of the creditor, [52] herein respondent
corporation, failing in which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty
charges on the outstanding balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the
collection of the loan in order that the interests and penalty charges would accumulate. The statement, likewise
traversed by said respondent, is misleading.
In an affidavit[53] executed by petitioner, which was attached to her petition, she stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarragas loan has been released
and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto
Banusing of MB Lending informing me of this fact and of my liability arising from the promissory
note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time,
I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to
collect from Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to
collect first from Merlyn and Osmea Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that
the loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been
paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a
parcel of land which I own. Mr. Banusings secretary, however, refused my offer for the reason that
they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB
Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila
Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal
obligation of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB
Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the
outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is
acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to
effectively discharge her from liability. There are a number of circumstances which conjointly inveigh against
her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment from
petitioner. It was petitioner who initially requested that the creditor try to collect from her principal
first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was
occasioned by the fact that respondent corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual offer of payment to speak of but only a
commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she
owned. Respondent corporation was acting well within its rights when it refused to accept the
offer. The debtor of a thing cannot compel the creditor to receive a different one, although the latter
may be of the same value, or more valuable than that which is due. [54] The obligee is entitled to
demand fulfillment of the obligation or performance as stipulated. A change of the object of the
obligation would constitute novation requiring the express consent of the parties.[55]
3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding
balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again,
respondent corporation cannot be blamed for refusing the amount being offered because it fell way
below the amount it had computed, based on the stipulated interests and penalty charges, as owing
and due from herein petitioner. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered, as the case may
be.[56] In other words, the prestation must be fulfilled completely. A person entering into a contract
has a right to insist on its performance in all particulars.[57]
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the
moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing
any protest or objection, then the obligation shall be deemed fully complied with. [58] Precisely, this is what
respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what
was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorneys
fees equivalent to 25% of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already
been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall
equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the
debtor.And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or
leonine.
In a case previously decided by this Court which likewise involved private respondent M.B. Lending
Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the
penalty interest for being excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of
the penalty interest of three percent (3%) per month on total amount due but unpaid should be
equitably reduced. The purpose for which the penalty interest is intended - that is, to punish the obligor
- will have been sufficiently served by the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount loaned was onlyP15,000.00; partial payment
of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest,
the penalty interest stipulated in the parties promissory note is iniquitous and unconscionable and may
be equitably reduced further by eliminating such penalty interest altogether.[59]
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorneys fees, this Court has previously ruled that even with an
agreement thereon between the parties, the court may nevertheless reduce such attorneys fees fixed in the
contract when the amount thereof appears to be unconscionable or unreasonable. [60] To that end, it is not even
necessary to show, as in other contracts, that it is contrary to morals or public policy. [61] The grant of attorneys
fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering
the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of
a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorneys fee would be sufficient
in this case.[62]
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that
the penalty interest of 3% per month is hereby deleted and the award of attorneys fees is reduced to P10,000.00.
SO ORDERED.

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Republic of the Philippines

G.R. No. L-29139 November 15, 1974

CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, plaintiffs-appellants,

Vicente C. Santos for plaintiffs-appellants.

Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.

Vicente M. Macabidang for defendant-appellee Esteban Piczon.

That the issues in this case are legal ones namely:

(b) Is defendant Esteban Piczon liable as a guarantor or a surety?

SO ORDERED. 1 (Record on Appeal pp. 28-30.)

Annex "A", the actionable document of appellants reads thus:

KNOW YE ALL MEN BY THESE PRESENTS:

(Sgd.) ESTEBAN PICZON

(Record on Appeal, pp. 6-7.)

THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT ESTEBAN PICZON AS GUARANTOR

(1) When the obligation or the law expressly so declares; or

Republic of the Philippines

G.R. No. 34642 September 24, 1931

FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,

R. Nepomuceno for appellant.

Republic of the Philippines

G.R. No. L-49401 July 30, 1982

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

Laurente C. Ilagan for petitioner.

Victor A. Clapano for respondents.

PNB vs. CA, Luzon Surety Co.

Issue: WON Luzon Surety is liable

Republic of the Philippines

G.R. No. 89775 November 26, 1992

JACINTO UY DIO and NORBERTO UY, petitioners,

DAVIDE, JR., J.:

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;

SO ORDERED. (Records, p. 336) 4

II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS ANSWERABLE TO

With costs against appellees.

In its Resolution of 21 August 1989, public respondent denied the motion:

The issues presented for determination are quite simple:

Paragraph IV of both agreements stipulate that:

xxx xxx xxx

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable

They further provide that:

xxx xxx xxx

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

ATTENTION TO CO-MAKERS: PLEASE READ WELL

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