G.R. No.

L-66826 August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the
Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to
as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal Caloocan
City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI ruled
in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI decision
absolving the bank from liability on the fourth cause of action. The pertinent portions of the judgment, as modified,
read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No. 25-
4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the
remaining balance of the said account at the rate fixed by the bank for dollar deposits under Central
Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00 immediately
upon the finality of this decision, without interest for the reason that the said amount was merely held
in custody for safekeeping, but was not actually deposited with the defendant COMTRUST because
being cash currency, it cannot by law be deposited with plaintiffs dollar account and defendant's only
obligation is to return the same to plaintiff upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in the
concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the failure of the
defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to return to him
(plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The latter
not having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's liability with
regard to the first and second causes of action and its liability for damages.
1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife,
Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current
account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch
Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the
application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to
be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There was no indication of
the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable to
the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York, with an
indication that it was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr.,
brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for
P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and the
Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted
inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the
withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his
dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current

1
account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the peso
current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown how
the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of Dizon
financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of each
other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack.
Payment made to Ernesto cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that
the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance a
dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no proof
whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of the US$1,000.00
withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975,
Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks)
for safekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made
part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE
THOUSAND ONLY (US$3,000.00) for safekeeping.
Received by:
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing
conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of the
above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum was
disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining
US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his
current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract
embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do
not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is
claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be
considered.
The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which
document was attached to the complaint. In short, the second cause of action was based on an actionable document.
It was therefore incumbent upon the bank to specifically deny under oath the due execution of the document, as
prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the corporation; and (2)
to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314
(1906).] No sworn answer denying the due execution of the document in question, or questioning the authority of
Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was ever filed. Hence, the bank is
deemed to have admitted not only Garcia's authority, but also the bank's power, to enter into the contract in question.

2
In the past, this Court had occasion to explain the reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In
dealing with corporations the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that authority and thereby held him out as
a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit
supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual
authority may never have been granted
... Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the stranger who
deals with the corporation on the faith of the ostensible authority exercised by some of the corporate
officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in
its name, that the corporation should be required, if it denies his authority, to state such defense in its
answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and
he is given an opportunity to adduce evidence showing either that the authority existed or that the
contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646
(1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from
liability every time an officer enters into a contract which is beyond corporate powers, even without the proper
allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so
perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan
Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only to
put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to them an
excellence which does not belong to any created existence with which we are acquainted. The distinction between
power and right is no more to be lost sight of in respect to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the correct
nature of the contract, and its legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping.
The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the
dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10,
1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions,
promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in
this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever nature, including,
where applicable their exportation and importation, shall NOT be effected, except with respect to
deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit
accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or banking
institutions located in the Philippines, including money, checks, drafts, bullions bank
drafts, deposit accounts (demand, time and savings), all debts, indebtedness or
obligations, financial brokers and investment houses, notes, debentures, stocks,
bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the
nature of security, expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or other unincorporated
body or corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph (a)
above, whether or not held through, in, or with banks or banking institutions, and
existent within the Philippines, which belong to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or
corporation not residing or located within the Philippines;

3
 (c) Any and all assets existent within the Philippines including money, checks, drafts,
bullions, bank drafts, all debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights
in the nature of security expressed in foreign currencies, or if payable abroad,
irrespective of the currency in which they are expressed, and belonging to any
person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to
deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or corporation shall be sold
to the authorized agents of the Central Bank by the recipients within one business day following the
receipt of such foreign exchange. Any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation, residing or located within the Philippines, who
acquires on and after the date of this Circular foreign exchange shall not, unless licensed by the
Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value,
nor delay taking ownership thereof except as such delay is customary; Provided, further, That within
one day upon taking ownership, or receiving payment, of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation,
foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations or
directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to comply
with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in the
Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign
Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6
provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be
sold to authorized agents of the Central Bank by the recipients within one business day following the
receipt of such foreign exchange. Any resident person, firm, company or corporation residing or
located within the Philippines, who acquires foreign exchange shall not, unless authorized by the
Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value,
nor delay taking ownership thereof except as such delay is customary; Provided, That, within one
business day upon taking ownership or receiving payment of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep
the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident.
The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from
receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under
the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been
executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a
cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against
each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for
violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and
attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar savings
account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by
the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount of P8,000.00
as damages. The other causes of action of private respondent are ordered dismissed.
SO ORDERED.

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G.R. No. L-6913 November 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,

vs.
GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la Pea, defendant-appellant.

J. Lopez Vito, for appellant.

Arroyo and Horrilleno, for appellee.

MORELAND, J.:

This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding to the
plaintiff the sum of P6,641, with interest at the legal rate from the beginning of the action.

It is established in this case that the plaintiff is the trustee of a charitable bequest made for the construction of a
leper hospital and that father Agustin de la Pea was the duly authorized representative of the plaintiff to receive
the legacy. The defendant is the administrator of the estate of Father De la Pea.

In the year 1898 the books Father De la Pea, as trustee, showed that he had on hand as such trustee the sum
of P6,641, collected by him for the charitable purposes aforesaid. In the same year he deposited in his personal
account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the
revolution, Father De la Pea was arrested by the military authorities as a political prisoner, and while thus
detained made an order on said bank in favor of the United States Army officer under whose charge he then was
for the sum thus deposited in said bank. The arrest of Father De la Pea and the confiscation of the funds in the
bank were the result of the claim of the military authorities that he was an insurgent and that the funds thus
deposited had been collected by him for revolutionary purposes. The money was taken from the bank by the
military authorities by virtue of such order, was confiscated and turned over to the Government.

While there is considerable dispute in the case over the question whether the P6,641 of trust funds was included
in the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case leads us to the
conclusion that said trust funds were a part of the funds deposited and which were removed and confiscated by
the military authorities of the United States.

That branch of the law known in England and America as the law of trusts had no exact counterpart in the
Roman law and has none under the Spanish law. In this jurisdiction, therefore, Father De la Pea's liability is
determined by those portions of the Civil Code which relate to obligations. (Book 4, Title 1.)

Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the
diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman
law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which
could not be foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares." (Art. 1105.)

By placing the money in the bank and mixing it with his personal funds De la Pea did not thereby assume an
obligation different from that under which he would have lain if such deposit had not been made, nor did he
thereby make himself liable to repay the money at all hazards. If the had been forcibly taken from his pocket or
from his house by the military forces of one of the combatants during a state of war, it is clear that under the
provisions of the Civil Code he would have been exempt from responsibility. The fact that he placed the trust
fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a
debtor who must respond at all hazards.

We do not enter into a discussion for the purpose of determining whether he acted more or less negligently by
depositing the money in the bank than he would if he had left it in his home; or whether he was more or less
negligent by depositing the money in his personal account than he would have been if he had deposited it in a
separate account as trustee. We regard such discussion as substantially fruitless, inasmuch as the precise
question is not one of negligence. There was no law prohibiting him from depositing it as he did and there was
no law which changed his responsibility be reason of the deposit. While it may be true that one who is under

5
obligation to do or give a thing is in duty bound, when he sees events approaching the results of which will be
dangerous to his trust, to take all reasonable means and measures to escape or, if unavoidable, to temper the
effects of those events, we do not feel constrained to hold that, in choosing between two means equally legal, he
is culpably negligent in selecting one whereas he would not have been if he had selected the other.

The court, therefore, finds and declares that the money which is the subject matter of this action was deposited
by Father De la Pea in the Hongkong and Shanghai Banking Corporation of Iloilo; that said money was forcibly
taken from the bank by the armed forces of the United States during the war of the insurrection; and that said
Father De la Pea was not responsible for its loss.

The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his complaint.

Arellano, C.J., Torres and Carson, JJ., concur.

Separate Opinions

TRENT, J., dissenting:

I dissent. Technically speaking, whether Father De la Pea was a trustee or an agent of the plaintiff his books
showed that in 1898 he had in his possession as trustee or agent the sum of P6,641 belonging to the plaintiff as
the head of the church. This money was then clothed with all the immunities and protection with which the law
seeks to invest trust funds. But when De la Pea mixed this trust fund with his own and deposited the whole in
the bank to hispersonal account or credit, he by this act stamped on the said fund his own private marks and
unclothed it of all the protection it had. If this money had been deposited in the name of De la Pea as trustee or
agent of the plaintiff, I think that it may be presumed that the military authorities would not have confiscated it for
the reason that they were looking for insurgent funds only. Again, the plaintiff had no reason to suppose that De
la Pea would attempt to strip the fund of its identity, nor had he said or done anything which tended to relieve
De la Pea from the legal reponsibility which pertains to the care and custody of trust funds.

The Supreme Court of the United States in the United State vs. Thomas (82 U. S., 337), at page 343, said:
"Trustees are only bound to exercise the same care and solicitude with regard to the trust property which they
would exercise with regard to their own. Equity will not exact more of them. They are not liable for a loss by theft
without their fault. But this exemption ceases when they mix the trust-money with their own, whereby it loses its
identity, and they become mere debtors."

If this proposition is sound and is applicable to cases arising in this jurisdiction, and I entertain no doubt on this
point, the liability of the estate of De la Pea cannot be doubted. But this court in the majority opinion says: "The
fact that he (Agustin de la Pea) placed the trust fund in the bank in his personal account does not add to his
responsibility. Such deposit did not make him a debtor who must respond at all hazards. . . . There was no law
prohibiting him from depositing it as he did, and there was no law which changed his responsibility, by reason of
the deposit."

I assume that the court in using the language which appears in the latter part of the above quotation meant to
say that there was no statutory law regulating the question. Questions of this character are not usually governed
by statutory law. The law is to be found in the very nature of the trust itself, and, as a general rule, the courts say
what facts are necessary to hold the trustee as a debtor.

If De la Pea, after depositing the trust fund in his personal account, had used this money for speculative
purposes, such as the buying and selling of sugar or other products of the country, thereby becoming a debtor,
there would have been no doubt as to the liability of his estate. Whether he used this money for that purpose the
record is silent, but it will be noted that a considerable length of time intervened from the time of the deposit until
the funds were confiscated by the military authorities. In fact the record shows that De la Pea deposited on
June 27, 1898, P5,259, on June 28 of that year P3,280, and on August 5 of the same year P6,000. The record
also shows that these funds were withdrawn and again deposited all together on the 29th of May, 1900, this last
deposit amounting to P18,970. These facts strongly indicate that De la Pea had as a matter of fact been using
the money in violation of the trust imposed in him. lawph!1.net

If the doctrine announced in the majority opinion be followed in cases hereafter arising in this jurisdiction trust
funds will be placed in precarious condition. The position of the trustee will cease to be one of trust.

6
G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit
box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a
consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was
covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to
the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles
thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box
of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner
and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos
then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic
banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of
lease (Exhibit "2") which contains, inter alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and
it assumes absolutely no liability in connection therewith. 1

After the execution of the contract, two (2) renter's keys were given to the renters one to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The
safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be
opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the said
box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of
P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per
square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of
sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by
the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get
the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no
such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to
purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit of
P280,500.00. Hence, the latter filed on 1 September 1980 a complaint for damages against the respondent
2

Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same
as Civil Case No. 38382.

In its Answer with Counterclaim, respondent Bank alleged that the petitioner has no cause of action because of
3

paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles
contained in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary

7
damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the
counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro
Manila, rendered a decision adverse to the petitioner on 8 December 1986, the dispositive portion of which
5

reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's

complaint.

On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the
amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.

With costs against plaintiff. 6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract
of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said
provisions are binding on the parties.

Its motion for reconsideration having been denied, petitioner appealed from the adverse decision to the
7

respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the
respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the
respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public
order and public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from
any liability for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for
nominal and exemplary damages and attorney's fees. 8

In its Decision promulgated on 4 July 1989, respondent Court affirmed the appealed decision principally on the
9

theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box
and its contents while the Bank retained no right to open the said box because it had neither the possession nor
control over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code which
10

provides:

Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment
or use of a thing for a price certain, and for a period which may be definite or indefinite. However,
no lease for more than ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales which held that the owner of the property loses his control over the
11

property leased during the period of the contract and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn
interest shall be bound to collect the latter when it becomes due, and to take such steps as may
be necessary in order that the securities may preserve their value and the rights corresponding
to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents
of the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature
of the contract of lease and cannot be regarded as contrary to law, public order and public policy." The12

appellate court was quick to add, however, that under the contract of lease of the safety deposit box,
respondent Bank is not completely free from liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly
provided for in stipulation number 8 of the contract in question:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from
it.
13

8
Its motion for reconsideration having been denied in the respondent Court's Resolution of 28 August
14

1989, petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside
15

the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not
properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of
jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from
precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence adopted
in the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial court's decision,
the brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a nutshell,
petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit
"2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title
16

pursuant to Article 1972 of the said Code which provides:

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the
depositor, or to his heirs and successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be
governed by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care
that the depositary must observe.

Petitioner then quotes a passage from American Jurisprudence 17

which is supposed to expound on the
prevailing rule in the United States, to wit:

The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box
or safe and the lessee takes possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bail or is created between the parties to the transaction
as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safe-deposit box or safe does not
change that relation. That access to the contents of the safe-deposit box can be had only by the
use of a key retained by the lessee ( whether it is the sole key or one to be used in connection
with one retained by the lessor) does not operate to alter the foregoing rule. The argument that
there is not, in such a case, a delivery of exclusive possession and control to the deposit
company, and that therefore the situation is entirely different from that of ordinary bailment, has
been generally rejected by the courts, usually on the ground that as possession must be either in
the depositor or in the company, it should reasonably be considered as in the latter rather than in
the former, since the company is, by the nature of the contract, given absolute control of access
to the property, and the depositor cannot gain access thereto without the consent and active
participation of the company. . . . (citations omitted).

and a segment from Words and Phrases which states that a contract for the rental of a bank safety
18

deposit box in consideration of a fixed amount at stated periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public
policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which
provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy.

After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties
to simultaneously submit their respective Memoranda.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that
the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on
deposit; the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary
19

contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit
box was not given to the joint renters the petitioner and the Pugaos. The guard key of the box remained with
the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the
9
respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a
duplicate which was made so that both renters could have access to the box.

Hence, the authorities cited by the respondent Court on this point do not apply. Neither could Article 1975, also
20

relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first
paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which
earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot
open the box without the renter being present.

We observe, however, that the deposit theory itself does not altogether find unanimous support even in
American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation
between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of
a bail or and bailee, the bailment being for hire and mutual benefit. This is just the prevailing view because:
21

There is, however, some support for the view that the relationship in question might be more
properly characterized as that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and licensee. The relation between a
bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral or written, in whole or in part. But there is
apparently no jurisdiction in which any rule other than that applicable to bailments governs
questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit
boxes. (citations omitted)
22

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in
this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking
Act pertinently provides:
23

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
as depositories or as agents. . . . (emphasis supplied)
24

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit
boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit
may be entered into orally or in writing and, pursuant to Article 1306 of the Civil Code, the parties thereto may
25

establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the agreement. In the absence of any stipulation prescribing the degree
26

of diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting the
27

depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions
13 and 14 of the questioned contract of lease of the safety deposit box, which read:

13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and
it assumes absolutely no liability in connection therewith. 28

are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a
depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability
10
 except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only
with respect to who shall be admitted to any rented safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented
safe and beyond this, the Bank will not be responsible for the contents of any safe rented from
it.
29

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank.
It is not correct to assert that the Bank has neither the possession nor control of the contents of the box
since in fact, the safety deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot
open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in the contract in question are void and
ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit

company, the parties, since the relation is a contractual one, may by special contract define their
respective duties or provide for increasing or limiting the liability of the deposit company, provided
such contract is not in violation of law or public policy. It must clearly appear that there actually
was such a special contract, however, in order to vary the ordinary obligations implied by law
from the relationship of the parties; liability of the deposit company will not be enlarged or
restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed
as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that
the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may limits its liability to some extent
by agreement or stipulation. (citations omitted)
30

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed
from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent
proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the
Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both
parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was
due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the
contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have
one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box
and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter
being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had
been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees.
To this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4
July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to
the pronouncement We made above on the nature of the relationship between the parties in a contract of lease
of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition
for Review is otherwise DENIED for lack of merit.

No pronouncement as to costs.

11
 [G.R. No. 126780. February 17, 2005]
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners, vs. THE COURT OF
APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is whether a hotel may
evade liability for the loss of items left with it for safekeeping by its guests, by having these guests execute written
waivers holding the establishment or its employees free from blame for such loss in light of Article 2003 of the Civil
Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision[1] dated 19 October 1995 of the Court of Appeals
which affirmed the Decision[2] dated 16 December 1991 of the Regional Trial Court (RTC), Branch 13, of Manila,
finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam (Payam) jointly
and solidarily liable for damages in an action filed by Maurice McLoughlin (McLoughlin) for the loss of his American
and Australian dollars deposited in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned and
operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton Hotel during
his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by showing him around,
introducing him to important people, accompanying him in visiting impoverished street children and assisting him in
buying gifts for the children and in distributing the same to charitable institutions for poor children. Tan convinced
McLoughlin to transfer from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were employed.
Lopez served as manager of the hotel while Lainez and Payam had custody of the keys for the safety deposit boxes of
Tropicana. Tan took care of McLoughlins booking at the Tropicana where he started staying during his trips to the
Philippines from December 1984 to September 1987.[3]
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a safety deposit
box as it was his practice to rent a safety deposit box every time he registered at Tropicana in previous trips. As a
tourist, McLoughlin was aware of the procedure observed by Tropicana relative to its safety deposit boxes. The safety
deposit box could only be opened through the use of two keys, one of which is given to the registered guest, and the
other remaining in the possession of the management of the hotel. When a registered guest wished to open his safety
deposit box, he alone could personally request the management who then would assign one of its employees to
accompany the guest and assist him in opening the safety deposit box with the two keys. [4]
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars (US$15,000.00)
which he placed in two envelopes, one envelope containing Ten Thousand US Dollars (US$10,000.00) and the other
envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian Dollars (AUS$10,000.00) which he also
placed in another envelope; two (2) other envelopes containing letters and credit cards; two (2) bankbooks; and a
checkbook, arranged side by side inside the safety deposit box. [5]
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety deposit box
with his key and with the key of the management and took therefrom the envelope containing Five Thousand US
Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports and
his credit cards.[6] McLoughlin left the other items in the box as he did not check out of his room at the Tropicana
during his short visit to Hongkong. When he arrived in Hongkong, he opened the envelope which contained Five
Thousand US Dollars (US$5,000.00) and discovered upon counting that only Three Thousand US Dollars
(US$3,000.00) were enclosed therein. [7] Since he had no idea whether somebody else had tampered with his safety
deposit box, he thought that it was just a result of bad accounting since he did not spend anything from that envelope.
[8]

After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia. When he
arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars (US$10,000.00) was short of Five
Thousand US Dollars (US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored in the
safety deposit box upon his return to Tropicana was likewise missing, except for a diamond bracelet. [9]
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money and/or jewelry
which he had lost were found and returned to her or to the management. However, Lainez told him that no one in the
hotel found such things and none were turned over to the management. He again registered at Tropicana and rented
a safety deposit box. He placed therein one (1) envelope containing Fifteen Thousand US Dollars (US$15,000.00),
another envelope containing Ten Thousand Australian Dollars (AUS$10,000.00) and other envelopes containing his
traveling papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam to open his safety deposit
box. He noticed that in the envelope containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US
Dollars (US$2,000.00) were missing and in the envelope previously containing Ten Thousand Australian Dollars
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were missing. [10]
12
 When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted that Tan
opened the safety deposit box with the key assigned to him. [11] McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen McLoughlins key and was able to open the safety deposit box
with the assistance of Lopez, Payam and Lainez.[12] Lopez also told McLoughlin that Tan stole the key assigned to
McLoughlin while the latter was asleep.[13]
McLoughlin requested the management for an investigation of the incident. Lopez got in touch with Tan and
arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez and Tan went to the
room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a promissory note dated 21 April 1988.
The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent in Philippine currency
on or before May 5, 1988.[14]
Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a witness.
Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel who must assume
responsibility for the loss he suffered. However, Lopez refused to accept the responsibility relying on the conditions for
renting the safety deposit box entitled Undertaking For the Use Of Safety Deposit Box,[15] specifically paragraphs (2)
and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising from any loss
in the contents and/or use of the said deposit box for any cause whatsoever, including but not limited to the presentation
or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon giving up the
use of the box.[16]
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the stipulations are void for being violative of universal hotel practices
and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by McLoughlin and sent to
President Corazon Aquino.[17] The Office of the President referred the letter to the Department of Justice (DOJ) which
forwarded the same to the Western Police District (WPD). [18]
After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and registered again
as a hotel guest of Tropicana. McLoughlin went to Malacaang to follow up on his letter but he was instructed to go to
the DOJ. The DOJ directed him to proceed to the WPD for documentation. But McLoughlin went back to Australia as
he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back to the Philippines to
follow up on his letter to the President but he failed to obtain any concrete assistance. [19]
McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to pursue his claims
against petitioners, the WPD conducted an investigation which resulted in the preparation of an affidavit which was
forwarded to the Manila City Fiscals Office. Said affidavit became the basis of preliminary investigation. However,
McLoughlin left again for Australia without receiving the notice of the hearing on 24 November 1989. Thus, the case at
the Fiscals Office was dismissed for failure to prosecute. Mcloughlin requested the reinstatement of the criminal
charge for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand to those having responsibility to
pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila. Meetings were held
between McLoughlin and his lawyer which resulted to the filing of a complaint for damages on 3 December 1990
against YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlins money
which was discovered on 16 April 1988. After filing the complaint, McLoughlin left again for Australia to attend to an
urgent business matter. Tan and Lopez, however, were not served with summons, and trial proceeded with only
Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and assisted Tan to
open the safety deposit box, McLoughlin filed an Amended/Supplemental Complaint[20] dated 10 June 1991 which
included another incident of loss of money and jewelry in the safety deposit box rented by McLoughlin in the same
hotel which took place prior to 16 April 1988.[21] The trial court admitted the Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to urgent business in
Australia, and while staying in the Philippines to attend the hearing, he incurred expenses for hotel bills, airfare and
other transportation expenses, long distance calls to Australia, Meralco power expenses, and expenses for food and
maintenance, among others.[22]
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor of plaintiff and against the
defendants, to wit:

13
 1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its equivalent in
Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00 or its equivalent in
Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with 12% interest from April
16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual and
consequential damages arising from the loss of his Australian and American dollars and jewelries
complained against and in prosecuting his claim and rights administratively and judicially (Items II, III,
IV, V, VI, VII, VIII, and IX, Exh. CC);
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral damages
(Item X, Exh. CC);
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary damages
(Item XI, Exh. CC);
5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of P200,000.00 (Item
XII, Exh. CC);
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorneys fees, and a
fee of P3,000.00 for every appearance; and
7. Plus costs of suit.
SO ORDERED.[23]
The trial court found that McLoughlins allegations as to the fact of loss and as to the amount of money he lost
were sufficiently shown by his direct and straightforward manner of testifying in court and found him to be credible and
worthy of belief as it was established that McLoughlins money, kept in Tropicanas safety deposit box, was taken by
Tan without McLoughlins consent. The taking was effected through the use of the master key which was in the
possession of the management. Payam and Lainez allowed Tan to use the master key without authority from
McLoughlin. The trial court added that if McLoughlin had not lost his dollars, he would not have gone through the
trouble and personal inconvenience of seeking aid and assistance from the Office of the President, DOJ, police
authorities and the City Fiscals Office in his desire to recover his losses from the hotel management and Tan. [24]
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth approximately One
Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred during his stay at Tropicana previous to 4
April 1988, no claim was made by McLoughlin for such losses in his complaint dated 21 November 1990 because he
was not sure how they were lost and who the responsible persons were. But considering the admission of the
defendants in their pre-trial brief that on three previous occasions they allowed Tan to open the box, the trial court
opined that it was logical and reasonable to presume that his personal assets consisting of Seven Thousand US
Dollars (US$7,000.00) and jewelry were taken by Tan from the safety deposit box without McLoughlins consent
through the cooperation of Payam and Lainez.[25]
The trial court also found that defendants acted with gross negligence in the performance and exercise of their
duties and obligations as innkeepers and were therefore liable to answer for the losses incurred by McLoughlin. [26]
Moreover, the trial court ruled that paragraphs (2) and (4) of the Undertaking For The Use Of Safety Deposit
Box are not valid for being contrary to the express mandate of Article 2003 of the New Civil Code and against public
policy.[27] Thus, there being fraud or wanton conduct on the part of defendants, they should be responsible for all
damages which may be attributed to the non-performance of their contractual obligations. [28]
The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount of damages
awarded. The decretal text of the appellate courts decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and back for a total of eleven
(11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to Sidney [sic] Airport and
from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;
8) P50,000.00 for moral damages;

14
 9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.[29]
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the appellate courts conclusion on
the alleged prior existence and subsequent loss of the subject money and jewelry is supported by the evidence on
record; (b) whether the finding of gross negligence on the part of petitioners in the performance of their duties as
innkeepers is supported by the evidence on record; (c) whether the Undertaking For The Use of Safety Deposit Box
admittedly executed by private respondent is null and void; and (d) whether the damages awarded to private
respondent, as well as the amounts thereof, are proper under the circumstances. [30]
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any peripheral factual
question addressed to this Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence of the dollars
and the jewelry which had been lost while deposited in the safety deposit boxes of Tropicana, the basis of the trial
court and the appellate court being the sole testimony of McLoughlin as to the contents thereof. Likewise, petitioners
dispute the finding of gross negligence on their part as not supported by the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as affirmed by the appellate court that the fact
of loss was established by the credible testimony in open court by McLoughlin. Such findings are factual and therefore
beyond the ambit of the present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while testifying which reflected the
veracity of the facts testified to by him. On this score, we give full credence to the appreciation of testimonial evidence
by the trial court especially if what is at issue is the credibility of the witness. The oft-repeated principle is that where
the credibility of a witness is an issue, the established rule is that great respect is accorded to the evaluation of the
credibility of witnesses by the trial court.[31] The trial court is in the best position to assess the credibility of witnesses
and their testimonies because of its unique opportunity to observe the witnesses firsthand and note their demeanor,
conduct and attitude under grilling examination.[32]
We are also not impressed by petitioners argument that the finding of gross negligence by the lower court as
affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys are required to open
the safety deposit boxes of Tropicana. One key is assigned to the guest while the other remains in the possession of
the management. If the guest desires to open his safety deposit box, he must request the management for the other
key to open the same. In other words, the guest alone cannot open the safety deposit box without the assistance of
the management or its employees. With more reason that access to the safety deposit box should be denied if the one
requesting for the opening of the safety deposit box is a stranger. Thus, in case of loss of any item deposited in the
safety deposit box, it is inevitable to conclude that the management had at least a hand in the consummation of the
taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the master key
of the management when the loss took place. In fact, they even admitted that they assisted Tan on three separate
occasions in opening McLoughlins safety deposit box. [33] This only proves that Tropicana had prior knowledge that a
person aside from the registered guest had access to the safety deposit box. Yet the management failed to notify
McLoughlin of the incident and waited for him to discover the taking before it disclosed the matter to him. Therefore,
Tropicana should be held responsible for the damage suffered by McLoughlin by reason of the negligence of its
employees.
The management should have guarded against the occurrence of this incident considering that Payam admitted
in open court that she assisted Tan three times in opening the safety deposit box of McLoughlin at around 6:30 A.M. to
7:30 A.M. while the latter was still asleep. [34] In light of the circumstances surrounding this case, it is undeniable that
without the acquiescence of the employees of Tropicana to the opening of the safety deposit box, the loss of
McLoughlins money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its employees believe that Tan was his
spouse for she was always with him most of the time. The evidence on record, however, is bereft of any showing that
McLoughlin introduced Tan to the management as his wife. Such an inference from the act of McLoughlin will not
exculpate the petitioners from liability in the absence of any showing that he made the management believe that Tan
was his wife or was duly authorized to have access to the safety deposit box. Mere close companionship and intimacy
are not enough to warrant such conclusion considering that what is involved in the instant case is the very safety of
McLoughlins deposit. If only petitioners exercised due diligence in taking care of McLoughlins safety deposit box, they
should have confronted him as to his relationship with Tan considering that the latter had been observed opening
McLoughlins safety deposit box a number of times at the early hours of the morning. Tans acts should have prompted

15
the management to investigate her relationship with McLoughlin. Then, petitioners would have exercised due diligence
required of them. Failure to do so warrants the conclusion that the management had been remiss in complying with
the obligations imposed upon hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180, paragraph (4) of
the same Code provides that the owners and managers of an establishment or enterprise are likewise responsible
for damages caused by their employees in the service of the branches in which the latter are employed or on the
occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the
employer was negligent in selecting and/or supervising him for it is hard for the victim to prove the negligence of such
employer.[35] Thus, given the fact that the loss of McLoughlins money was consummated through the negligence of
Tropicanas employees in allowing Tan to open the safety deposit box without the guests consent, both the assisting
employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable
pursuant to Article 2193.[36]
The issue of whether the Undertaking For The Use of Safety Deposit Box executed by McLoughlin is tainted with
nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial court and the appellate
court found the same to be null and void. We find no reason to reverse their common conclusion. Article 2003 is
controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the
articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as
set forth in Articles 1998 to 2001[37] is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to
situations such as that presented in this case. The hotel business like the common carriers business is imbued with
public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security
to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow
such duty to the public to be negated or diluted by any contrary stipulation in so-called undertakings that ordinarily
appear in prepared forms imposed by hotel keepers on guests for their signature.
In an early case,[38] the Court of Appeals through its then Presiding Justice (later Associate Justice of the Court)
Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary
that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel
or inn.[39] With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken
without the guests knowledge and consent from a safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking manifestly contravene Article 2003 of the New Civil Code for they allow
Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit box
for any cause whatsoever.[40] Evidently, the undertaking was intended to bar any claim against Tropicana for any loss
of the contents of the safety deposit box whether or not negligence was incurred by Tropicana or its employees. The
New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal
property of the guests even if caused by servants or employees of the keepers of hotels or inns as well as by
strangers, except as it may proceed from any force majeure.[41] It is the loss through force majeure that may spare the
hotel-keeper from liability. In the case at bar, there is no showing that the act of the thief or robber was done with the
use of arms or through an irresistible force to qualify the same as force majeure.[42]
Petitioners likewise anchor their defense on Article 2002 [43] which exempts the hotel-keeper from liability if the
loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision would lead us to
reject petitioners contention. The justification they raise would render nugatory the public interest sought to be
protected by the provision. What if the negligence of the employer or its employees facilitated the consummation of a
crime committed by the registered guests relatives or visitor? Should the law exculpate the hotel from liability since the
loss was due to the act of the visitor of the registered guest of the hotel? Hence, this provision presupposes that the
hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of the loss. A
depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss. [44]
In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest himself
but also by the management since two keys are necessary to open the safety deposit box. Without the assistance of
hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing
Tan, who was not the registered guest, to open the safety deposit box of McLoughlin, even assuming that the latter
was also guilty of negligence in allowing another person to use his key. To rule otherwise would result in undermining
the safety of the safety deposit boxes in hotels for the management will be given imprimatur to allow any person,
under the pretense of being a family member or a visitor of the guest, to have access to the safety deposit box without
fear of any liability that will attach thereafter in case such person turns out to be a complete stranger. This will allow
the hotel to evade responsibility for any liability incurred by its employees in conspiracy with the guests relatives and
visitors.
Petitioners contend that McLoughlins case was mounted on the theory of contract, but the trial court and the
appellate court upheld the grant of the claims of the latter on the basis of tort. [45] There is nothing anomalous in how

16
the lower courts decided the controversy for this Court has pronounced a jurisprudential rule that tort liability can exist
even if there are already contractual relations. The act that breaks the contract may also be tort. [46]
As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the appellate court
for the same were based on facts and law. It is within the province of lower courts to settle factual issues such as the
proper amount of damages awarded and such finding is binding upon this Court especially if sufficiently proven by
evidence and not unconscionable or excessive. Thus, the appellate court correctly awarded McLoughlin Two
Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred Australian dollars (AUS$4,500.00) or their
peso equivalent at the time of payment,[47] being the amounts duly proven by evidence. [48] The alleged loss that took
place prior to 16 April 1988 was not considered since the amounts alleged to have been taken were not sufficiently
established by evidence. The appellate court also correctly awarded the sum of P308,880.80, representing the peso
value for the air fares from Sydney to Manila and back for a total of eleven (11) trips; [49] one-half of P336,207.05
or P168,103.52 representing payment to Tropicana; [50] one-half of P152,683.57 or P76,341.785 representing payment
to Echelon Tower;[51] one-half of P179,863.20 or P89,931.60 for the taxi or transportation expenses from McLoughlins
residence to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips; [52] one-half of P7,801.94
or P3,900.97 representing Meralco power expenses;[53] one-half of P356,400.00 or P178,000.00 representing
expenses for food and maintenance.[54]
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given discretion to
determine the amount of moral damages, the appellate court may modify or change the amount awarded when it is
palpably and scandalously excessive. Moral damages are not intended to enrich a complainant at the expense of a
defendant. They are awarded only to enable the injured party to obtain means, diversion or amusements that will
serve to alleviate the moral suffering he has undergone, by reason of defendants culpable action. [55]
The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorneys fees are likewise
sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19 October 1995 is
hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of eleven (11)
trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlins residence to Sydney
Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.

17
G.R. No. 107243 September 1, 1993
PHILIPPINE NATIONAL BANK, petitioner,
vs.
NOAH'S ARK SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO, WILSON T. GO, respondents.
Santiago, Jr. Vida, Corpuz & Associates for petitioner.
Tomas P. Madella Jr. for respondents.

NARVASA, C.J.:
The case at bar involves extraordinary situation in which a Regional Trial
Judge after receiving notice to the final and executory judgment of the Court of Appeals in a special civil
action of certiorari in which said Trial Judge was a respondent, and which judgment contained the following
disposition, viz.:
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of
discretion which justify holding null and void and setting aside the Orders date May 2 and July 4,
1990 of respondent Court, and that a summary judgment be rendered forthwith in favor of the
PNB against Noah's Ark Sugar Refinery, et al., as prayed for in petitioner's Motion for Summary
Judgment.
SO ORDERED.
proceeded to render judgment, not "in favor of the PNB against Noah's Ark Sugar Refinery, et al.," but in favor
of the latter and its co-defendants. That judgment has been appealed by PNB to this Court "on pure questions of
law."
No dispute exists about the facts which gave rise to the controversy at bar.
In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar Refinery issued on several
dates warehouse receipts (quedans) as follows:
March 1, 1989, receipt No. 18062 covering sugar deposited by Rosa Sy;
March 7, 1989, receipt No. 18080 covering sugar deposited by RNS Merchandising (Rosa Ng
Sy);
March 21, 1989, receipt No. 18081 covering sugar deposited by RNS Merchandising;
March 31, 1989, receipt No. 18086 covering sugar deposited by St. Therese Merchandising; and
April 1, 1989, receipt No. 18087 covering sugar deposited by RNS Merchandising.
The receipts are substantially in the form, and contain the terms, prescribed for negotiable warehouse receipts
by Section 2 of the law.
Subsequently, warehouse receipts Numbered 18080 and 18081 (covering sugar deposited by RNS
Merchandising) were negotiated and indorsed to Luis T. Ramos; and receipts Numbered 18086 (sugar of St.
Therese Merchandising), 18087 (sugar of RNS Merchandising) and 18062 (sugar of Rosa Sy) were negotiated
and indorsed to Cresencia K. Zoleta. Zoleta and Ramos then used the quedans as security for loans obtained by
them from the Philippine National Bank (PNB) in the amounts of P23.5 million and P15.6 million, respectively.
These quedans they indorsed to the bank.
Both Zoleta and Ramos failed to pay their loans upon maturity on January 9, 1990. Consequently on March 16,
1990, PNB wrote to Noah's Ark Sugar Refinery (hereafter, simply Noah's Ark) demanding delivery of the sugar
covered by the quedans indorsed to it by Zoleta and Ramos. When Noah's Ark refused to comply with the
demand, PNB filed with the Regional Trial Court of Manila a verified complaint for "Specific Performance with
Damages and Application for Writ of Attachment" against Noah's Ark, Alberto T. Looyuko, Jimmy T. Go, and
Wilson T. Go, the last three being identified as "the Sole Proprietor, Managing Partner and Executive Vice
President of Noah's Ark, respectively."
The Court, by Order dated June 28, 1990, denied the application for preliminary attachment after conducting a
hearing thereon. It denied as well the motion for reconsideration thereafter filed by PNB, by Order dated August
22, 1990.
Noah's Ark and its co-defendants then filed their responsive pleading entitled "Answer with Counterclaim and
Third Party Complaint," dated June 21, 1990 in which they claimed, inter alia, that they "are still the legal owners
18
of the subject quedans and the quantity of sugar represented thereon," a claim founded on the following
averments, to wit:
. . . In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS
Merchandising and Teresita Ng of St. Therese Merchandising the total volume of sugar indicated
in the quedans stored at Noah's Ark Sugar Refinery for a total consideration of P63,000,000.00, .
. . The corresponding payments in the form of checks issued by the vendees in favor of
defendants were subsequently dishonored by the drawee banks by reason of "payment stopped"
and "drawn against insufficient funds," . . . Upon proper notification to said vendees and plaintiff
in due course, defendants refused to deliver to vendees therein the quantity of sugar covered by
subject quedans.
. . . Considering that the vendees and first indorsers of subject quedans did not acquire
ownership thereof, the subsequent indorsers and plaintiff itself did not acquire a better right of
ownership than the original vendees/first indorsers.
The defendants also adverted to PNB's supposed awareness "that subject quedans are not negotiable
instruments within the purview of the Warehouse Receipts Law but simply an internal guarantee of defendants in
the sale of their stocks of sugar. . . ."
The answer incorporated a third party complaint by Alberto Looyuko, Jimmy T. Go and Wilson T. Go ("doing
business under the name and style of Noah's Ark Sugar Refinery") against Rosa Ng Sy and Teresita Ng, praying
that the latter be ordered to deliver or return to them the quedans (eventually indorsed to the PNB and now
subject of this suit) and pay damages and litigation expenses.
The answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, was essentially to the effect that the
transaction between them and Jimmy T. Go concerning the quedans and the sugar thereby covered was "bogus
and simulated (being part of the latter's) complex banking schemes and financial maneuvers;" that the simulated
transaction "was just a tolling scheme to
avoid VAT payment and other BIR assessments (considering that) as . . . confidentially intimated (by said Jimmy
Go) . . . Noah's Ark is under sequestration by the PCGG," and that the quedans "were in fact used by Noah's Ark
Executive Director, Luis T. Ramos, and one Cresenciana K. Zoleta as security for their loans from the bank . . . .
(in the aggregate amount) of P39.1 million pesos."
On January 31, 1991, PNB filed a "Motion for Summary Judgment." It asserted that "from the pleadings,
documents, and admissions on file, there is no genuine issue as to a material fact proper for trial and that
plaintiff is entitled as a matter of law, . . . (to) a summary judgment." It contended that the defenses set up by
Noah's Ark, et al. in their responsive pleading involve purely questions of law i.e., (a) that the vendees of the
sugar covered by the quedans in dispute never acquired title to the goods because of their failure to pay the
stipulated purchase price and hence, ownership over the sugar was retained by Noah's Ark, et al.; and (b) PNB's
action is premature since as pledgee it failed to exercise the remedies provided in the contract of pledge and the
Civil Code. And it specified in no little detail the admissions and documents on record demonstrating the
absence of any genuine factual issue. On these premises, it prayed "that a summary judgment be rendered for
plaintiff against the defendants for the reliefs prayed for in the complaint," these reliefs being:
(a) to deliver to PNB the sugar stocks covered by the Warehouse Receipts/Quedans which are
now in the latter's possession as holder for value and in due course; or alternatively, to pay
plaintiff actual damages in the amount of P39.1 Million exclusive of interest, penalties and
charges; and
(b) to pay plaintiff attorney's fees, litigation expenses and judicial costs estimated at no less than
P1 Million; (and) such other reliefs just and equitable under the premises.
An opposition to the motion was presented by defendants Noah's Ark, et al., dated March 4, 1991, asserting the
existence of genuine issues, to wit: whether or not the sale was ever consummated considering that "the checks
issued by the first indorsees in payment of said quedans bounced," and whether or not PNB acquired ownership
over the quedans considering that "it did not dispose (of) said quedans under Art. 2112 of the Civil Code, as
specifically reflected in the contract of pledge," both contentions allegedly being "material facts which has (sic) to
be supported by evidence."
The third-party defendants (Rosa Ng Sy and Teresita Ng) also opposed the motion for summary judgment
insofar as concerned their counterclaim in relation to the third-party complaint asserted against them.
On May 2, 1991, the Trial Court issued an Order denying the motion for summary judgment on the ground that
an "examination of the pleadings and the record readily shows that there exists sharply conflicting claims among
the parties relative to the ownership of the sugar quedans as to whether or not the subject quedans falls (sic)
squarely within the coverage of the Warehouse Receipt Law and whether or not the transaction between plaintiff
and third party defendants is governed by contract of pledge that would require plaintiff's compliance with Art.
19
2112, Civil Code on pledge as regards the disposition of the subjects quedans." PNB's for reconsideration was
denied by Order dated July 4, 1991.
PNB thereupon filed a petition for certiorari with the Court of Appeals, which was docketed as CA-G.R. SP No.
25938. This special civil action eventuated in a Decision promulgated on December 13, 1991 by the Sixth
Division of that Court, nullifying and setting aside the challenged Orders of May 2, 1991 and July 4, 1991, and
1

commanding that "summary judgment be rendered forthwith in favor of the PNB against Noah's Ark Sugar
Refinery, et al., as prayed for in petitioner's Motion for Summary Judgment." Said the Appellate Court: 2

In issuing the questioned Orders, the respondent Court ruled that "questions of law should be
resolved after and not before, the questions of fact are properly litigated." A scrutiny of
defendants' affirmative defenses does not show material questions of facts as to the alleged non-
payment of purchase price by the vendees/first indorsers, and which non-payment is not
disputed by PNB as it does not materially affect PNB's title to the sugar stock as holder of the
negotiable quedans.
What is determinative of the propriety of summary judgment is not the existence of conflicting
claims for prior parties but whether from an examination of the pleadings, depositions,
admissions and documents on file, the defenses as to the main issue do not tender material
questions of fact (see Garcia vs. Court of Appeals 167 SCRA 815) or the issues thus tendered
are in fact sham, fictitious, contrived, set up in bad faith or so unsubstantial as not to constitute
genuine issues for trial. (See Vergara vs. Suelto, et al., 156 SCRA 753; Mercado, et al. vs. Court
of Appeals, 162 SCRA 75). The questioned Orders themselves do not specify what material facts
are in issue. (See Sec. 4, Rule 34, Rules of Court).
To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing
on record, would constitute a waste of time and an injustice to the PNB whose rights to relief to
which it is plainly entitled would be further delayed to its prejudice.
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of
discretion which justify holding null and void and setting aside the Orders dated May 2 and July
4, 1990 of respondent Court, and that a summary judgment be rendered forthwith in favor of the
PNB against Noah's Ark Sugar Refinery, et al., as prayed for in the petitioner's Motion for
Summary Judgment.
SO ORDERED.
Noah's Ark, et al. moved for reconsideration, but their motion was denied by the Appellate Tribunal's Resolution
dated March 6, 1991.
The judgment became final. Entry of Judgment was made on May 26, 1992. Thereafter the case was remanded
to the Court of origin.
On June 18, 1992, the Regional Trial Court rendered judgment, but not in accordance with the aforesaid
decision of the Court of Appeals. As stated in the opening paragraph of this opinion, instead of a summary
judgment "in favor of the PNB against Noah's Ark Sugar Refinery, et al., as prayed for in . . . (PNB)'s Motion for
Summary Judgment," the Trial Court's verdict decreed the dismissal of "plaintiff's complaint against defendants
Noah's Ark Sugar Refinery, Alberto T. Looyuko, Jimmy Go and Wilson T. Go . . . . for lack of cause of action;" and
dismissal as well of the counterclaim pleaded by the latter against PNB, and of the third-party complaint, and the
third-party defendant's counterclaim.
The Trial Court declared that if "the only material facts established on the basis of the pleadings, documentary
evidence on record, admissions and stipulations during the hearing on PNB's application for a writ of preliminary
attachment, are the facts as alleged by plaintiff and accepted as established by the Court of Appeals, this Court
will have no difficulty in finding for plaintiff as prayed for in its motion for summary judgment. But are the facts
alleged by plaintiff the only material facts established on the basis of the pleadings, documentary evidence on
record, stipulations and admissions during the proceedings on the application for a writ of preliminary
attachment?" To this question the Trial Court gave a negative answer, it being its view that other facts, "as
alleged by defendants . . . (and) not disputed by PNB, have been likewise established."
The Trial Court later denied PNB's motion for reconsideration (by Order dated September 4, 1992), evidently
finding merit in the argument of Noah's Ark, et al., therein quoted, that "Certiorari as a mode of appeal involves
the review of judgment, award of final order on the merits, while the original action for certiorari and as a special
civil action is generally directed against an interlocutory order of the Court, prior to an appeal from the judgment
of the main case which in the case at bar is specific performance . . ."
Hence, this appeal.

20
In CA-G.R. SP No. 25938 above mentioned, after an extensive review of the entire record of the case before the
Regional Trial Court (including the admissions of Noah's Ark, et al. and the parties' stipulations of fact), as well
as the pleadings filed by the parties before it, the Court of Appeals arrived at the conclusion that a summary
judgment was proper since "there was no substantial controversy on a(ny) material fact, the only issues for the
Court's
determination . . . (being) purely . . . questions of law, as follows:
1) Whether or not the non-payment of the purchase price for the sugar stock
evidenced by the quedans, by the original depositors/ vendees (RNS
Merchandising and St. Therese Merchandising) rendered invalid the negotiation
of said quedans by vendees/first indorsers to indorsers (Ramos and Zoleta) and
the subsequent negotiation of Ramos and Zoleta to PNB.
2) Whether or not PNB as indorsee/ pledgee of quedans was entitled to delivery
of sugar stocks from the warehouseman, Noah's Ark."
These legal questions were disposed of by the Appellate Court as follows:
The validity of the negotiation by RNS Merchandising and St. Therese Merchandising to Ramos
and Zoleta, and by the latter to PNB to secure a loan cannot be impaired by the fact that the
negotiation between Noah's Ark and RNS Merchandising and St. Therese Merchandising was in
breach of faith on the part of the merchandising firms or by the fact that the owner (Noah's Ark)
was deprived of the possession of the same by fraud, mistake or conversion of the person to
whom the warehouse receipt/quedan was subsequently negotiated if (PNB) paid value therefor in
good faith without notice of such breach of duty, fraud, mistake or conversion. (See Article 1518,
New Civil Code). And the creditor (PNB) whose debtor was the owner of the negotiable
document of title (warehouse receipt) shall be entitled to such aid from the court of appropriate
jurisdiction attaching such document or in satisfying the claim by means as is allowed by law or
in equity in regard to property which cannot be readily attached or levied upon by ordinary
process. (See Art. 1520, New Civil Code). If the quedans were negotiable in form and duly
indorsed to PNB (the creditor), the delivery of the quedans to PNB makes the PNB the owner of
the property covered by said quedans and on deposit with Noah's Ark, the warehouseman. (See
Sy Cong Bieng & Co. vs. Hongkong & Shanghai Bank Corp., 56 Phil. 598).
In the case at bar, We found that the factual bases underlying the defendant's affirmative
defenses (upon which PNB has moved for summary judgment) are not disputed and have been
stipulated by the parties and therefore do not require presentation of evidence. PNB's right to
enforce the obligation of Noah's Ark as a warehouseman, to deliver the sugar stock to PNB as
holder of the quedans, does not depend on the outcome of the third-party complaint because the
validity of the negotiation transferring title to the goods to PNB as holder of the quedans is not
affected by an act of RNS Merchandising and St. Therese Merchandising, in breach of trust,
fraud or conversion against Noah's Ark.
The Court considers the Appellate Court's conclusions of fact and law to be correct.
The Trial Judge's argument that the Appellate Court's decision failed to take account of other "material facts
established on the basis of the pleadings, documentary evidence on record, stipulations and admissions during
the proceedings on the application for a writ of preliminary attachment," is quite transparently specious. For the
matters cited by His Honor, as allegedly not examined by the Court of Appeals, were in fact duly considered by
the latter i.e., that "the various postdated checks issued by the buyers (RNS Merchandising and St. Therese
Merchandising) in favor of Noah's Ark were dishonored when presented for payment . . (and hence) the buyers
never acquired title to the sugar evidenced by the quedans," and that PNB "did not follow the procedure stated
3

in Article 2112 of the Civil Code." In its decision, as just pointed out, the Court of Appeals explicitly ruled that the
4

"validity of the negotiation" of the quedans to PNB" cannot be impaired by the fact that the negotiation between
Noah's Ark and RNS Merchandising and St. Therese Merchandising was made in breach of faith on the part of
the merchandising firms or by the fact that the owner (Noah's Ark) was deprived of the possession of the same
by fraud, mistake or conversion . . ." It also ruled that the quedans were negotiable documents and had been
5

duly negotiated to the PNB which thereby acquired the rights set out in Article 1513 of the Civil Code," viz.:"
6

(1) Such title to the goods as the person negotiating the documents to him had or had ability to
convey to a purchaser in good faith for value and also such title to the goods as the person to
whose order the goods were to be delivered by the terms of the document had or had ability to
convey to a purchaser in good faith for value; and
(2) The direct obligation of the bailee issuing the document to hold possession of the goods for
him according to the terms of the document as fully as if such bailee had contracted directly with
him.
21
The Court of Appeals found correctly that the indications in the pleadings to the contrary notwithstanding, no
substantial triable issue of fact actually existed, and that certain issues raised in answer, even if taken as
established, would not materially change the ultimate findings relative to the main claim. Its decision is entirely
7

in accord with this Court's rulings regarding the propriety of summary judgments invoked by the Appellate
Tribunal, i.e., Vergara, Sr. v. Suelto, and Mercado v. Court of Appeals. According to Vergara, for instance,
8 9

"even if the answer does tender issues and therefore a judgment on the pleadings is not proper a
summary judgment may still be rendered on the plaintiff's motion if he can show to the Court's satisfaction that
"except as to the amount of damages, there is no genuine issue as to any material fact," that is to say, the
10

issues thus tendered are not genuine, are in other words sham, fictitious, contrived, set up in bad faith, patently
unsubstantial. The determination may be made by the Court on the basis of the pleadings, and the depositions,
11

admissions and affidavits that the movant may submit, as well as those which the defendant may present in
turn."
12

In any event, the conclusions of fact and law set out in the Appellate Court's decision are undeniably binding on
all the parties to the case, the respondent Regional Trial Judge included. Having been rendered by a competent
court within its jurisdiction, and having become final and executory, the decision now operates as the immutable
law among the parties, the respondent Trial Judge included; it has become the law of the case and may no
longer, in subsequent proceedings, be altered or modified in any way, much less reversed or set at naught, by
the latter, or any other judge, not even by the Supreme Court; it is an unalterable determination of the propriety
of a summary judgment in the action in question, and upon all the issues therein raised or which could have
been raised relative to the merits of said action.
13

The Trial Judge may not evade compliance with the final judgment of the Court of Appeals on the theory that the
latter had acted only on a mere interlocutory order (the order denying PNB's motion for summary judgment),
while he had subsequently adjudged the action for specific performance on the merits. Quite obvious is that the
Court of Appeals had decided that a summary judgment was proper in said action of specific performance, that
this was in truth a determination of the merits of the suit, that that decision had become final and executory, and
that the decision expressly commanded His Honor to render such a judgment. Under the circumstances, the
latter's duty was clear and inescapable.
It was not within the Trial Judge's competence or discretion to take exception to, much less overturn, any of the
factual or legal conclusions laid down by the Court of Appeals in its verdict. He was as much bound thereby as
the private parties themselves. His only function was to implement and carry out the Appellate Tribunal's
judgment. It was an act of supererogation, of presumptuousness, on His Honor's part to disregard the Court's
clear and categorical command, and to dispose of the case in a manner diametrically opposed thereto. In doing
so, the Trial Judge committed grave error which must forthwith be corrected.
WHEREFORE, the Trial Judge's Decision in Civil Case No. 90-53023 dated June 18, 1992 is REVERSED and
SET ASIDE and a new one rendered conformably with the final and executory Decision of the Court of Appeals
in CA-G.R. SP No. 25938, ordering the private respondents, Noah's Ark Sugar Refinery, Alberto T. Looyuko,
Jimmy T. Go and William T. Go, jointly and severally:
a) to deliver to the petitioner Philippine National Bank, "the sugar stocks covered by the Warehouse
Receipts/Quedans which are now in the latter's possession as holder for value and in due course; or
alternatively, to pay (said) plaintiff actual damages in the amount of P39.1 Million," with legal interest thereon
from the filing of the complaint until full payment; and
b) to pay plaintiff Philippine National Bank attorney's fees, litigation expenses and judicial costs hereby fixed at
the amount of one hundred fifty thousand pesos (150,000.00), as well as the costs.
SO ORDERED.

22
 [G.R. No. 119231. April 18, 1996]
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. PRES. JUDGE BENITO C. SE, JR., RTC, BR. 45, MANILA;
NOAHS ARK SUGAR REFINERY; ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T.
GO, respondents.
SYLLABUS
1. COMMERCIAL LAW; WAREHOUSE RECEIPTS LAW; THE UNCONDITIONAL PRESENTMENT OF THE
RECEIPTS FOR PAYMENT CARRIED WITH IT THE ADMISSIONS OF THE EXISTENCE AND VALIDITY OF
THE TERMS, CONDITIONS AND STIPULATIONS WRITTEN ON THE FACE OF THE WAREHOUSE
RECEIPTS, INCLUDING THE UNQUALIFIED RECOGNITION OF THE PAYMENT OF WAREHOUSEMANS
LIEN FOR STORAGE FEES AND PRESERVATION EXPENSES; CASE AT BAR. - Petitioner is in estoppel in
disclaiming liability for the payment of storage fees due the private respondents as warehouseman while claiming
to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its
claim for payment or delivery of the sugar stocks. The unconditional presentment of the receipts by the petitioner
for payment against private respondents on the strength of the provisions of the Warehouse Receipts Law (R.A.
2137) carried with it the admission of the existence and validity of the terms, conditions and stipulations written
on the face of the Warehouse Receipts, including the unqualified recognition of the payment of warehousemans
lien for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks without paying
the lien due private respondents as warehouseman.
2. ID.; ID.; ID.; WAREHOUSEMANS LIEN; POSSESSORY IN NATURE. - While the PNB is entitled to the stocks of
sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by
surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a warehousemans lien is possessory in
nature.
APPEARANCES OF COUNSEL
Rolan A. Nieto for petitioner.
Madella & Cruz Law Offices for private respondents.
DECISION
HERMOSISIMA, JR., J.:
The source of conflict herein is the question as to whether the Philippine National Bank should pay storage fees
for sugar stocks covered by five (5) Warehouse Receipts stored in the warehouse of private respondents in the face of
the Court of Appeals decision (affirmed by the Supreme Court) declaring the Philippine National Bank as the owner of
the said sugar stocks and ordering their delivery to the said bank. From the same facts but on a different perspective,
it can be said that the issue is: Can the warehouseman enforce his warehousemans lien before delivering the sugar
stocks as ordered by the Court of Appeals or need he file a separate action to enforce payment of storage fees?
The herein petition seeks to annul: (1) the Resolution of respondent Judge Benito C. Se, Jr. of the Regional Trial
Court of Manila, Branch 45, dated December 20, 1994, in Civil Case No. 90-53023, authorizing reception of evidence
to establish the claim of respondents Noahs Ark Sugar Refinery, et al., for storage fees and preservation expenses
over sugar stocks covered by five (5) Warehouse Receipts which is in the nature of a warehousemans lien; and (2) the
Resolution of the said respondent Judge, dated March 1, 1995, declaring the validity of private respondents
warehousemans lien under Section 27 of Republic Act No 2137 and ordering that execution of the Court of Appeals
decision, dated December 13, 1991, be in effect held in abeyance until the full amount of the warehousemans lien on
the sugar stocks covered by five (5) quedans subject of the action shall have been satisfied conformably with the
provisions of Section 31 of Republic Act 2137.
Also prayed for by the petition is a Writ of Prohibition to require respondent RTC Judge to desist from further
proceeding with Civil Case No. 90-53023, except order the execution of the Supreme Court judgment; and a Writ of
Mandamus to compel respondent RTC Judge to issue a Writ of Execution in accordance with the said executory
Supreme Court decision.
THE FACTS
In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs Ark Sugar Refinery issued on several
dates, the following Warehouse Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062, covering sugar deposited
by Rosa Sy; (b) March 7, 1989, Receipt No. 18080, covering sugar deposited by RNS Merchandising (Rosa Ng Sy);
(c) March 21, 1989, Receipt No. 18081, covering sugar deposited by St. Therese Merchandising; (d)March 31, 1989,
Receipt No. 18086, covering sugar deposited by St. Therese Merchandising; and (e) April 1, 1989, Receipt No. 18087,

23
covering sugar deposited by RNS Merchandising. The receipts are substantially in the form, and contains the terms,
prescribed for negotiable warehouse receipts by Section 2 of the law.
Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to Luis T. Ramos; and
Receipts Nos. 18086, 18087 and 18062 were negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta
then used the quedans as security for two loan agreements - one for P15.6 million and the other for P23.5 million -
obtained by them from the Philippine National Bank. The aforementioned quedans were endorsed by them to the
Philippine National Bank.
Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on January 9, 1990. Consequently,
on March 16, 1990, the Philippine National Bank wrote to Noahs Ark Sugar Refinery demanding delivery of the sugar
stocks covered by the quedans endorsed to it by Zoleta and Ramos. Noahs Ark Sugar Refinery refused to comply with
the demand alleging ownership thereof, for which reason the Philippine National Bank filed with the Regional Trial
Court of Manila a verified complaint for Specific Performance with Damages and Application for Writ of Attachment
against Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified
as the sole proprietor, managing partner, and Executive Vice President of Noahs Ark, respectively.
Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the Application for Preliminary
Attachment. Reconsideration therefor was likewise denied.
Noahs Ark and its co-defendants filed an Answer with Counterclaim and Third-Party Complaint in which they
claimed that they are the owners of the subject quedans and the sugar represented therein, averring as they did that:
9.*** In an agreement dated April 1, 1989, defendants agreed to sell to Rosa Ng Sy of RNS Merchandising and Teresita Ng
of St. Therese Merchandising the total volume of sugar indicated in the quedans stored at Noahs Ark Sugar Refinery for a total
consideration of P63,000,000.00,
*** The corresponding payments in the form of checks issued by the vendees in favor of defendants were subsequently
dishonored by the drawee banks by reason of payment stopped and drawn against insufficient funds,
*** Upon proper notification to said vendees and plaintiff in due course, defendants refused to deliver to vendees therein the
quantity of sugar covered by the subject quedans.
10. *** Considering that the vendees and first endorsers of subject quedans did not acquire ownership thereof, the subsequent
endorsers and plaintiff itself did not acquire a better right of ownership than the original vendees/first endorsers. 1
The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, doing
business under the trade name and style Noahs Ark Sugar Refinery against Rosa Ng Sy and Teresita Ng, praying that
the latter be ordered to deliver or return to them the quedans (previously endorsed to PNB and the subject of the suit)
and pay damages and litigation expenses.
The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of avoidance, is essentially to the
effect that the transaction between them, on the one hand, and Jimmy T. Go, on the other, concerning the quedans
and the sugar stocks covered by them was merely a simulated one being part of the latters complex banking schemes
and financial maneuvers, and thus, they are not answerable in damages to him.
On January 31, 1991, the Philippine National Bank filed a Motion for Summary Judgment in favor of the plaintiff
as against the defendants for the reliefs prayed for in the complaint.
On May 2, 1991, the Regional Trial Court issued an order denying the Motion for Summary Judgment.
Thereupon, the Philippine National Bank filed a Petition for Certiorari with the Court of Appeals, docketed as CA-G.R.
SP. No. 25938 on December 13, 1991.
Pertinent portions of the decision of the Court of Appeals read:
In issuing the questioned Orders, the respondent Court ruled that questions of law should be resolved after and not before, the
questions of fact are properly litigated. A scrutiny of defendants affirmative defenses does not show material questions of fact as
to the alleged nonpayment of purchase price by the vendees/first endorsers, and which nonpayment is not disputed by PNB as it
does not materially affect PNBs title to the sugar stocks as holder of the negotiable quedans.
What is determinative of the propriety of summary judgment is not the existence of conflicting claims from prior parties but
whether from an examination of the pleadings, depositions, admissions and documents on file, the defenses as to the main issue do
not tender material questions of fact (see Garcia vs. Court of Appeals, 167 SCRA 815) or the issues thus tendered are in fact
sham, fictitious, contrived, set up in bad faith or so unsubstantial as not to constitute genuine issues for trial. (See Vergara vs.
Suelto, et al., 156 SCRA 753; Mercado, et al. vs. Court of Appeals, 162 SCRA 75). The questioned Orders themselves do not
specify what material facts are in issue. (See Sec. 4, Rule 34, Rules of Court).
To require a trial notwithstanding pertinent allegations of the pleadings and other facts appearing on the record, would constitute
a waste of time and an injustice to the PNB whose rights to relief to which it is plainly entitled would be further delayed to its
prejudice.
In issuing the questioned Orders, We find the respondent Court to have acted in grave abuse of discretion which justify holding
null and void and setting aside the Orders dated May 2 and July 4, 1990 of respondent Court, and that a summary judgment be

24
rendered forthwith in favor of the PNB against Noahs Ark Sugar Refinery, et al., as prayed for in petitioners Motion for Summary
Judgment.2
On December 13, 1991, the Court of Appeals nullified and set aside the orders of May 2 and July 4, 1990 of the
Regional Trial Court and ordered the trial court to render summary judgment in favor of the PNB. On June 18, 1992,
the trial court rendered judgment dismissing plaintiffs complaint against private respondents for lack of cause of action
and likewise dismissed private respondents counterclaim against PNB and of the Third-Party Complaint and the Third-
Party Defendants Counterclaim. On September 4, 1992, the trial court denied PNBs Motion for Reconsideration.
On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme Court, G.R. No. 107243, by
way of a Petition for Review on Certiorari under Rule 45 of the Rules of Court. This Court rendered judgment
on September 1, 1993, the dispositive portion of which reads:
WHEREFORE, the trial judges decision in Civil Case No. 90-53023, dated June 18, 1992, is reversed and set aside and a new
one rendered conformably with the final and executory decision of the Court of Appeals in CA-G.R SP. No. 25938, ordering the
private respondents Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, jointly and severally:
(a) to deliver to the petitioner Philippine National Bank, the sugar stocks covered by the Warehouse
Receipts/ Quedans which are now in the latters possession as holder for value and in due course; or
alternatively, to pay (said) plaintiff actual damages in the amount of P39.1 million, with legal interest
thereon from the filing of the complaint until full payment; and
(b) to pay plaintiff Philippine National Bank attorneys fees, litigation expenses and judicial costs hereby fixed
at the amount of One Hundred Fifty Thousand Pesos (P150,000.00) as well as the costs.
SO ORDERED.3
On September 29, 1993, private respondents moved for reconsideration of this decision. A Supplemental/Second
Motion for Reconsideration with leave of court was filed by private respondents on November 8, 1993. We denied
private respondents motion on January 10, 1994. .
Private respondents filed a Motion Seeking Clarification of the Decision, dated September 1, 1993. We denied
this motion in this manner:
It bears stressing that the relief granted in this Courts decision of September 1, 1993 is precisely that set out in the final and
executory decision of the Court of Appeals in CA-G.R. SP No. 25938, dated December 13, 1991, which was affirmed in toto by
this Court and which became unalterable upon becoming final and executory. 4
Private respondents thereupon filed before the trial court an Omnibus Motion seeking among others the
deferment of the proceedings until private respondents are heard on their claim for warehousemans lien. On the other
hand, on August 22, 1994, the Philippine National Bank filed a Motion for the Issuance of a Writ of Execution and an
Opposition to the Omnibus Motion filed by private respondents.
The trial court granted private respondents Omnibus Motion on December 20, 1994 and set reception of
evidence on their claim for warehousemans lien. The resolution of the PNBs Motion for Execution was ordered
deferred until the determination of private respondents claim.
On February 21, 1995, private respondents claim for lien was heard and evidence was received in support
thereof. The trial court thereafter gave both parties five (5) days to file respective memoranda.
On February 28, 1995, the Philippine National Bank filed a Manifestation with Urgent Motion to Nullify Court
Proceedings. In adjudication thereof, the trial court issued the following order on March 1, 1995:
WHEREFORE, this court hereby finds that there exists in favor of the defendants a valid warehousemans lien under Section 27 of
Republic Act 2137 and accordingly, execution of the judgment is hereby ordered stayed and/ or precluded until the full amount of
defendants lien on the sugar stocks covered by the five (5) quedans subject of this action shall have been satisfied conformably
with the provisions of Section 31 of Republic Act 2137. 5
Consequently, the Philippine National Bank filed the herein petition to seek the nullification of the above-assailed
orders of respondent judge.
The PNB submits that:
I
PNBs RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND EXECUTORY DECISIONS:
THE DECEMBER 13, 1991 COURT OF APPEALS DECISION IN CA-G.R. SP. NO. 25938; AND, THE NOVEMBER 9,
1992 SUPREME COURT DECISION IN G.R NO. 107243. RESPONDENT RTCS MINISTERIAL AND MANDATORY DUTY IS
TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT THE DECRETAL PORTION OF SAID SUPREME COURT
DECISION
II
RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE RESPONDENTS OMNIBUS MOTION. THE CLAIMS
SET FORTH IN SAID MOTION: (1) WERE ALREADY REJECTED BY THE SUPREME COURT IN ITS MARCH 9,

25
1994 RESOLUTION DENYING PRIVATE RESPONDENTS MOTION FOR CLARIFICATION OF DECISION IN .G.R. NO.
107243; AND (2) ARE BARRED FOREVER BY PRIVATE RESPONDENTS FAILURE TO INTERPOSE THEM IN THEIR
ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18, 1992 RTC DECISION IN CIVIL CASE NO. 90-52023
III
RESPONDENT RTCS ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT DECISION.
THUS, PNB IS ENTITLED TO: (1) A WRIT OF CERTIORARI TO ANNUL THE RTC RESOLUTION DATED DECEMBER 20,
1994 AND THE ORDER DATED FEBRUARY 7, 1995 AND ALL PROCEEDINGS TAKEN BY THE RTC THEREAFTER; (2) A
WRIT OF PROHIBITION TO PREVENT RESPONDENT RTC FROM FURTHER PROCEEDING WITH CIVIL CASE NO. 90-
53023 AND COMMITTING OTHER ACTS VIOLATIVE OF THE SUPREME COURT DECISION IN G.R. NO. 107243; AND (3)
A WRIT OF MANDAMUS TO COMPEL RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT
JUDGMENT IN FAVOR OF PNB
The issues presented before us in this petition revolve around the legality of the questioned orders of respondent
judge, issued as they were after we had denied with finality private respondents contention that the PNB could not
compel them to deliver the stocks of sugar in their warehouse covered by the endorsed quedans or pay the value of
the said stocks of sugar.
Petitioners submission is on a technicality, that is, that private respondents have lost their right to recover
warehousemans lien on the sugar stocks covered by the five (5) Warehouse Receipts for the reason that they failed to
set up said claim in their Answer before the trial court and that private respondents did not appeal from the decision in
this regard, dated June 18, 1992. Petitioner asseverates that the denial by this Court on March 9, 1994 of the motion
seeking clarification of our decision, dated September 1, 1993, has foreclosed private respondents right to enforce
their warehousemans lien for storage fees and preservation expenses under the Warehouse Receipts Act.
On the other hand, private respondents maintain that they could not have claimed the right to a warehouseman s
lien in their Answer to the complaint before the trial court as it would have been inconsistent with their stand that they
claim ownership of the stocks covered by the quedans since the checks issued for payment thereof were dishonored.
If they were still the owners, it would have been absurd for them to ask payment for storage fees and preservation
expenses. They further contend that our resolution, dated March 9, 1994, denying their motion for clarification did not
preclude their right to claim their warehousemans lien under Sections 27 and 31 of Republic Act 2137, as our
resolution merely affirmed and adopted the earlier decision, dated December 13, 1991, of the Court of Appeals (6th
Division) in CA-G.R. SP. No. 25938 and did not make any finding on the matter of the warehouseman s lien.
We find for private respondents on the foregoing issue and so the petition necessarily must fail.
We have carefully examined our resolution, dated March 9, 1994, which denied Noahs Arks motion for
clarification of our decision, dated September 1, 1993, wherein we affirmed in full and adopted the Court of Appeals
earlier decision, dated December 13, 1991, in CA-G.R. SP. No. 25938. We are not persuaded by the petitioners
argument that our said resolution carried with it the denial of the warehousemans lien over the sugar stocks covered
by the subject Warehouse Receipts. We have simply resolved and upheld in our decision, dated September 1, 1993,
the propriety of summary judgment which was then assailed by private respondents. In effect, we ruled therein that,
considering the circumstances obtaining before the trial court, the issuance of the Warehouse Receipts not being
disputed by the private respondents, a summary judgment in favor of PNB was proper. We in effect further affirmed
the finding that Noahs Ark is a warehouseman which was obliged to deliver the sugar stocks covered by the
Warehouse Receipts pledged by Cresencia K. Zoleta and Luis T. Ramos to the petitioner pursuant to the pertinent
provisions of Republic Act 2137.
In disposing of the private respondents motion for clarification, we could not contemplate the matter of
warehousemans lien because the issue to be finally resolved then was the claim of private respondents for retaining
ownership of the stocks of sugar covered by the endorsed quedans. Stated otherwise, there was no point in taking up
the issue of warehousemans lien since the matter of ownership was as yet being determined. Neither could storage
fees be due then while no one has been declared the owner of the sugar stocks in question.
Of considerable relevance is the pertinent stipulation in the subject Warehouse Receipts which provides for
respondent Noahs Arks right to impose and collect warehousemans lien:
Storage of the refined sugar quantities mentioned herein shall be free up to one (1) week from the date of the quedans covering
said sugar and thereafter, storage fees shall be charged in accordance with the Refining Contract under which the refined sugar
covered by this Quedan was produced. 6
It is not disputed, therefore, that, under the subject Warehouse Receipts provision, storage fees are chargeable.
Petitioner anchors its claim against private respondents on the five (5) Warehouse Receipts issued by the latter
to third-party defendants Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese Merchandising, which
found their way to petitioner after they were negotiated to them by Luis T. Ramos and Cresencia K. Zoleta for a loan of
P39.1 Million. Accordingly, petitioner PNB is legally bound to stand by the express terms and conditions on the face of
the Warehouse Receipts as to the payment of storage fees. Even in the absence of such a provision, law and equity
dictate the payment of the warehouseman s lien pursuant to Sections 27 and 31 of the Warehouse Receipts Law (R.A.
2137), to wit:

26
SECTION 27. What claims are included in the warehousemans lien. - Subject to the provisions of section thirty, a warehouseman
shall have lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of
the goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing coopering and other
charges and expenses in relation to such goods; also for all reasonable charges and expenses for notice, and advertisement of
sale, and for sale of the goods where default has been made in satisfying the warehousemans lien.
xxx xxx xxx
SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
After being declared not the owner, but the warehouseman, by the Court of Appeals on December 13, 1991 in
CA-G.R. SP. No. 25938, the decision having been affirmed by us on December 1, 1993, private respondents cannot
legally be deprived of their right to enforce their claim for warehousemans lien, for reasonable storage fees and
preservation expenses. Pursuant to Section 31 which we quote hereunder, the goods under storage may not be
delivered until said lien is satisfied.
SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him until the lien is satisfied.
Considering that petitioner does not deny the existence, validity and genuineness of the Warehouse Receipts on
which it anchors its claim for payment against private respondents, it cannot disclaim liability for the payment of the
storage fees stipulated therein. As contracts, the receipts must be respected by authority of Article 1159 of the Civil
Code, to wit:
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with
in good faith.
Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as
warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the
basis of which it anchors its claim for payment or delivery of the sugar stocks. The unconditional presentment of the
receipts by the petitioner for payment against private respondents on the strength of the provisions of the Warehouse
Receipts Law (R.A. 2137) carried with it the admission of the existence and validity of the terms, conditions and
stipulations written on the face of the Warehouse Receipts, including the unqualified recognition of the payment of
warehousemans lien for storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks
without paying the lien due private respondents as warehouseman.
In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks of sugar as the
endorsee of the quedans, delivery to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by
surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a warehousemans lien is possessory in
nature.
We, therefore, uphold and sustain the validity of the assailed orders of public respondent, dated December 20,
1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on the part of the public respondent in issuing the
questioned orders which recognized the legitimate right of Noahs Ark, after being declared as warehouseman, to
recover storage fees before it would release to the PNB sugar stocks covered by the five (5) Warehouse Receipts.
Our resolution, dated March 9, 1994, did not preclude private respondents unqualified right to establish its claim to
recover storage fees which is recognized under Republic Act No. 2137. Neither did the Court of Appeals decision,
dated December 13, 1991, restrict such right.
Our Resolutions reference to the decision by the Court of Appeals, dated December 13, 1991, in CA-G.R. SP. No.
25938, was intended to guide the parties in the subsequent disposition of the case to its final end. We certainly did not
foreclose private respondents inherent right as warehouseman to collect storage fees and preservation expenses as
stipulated n the face of each of the Warehouse Receipts and as provided for in the Warehouse Receipts Law (R.A.
2137).
WHEREFORE, the petition should be, as it is, hereby dismissed for lack of merit. The questioned orders issued
by public respondent judge are affirmed.
Costs against the petitioner.
SO ORDERED.

27
G.R. No. L-158025 November 5, 1920
CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants, vs. GEORGE C. SELLNER, defendant-
appellee.
MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant the sum of P10,000. The brief decision of the trial court held that
the suit was premature, and absolved the defendant from the complaint, with the costs against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent for Mrs. Horace L.
Higgins, on May 31, 1915, of the following tenor:lawph!l.net
DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the promissory note executed the
29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally, in your favor and due
six months after date for Pesos 10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such
default, pay you in cash the sum of P10,000 and interest upon your surrendering to me the three thousand shares of stock of
the Keystone Mining Co. held by you as security for the payment of said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the determination of defendant's status in the transaction referred to.
Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs also admit that if defendant is a guarantor,
articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled "De la Fianza." The
Spanish word "fianza" is translated in the Washington and Walton editions of the Civil Code as "security." "Fianza" appears in the
Fisher translation as "suretyship." The Spanish world "fiador" is found in all of the English translations of the Civil Code as "surety."
The law of guaranty is not related of by that name in the Civil Code, although indirect reference to the same is made in the Code of
Commerce. In terminology at least, no distinction is made in the Civil Code between the obligation of a surety and that of a
guarantor.
As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law origin, we feel free to
supplement the statutory law by a reference to the precepts of the law merchant.
The points of difference between a surety and a guarantor are familiar to American authorities. A surety and a guarantor are alike in
that each promises to answer for the debt or default of another. A surety and a guarantor are unlike in that the surety assumes
liability as a regular party to the undertaking, while the liability as a regular party to upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A surety is charged as an original promissory; the engagement of the guarantor is a
collateral undertaking. The obligation of the surety is primary; the obligation of the guarantor is secondary. (See U.S. vs. Varadero
de la Quinta [1919], 40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492; Brandt, on
Suretyship and Guaranty, sec. 1, cited approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or suretyship) one person
binds himself to pay or perform for a third person in case the latter should fail to do so." But "If the surety binds himself in
solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title first, shall be applicable." What the first portion
of the cited article provides is, consequently, seen to be somewhat akin to the contract of guaranty, while what is last provided is
practically equivalent to the contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the title
concerning fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in comparison with the common
law, the effect of guaranty between guarantor and creditor. The civil law suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship existing between codebtors liable in solidum is similar to the common law
suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more precise, of
the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and upon surrender to him of the three thousand shares of Keystone
Mining Company stock, he will assume responsibility. Sellner is not bound with the principals by the same instrument executed at
the same time and on the same consideration, but his responsibility is a secondary one found in an independent collateral
agreement, Neither is Sellner jointly and severally liable with the principal debtors.
With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a guarantor within the
meaning of the provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the Keystone Mining
Company matured on November 29, 1915. Interest on the note was not accepted by the makers until September 30, 1916. When
the note became due, it is admitted that the shares of stock used as collateral security were selling at par; that is, they were worth
pesos 30,000. Notice that the note had not been paid was not given to and when the Keyston Mining Company stock was
worthless. Defendant, consequently, through the laches of plaintiff, has lost possible chance to recoup, through the sale of the
stock, any amount which he might be compelled to pay as a surety or guarantor. The "indulgence," as this word is used in the law

28
of guaranty, of the creditors of the principal, as evidenced by the acceptance of interest, and by failure promptly to notify the
guarantor, may thus have served to discharge the guarantor.
For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with costs of this instance against
the appellants. So ordered.

G.R. No. L-16666 April 10, 1922

ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant

OSTRAND, J.:

It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to construct a building
on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being P64,000. One of the conditions of the
agreement was that the contractor should obtain the "guarantee" of the Fidelity and Surety Company of the Philippine Islands to the
amount of P128,800 and the following endorsement in the English language appears upon the contract:

MANILA, July 15, 1916.

For value received we hereby guarantee compliance with the terms and conditions as outlined in the above
contract.

FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.

(Sgd) OTTO VORSTER,

Vice-President.

Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and, as the work
progressed, payments were made to him from time to time upon the recommendation of the architects, until the entire contract
price, with the exception of the sum of the P4,978.08, was paid. Subsequently it was found that the work had not been carried out
in accordance with the specifications which formed part of the contract and that the workmanship was not of the standard required,
and the Hospicio de San Jose therefore answered the complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined,
Machetti, on petition of his creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an order was entered
suspending the proceeding in the present case in accordance with section 60 of the Insolvency Law, Act No. 1956.

The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be made cross-
defendant to the exclusion of Machetti and that the proceedings be continued as to said company, but still remain suspended as to
Machetti. This motion was granted and on February 7, 1920, the Hospicio filed a complaint against the Fidelity and Surety
Company asking for a judgement for P12,800 against the company upon its guaranty. After trial, the Court of First Instance
rendered judgment against the Fidelity and Surety Company for P12,800 in accordance with the complaint. The case is now before
this court upon appeal by the Fidelity and Surety Company form said judgment.

As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant, has been converted
into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's guarantor, is
the defendant, Machetti having been practically eliminated from the case.

But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of guaranty is written in the
English language and the terms employed must of course be given the signification which ordinarily attaches to them in that
language. In English the term "guarantor" implies an undertaking of guaranty, as distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of
suretyship but such circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration moving from the
principal and that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking
separate and distinct from the latter. All of these circumstances are distinguishing features of contracts of guaranty.

Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot
pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor. (Saint vs.Wheeler & Wilson Mfg. Co., 95
Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de
la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is
perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if
ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti, cannot pay it
follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of

29
a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared
insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until
the final liquidation of his estate.

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

G.R. No. 172041 December 18, 2008

GATEWAY ELECTRONICS CORPORATION and GERONIMO B. DELOS REYES, JR., petitioners,
vs.
ASIANBANK CORPORATION, respondent.
VELASCO, JR., J.:
This petition for review under Rule 45 seeks to nullify and set aside the Decision 1 dated October 28, 2005 of the Court
of Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution 2 of March 17, 2006 denying petitioners motion for
reconsideration.
The Facts
Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged in the semi-
conductor business. During the period material, petitioner Geronimo B. delos Reyes, Jr. was its president and one
Andrew delos Reyes its executive vice-president.
On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for Gateway in
favor of respondent Asianbank Corporation (Asianbank), pertinently providing:
I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK CORPORATION, x x x due and punctual
payment by the following individuals/companies/firms, hereinafter called the DEBTOR(S), of such amounts whether
due or not, as indicated opposite their respective names, to wit:

NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

GATEWAY ELECTRONICS *P10,000,000.00 *US$3,000,000.00

CORPORATION *DOMESTIC BILLS *OMNIBUS CREDIT LINE
[PURCHASED LINE]

owing to the said ASIANBANK CORPORATION, hereafter called the CREDITOR, as evidenced by all notes, drafts,
overdrafts and other [credit] obligations of every kind and nature contracted/incurred by said DEBTOR(S) in favor of
said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebt nbsp nbsp
nbsp nbsp erein secured at maturity, I/WE BR
vs.
and severally agree and engage to the CREDITOR, its successors and assigns, the prompt payment, x x x of such
notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may hereafter
become indebted to the CREDITOR, together with all interests, penalty and other bank charges as may accrue
thereon x x x.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations to be performed under any
contracts evidencing indebtedness/obligations and any supplements, amendments, changes or modifications made
thereto, including but not limited to, the due and punctual payment by the said DEBTOR(S).
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon the
pursuit by the CREDITOR x x x of whatever remedies it or they may have against the DEBTOR(S) or the securities or
liens it or they may possess; and I/WE hereby agree to be and remain bound upon this suretyship, x x x and
notwithstanding also that all obligations of the DEBTOR(S) to you outstanding and unpaid at any time may exceed the
aggregate principal sum hereinabove stated.3
Later developments saw Asianbank extending to Gateway several export packing loans in the total aggregate amount
of USD 1,700,883.48. This loan package was later consolidated with Dollar Promissory Note (PN) No. FCD-0599-
27494 for the amount of USD 1,700,883.48 and secured by a chattel mortgage over Gateways equipment for USD 2
million.
Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateways request, Asianbank
extended the maturity dates of the loan several times. These extensions bore the conformity of three of Gateways
officers, among them Andrew.

30
On July 15 and 30, 1999, Gateway issued two Philippine Commercial International Bank checks for the amounts of
USD 40,000 and USD 20,000, respectively, as payment for its arrearages and interests for the periods June 30 and
July 30, 1999; but both checks were dishonored for insufficiency of funds. Asianbanks demands for payment made
upon Gateway and its sureties went unheeded. As of November 23, 1999, Gateways obligation to Asianbank,
inclusive of principal, interest, and penalties, totaled USD 2,235,452.17.
Thus, on December 15, 1999, Asianbank filed with the Regional Trial Court (RTC) in Makati City a complaint for a sum
of money against Gateway, Geronimo, and Andrew. The complaint, as later amended, was eventually raffled to Branch
60 of the court and docketed as Civil Case No. 99-2102 entitled Asian Bank Corporation v. Gateway Electronics
Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
In its answer to the amended complaint, Gateway traced the cause of its financial difficulties, described the steps it
had taken to address its mounting problem, and faulted Asianbank for trying to undermine its efforts toward recovery.
Andrew also filed an answer alleging, among other things, that the deed of suretyship he executed covering the PhP
10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line did not include PN No. FCD-
0599-2749, the payment of which was extended several times without his consent.
Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the authenticity of his signature
on it, was signed without his wifes consent and should, thus, be considered as a mere continuing offer. Like Andrew,
Geronimo argued that he ought to be relieved of his liability under the surety agreement inasmuch as he too never
consented to the repeated loan maturity date extensions given by Asianbank to Gateway.
After due hearing, the RTC rendered judgment dated October 7, 2003 5 in favor of Gateway, the dispositive portion of
which states:
WHEREFORE then, in view of the foregoing, judgment is rendered holding defendants Gateway Electronics
Corporation, Geronimo De Los Reyes and Andrew De Los Reyes jointly and severally liable to pay the plaintiff the
following:
a) The sum of $2,235,452.17 United States Currency with interest to be added on at the prevailing market rate over a
given thirty day London Interbank Offered Rate (LIBOR) plus a spread of 5.5358 percent or ten and [45,455/100,000]
percent per annum for the first 35 days and every thirty days beginning November 23, 1999 until fully paid;
b) a penalty charge after November 23, 1999 of two percent (2%) per month until fully paid;
c) attorneys fees of twenty percent (20%) of the total amount due and unpaid; and
d) costs of the suit.
SO ORDERED.
Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their recourse docketed as CA-G.R. CV No. 80734.
Following the filing of its and Geronimos joint appellants brief, Gateway filed on November 10, 2004 a petition for
voluntary insolvency6 with the RTC in Imus, Cavite, Branch 22, docketed as SEC Case No. 037-04, in which
Asianbank was listed in the attached Schedule of Obligations as one of the creditors. On March 16, 2005, Metrobank,
as successor-in-interest of Asianbank, via a Notice of Creditors Claim, prayed that it be allowed to participate in the
Gatewayss creditors meeting.
In its Decision dated October 28, 2005, the CA affirmed the decision of the Makati City RTC. In time, Gateway and
Geronimo interposed a motion for reconsideration. This was followed by a Supplemental Motion for Reconsideration
dated January 20, 2006, stating that in SEC Case No. 037-04, the RTC in Imus, Cavite had issued an Order dated
December 2, 2004, declaring Gateway insolvent and directing all its creditors to appear before the court on a certain
date for the purpose of choosing among themselves the assignee of Gateways estate which the courts sheriff has
meanwhile placed in custodia legis.7 Gateway and Geronimo thus prayed that the assailed decision of the Makati City
RTC be set aside, the insolvency court having acquired exclusive jurisdiction over the properties of Gateway by virtue
of Section 60 of Act No. 1956, without prejudice to Asianbank pursuing its claim in the insolvency proceedings.
In its March 17, 2006 Resolution, however, the CA denied the motion for reconsideration and its supplement.
Hence, Gateway and Geronimo filed this petition anchored on the following grounds:
I
The [CA] erred in disregarding the established rule that an action commenced by a creditor against a judicially
declared insolvent for the recovery of his claim should be dismissed and referred to the insolvency court. Where,
therefore, as in this case, petitioner GEC [referring to Gateway] has been declared insolvent x x x, respondent
Asianbanks claim for the payment of GECs loans should be ventilated before the insolvency court x x x.
II
The [CA] erred in admitting as evidence the Deed of Surety purportedly signed by petitioner GBR [referring to
Geronimo] despite the unexplained failure of respondent Asianbank to present the originals of the Deed of Surety
during the trial.

31
III
The [CA] erred in holding that the repeated extensions granted by respondent Asianbank to GEC without notice to and
the express consent of petitioner GBR did not discharge petitioner GBR from his liabilities as surety GEC in that:
A. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty.
B. The [CA] interpreted the supposed Deed of Surety of petitioner GBR as "too comprehensive and all encompassing
as to amount to absurdity."
C. The repeated extensions granted by Asianbank to GEC prevented petitioner GBR from exercising his right of
subrogation under Article 2080 of the Civil Code. As such, petitioner GBR should be released from his obligations as
surety of GEC.
IV
It is a well-settled rule that when a bank deviates from normal banking practice in a transaction and sustains injury as
a result thereof, the bank is deemed to have assumed the risk and no right of payment accrues to the latter against
any party to the transaction. By repeatedly extending the period for the payment of GECs obligations and granting
GEC other loans after the suretyship agreement despite GECs default and in failing to foreclose the chattel mortgage
constituted as security for GECs loan contrary to normal banking practices, Asianbank failed to exercise reasonable
caution for its own protection and assumed the risk of non-payment through its own acts, and thus has no right to
proceed against petitioner GBR as surety for the payment of GECs loans.
V
In Agcaoili v. GSIS, this Honorable Court had occasion to state that in determining the precise relief to give, the court
will "balance the equities" or the respective interests of the parties and take into account the relative hardship that one
relief or another may occasion to them. Upon a balancing of interests of both petitioner GBR and respondent
Asianbank, greater and irreparable harm and injury would be suffered by petitioner GBR than respondent Asianbank if
the assailed Decision and Resolution of the [CA] would be upheld x x x. This Honorable Court x x x should thus
exercise its equity jurisdiction in the instant case to the end that it may render complete justice to both parties and
declare petitioner GBR as released and discharged from any liability in respect of respondent Asianbanks claims. 8
The Ruling of the Court
Gateway May Be Discharged from Liability But Not Geronimo
Gateway, having been declared insolvent, argues that jurisdiction over all claims against all of its properties and
assets properly pertains to the insolvency court. Accordingly, Gateway adds, citing Sec. 60 of Act No. 1956, 9 as
amended, or the Insolvency Law, any pending action against its properties and assets must be dismissed, the
claimant relegated to the insolvency proceedings for the claimants relief.
The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No. 1956, as couched, the
issuance of an order declaring the petitioner insolvent after the insolvency court finds the corresponding petition for
insolvency to be meritorious shall stay all pending civil actions against the petitioners property. For reference, said
Sec. 18, setting forth the effects and contents of a voluntary insolvency order, 10 pertinently provides:
Section 18. Upon receiving and filing said petition, schedule, and inventory, the court x x x shall make an order
declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition is filed to take
possession of, and safely keep, until the appointment of a receiver or assignee, all the deeds, vouchers, books of
account, papers, notes, bonds, bills, and securities of the debtor and all his real and personal property, estate and
effects x x x. Said order shall further forbid the payment to the creditor of any debts due to him and the delivery to the
debtor, or to any person for him, of any property belonging to him, and the transfer of any property by him, and shall
further appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order shall [be
published] x x x. Upon the granting of said order, all civil proceedings pending against the said insolvent shall
be stayed. When a receiver is appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon
deliver to such receiver or assignee, as the case may be all the property, assets, and belongings of the insolvent
which have come into his possession x x x. (Emphasis supplied.)
Complementing Sec. 18 which appropriately comes into play "upon the granting of [the] order" of insolvency is the
succeeding Sec. 60 which properly applies to the period "after the commencement of proceedings in insolvency." The
two provisions may be harmonized as follows: Upon the filing of the petition for insolvency, pending civil actions
against the property of the petitioner are not ipso facto stayed, but the insolvent may apply with the court in which the
actions are pending for a stay of the actions against the insolvents property. If the court grants such application,
pending civil actions against the petitioners property shall be stayed; otherwise, they shall continue. Once an order of
insolvency nevertheless issues, all civil proceedings against the petitioners property are, by statutory command,
automatically stayed. Sec. 60 is reproduced below:
SECTION 60. Creditors proving claims cannot sue; Stay of action.No creditor, proving his debt or claim, shall be
allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived all right of action and suit
against him, and all proceedings already commenced, or any unsatisfied judgment already obtained thereon, shall be
deemed to be discharged and surrendered thereby; and after the debtors discharge, upon proper application and
32
proof to the court having jurisdiction, all such proceedings shall be, dismissed, and such unsatisfied judgments
satisfied of record: Provided, x x x. A creditor proving his debt or claim shall not be held to have waived his right of
action or suit against the debtor when a discharge has have been refused or the proceedings have been determined
to the without a discharge. No creditor whose debt is provable under this Act shall be allowed, after the
commencement of proceedings in insolvency, to prosecute to final judgment any action therefor against the
debtor until the question of the debtors discharge shall have been determined, and any such suit proceeding
shall, upon the application of the debtor or of any creditor, or the assignee, be stayed to await the
determination of the court on the question of discharge: Provided, That if the amount due the creditor is in
dispute, the suit, by leave of the court in insolvency, may proceed to judgment for purpose of ascertaining the
amount due, which amount, when adjudged, may be allowed in the insolvency proceedings, but execution shall be
stayed aforesaid. (Emphasis supplied.)
Applying the aforequoted provisions, it can rightfully be said that the issuance of the insolvency order of December 2,
2004 had the effect of automatically staying the civil action for a sum of money filed by Asianbank against Gateway. In
net effect, the proceedings before the CA in CA-G.R. CV No. 80734, but only insofar as the claim against Gateway
was concerned, was, or ought to have been, suspended after December 2, 2004, Asianbank having been duly notified
of and in fact was a participant in the insolvency proceedings. The Court of course takes stock of the proviso in Sec.
60 of Act No. 1956 which in a way provided the CA with a justifying tool to continue and to proceed to judgment in CA-
G.R. CV No. 80734, but only for the purpose of ascertaining the amount due from Gateway. At any event, on the
postulate that jurisdiction over the properties of the insolvent-declared Gateway lies with the insolvency court,
execution of the CA insolvency judgment against Gateway can only be pursued before the insolvency court.
Asianbank, no less, tends to agree to this conclusion when it stated: "[E]ven it if is assumed that the declaration of
insolvency of petitioner Gateway can be taken cognizance of, such fact does relieve petitioner Geronimo and/or
Andrew delos Reyes from performing their obligations based on the Deeds of Suretyship x x x." 11
Geronimo, however, is a different story.
Asianbank argues that the stay of the collection suit against Gateway is without bearing on the liability of Geronimo as
a surety, adding that claims against a surety may proceed independently from that against the principal debtor.
Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway as a defense to evade
liability.
Geronimo counters with the argument that his liability as a surety cannot be separated from Gateways liability. As
surety, he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including its insolvency,
suggesting that if Gateway is eventually released from what it owes Asianbank, he, too, should also be so relieved.
Geronimos above contention is untenable.
Suretyship is covered by Article 2047 of the Civil Code, which states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in
case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a suretyship.
The Courts disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid x x x. Stated differently, a surety promises to pay the principals debt if the
principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed
against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not,
without regard to his ability to do so. x x x In other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default x x x.
xxxx
A creditors right to proceed against the surety exists independently of his right to proceed against the
principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor
has the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to
proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the
surety is the same as that of the principal, then soon as the principal is in default, the surety is likewise in default, and
may be sued immediately and before any proceedings are had against the principal. Perforce, x x x a surety is
primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement,
the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of
the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his
remedies against the principal, particularly where both principal and surety are equally bound. 12
Clearly, Asianbanks right to collect payment for the full amount from Geronimo, as surety, exists independently of its
right against Gateway as principal debtor; 13 it could thus proceed against one of them or file separate actions against
them to recover the principal debt covered by the deed on suretyship, subject to the rule prohibiting double recovery
33
from the same cause.14 This legal postulate becomes all the more cogent in case of an insolvency situation where, as
here, the insolvency court is bereft of jurisdiction over the sureties of the principal debtor. As Asianbank aptly points
out, a suit against the surety, insofar as the suretys solidary liability is concerned, is not affected by an insolvency
proceeding instituted by or against the principal debtor. The same principle holds true with respect to the surety of a
corporation in distress which is subject of a rehabilitation proceeding before the Securities and Exchange Commission
(SEC). As we held in Commercial Banking Corporation v. CA, a surety of the distressed corporation can be sued
separately to enforce his liability as such, notwithstanding an SEC order declaring the former under a state of
suspension of payment.15
Geronimo also states that, as things stand, his liability, as compared to that of Gateway, is contextually more onerous
and burdensome, precluded as he is from seeking recourse against the insolvent corporation. From this premise,
Geronimo claims that since Gateway cannot, owing to the order of insolvency, be made to pay its obligation, he, too,
being just a surety, cannot also be made to pay, obviously having in mind Art. 2054 of the Civil Code, as follows:
A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the
onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.
The Court is not convinced. The above article enunciates the rule that the obligation of a guarantor may be less, but
cannot be more than the obligation of the principal debtor. The rule, however, cannot plausibly be stretched to mean
that a guarantor or surety is freed from liability as such guarantor or surety in the event the principal debtor becomes
insolvent or is unable to pay the obligation. This interpretation would defeat the very essence of a suretyship contract
which, by definition, refers to an agreement whereunder one person, the surety, engages to be answerable for the
debt, default, or miscarriage of another known as the principal. 16 Geronimos position that a surety cannot be made to
pay when the principal is unable to pay is clearly specious and must be rejected.
The CA Did Not Err in Admitting
the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA erred in admitting the Deed of Suretyship purportedly
signed by him, given that Asianbank failed to present its original copy.
This contention is bereft of merit.
As may be noted, paragraph 6 of Asianbanks complaint alleged the following:
6. The loan was secured by the Deeds of Suretyship dated July 23, 1996 that were executed by defendants Geronimo
B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Attached as Annexes "B" and "C," respectively, are photocopies of
the Deeds of Suretyship executed by defendants Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.
Subsequently, a chattel mortgage over defendant Gateways equipment for $2 million, United States currency, was
executed.17
Geronimo traversed in his answer the foregoing allegation in the following wise: "2.5. Paragraph 6 is denied, subject to
the special and affirmative defenses and allegations hereinafter set forth."
The ensuing special and affirmative defenses were raised in Gateways answer:
15. Granting even that [Geronimo] signed the Deed of Suretyship, his wife x x x had not given her consent thereto.
Accordingly, the security created by the suretyship shall be construed only as a continuing offer on the part of
[Geronimo] and plaintiff and may only be perfected as a binding contract upon acceptance by Mrs. Delos Reyes. x x x
17. Moreover, assuming, gratia argumenti, that [Geronimo] may be bound by the suretyship agreement, there is no
showing that he has consented to the repeated extensions made by plaintiff in favor of GEC or to a waiver of notice of
such extensions. It should be pointed out that Mr. Geronimo delos Reyes executed the suretyship agreement in his
personal capacity and not in his capacity as Chairman of the Board of GEC. His consent, insofar as the continuing
application of the suretyship agreement to GECs obligations in view of the repeated extension extended by plaintiff [is
concerned], is therefore necessary. Obviously, plaintiff cannot now hold him liable as a surety to GECs obligations. 18
The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8, the procedure should a suit or defense is predicated
on a written document, thus:
Sec. 7. Action or defense based on document.Whenever an action or defense is based upon a written instrument or
document, the substance of such instrument or document shall be set forth in the pleading, and the original or a
copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part of the pleading,
or said copy may with like effect be set forth in the pleading.
Sec. 8. How to contest such documents.When an action or defense is founded upon a written instrument, copied in
or attached to the corresponding pleading as provided in the preceding section, the genuineness and due execution
of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them,
and sets forth what he claims to be the facts; but the requirement of an oath does not apply when the adverse
party does not appear to be a party to the instrument or when compliance with an order for an inspection of the
original instrument is refused. (Emphasis supplied.)

34
Given the above perspective, Asianbank, by attaching a photocopy of the Deed of Suretyship to its underlying
complaint, hewed to the requirements of the above twin provisions. Asianbank, thus, effectively alleged the due
execution and genuineness of the said deed. From that point, Geronimo, if he intended to contest the surety deed,
should have specifically denied the due execution and genuineness of the deed in the manner provided by Sec. 10,
Rule 8 of the Rules of Court, thus:
Sec. 10. Specific denial.A defendant must specify each material allegation of fact the truth of which he does
not admit and, whenever practicable, shall set forth the substance of the matters upon which he relies to
support his denial. Where a defendant desires to deny only a part of an averment, he shall specify so much of it as is
true and material and shall deny only the remainder. Where a defendant is without knowledge or information sufficient
to form a belief as to the truth of a material averment made in the complaint, he shall so state, and this shall have the
effect of a denial. (Emphasis supplied.)
In the instant case, Geronimo should have categorically stated that he did not execute the Deed of Suretyship and that
the signature appearing on it was not his or was falsified. His Answer does not, however, contain any such statement.
Necessarily then, Geronimo had not specifically denied, and, thus, is deemed to have admitted, the genuineness and
due execution of the deed in question. In this regard, Sec. 11, Rule 8 of the Rules of Court states:
Sec. 11. Allegations not specifically denied deemed admitted.Material averment in the complaint, other than those as
to the amount of unliquidated damages, shall be deemed admitted when not specifically denied. x x x
Owing to Geronimos virtual admission of the genuineness and due execution of the deed of suretyship, Asianbank,
contrary to the view of Gateway and Geronimo, need not present the original of the deed during the hearings of the
case. Sec. 4, Rule 129 of the Rules says so:
Sec. 4. Judicial admissions.An admission, verbal or written, made by the party in the course of the
proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it
was made through palpable mistake or that no such admission was made. (Emphasis supplied.)
Geronimo Is Liable for PN No. FCD-0599-2749
under His Deed of Suretyship
This brings us to the third ground which involves the issue of the coverage of the suretyship. Preliminarily, an overview
on the process of taking out loans should first be made. Generally, especially for large loans, banks first approve a line
or facility out of which a client may avail itself of loans in the form of promissory notes without need of further
processing and/or approval every time a draw down is made. In the instant case, Asianbank approved in favor of
Gateway the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Asianbank
approved these credit lines which were covered by a chattel mortgage as well as the deeds of suretyship, such that
loans extended from these lines would already be secured and pre-approved. In other words, these facilities are not
financial obligations yet. Asianbank did not yet lend out any money to Gateway with the approval of these lines. The
loan transaction occurred or the principal obligation, as secured by a surety agreement, was born after the execution
of loan documents, such as PN No. FCD-0599-2749.
Geronimo now excepts from the ruling that the deed of suretyship he executed covered PN No. FCD-0599-2749 which
embodied several export packing loans issued by Asianbank to Gateway. He claims that the deed only secured the
PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Geronimo describes as
absurd the notion that a deed of suretyship would secure a loan obligation contracted three (3) years after the
execution of the surety deed.
Geronimos thesis that the deed in question cannot be accorded prospective application is erroneous. To be sure, the
provisions of the subject deed of suretyship indicate a continuing suretyship. In Fortune Motors (Phils.) v. Court of
Appeals,19 the Court, citing cases, defined and upheld the validity of a continuing suretyship in this wise:
"x x x Of course, a surety is not bound under any particular principal obligation until that principal obligation is born.
But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and
binding even before the principal obligation intended to be secured thereby is born, any more than there would be in
saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the
condition precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and
commercial practice. A bank or financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor; with such suretyship
agreement, there would be no need to execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor."20
In Dio vs. Court of Appeals,21 we again had occasion to discourse on continuing guaranty/suretyship thus:
"x x x A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course
of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its
operation and is generally intended to provide security with respect to future transactions within certain limits, and
35
contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a
continuing guaranty is one which covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be
construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely or until a certain period x x x.
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of any debt,
any indebtedness, any deficiency, or any sum, or the guaranty of any transaction or money to be furnished the
principal debtor at any time, or on such time that the principal debtor may require, have been construed to indicate a
continuing guaranty." (Emphasis supplied.)
By its nature, a continuing suretyship covers current and future loans, provided that, with respect to future loan
transactions, they are, to borrow from Dio, as cited above, "within the description or contemplation of the contract of
guaranty." The Deed of Suretyship Geronimo signed envisaged a continuing suretyship when, by the express terms of
the deed, he warranted payment of the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus
Credit Line, as evidenced by:
x x x notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may
hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank charges as may
accrue thereon and all expenses which may be incurred by the latter in collecting any or all such instruments. 22
Evidently, under the deed of suretyship, Geronimo undertook to secure all obligations obtained under the Domestic
Bills Purchased Line and Omnibus Credit Line, without any specification as to the period of the loan.
Geronimos application of Garcia v. Court of Appeals, a case covering two separate loans, denominated as SWAP
Loan and Export Loan, is quite misplaced. There, the Court ruled that the continuing suretyship only covered the
SWAP Loan as it was only this loan that was referred to in the continuing suretyship. The Court wrote in Garcia:
Particular attention must be paid to the statement appearing on the face of the Indemnity [Suretyship] Agreement x x x
"evidenced by those certain loan documents dated April 20, 1982" x x x. From this statement, it is clear that the
Indemnity Agreement refers only to the loan document of April 20, 1982 which is the SWAP loan. It did not include the
EXPORT loan. Hence, petitioner cannot be held answerable for the EXPORT loan. 23 (Emphasis supplied.)
The Indemnity Agreement in Garcia specifically identified loan documents evidencing obligations of the debtor that the
agreement was intended to secure. In the present case, however, the suretyship Geronimo assumed did not limit itself
to a specific loan document to the exclusion of another. The suretyship document merely mentioned the Domestic Bills
Purchased Line and Omnibus Credit Line as evidenced by "all notes, drafts x x x contracted/incurred by [Gateway] in
favor of [Asianbank]."24 As explained earlier, such credit facilities are not loans by themselves. Thus, the Deed of
Suretyship was intended to secure future loans for which these facilities were opened in the first place.
Lest it be overlooked, both the trial and appellate courts found the Omnibus Credit Line referred to in the Deed of
Suretyship as covering the export packing credit loans Asianbank extended to Gateway. We agree with this factual
determination. By the very use of the term "omnibus," and in practice, an omnibus credit line refers to a credit facility
whence a borrower may avail of various kinds of credit loans. Defined as such, an omnibus line is broad enough to
refer to or cover an export packing credit loan.
Geronimos allegation that an export packing credit loan is separate and distinct from an omnibus credit line is but a
bare and self-serving assertion bereft of any factual or legal basis. One who alleges something must prove it: a mere
allegation is not evidence.25 Geronimo has not discharged his burden of proof. His contention cannot be given any
weight.
As a final and major ground for his release as surety, Geronimo alleges that Asianbank repeatedly extended the
maturity dates of the obligations of Gateway without his knowledge and consent. Pressing this point, he avers that,
contrary to the findings of the CA, he did not waive his right to notice of extensions of Gateways obligations.
Such contention is unacceptable as it glosses over the fact that the waiver to be notified of extensions is embedded in
surety document itself, built in the ensuing provision:
In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtedness herein secured at
maturity, I/WE jointly and severally, agree and engage to the CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said CREDITOR of such notes, drafts, overdrafts and other credit
obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the
CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or all such instruments. 26 (Emphasis supplied.)
In light of the above provision, Geronimo verily waived his right to notice of the maturity of notes, drafts, overdraft, and
other credit obligations for which Gateway shall become indebted. This waiver necessarily includes new agreements
resulting from the novation of previous agreements due to changes in their maturity dates.
Additionally, Geronimos lament about losing his right to subrogation is erroneous. He argues that by virtue of the
order of insolvency issued by the insolvency court, title and right to possession to all the properties and assets of
Gateway were vested upon Gateways assignee in accordance with Sec. 32 of the Insolvency Law.

36
The transfer of Gateways property to the insolvency assignee, if this be the case, does not negate Geronimos right of
subrogation, for such right may be had or exercised in the insolvency proceedings. The possibility that he may only
recover a portion of the amount he is liable to pay is the risk he assumed as a surety of Gateway. Such loss does not,
however, render ineffectual, let alone invalidate, his suretyship.
Geronimos other arguments to escape liability are puerile and really partake more of a plea for liberality. They need
not detain us long. In gist, Geronimo argues: first, that he is a gratuitous surety of Gateway; second, Asianbank
deviated from normal banking practice, such as when it extended the period for payment of Gateways obligation and
when it opted not to foreclose the chattel mortgage constituted as guarantee of Gateways loan obligation; and third,
implementing the appealed CAs decision would cause him great harm and injury.
Anent the first argument, suffice it to state that Geronimo was then the president of Gateway and, as such, was
benefited, albeit perhaps indirectly, by the loan thus granted by Asianbank. And as we said in Security Pacific
Assurance Corporation, the surety is liable for the debt of another although the surety possesses no direct or personal
interest over the obligation nor does the surety receive any benefit from it. 27
Whether or not Asianbank really deviated from normal banking practice by extending the period for Gateway to comply
with its loan obligation or by not going after the chattel mortgage adverted to is really of no moment. Banks are
primarily in the business of extending loans and earn income from their lending operations by way of service and
interest charges. This is why Asianbank opted to give Gateway ample opportunity to pay its obligations instead of
foreclosing the chattel mortgage and in the process holding on to assets of which the bank has really no direct use.
The following excerpts from Palmares are in point:
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not
release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated.
In other words, mere want of diligence or forbearance does not affect the creditors rights vis--vis the surety, unless
the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does
not discharge the surety whether given at the principals request or without it, and whether it is yielded by the creditor
through sympathy or from an inclination to favor the principal x x x. The neglect of the creditor to sue the principal at
the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes
insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the creditors mere statement
that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as
the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of
time, are immaterial.28
The Courts Equity Jurisdiction
Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him from any liability arising from Asianbanks claims if what he
terms as "complete justice" is to be served. He cites, as supporting reference, Agcaoili v. GSIS,29 presenting in the
same breath the following arguments: first, the Deed of Suretyship is a gratuitous contract from which he did not
benefit; second, Asianbank assured him that the deed would not be enforced against him; third, the enforcement of
the judgment of the CA would reduce Geronimo and his family to a life of penury; and fourth, Geronimo would be
unable to exercise his right of subrogation, Gateway having already been declared as insolvent.
The first and last arguments have already been addressed and found to be without merit. The second argument is a
matter of defense which has remained unproved and even belied by Asianbank by its filing of the complaint. We see
no need to further belabor any of them.
As regards the third allegation, suffice it to state that the predicament Geronimo finds himself in is his very own doing.
His misfortune is but the result of the implementation of a bona fide contract he freely executed, the terms of which he
is presumed to have thoroughly examined. He was not at all compelled to act as surety; he had a choice. It may be
more offensive to public policy or good customs if he be allowed to go back on his undertaking under the surety
contract. The Court cannot be a party to the contracts impairment and relieve a surety from the effects of an unwise
but nonetheless a valid surety contract.
WHEREFORE, the instant petition is hereby DENIED. The appealed Decision dated October 28, 2005 of the CA and
its March 17, 2006 Resolution in CA-G.R. CV No. 80734 are hereby AFFIRMED with the modification that any claim of
Asianbank or its successor-in-interest against Gateway, if any, arising from the judgment in this suit shall be pursued
before the RTC, Branch 22 in Imus, Cavite as the insolvency court.
Costs against petitioners.
SO ORDERED.

37
[G.R. No. 113931. May 6, 1998]

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

DECISION

MARTINEZ, J.:

This petition for review on certiorari seeks the reversal of the decision [1] of the Court of Appeals dated July 13, 1993
which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying petitioner's Motion to Dismiss the
complaint, as well as the Resolution[2] dated February 15, 1994 denying the motion for reconsideration thereto.

The facts are as follows:

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan with
respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight Hundred
Seventy Five Thousand Pesos (P2, 875,000.00) to finance the purchase of two (2) maritime barges and one
tugboat[3] which would be used in their molasses business. The loan was granted subject to the condition that
respondent spouses execute a chattel mortgage over the three (3) vessels to be acquired and that a continuing
guarantee be executed by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc. in favor of
SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a
Continuing Guaranty[4] were executed.

Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January 31,1991,
SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment, against
respondents spouses and petitioner. The case was docketed as Civil Case No. 91-55909 in the Regional Trial Court of
Manila.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished
pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the
first chattel mortgage in view of SOLIDBANK's failure to register the chattel mortgage with the appropriate government
agency.

SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a guarantor
but a surety.

On February 18, 1993, the trial court issued an Order, portions of which reads:

"After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss without merit.
The document referred to as 'Continuing Guaranty' dated August 21,1985 (Exh. 7) states as follows:

'For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship owned by Mr.
Raul Claveria for the payment of which the undersigned is now obligated to you as surety and in order to induce you,
in your discretion, at any other manner, to, or at the request or for the account of the borrower, x x x '

"The provisions of the document are clear, plain and explicit.

"Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is 'Continuing
Guaranty', the Court's interpretation is not limited to the title alone but to the contents and intention of the parties more
specifically if the language is clear and positive. The obligation of the defendant Zobel being that of a surety, Art. 2080
New Civil Code will not apply as it is only for those acting as guarantor. In fact, in the letter of January 31, 1986 of the
defendants (spouses and Zobel) to the plaintiff it is requesting that the chattel mortgage on the vessels and tugboat be
waived and/or rescinded by the bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in
38
favor of the plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an essential condition of
the guaranty. In its letter, it said that because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is
rendered unnecessary and redundant.

"With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper government
agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds makes the obligation a guaranty,
the same merits a scant consideration and could not be taken by this Court as the basis of the extinguishment of the
obligation of the defendant corporation to the plaintiff as surety. The chattel mortgage is an additional security and
should not be considered as payment of the debt in case of failure of payment. The same is true with the failure to
register, extinction of the liability would not lie.

"WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its answer to
the complaint within ten (10) days from receipt of a copy of this Order." [5]

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

Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition for certiorari,
alleging that the trial court committed grave abuse of discretion in denying the motion to dismiss.

On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive portion of which reads:

"WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in issuing the herein
assailed orders, We hereby DISMISS the petition."

A motion for reconsideration filed by petitioner was denied for lack of merit on February 15,1994.

Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its finding: (1) that
Article 2080 of the New Civil Code which provides: "The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and
preferences of the latter," is not applicable to petitioner; (2) that petitioner's obligation to respondent SOLIDBANK
under the continuing guaranty is that of a surety; and (3) that the failure of respondent SOLIDBANK to register the
chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.

We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated itself to
SOLIDBANK as a guarantor or a surety.

A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees
with the creditor to satisfy the obligation if the debtor does not. [7] A contract of guaranty, on the other hand, is a
collateral undertaking to pay the debt of another in case the latter does not pay the debt. [8]

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However,
under our civil law, they may be distinguished thus: A surety is usually bound with his principal by the same
instrument, executed at the same time, and on the same consideration. He is an original promissor and debtor from
the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be discharged, either by
the mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no matter how
much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor's own separate
undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is
often supported on a separate consideration from that supporting the contract of the principal. The original contract of
his principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by
the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the
principal.[9]

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor
and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he
obligates himself to pay if the principal does not pay.[10]

Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent spouses. This can
be seen in the following stipulations.

"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned by
MR. RAUL P. CLAVERIA, of legal age, married and with business address x x x (hereinafter called the Borrower), for
39
the payment of which the undersigned is now obligated to you as surety and in order to induce you, in your
discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other
manner to, or at the request or for the account of the Borrower, either with or without purchase or discount, or to make
any loans or advances evidenced or secured by any notes, bills receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness x x upon which the Borrower is or may become liable as maker, endorser,
acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual
payment, at maturity or upon demand, to you of any and all such instruments, loans, advances, credits and/or
other obligations herein before referred to, and also any and all other indebtedness of every kind which is
now or may hereafter become due or owing to you by the Borrower, together with any and all expenses which
may be incurred by you in collecting all or any such instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights hereunder, and also to make or cause any and all such
payments to be made strictly in accordance with the terms and provisions of any agreement (g), express or implied,
which has (have) been or may hereafter be made or entered into by the Borrower in reference thereto, regardless of
any law, regulation or decree, now or hereafter in effect which might in any manner affect any of the terms or
provisions of any such agreements(s) or your right with respect thereto as against the Borrower, or cause or permit to
be invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments,
obligations or indebtedness; x x x " (Italics Ours)

One need not look too deeply at the contract to determine the nature of the undertaking and the intention of the
parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses'
properties before it can hold petitioner liable for the obligation. This can be gleaned from a reading of the stipulations
in the contract, to wit:

'x x x If default be made in the payment of any of the instruments, indebtedness or other obligation hereby
guaranteed by the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail in business, or
become insolvent, x x x , or if any funds or other property of the Borrower, or of the undersigned which may
be or come into your possession or control or that of any third party acting in your behalf as aforesaid should
be attached of distrained, or should be or become subject to any mandatory order of court or other legal
process, then, or any time after the happening of any such event any or all of the instruments of indebtedness
or other obligations hereby guaranteed shall, at your option become (for the purpose of this guaranty) due
and payable by the undersigned forthwith without demand of notice, and full power and authority are hereby
given you, in your discretion, to sell, assign and deliver all or any part of the property upon which you may then have a
lien hereunder at any broker's board, or at public or private sale at your option, either for cash or for credit or for future
delivery without assumption by you of credit risk, and without either the demand, advertisement or notice of any kind,
all of which are hereby expressly waived. At any sale hereunder, you may, at your option, purchase the whole or any
part of the property so sold, free from any right of redemption on the part of the undersigned, all such rights being also
hereby waived and released. In case of any sale and other disposition of any of the property aforesaid, after
deducting all costs and expenses of every kind for care, safekeeping, collection, sale, delivery or otherwise,
you may apply the residue of the proceeds of the sale and other disposition thereof, to the payment or
reduction, either in whole or in part, of any one or more of the obligations or liabilities hereunder of the
undersigned whether or not except for disagreement such liabilities or obligations would then be due, making
proper allowance or interest on the obligations and liabilities not otherwise then due, and returning the
overplus, if any, to the undersigned; all without prejudice to your rights as against the undersigned with
respect to any and all amounts which may be or remain unpaid on any of the obligations or liabilities
aforesaid at any time (s)"

xxx xxx xxx

'Should the Borrower at this or at any future time furnish, or should be heretofore have furnished, another
surety or sureties to guarantee the payment of his obligations to you, the undersigned hereby expressly
waives all benefits to which the undersigned might be entitled under the provisions of Article 1837 of the Civil
Code (beneficio division), the liability of the undersigned under any and all circumstances being joint and
several;" (Italics Ours)

The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Authorities recognize
that the word "guarantee" is frequently employed in business transactions to describe not the security of the debt but
an intention to be bound by a primary or independent obligation. [11] As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but to the contents and intention of the parties.

Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no
application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa,[12] we have ruled that Article 2080
of the New Civil Code does not apply where the liability is as a surety, not as a guarantor.

40
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel mortgage did not
release petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound
itself to the contract irrespective of the existence of any collateral. It even released SOLIDBANK from any fault or
negligence that may impair the contract. The pertinent portions of the contract so provides:

"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty, irrespective
of the existence, value or condition of any collateral, and notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application, renewal or extension, and notwithstanding also that all obligations
of the Borrower to you outstanding and unpaid at any time (s) may exceed the aggregate principal sum herein above
prescribed.

'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have been received by
you that it has been revoked by the undersigned, but any such notice shall not be released the undersigned from any
liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by you, or
in which you may have any interest, at the time of the receipt of such notice. No act or omission of any kind on
your part in the premises shall in any event affect or impair this guaranty, nor shall same be affected by any
change which may arise by reason of the death of the undersigned, of any partner (s) of the undersigned, or of the
Borrower, or of the accession to any such partnership of any one or more new partners." (Italics supplied)

In fine, we find the petition to be without merit as no reversible error was committed by respondent Court of Appeals in
rendering the assailed decision.

WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against the petitioner.

SO ORDERED.

41
G.R. No. 140047 July 13, 2004
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,
vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C.
EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED BONDING AND
INSURANCE COMPANY, INC., respondents.
DAVIDE, JR., C.J.:
This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi Government for
the construction of the Institute of Physical Therapy-Medical Center, Phase II, in Baghdad, Iraq, at a time when the
Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and assigned to
Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation 1 (hereinafter Philguarantee) sought
reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it
issued for respondent V.P. Eusebio Construction, Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad,
Iraq, awarded the construction of the Institute of Physical TherapyMedical Rehabilitation Center, Phase II, in
Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company (hereinafter Ajyal), a firm duly
licensed with the Kuwait Chamber of Commerce for a total contract price of ID5,416,089/046 (or about
US$18,739,668).2
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex International,
Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a joint venture agreement
with Ajyal wherein the former undertook the execution of the entire Project, while the latter would be entitled to a
commission of 4% of the contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or
registered with the Philippine Overseas Construction Board (POCB), assigned and transferred all its rights and
interests under the joint venture agreement to VPECI, a construction and engineering firm duly registered with the
POCB.4 However, on 2 May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project
would be under their joint management.5
The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of the total
contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the advance payment to be
released upon signing of the contract.6 To comply with these requirements, respondents 3-Plex and VPECI applied for
the issuance of a guarantee with petitioner Philguarantee, a government financial institution empowered to issue
guarantees for qualified Filipino contractors to secure the performance of approved service contracts abroad. 7
Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee 8 were issued by
Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds, but
they were not accepted by SOB. What SOB required was a letter-guarantee from Rafidain Bank, the government bank
of Iraq. Rafidain Bank then issued a performance bond in favor of SOB on the condition that another foreign bank, not
Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged
to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-guarantee in its favor from the
petitioner. Thus, three layers of guarantees had to be arranged. 9
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Ahli Bank of
Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the amount of ID271,808/610 and Letter
of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of
eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of Undertaking 12executed
by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E.
Santos and Iluminada Santos; and (2) a surety bond 13 issued by respondent First Integrated Bonding and Insurance
Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage
from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner's guarantee was issued, from
Rafidain Bank to Al Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract 15 for the construction of
the Institute of Physical Therapy Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint venture
contractor undertook to complete the Project within a period of 547 days or 18 months. Under the Contract, the Joint
Venture would supply manpower and materials, and SOB would refund to the former 25% of the project cost in Iraqi
Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars. 16
42
The construction, which was supposed to start on 2 June 1981, commenced only on the last week of August 1981.
Because of this delay and the slow progress of the construction work due to some setbacks and difficulties, the Project
was not completed on 15 November 1982 as scheduled. But in October 1982, upon foreseeing the impossibility of
meeting the deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or
extension of the Performance Bond and Advance Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-
F (Performance Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then
renewed or extended to 9 February 1983 and 9 March 1983, respectively. 17 The surety bond was also extended for
another period of one year, from 12 May 1982 to 12 May 1983. 18 The Performance Bond was further extended twelve
times with validity of up to 8 December 1986,19 while the Advance Payment Guarantee was extended three times more
up to 24 May 1984 when the latter was cancelled after full refund or reimbursement by the joint venture
contractor.20 The surety bond was likewise extended to 8 May 1987.21
As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already finished. The
remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which both required importation of
equipment and materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its
performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade and
Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the performance guarantee for
being a drastic action in contravention of its mutual agreement with the latter that (1) the imposition of penalty would
be held in abeyance until the completion of the project; and (2) the time extension would be open, depending on the
developments on the negotiations for a foreign loan to finance the completion of the project. 23 It also wrote SOB
protesting the call for lack of factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi
government's lack of foreign exchange with which to pay its (VPECI's) accomplishments and (2) SOB's
noncompliance for the past several years with the provision in the contract that 75% of the billings would be paid in US
dollars.24 Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay yet Al Ahli Bank
because efforts were being exerted for the amicable settlement of the Project. 25
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had already paid to
Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by the petitioner
of what it paid to the latter bank plus interest thereon and related expenses. 26
Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies of the
Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the payment by the petitioner
"to allow the diplomatic machinery to take its course, for otherwise, the Philippine government , through the
Philguarantee and the Central Bank, would become instruments of the Iraqi Government in consummating a clear act
of injustice and inequity committed against a Filipino contractor." 27
On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of US$876,564
(equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the performance counter-guarantee for
VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated
the joint and solidary obligation of the respondents to reimburse the petitioner for the advances made on its counter-
guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January 1988. 30 Then, on 6 May
1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing interest and penalty charges demanded
by the latter bank.31
On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the amount
of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to their joint and solidary
obligations under the deed of undertaking and surety bond. 32 When the respondents failed to pay, the petitioner filed
on 9 July 1991 a civil case for collection of a sum of money against the respondents before the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of action against
the respondents. It opined that at the time the call was made on the guarantee which was executed for a specific
period, the guarantee had already lapsed or expired. There was no valid renewal or extension of the guarantee for
failure of the petitioner to secure respondents' express consent thereto. The trial court also found that the joint venture
contractor incurred no delay in the execution of the Project. Considering the Project owner's violations of the contract
which rendered impossible the joint venture contractor's performance of its undertaking, no valid call on the guarantee
could be made. Furthermore, the trial court held that no valid notice was first made by the Project owner SOB to the
joint venture contractor before the call on the guarantee. Accordingly, it dismissed the complaint, as well as the
counterclaims and cross-claim, and ordered the petitioner to pay attorney's fees of P100,000 to respondents VPECI
and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs. 33
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as follows:

43
First, appellant cannot deny the fact that it was fully aware of the status of project implementation as well as the
problems besetting the contractors, between 1982 to 1985, having sent some of its people to Baghdad during that
period. The successive renewals/extensions of the guarantees in fact, was prompted by delays, not solely attributable
to the contractors, and such extension understandably allowed by the SOB (project owner) which had not anyway
complied with its contractual commitment to tender 75% of payment in US Dollars, and which still retained overdue
amounts collectible by VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its contractual undertakings with
VPECI, principally, the payment of foreign currency (US$) for 75% of the total contract price, as well as of the
complications and injustice that will result from its payment of the full amount of the performance guarantee, as
evident in PHILGUARANTEE's letter dated 13 May 1987 .

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there was still an amount
collectible from and still being retained by the project owner, which amount can be set-off with the sum covered by the
performance guarantee.

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the war situation at the
time in Iraq, appellant, though earlier has made representations with the SOB regarding a possible amicable
termination of the Project as suggested by VPECI, made a complete turn-around and insisted on acting in favor of the
unjustified "call" by the foreign banks.35
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of Appeals erred in
affirming the trial court's ruling that
I
RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED IN FAVOR OF
PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT
PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-
GUARANTEE.
II
PETITIONER CANNOT CLAIM SUBROGATION.
III
IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER THEIR DEED
OF UNDERTAKING.36
The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under Letter of
Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking and surety bond from
the respondents.
The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the nature and
extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure of the respondents to
finish the construction of the Institute of Physical Therapy Buildings in Baghdad.
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 contract is called
suretyship. 37
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. In both
contracts, there is a promise to answer for the debt or default of another. However, in this jurisdiction, they may be
distinguished thus:
1. A surety is usually bound with his principal by the same instrument executed at the same time and on the same
consideration. On the other hand, the contract of guaranty is the guarantor's own separate undertaking often
supported by a consideration separate from that supporting the contract of the principal; the original contract of his
principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor is conditional
depending on the failure of the primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged on his own
undertaking.

44
5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not bound to take notice of
the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or by want of
notice of the default of the principal, no matter how much he may be injured thereby. A guarantor is often discharged
by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the
principal. 38
In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in part as
follows:
In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby unconditionally and
irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written or telex demand Iraq Dinars
Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing
100% of the performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase
II, Baghdad, Iraq, plus interest and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case shall
such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses. (Emphasis
supplied)39
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this case,
we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and not a
surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a
surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect
until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and in the
form he bound himself.40 In other words, an unconditional guarantee is still subject to the condition that the principal
debtor should default in his obligation first before resort to the guarantor could be had. A conditional guaranty, as
opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default
of the principal, and generally upon notice of the principal's default and reasonable diligence in exhausting proper
remedies against the principal.41
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent VPECI the
petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not
conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is unconditional does not make it a surety.
Besides, surety is never presumed. A party should not be considered a surety where the contract itself stipulates that
he is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the
contract becomes one of suretyship.42
Having determined petitioner's liability as guarantor, the next question we have to grapple with is whether the
respondent contractor has defaulted in its obligations that would justify resort to the guaranty. This is a mixed
question of fact and law that is better addressed by the lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals are binding or
conclusive upon this Court unless they are not supported by the evidence or unless strong and cogent reasons dictate
otherwise.43 The factual findings of the Court of Appeals are normally not reviewable by us under Rule 45 of the Rules
of Court except when they are at variance with those of the trial court. 44 The trial court and the Court of Appeals were
in unison that the respondent contractor cannot be considered to have defaulted in its obligations because the cause
of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the respondent contractor has defaulted in the
performance of its obligations under the service contract. The question of whether there is a breach of an agreement,
which includes default or mora,45 pertains to the essential or intrinsic validity of a contract. 46
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed by most legal
systems, however, is that the intrinsic validity of a contract must be governed by the lex contractus or "proper law of
the contract." This is the law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended by them
either expressly or implicitly (the lex loci intentionis). The law selected may be implied from such factors as substantial
connection with the transaction, or the nationality or domicile of the parties. 47 Philippine courts would do well to adopt
the first and most basic rule in most legal systems, namely, to allow the parties to select the law applicable to their
contract, subject to the limitation that it is not against the law, morals, or public policy of the forum and that the chosen
law must bear a substantive relationship to the transaction. 48
It must be noted that the service contract between SOB and VPECI contains no express choice of the law that would
govern it. In the United States and Europe, the two rules that now seem to have emerged as "kings of the hill" are (1)
the parties may choose the governing law; and (2) in the absence of such a choice, the applicable law is that of the
State that "has the most significant relationship to the transaction and the parties." 49 Another authority proposed that all
matters relating to the time, place, and manner of performance and valid excuses for non-performance are determined
by the law of the place of performance or lex loci solutionis, which is useful because it is undoubtedly always
connected to the contract in a significant way. 50

45
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is the Iraqi
Government and the place of performance is in Iraq. Hence, the issue of whether respondent VPECI defaulted in its
obligations may be determined by the laws of Iraq. However, since that foreign law was not properly pleaded or
proved, the presumption of identity or similarity, otherwise known as the processual presumption, comes into play.
Where foreign law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the same as
ours.51
Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal obligations, neither party
incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent
upon him."
Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable
to the former. 52 It is the non-fulfillment of an obligation with respect to time. 53
It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished portion consisted in
the purchase and installation of electro-mechanical equipment and materials, which were available from foreign
suppliers, thus requiring US Dollars for their importation. The monthly billings and payments made by SOB 54 reveal
that the agreement between the parties was a periodic payment by the Project owner to the contractor depending on
the percentage of accomplishment within the period. 55 The payments were, in turn, to be used by the contractor to
finance the subsequent phase of the work. 56 However, as explained by VPECI in its letter to the Department of
Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the Contractor purely in
Iraqi Dinars and which payment came only after some delays.
5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$), to finance the
purchase of various equipment, materials, supplies, tools and to pay for the cost of project management, supervision
and skilled labor not available in Iraq and therefore have to be imported and or obtained from the Philippines and other
sources outside Iraq.
5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into the Philippines of 70% of
the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to purchase equipment,
materials, supplies, etc. outside of Iraq;
5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and therefore have to be
imported;
5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of Iraq and hence, imported
materials, equipment, etc., cannot be purchased or obtained using Iraqui Dinars as medium of acquisition.

8. Following the approved construction program of the CONTRACT, upon completion of the civil works portion of the
installation of equipment for the building, should immediately follow, however, the CONTRACT specified that these
equipment which are to be installed and to form part of the PROJECT have to be procured outside Iraq since these
are not being locally manufactured. Copy f the relevant portion of the Technical Specification is hereto attached as
Annex "C" and made an integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi government in completing
the PROJECT, the Contractor without any obligation on its part to do so but with the knowledge and consent of SOB
and the Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a foreign currency loan,
through the facilities of Circle International S.A., the Contractor's Sub-contractor and SACE MEDIO CREDITO which
will act as the guarantor for this foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is informed of the
developments of this negotiation, attached is a copy of the draft of the loan Agreement between SOB as the Borrower
and Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine
(Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione (Sace). Negotiations went on and
continued until it suddenly collapsed due to the reported default by Iraq in the payment of its obligations with Italian
government, copy of the news clipping dated June 18, 1986 is hereto attached as Annex "D" to form an integral part
hereof;
15. On September 15, 1986, Contractor received information from Circle International S.A. that because of the news
report that Iraq defaulted in its obligations with European banks, the approval by Banco di Roma of the loan to SOB

46
shall be deferred indefinitely, a copy of the letter of Circle International together with the news clippings are hereto
attached as Annexes "F" and "F-1", respectively.57
As found by both the Court of Appeals and the trial court, the delay or the non-completion of the Project was caused
by factors not imputable to the respondent contractor. It was rather due mainly to the persistent violations by SOB of
the terms and conditions of the contract, particularly its failure to pay 75% of the accomplished work in US Dollars.
Indeed, where one of the parties to a contract does not perform in a proper manner the prestation which he is bound
to perform under the contract, he is not entitled to demand the performance of the other party. A party does not incur in
delay if the other party fails to perform the obligation incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi Dinars did not
render impossible the performance of the Project by VPECI. Such posture is quite contrary to its previous
representations. In his 26 March 1987 letter to the Office of the Middle Eastern and African Affairs (OMEAA), DFA,
Manila, petitioner's Executive Vice-President Jesus M. Taedo stated that while VPECI had taken every possible
measure to complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was proving to be
a great obstacle; thus:
VPECI has taken every possible measure for the completion of the project but the war situation in Iraq particularly the
lack of foreign exchange is proving to be a great obstacle. Our performance counterguarantee was called last 26
October 1986 when the negotiations for a foreign currency loan with the Italian government through Banco de Roma
bogged down following news report that Iraq has defaulted in its obligation with major European banks. Unless the
situation in Iraq is improved as to allay the bank's apprehension, there is no assurance that the project will ever be
completed. 58
In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation
be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the
performance because it must appear that the tolerance or benevolence of the creditor must have ended. 59
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet itself performed
its obligation in a proper manner, particularly the payment of the 75% of the cost of the Project in US Dollars. The
VPECI cannot yet be said to have incurred in delay. Even assuming that there was delay and that the delay was
attributable to VPECI, still the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be
implied when the latter granted several extensions of time to the former. 60 Besides, no demand has yet been made by
SOB against the respondent contractor. Demand is generally necessary even if a period has been fixed in the
obligation. And default generally begins from the moment the creditor demands judicially or extra-judicially the
performance of the obligation. Without such demand, the effects of default will not arise. 61
Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be compelled to pay the
creditor SOB unless the property of the debtor VPECI has been exhausted and all legal remedies against the said
debtor have been resorted to by the creditor.62 It could also set up compensation as regards what the creditor SOB
may owe the principal debtor VPECI.63 In this case, however, the petitioner has clearly waived these rights and
remedies by making the payment of an obligation that was yet to be shown to be rightfully due the creditor and
demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had collectibles from SOB
which could be set off with the amount covered by the performance guarantee. In February 1987, the OMEAA
transmitted to the petitioner a copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq,
informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the
joint venture contractor from the petitioner would "be deducted from the dues of the two contractors." 64
Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the petitioner raised as
among the arguments to be presented in support of the cancellation of the counter-guarantee the fact that the amount
of ID281,414/066 retained by SOB from the Project was more than enough to cover the counter-guarantee of
ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations of paying 75% of
progress billings in US dollars.

It could also be argued that the amount of ID281,414/066 retained by SOB from the proposed project is more than
the amount of the outstanding counterguarantee. 65
In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it should have set
up compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13 May 1987 letter
to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of the project was mainly due to SOB's violation of contract
terms and as such, call on the guarantee has no basis.
47
While PHILGUARANTEE is prepared to honor its commitment under the guarantee, PHILGUARANTEE does not want
to be an instrument in any case of inequity committed against a Filipino contractor. It is for this reason that we are
constrained to seek your assistance not only in ascertaining the veracity of Al Ahli Bank's claim that it has paid
Rafidain Bank but possibly averting such an event. As any payment effected by the banks will complicate matters, we
cannot help underscore the urgency of VPECI's bid for government intervention for the amicable termination of the
contract and release of the performance guarantee. 66
But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's outstanding
receivables from SOB, as well as the situation obtaining in the Project site compounded by the Iran-Iraq war, the
petitioner opted to pay the second layer guarantor not only the full amount of the performance bond counter-guarantee
but also interests and penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure reimbursement from the respondents for
what it has paid under Letter of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified by the latter 67 and would be legally subrogated to
the rights which the creditor has against the debtor. 68 However, a person who makes payment without the knowledge
or against the will of the debtor has the right to recover only insofar as the payment has been beneficial to the
debtor.69 If the obligation was subject to defenses on the part of the debtor, the same defenses which could have been
set up against the creditor can be set up against the paying guarantor. 70
From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the petitioner
guarantor did not in any way benefit the principal debtor, given the project status and the conditions obtaining at the
Project site at that time. Moreover, the respondent contractor was found to have valid defenses against SOB, which
are fully supported by evidence and which have been meritoriously set up against the paying guarantor, the petitioner
in this case. And even if the deed of undertaking and the surety bond secured petitioner's guaranty, the petitioner is
precluded from enforcing the same by reason of the petitioner's undue payment on the guaranty. Rights under the
deed of undertaking and the surety bond do not arise because these contracts depend on the validity of the
enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI should have, in the
first place, defaulted in its obligation and that the creditor SOB should have first made a demand from the principal
debtor. It is only when the debtor does not or cannot pay, in whole or in part, that the guarantor should pay. 71 When the
petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it
defenses available against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must
learn.
As the government arm in pursuing its objective of providing "the necessary support and assistance in order to enable
[Filipino exporters and contractors to operate viably under the prevailing economic and business conditions," 72 the
petitioner should have exercised prudence and caution under the circumstances. As aptly put by the Court of Appeals,
it would be the height of inequity to allow the petitioner to pass on its losses to the Filipino contractor VPECI which had
sternly warned against paying the Al Ahli Bank and constantly apprised it of the developments in the Project
implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the decision of the Court of
appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

48
G.R. No. 160466. January 17, 2005]
SPOUSES ALFREDO and SUSANA ONG, petitioners, vs. PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondent.

PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the Decision of the Court of
Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming the decision of the trial court denying
petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of
finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine Commercial
International Bank or E-PCIB) filed a case for collection of a sum of money [1] against petitioners-spouses. Respondent
bank sought to hold petitioners-spouses liable as sureties on the three (3) promissory notes they issued to secure
some of BMCs loans, totalling five million pesos (P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various loans,
amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for these
loans and issued three (3) promissory notes for the purpose. Under the terms of the notes, it was stipulated that
respondent bank may consider debtor BMC in default and demand payment of the remaining balance of the loan upon
the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a
state of suspension of payments. Respondent bank granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities and
Exchange Commission (SEC) after its properties were attached by creditors. Respondent bank considered debtor
BMC in default of its obligations and sought to collect payment thereof from petitioners-spouses as sureties. In due
time, petitioners-spouses filed their Answer.
On October 13, 1992, a Memorandum of Agreement (MOA) [2] was executed by debtor BMC, the petitioners-spouses
as President and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent bank is
included). The MOA took effect upon its approval by the SEC on November 27, 1992. [3]
Thereafter, petitioners-spouses moved to dismiss[4] the complaint. They argued that as the SEC declared the
principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks, including
respondent bank, agreed to temporarily suspend any pending civil action against the debtor BMC, the benefits of the
MOA should be extended to petitioners-spouses who acted as BMCs sureties in their contracts of loan with
respondent bank. Petitioners-spouses averred that respondent bank is barred from pursuing its collection case filed
against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of Appeals which affirmed
the trial courts ruling that a creditor can proceed against petitioners-spouses as surety independently of its right to
proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent bank should be dismissed for
three (3) reasons: First, the MOA provided that during its effectivity, there shall be a suspension of filing or pursuing of
collection cases against the BMC and this provision should benefit petitioners as sureties. Second, principal debtor
BMC has been placed under suspension of payment of debts by the SEC; petitioners contend that it would prejudice
them if the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners, who acted only
as sureties for some of BMCs debts, would be compelled to make the payment; petitioners add that compelling them
to pay is contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and
principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of
the Civil Code which provides that: the guarantor may set up against the creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but not those which are purely personal to the debtor. Petitioners aver
that if the principal debtor BMC can set up the defense of suspension of payment of debts and filing of collection suits
against respondent bank, petitioners as sureties should likewise be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions
refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-spouses are not guarantors
49
but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of a guarantor and a surety.
A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of
guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has
proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held
liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however, the
benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the
surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of
whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety
although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety
is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed
as an original promissor and debtor from the beginning.[5]
Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated
themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank
amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,[6] respondent bank as creditor
may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the
suspension of payment and filing of collection suits against BMC. Respondent banks right to collect payment from the
surety exists independently of its right to proceed directly against the principal debtor. In fact, the creditor bank may go
against the surety alone without prior demand for payment on the principal debtor. [7]
The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection
suits by the creditor banks pertain only to the property of the principal debtor BMC. Firstly, in the rehabilitation
receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC. [8] Secondly, there
is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of
the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was
approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over
the properties of BMCs officers or sureties.
Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper. The trial
courts denial of petitioners motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs.
SO ORDERED.

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