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G.R. No.

L-20588 December 17, 1923

THE ASIATIC PETROLEUM COMPANY (PHILIPPINE ISLANDS), LTD., plaintiff-appellant,


vs.
FRANCISCO HIZON Y SINGIAN and JUSTINO A. DAVID, defendants. FRANCISCO HIZON Y
SINGIAN,defendant-appellant.

Jose Gutierrez David for plaintiff-appellant.


Araneta and Zaragoza for defendant-appellant.

STREET, J.:

This civil action was instituted in the Court of First Instance of the Province of Pampanga by the
Asiatic Petroleum Company (Philippine Islands), Ltd., to recover of Justino A. David, as principal,
and of Francisco Hizon y Singian, as security, the sum of P51,560.12, an alleged balance due upon
liquidation of accounts between the plaintiff and said David, and for which Francisco Hizon y Singian
is alleged to be obligated as joint and several surety with the principal debtor. At the hearing
judgment was rendered in favor of the plaintiff to recover of Justino A. David, as principal, the sum
P40,786.98, and of Francisco Hizon y Singian, as surety, a portion of the same debt not to exceed
the sum of P5,000. From this judgment Justino A. David did not appeal, and his obligation, as
principal debtor, to the extent adjudged by the trial court, is not now in question. As regards the
liability declared by the trial court against Francisco Hizon y Singian, an appeal was taken both by
the plaintiff and by said Hizon, the plaintiff contending that the court should have held Hizon jointly
and severally responsible for the entire sum adjudged against the principal debtor, while Hizon
claims that he should have been wholly absolved.

It appears in evidence that the plaintiff is a corporation lawfully engaged in the selling of petroleum
products in the Philippine Islands. In the year 1916 the plaintiff made a contract (Exhibit B) with
Justino A. David, whereby the latter became the selling agent of the plaintiff at San Fernando, in the
Province of Pampanga, with authority extending not only over the municipality of San Fernando but
over the neighboring places of Guagua, Angeles, San Simon, Capas, Magalang, and Mabalakat, in
the same province. In accordance with this contract and in conformity with the practices of the
contracting parties thereunder, the said Justino A. David from time to time over a period of about five
years received for sale and distribution at the places mentioned various consignments of kerosene,
gasoline, and similar petroleum products, which were sold and disposed of by Justino A. David as
selling agent. The relation thus established was continued without interruption until in the year 1921,
when all the transactions between the two parties were gone over, and it was found that David was
indebted to the plaintiff in the amount of nearly P60,000, a sum which, by subsequent payments,
was reduced to P40,786.98, as found and adjudged by the trial court.

The alleged liability of the appellant, Francisco Hizon y Singian, is planted upon a document (Exhibit
B-1), which, as appearing in evidence, is pasted to the Exhibit B. By the said exhibit B-1, Francisco
Hizon y Singian obligates himself to answer jointly and severally with the agent (Justino A. David) for
all the obligations contracted or to be contracted by the latter in accordance with the terms of the
contract of agency (Exhibit B), and the said Francisco Hizon y Singian further agrees finally to
answer for any balance that should be due to the plaintiff from said agent upon liquidation of the
account, or accounts, between said two parties.
The contract of suretyship (Exhibit B-1) consists of a single sheet of paper and the agreement
therein expressed consists of a printed form completed by the interpolation, with pen and ink, of the
names of the parties and the date of the transaction. It purports to have been signed on November
13, 1916, but the notarial acknowledgment appended thereto bears date of November 17, 1916,
which is the same as the date upon which the contract Exhibit B was acknowledged. As already
stated the document B-1 is pasted to the contract Exhibit B, also made upon a printed form, but the
two documents do not form integral parts of the same sheet, or sheets. However, the document B-1
refers to the contract of agency to which it is appended; and when the two are considered together, it
would appear that the contract Exhibit B is the identical instrument referred to in Exhibit B-1 and that
the former was executed in relation with the latter. Upon this point, however, a question is made,
which constitutes in our opinion the decisive feature of the case.1aw phi 1.net

As already stated the contract Exhibit B declares that David shall serve the plaintiff company as its
only selling agent at San Fernando, Guagua, Angeles, San Simon, Capas, Magalang, and
Mabalakat, in the Province of Pampanga; and the indebtedness which is the subject of this action
was incurred by said David as selling agent of the plaintiff at all the places named.

From the time demand was first made upon the present appellant, Hizon, for the satisfaction of the
balance due to the plaintiff upon liquidation of the account of David, the appellant has insisted that
he had obligated himself to answer for indebtedness to be incurred by David as selling agent at and
for the town of San Fernando and that he had been given to understand, at the time he contracted
the obligation, that the indebtedness so incurred would not be in excess of P5,000.

The representation as to the amount into which the indebtedness would run a representation
which seems to have come exclusively from David we consider unimportant, since the written
contract places no limit upon the amount of the obligation; but the defendant's contention concerning
the place, or places, over which David's agency extended is of a more serious character.

In this connection it is important to note that in the principal contract (Exhibit B), as submitted in
evidence, the words "Guagua, Angeles, San Simon, Capas, Magalang, Mabalakat" (after the words
San Fernando), have been inserted in the printed form by means of a typewriting machine, and
owing to lack of space in the printed form, it was necessary for the typist to interline the words
"Guagua, Angeles, and San Simon." Furthermore, the word "Mabalakat" as written by the typist,
overlaps and obscures the succeeding printed words, "in the," standing before "Province of
Pampanga." There is of course nothing particularly suspicious about this, but the situation thus
revealed suggests the possibility that the words Guagua, Angeles, San Simon, Capas, Magalang,
and Mabalakat may have been inserted after the contract of suretyship had been signed and
acknowledged by the appellant Hizon. Conclusive proof on this point comes, however, from another
quarter and from a source not at all dependent upon the credibility of the oral testimony of the
appellant Hizon. Said proof consists in the fact now to be stated.

It appears that at the time the appellant acknowledged the contract of suretyship (Exhibit B-1),
duplicate copies of the principal contract were produced before the notary public and were there
present for the inspection of the parties. The notary who acted in the matter was one A.E. Cuyugan,
an attorney, who, at the time of the incident now in question, was engaged in the exercise of the
legal profession, and at the time he was examined as a witness was filing the office of assistant
attorney of the Bureau of Justice. This witness was introduced by the plaintiff, and his testimony has
every appearance of being candid and truthful. He states that the two copies of the principal contract
which were produced at the time the acknowledgment of Hizon to the contract of suretyship was
taken were the same.
Now, after the principal contract had been acknowledged by Justino A. David, as appears from the
notarial certificate appended thereto, and after the contract of suretyship had been at the same time
acknowledged by the appellant, as appears from the contemporaneous notarial certificate appended
thereto, the notary public delivered to David one copy of the principal contract, together with one
copy of the contract of suretyship acknowledged by the appellant; and these two documents went to
the hands of the plaintiff and have appeared in evidence as Exhibits B and B-1, as already stated.
The other copy of the principal contract was retained in possession of the notary, in accordance with
notarial usage in such matters. It thus became a part of his official records and, with other
documents, was afterwards delivered by the notary to the clerk of court, of the Province of
Pampanga, by whom it was transmitted to the division of archives of the Philippine Library and
Museum.

In the course of the trial of this case, a duly authenticated copy of said contract, as appearing in the
official archives of said division, was introduced in evidence in this case; and upon comparison of
said copy with the Exhibit B, the two documents are found to differ in the sole circumstance that the
words Guagua, Angeles, San Simon, Capas, Magalang, and Mabalakat, are wanting in the
instrument now preserved in the division of archives.

Upon this circumstance, in relation with the testimony of the notary public and the appellant, the trial
judge reached the conclusion that at the time the appellant signed and acknowledged the contract of
suretyship the principal contract made no mention of other places than San Fernando, had been
interpolated in the document Exhibit B after the contract of suretyship had been acknowledged. We
believe that there can be little doubt as to the correctness of this conclusion, and it completely bears
out the contention of the appellant to the effect that he really obligated himself only to answer for
such indebtedness as might be incurred by David as agent at San Fernando. We may add that no
witness was produced by the plaintiff for the purpose of explaining in any way the discrepancy
between the two documents above referred to.

The circumstance should not pass unnoticed that the appellant's contention concerning the extent of
the agency at the time he obligated himself was formulated at a time when he did not know of the
existence of a copy of the contract of agency in the files of the division of archives; and the
subsequent discovery of this piece of evidence is strongly suggestive of the appellant's good faith in
claiming that he had obligated himself only for the results of an agency to be established at San
Fernando. Our conclusion upon a careful consideration of the evidence is that, when the appellant
acknowledged the contract of suretyship, the principal contract was limited to the agency at that
place and that the document Exhibit B was subsequently amended by agreement between the
plaintiff and Justino A. David, but without the knowledged or consent of the appellant, by the
insertion therein of the names of the other places mentioned in said exhibit.

It is fundamental in the law of suretyship that any agreement between the creditor and the principal
debtor which essentially varies the terms of the principal contract, without the consent of the surety,
will release the surety from liability. (21 R.C.L., 1004.) This principle is equally valid under the civil as
under the common law; and though not specifically expressed in the Civil Code, it may be deduced,
so far as its application to the facts of this case is concerned, from the second paragraph of article
1822 in relation with article 1143 of the same Code. It requires no argument to show that the
increase of liability incident to the extension of the agency to other places that San Fernando was
prejudicial to the interest of the appellant, and the change could not be lawfully made without his
consent.

The trial judge was therefore not in error in holding that the appellant was in effect discharged from
liability under the contract of suretyship (Exhibit B-1); but his Honor nevertheless gave judgment
against the defendant for the sum of P5,000. In doing so he proceeded upon the idea that the
defendant admitted that he had intended to obligate himself to the extent of P5,000, and his Honor
concluded that by entering into the contract of suretyship the defendant had induced the plaintiff to
make the contract of agency which appears to have been signed by the representative of the
plaintiff after it had been signed and acknowledged by David; for which reason his Honor considered
it just to hold the defendant to the extent at least in which he had intended to bind himself. The
validity of this conclusion cannot be admitted. The only obligation which was created on the part of
the defendant was the contract of suretyship (Exhibit B-1), and when that obligation was nullified by
the subsequent alteration of the principal contract, the appellant was discharged in toto.

In the course of this decision the fact has not escaped our attention that the answer of the appellant
does not specially plead the alteration of the contract of agency. But this is sufficiently explained by
the circumstance that the document which conclusively proves the fact of alteration had not been
discovered in the division of archives at the time the answer was filed. We note further that when a
copy of said document was finally produced, it was introduced in evidence and admitted without
question. Upon this state of facts it would be permissible, if necessary, for this court to direct an
amendment of the answer, as was done in Harty vs. Macabuhay (39 Phil., 495). But as the point is
purely defensive and the right clear, we consider it unnecessary to require the appellant to go
through the form of this technicality.

In the light of what has been said it becomes necessary to reverse the appealed judgment in so far
as it awards the sum of P5,000 against the appellant Francisco Hizon y Singian, and he will be
completely absolved from the complaint.

So ordered, without special pronouncement as to costs.


Art. 2079 Extension granted to debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. Mere failure on part of the creditor to demand payment after the debt has
become due does not itself constitute any extension of time referred to herein.

Radio Corp. v. Roa

CFI Manila ruled in favor of Radio Corp. against defendants Jesus Roa, Ramon Chavez, Andres Roa and
Manuel Roa.

- Jesus Roa 22,935


- Upon failure chattel mortgage to be sold at a public auction
- Jesus Roa, Ramon Chavez, Andres Roa and Manuel Roa to pay solidarily 22,935

Facts:

- Jesus Roa became indebted to Philippine Theater Enterprises 28,400 payable in 71 monthly
installment at P400/month.
- PET assigned its rights to Radio Corp.
- There was an accelerating clause:
- In case Roa fails to pay, the whole amount shall immediately become due and demandable and
the mortgage and the Luzon Surety bond may be foreclosed by the vendor/mortgagee
- Radio Corp, through its attorney in fact Erlanger and Galinger, Inc. wrote a letter to Jesus saying
that it has no objection to the extension requested by Roa to pay the Feb installment on April.

Issue:

W/N the extension granted, without the consent of the guarantors, extinguishes the liability not only to
the installments due at that time but also to the whole amount of their obligation?

Held:

Whole amount.

Ratio:

In the stipulation between Roa and PET, the creditor is given the right to treat and declare all said
installments as immediately due when there is nonpayment.

Under the express provision of the contract, the whole unpaid balance becomes due and payable upon
to failure to pay one installment. The act of Radio Corp extending payment, without the consent of the
guarantors, constituted in fact an extension of the payment of the whole amount of indebtedness.

G.R. No. 42829 September 30, 1935

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,


vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.
M.H. de Joya and Juan de Borja for appellants.
Barrera and Reyes for appellee.

GODDARD, J.:

This is an appeal from decision of the Court of First Instance of the City of Manila the dispositive part
of which reads:

In view of all the foregoing, judgment is hereby rendered in favor of the plaintiff Radio
Corporation of the Philippines and against the defendants Jesus R. Roa, Ramon Chavez,
Andes Roa and Manuel Roa: (a) Ordering the defendant Jesus R. Roa to pay the plaintiff the
sum of P22,935, plus P99.64, with legal interest thereon from the date of the filing of the
complaint until fully paid: (b) that upon failure of the defendant Jesus Roa to pay the said
sum indicated, the chattel described in the second cause of action shall be sold at public
auction to be applied to the satisfaction of the amount of this judgment; (c) that the
defendants Jesus R. Roa, Ramon Chavez, Andres Roa and Manuel Roa pay jointly and
severally to the plaintiff the amount of P10,000; (d) and that Jesus R. Roa pay to the plaintiff
the amount equivalent to 10 per cent of P22,935, as attorney's fees, and that all the
defendants in this case pay the costs of this action.

The defendants Ramon Chavez, Andres Roa and Manuel Roa have appealed from the judgment
against them for P10,00 and costs. These appellants make the following assignments of error:

1. The court below erred in not finding that the balance of the total indebtedness became
immediately due and demandable upon the failure of the defendant Jesus R. Roa to pay any
installment on his note.

2. The court below erred in not finding that defendant Jesus R. Roa defaulted in the payment
of the installment due on February 27,1932, and that plaintiff corporation gave him an
extension of time for the payment of said installment.

3. The court below erred in not finding that the extension of time given to defendant Jesus R.
Roa for the payment of an overdue installment served as a release of defendant sureties
from liability on all the subsequent installments.

4. The court below erred in not finding that the sureties were discharged from their bond
when the plaintiff authorized Jesus R. Roa to remove the photophone equipment from
Cagayan, Misamis Oriental, to Silay, Occidental Negros, without the knowledge or consent of
said sureties.

5. The court below erred in condemning Ramon Chavez, Andres Roa and Manuel Roa to
pay jointly and severally the sum of P10,000 to the Radio Corporation of the Philippines.

The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in the
sum of P28,400 payable in seventy-one equal monthly installments at the rate of P400 a month
commencing thirty days after December 11, 1931, with five days grace monthly until complete
payment of said sum. On that same date the Philippine Theatrical Enterprises, Inc., assigned all its
right and interest in that contract to the Radio Corporation of the Philippines.

The paragraph of that contract in which the accelerating clause appears reads as follows:
In case the vendee-mortgagor fails to make any of the payments as hereinbefore provided,
the whole amount remaining unpaid under this mortgage shall immediately become due and
payable and this mortgage on the property herein mentioned as well as the Luzon Surety
Bond may be foreclosed by the vendor-mortgagee; and, in such case, the vendee-mortgager
further agrees to pay the vendor- mortgagee an additional sum equivalent to 25 per cent of
the principal due unpaid as costs, expenses and liquidated damages, which said sum, shall
be added to the principal sum for which this mortgage is given as security, and shall become
a part, thereof.

On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of the Radio
Corporation of the Philippines wrote the following letter (Exhibit 13) to the principal debtor Jesus R.
Roa:

Mr. JESUS R. ROA


Cagayan, Oriental Misamis

Attention of Mrs. Amparo Chavez de Roa

DEAR SIR: We acknowledge with thanks the receipt of your letter of March 9th together with
your remittance of P200 for which we enclose receipt No. 7558. We are applying this amount
to the balance of your January installment.

We have no objection to the extension requested by you to pay the February installment by
the first week of April. We would, however, urge you to make every efforts to bring the
account up-to date as we are given very little discretion by the RCP in giving extension of
payment.

Very truly yours,


RADIO CORP. OF THE
PHIL.
By: ERLANGER & GALINGER,
INC.
(Sgd.) H.N. SALET
Vice-President

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

ART. 1851. An extension grated to the debtor by the creditor, without the consent of the
guarantor, extinguishes the latter's liability.

This court has held that mere delay in suing for the collection of the does not release the sureties.
(Sons of I. de la Rama vs. Estate of Benedicto, 5 Phil., 512; Banco Espaol Filipino vs. Donaldson
Sim & Co., 5 Phil., 418; Manzano vs. Tan Suanco, 13 Phil., 183; Hongkong & Shanghai Baking
Corporation vs. Aldecoa & Co., 30 Phil., 255.) In the case of Villa vs. Garcia Bosque (49 Phil., 126,
134, 135), this court stated:
. . . The rule that an extension of time granted to the debtor by the creditor, without the
consent of the sureties, extinguishes the latter's liability is common both to Spanish
jurisprudence and the common law; and it is well settled in English and American
jurisprudence that where a surety is liable for different payments, such as installments of
rent, or upon a series of promissory notes, an extension of time as to one or more will not
affect the liability of the surety for the others. . . .

There is one stipulation in the contract (Exhibit A) which, at first blush, suggests a doubt as
to the propriety of applying the doctrine above stated to the case before us. We refer to
clause (f) which declares that the non-fulfillment on the part of the debtors of the stipulation
with respect to the payment of any installment of the indebtedness, with interest, will give to
the creditor the right to treat and declare all of said installments as immediately due. If the
stipulation had been to the effect that the failure to pay any installment when due would ipso
facto cause the other installments to fall due at once, it might be plausibly contended that
after default of the payment of one installment the act of the creditor in extending the time as
to such installment would interfere with the right of the surety to exercise his legal rights
against the debtor, and that the surety would in such case be discharged by the extension of
time, in conformity with article 1851 and 1852 of the Civil Code. But it will be noted that in the
contract now under consideration the stipulation is not that the maturity of the latter
installments shall be ipso facto accelerated by default in the payment of a prior installment,
but only that it shall give the creditor a right treat the subsequent installments as due; and in
this case it does not appear that the creditor has exercised this election. On the contrary, this
action was not instituted until after all of the installments had fallen due in conformity with
original contract. It results that the stipulation contained in paragraph (f) does not effect the
application of the doctrine above enunciated to the case before us.

The stipulation in the contract under consideration, copied above, is to the effect that upon failure to
pay any installment when due the other installments ipso facto become due and payable. In view of
of the fact that under the express provision of the contract, quoted above, the whole unpaid balance
automatically becomes due and payable upon failure to pay one installment, the act of the plaintiff in
extending the payment of the installment corresponding to February, 1932, to April, 1932, without
the consent of the guarantors, constituted in fact an extension of the payment of the whole amount
of the indebtedness, as by that extension the plaintiff could not have filed an action for the collection
of the whole amount until after April, 1932. Therefore appellants' contention that after default of the
payment of one installment the act of the herein creditor in extending the time of payment discharges
them as guarantors in conformity with articles 1851 and 1852 of the Civil Code is correct.

It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without
the consent of the surety, extends the time of payment, he thereby discharges the surety. . . .
The time of payment may be quite as important a consideration to the surety as the amount
he has promised conditionally to pay. . . .Again, a surety has the right, on payment of the
debt, to be subrogated to all the rights of the creditor, and to proceed at once to collect it
from the principal; but if the creditor has tied own hands from proceeding promptly, by
extending the time of collection, the hands of the surety will equally be bound; and before
they are loosed, by the expiration of the extended credit, the principal debtor may have
become insolvent and the right of subrogation rendered worthless. It should be observed,
however, that it is really unimportant whewther the extension given has actually proved
prejudicial to the surety or not. The rule stated is quite independent of the event, and the fact
that the principal is insolvent or that the extension granted promised to be beneficial to the
surety would give no right to the creditor to change the terms of the contract without the
knowledge or consent of the surety. Nor does it matter for how short a period the time of
payment may be extended. The principle is the same whether the time is long or short. The
creditor must be in such a situation that when the surety comes to be substituted in his place
by paying the debt, he may have an immediate right of action against the principal. The
suspension of the right to sue for a month, or even a day, is as effectual to release the surety
as a year or two years. (21 R.C.L., 1018-1020.)

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

Plaintiff-appellee contends that there was no consideration for the extension granted the principal
debtor. Article 1277 of the Civil Code provides that "even though the consideration should be
expressed in the contract, it shall be presumed that a consideration exists and that it is licit, unless
the debtor proves the contrary." It was incumbent upon the plaintiff to prove that there was no valid
consideration for the extension granted.

In view of the forgoing the judgment of the trial court is reversed as to the appellants Ramon
Chavez, Andres Roa and Manuel Roa, without costs.

G.R. No. L-29666 October 29, 1971

PFOPLES BANK AND TRUST COMPANY, plaintiff-appellee,


vs.
JOSE MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and FRANCISCO D. SANTANA,
defendants. FRANCISCO D. SANTANA, defendant-appellant.

Araneta, Mendoza & Papa for plaintiff-appellee.

Paredes, Poblador, Nazareno, Asada & Tomacruz for defendant-appellant.

FERNANDO, J.:

Appellant Francisco D. Santana was sued by plaintiff, now appellee, Peoples Bank & Trust
Company, along with the other defendants, Jose Maria Tambunting and Maria Paz Tambunting, his
son-in-law and his daughter, for the recovery of the sum of money due in an overdraft agreement,
with the Tambunting couple as principal debtors and appellant as surety. The judgment went against
him notwithstanding his plea based on Article 2080 of the Civil Code, releasing guarantors, even if
they be solidary, if by some act of the creditor subrogation is thereby precluded.1The lower court,
presided by the then Judge, now Justice of the Court of Appeals, Jose N. Leuterio, in a well-written
decision, found such a defense untenable as in what was characterized by the lower courts as the
"contract of absolute guaranty", appellant had waived his rights to the benefit conferred by such a
provision. In this appeal, would vigorously contend that what was thus agreed to by him was bereft
of a binding force. The law in its wisdom does not lend its approval to such an ill-disguised attempt
for turn one's back to all obligation arising from a valid contract. We have to affirm.

The decision, now on appeal, after stating the nature of the action which as noted is for the recovery
of a sum of money due on an overdraft agreement set forth the undisputed facts thus: "On
September 9, 1968, plaintiff and defendants executed a contract denominated 'overdraft agreement
and pledge' wherein the plaintiff granted to the spouses Jose Maria Tambunting and Maria Paz
Tambunting an overdraft from time to time on their current account with the plaintiff bank not to
exceed P200,000.00 with interest at the rate of 9% per annum until September 10, 1964, ..., the
proceeds of which were to be used by the Tambuntings in their logging operations. Defendant
Francisco D. Santana, as guarantor, and the spouses Tambuntings, conveyed to the bank shares of
capital stock of the International Sports Development Corporation collateral security for the payment
of any and all indebtedness incurred or arising from the overdraft, and all extensions, renewals,
amendments or applications thereof. On the same day, defendant Francisco D. Santana executed a
document denominated as absolute guaranty in which, in consideration of the 'overdraft agreement
and pledge,' he bound himself to the bank, jointly and severally, with the Tambunting spouses for the
full and prompt payment of all the indebtedness incurred or to be incurred by said spouses on
account of the overdraft line. On July 24, 1964, Jose Maria Tambunting wrote to the plaintiff bank [a]
latter, ..., requesting renewal of the overdraft agreement. Plaintiff bank, in a letter dated September
21, 1964, ..., granted the Tambunting spouses an extension of the overdraft line for six (6) months
from September 10, 1964, but reducing the overdraft line to P185,000.00 with the understanding that
other terms and conditions of the overdraft agreement would be in full force and effect. Before the
expiration of the six (6) months period, or on March 5, 1965, Jose Maria Tambunting asked for
another renewal of the overdraft line for another year, ... . Apparently, this letter was granted by the
plaintiff on March 15, 1965, for in another letter of Jose Maria Tambunting to the bank, ... the
defendant, on March 29, 1965, assured the bank that he would comply with the requirements of the
plaintiff. In a letter dated May 11, 1965, ... of the bank to Tambunting, the Manager of the Credit
Department advised Jose Maria Tambunting that the Board of Directors of the plaintiff bank
approved his request for an extension of the overdraft line in the amount of P185,000.00 for another
year, or until March 10, 1966, but with interest at the rate of 10% per annum; that in the same
meeting, the Board also approved the release of the pledge of 135 shares of stocks of the
International Sports Development Corporation. The defendants failed to pay the indebtedness on the
date due and demand for payment was made upon Francisco Santana and Tambunting as per
letters dated December 14, 1965, January 24, 1966 and March 4, 1966, ... . As of December 27,
1966, the total amount due from the defendants, including interests, was P219,165.18, ... ."2 The
decision went on to state: "The Tambunting spouses failed to answer the complaint and were
declared in default. The defendant Santana does not dispute the indebtedness. However, it is the
contention that he had been released from the guaranty for several reasons. Defendant Santana
contends that he was released from his obligation on the overdraft line because the plaintiff had
extended the time of payment and released to the Tambuntings without his consent, the 135 shares
of stocks of the International Sports Development Corporation which had been pledged to the bank
to secure the overdraft line. It is argued that, in accordance with Article 2080 of the New Civil Code,
'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, andpreferences of the latter.'
"3

Why such a contention was held devoid of merit was explained in such decision thus: "The contract
of absolute guaranty, ..., expressly authorized the plaintiff bank to extend the time of payment and to
release or surrender any security or part thereof held by it without notice to, the consent of, Santana.
He had consented in advance the release of the guaranty which the bank might make, Santana
cannot now complain that the release of the pledge was without his consent, and that it deprived him
of the right to be subrogated to the rights of the creditor. The waiver is not contrary to law, nor is it
contrary to public policy. The law does not prohibit the debtor-guarantor from agreeing in advance
and without notice to the release of any security which had been given to assure payment of the
obligation. The waiver is not contrary to public policy, because the right is purely personal, and does
not affect public interest nor does it violate any public policy. Neither does the return of the shares of
stocks novate the original contract for the obligation remains the same; and if it is a novation, it is a
novation made with the consent of Santana. Moreover, the pledge is merely an accessory obligation,
and its release does not vary the terms of the principal obligation."4
The appealed decision speaks for itself. It cannot, as was made plain in the opening paragraph of
this opinion be overturned.

1. It is thus obvious that the contract of absolute guaranty executed by appellant Santana is the
measure of rights and duties. As it is with him, so it is with the plaintiff bank. What was therein
stipulated had to be complied with by both parties. Nor could appellant have any valid cause for
complaint. He had given his word; he must live up to it. Once the validity of its terms is conceded, he
cannot be indulged in his unilateral determination to disregard his commitment. A promise to which
the law accords binding force must be fulfilled. It is as simple as that. So the Civil Code explicitly
requires: "Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith."5

2. It could have been different if there were no such contract of absolute guaranty to which appellant
was a party under the aforesaid Article 2080. He would have been freed from the obligation as a
result of plaintiff releasing to the Tambuntings without his consent the 135 shares of the International
Sports Development Corporation pledged to plaintiff bank to secure the overdraft line. For thereby
subrogation became meaningless. Such a provision is intended for the benefit of a surety. That was
a right he could avail of. He is not precluded however from waiving it. That was what appellant did
precisely when he agreed to the contract of absolute guaranty. Again the law is clear. A right may be
waived unless it would be contrary to law, public order, public policy, morals or good customs.6 There
is no occasion here for the exceptions coming into play. It has been traditional in the Philippine for
parents to extend all available aid and assistance to their children. That is a custom of long standing.
Nor is there anything offensive to morals by an assumption of contingent liability as thus worded.
The law has not been thwarted. Neither is public order nor public policy disregarded. The lower court
was right thereto in yielding full assent to the waiver in question.7 The vigor with which counsel for
appellant impugned the lower decision cannot therefore be attended with success. It can stand its
ground notwithstanding such a sustained and spirited attack.

WHEREFORE, the decision of October 30, 1967, as modified on January 8, 1969, is affirmed. With
costs against appellant Francisco D. Santana.

Concepcion C.J., Reyes, J.B.L., Makalintal, Zaldivar, Castro, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur
PHILIPPINE NATIONAL BANK, petitioner,
vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second
Division), respondents.

Besa, Galang and Medina for petitioner.


De Santos and Delfino for respondents.

REYES, J.B.L., J.:

The Philippine National Bank petitions for the review and reversal of the decision rendered by the
Court of Appeals (Second Division), in its case CA-G.R. No. 24232-R, dismissing the Bank's
complaint against respondent Manila Surety & Fidelity Co., Inc., and modifying the judgment of the
Court of First Instance of Manila in its Civil Case No. 11263.

The material facts of the case, as found by the appellate Court, are as follows:

The Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00 to
Edgington Oil Refinery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00
were released and delivered to Adams & Taguba Corporation (known as ATACO) under a trust
receipt guaranteed by Manila Surety & Fidelity Co. up to the amount of P75,000.00. To pay for the
asphalt, ATACO constituted the Bank its assignee and attorney-in-fact to receive and collect from
the Bureau of Public Works the amount aforesaid out of funds payable to the assignor under
Purchase Order No. 71947. This assignment (Exhibit "A") stipulated that:

The conditions of this assignment are as follows:

1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.

2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us and
in our name, place and stead, to collect and to receive the payments to be made by virtue of
the aforesaid Purchase Order, with full power and authority to execute and deliver on our
behalf, receipt for all payments made to it; to endorse for deposit or encashment checks,
money order and treasury warrants which said Bank may receive, and to apply said
payments to the settlement of said credit accommodation.

This power of attorney shall also remain irrevocable until our total indebtedness to the said
Bank have been fully liquidated. (Exhibit E)

ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of
P431,466.52. Of this amount the Bank regularly collected, from April 21, 1948 to November 18,
1948, P106,382.01. Thereafter, for unexplained reasons, the Bank ceased to collect, until in 1952 its
investigators found that more moneys were payable to ATACO from the Public Works office,
because the latter had allowed mother creditor to collect funds due to ATACO under the same
purchase order to a total of P311,230.41.

Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the
Court of First Instance of Manila to recover the balance of P158,563.18 as of February 15, 1950,
plus interests and costs.

On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc.,
to pay plaintiff, Philippines National Bank, the sum of P174,462.34 as of February 24, 1956,
minus the amount of P8,000 which defendant, Manila Surety Co., Inc. paid from March, 1956
to October, 1956 with interest at the rate of 5% per annum from February 25, 1956, until fully
paid provided that the total amount that should be paid by defendant Manila Surety Co., Inc.,
on account of this case shall not exceed P75,000.00, and to pay the costs;

2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant,


Pedro A. Taguba, jointly and severally, to pay cross and third-party plaintiff, Manila Surety &
Fidelity Co., Inc., whatever amount the latter has paid or shall pay under this judgment;

3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and

4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila
Surety & Fidelity Co., Inc.

From said decision, only the defendant Surety Company has duly perfected its appeal. The Central
Bank of the Philippines did not appeal, while defendant ATACO failed to perfect its appeal.

The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the
judgment of the court of origin as to the surety's liability. Its motions for reconsideration having
proved unavailing, the Bank appealed to this Court.

The Court of Appeals found the Bank to have been negligent in having stopped collecting from the
Bureau of Public Works the moneys falling due in favor of the principal debtor, ATACO, from and
after November 18, 1948, before the debt was fully collected, thereby allowing such funds to be
taken and exhausted by other creditors to the prejudice of the surety, and held that the Bank's
negligence resulted in exoneration of respondent Manila Surety & Fidelity Company.

This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO
was merely in additional security in its favor, and that it was the duty of the surety, and not that of the
creditor, owed see to it that the obligor fulfills his obligation, and that the creditor owed the surety no
duty of active diligence to collect any, sum from the principal debtor, citing Judge Advocate General
vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.

This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank
answerable for negligence in failing to collect from the principal debtor but for its neglect in collecting
the sums due to the debtor from the Bureau of Public Works, contrary to its duty as holder of an
exclusive and irrevocable power of attorney to make such collections, since an agent is required to
act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the
damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884).
Certainly, the Bank could not expect that the Bank would diligently perform its duty under its power
of attorney, but because they could not have collected from the Bureau even if they had attempted to
do so. It must not be forgotten that the Bank's power to collect was expressly made irrevocable, so
that the Bureau of Public Works could very well refuse to make payments to the principal debtor
itself, and a fortiori reject any demands by the surety.

Even if the assignment with power of attorney from the principal debtor were considered as mere
additional security still, by allowing the assigned funds to be exhausted without notifying the surety,
the Bank deprived the former of any possibility of recoursing against that security. The Bank thereby
exonerated the surety, pursuant to Article 2080 of the Civil Code:

ART. 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by come act of the creditor they cannot be subrogated to the rights,
mortgages and preferences of the latter. (Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public
Works, on May 5, 1949, and its letter to ATACO, Exhibit "G", informing the debtor that as of its date,
October 31, 1949, its outstanding balance was P156,374.83. Said Exhibit "G" has no bearing on the
issue whether the Bank has exercised due diligence in collecting from the Bureau of Public Works,
since the letter was addressed to ATACO, and the funds were to come from elsewhere. As to the
letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the surety were ever apprised that payment
was not being made. The fact remains that because of the Bank's inactivity the other creditors were
enabled to collect P173,870.31, when the balance due to appellant Bank was only P158,563.18. The
finding of negligence made by the Court of Appeals is thus not only conclusive on us but fully
supported by the evidence.

Even if the Court of Appeals erred on the second reason it advanced in support of the decision now
under appeal, because the rules on application of payments, giving preference to secured
obligations are only operative in cases where there are several distinct debts, and not where there is
only one that is partially secured, the error is of no importance, since the principal reason based on
the Bank's negligence furnishes adequate support to the decision of the Court of Appeals that the
surety was thereby released.

WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National
Bank.
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners, vs. SOLID BANK CORPORATION, FIRST
BUSINESS PAPER CORPORATION (FBPC)

RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus line" credit facility
worth P10 million in favor of (FBPC). The terms and conditions of the agreement as well as the
checklist of documents necessary to open the credit line were stipulated in a "letter-advise" of
the Bank. The documents essential for the credit facility and submitted for this purpose were
the

xxx(c) Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh and
Vicky Tan Toh, and respondent-spouses Kenneth and Ma. Victoria Ng Li xxx

The spouses Toh were then Chairman of the Board and Vice-President, of FBPC, while
respondent-spouses Ng Li were President and General Manager of the same corporation.5

The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent
FBPC may incur and contained a de facto acceleration clause. So as to strengthen this security,
the Continuing Guaranty waived rights of the sureties against delay or absence of notice or
demand on the part of respondent Bank, and gave future consent to the Bank's action to
"extend or change the time payment, and/or the manner, place or terms of payment,"
including renewal, of the credit facility or any part thereof in such manner and upon such terms
as the Bank may deem proper without notice to or further assent from the sureties.

On 16 June 1993 respondent FBPC started to avail of the credit facility and secured letters of
credit.7 FBPC opened thirteen (13) letters of credit and executed a series of trust receipts over
the goods allegedly purchased from the proceeds of the loans.9

On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth


Ng Li and Ma. Victoria Ng Li had fraudulently departed from their conjugal home.10 On 14
January 1994 the Bank served a demand letter upon FBPC and petitioner Luis Toh invoking the
acceleration clause11 in the trust receipts of FBPC and claimed payment for P10,539,758.68 as
unpaid overdue accounts on the letters of credit plus interests and penalties within twenty-four
(24) hours from receipt thereof.12 The Bank also invoked the Continuing Guaranty executed by
petitioner-spouses Luis Toh and Vicky Tan Toh.

On 17 January 1994 respondent Bank filed a complaint for sum of money.

Petitioners also contended that through FBPC Board Resolution, petitioner Luis Toh was
removed as an authorized signatory for FBPC and replaced by respondent-spouses Ng Li and
Padilla for all the transactions of FBPC with respondent Bank.24 They even resigned from their
respective positions in FBPC. Finally, petitioners averred that sometime in June 1993 they
obtained from respondent Kenneth Ng Li their exclusion from the several surety agreements
they had entered into .

ISSUE: WON spouses TOH are discharged as sureties under the Continuing Guaranty.

HELD This Court holds that the Continuing Guaranty is a valid and binding contract of
petitioner-spouses as it is a public document that enjoys the presumption of authenticity and
due execution. Similarly, there is no basis for petitioners to limit their responsibility so long as
they were corporate officers and stockholders of FBPC. Nothing in the Continuing Guaranty
restricts their contractual undertaking to such condition or eventuality.

But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so
must we also hold respondent Bank to its representations in the "letter-advise" of 16 May
1993. Particularly, as to the extension of the due dates of the letters of credit, we cannot
exclude from the Continuing Guaranty the preconditions of the Bank that were plainly
stipulated in the "letter-advise."

Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any
time, or from time to time, in [its] discretion x x x extend or change the time payment," this
provision even if understood as a waiver is confined per se to the grant of an extension and
does not surrender the prerequisites therefor as mandated in the "letter-advise." In other
words, the authority of the Bank to defer collection contemplates only authorized extensions,
that is, those that meet the terms of the "letter-advise."

Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing
Guaranty, it should nonetheless comply with the requirements that domestic letters of credit
be supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period
of thirty (30) days for each extension, subject to twenty-five percent (25%) partial payment per
extension.

Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or
omission of any kind on [the Bank's] part in the premises shall in any event affect or impair this
guaranty"51 must also be read "strictissimi juris" for the reason that petitioners are only
accommodation sureties, i.e., they received nothing out of the security contract they signed.5
An extension of the period for enforcing the indebtedness does not by itself bring about the
discharge of the sureties unless the extra time is not permitted within the terms of the waiver,
i.e., where there is no payment or there is deficient settlement of the marginal deposit and the
twenty-five percent (25%) consideration, in which case the illicit extension releases the
sureties. Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of
his contract, and while he is liable to the full extent thereof, his accountability is strictly limited
to that assumed by its terms.
It is admitted by respondent Bank before the trial court that several letters of credit were
irrevocably extended for ninety (90) days with alarmingly flawed and inadequate consideration
- the indispensable marginal deposit of fifteen percent (15%) and the twenty-five percent (25%)
prerequisite for each extension of thirty (30) days.

The foregoing extensions of the letters of credit made by respondent Bank without observing
the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the
Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of
the Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty."

As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved
of their obligations as sureties of respondent FBPC under Art. 2079 of the Civil Code.

By the same token, there is no explanation on record for the utter worthlessness of the trust
receipts in favor of the Bank when these documents ought to have added more security to the
indebtedness of FBPC. To be sure, the goods subject of the trust receipts were not entirely lost
since the security officer of respondent Bank who conducted surveillance of FBPC even had the
chance to intercept the surreptitious transfer of the items under trust. In addition, the attached
properties of FBPC were perfunctorily abandoned by respondent Bank although the bonds
therefor were considerably reduced by the trial court.58

The consequence of these omissions is to discharge the surety, petitioners herein, or at the very
least, mitigate the liability of the surety up to the value of the property or lien released If the
creditor has acquired a lien upon the property of a principal, the creditor at once becomes
charged with the duty of retaining such security, or maintaining such lien in the interest of the
surety, and any release or impairment of this security as a primary resource for the payment of
a debt, will discharge the surety to the extent of the value of the property or lien released x x x
x [for] there immediately arises a trust relation between the parties, and the creditor as trustee
is bound to account to the surety for the value of the security in his hands.60

For the same reason, the grace period granted by respondent Bank represents unceremonious
abandonment and forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five
percent (25%) partial payment as fixed in the "letter-advise." These payments are unmistakably
additional securities intended to protect both respondent Bank and the sureties in the event
that the principal debtor FBPC becomes insolvent during the extension period. Compliance with
these requisites was not waived by petitioners in the Continuing Guaranty. For this
unwarranted exercise of discretion, respondent Bank bears the loss; due to its unauthorized
extensions to pay granted to FBPC, petitioner-spouses Luis Toh and Vicky Tan Toh are
discharged as sureties under the Continuing Guaranty.
Stronghold Insurance v Republic Asahi

Facts: Republic Asahi Glass contracts with JDS for the construction of roadways and drainage
systems in RAG's compound. JDS does so and files the required compliance bond with
Stronghold Insurance acting as surety. The contract is 5.3M the bond is 795k. JDS falls woefully
behind schedule, prompting RAG to rescind the contract and demand the compliance bond. The
owner of JDS dies and JDS disappears. SHI refuses to pay the bond claiming that the death of
JDS owner extinguishes the obligation.

Is SHI right?

Held: As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.[8]Obligations are transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the nature of the obligation.[9]Only
obligations that are personal[10] or are identified with the persons themselves are extinguished
by death.[11] Furthermore, The liability of petitioner is contractual in nature, because it
executed a performance bond, As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code.

G.R. No. 147561 June 22, 2006

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,


vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.

DECISION

PANGANIBAN, CJ:

Asurety companys liability under the performance bond it issues is solidary. The death of the
principal obligor does not, as a rule, extinguish the obligation and the solidary nature of that liability.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the March
13, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 41630. The assailed Decision
disposed as follows:

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

The Facts

The facts of the case are narrated by the CA in this wise:


"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a
contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction
of roadways and a drainage system in Republic-Asahis compound in Barrio Pinagbuhatan, Pasig
City, where [respondent] was to pay x x x JDS five million three hundred thousand pesos
(P5,300,000.00) inclusive of value added tax for said construction, which was supposed to be
completed within a period of two hundred forty (240) days beginning May 8, 1989. In order to
guarantee the faithful and satisfactory performance of its undertakings x x x JDS, shall post a
performance bond of seven hundred ninety five thousand pesos (P795,000.00). x x x JDS executed,
jointly and severally with [petitioner] Stronghold Insurance Co., Inc. (SICI) Performance Bond No.
SICI-25849/g(13)9769.

"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos
(P795,000.00) by way of downpayment.

"Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two
hundred seventy four thousand six hundred twenty one pesos and one centavo (P274,621.01) were
submitted by x x x JDS to [respondent], which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work supposed to be undertaken by x x x JDS
under the terms of the contract.

"Several times prior to November of 1989, [respondents] engineers called the attention of x x x JDS
to the alleged alarmingly slow pace of the construction, which resulted in the fear that the
construction will not be finished within the stipulated 240-day period. However, said reminders went
unheeded by x x x JDS.

"On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS,
[respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said
contract, and wrote a letter to x x x JDS informing the latter of such rescission. Such rescission,
according to Article XV of the contract shall not be construed as a waiver of [respondents] right to
recover damages from x x x JDS and the latters sureties.

"[Respondent] alleged that, as a result of x x x JDSs failure to comply with the provisions of the
contract, which resulted in the said contracts rescission, it had to hire another contractor to finish the
project, for which it incurred an additional expense of three million two hundred fifty six thousand,
eight hundred seventy four pesos (P3,256,874.00).

"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for
not less than P795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its
demand for payment under the aforementioned bond. Both letters allegedly went unheeded.

"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x JDS payment
of P3,256,874.00 representing the additional expenses incurred by [respondent] for the completion
of the project using another contractor, and from x x x JDS and SICI, jointly and severally, payment
of P750,000.00 as damages in accordance with the performance bond; exemplary damages in the
amount of P100,000.00 and attorneys fees in the amount of at least P100,000.00.

"According to the Sheriffs Return dated June 14, 1991, submitted to the lower court by Deputy
Sheriff Rene R. Salvador, summons were duly served on defendant-appellee SICI. However, x x x
Jose D. Santos, Jr. died the previous year (1990), and x x x JDS Construction was no longer at its
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its
whereabouts were unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondents] money claims
against [petitioner and JDS] have been extinguished by the death of Jose D. Santos, Jr. Even if this
were not the case, [petitioner] SICI had been released from its liability under the performance bond
because there was no liquidation, with the active participation and/or involvement, pursuant to
procedural due process, of herein surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SICI under the performance bond. At
this point in time, said liquidation was impossible because of the death of Santos, who as such can
no longer participate in any liquidation. The unilateral liquidation on the party (sic) of [respondent] of
the work accomplishments did not bind SICI for being violative of procedural due process. The claim
of [respondent] for the forfeiture of the performance bond in the amount of P795,000.00 had no
factual and legal basis, as payment of said bond was conditioned on the payment of damages which
[respondent] may sustain in the event x x x JDS failed to complete the contracted works.
[Respondent] can no longer prove its claim for damages in view of the death of Santos. SICI was not
informed by [respondent] of the death of Santos. SICI was not informed by [respondent] of the
unilateral rescission of its contract with JDS, thus SICI was deprived of its right to protect its interests
as surety under the performance bond, and therefore it was released from all liability. SICI was
likewise denied due process when it was not notified of plaintiff-appellants process of determining
and fixing the amount to be spent in the completion of the unfinished project. The procedure
contained in Article XV of the contract is against public policy in that it denies SICI the right to
procedural due process. Finally, SICI alleged that [respondent] deviated from the terms and
conditions of the contract without the written consent of SICI, thus the latter was released from all
liability. SICI also prayed for the award of P59,750.00 as attorneys fees, and P5,000.00 as litigation
expenses.

"On August 16, 1991, the lower court issued an order dismissing the complaint of [respondent]
against x x x JDS and SICI, on the ground that the claim against JDS did not survive the death of its
sole proprietor, Jose D. Santos, Jr. The dispositive portion of the [O]rder reads as follows:

ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing business under
trade and style, JDS Construction and Stronghold Insurance Company, Inc. is ordered
DISMISSED.

SO ORDERED.

"On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking reconsideration of
the lower courts August 16, 1991 order dismissing its complaint. [Petitioner] SICI field its Comment
and/or Opposition to the Motion for Reconsideration. On October 15, 1991, the lower court issued
an Order, the dispositive portion of which reads as follows:

WHEREFORE, premises considered, the Motion for Reconsideration is hereby given due course.
The Order dated 16 August 1991 for the dismissal of the case against Stronghold Insurance
Company, Inc., is reconsidered and hereby reinstated (sic). However, the case against defendant
Jose D. Santos, Jr. (deceased) remains undisturbed.

Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold] Insurance
Company Inc., are set for hearing on November 7, 1991 at 2:00 oclock in the afternoon.

SO ORDERED.

"On June 4, 1992, [petitioner] SICI filed its Memorandum for Bondsman/Defendant SICI (Re: Effect
of Death of defendant Jose D. Santos, Jr.) reiterating its prayer for the dismissal of [respondents]
complaint.
"On January 28, 1993, the lower court issued the assailed Order reconsidering its Order dated
October 15, 1991, and ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed
its motion for reconsideration which was opposed by [petitioner] SICI. On April 16, 1993, the lower
court denied [respondents] motion for reconsideration. x x x."4

Ruling of the Court of Appeals

The CA ruled that SICIs obligation under the surety agreement was not extinguished by the death of
Jose D. Santos, Jr. Consequently, Republic-Asahi could still go after SICI for the bond.

The appellate court also found that the lower court had erred in pronouncing that the performance of
the Contract in question had become impossible by respondents act of rescission. The Contract was
rescinded because of the dissatisfaction of respondent with the slow pace of work and pursuant to
Article XIII of its Contract with JDS.

The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of [respondents]
fault, but because of the fault of JDS Construction and Jose D. Santos, Jr. for failure on their part to
make satisfactory progress on the project, which amounted to non-performance of the same. x x x
[P]ursuant to the [S]urety [C]ontract, SICI is liable for the non-performance of said [C]ontract on the
part of JDS Construction."5

Hence, this Petition.6

Issue

Petitioner states the issue for the Courts consideration in the following manner:

"Death is a defense of Santos heirs which Stronghold could also adopt as its defense against
obligees claim."7

More precisely, the issue is whether petitioners liability under the performance bond was
automatically extinguished by the death of Santos, the principal.

The Courts Ruling

The Petition has no merit.

Sole Issue:

Effect of Death on the Suretys Liability

Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the
surety bond. Consequently, it says, it is automatically released from any liability under the bond.

As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.8 Obligations are transmissible to the heirs, except when the transmission is prevented by
the law, the stipulations of the parties, or the nature of the obligation.9 Only obligations that are
personal10 or are identified with the persons themselves are extinguished by death.11

Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution of money claims arising
from a contract against the estate of a deceased debtor. Evidently, those claims are not actually
extinguished.13 What is extinguished is only the obligees action or suit filed before the court, which is
not then acting as a probate court.14

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

The liability of petitioner is contractual in nature, because it executed a performance bond worded as
follows:

"KNOW ALL MEN BY THESE PRESENTS:

"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig,
MM Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation
duly organized and existing under and by virtue of the laws of the Philippines with head office at
Makati, as Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION
and to any individual, firm, partnership, corporation or association supplying the principal with labor
or materials in the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00),
Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our
heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these
presents.

"The CONDITIONS OF THIS OBLIGATION are as follows;

"WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a
contract with the REPUBLIC ASAHI GLASS CORPORATION represented by _________________,
to fully and faithfully. Comply with the site preparation works road and drainage system of Philippine
Float Plant at Pinagbuhatan, Pasig, Metro Manila.

"WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of
PESOS SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency,
inclusive of interest, attorneys fee, and other damages, and shall not be liable for any advances of
the obligee to the principal.

"WHEREAS, said contract requires the said principal to give a good and sufficient bond in the
above-stated sum to secure the full and faithfull performance on its part of said contract, and the
satisfaction of obligations for materials used and labor employed upon the work;

"NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of said contract during the original term of said
contract and any extension thereof that may be granted by the obligee, with notice to the surety and
during the life of any guaranty required under the contract, and shall also perform well and truly and
fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly
authorized modifications of said contract that may hereinafter be made, without notice to the surety
except when such modifications increase the contract price; and such principal contractor or his or
its sub-contractors shall promptly make payment to any individual, firm, partnership, corporation or
association supplying the principal of its sub-contractors with labor and materials in the prosecution
of the work provided for in the said contract, then, this obligation shall be null and void; otherwise it
shall remain in full force and effect. Any extension of the period of time which may be granted by the
obligee to the contractor shall be considered as given, and any modifications of said contract shall
be considered as authorized, with the express consent of the Surety.

"The right of any individual, firm, partnership, corporation or association supplying the contractor with
labor or materials for the prosecution of the work hereinbefore stated, to institute action on the penal
bond, pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed."16

As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which
provides as follows:

"Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

"If a person binds himself solidarily with the principal debtor, the provisions of Section 4,17 Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship."

xxxxxxxxx

"Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected."

Elucidating on these provisions, the Court in Garcia v. Court of Appeals18 stated thus:

"x x x. The suretys obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although
the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal. x x x."19

Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor
and the petitioner herein, in view of the solidary nature of their liability. The death of the principal
debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor.
Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in
accordance with the solidary nature of the latters liability under the performance bond.

WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED. Costs
against petitioner.
AUTOCORP and Rodriguez vs. ISAC and BOC

G.R. No. 166662

June 27, 2008

FACTS: Autocorp Group, represented by its President, Rodriguez, secured an ordinary re-export
bond from private respondent Intra Strata Assurance Corporation (ISAC) in favor of public
Bureau of Customs (BOC), to guarantee the re-export of 2 units of car (at 2 different dates)
and/or to pay the taxes and duties thereon. Petitioners executed and signed two Indemnity
Agreements with identical stipulations in favor of ISAC, agreeing to act as surety of the subject
bonds

In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their
undertaking with the BOC to re-export the imported vehicles within the given period and pay
the taxes and/or duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC
for the liability the latter may incur on the said bonds

Autocorp failed to re-export the items guaranteed by the bonds and/or liquidate the entries or
cancel the bonds, and pay the taxes and duties pertaining to the said items, despite repeated
demands made by the BOC, as well as by ISAC. By reason thereof, the BOC considered the two
bonds forfeited.

Failing to secure from petitioners the payment of the face value of the two bonds, ISAC filed
with the RTC an action against petitioners to recover a sum of money plus AF. ISAC impleaded
the BOC as a necessary party plaintiff in order that the reward of money or judgment shall be
adjudged unto the said necessary plaintiff.

Petitioners filed a MTD, which was denied. RTC ordered Autocorp to pay ISAC and/or BOC the
face value of the subject bonds plus AF. Autocorps MR was denied. CA affirmed the trial courts
decision. MR was denied. Hence this Petition for Review on Certiorari

ISSUE: WON these bonds are now due and demandable, as there is yet no actual forfeiture of
the bonds, but merely a recommendation of forfeiture, for no writ of execution has been issued
against such bonds, therefore the case was prematurely filed by ISAC

HELD: PETITION IS WITHOUT MERIT

YES

The Indemnity Agreements give ISAC the right to recover from petitioners the face value of the
subject bonds plus attorneys fees at the time ISAC becomes liable on the said bonds to the
BOC, (specifically to re-export the imported vehicles within the period of six months from their
date of entry) regardless of whether the BOC had actually forfeited the bonds, demanded
payment thereof and/or received such payment. It must be pointed out that the Indemnity
Agreements explicitly provide that petitioners shall be liable to indemnify ISAC whether or not
payment has actually been made by the [ISAC] and ISAC may proceed against petitioners by
court action or otherwise even prior to making payment to the [BOC] which may hereafter be
done by [ISAC].

Article 2071 of the Civil Code provides:

Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:

(1) When he is sued for the payment;

(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a specified
period, and this period has expired;

(4) When the debt has become demandable, by reason of the expiration of the period for
payment;

(5) After the lapse of ten years, when the principal obligation has no fixed period for its
maturity, unless it be of such nature that it cannot be extinguished except within a period
longer than ten years;

(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.

NOTES:

A demand is only necessary in order to put an obligor in a due and demandable obligation in
delay, which in turn is for the purpose of making the obligor liable for interests or damages for
the period of delay. Thus, unless stipulated otherwise, an extrajudicial demand is not required
before a judicial demand, i.e., filing a civil case for collection, can be resorted to