G.R. No.

188539 March 12, 2014

MARIANO LIM, Petitioner,

vs.
SECURITY BANK CORPORATION,* Respondent.

DECISION

PERALTA, J.:

This deals with the Petition for Review on Certiorari under Rule 45 of the Rules of
Court praying that the Decision1of the Court of Appeals (CA), promulgated on July
30, 2008, and the Resolution2 dated June 1, 2009, denying petitioner's motion for
reconsideration thereof, be reversed and set aside.

Petitioner executed a Continuing Suretyship in favor of respondent to secure "any

and all types of credit accommodation that may be granted by the bank hereinto and
hereinafter" in favor of Raul Arroyo for the amount of ₱2,000,000.00 which is covered
by a Credit Agreement/Promissory Note.3 Said promissory note stated that the
interest on the loan shall be 19% per annum, compounded monthly, for the first 30
days from the date thereof, and if the note is not fully paid when due, an additional
penalty of 2% per month of the total outstanding principal and interest due and
unpaid, shall be imposed.

In turn, the Continuing Suretyship4 executed by petitioner stipulated that:

3. Liability of the Surety. - The liability of the Surety is solidary and not contingent
upon the pursuit of the Bank of whatever remedies it may have against the Debtor or
the collaterals/liens it may possess. If any of the Guaranteed Obligations is not paid
or performed on due date (at stated maturity or by acceleration), the Surety shall,
without need for any notice, demand or any other act or deed, immediately become
liable therefor and the Surety shall pay and perform the same.5

Guaranteed Obligations are defined in the same document as follows:

a) "Guaranteed Obligations" - the obligations of the Debtor arising from all credit
accommodations extended by the Bank to the Debtor, including increases, renewals,
roll-overs, extensions, restructurings, amendments or novations thereof, as well as
(i) all obligations of the Debtor presently or hereafter owing to the Bank, as appears
in the accounts, books and records of the Bank, whether direct or indirect, and (ii) any
and all expenses which the Bank may incur in enforcing any of its rights, powers and
remedies under the Credit Instruments as defined hereinbelow.6

The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner
received a Notice of Final Demand dated August 2, 2001, informing him that he was
liable to pay the loan obtained by Raul and Edwina Arroyo, including the interests and
penalty fees amounting to ₱7,703,185.54, and demanding payment thereof. For
failure of petitioner to comply with said demand, respondent filed a complaint for
collection of sum of money against him and the Arroyo spouses. Since the Arroyo
spouses can no longer be located, summons was not served on them, hence, only
petitioner actively participated in the case.

After trial, the Regional Trial Court of Davao (RTC) rendered judgment against
petitioner.7 The dispositive portion of the RTC Decision reads as follows:
Wherefore, judgment is hereby rendered ordering defendant Lim to pay the following
sums.

1. The principal sum of two million pesos plus nineteen percent interest of the
outstanding principal interest due and unpaid to be computed from January 28, 1997
until fully paid, plus two percent interest per month as penalty to be computed from
February 28, 1997 until fully paid.

2. Four hundred thousand pesos as attorney's fees.

3. Thirty thousand pesos as litigation expenses.

SO ORDERED.8

Petitioner appealed to the CA, but the appellate court, in its Decision dated July 30,
2008, affirmed the RTC judgment with the modification that interest be computed from
August 1, 1997; the penalty should start only from August 28, 1997; the award of
attorney's fees is set at 10% of the total amount due; and the award for litigation
expenses increased to ₱92,321.10.9

Petitioner's motion for reconsideration of the CA Decision was denied per Resolution
dated June 1, 2009.

Petitioner then elevated the matter to this Court via a petition for review on certiorari,
where the main issue is whether petitioner may validly be held liable for the principal
debtor's loan obtained six months after the execution of the Continuing Suretyship.

The other issues, such as the proper computation of the total indebtedness and the
amount of litigation expenses are factual matters that had been satisfactorily
addressed by the CA, to wit: (1) the CA ruled that respondent should recompute the
total amount due, since the proceeds from the foreclosure of the real estate and
chattel mortgages were deducted only on June 20, 2001, when the public auctions
were conducted on August 26, 1998 and September 7, 1999, respectively, thus, the
amount of the proceeds from the foreclosure of the mortgaged properties should have
been deducted from the amount of indebtedness on the date the public auction was
held; and (2) the CA likewise pointed out that as can be seen from the Legal Fees
Form,10 the litigation expense incurred by respondent was ₱92,321.10, the amount
it paid as filing fee. It is hornbook principle that this Court is not a trier of facts, hence,
such issues will not be revisited by this Court in the present petition. With regard to
the propriety of making petitioner a hostile witness, respondent is correct that the
issue cannot be raised for the first time on appeal. Thus, the Court will no longer
address these issues which had been improperly raised in this petition for review on
certiorari.

The main issue deserves scant consideration, but the matter of the award of
attorney's fees deserves reexamination.

The nature of a suretyship is elucidated in Philippine Charter Insurance Corporation

v. Petroleum Distributors & Service Corporation11 in this wise:

A contract of suretyship is an agreement whereby a party, called the surety,

guarantees the performance by another party, called the principal or obligor, of an
obligation or undertaking in favor of another party, called the obligee. Although the
contract of a surety is secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it possesses no direct or
personal interest over the obligations nor does it receive any benefit therefrom. This
was explained in the case of Stronghold Insurance Company, Inc. v. Republic-Asahi
Glass Corporation, where it was written:

The surety's 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.

xxxx

Thus, suretyship arises upon the solidary binding of a person deemed the surety with
the principal debtor for the purpose of fulfilling an obligation. A surety is considered
in law as being the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable. x x x.12

In this case, what petitioner executed was a Continuing Suretyship, which the Court
described in Saludo, Jr. v. Security Bank Corporation13 as follows:

The essence of a continuing surety has been highlighted in the case of Totanes v.
China Banking Corporation in this wise:

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,
normally 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.14

The terms of the Continuing Suretyship executed by petitioner, quoted earlier, are
very clear.1âwphi1 It states that petitioner, as surety, shall, without need for any
notice, demand or any other act or deed, immediately become liable and shall pay
"all credit accommodations extended by the Bank to the Debtor, including increases,
renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as
well as (i) all obligations of the Debtor presently or hereafter owing to the Bank, as
appears in the accounts, books and records of the Bank, whether direct or indirect,
and

(ii) any and all expenses which the Bank may incur in enforcing any of its rights,
powers and remedies under the Credit Instruments as defined hereinbelow."15 Such
stipulations are valid and legal and constitute the law between the parties, as Article
2053 of the Civil Code provides that "[a] guaranty may also be given as security for
future debts, the amount of which is not yet known; x x x." Thus, petitioner is
unequivocally bound by the terms of the Continuing Suretyship. There can be no cavil
then that petitioner is liable for the principal of the loan, together with the interest and
penalties due thereon, even if said loan was obtained by the principal debtor even
after the date of execution of the Continuing Suretyship.

With regard to the award of attorney's fees, it should be noted that Article 2208 of the
Civil Code does not prohibit recovery of attorney's fees if there is a stipulation in the
contract for payment of the same. Thus, in Asian Construction and Development
Corporation v. Cathay Pacific Steel Corporation (CAPASCO),16 the Court, citing
Titan Construction Corporation v. Uni-Field Enterprises, Inc.,17 expounded as
follows:

The law allows a party to recover attorney's fees under a written agreement. In Barons
Marketing Corporation v. Court of Appeals, the Court ruled that:

[T]he attorney's fees here are in the nature of liquidated damages and the stipulation
therefor is aptly called a penal clause. It has been said that so long as such stipulation
does not contravene law, morals, or public order, it is strictly binding upon defendant.
The attorney's fees so provided are awarded in favor of the litigant, not his counsel.

On the other hand, the law also allows parties to a contract to stipulate on liquidated
damages to be paid in case of breach. A stipulation on liquidated damages is a
penalty clause where the obligor assumes a greater liability in case of breach of an
obligation. The obligor is bound to pay the stipulated amount without need for proof
on the existence and on the measure of damages caused by the breach.18

However, even if such attorney's fees are allowed by law, the courts still have the
power to reduce the same if it is unreasonable. In Trade & Investment Corporation of
the Philippines v. Roblett Industrial Construction Corp.,19 the Court equitably
reduced the amount of attorney's fees to be paid since interests and penalties had
ballooned to thrice as much as the principal debt. That is also the case here. The
award of attorney's fees amounting to ten percent (10%) of the principal debt, plus
interest and penalty charges, would definitely exceed the principal amount; thus,
making the attorney's fees manifestly exorbitant. Hence, we reduce the amount of
attorney's fees to ten percent (10%) of the principal debt only.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision of the Court of

Appeals, dated July 30, 2008, in CA-G.R. CV No. 00462, is AFFIRMED with
MODIFICATION in that the award of attorney's fees is reduced to ten percent (10%)
of the principal debt only.

SO ORDERED.

G.R. No. L-22108 August 30, 1967

GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the BUREAU
OF SUPPLY COORDINATION plaintiff-appellee,
vs.
MARCELINO TIZON, ET AL., defendants.
CAPITAL INSURANCE and SURETY CO., INC., defendant-appellant.

Achacoso, Nera and Ocampo for defendant-appellant.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General J.C.
Borromeo and Solicitor N. P. Eduardo for plaintiff-appellee.

ANGELES, J.:

Appeal from an order of the Court of First Instance of Manila, dated September 11,
1963, expunging from the record of the case the answer of the Capital Insurance &
Surety, Co., Inc. and remanding said record to the City Court of Manila for execution
against the Surety of the decision rendered by the latter court.

It appears that in a bidding conducted by the Bureau of Supply Coordination of the

Department of General Services, for the supply of "one (1) Baylift portable heavy-duty
truck and auto lift, fully air operated, 500 lbs. capacity, and two (2) Baylift Ramps,
U.S. manufacture", Tizon engineering, of which Marcelino Tizon was the sole owner
and proprietor, won the bid, having offered the lowest bid of P4,000.00. To guarantee
faithful performance of the conditions of the bid, the Bureau of Supply Coordination
required Tizon Engineering to give a bond in the sum of P10,000.00. On September
12, 1958, the Surety issued its bond for the said amount in favor of the Republic of
the Philippines. Tizon Engineering failed to comply with the conditions of the bid,
failing as he did to deliver the equipment called for in the Buyer's order No. 42546 of
the Bureau of Supply, constraining the latter to purchase the equipment from Fema
Trading, the second lowest bidder, resulting in a loss of P2,975.00 to the Government.
Notwithstanding demands made by the Bureau of Supply on defendants Marcelino
Tizon and the Surety to pay said amount, they failed and refused. Hence, complaint
was filed in the City Court of Manila by the Republic of the Philippines to recover the
said sum with legal interests, plus attorney's fees and costs.

Defendant Tizon averred in his answer that: (a) "the alleged bidding conducted by the
Bureau of Supply is in utter disregard and wanton violation of the Rules and
Regulations of the said office"; (b) "that assuming that a corresponding buyer's order
was prepared, the same was not delivered to and duly received by him, such that
there has never been a binding contract between plaintiff and the answering
defendant; furthermore, the plaintiff deliberately failed to notify the answering
defendant as to the acceptance of his bid, thus again violating the Rules and
Regulations mentioned above"; (c) that the bond-issued by the Surety "answers only
(for) those contracts legally entered into by the herein defendants with the Bureau of
Supply and certainly not those contracts and/or bids which are of doubtful legality, as
in the present case."

The defendant Surety, in answer to the complaint, admitted having executed a bond
in favor of the Republic of the Philippines for the purpose as therein stated, but denied
"that it failed and refused to pay the demand (of the plaintiff), the truth of the matter
being that its co-defendant, Marcelino Tizon, doing business under the name of Tizon
Engineering, has put it on notice not to settle the claim because he is not in any way
whatsoever liable to plaintiff." As cross-claim against defendant Tizon, the Surety
asserted that if it is made liable to the plaintiff on its bond, Marcelino Tizon should be
ordered to make the corresponding reimbursement, with interest of 12%, plus
attorney's fees.

After trial, judgment was rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay,jointly and severally, the sum of P2,972.00 with legal
interests from November 12, 1960, and the costs of suit. On the cross-claim of the
Surety, defendant Tizon was ordered to reimburse the cross-plaintiff of whatever
amount the latter might have paid to the plaintiff, plus P100.00 as attorney's fees.

Only defendant Tizon appealed from the decision to the Court of First Instance of
Manila.

Within fifteen days from receipt of notice from the clerk of the Court of First Instance
of Manila, that the case has been received and docketed in said court, the
defendants, Tizon and the Surety, each filed separate manifestations that they were
reproducing their respective answers filed in the City Court.

On August 29, 1963, the plaintiff filed a motion praying "(a) To strike out the answer
filed by the Surety reproducing its answer filed in the City Court; (b) To remand the
case to the City Court, as concerns the Surety, for execution of the judgment rendered
in said court."

The Surety opposed the motion on two grounds: (a) that although it did not appeal
from the decision of the inferior court, the appeal interposed by its co-defendant
inured to its benefit, because the obligation sued on "is so dependent on that of the
principal debtor, that the Surety is considered in law as being the same party in
relation to whatever is adjudged, touching the obligation of its co-defendant"; and (b)
the appeal of its co-defendant, the principal debtor, "should be considered in law as
to include the defendant Surety, in view of the latter's cross-claim against the former."
The opposition was over-ruled in the order appealed from.

The issue at this instance is whether an appeal by one of the parties sentenced to
pay solidarily a sum of money, inures to the benefit of the other who did not appeal.
The pronouncements in the case of Municipality of Orion vs. Concha, 50 Phil. 682,
provide ample guideposts in the resolution of the issue at bar. In said case this Court
held:

The judgment was joint and several, which means that they are severally liable. We
have made a careful examination of numerous authorities and believe that we are
correct in saying that the effect of the appeal by one judgment debtor upon the co-
debtors depends upon the particular facts and conditions in each case. The difference
in the apparently conflicting opinions may be well illustrated in this very case.

Suppose, for example, that F. B. Concha, the contractor, had appealed from the
judgment of the lower court upon the ground that he had either completed his contract
within time or that the municipality had suffered no damages whatever, and the
Supreme Court had reversed the judgment of the lower court on his appeal. Certainly
that judgment would have the effect of relieving the bondsmen from any liability
whatever, for the reason that their liability was consequent upon the liability of the
contractor; and the court having declared that no liability for damages had resulted
from the execution of said contract, then certainly the bondsmen would have been
relieved because their liability depended upon the liability of the principal. That
example gives us a clear case, showing that the effect of the appeal of the one of the
judgment debtors would necessarily have the effect of releasing his co-judgment
debtors.
xxx xxx xxx

As we have already said, whether an appeal by one of several judgment debtors will
affect the liability of those who did not appeal must depend upon the facts in each
particular case. If the judgment can only be sustained upon the liability of the one who
appeals and the liability of the other co-judgment debtors depends solely upon the
question whether or not the appellant is liable, and the judgment is revoked as to that
appellant, then the result of his appeal will inure to the benefit of all. . . .

The rule is quite general that a reversal as to parties appealing does not necessitate
a reversal as to parties not appealing, but that the judgment may be affirmed or left
undisturbed as to them. An exception to the rule exists, however, where a judgment
cannot be reversed as to the party appealing without affecting the rights of his co-
debtor. (4 C.J. 1184)

A reversal of a judgment on appeal is binding on the parties to the suit, but does not
inure to the benefit of parties against whom judgment was rendered in the lower court
who did not join in the appeal, unless their rights and liabilities and those of the parties
appealing are so interwoven and dependent as to be inseparable, in which case a
reversal as to one operates as a reversal as to all. (4 C.J., 1206; Alling vs. Wenzel,
133 Ill., 264-278.)

In the case of Brashear vs. Carlin, Curator (19 La. 395) a judgment was rendered in
the lower court against the principal debtor and his surety to pay damages. The
principal debtor alone appealed and the judgment was reversed. When the question
of the liability of the surety under the judgment of the lower court was raised, the court
said:

"It is obvious, that the judgment of the inferior court could not be reversed as to the
principal debtor in this case, and continue in force against the surety. The latter could
not remain bound, after the former had been released; although the surety had not
joined in the appeal, the judgment rendered in this court inured to his benefit. The
obligation of a surety is so dependent on that of the principal debtor, that he is
considered in law as being the same party as the debtor in relation to whatever is
adjudged, touching the obligation of the latter; provided it be not on grounds personal
to such principal debtor; it is for this reason, that a judgment in favor of the principal
debtor can be invoked as res judicata by the surety."

In the case of Schoenberger vs. White (75 Con. 605) a joint judgment was rendered
against husband and wife for a sum of money in an action ex contractu. The wife
appealed. As to the effect of the appeal of the wife upon the liability of both, the court
said:

"Such a judgment is an entirety, and upon appeal to this court must be affirmed or
set aside in toto."

"That the husband was not so made a party does not vary this rule. After the filing of
the notice of appeal, he had the right to be heard in this court as to all the questions
brought up for review. As he has not exercised this right, it may be assumed that he
is content with the judgment against him as it stands; but he might complain of it,
were we to modify it by reducing the amount which it requires his wife to pay, and
thus reducing the amount of the contribution which he might be able to call upon her
to make, in case he paid all that it requires of him."
In the case of Philippines International Surety Co., Inc. vs. Commissioner of Customs,
L-22790, December 17, 1966, this Court, speaking through Chief Justice
Concepcion, sanctioned the view, albeit impliedly, that under a given set of facts, the
appeal of the principal debtor, if successful, may inure to the benefit of the surety.
Held this Court in that case:

Although the appeal taken from said decision by the importer (principal debtor) might
have, perhaps, inured to the benefit of the surety, if, the result of that appeal had been
favorable to said importer, the fact is he had failed in his appeal.1äwphï1.ñët

Solution of the question posed in this appeal hinges on the nature of the obligation
assumed by the Surety under its bond. As Article 1222 of the new Civil Code provides:

A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal
to him, or pertain to his own share. With respect to those which personally belong to
the others, he may avail himself thereof only as regards that part of the debt for which
the latter are responsible.

Pertinent parts of the surety bond provides:

That we, Tizon Engineering, as principal, and the Capital Insurance & Surety Co.,
Inc., as surety, . . . are held and firmly bound unto the Republic of the Philippines, in
the penal sum of P10,000.00, for the payment of which sum, well and truly to be
made, we bind ourselves, Jointly and Severally, by these presents.

Whereas, the principal agrees to comply with all the terms and conditions of the
proposal with the Bureau of Supply;

NOW THEREFORE, the conditions of this obligations are such that if the above
bounden principal shall, in case he becomes the successful bidder in any of the
proposal of the Bureau of Supply — (a) accept a contract with the Republic of the
Philippines, represented by the Bureau of Supply; (b) faithfully and truly performs in
good faith the contract; (c) to pay to the Republic of the Philippines, in case of delay
and/or default in the execution of the contract, any loss or damages which the latter
may suffer by reason thereof, not to exceed the sum of P10,000.00, Philippine
currency, then this obligation shall be void, otherwise it shall remain in full force and
effect.

It thus appears that the Surety bound itself, jointly and severally, with the principal
obligor to pay the Republic of the Philippines any loss or damage the latter may suffer,
not exceeding P10,000.00, "in case of delay and/or default in the execution of the
contract."

However, although the defendants bound themselves in solidum, the liability of the
Surety under its bond would arise only if its co-defendant, the principal obligor, should
fail to comply with the contract. To paraphrase the ruling in the case of Municipality
of Orion vs. Concha, the liability of the Surety is "consequent upon the liability" of
Tizon, or "so dependent on that of the principal debtor" that the Surety "is considered
in law as being the same party as the debtor in relation to whatever is adjudged,
touching the obligation of the latter"; or the liabilities of the two defendants herein "are
so interwoven and dependent as to be inseparable." Changing the expression, if the
defendants are held liable, their liability to pay the plaintiff would be solidary, but the
nature of the Surety's undertaking is such that it does not incur liability unless and
until the principal debtor is held liable.
True, it is that the Surety did not appeal the decision of the inferior court to the Court
of First Instance, and on account of its failure to appeal, it lost its personality to appear
in the latter court or to file an answer therein. However this may be, it is not certain at
this stage of the proceeding that the Surety's liability unto plaintiff has attached. The
principal debtor has asserted on appeal that it has no liability whatsoever to the
plaintiff, and, if this assertion be proven and sustained, the reversal of the judgment
of the inferior court would operate as a reversal on the Surety, even though it did not
appeal, in view of the dependency of its obligation upon the liability of the principal
debtor. The principal debtor might succeed in his appeal; in such eventuality, the
judgment of the inferior court could not continue in force against the Surety.
Consequently, it is premature at this juncture to execute said judgment against the
Surety.

The situation of the Surety may be likened to that of a defaulting defendant whose
right is protected under Section 4, Rule 18 of the Rules of Court as follows:

Judgment When Some Defendants Answer and Others make Default.—When a

complaint states a common cause of action against several defendants, some of
whom answer, and the others fail to do so, the court shall try the case against all upon
the answer thus filed and render judgment upon the evidence presented. The same
procedure applies when a common cause of action is pleaded in a counterclaim,
cross-claim and third-party claim.

Albeit it may not personally be allowed to file an answer in the Court of First Instance,
having failed to interpose an appeal, the Surety can rely on the answer of its co-
defendant and derive benefit therefrom if the judgment on appeal should turn out to
be favorable to the answering defendant (Castro vs. Peña, 80 Phil. 488, 502).

The decision in Ishar Singh vs. Liberty Insurance Corp. and Leonardo Anne, et al.,
(third-party defendants in the third-party complaint of Liberty Insurance Corp.), L-
16860, July 31, 1963, relied upon by the appellee, is not applicable to the facts of the
case at bar. In said case, Liberty Insurance Corp. was the only defendant and the
decision was against said defendant alone. The third party defendants were
impleaded as such upon the third party complaint filed against them by the Liberty
Insurance Corp. And as stated in the decision in said case, "the record does not
disclose whether the third-party defendants filed an answer to the third-party
complaint or not." Moreover, the liability of the third-party defendants to the third-party
plaintiff stemmed from the indemnity agreement executed by them in favor of the
Liberty Insurance Corp., and the third-party defendants did not have privity of contract
with the creditor Ishar Singh.

Upon the foregoing considerations, that portion of the appealed order remanding the
record of the case to the City Court of Manila for execution of the decision of said
court is hereby set aside, without costs.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and
Fernando, JJ., concur.
Concepcion, C.J., is on leave.

G.R. No. L-45848 November 9,1977

TOWERS ASSURANCE CORPORATION, petitioner,

vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and JUDGE
BENJAMIN K. GOROSPE, Presiding Judge, Court of First Instance of Misamis
Oriental, Branch I, respondents.

Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J.:

This case is about the liability of a surety in a counterbond for the lifting of a writ of
preliminary attachment.

On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan
de Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First
Instance of Misamis Oriental for the collection of the sum of P 58,400 plus litigation
expenses and attorney's fees (Civil Case No. 4930).

See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower
court issued an order of attachment. The deputy sheriff attached the properties of the
Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in 'the
amount of P 58,400 with Towers Assurance Corporation as surety. In that
undertaking, the Ong spouses and Towers Assurance Corporation bound themselves
to pay solidarity to See Hong the sum of P 58,400.

On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For non-
appearance at the pre- trial, the Ong spouses were declared in default.

On October 25, 1976, the lower court rendered a decision, ordering not only the Ong
spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See
Hong the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000
as litigation expenses and attorney's fees.

Ernesto Ong manifested that he did not want to appeal. On March 8, 1977, Ororama
Supermart filed a motion for execution. The lower court granted that motion. The writ
of execution was issued on March 14 against the judgment debtors and their surety.
On March 29, 1977, Towers Assurance Corporation filed the instant petition for
certiorari where it assails the decision and writ of execution.

We hold that the lower court acted with grave abuse of discretion in issuing a writ of
execution against the surety without first giving it an opportunity to be heard as
required in Rule 57 of tie Rules of Court which provides:

SEC. 17. When execution returned unsatisfied, recovery had upon bound. — If the
execution be returned unsatisfied in whole or in part, the surety or sureties on any
counterbound given pursuant to the provisions of this rule to secure the payment of
the judgment shall become charged on such counterbound, and bound to pay to the
judgment creditor upon demand, the amount due under the judgment, which amount
may be recovered from such surety or sureties after notice and summary hearing in
the same action.

Under section 17, in order that the judgment creditor might recover from the surety
on the counterbond, it is necessary (1) that execution be first issued against the
principal debtor and that such execution was returned unsatisfied in whole or in part;
(2) that the creditor made a demand upon the surety for the satisfaction of the
judgment, and (3) that the surety be given notice and a summary hearing in the same
action as to his liability for the judgment under his counterbond.

The first requisite mentioned above is not applicable to this case because Towers
Assurance Corporation assumed a solidary liability for the satisfaction of the
judgment. A surety is not entitled to the exhaustion of the properties of the principal
debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May 15,
1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be heard before an execution can be issued
against him since he is not a party in the case involving his principal. Notice and
hearing constitute the essence of procedural due process. (Martinez vs. Villacete 116
Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon
Surety Co., Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).

WHEREFORE, the order and writ of execution, insofar as they concern Towers
Corporation, are set aside. The lower court is directed to conduct a summary hearing
on the surety's liability on its counterbound. No costs.

SO ORDERED.

Fernando (Chairman), Barredo, Antonio, Concepcion, Jr. and Santos, JJ., concur.

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE
BANK, respondents.

Tangle-Chua, Cruz & Aquino for petitioner.

Fe B. Macalino & Associates for respondent Interbank.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari of the decision[1] of the Court of Appeals in
C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the
National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex
Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and
severally, to pay private respondent International Corporate Bank certain sums of
money, and the appellate courts resolution of October 17, 1989 denying petitioners
motion for reconsideration.

The facts are as follows:

Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with

the Manila Banking Corporation. To secure payment of the credit accommodation,
Inter-Resin Industrial and the Investment and Underwriting Corporation of the
Philippines (IUCP) executed two documents, both entitled Continuing Surety
Agreement and dated December 1, 1978, whereby they bound themselves solidarily
to pay Manilabank obligations of every kind, on which the [Inter-Resin Industrial] may
now be indebted or hereafter become indebted to the [Manilabank]. The two
agreements (Exhs. J and K) are the same in all respects, except as to the limit of
liability of the surety, the first surety agreement being limited to US$333,830.00, while
the second one is limited to US$334,087.00.

On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp.,
executed a Continuing Guaranty in favor of IUCP whereby For and in consideration
of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial
Corporation from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally
guaranteed the prompt and punctual payment at maturity of the NOTE/S issued by
the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION
PESOS (P5,000,000.00) Philippine Currency and such interests, charges and
penalties as hereafter may be specified.

On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrials outstanding obligation. (Exh. M-
1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the
payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties
paid, Atrium filed this case in the court below against Inter-Resin Industrial and Willex
Plastic.

On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,500.00 representing the proceeds of its fire
insurance policy for the destruction of its properties.

In its answer, Inter-Resin Industrial admitted that the Continuing Guaranty was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter
had paid to Manilabank. It claimed, however, that it had already fully paid its obligation
to Atrium Capital.

On the other hand, Willex Plastic denied the material allegations of the complaint and
interposed the following Special Affirmative Defenses:

(a) Assuming arguendo that main defendant is indebted to plaintiff, the formers
liability is extinguished due to the accidental fire that destroyed its premises, which
liability is covered by sufficient insurance assigned to plaintiff;

(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its
account is now very much lesser than those stated in the complaint because of some
payments made by the former;

(c) The complaint states no cause of action against WILLEX;

(d) WILLEX is only a guarantor of the principal obligor, and thus, its liability is only
secondary to that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the
principal obligor;

(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then
proceeded to trial.

On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the
right to present evidence for its failure to appear at the hearing despite due notice. On
the other hand, Willex Plastic rested its case without presenting any
evidence. Thereafter Interbank and Willex Plastic submitted their respective
memoranda.

On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial
and Willex Plastic jointly and severally to pay to Interbank the following amounts:

(a) P3,646,780.61, representing their indebtedness to the plaintiff, with interest of

17% per annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00
to the plaintiff, until full payment of the said amount;

(b) Liquidated damages equivalent to 17% of the amount due; and

(c) Attorneys fees and expenses of litigation equivalent to 20% of the total amount
due.

Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex
Plastic filed its brief, while Inter-Resin Industrial presented a Motion to Conduct
Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of
the Appellants Brief. After its motion was denied, Inter-Resin Industrial did not file its
brief anymore.

On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling
of the trial court.

Willex Plastic filed a motion for reconsideration praying that it be allowed to present
evidence to show that Inter-Resin Industrial had already paid its obligation to
Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin
Industrials motion for reception of evidence because the situation or situations in
which we could exercise the power under B.P. 129 did not exist. Movant here has not
presented any argument which would show otherwise.

Hence, this petition by Willex Plastic for the review of the decision of February 22,
1991 and the resolution of December 6,1991 of the Court of Appeals.

Petitioner raises a number of issues.

[1] The main issue raised is whether under the Continuing Guaranty signed on April
2, 1979 petitioner Willex Plastic may be held jointly and severally liable with Inter-
Resin Industrial for the amount paid by Interbank to Manilabank.

As already stated, the amount had been paid by Interbanks predecessor-in-interest,

Atrium Capital, to Manilabank pursuant to the Continuing Surety Agreements made
on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic
argues that under the Continuing Guaranty, its liability is for sums obtained by Inter-
Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the
account of Inter-Resin Industrial. In support of this contention Willex Plastic cites the
following portion of the Continuing Guaranty:

For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN

INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from
you and/or your principal/s as may be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you
and/or your principal/s, successor/s and assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges
and penalties as may hereinafter be specified.

The contention is untenable. What Willex Plastic has overlooked is the fact that
evidence aliunde was introduced in the trial court to explain that it was actually to
secure payment to Interbank (formerly IUCP) of amounts paid by the latter to
Manilabank that the Continuing Guaranty was executed. In its complaint below,
Interbanks predecessor-in-interest. Atrium Capital, alleged:

5. to secure the guarantee made by plaintiff of the credit accommodation granted to

defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required defendant
IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor and a
Continuing Guaranty which was signed by the other defendant WPIC [Willex Plastic].

In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it
had already paid its obligation in its entirety. On the other hand, Willex Plastic, while
denying the allegation in question, merely did so for lack of knowledge or information
of the same. But, at the hearing of the case on September 16, 1986, when asked by
the trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin
Industrial, Willex Plastics counsel replied in the negative and manifested that the
plaintiff in this case [Interbank] is the guarantor and my client [Willex Plastic] only
signed as a guarantor to the guarantee.[2]

For its part Interbank adduced evidence to show that the Continuing Guaranty had
been made to guarantee payment of amounts made by it to Manilabank and not of
any sums given by it as loan to Inter-Resin Industrial. Interbanks witness testified
under cross- examination by counsel for Willex Plastic that Willex guaranteed the
exposure/of whatever exposure of ACP [Atrium Capital] will later be made because
of the guarantee to Manila Banking Corporation.[3]

It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it
relates.[4] At all events, Willex Plastic cannot now claim that its liability is limited to
any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial
as debtor because, by failing to object to the parol evidence presented, Willex Plastic
waived the protection of the parol evidence rule.[5]

Accordingly, the trial court found that it was to secure the guarantee made by plaintiff
of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage
in its favor and a Continuing Guaranty which was signed by the defendant Willex
Plastic Industries Corporation.[6]

Similarly, the Court of Appeals found it to be an undisputed fact that to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-
appellants to sign a Continuing Guaranty. These factual findings of the trial court and
of the Court of Appeals are binding on us not only because of the rule that on appeal
to the Supreme Court such findings are entitled to great weight and respect but also
because our own examination of the record of the trial court confirms these findings
of the two courts.[7]

Nor does the record show any other transaction under which Inter-Resin Industrial
may have obtained sums of money from Interbank. It can reasonably be assumed
that Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for
amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.

Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC
[Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a Continuing
Guaranty was executed on April 2, 1979 by WILLEX PLASTIC INDUSTRIES
CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in
consideration of the loan obtained by IRIC [Inter-Resin Industrial].

[2] Willex Plastic argues that the Continuing Guaranty, being an accessory contract,
cannot legally exist because of the absence of a valid principal obligation.[8] Its
contention is based on the fact that it is not a party either to the Continuing Surety
Agreement or to the loan agreement between Manilabank and Inter-Resin Industrial.

Put in another way the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. . . . It is never necessary
that a guarantor or surety should receive any part or benefit, if such there be, accruing
to his principal.[9] In an analogous case,[10] this Court held:

At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the
purpose of having an additional capital for buying and selling coco-shell charcoal and
importation of activated carbon, the comprehensive surety agreement was admittedly
in full force and effect. The loan was, therefore, covered by the said agreement, and
private respondent, even if he did not sign the promissory note, is liable by virtue of
the surety agreement. The only condition that would make him liable thereunder is
that the Borrower is or may become liable as maker, endorser, acceptor or otherwise.
There is no doubt that Daicor is liable on the promissory note evidencing the
indebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one
which, in this case is the loan obtained by Daicor as evidenced by a promissory note.

[3] Willex Plastic contends that the Continuing Guaranty cannot be retroactively
applied so as to secure the payments made by Interbank under the two Continuing
Surety Agreements. Willex Plastic invokes the ruling m El Vencedor v.
Canlas[11] and Dio v. Court of Appeals[12] in support of its contention that a contract
of suretyship or guaranty should be applied prospectively.

The cases cited are, however, distinguishable from the present case. In El Vencedor
v. Canlas we held that a contract of suretyship is not retrospective and no liability
attaches for defaults occurring before it is entered into unless an intent to be so liable
is indicated. There we found nothing in the contract to show that the parties intended
the surety bonds to answer for the debts contracted previous to the execution of the
bonds. In contrast, in this case, the parties to the Continuing Guaranty clearly
provided that the guaranty would cover sums obtained and/or to be obtained by Inter-
Resin Industrial from Interbank.

On the other hand, in Dio v. Court of Appeals the issue was whether the sureties
could be held liable for an obligation contracted after the execution of the continuing
surety agreement.

It was held that by its very nature a continuing suretyship contemplates a future
course of dealing. It is prospective in its operation and is generally intended to provide
security with respect to future transactions. By no means, however, was it meant in
that case that in all instances a contract of guaranty or suretyship should be
prospective in application.

Indeed, as we also held in Bank of the Philippine Islands v. Foerster,[13] although a

contract of suretyship is ordinarily not to be construed as retrospective, in the end the
intention of the parties as revealed by the evidence is controlling. What was said
there[14] applies mutatis mutandis to the case at bar:

In our opinion, the appealed judgment is erroneous. It is very true that bonds or other
contracts of suretyship are ordinarily not to be construed as retrospective, but that
rule must yield to the intention of the contracting parties as revealed by the evidence,
and does not interfere with the use of the ordinary tests and canons of interpretation
which apply in regard to other contracts.

In the present case the circumstances so clearly indicate that the bond given by
Echevarria was intended to cover all of the indebtedness of the Arrocera upon its
current account with the plaintiff Bank that we cannot possibly adopt the view of the
court below in regard to the effect of the bond.

[4] Willex Plastic says that in any event it cannot be proceeded against without first
exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit
of excussion.The Civil Code provides, however:

Art. 2059. This excussion shall not take place:

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor;

xxxxxxxxx

The pertinent portion of the Continuing Guaranty executed by Willex Plastic and Inter-
Resin Industrial in favor of IUCP (now Interbank) reads:

If default be made in the payment of the NOTE/s herein guaranteed you and/or your
principal/s may directly proceed against Me/Us without first proceeding against and
exhausting DEBTOR/s properties in the same manner as if all such liabilities
constituted My/Our direct and primary obligations. (italics supplied)

This stipulation embodies an express renunciation of the right of excussion. In

addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under
the same agreement:

For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN

INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you
and/or your principal/s as may be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto
you and/ or your principal/s, successor/s and assigns the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your
principal/s, successor/s and assigns favor to the extent of the aggregate principal sum
of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests,
charges and penalties as may hereinafter he specified.

[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness
to Interbank and that Willex Plastic should have been allowed by the Court of Appeals
to adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been
given generous opportunity to present its evidence but it failed to make use of the
same. On the other hand, Willex Plastic rested its case without presenting evidence.

The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but
because of its failure to appear on that date, the hearing was reset on March 12, 26
and April 2, 1987.

On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of
Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and reset for
the last time on April 2 and 30, 1987.

On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial
court issued the following order:

Considering that, as shown by the records, the Court had exerted every earnest effort
to cause the service of notice or subpoena on the defendant Inter-Resin Industrial but
to no avail, even with the assistance of the defendant Willex. . . the defendant Inter-
Resin Industrial is hereby deemed to have waived the right to present its evidence.

On the other hand, Willex Plastic announced it was resting its case without presenting
any evidence.

Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order
and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved
for the postponement of the hearing to August 11, 1987. The hearing was, therefore,
reset on September 8 and 22, 1987 but the hearings were reset on October 13,1987,
this time upon motion of Interbank. To give Interbank time to comment on a motion
filed by Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was
again reset on November 17, 26 and December 11, 1987. However, Inter-Resin
Industrial again moved for the postponement of the hearing. Accordingly, the hearing
was reset on November 26 and December 11, 1987, with warning that the hearings
were intransferrable.

Again, the reception of evidence for Inter-Resin Industrial was reset on January 22,
1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still
failed to present its evidence, it was declared to have waived its evidence.

To give Inter-Resin Industrial a last opportunity to present its evidence, however, the
hearing was postponed to March 4, 1988. Again Inter-Resin Industrials counsel did
not appear. The trial court, therefore, finally declared Inter-Resin Industrial to have
waived the right to present its evidence. On the other hand, Willex Plastic, as before,
manifested that it was not presenting evidence and requested instead for time to file
a memorandum.

There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to
Interbank.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against
the petitioner.

SO ORDERED.

Regalado (Chairman), Romero, Puno, and Torres, Jr., JJ., concur.

G.R. No. 89775 November 26, 1992

JACINTO UY DIÑO and NORBERTO UY, petitioners,

vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present
controversy.d
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No.
17724 1 which reversed the 2 December 1987 Decision of Branch 45 of the Regional
Trial Court (RTC) of Manila in a collection suit entitled "Metropolitan Bank and Trust
Company vs. Uy Tiam, doing business under the name of "UY TIAM ENTERPRISES
& FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" and docketed as Civil
Case No. 82-9303. They likewise challenge public respondent's Resolution of 21
August 1989 2 denying their motion for the reconsideration of the former.

The impugned Decision of the Court summarizes the antecedent facts as follows:

It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter

referred to as UTEFS), thru its representative Uy Tiam, applied for and obtained credit
accommodations (letter of credit and trust receipt accommodations) from the
Metropolitan Bank and Trust Company (hereinafter referred to as METROBANK) in
the sum of P700,000.00 (Original Records, p. 333). To secure the aforementioned
credit accommodations Norberto Uy and Jacinto Uy Diño executed separate
Continuing Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977,
in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay
METROBANK any indebtedness of UTEFS up to the aggregate sum of P300,000.00
while Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00.

Having paid the obligation under the above letter of credit in 1977, UTEFS, through
Uy Tiam, obtained another credit accommodation from METROBANK in 1978, which
credit accommodation was fully settled before an irrevocable letter of credit was
applied for and obtained by the abovementioned business entity in 1979 (September
8, 1987, tsn, pp. 14-15).

The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum
of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000
Bags Planters 21-0-0." It was applied for and obtain by UTEFS without the
participation of Norberto Uy and Jacinto Uy Diño as they did not sign the document
denominated as "Commercial Letter of Credit and Application." Also, they were not
asked to execute any suretyship to guarantee its payment. Neither did METROBANK
nor UTEFS inform them that the 1979 Letter of Credit has been opened and the
Continuing Suretyships separately executed in February, 1977 shall guarantee its
payment (Appellees brief, pp. 2-3; rollo, p. 28).

The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters
Products the amount of P815,600.00 which payment was covered by a Bill of
Exchange (Exhibit "C"), dated 4 June 1979, in favor of (Original Records, p. 331).

Pursuant to the above commercial transaction, UTEFS executed and delivered to

METROBANK and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former
acknowledged receipt in trust from the latter of the aforementioned goods from
Planters Products which amounted to P815, 600.00. Being the entrusted, the former
agreed to deliver to METROBANK the entrusted goods in the event of non-sale or, if
sold, the proceeds of the sale thereof, on or before September 2, 1979.

However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt.
As a consequence, METROBANK sent letters to the said principal obligor and its
sureties, Norberto Uy and Jacinto Uy Diño, demanding payment of the amount due.
Informed of the amount due, UTEFS made partial payments to the Bank which were
accepted by the latter.
Answering one of the demand letters, Diño, thru counsel, denied his liability for the
amount demanded and requested METROBANK to send him copies of documents
showing the source of his liability. In its reply, the bank informed him that the source
of his liability is the Continuing Suretyship which he executed on February 25, 1977.

As a rejoinder, Diño maintained that he cannot be held liable for the 1979 credit
accommodation because it is a new obligation contracted without his participation.
Besides, the 1977 credit accommodation which he guaranteed has been fully paid.

Having sent the last demand letter to UTEFS, Diño and Uy and finding resort to
extrajudicial remedies to be futile, METROBANK filed a complaint for collection of a
sum of money (P613,339.32, as of January 31, 1982, inclusive of interest,
commission penalty and bank charges) with a prayer for the issuance of a writ of
preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded
Diño and Uy as parties-defendants.

The court issued an order, dated 29 July 1983, granting the attachment writ, which
writ was returned unserved and unsatisfied as defendant Uy Tiam was nowhere to
be found at his given address and his commercial enterprise was already non-
operational (Original Records, p. 37).

On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant herein) filed
a motion to dismiss the complaint on the ground of lack of cause of action. They
maintained that the obligation which they guaranteed in 1977 has been extinguished
since it has already been paid in the same year. Accordingly, the Continuing
Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's Letter of
Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It
was further argued that they can not be held liable for the obligation contracted in
1979 because they are not privies thereto as it was contracted without their
participation (Records, pp. 42-46).

On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking
the terms and conditions embodied in the comprehensive suretyships separately
executed by sureties-defendants, the bank argued that sureties-movants bound
themselves as solidary obligors of defendant Uy Tiam to both existing obligations and
future ones. It relied on Article 2053 of the new Civil Code which provides: "A guaranty
may also be given as security for future debts, the amount of which is not yet known;
. . . ." It was further asserted that the agreement was in full force and effect at the time
the letter of credit was obtained in 1979 as sureties-defendants did not exercise their
right to revoke it by giving notice to the bank. (Ibid., pp. 51-54).

Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance
pending the introduction of evidence by the parties as per order dated February 21,
1986 (Ibid., p. 71).

Having been granted a period of fifteen (15) days from receipt of the order dated
March 7, 1986 within which to file the answer, sureties-defendants filed their
responsive pleading which merely rehashed the arguments in their motion to dismiss
and maintained that they are entitled to the benefit of excussion (Original Records,
pp. 88-93).

On February 23, 1987, plaintiff filed a motion to dismiss the complaint against
defendant Uy Tiam on the ground that it has no information as to the heirs or legal
representatives of the latter who died sometime in December, 1986, which motion
was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion
of which reads:

The evidence and the pleadings, thus, pose the querry (sic):

Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the obligation
contracted by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987
by virtue of the Continuing Suretyships they executed on February 25, 1977?

Under the admitted proven facts, the Court finds that they are not.

a) When Uy and Diño executed the continuing suretyships, exhibits E and F, on

February 25, 1977, Uy Tiam was obligated to the plaintiff in the amount of
P700,000.00 — and this was the obligation which both obligation which both
defendants guaranteed to pay. Uy Tiam paid this 1977 obligation –– and such
payment extinguished the obligation they assumed as guarantors/sureties.

b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which
covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and
distinct from the obligation created in the other — as evidenced by the fact that Uy
Tiam had to apply anew for the 1979 transaction (Exh. A). And Diño and Uy, being
strangers thereto, cannot be answerable thereunder.

c) The plaintiff did not serve notice to the defendants Diño and Uy when it extended
to Credit — at least to inform them that the continuing suretyships they executed on
February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction
of Uy Tiam.

d) There is no sufficient and credible showing that Diño and Uy were fully informed of
the import of the Continuing Suretyships when they affixed their signatures thereon –
– that they are thereby securing all future obligations which Uy Tiam may contract the
plaintiff. On the contrary, Diño and Uy categorically testified that they signed the blank
forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience
to the instruction of Uy Tiam, their former employer. They denied having gone to the
office of the plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14;
October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3

xxx xxx xxx

In its Decision, the trial court decreed as follows:

PREMISES CONSIDERED, judgment is hereby rendered:

a) dismissing the COMPLAINT against JACINTO UY DIÑO and NORBERTO UY;

b) ordering the plaintiff to pay to Diño and Uy the amount of P6,000.00 as attorney's
fees and expenses of litigation; and

c) denying all other claims of the parties for want of legal and/or factual basis.

SO ORDERED. (Records, p. 336) 4

From the said Decision, the private respondent appealed to the Court of Appeals.
The case was docketed as CA-G.R. CV No. 17724. In support thereof, it made the
following assignment of errors in its Brief:

I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING

THAT DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY ARE
SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30,
1979 BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.

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

ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIÑO AND
NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5

On 22 June 1989, public respondent promulgated the assailed Decision the

dispositive portion of which reads:

WHEREFORE, premises considered, the judgment appealed from is hereby

REVERSED AND SET, ASIDE. In lieu thereof, another one is rendered:

1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and

severally, to appellant METROBANK the amount of P2,397,883.68 which represents
the amount due as of July 17, 1987 inclusive of principal, interest and charges;

2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and

severally, appellant METROBANK the accruing interest, fees and charges thereon
from July 18, 1987 until the whole monetary obligation is paid; and

3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly and

severally, to plaintiff P20,000.00 as attorney's fees.

With costs against appellees.

SO ORDERED. 6

In ruling for the herein private respondent (hereinafter METROBANK), public

respondent held that the Continuing Suretyship Agreements separately executed by
the petitioners in 1977 were intended to guarantee payment of Uy Tiam's outstanding
as well as future obligations; each suretyship arrangement was intended to remain in
full force and effect until METROBANK would have been notified of its revocation.
Since no such notice was given by the petitioners, the suretyships are deemed
outstanding and hence, cover even the 1979 letter of credit issued by METROBANK
in favor of Uy Tiam.

Petitioners filed a motion to reconsider the foregoing Decision. They questioned the
public respondent's construction of the suretyship agreements and its ruling with
respect to the extent of their liability thereunder. They argued the even if the
agreements were in full force and effect when METROBANK granted Uy Tiam's
application for a letter of credit in 1979, the public respondent nonetheless seriously
erred in holding them liable for an amount over and above their respective face
values.

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

. . . considering that the issues raised were substantially the same grounds utilized
by the lower court in rendering judgment for defendants-appellees which We upon
appeal found and resolved to be untenable, thereby reversing and setting aside said
judgment and rendering another in favor of plaintiff, and no new or fresh issues have
been posited to justify reversal of Our decision herein, . . . . 7

Hence, the instant petition which hinges on the issue of whether or not the petitioners
may be held liable as sureties for the obligation contracted by Uy Tiam with
METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship
Agreements signed on 25 February 1977.

Petitioners vehemently deny such liability on the ground that the Continuing
Suretyship Agreements were automatically extinguished upon payment of the
principal obligation secured thereby, i.e., the letter of credit obtained by Uy Tiam in
1977. They further claim that they were not advised by either METROBANK or Uy
Tiam that the Continuing Suretyship Agreements would stand as security for the 1979
obligation. Moreover, it is posited that to extend the application of such agreements
to the 1979 obligation would amount to a violation of Article 2052 of the Civil Code
which expressly provides that a guaranty cannot exist without a valid obligation.
Petitioners further argue that even granting, for the sake of argument, that the
Continuing Suretyship Agreements still subsisted and thereby also secured the 1979
obligations incurred by Uy Tiam, they cannot be held liable for more than what they
guaranteed to pay because it s axiomatic that the obligations of a surety cannot
extend beyond what is stipulated in the agreement.

On 12 February 1990, this Court resolved to give due course to the petition after
considering the allegations, issues and arguments adduced therein, the Comment
thereon by the private respondent and the Reply thereto by the petitioners; the parties
were required to submit their respective Memoranda.

The issues presented for determination are quite simple:

1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing Suretyship Agreements they separately
signed in 1977; and

2. On the assumption that they are, what is the extent of their liabilities for said 1979
obligations.

Under the Civil Code, a guaranty may be given to secure even future debts, the
amount of which may not known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or
suretyship. A continuing guaranty is one which is not limited to a single transaction,
but which contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is prospective in its operation and
is generally intended to provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for which, as they accrue,
the guarantor becomes liable.9 Otherwise stated, a continuing guaranty is one which
covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract, of guaranty, until the expiration or
termination thereof. 10 A guaranty shall be construed as continuing when by the
terms thereof it is evident that the object is to give a standing credit to the principal
debtor to be used from time to time either indefinitely or until a certain period,
especially if the right to recall the guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to secure advances to be made "from
time to time" the guaranty will be construed to be a continuing one. 11

In other jurisdictions, it has been held that the use of particular words and expressions
such as payment of "any debt," "any indebtedness," "any deficiency," or "any sum,"
or the guaranty of "any transaction" or money to be furnished the principal debtor "at
any time," or "on such time" that the principal debtor may require, have been
construed to indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement
executed by petitioner Uy provides thus:

I. For and in consideration of any existing indebtedness to the BANK of UY TIAM

(hereinafter called the "Borrower"), for the payment of which the SURETY is now
obligated to the BANK, either as guarantor or otherwise, and/or in order to induce the
BANK, in its discretion, at any time or from time to time hereafter, to make loans or
advances or to extend credit in any other manner to, or at the request, or for the
account of the Borrower, either with or without security, and/or to purchase or
discount, or to make any loans or advances evidence or secured by any notes, bills,
receivables, drafts, acceptances, checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon which the Borrower is or may
become liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to
guarantee, and does hereby guarantee, the punctual payment at maturity to the
loans, advances credits and/or other obligations hereinbefore referred to, and also
any and all other indebtedness of every kind which is now or may hereafter become
due or owing to the BANK by the Borrower, together with any and all expenses which
may be incurred by the BANK in collecting all or any such instruments or other
indebtedness or obligations herein before referred to, and/or in enforcing any rights
hereunder, and the SURETY also agrees that the BANK may make or cause any and
all such payments to be made strictly in accordance with the terms and provisions of
any agreement(s) express or implied, which has (have) been or may hereafter be
made or entered into by the Borrow in reference thereto, regardless of any law,
regulation or decree, unless the same is mandatory and non-waivable in character,
nor or hereafter in effect, which might in any manner affect any of the terms or
provisions of any such agreement(s) or the Bank's rights with respect thereto as
against the Borrower, or cause or permit to be invoked any alteration in the time,
amount or manner of payment by the Borrower of any such instruments, obligations
or indebtedness; provided, however, that the liability of the SURETY hereunder shall
not exceed at any one time the aggregate principal sum of PESOS: THREE
HUNDRED THOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in
which the obligations hereby guaranteed are payable), and such interest as may
accrue thereon either before or after any maturity(ies) thereof and such expenses as
may be incurred by the BANK as referred to above. 13

Paragraph I of the Continuing Suretyship Agreement executed by petitioner Diño

contains identical provisions except with respect to the guaranteed aggregate
principal amount which is EIGHT THOUSAND PESOS (P800,000.00). 14

Paragraph IV of both agreements stipulate that:

VI. This is a continuing guaranty and shall remain in full force and effect until written
notice shall have been received by the BANK that it has been revoked by the
SURETY, but any such notice shall not release the SURETY, from any liability as to
any instruments, loans, advances or other obligations hereby guaranteed, which may
be held by the BANK, or in which the BANK may have any interest at the time of the
receipt (sic) of such notice. No act or omission of any kind on the BANK'S part in the
premises shall in any event affect or impair this guaranty, nor shall same (sic) be
affected by any change which may arise by reason of the death of the SURETY, or
of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such
partnership of any one or more new partners. 15

The foregoing stipulations unequivocally reveal that the suretyship agreement in the
case at bar are continuing in nature. Petitioners do not deny this; in fact, they candidly
admitted it. Neither have they denied the fact that they had not revoked the suretyship
agreements. Accordingly, as correctly held by the public respondent:

Undoubtedly, the purpose of the execution of the Continuing Suretyships was to

induce appellant to grant any application for credit accommodation (letter of
credit/trust receipt) UTEFS may desire to obtain from appellant bank. By its terms,
each suretyship is a continuing one which shall remain in full force and effect until the
bank is notified of its revocation.

xxx xxx xxx

When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant
bank, for the purpose of obtaining goods (covered by a trust receipt) from Planters
Products, the continuing suretyships were in full force and effect. Hence, even if
sureties-appellees did not sign the "Commercial Letter of Credit and Application, they
are still liable as the credit accommodation (letter of credit/trust receipt) was covered
by the said suretyships. What makes them liable thereunder is the condition which
provides that the Borrower "is or may become liable as maker, endorser, acceptor or
otherwise." And since UTEFS which (sic) was liable as principal obligor for having
failed to fulfill the obligatory stipulations in the trust receipt, they as insurers of its
obligation, are liable thereunder. 16

Petitioners maintain, however, that their Continuing Suretyship Agreements cannot

be made applicable to the 1979 obligation because the latter was not yet in existence
when the agreements were executed in 1977; under Article 2052 of the Civil Code, a
guaranty "cannot exist without a valid obligation." We cannot agree. First of all, the
succeeding article provides that "[a] guaranty may also be given as security for future
debts, the amount of which is not yet known." Secondly, Article 2052 speaks about
a valid obligation, as distinguished from a void obligation, and not an existing or
current obligation. This distinction is made clearer in the second paragraph of Article
2052 which reads:

Nevertheless, a guaranty may be constituted to guarantee the performance of a

voidable or an unenforceable contract. It may also guarantee a natural obligation.

As to the amount of their liability under the Continuing Suretyship Agreements,

petitioners contend that the public respondent gravely erred in finding them liable for
more than the amount specified in their respective agreements, to wit: (a)
P800,000.00 for petitioner Diño and (b) P300,000.00 for petitioner Uy.

The limit of the petitioners respective liabilities must be determined from the
suretyship agreement each had signed. It is undoubtedly true that the law looks upon
the contract of suretyship with a jealous eye, and the rule is settled that the obligation
of the surety cannot be extended by implication beyond its specified limits. To the
extent, and in the manner, and under the circumstances pointed out in his obligation,
he is bound, and no farther. 17

Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and

petitioner Uy fix the aggregate amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. The law is clear that a guarantor may
bond himself for less, but not for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions. 18 In the case at bar, both
agreements provide for liability for interest and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies)
thereof and such expenses as may be incurred by the BANK referred to above.19

They further provide that:

In the event of judicial proceedings being instituted by the BANK against the SURETY
to enforce any of the terms and conditions of this undertaking, the SURETY further
agrees to pay the BANK a reasonable compensation for and as attorney's fees and
costs of collection, which shall not in any event be less than ten per cent (10%) of the
amount due (the same to be due and payable irrespective of whether the case is
settled judicially or extrajudicially). 20

Thus, by express mandate of the Continuing Suretyship Agreements which they had
signed, petitioners separately bound themselves to pay interest, expenses, attorney's
fees and costs. The last two items are pegged at not less than ten percent (10%) of
the amount due.

Even without such stipulations, the petitioners would, nevertheless, be liable for the
interest and judicial costs. Article 2055 of the Civil Code provides: 21

Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more
than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal obligation, but also
all its accessories, including the judicial costs, provided with respect to the latter, that
the guarantor shall only be liable for those costs incurred after he has been judicially
required to pay.

Interest and damages are included in the term accessories. However, such interest
should run only from the date when the complaint was filed in court. Even attorney's
fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil
Code. Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co.,
Inc., 22 this Court held:

Petitioner objects to the payment of interest and attorney's fees because: (1) they
were not mentioned in the bond; and (2) the surety would become liable for more than
the amount stated in the contract of suretyship.

xxx xxx xxx

The objection has to be overruled, because as far back as the year 1922 this Court
held in Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond
may recover from the surety as part of their damages, interest at the legal rate even
if the surety would thereby become liable to pay more than the total amount stipulated
in the bond. The theory is that interest is allowed only by way of damages for delay
upon the part of the sureties in making payment after they should have done so. In
some states, the interest has been charged from the date of the interest has been
charged from the date of the judgment of the appellate court. In this jurisdiction, we
rather prefer to follow the general practice, which is to order that interest begin to run
from the date when the complaint was filed in court, . . .

Such theory aligned with sec. 510 of the Code of Civil Procedure which was
subsequently recognized in the Rules of Court (Rule 53, section 6) and with Article
1108 of the Civil Code (now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but
by reason of its failure to pay when demanded and for having compelled the plaintiff
to resort to the courts to obtain payment. It should be observed that interest does not
run from the time the obligation became due, but from the filing of the complaint.

As to attorney's fees. Before the enactment of the New Civil Code, successful litigants
could not recover attorney's fees as part of the damages they suffered by reason of
the litigation. Even if the party paid thousands of pesos to his lawyers, he could not
charge the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).

However the New Civil Code permits recovery of attorney's fees in eleven cases
enumerated in Article 2208, among them, "where the court deems it just and equitable
that attorney's (sic) fees and expenses of litigation should be recovered" or "when the
defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's
plainly valid, just and demandable claim." This gives the courts discretion in
apportioning attorney's fees.

The records do not reveal the exact amount of the unpaid portion of the principal
obligation of Uy Tiam to MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-
309 dated 30 March 1979. In referring to the last demand letter to Mr. Uy Tiam and
the complaint filed in Civil Case No. 82-9303, the public respondent mentions the
amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission
penalty and bank charges." 23This is the same amount stated by METROBANK in its
Memorandum. 24 However, in summarizing Uy Tiam's outstanding obligation as of
17 July 1987, public respondent states:

Hence, they are jointly and severally liable to appellant METROBANK of UTEFS'
outstanding obligation in the sum of P2,397,883.68 (as of July 17, 1987) —
P651,092.82 representing the principal amount, P825,133.54, for past due interest
(5-31-82 to 7-17-87) and P921,657.32, for penalty charges at 12%per annum (5-31-
82 to 7-17-87) as shown in the Statement of Account (Exhibit I). 25

Since the complaint was filed on 18 May 1982, it is obvious that on that date, the
outstanding principal obligation of Uy Tiam, secured by the petitioners' Continuing
Suretyship Agreements, was less than P613,339.32. Such amount may be fully
covered by the Continuing Suretyship Agreement executed by petitioner Diño which
stipulates an aggregate principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.

Consequently, the judgment of the public respondent shall have to be modified to

conform to the foregoing exposition, to which extent the instant petition is impressed
with partial merit.

WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged
decision has to be modified with respect to the extend of petitioners' liability. As
modified, petitioners JACINTO UY DIÑO and NORBERTO UY are hereby declared
liable for and are ordered to pay, up to the maximum limit only of their respective
Continuing Suretyship Agreement, the remaining unpaid balance of the principal
obligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under
Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March 1979, together with the
interest due thereon at the legal rate commencing from the date of the filing of the
complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of
Manila, as well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not
inconsistent with the above are affirmed.

SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

G.R. No. L-10749 April 25, 1958

BRIGIDO R. VALENCIA, petitioner,

vs.
REHABILITATION FINANCE CORPORATION and COURT OF
APPEALS, respondents.

Eligio G. Lagman for petitioner.

Jesus A. Avancena for respondent.

CONCEPCION, J.:

Petitioner Brigido R. Valencia seeks a review, by certiorari, of a decision of the

Court of Appeals, reversing that of the Court of First Instance of Manila, and
sentencing him to pay respondent Rehabilitation Finance Corporation sum of
P6,200, by way of actual damages, with legal interest thereon, from the date
of the institution of this case, apart from the sum of P1,000 as attorneys fees,
and absolving respondent from the counterclaim of said petitioner, with costs
against the latter.

It appears that, prior to May 15, 1952, respondent issued and advertised to the
general public an "invitation to bid" for the construction of a reinforced concrete
building at Claveria Street, City of Davao. For the guidance of, and compliance
by, the parties concerned, said invitation to bid was supplemented with
"General Specifications," "Instructions to Bidders" and "Index of General
Conditions." In response to the invitation, petitioner submitted a bid, dated May
15, 1952, pertinent parts of which read:

In accordance with your advertisement inviting proposals for the

Construction of the Office Building owned by REHABILITATION
FINANCE CORPORATION, to be erected at Claveria Street, Davao
City, and subject to all conditions and requirements thereof, and of your
Plans and Specifications, with all their agenda, which so far as they
relate to this proposal, are made a part thereof, we (or I) propose to
furnish, deliver, and place and complete any and all necessary work as
called for by the said Plans and Specifications, we (or I) will furnish all
necessary plant, tools, appliances, and labor, and complete the work at
our (or My) own expenses, at the following prices in Philippine currency:

ITEM I:

Stipulated sum proposal for the complete construction of the Office

Building as per Plans and Specifications, including the following:

1. All electrical installations

2. All plumbing installations

Three Hundred Eighty Nine Thousand Nine Hundred Eighty Pesos

LUMP SUM .....................................................

P389,980.00

ITEM II:

Stipulated sum proposal for the complete construction of the Office

Building Only as per Plans and Specifications.

Three Hundred Fifty Eight Thousand Four Hundred Eighty Pesos

LUMP SUM
......................................................
P358,480.00

ITEM III:

ELECTRICAL INSTALLATIONS only.

Eighteen Thousand Nine Hundred pesos

 LUMP SUM
...................................................... P18 900.00

ITEM IV:

PLUMBING INSTALLATIONS only.

Twelve Thousand Six Hundred Pesos.

LUMP SUM
.......................................................
P12,000.00.

xxx xxx xxx

We (or I) inclose herewith Bidders Bond, in the sum of Thirty Nine

Thousand Pesos (P39,000.00) which is to be returned if this proposal is
rejected or retained if accepted as security until the execution and
delivery of a satisfactory bond in the sum of twenty per centum (20%) of
the total contract price for the full and faithful performance of the
contract.

On or about June 9, 1952, respondent's Board of Governors passed a

resolution awarding the contract for the construction of the building to Sanchez
& Antigua Engineering Co. for P292,000, that for the electrical installations to
Lorenzo Sarmiento, for P18,340, and that for the plumbing installations to
petitioner Valencia, for P12,800 By a letter dated June 16, 1952, which was
received by petitioner on June 22, 1952, the manager of the Davao branch of
respondent advised petitioner of said award, and of the fact that the
corresponding contract documents were being prepared in Manila and that he
(petitioner) would be notified upon receipt thereof. This notice was given to
petitioner through a letter of said Davao Manager, dated July 28, 1952, in which
petitioner was, also, requested to call at the office of the writer for the purpose
of affixing his (petitioner's) signature on the aforesaid contract and to post the
performance bond for 20% of the contract price of P12,800. Petitioner replied
on August 28, 1952, expressing his "thanks and appreciation" for the award,
and stating that it would be to the advantage of respondent to award the
contract for the plumbing installations to the contractor of the main building,
because the presence of petitioner's men in the building might give said
contractor an excuse to seek extension of time; because synchronization of
the work, to prevent possible delay, would not be promoted by awarding the
different parts of the building to different con-tractors; and because plumbing
installations particularly should go hand in hand with the progress of the work
of construction of the building, so that its contractor may have no valid ground
to ask extension of time. In view of petitioner's failure to sign the
aforementioned contract for the plumbing installations, respondent eventually
awarded the same for P19,000 to the contractor for the construction of the
building. Soon thereafter, or on December 19, 1962, respondent brought this
action in the Court of First Instance of Manila against petitioner herein, to
recover the sum of P6,200 representing the difference between the amount of
the contract awarded to him and the price at which the plumbing installations
were awarded to Sanchez and Antigua Engineering Co. — plus P1,000, as
attorney's fees, and the costs.
In his answer, petitioner alleged that, upon being notified of the award in his
favor, he "prepared all the necessary equipments, materials and plumbers to
do and perform the plumbing installations" in respondent's building, but,
without his knowledge and consent, respondent "entered into a contract with
Sanchez and Antigua Engineering Co. for the same plumbing installations
which was previously awarded" to petitioner, for which reason he set up a
counterclaim of P5,000, for compensatory damages, plus P10,000, for moral
damages, and P1,000 for attorney's fees.

In due course, the Court of First Instance of Manila rendered judgment,

absolving petitioner from the complaint, with costs against the respondent, and
sentencing the latter to pay petitioner the sum of P1,000, as "liquidated
attorney's fees." On appeal, this decision was re-versed by the Court of
Appeals, which rendered judgment for respondent, as above stated. Hence,
this petition for review by petitioner herein, who maintains in his brief, that:

1. La Corte de Apelacioines erro al declarar que exists un contrato valido

y obligatorio entre Rehabilitation Finance Corporation y Brigido R.
Valencia respecto a la instalacion de canerias (plumbing) en el edificio
de aquella en la ciudad de Davao.

2. Erro tambien la Corte de Apelaciones al no considerar como contra

oferta la resolucion de la junta de governadores de la Re-habilitation
Finance Corporation al adjudicar a Valencia solamente los trabajos de
instalacion de canerias (P12,600.00), en lugar de aceptar o rechazar
toda la oferta de P389,980.00.

3. Erro asimismo al declarar que la fianza del postor Brigido R. Valencia

debe considerarse eficaz no obstante que en la misma se hace constar
claramente que caducaba el 15 de junio de 1952.

4. Erro asimismo la Corte de Apelaciones al no declarar que la

aceptacion parcial de la Rehabilitation Finance Corporation se ha heche
despues de caducada la oferta de Valencia, y por tanto no es valida.

5. Erro finalinente la Corte de Apelaciones al revocar la decisiondel

juzgado de primers instancia de Manila y condenar a Brigido R. Valencia
al pago de P6,200.00 como daños y perjuicios, mas P1,000.00 como
honoraries de abogado, y las costas.

The arguments adduced by petitioner, in support of these assignments of error,

may be summed up as follows:

1. His offer was for the construction of respondent's building in Davao, with its
electrical and plumbing installations, whereas respondent awarded to him the
con-tract for the plumbing installations only. This award substantially modified,
therefore, the terms of his offer, so that a meeting of minds did not take place,
inasmuch as such modification was not accepted by petitioner herein.

2. Petitioner's offer was good until June 15, 1952 only, because it was
accompanied by a bond that expired on such date. The award in his favor came
to his knowledge on June 22, 1952, when he received the letter of respondent's
representative, dated June 16, 1952, giving notice of the award. Having been
effected after the expiration of petitioner's offer, said notice of its acceptance
did not perfect a contract between the parties herein.
3. Said acceptance by respondent was made subject to a condition, namely,
the giving of a performance bond for twenty per centum (20%) of the amount
of petitioner's offer. Inasmuch as this condition was not fulfilled, no contract
could, or did, exist between the parties.

With respect to the first argument, it is worthy of notice that the proposal
submitted by petitioner consisted of several items, among which are: (a) one
for P389,980, for the "complete construction of the office building" in question,
"including (1) all electrical installations; and (2) all plumbing installations"; (b)
another for P358,480, for the "complete construction of the office building only",
excluding, therefore, the electrical and plumbing installations; (e) a third one
for P18,900, for the "electrical installations only", excluding, therefore, the
building and its plumbing installations; and (d) a fourth item for P12,600, for the
"plumbing installations only", excluding, therefore, the building and its
electrical installations.

Each one of these items was complete in itself , and, as such, it was distinct,
separate and independent from the other items. The award in favor of petitioner
herein, implied, therefore, neither a modification of his offer nor a partial
acceptance thereof. It was an unqualified acceptance of the fourth item of his
bid, which item constituted a complete offer or proposal on the part of petitioner
herein. The effect of said acceptance was to perfect a contract, upon notice of
the award to petitioner herein.

Incidentally, said items in petitioner's bid were due, evidently, to the terms of
respondent's "instruction to bidders," paragraph 5 of which reads:

Where bids are not qualified by specific limitations, the Rehabilitation

Finance Corporation reserves the right of awarding all or any of the
items according to its best interest.

Indeed, petitioner's bid stated that it was submitted "in accordance with"
respondent's " advertisement inviting proposals for the construction" in
question "and subject to all conditions and requirements thereof ," one of which
is said paragraph 5 just quoted.

As regards the second argument, petitioner's bid did not specify its duration. It
enclosed therewith a bond for ten per centum (10%) of the amount of said bid,
in compliance with paragraph 10 of the instruction to bidders. Although
the bond itself stated that it expired on June 15, 1952, this does not mean that
the bid lapsed on the same date. The bond merely guaranteed the
performance of a principal obligation of petitioner herein. Needless say, this
principal obligation may stand without said bond, which is merely accessory
thereto, although the latter cannot exist without the former. Moreover, the bond
was given for the benefit, not of petitioner, but of respondent, so that the latter
could legally waive said benefit.

Petitioner's brief (p. 4) says that he understood or believed that upon expiration
of said bond, on June 15, 1952, his bid, likewise, lapsed. This allegation is
refuted by petitioner's conduct. Upon receipt of notice of the award in his favor,
petitioner did not object thereto upon any ground whatsoever. He did not even
say that his offer had expired already or had been modified. On the contrary,
he replied expressing his "thanks and appreciation" for the award, although he
stated, also, that it would be "to the advantage" of respondent to award the
plumbing installations "to the contractor of the main building." What is more, in
his answer to respondent's complaint, petitioner alleged, by way of special
defense, that upon notice of the award in his favor, he "prepared all the
necessary equipments, materials and plumbers to do and perform the
plumbing installations" in question. For this reason, he alleged, also, in his
answer, that he "should be the one entitled to damages" inasmuch as
respondent "awarded to Sanchez and Antigua Engineering Co. . . . the contract
for plumbing installations . . . without prior notice" to petitioner "who is the first
awardee, and set up a counterclaim for damages thus allegedly caused to him.
These acts of petitioner herein show, beyond doubt, that, upon receipt of notice
of the award on June 22, 1952, he knew that the contract between him and
respondent had become perfected, and that he must have felt, accordingly,
that his bid was still good at that time.

Referring now to the third argument, paragraph 10 of the aforementioned

instruction to bidders, imposed upon them the obligation to execute the
corresponding documents "within five (5) days after notice of the acceptance
of his bid." Paragraph 15 of said instruction to bidders, further provided:

The contract shall be made and executed in quadruplicate and shall be

accompanied by a bond or bonds given by the contractor with two or
more good and sufficient sureties or with a surety company, satisfactory
to the Manager, Industrial Department, RFC in a penal sum equal to
twenty (20) per cent of the full contract price of the work, conditioned for
the faithful performance of the contract according to its tenor and effect
and the satisfaction of obligation for materials used and labor employed
upon the same.

The obligation to give the performance bond mentioned in this paragraph, as

well as to execute the instrument incorporating the construction contract, within
five (5) days from notice of acceptance of the bid, as stated in paragraph 10 of
the instruction to bidders, were accepted by petitioner herein, for he submitted
his bid "subject to all conditions and requirements" of respondent's invitation
for bids. Hence, his (petitioner's) bid explicitly says:

We (or I) make this proposal with a full knowledge of the kind, quantity,
and quality of the articles and services required and said proposal is
accepted will, after receiving written notice of such acceptance, enter
into contract within five (5) days, with good and sufficient securities for
the faithful performance thereof.

Accordingly, respondent's communication of June 16, 1952, advised

petitioners that the contract for plumbing installations was awarded to him for
P12,800 "with performance bond of 20% thereof." Again, the letter of
respondent's manager in Davao, dated July 28, 1952, in-formed petitioner that
the contract for the plumbing installations had been received from the head
office and asked him to call at the writer's office for the purpose of affixing his
signature on said contract, and requested him to post said performance bond.
Petitioner's failure to do so did not relieve him of the obligation arising from the
un-qualified acceptance of his offer. Much less did it affect the existence of a
contract between him and respondent.

Petitioner insists that the giving of a performance bond was a condition

precedent. But such condition presupposes the existence of a contract, which
is qualified thereby. Compliance with said condition is essential to the
existence of petitioner's right to undertake the plumbing installations and
collect the price thereof. But, he had a contractual right to give the performance
bond, in the sense that respondent had granted him by agreement the right to
post said bond, and, once this had been done, he could invoke and enforce his
other rights by virtue of the award in his favor. At the same time, respondent
had a contractual right to demand the posting of the performance bond, and,
upon failure of petitioner to do so, respondent had a similar right to refuse to
allow petitioner to under-take the plumbing installations and to demand
damages for breach of petitioner's obligations. In either case, the existence of
the contractual relation between the parties did not depend upon the posting
the performance bond. Although, the latter was essential to the birth of some
of the rights stipulated in favor of petitioner herein, those of respondent
were not conditioned upon the giving of said performance bond.

Being in accordance with the facts and the law, the decision of the Court of
Appeals is hereby affirmed, therefore, with costs against petitioner Brigido R.
Valencia. It is so ordered.