Credit Transactions – 22 July 2019

were attached by creditors. Respondent bank considered debtor BMC in default of

its obligations and sought to collect payment thereof from petitioners-spouses as
G.R. No. 160466 January 17, 2005 sureties. In due time, petitioners-spouses filed their Answer.1awphi1.nét

SPOUSES ALFREDO and SUSANA ONG, petitioners, On October 13, 1992, a Memorandum of Agreement (MOA)2 was executed by
vs. debtor BMC, the petitioners-spouses as President and Treasurer of BMC, and the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent. consortium of creditor banks of BMC (of which respondent bank is included). The
MOA took effect upon its approval by the SEC on November 27, 1992. 3
DECISION
Thereafter, petitioners-spouses moved to dismiss4 the complaint. They argued that
PUNO, J.: as the SEC declared the principal debtor BMC in a state of suspension of payments
and, under the MOA, the creditor banks, including respondent bank, agreed to
temporarily suspend any pending civil action against the debtor BMC, the benefits
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set
of the MOA should be extended to petitioners-spouses who acted as BMC’s sureties
aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February
in their contracts of loan with respondent bank. Petitioners-spouses averred that
17, 2003, affirming the decision of the trial court denying petitioners’ motion to
respondent bank is barred from pursuing its collection case filed against them.
dismiss.

The trial court denied the motion to dismiss. Petitioners-spouses appealed to the
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged
Court of Appeals which affirmed the trial court’s ruling that a creditor can proceed
in the manufacture and export of finished wood products. Petitioners-spouses
against petitioners-spouses as surety independently of its right to proceed against
Alfredo and Susana Ong are its President and Treasurer, respectively.
the principal debtor BMC.
On April 20, 1992, respondent Philippine Commercial International Bank (now
Hence this appeal.
Equitable-Philippine Commercial International Bank or E-PCIB) filed a case for
collection of a sum of money1 against petitioners-spouses. Respondent bank sought
to hold petitioners-spouses liable as sureties on the three (3) promissory notes they Petitioners-spouses claim that the collection case filed against them by respondent
issued to secure some of BMC’s loans, totalling five million pesos (₱5,000,000.00). bank should be dismissed for three (3) reasons: First, the MOA provided that during
its effectivity, there shall be a suspension of filing or pursuing of collection cases
against the BMC and this provision should benefit petitioners as sureties. Second,
The complaint alleged that in 1991, BMC needed additional capital for its business
principal debtor BMC has been placed under suspension of payment of debts by the
and applied for various loans, amounting to a total of five million pesos, with the
SEC; petitioners contend that it would prejudice them if the principal debtor BMC
respondent bank. Petitioners-spouses acted as sureties for these loans and issued
would enjoy the suspension of payment of its debts while petitioners, who acted
three (3) promissory notes for the purpose. Under the terms of the notes, it was
only as sureties for some of BMC’s debts, would be compelled to make the
stipulated that respondent bank may consider debtor BMC in default and demand
payment; petitioners add that compelling them to pay is contrary to Article 2063 of
payment of the remaining balance of the loan upon the levy, attachment or
the Civil Code which provides that a compromise between the creditor and principal
garnishment of any of its properties, or upon BMC’s insolvency, or if it is declared to
debtor benefits the guarantor and should not prejudice the latter. Lastly,
be in a state of suspension of payments. Respondent bank granted BMC’s loan
petitioners rely on Article 2081 of the Civil Code which provides that:
applications.
"the guarantor may set up against the creditor all the defenses which pertain to the
principal debtor and are inherent in the debt; but not those which are purely
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of
personal to the debtor." Petitioners aver that if the principal debtor BMC can set up
payments with the Securities and Exchange Commission (SEC) after its properties
the defense of suspension of payment of debts and filing of collection suits against
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Credit Transactions – 22 July 2019
respondent bank, petitioners as sureties should likewise be allowed to avail of these properties are separate and distinct from that of the debtor BMC. Lastly, it bears to
defenses. stress that the MOA executed by BMC and signed by the creditor-banks was
approved by the SEC whose jurisdiction is limited only to corporations and
We find no merit in petitioners’ contentions. corporate assets. It has no jurisdiction over the properties of BMC’s officers or
sureties.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is
misplaced as these provisions refer to contracts of guaranty. They do not apply to Clearly, the collection suit filed by respondent bank against petitioners-spouses as
suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMC’s sureties can prosper. The trial court’s denial of petitioners’ motion to dismiss was
debts. There is a sea of difference in the rights and liabilities of a guarantor and a proper.
surety. A guarantor insures the solvency of the debtor while a surety is an insurer
of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement
part of the guarantor. It is only after the creditor has proceeded against the as to costs.
properties of the principal debtor and the debt remains unsatisfied that a guarantor
can be held liable to answer for any unpaid amount. This is the principle of SO ORDERED.
excussion. In a suretyship contract, however, the benefit of excussion is not
available to the surety as he is principally liable for the payment of the debt. As Republic of the Philippines
the surety insures the debt itself, he obligates himself to pay the debt if the SUPREME COURT
principal debtor will not pay, regardless of whether or not the latter is financially Manila
capable to fulfill his obligation. Thus, a creditor can go directly against the surety
although the principal debtor is solvent and is able to pay or no prior demand is
SECOND DIVISION
made on the principal debtor. A surety is directly, equally and absolutely bound
with the principal debtor for the payment of the debt and is deemed as an
G.R. No. 151953 June 29, 2007
original promissor and debtor from the beginning.5

SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioner,

Under the suretyship contract entered into by petitioners-spouses with respondent
bank, the former obligated themselves to be solidarily bound with the principal
debtor BMC for the payment of its debts to respondent bank amounting to five
million pesos (₱5,000,000.00). Under Article 1216 of the Civil Code,6 respondent
bank as creditor may proceed against petitioners-spouses as sureties despite the
execution of the MOA which provided for the suspension of payment and filing of
collection suits against BMC. Respondent bank’s right to collect payment from the
surety exists independently of its right to proceed directly against the principal
debtor. In fact, the creditor bank may go against the surety alone without prior
demand for payment on the principal debtor.7
The provisions of the MOA regarding the suspension of payments by BMC and the
non-filing of collection suits by the creditor banks pertain only to the property of
the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC,
only the properties of BMC were mentioned in the petition with the SEC. 8Secondly,
there is nothing in the MOA that involves the liabilities of the sureties whose
vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are not under
obligation to reimburse respondent, a claim that can be easily debunked. The more
perplexing question is whether this obligation to repay is solidary, as contended by
respondent and the lower courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the Philippines
(PDCP)1 entered into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby
PDCP agreed to make available and lend to Falcon the amount of US$320,000.00,
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for specific purposes and subject to certain terms and conditions.2 On the same day,
three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr.
(Ortigas), George A. Scholey and George T. Scholey executed an Assumption of
Solidary Liability whereby they agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment" of the loan
contracted by Falcon with PDCP.3 In the meantime, two separate guaranties were
executed to guarantee the payment of the same loan by other stockholders and
officers of Falcon, acting in their personal and individual capacities. One
Guaranty4 was executed by petitioner Salvador Escaño (Escaño), while the other5 by
petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo
(Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escaño, Silos
and Joseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas,
George A. Scholey, Inductivo and the heirs of then already deceased George T.
Scholey assigned their shares of stock in Falcon to Escaño, Silos and Matti. 6 Part of
the consideration that induced the sale of stock was a desire by Ortigas, et al., to
relieve themselves of all liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan with PDCP. Thus, an
Undertaking dated 11 June 1982 was executed by the concerned parties, 7 namely:
with Escaño, Silos and Matti identified in the document as "SURETIES," on one
hand, and Ortigas, Inductivo and the Scholeys as "OBLIGORS," on the other. The
Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to
release OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably
agree and undertake to assume all of OBLIGORs’ said guarantees [sic] to PDCP and
PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC
for the payment of FALCON’s obligations with it, any of [the] OBLIGORS shall
immediately inform SURETIES thereof so that the latter can timely take appropriate
measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of
OBLIGORS for collection of said loans and/or credit facilities, SURETIES agree to
defend OBLIGORS at their own expense, without prejudice to any and/or all of
OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogation or
other relief in respect to any of the claims of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to pay any
amount to PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due
from FALCON arising out of, or in connection with, their said guarantees[sic]. 8
Falcon eventually availed of the sum of US$178,655.59 from the credit line
extended by PDCP. It would also execute a Deed of Chattel Mortgage over its
personal properties to further secure the loan. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there
remained a subsisting deficiency of ₱5,031,004.07, which Falcon did not satisfy
despite demand.9
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for
sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas,
Escaño, Silos, Silverio and Inductivo. The case was docketed as Civil Case No. 89-
5128. For his part, Ortigas filed together with his answer a cross-claim against his
co-defendants Falcon, Escaño and Silos, and also manifested his intent to file a
third-party complaint against the Scholeys and Matti.10 The cross-claim lodged
against Escaño and Silos was predicated on the 1982 Undertaking, wherein they
agreed to assume the liabilities of Ortigas with respect to the PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with PDCP. The first to
come to terms with PDCP was Escaño, who in December of 1993, entered into a
compromise agreement whereby he agreed to pay the bank ₱1,000,000.00. In
exchange, PDCP waived or assigned in favor of Escaño one-third (1/3) of its entire
claim in the complaint against all of the other defendants in the case. 11 The
compromise agreement was approved by the RTC in a Judgment12 dated 6 January
1994.
Then on 24 February 1994, Ortigas entered into his own compromise
agreement13 with PDCP, allegedly without the knowledge of Escaño, Matti and
Silos. Thereby, Ortigas agreed to pay PDCP ₱1,300,000.00 as "full satisfaction of the
PDCP’s claim against Ortigas,"14 in exchange for PDCP’s release of Ortigas from any
liability or claim arising from the Falcon loan agreement, and a renunciation of its
claims against Ortigas.
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In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he
agreed to pay ₱500,000.00 in exchange for PDCP’s waiver of its claims against
him.15
In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escaño, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-
party complaint against Matti and Silos,16 while he maintained his cross-claim
against Escaño. In 1995, Ortigas filed a motion for Summary Judgment in his favor
against Escaño, Silos and Matti. On 5 October 1995, the RTC issued the Summary
Judgment, ordering Escaño, Silos and Matti to pay Ortigas, jointly and severally, the
amount of ₱1,300,000.00, as well as ₱20,000.00 in attorney’s fees.17 The trial court
ratiocinated that none of the third-party defendants disputed the 1982
Undertaking, and that "the mere denials of defendants with respect to non-
compliance of Ortigas of the terms and conditions of the Undertaking,
unaccompanied by any substantial fact which would be admissible in evidence at a
hearing, are not sufficient to raise genuine issues of fact necessary to defeat a
motion for summary judgment, even if such facts were raised in the pleadings." 18 In
an Order dated 7 March 1996, the trial court denied the motion for reconsideration
of the Summary Judgment and awarded Ortigas legal interest of 12% per annum to
be computed from 28 February 1994.19
From the Summary Judgment, recourse was had by way of appeal to the Court of
Appeals. Escaño and Silos appealed jointly while Matti appealed by his lonesome. In
a Decision20 dated 23 January 2002, the Court of Appeals dismissed the appeals and
affirmed the Summary Judgment. The appellate court found that the RTC did not
err in rendering the summary judgment since the three appellants did not
effectively deny their execution of the 1982 Undertaking. The special defenses that
were raised, "payment and excussion," were characterized by the Court of Appeals
as "appear[ing] to be merely sham in the light of the pleadings and supporting
documents and affidavits."21Thus, it was concluded that there was no genuine issue
that would still require the rigors of trial, and that the appealed judgment was
decided on the bases of the undisputed and established facts of the case.
Hence, the present petition for review filed by Escaño and Silos.22 Two main issues
are raised. First, petitioners dispute that they are liable to Ortigas on the basis of
the 1982 Undertaking, a document which they do not disavow and have in fact
annexed to their petition. Second, on the assumption that they are liable to Ortigas
under the 1982 Undertaking, petitioners argue that they are jointly liable only, and
not solidarily. Further assuming that they are liable, petitioners also submit that
they are not liable for interest and if at all, the proper interest rate is 6% and not
12%.
Interestingly, petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary judgment as a
relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil
Procedure, summary judgment may avail if the pleadings, supporting affidavits,
depositions and admissions on file show that, except as to the amount of damages,
there is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law. Petitioner have not attempted to
demonstrate before us that there existed a genuine issue as to any material fact
that would preclude summary judgment. Thus, we affirm with ease the common
rulings of the lower courts that summary judgment is an appropriate recourse in
this case.
The vital issue actually raised before us is whether petitioners were correctly held
liable to Ortigas on the basis of the 1982 Undertaking in this Summary Judgment.
An examination of the document reveals several clauses that make it clear that the
agreement was brought forth by the desire of Ortigas, Inductivo and the Scholeys to
be released from their liability under the loan agreement which release was, in
turn, part of the consideration for the assignment of their shares in Falcon to
petitioners and Matti. The whereas clauses manifest that Ortigas had bound himself
with Falcon for the payment of the loan with PDCP, and that "amongst the
consideration for OBLIGORS and/or their principals aforesaid selling is SURETIES’
relieving OBLIGORS of any and all liability arising from their said joint and several
undertakings with FALCON."23 Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners "irrevocably agree and undertake to assume all of
OBLIGORs’ said guarantees [sic] to PDCP x x x under the following terms and
conditions."24
At the same time, it is clear that the assumption by petitioners of Ortigas’s
"guarantees" [sic] to PDCP is governed by stipulated terms and conditions as set
forth in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by "any of
OBLIGORS" of any demand from PDCP for the payment of Falcon’s obligations with
it, "any of OBLIGORS" was to immediately inform "SURETIES" thereof so that the
latter can timely take appropriate measures. Second, should "any and/or all of
OBLIGORS" be impleaded by PDCP in a suit for collection of its loan, "SURETIES
agree[d] to defend OBLIGORS at their own expense, without prejudice to any
and/or all of OBLIGORS impleading SURETIES therein for contribution, indemnity,
subrogation or other relief"25 in respect to any of the claims of PDCP. Third, if any of
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Credit Transactions – 22 July 2019
the "OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES
[were to] reimburse OBLIGORS for said amount/s within seven (7) calendar days
from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was
not "made to pay" PDCP the amount now sought to be reimbursed, as Ortigas
voluntarily paid PDCP the amount of ₱1.3 Million as an amicable settlement of the
claims posed by the bank against him. However, the subject clause in paragraph
3(c) actually reads "[i]n the event that any of OBLIGORS is for any reason made to
pay any amount to PDCP x x x"27 As pointed out by Ortigas, the phrase "for any
reason" reasonably includes any extra-judicial settlement of obligation such as what
Ortigas had undertaken to pay to PDCP, as it is indeed obvious that the phrase was
incorporated in the clause to render the eventual payment adverted to therein
unlimited and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking
made clear that the right of Ortigas to seek reimbursement accrued only after he
had delivered payment to PDCP as a consequence of a final and executory
judgment. On the contrary, the clear intent of the Undertaking was for petitioners
and Matti to relieve the burden on Ortigas and his fellow "OBLIGORS" as soon as
possible, and not only after Ortigas had been subjected to a final and executory
adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause
PDCP x x x to within a reasonable time release all the OBLIGORS x x x from their
guarantees [sic] to PDCP x x x"28 In the event that Ortigas and his fellow "OBLIGORS"
could not be released from their guaranties, paragraph 2 commits petitioners and
Matti to cause the Board of Directors of Falcon to make a call on its stockholders for
the payment of their unpaid subscriptions and to pledge or assign such payments to
Ortigas, et al., as security for whatever amounts the latter may be held liable under
their guaranties. In addition, paragraph 1 also makes clear that nothing in the
Undertaking "shall prevent OBLIGORS, or any one of them, from themselves
negotiating with PDCP x x x for the release of their said guarantees [sic]."29
There is no argument to support petitioners’ position on the import of the phrase
"made to pay" in the Undertaking, other than an unduly literalist reading that is
clearly inconsistent with the thrust of the document. Under the Civil Code, the
various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly. 30 Likewise
applicable is the provision that if some stipulation of any contract should admit of
several meanings, it shall be understood as bearing
that import which is most adequate to render it effectual. 31 As a means to effect the
general intent of the document to relieve Ortigas from liability to PDCP, it is his
interpretation, not that of petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other
conditions set in paragraph 3, as they claim. Following the general assertion in the
petition that Ortigas violated the terms of the Undertaking, petitioners add that
Ortigas "paid PDCP BANK the amount of ₱1.3 million without petitioners ESCANO
and SILOS’s knowledge and consent."32 Paragraph 3(a) of the Undertaking does
impose a requirement that any of the "OBLIGORS" shall immediately inform
"SURETIES" if they received any demand for payment of FALCON’s obligations to
PDCP, but that requirement is reasoned "so that the [SURETIES] can timely take
appropriate measures"33 presumably to settle the obligation without having to
burden the "OBLIGORS." This notice requirement in paragraph 3(a) is markedly way
off from the suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the 1982
Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas are
similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note
that Ortigas had, in his answer, denied any liability to PDCP and had alleged that he
signed the Assumption of Solidary Liability not in his personal capacity, but as an
officer of Falcon. However, such position, according to petitioners, could not be
justified since Ortigas later voluntarily paid PDCP the amount of ₱1.3 Million. Such
circumstances, according to petitioners, amounted to estoppel on the part of
Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The
Partial Compromise Agreement between PDCP and Ortigas expressly stipulated that
Ortigas’s offer to pay PDCP was conditioned "without [Ortigas’s] admitting liability
to plaintiff PDCP Bank’s complaint, and to terminate and dismiss the said case as
against Ortigas solely."34 Petitioners profess it is "unthinkable" for Ortigas to have
voluntarily paid PDCP without admitting his liability,35 yet such contention based on
assumption cannot supersede the literal terms of the Partial Compromise
Agreement.
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Petitioners further observe that Ortigas made the payment to PDCP after he had
already assigned his obligation to petitioners through the 1982 Undertaking. Yet the
fact is PDCP did pursue a judicial claim against Ortigas notwithstanding the
Undertaking he executed with petitioners. Not being a party to such Undertaking,
PDCP was not precluded by a contract from pursuing its claim against Ortigas based
on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his
distress through a settlement with the creditor bank. Indeed, paragraph 1 of the
Undertaking expressly states that "nothing herein shall prevent OBLIGORS, or any
one of them, from themselves negotiating with PDCP x x x for the release of their
said guarantees [sic]."36 Simply put, the Undertaking did not bar Ortigas from
pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas
from recovering from petitioners whatever amount he may have paid PDCP through
his own settlement. The stipulation that if Ortigas was "for any reason made to pay
any amount to PDCP[,] x x x SURETIES shall reimburse OBLIGORS for said amount/s
within seven (7) calendar days from such payment"37makes it clear that petitioners
remain liable to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that
is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to
Ortigas, claiming that the Undertaking did not provide for express solidarity. They
cite Article 1207 of the New Civil Code, which states in part that "[t]here is a
solidary liability only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally
liable for the Undertaking, as the language used in the agreement "clearly shows
that it is a surety agreement"38 between the obligors (Ortigas group) and the
sureties (Escaño group). Ortigas points out that the Undertaking uses the word
"SURETIES" although the document, in describing the parties. It is further
contended that the principal objective of the parties in executing the Undertaking
cannot be attained unless petitioners are solidarily liable "because the total loan
obligation can not be paid or settled to free or release the OBLIGORS if one or any
of the SURETIES default from their obligation in the Undertaking."39
In case, there is a concurrence of two or more creditors or of two or more debtors
in one and the same obligation, Article 1207 of the Civil Code states that among
them, "[t]here is a solidary liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity." Article 1210
supplies further caution against the broad interpretation of solidarity by providing:
"The indivisibility of an obligation does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility."
These Civil Code provisions establish that in case of concurrence of two or more
creditors or of two or more debtors in one and the same obligation, and in the
absence of express and indubitable terms characterizing the obligation as solidary,
the presumption is that the obligation is only joint. It thus becomes incumbent
upon the party alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners
agreed "to bind themselves jointly and severally" in their obligations to the Ortigas
group, or any such terms to that effect. Hence, such obligation established in the
Undertaking is presumed only to be joint. Ortigas, as the party alleging that the
obligation is in fact solidary, bears the burden to overcome the presumption of
jointness of obligations. We rule and so hold that he failed to discharge such
burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified
themselves in the Undertaking as "SURETIES", a term repeated no less than thirteen
(13) times in the document. Ortigas claims that such manner of identification
sufficiently establishes that the obligation of petitioners to him was joint and
solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047
provides the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract
is called a suretyship. [Emphasis supplied]40
As provided in Article 2047 in a surety agreement the surety undertakes to be
bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary
contract as it presupposes the existence of a principal contract. It appears that
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Credit Transactions – 22 July 2019
Ortigas’s argument rests solely on the solidary nature of the obligation of the surety
under Article 2047. In tandem with the nomenclature "SURETIES" accorded to
petitioners and Matti in the Undertaking, however, this argument can only be viable
if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047
in the first place. That clearly is not the case here, notwithstanding the use of the
nomenclature "SURETIES" in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to
whom the surety is solidarily bound by way of an ancillary obligation of segregate
identity from the obligation between the principal debtor and the creditor. The
suretyship does bind the surety to the creditor, inasmuch as the latter is vested
with the right to proceed against the former to collect the credit in lieu of
proceeding against the principal debtor for the same obligation. 41 At the same time,
there is also a legal tie created between the surety and the principal debtor to
which the creditor is not privy or party to. The moment the surety fully answers to
the creditor for the obligation created by the principal debtor, such obligation is
extinguished.42 At the same time, the surety may seek reimbursement from the
principal debtor for the amount paid, for the surety does in fact "become
subrogated to all the rights and remedies of the creditor." 43
Note that Article 2047 itself specifically calls for the application of the provisions on
joint and solidary obligations to suretyship contracts. 44 Article 1217 of the Civil Code
thus comes into play, recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who paid (i.e., the
surety).45However, a significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor
can compel any one of the joint and several debtors or the surety alone to answer
for the entirety of the principal debt. The difference lies in the respective faculties
of the joint and several debtor and the surety to seek reimbursement for the sums
they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and a
fiador in solidum (surety). The latter, outside of the liability he assumes to pay the
debt before the property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of the fiansa;
while a solidary co-debtor has no other rights than those bestowed upon him in
Section 4, Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the contract of
suretyship. The civil law suretyship is, accordingly, nearly synonymous with the
common law guaranty; and the civil law relationship existing between the co-
debtors liable in solidum is similar to the common law suretyship.46
In the case of joint and several debtors, Article 1217 makes plain that the solidary
debtor who effected the payment to the creditor "may claim from his co-debtors
only the share which corresponds to each, with the interest for the payment
already made." Such solidary debtor will not be able to recover from the co-debtors
the full amount already paid to the creditor, because the right to recovery extends
only to the proportional share of the other co-debtors, and not as to the particular
proportional share of the solidary debtor who already paid. In contrast, even as the
surety is solidarily bound with the principal debtor to the creditor, the surety who
does pay the creditor has the right to recover the full amount paid, and not just any
proportional share, from the principal debtor or debtors. Such right to full
reimbursement falls within the other rights, actions and benefits which pertain to
the surety by reason of the subsidiary obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the
right under Article 2066 of the Civil Code, which assures that "[t]he guarantor who
pays for a debtor must be indemnified by the latter," such indemnity comprising of,
among others, "the total amount of the debt."47 Further, Article 2067 of the Civil
Code likewise establishes that "[t]he guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor."48
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that
the provisions should not extend to sureties, especially in light of the qualifier in
Article 2047 that the provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr. Tolentino’s observation
that "[t]he reference in the second paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however,
does not mean that suretyship is withdrawn from the applicable provisions
governing guaranty."49 For if that were not the implication, there would be no
material difference between the surety as defined under Article 2047 and the joint
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and several debtors, for both classes of obligors would be governed by exactly the
same rules and limitations.
Accordingly, the rights to indemnification and subrogation as established and
granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as
defined under Article 2047. These rights granted to the surety who pays materially
differ from those granted under Article 1217 to the solidary debtor who pays, since
the "indemnification" that pertains to the latter extends "only [to] the share which
corresponds to each [co-debtor]." It is for this reason that the Court cannot accord
the conclusion that because petitioners are identified in the Undertaking as
"SURETIES," they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general
presumption favoring joint liability, the Court would have to be satisfied that among
the petitioners and Matti, there is one or some of them who stand as the principal
debtor to Ortigas and another as surety who has the right to full reimbursement
from the principal debtor or debtors. No suggestion is made by the parties that such
is the case, and certainly the Undertaking is not revelatory of such intention. If the
Court were to give full fruition to the use of the term "sureties" as conclusive
indication of the existence of a surety agreement that in turn gives rise to a solidary
obligation to pay Ortigas, the necessary implication would be to lay down a
corresponding set of rights and obligations as between the "SURETIES" which
petitioners and Matti did not clearly intend.
It is not impossible that as between Escaño, Silos and Matti, there was an
agreement whereby in the event that Ortigas were to seek reimbursement from
them per the terms of the Undertaking, one of them was to act as surety and to pay
Ortigas in full, subject to his right to full reimbursement from the other two
obligors. In such case, there would have been, in fact, a surety agreement which
evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an
agreement, it does not appear on the record. More consequentially, no such
intention is reflected in the Undertaking itself, the very document that creates the
conditional obligation that petitioners and Matti reimburse Ortigas should he be
made to pay PDCP. The mere utilization of the term "SURETIES" could not work to
such effect, especially as it does not appear who exactly is the principal debtor
whose obligation is "assured" or "guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary
obligation of the Sureties," since the Undertaking expressly seeks to "reliev[e]
obligors of any and all liability arising from their said joint and several undertaking
with [F]alcon," and for the "sureties" to "irrevocably agree and undertake to
assume all of obligors said guarantees to PDCP."50 We do not doubt that a finding of
solidary liability among the petitioners works to the benefit of Ortigas in the
facilitation of these goals, yet the Undertaking itself contains no stipulation or
clause that establishes petitioners’ obligation to Ortigas as solidary. Moreover, the
aims adverted to by Ortigas do not by themselves establish that the nature of the
obligation requires solidarity. Even if the liability of petitioners and Matti were
adjudged as merely joint, the full relief and reimbursement of Ortigas arising from
his payment to PDCP would still be accomplished through the complete execution
of such a judgment.
Petitioners further claim that they are not liable for attorney’s fees since the
Undertaking contained no such stipulation for attorney’s fees, and that the
situation did not fall under the instances under Article 2208 of the Civil Code where
attorney’s fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to
his being impleaded in the suit filed by PDCP. The Undertaking was precisely
executed as a means to obtain the release of Ortigas and the Scholeys from their
previous obligations as sureties of Falcon, especially considering that they were
already divesting their shares in the corporation. Specific provisions in the
Undertaking obligate petitioners to work for the release of Ortigas from his surety
agreements with Falcon. Specific provisions likewise mandate the immediate
repayment of Ortigas should he still be made to pay PDCP by reason of the guaranty
agreements from which he was ostensibly to be released through the efforts of
petitioners. None of these provisions were complied with by petitioners, and Article
2208(2) precisely allows for the recovery of attorney’s fees "[w]hen the defendant’s
act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest."
Finally, petitioners claim that they should not be liable for interest since the
Undertaking does not contain any stipulation for interest, and assuming that they
are liable, that the rate of interest should not be 12% per annum, as adjudged by
the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals51 set forth the
rules with respect to the manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
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The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at
which time quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
14 March 1994, Ortigas made a judicial demand when he filed a Third-Party
Complaint praying that petitioners and Matti be made to reimburse him for the
payments made to PDCP. It is the filing of this Third Party Complaint on 14 March
1994 that should be considered as the date of judicial demand from which the
computation of interest should be reckoned.53 Since the RTC held that interest
should be computed from 28 February 1994, the appropriate redefinition should be
made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial
Court dated 5 October 1995 is modified by declaring that petitioners and Joseph M.
Matti are only jointly liable, not jointly and severally, to respondent Rafael Ortigas,
Jr. in the amount of ₱1,300,000.00. The Order of the Regional Trial Court dated 7
March 1996 is MODIFIED in that the legal interest of 12% per annum on the amount
of ₱1,300,000.00 is to be computed from 14 March 1994, the date of judicial
demand, and not from 28 February 1994 as directed in the Order of the lower
court. The assailed rulings are affirmed in all other respects. Costs against
petitioners.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 34642 September 24, 1931

3. When the judgment of the court awarding a sum of money becomes final and FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-
executory, the rate of legal interest, whether the case falls under paragraph 1 or appellees,
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, vs.
this interim period being deemed to be by then an equivalent to a forbearance of GUILLERMO SEVERINO, ET AL., defendants.
credit.52 ENRIQUE ECHAUS, appellant.

Since what was the constituted in the Undertaking consisted of a payment in a sum R. Nepomuceno for appellant.
of money, the rate of interest thereon shall be 12% per annum to be computed Jacinto E. Evidente for appellees.
from default, i.e., from judicial or extrajudicial demand. The interest rate imposed
by the RTC is thus proper. However, the computation should be reckoned from
STREET, J.:
judicial or extrajudicial demand. Per records, there is no indication that Ortigas
made any extrajudicial demand to petitioners and Matti after he paid PDCP, but on
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This action was instituted in the Court of First Instance of the Province of Iloilo by
Fabiola Severino, with whom is joined her husband Ricardo Vergara, for the
purpose of recovering the sum of P20,000 from Guillermo Severino and Enrique
Echaus, the latter in the character of guarantor for the former. Upon hearing he
cause the trial court gave judgment in favor of the plaintiffs to recover the sum of
P20,000 with lawful from November 15, 1929, the date of the filing of the
complaint, with costs. But it was declared that execution of this judgment should
issue first against the property of Guillermo Severino, and if no property should be
found belonging to said defendant sufficient to satisfy the judgment in whole or in
part, execution for the remainder should be issued against the property of Enrique
Echaus as guarantor. From this judgment the defendant Echaus appealed, but his
principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio
Severino, deceased, former resident of Occidental Negros. Upon the death of
Melecio Severino a number of years ago, he left considerable property and
litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on
the one part, and other heirs of the deceased on the other part. In order to make an
end of this litigation a compromise was effected by which Guillermo Severino, a son
of Melecio Severino, took over the property pertaining to the estate of his father at
the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola
Severino. This sum of money was made payable, first, P40,000 in cash upon the
execution of the document of compromise, and the balance in three several
payments of P20,000 at the end of one year; two years, and three years
respectively. To this contract the appellant Enrique Echaus affixed his name as
guarantor. The first payment of P40,000 was made on July 11, 1924, the date when
the contract of compromise was executed; and of this amount the plaintiff Fabiola
Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid,
Fabiola Severino is entitled to the sum of P20,000.
It appears that at the time of the compromise agreement above-mentioned was
executed Fabiola Severino had not yet been judicially recognized as the natural
daughter of Melecio Severino, and it was stipulated that the last P20,000
corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva
should retained on deposit until the definite status of Fabiola Severino as natural
daughter of Melecio Severino should be established. The judicial decree to this
effect was entered in the Court of First Instance of Occidental Negros on June 16,
1925, and as the money which was contemplated to be held in suspense has never
in fact been paid to the parties entitled thereto, it results that the point respecting
the deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never been paid and is
still owing to the plaintiff; and the only defense worth noting in this decision is the
assertion on the part of Enrique Echaus that he received nothing for affixing his
signature as guarantor to the contract which is the subject of suit and that in effect
the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties
thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a lawsuit
is recognized in law as a valuable consideration; and the dismissal of the action
which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo
Severino was an adequate consideration to support the promise on the part of
Guillermo Severino to pay the sum of money stipulated in the contract which is the
subject of this action. The promise of the appellant Echaus as guarantor therefore
binding. It is never necessary that the guarantor or surety should receive any part of
the benefit, if such there be, accruing to his principal. But the true consideration of
this contract was the detriment suffered by the plaintiffs in the former action in
dismissing that proceeding, and it is immaterial that no benefit may have accrued
either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will be
affirmed, with costs against the appellant. So ordered.
Republic of the Philippines
SUPREME COURT
THIRD DIVISION
G.R. No. 160324 November 15, 2005
INTERNATIONAL FINANCE CORPORATION, Petitioner,
vs.
IMPERIAL TEXTILE MILLS, INC.,* Respondent.
DECISION
PANGANIBAN, J.:
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Credit Transactions – 22 July 2019
he terms of a contract govern the rights and obligations of the contracting parties.
When the obligor undertakes to be "jointly and severally" liable, it means that the
obligation is solidary.
If solidary liability was instituted to "guarantee" a principal obligation, the law
deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly that, although
denominated as a "Guarantee Agreement," the Contract was actually a surety.
Notwithstanding the use of the words "guarantee" and "guarantor," the subject
Contract was indeed a surety, because its terms were clear and left no doubt as to
the intention of the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the
February 28, 2002 Decision2and September 30, 2003 Resolution3 of the Court of
Appeals (CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows:
"WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court
is MODIFIED to read as follows:
"1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner]
International Finance Corporation, the following amounts:
‘(a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement;
‘(b) Interest of 12% per annum on accrued interest, which shall be counted from the
date of filing of the instant action up to the actual payment;
‘(c) ₱73,340.00 as attorney’s fees;
‘(d) Costs of suit.’
"2. The guarantor Imperial Textile Mills, Inc. together with Grandtex
is HELD secondarily liable to pay the amount herein adjudged to [Petitioner]
International Finance Corporation."4
The assailed Resolution denied both parties’ respective Motions for
Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
"On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and
[Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan
agreement wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in
sixteen (16) semi-annual installments of US$437,500.00 each, beginning June 1,
1977 to December 1, 1984, with interest at the rate of 10% per annum on the
principal amount of the loan advanced and outstanding from time to time. The
interest shall be paid in US dollars semi-annually on June 1 and December 1 in each
year and interest for any period less than a year shall accrue and be pro-rated on
the basis of a 360-day year of twelve 30-day months.
"On December 17, 1974, a ‘Guarantee Agreement’ was executed with x x x Imperial
Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and
IFC as parties thereto. ITM and Grandtex agreed to guarantee PPIC’s obligations
under the loan agreement.
"PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1,
1978. The payments due on December 1, 1978, June 1, 1979 and December 1, 1979
were rescheduled as requested by PPIC. Despite the rescheduling of the installment
payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC served a written
notice of default to PPIC demanding the latter to pay the outstanding principal loan
and all its accrued interests. Despite such notice, PPIC failed to pay the loan and its
interests.
"By virtue of PPIC’s failure to pay, IFC, together with DBP, applied for the
extrajudicial foreclosure of mortgages on the real estate, buildings, machinery,
equipment plant and all improvements owned by PPIC, located at Calamba, Laguna,
with the regional sheriff of Calamba, Laguna. On July 30, 1985, the deputy sheriff of
Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP were the only
bidders during the auction sale. IFC’s bid was for ₱99,269,100.00 which was
equivalent to US$5,250,000.00 (at the prevailing exchange rate of ₱18.9084 =
US$1.00). The outstanding loan, however, amounted to US$8,083,967.00 thus
leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining balance.
"Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, despite the demand made by IFC, the outstanding
balance remained unpaid.
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Credit Transactions – 22 July 2019
"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against
PPIC and ITM for the payment of the outstanding balance plus interests and
attorney’s fees.
"The trial court held PPIC liable for the payment of the outstanding loan plus
interests. It also ordered PPIC to pay IFC its claimed attorney’s fees. However, the
trial court relieved ITM of its obligation as guarantor. Hence, the trial court
dismissed IFC’s complaint against ITM.
xxxxxxxxx
"Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to
the CA]."5
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM
from any obligation to IFC. According to the appellate court, ITM bound itself under
the "Guarantee Agreement" to pay PPIC’s obligation upon default. 6 ITM was not
discharged from its obligation as guarantor when PPIC mortgaged the latter’s
properties to IFC.7 The CA, however, held that ITM’s liability as a guarantor would
arise only if and when PPIC could not pay. Since PPIC’s inability to comply with its
obligation was not sufficiently established, ITM could not immediately be made to
assume the liability.8
The September 30, 2003 Resolution of the CA denied reconsideration. 9 Hence, this
Petition.10
The Issues
Petitioner states the issues in this wise:
"I. Whether or not ITM and Grandtex11 are sureties and therefore, jointly and
severally liable with PPIC, for the payment of the loan.
"II. Whether or not the Petition raises a question of law.
"III. Whether or not the Petition raises a theory not raised in the lower court." 12
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the
payment of the loan.
The Court’s Ruling
The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan
Agreement dated December 17, 1974, between IFC and PPIC;13 and (2) the
Guarantee Agreement dated December 17, 1974, between ITM and Grandtex, on
the one hand, and IFC on the other.14
IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to
PPIC’s obligations proceeding from the Loan Agreement.15 For its part, ITM asserts
that, by the terms of the Guarantee Agreement, it was merely a guarantor16 and not
a surety. Moreover, any ambiguity in the Agreement should be construed against
IFC -- the party that drafted it.17
Language of the
Contract
The premise of the Guarantee Agreement is found in its preambular clause, which
reads:
"Whereas,
"(A) By an Agreement of even date herewith between IFC and PHILIPPINE
POLYAMIDE INDUSTRIAL CORPORATION (herein called the Company), which
agreement is herein called the Loan Agreement, IFC agrees to extend to the
Company a loan (herein called the Loan) of seven million dollars ($7,000,000) on
the terms therein set forth, including a provision that all or part of the Loan may be
disbursed in a currency other than dollars, but only on condition that the
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Credit Transactions – 22 July 2019
Guarantors agree to guarantee the obligations of the Company in respect of the
Loan as hereinafter provided.
"(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and
in consideration of IFC entering into said Agreement, have agreed so to
guarantee such obligations of the Company."18
The obligations of the guarantors are meticulously expressed in the following
provision:
"Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and
unconditionally guarantee, as primary obligors and not as sureties merely, the due
and punctual payment of the principal of, and interest and commitment charge on,
the Loan, and the principal of, and interest on, the Notes, whether at stated
maturity or upon prematuring, all as set forth in the Loan Agreement and in the
Notes."19
The Agreement uses "guarantee" and "guarantors," prompting ITM to base its
argument on those words.20 This Court is not convinced that the use of the two
words limits the Contract to a mere guaranty. The specific stipulations in the
Contract show otherwise.
Solidary Liability
Agreed to by ITM
While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was "jointly and severally" liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a primary obligor, not
a mere surety. Those stipulations meant only one thing: that at bottom, and to all
legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily 21 liable with PPIC for the
latter’s obligations under the Loan Agreement with IFC. ITM thereby brought itself
to the level of PPIC and could not be deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITM’s
liability commenced only when it guaranteed PPIC’s obligation. It became a surety
when it bound itself solidarily with the principal obligor. Thus, the applicable law is
as follows:
"Article 2047. By guaranty, a person, called the guarantor binds himself to the
creditor to fulfill the obligation of the principal in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract
shall be called suretyship."22
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on
"Joint and Solidary Obligations." Relevant to this case is Article 1216, which states:
"The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected."
Pursuant to this provision, petitioner (as creditor) was justified in taking action
directly against respondent.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of the Guarantee
Agreement. When qualified by the term "jointly and severally," the use of the word
"guarantor" to refer to a "surety" does not violate the law. 23 As Article 2047
provides, a suretyship is created when a guarantor binds itself solidarily with the
principal obligor. Likewise, the phrase in the Agreement -- "as primary obligor and
not merely as surety" -- stresses that ITM is being placed on the same level as PPIC.
Those words emphasize the nature of their liability, which the law characterizes as a
suretyship.
The use of the word "guarantee" does not ipso facto make the contract one of
guaranty.24 This Court has recognized that the word is frequently employed in
business transactions to describe the intention to be bound by a primary or an
independent obligation.25 The very terms of a contract govern the obligations of the
parties or the extent of the obligor’s liability. Thus, this Court has ruled in favor of
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Credit Transactions – 22 July 2019
suretyship, even though contracts were denominated as a "Guarantor’s
Undertaking" 26 or a "Continuing Guaranty."27
Contracts have the force of law between the parties,28 who are free to stipulate any
matter not contrary to law, morals, good customs, public order or public
policy.29 None of these circumstances are present, much less alleged by respondent.
Hence, this Court cannot give a different meaning to the plain language of the
Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the premise provided in the
"Whereas" clause of the Guarantee Agreement. The execution of the Agreement
was a condition precedent for the approval of PPIC’s loan from IFC. Consistent with
the position of IFC as creditor was its requirement of a higher degree of liability
from ITM in case PPIC committed a breach. ITM agreed with the stipulation in
Section 2.01 and is now estopped from feigning ignorance of its solidary liability.
The literal meaning of the stipulations control when the terms of the contract are
clear and there is no doubt as to the intention of the parties. 30
We note that the CA denied solidary liability, on the theory that the parties would
not have executed a Guarantee Agreement if they had intended to name ITM as a
primary obligor.31 The appellate court opined that ITM’s undertaking was collateral
to and distinct from the Loan Agreement. On this point, the Court stresses that a
suretyship is merely an accessory or a collateral to a principal obligation.32 Although
a surety contract is secondary to the principal obligation, the liability of the surety is
direct, primary and absolute; or equivalent to that of a regular party to the
undertaking.33 A surety becomes liable to the debt and duty of the principal obligor
even without possessing a direct or personal interest in the obligations constituted
by the latter.34
ITM’s Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA erred in
declaring the former secondarily liable.35A surety is considered in law to be on the
same footing as the principal debtor in relation to whatever is adjudged against the
latter.36 Evidently, the dispositive portion of the assailed Decision should be
modified to require ITM to pay the amount adjudged in favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities allegedly justifying
the denial of the present Petition. Before the trial court and the CA, IFC had
allegedly instituted different arguments that effectively changed the corporation’s
theory on appeal, in violation of this Court’s previous pronouncements. 37 ITM
further
claims that the main issue in the present case is a question of fact that is not
cognizable by this Court.38
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal
Petitioner’s arguments before the trial court (that ITM was a "primary obligor") and
before the CA (that ITM was a "surety") were related and intertwined in the action
to enforce the solidary liability of ITM under the Guarantee Agreement. We
emphasize that the terms "primary obligor" and "surety" were premised on the
same stipulations in Section 2.01 of the Agreement. Besides, both terms had the
same legal consequences. There was therefore effectively no change of theory on
appeal. At any rate, ITM failed to show to this Court a disparity between IFC’s
allegations in the trial court and those in the CA. Bare allegations without proof
deserve no credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition for
Review,39 the Court has recognized exceptions,40 one of which applies to the
present case. The assailed Decision was based on a misapprehension of
facts,41 which particularly related to certain stipulations in the Guarantee
Agreement -- stipulations that had not been disputed by the parties. This
circumstance compelled the Court to review the Contract firsthand and to make its
own findings and conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and
Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a
surety to Philippine Polyamide Industrial Corporation. ITM is ORDEREDto pay
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International Finance Corporation the same amounts adjudged against PPIC in the gave rise to the contract and bond, Exhibits A and B, respectively, of the
assailed Decision. No costs. complaint, has been declared null and void by the provincial board and by
the Executive Bureau, the contract and bond in question are valid and,
SO ORDERED. consequently, enforceable on the ground that said resolution No. 161 is
within or had been adopted within the powers of the council.
Republic of the Philippines
SUPREME COURT II. The court a quo erred in holding that even granting that the contract
Manila Exhibit A is not valid de jure, it is a de facto contract as to the defendants,
particularly the defendant-grantee Miguel Marasigan.
EN BANC
III. The court a quo erred in not absolving the defendants Angel R. Sevilla
G.R. No. 43486 September 30, 1936 and Gonzalo L. Luna, sureties of the defendant Miguel Marasigan,
notwithstanding the fact that resolution No. 161, by virtue of which said
defendant subscribed the bond Exhibit B of the complaint, had been
THE MUNICIPALITY OF GASAN, plaintiff-appellee,
declared null and void by the provincial board and by the Executive
vs.
Bureau.
MIGUEL MARASIGAN, ANGEL R. SEVILLA and GONZALO L. LUNA, defendants-
appellants.
IV. The court a quo erred in holding that the herein defendant Miguel
Marasigan had taken advantage of the privilege to catch or gather
Luis Atienza Bijis for appellants.
whitefish spawn in the jurisdictional waters of the municipality of Gasan,
Provincial Fiscal Noel of Marinduque for appellee.
during the period from January 1, to December 31, 1931, notwithstanding
the fact that counsel for the plaintiff municipality failed to present
DIAZ, J.:
evidence, either documentary or oral, to justify said fact.

This is an action brought by the municipality of Gasan of the Province of

V. The court a quo erred in not absolving each and every one of the herein
Marinduque, against Miguel Marasigan, Angel R. Sevilla and Gonzalo L. Luna, to
defendants from the complaint, and in not ordering the plaintiff
recover from them the sum of P3,780, alleging that it forms a part of the license
municipality to return to the defendant Miguel Marasigan the sums of four
fees which Miguel Marasigan failed to pay for the privilege granted him of gathering
hundred twenty pesos (P420) and eight hundred forty pesos (P840)
whitefish spawn (semillas de bañgus) in the jurisdictional waters of the plaintiff
deposited with said plaintiff, with interest thereon from the respective
municipality during the period from January 1, 1931, to December 31 of said year.
dates of their deposit, until their return.

The Court of First Instance of Marinduque, which tried the case, rendered a
The case was tried by the lower court with no other evidence than the admissions
decision adverse to the defendants, sentencing them to pay jointly to the plaintiff
made by the parties in the stipulation of facts mentioned in the body of the
said sum of P3,780 with legal interest thereon from August 19, 1932, until fully
decision, the pertinent parts of which will be discussed later. Said stipulation and
paid, plus the costs of the suit. From said judgment, the defendants appealed to this
the attached papers forming a part thereof enables this court to narrate the
court, attributing to the lower court the five alleged errors relied upon in their brief,
material facts of the case, as follows:
as follows:
The plaintiff-appellee municipality, on December 9, 1930, put up at auction the
I. The court a quo erred in holding and maintaining that, notwithstanding
privilege of gathering whitefish spawn in its jurisdictional waters for the period of
the fact that resolution No. 161 of the municipal council of Gasan which
one year from January 1, 1931. Two bidders, Graciano Napa and Miguel Marasigan,
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appeared at the auction. Both attached to their respective bids the certificate of not
being behind in the payment of any tax, issued by the municipal treasurer of Gasan,
Marinduque, as required by the provisions of resolution No. 42, series of 1930, of
the council of said municipality. Graciano Napa proposed to accept the privilege by
paying P5,000 therefor, Miguel Marasigan proposed to do likewise, but by paying
only P4,200.
The council of the plaintiff-appellee municipality, in its resolution No. 161 (Exhibit 1)
of December 11, 1930 rejected Graciano Napa's bid and accepted that of the
appellant Miguel Marasigan, granting and selling to the latter the privilege put up at
auction for the sum of P4,200, payable quarterly in advance at the rate of P1,050 a
quarter (Exhibit A). To secure his compliance with the terms of the contract which
was immediately formalized by him and the plaintiff, and pursuant to the provisions
of section 8 of resolution No. 128, series of 1925, of the council of said plaintiff,
Miguel Marasigan filed the bond, Exhibit B, subscribed on December 15, 1930, by
the defendants-appellants Angel R. Sevilla and Gonzalo L. Luna, who bound
themselves in said document to pay to the plaintiff the sum of P8,400, if Miguel
Marasigan failed to deposit one-fourth of P4,200 quarterly in advance in the
municipal treasury of Gasan, in violation of the terms of the contract executed and
entered into by him and the plaintiff on December 11, 1930 (Exhibit A), for the
compliance with which they became sureties.
Before the plaintiff municipality and Miguel Marasigan entered into their contract,
and also before the latter's sureties executed the above-stated bond, Graciano
Napa, whose bid was rejected for the reason that he had not attached thereto the
certificate that he is not behind in the payment of any tax which he should have
obtained from the municipal treasurer of Lemery, his native town, forwarded a
protest (Exhibit 4) to the provincial board, which protest was later indorsed by said
provincial board to the Chief of the Executive Bureau, alleging that the plaintiff
municipality violated the provisions of section 2323 of the Administrative Code in
rejecting his bid.
The provincial board, passing upon Graciano Napa's protest and acting under the
authority which, in its opinion, was granted to it by section 2233 of the
Administrative Code, held that resolution No. 161, series of 1930, by virtue of which
the municipal council of Gasan rejected Graciano Napa's bid and accepted that of
Miguel Marasigan, notwithstanding the fact that the latter offered to pay less, was
invalid, and suggested that the privilege should be, awarded to Graciano Napa who,
in its opinion, appeared to be the highest bidder in accordance with the provisions
of sections 2323 and 2319 of the Administrative Code (Exhibit 9). The Executive
Bureau, concurring with the provincial board's points of view, declared, in turn, that
the concession made to Marasigan was illegal in view of the fact that Graciano Napa
was the highest bidder (Exhibit 13).
The plaintiff municipality, through its municipal council, exerted efforts to obtain
the reconsideration of the decisions of the provincial board of Marinduque and of
the Executive Bureau but, as these two entities maintained their decisions (Exhibits
14, 15, 16, 17 and 18), it decided, in its resolution No. 11, series of 1931 (Exhibit 19),
to award the privilege of gathering whitefish spawn within its waters to Graciano
Napa, giving him a period of six days, which was later extended to seven days, from
January 8, 1931 (Exhibit 19-A), to deposit the sum of P500, equivalent to 10 per
cent of his bid of P5,000, with the municipal treasurer of Gasan, so as to comply
with the provisions of section 8 of the conditions of the public auction at which he
was a bidder, warning him that if he failed to do so, the contract entered into by the
plaintiff, through its president, and the appellant Miguel Marasigan (Exhibit A),
would automatically take effect. Graciano Napa not only failed to make the deposit
required by the plaintiff in its two above-stated resolutions Nos. 11 and 12, series of
1931 (Exhibits 19 and 19-A), but he formally declared, through his duly authorized
representative, that he yielded the privilege granted him to Miguel Marasigan or to
any other person selected by the municipal authorities (Exhibit 20).
One day later, or on January 15, 1931, the president of the plaintiff-appellee
municipality sent the letter Exhibit 21 to Miguel Marasigan, which reads:
SIR:
By virtue of Res. No. 11, c. s., as amended by Res. No. 12, same series, and
communication of Mr. J. Zaguirre dated January 14, 1931 copy of which is
hereto attached, you are hereby advised that the contract entered into
between you and the municipality of Gasan for the lease of
the bañgus fishery privilege for the year 1931 becomes effective on
January 14, 1931, to run until December 31, 1931.
You are hereby requested to appear before the session of the Municipal
Council to be held at the office of the undersigned tomorrow, January 16,
1931, bringing with yourself the contract and bond executed in your favor
for ratification.
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You are further informed that you are given 10 days from the date hereof,
within which time you are to pay the amount of P1,050, as per tax
corresponding to the first quarter, 1931.
Prior to this, but after the adoption by the municipal council of Gazan of its
resolution No. 163 (Exhibit 7) on December 16, 1930, and two days before the
provincial board declared said council's resolutions Nos. 161 and 163 invalid, the
president of the plaintiff-appellee municipality notified the appellant Miguel
Marasigan that the contract whereby he was granted the privilege of gathering
whitefish spawn during the year 1931, upon his offer to pay P4,200 a year therefor,
was suspended and that he should consider it ineffective in the meantime in view of
the fact that the question whether he (Miguel Marasigan) or Graciano Napa was the
highest bidder still remained undecided by the provincial board of Marinduque and
by the Executive Bureau. The English translation of the letter sent by the municipal
president to Miguel Marasigan, which was written in Tagalog (Exhibit 8), reads:
SIR:
In view of the fact that the whitefish (bañgus) case has not been decided
or determined by the provincial board and is still pending action to date,
and in view of the instructions given me by the representative of the
Executive Bureau, Mr. Jose Zaguirre, I beg to inform you, with due respect,
that you should refrain from carrying out and giving efficacy to the
contract signed by me in the name of the municipality, relative to the
privilege of gathering whitefish in your favor, from this date until further
notice, because this case is still pending action.
Knowing the above-stated facts, let us now turn to the consideration of the alleged
errors attributed to the lower court by the appellants.
The first and third errors should be considered jointly on account of the close
relation existing between them. The determination of one depends upon that of
the other.
This court believes that there is no necessity of even discussing the first error
because the plaintiff itself accepted the conclusions and decision of the provincial
board and of the Executive Bureau, so much so that in its resolution No. 11, series
of 1931, it thereafter considered Graciano Napa as the highest bidder, going to the
extent of requiring him, as it in fact required him, to make the deposit of P500
prescribed by the conditions of the auction sale in which he had intervened, and
granting him a period of seven days to comply with said requirement (Exhibits 19
and 19-A). Furthermore, when the plaintiff received Graciano Napa's notice
informing it that he ceded the privilege just granted him to appellant Miguel
Marasigan or to any other person that it might choose, said plaintiff, through its
municipal president, required Miguel Marasigan to appear before its municipal
council to present his formerly prepared contract as well as his bond in order that
both documents might be ratified (Exhibit 21). It should be added to the foregoing
that on December 18, 1930, the plaintiff, also through its municipal president
notified appellant Marasigan that his contract should, in the meantime, be
considered ineffectual and that he should do nothing to put it in execution because
the case was still undecided by the provincial board and by the Executive Bureau
(Exhibit 8). It is clear that it may be logically inferred from these facts that the
contract regarding fishing privilege entered into between the plaintiff and appellant
Marasigan on December 11, 1930 (Exhibit A), not only was not consummated but
was cancelled. Consequently, it now appears useless and futile to discuss whether
or not resolution No. 161 (Exhibit 1) is valid and legal. In either case, it is a fact that,
said contract ceased to have life or force to bind each of the contracting parties. It
ceased to be valid from the time it was cancelled and this being so, neither the
appellant Marasigan nor his sureties or the appellants were bound to comply with
the terms of their respective contracts of fishing privilege and suretyship. This is so,
particularly with respect to the sureties-appellants, because suretyship cannot exist
without a valid obligation (art. 1824 of the Civil Code). The obligation whose
compliance by the appellant Marasigan was guaranteed by the sureties-appellants,
was exclusively that appearing in Exhibit A, which should begin on January 1, 1931,
not on the 14th of said month and year, and end on December 31st next. They
intervened in no other subsequent contract which the plaintiff and Miguel
Marasigan might have entered into on or after January 14, 1931. Guaranty is not,
presume; it must be expressed and cannot be extended beyond its specified limits
(art. 1827 of the Civil Code). Therefore, after eliminating the obligation for which
said sureties-appellants desired to answer with their bond, the bond necessarily
ceased and it ceases to have effects. Consequently, said errors I and III are true and
well founded.
As to the second error it must be known that among the stipulations contained in
the stipulation of facts submitted to the court are the following:
21. That on July 20, 1931, Miguel Marasigan paid the sum of P16.20 to the
municipal treasurer of Gasan, as internal revenue tax on sales of whitefish
(bañgus) spawn amounting to P1,080 during the months of April, May and
June, 1931; and that on August 22, 1931, said Miguel Marasigan presented
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his sales book to the municipal treasurer of Gasan, Mr. Gregorio D. Chavez,
it appearing therein that said Miguel Marasigan, in the month of July,
1931, sold whitefish spawn amounting to P85; in the month of August,
1931, none, and in the month of September, 1931, none.
22. That Miguel Marasigan is he concessionaire of the privilege to gather
whitefish spawn in the jurisdictional waters of the municipality of Boac,
Marinduque, during the period from January 1, 1931, to December 31 of
said year, and that during said period of time he had paid the sales tax on
the whitefish spawn in question only in the municipality of Gasan, without
having made any payment in the municipality of Boac.
23. That defendant Miguel Marasigan, as bidder at the auction of
December 9, 1930, deposited in the municipal treasury of Gasan the sum
of P420, equivalent to 10 per cent of his bid at said auction, and that said
sum has not yet been returned to him to date.
24. That on June 29, 1931, said Miguel Marasigan delivered another sum of
P840 to the municipal treasurer of Gasan, making the total amount
delivered by him to said municipal treasurer P1,260, the corresponding
receipt having been issued to Miguel Marasigan to that effect.
The facts resulting from the stipulations in question warrant and justify the
inference that the appellant Miguel Marasigan practically enjoyed the privilege of
gathering whitefish spawn in the jurisdictional waters of the municipality of Gasan,
under the terms of the contract executed by him on December 11, 1930, but which
was cancelled later by virtue of Graciano Napa's protest, at least from the month of
April to the month of July, 1931, inclusive. If this were not true, he would not have
paid, as he spontaneously paid to the municipal treasurer of Gasan, the following
sums: P840 on June 29, 1931, and P16.20 on July 20 of said year, nor presented, as
he in fact presented to said official for inspection, his sales book wherein it appears
that his sales of whitefish spawn during the month of July of said year amounted to
P85. The stipulation of facts, however, is silent as to whether or not he enjoyed the
privilege in question during the rest of the year. On the contrary, it states he sold no
whitefish spawn in August or September.
The excuse now offered by appellant Marasigan in his brief that the above-stated
amounts were on account of license fees or taxes on the privilege of gathering
whitefish spawn in the jurisdictional waters of Boac, obtained by him from said
municipality, is not supported by the evidence. If the payments made by him as he
claims them to be, he would have so stated in the stipulations of facts. Not having
done so and, furthermore, the practice generally observed being to pay an
obligation in the municipality where the payment is due, the only conclusion
possible is that said appellant made all such payments on account of the-tacit
contract entered into by him and the plaintiff after he had received the letter of
January 15, 1931 (Exhibit 21), sent to him by said plaintiff through its municipal
president. This conclusion is all the more logical because appellant Marasigan
insisted in his answer, and still continues to insist in his brief, that the plaintiff is
obliged to refund to him the amount of P1,260 which he claims to have paid to it,
and which is no other than the amount of the two sums of P420 and P840 stated in
the last two paragraphs of the abovestated stipulation of facts. If it were really true,
as said appellant contends, that the sum of P840 was paid by him on account of his
contract for privilege of gathering whitefish spawn, executed in his favor by the
municipality of Boac, he would not have insisted in his answer, nor would he now
insist in his brief, that said sum be refunded to him, because in the absence of
evidence to the contrary, it must be presumed that it was transmitted by the
municipal treasurer of Gasan to that of Boac, inasmuch as accepting his contention,
he was obliged to pay something to the latter municipality by virtue of his alleged
contract with it.
For the foregoing reasons, the conclusion of this court with respect to the second
error attributed to the lower court by appellant Marasigan is that said error is
without merit. The truth is that between him and the plaintiff, there was a tacit
contract for the privilege of gathering whitefish spawn in he jurisdictional waters of
the municipality of Gasan, based upon Exhibit A but without the intervention of the
sureties-appellants, for the above-stated period, or from April to July, 1931,
inclusive, which is equivalent to one and one-third quarter. Said contract was one
which, by its nature, need not be in writing (sec. 335 of Act No. 190); but it is
binding because it has all the essential requisites of a valid contract (art. 1278 of the
Civil Code).
The fourth error is practically disposed of by the same reasons stated in passing
upon the second error.
As to the fifth error, it must be stated that appellant Marasigan really deposited in
the municipal treasury of Gasan, as stated in paragraph 23 of the stipulation of
facts, the sum of P420 on account of his cancelled original contract (Exhibit A), and
that said deposit has not yet been returned to him. Therefore, he is entitled to be
credited with said sum.
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Summarizing all that has been stated heretofore, this court holds that appellant
Miguel Marasigan owes and is bound to pay to the plaintiff municipality the
proceeds of one and one-third quarter, for the privilege of gathering whitefish
spawn enjoyed by him in 1931, at the rate of P4,200 a year or P1,400 (P1,050 for
one quarter and P350 for one-third of a quarter); but he is, in turn, entitled to be
credited with the sum of P420 deposited by him on December 9, 1930, and P840
paid by him on June 29, 1931, or the total amount of P1,260. In other words,
appellant Marasigan is bound to pay the sum of P140 to the plaintiff.
In view of the foregoing considerations, this court absolves the defendants-
appellants Angel R. Sevilla and Gonzalo L. Luna from the complaint and orders the
defendant-appellant Miguel Marasigan to pay the sum of P140 to the plaintiff
municipality.
It is considered unnecessary to expressly mention appellant Miguel Marasigan's
counterclaim because, as may be seen, he is credited in this judgment with the sum
of P1,260 which is all that he claims therein, without special pronouncement as to
costs. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
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.
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
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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).
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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;
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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
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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
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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:
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Credit Transactions – 22 July 2019
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
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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.
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Republic of the Philippines
SUPREME COURT
Baguio City
SECOND DIVISION
G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision1 of the Court of Appeals in
C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the
National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner
Willex Plastic Industries Corporation and the Inter-Resin Industrial Corporation,
jointly and severally, to pay private respondent International Corporate Bank
certain sums of money, and the appellate court's resolution of October 17, 1989
denying petitioner's motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with
the Manila Banking Corporation. To secure payment of the credit accomodation,
Inter-Resin Industrial and the Investment and Underwriting Corporation of the
Philippines (IUCP) executed two documents, both entitled "Continuing Surety
Agreement" and dated December 1, 1978, whereby they bound themselves
solidarily to pay Manilabank "obligations of every kind, on which the [Inter-Resin
Industrial] may now be indebted or hereafter become indebted to the
[Manilabank]." The two agreements (Exhs. J and K) are the same in all respects,
except as to the limit of liability of the surety, the first surety agreement being
limited to US$333,830.00, while the second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp.,
executed a "Continuing Guaranty" in favor of IUCP whereby "For and in
consideration of the sum or sums obtained and/or to be obtained by Inter-Resin
Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly
and severally guaranteed "the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of
FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests,
charges and penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M-
1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the
payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties
paid, Atrium filed this case in the court below against Inter-Resin Industrial and
Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,600.00 representing the proceeds of its fire
insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the
latter had paid to Manilabank. It claimed, however, that it had already fully paid its
obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint
and interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to
plaintiff, the former's liability is extinguished due to the accidental
fire that destroyed its premises, which liability is covered by
sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is
indebted to plaintiff, its account is now very much lesser than
those stated in the complaint because of some payments made by
the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus,
its liability is only secondary to that of the principal;
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Credit Transactions – 22 July 2019
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its
claim against the principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then
proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the
right to present evidence for its failure to appear at the hearing despite due notice.
On the other hand, Willex Plastic rested its case without presenting any evidence.
Thereafter Interbank and Willex Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial
and Willex Plastic jointly and severally to pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the
plaintiff, with interest of 17% per 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 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of
the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex
Plastic filed its brief, while Inter-Resin Industrial presented a "Motion to Conduct
Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the
Appellant's Brief." After its motion was denied, Inter-Resin Industrial did not file its
brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling
of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to
present evidence to show that Inter-Resin Industrial had already paid its obligation
to Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-
appellant Inter-Resin Industrial's motion for reception of evidence
because the situation or situations in which we could exercise the
power under BP 129 did not exist. Movant here has not presented
any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22,
1991 and the resolution of December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed on
April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with
Inter-Resin Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-in-
interest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety
Agreements" made on December 1, 1978. In denying liability to Interbank for the
amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is
for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the
latter to Manilabank for the account of Inter-Resin Industrial. In support of this
contention Willex Plastic cites the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter
referred to as the DEBTOR/S, from you and/or your principal/s as
may be evidenced by promissory note/s, checks, bills receivable/s
and/or other evidence/s of indebtedness (hereinafter referred to
as the NOTE/S), I/We hereby jointly and severally 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
Page 28 of 40
Credit Transactions – 22 July 2019
Manilabank that the "Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest, Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit
accommodation granted to defendant IRIC [Inter-Resin Industrial]
by Manilabank, the plaintiff required defendant IRIC [Inter-Resin
Industrial] to execute a chattel mortgage in its favor and a
Continuing Guaranty which was signed by the other defendant
WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that
it had already paid its obligation in its entirety. On the other hand, Willex Plastic,
while denying the allegation in question, merely did so "for lack of knowledge or
information of the same." But, at the hearing of the case on September 16, 1986,
when asked by the trial judge whether Willex Plastic had not filed a crossclaim
against Inter-Resin Industrial, Willex Plastic's counsel replied in the negative and
manifested that "the plaintiff in this case [Interbank] is the guarantor and my client
[Willex Plastic] only signed as a guarantor to the guarantee."2
For its part Interbank adduced evidence to show that the "Continuing Guaranty"
had been made to guarantee payment of amounts made by it to Manilabank and
not of any sums given by it as loan to Inter-Resin Industrial. Interbank's witness
testified under cross examination by counsel for Willex Plastic that Willex
"guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later
be made because of the guarantee to Manila Banking Corporation."3
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it
relates.4 At all events, Willex Plastic cannot now claim that its liability is limited to
any amount which Interbank, as creditor, might give directly to Inter-Resin
Industrial as debtor because, by failing to object to the parol evidence presented,
Willex Plastic waived the protection of the parol evidence rule.5
Accordingly, the trial court found that it was "to secure the guarantee made by
plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin
Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a
chattel mortgage in its favor and a Continuing Guaranty which was signed by the
defendant Willex Plastic Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit
accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee
required defendant-appellants to sign a Continuing Guaranty." These factual
findings of the trial court and of the Court of Appeals are binding on us not only
because of the rule that on appeal to the Supreme Court such findings are entitled
to great weight and respect but also because our own examination of the record of
the trial court confirms these findings of the two courts.7
Nor does the record show any other transaction under which Inter-Resin Industrial
may have obtained sums of money from Interbank. It can reasonably be assumed
that Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for
amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC
[Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a
"Continuing Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC
INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in
consideration of the loan obtained by IRIC [Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory
contract, cannot legally exist because of the absence of a valid principal
obligation.8 Its contention is based on the fact that it is not a party either to the
"Continuing Surety Agreement" or to the loan agreement between Manilabank and
Interbank Industrial.
Put in another way the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a "guarantor or surety is bound by the same consideration that
makes the contract effective between the principal parties thereto. It is never
necessary that a guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal."9 In an analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner
by Daicor, for the purpose of having an additional capital for
buying and selling coco-shell charcoal and importation of
activated carbon, the comprehensive surety agreement was
admittedly in full force and effect. The loan was, therefore,
covered by the said agreement, and private respondent, even if
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Credit Transactions – 22 July 2019
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 retroactivelt
applied so as to secure payments made by Interbank under the two "Continuing
Surety Agreements." Willex Plastic invokes the ruling in El Vencedor
v. Canlas 11 and Diño v. Court of Appeals 12 in support of its contention that a
contract of suretyship or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor
v. Canlas we held that a contract of suretyship "is not retrospective and no liability
attaches for defaults occurring before it is entered into unless an intent to be so
liable is indicated." There we found nothing in the contract to show that the paries
intended the surety bonds to answer for the debts contracted previous to the
execution of the bonds. In contrast, in this case, the parties to the "Continuing
Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to
be obtained" by Inter-Resin Industrial from Interbank.
On the other hand, in Diño v. Court of Appeals the issue was whether the sureties
could be held liable for an obligation contracted after the execution of the
continuing surety agreement. It was held that by its very nature a continuing
suretyship contemplates a future course of dealing. "It is prospective in its
operation and is generallyintended to provide security with respect to future
transactions." By no means, however, was it meant in that case that in all instances
a contrast of guaranty or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a
contract of suretyship is ordinarily not to be construed as retrospective, in the end
the intention of the parties as revealed by the evidence is controlling. What was
said there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true
that bonds or other contracts of suretyship are ordinarily not to
be construed as retrospective, but that rule must yield to the
intention of the contracting parties as revealed by the evidence,
and does not interfere with the use of the ordinary tests and
canons of interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the
bond given by Echevarria was intended to cover all of the
indebtedness of the Arrocera upon its current account with the
plaintiff Bank that we cannot possibly adopt the view of the court
below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without first
exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the
benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and
Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein
guaranteed you and/or your principal/s may directly proceed
against Me/Us without first proceeding against and exhausting
DEBTOR/s propertiesin the same manner as if all such liabilities
constituted My/Our direct and primary obligations. (emphasis
supplied)
This stipulation embodies an express renunciation of the right of excussion. In
addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under
the same agreement:
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter
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Credit Transactions – 22 July 2019
referred to as the DEBTOR/S, from you and/or your principal/s as
may be evidenced by promissory note/s, checks, bills receivable/s
and/or other evidence/s of indebtedness (hereinafter referred to
as the NOTE/S), I/We hereby jointly and severally and
unconditionally guarantee unto you and/or your principal/s,
successor/s and assigns the prompt and punctual payment at
maturity of the NOTE/S issued by the DEBTOR/S in your and/or
your principal/s, successor/s and assigns favor to the extent of the
aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00),
Philippine Currency, and such interests, charges and penalties as
may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its
indebtedness to Interbank and that Willex Plastic should have been allowed by the
Court of Appeals to adduce evidence to prove this. Suffice it to say that Inter-Resin
Industrial had been given generous opportunity to present its evidence but it failed
to make use of the same. On the otherhand, Willex Plastic rested its case without
presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but
because of its failure to appear on that date, the hearing was reset on March 12, 26
and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of
Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset for
the last time" on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial
court issued the following order:
Considering that, as shown by the records, the Court had exerted
every earnest effort to cause the service of notice or subpoena on
the defendant Inter-Resin Industrial but to no avail, even with the
assistance of the defendant Willex the defendant Inter-Resin
Industrial is hereby deemed to have waived the right to present
its evidence.
On the other hand, Willex Plastic announced it was resting its case without
presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its
order and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again
moved for the postponement of the hearing be postponed to August 11, 1987. The
hearing was, therefore, reset on September 8 and 22, 1987 but the hearings were
reset on October 13, 1987, this time upon motion of Interbank. To give Interbank
time to comment on a motion filed by Inter-Resin Industrial, the reception of
evidence for Inter-Resin Industrial was again reset on November 17, 26 and
December 11, 1987. However, Inter-Resin Industrial again moved for the
postponement of the hearing. Accordingly the hearing was reset on November 26
and December 11, 1987, with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22,
1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still
failed to present its evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however,
the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel
did not appear. The trial court, therefore, finally declared Inter-Resin Industrial to
have waived the right to present its evidence. On the other hand, Willex Plastic, as
before, manifested that it was not presenting evidence and requested instead for
time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to
Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against
the petitioner.
SO ORDERED.
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SUPREME COURT
Manila
EN BANC
G.R. No. L-13873 January 31, 1963
GENERAL INSURANCE and SURETY CORPORATION, petitioner,
vs.
REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON EDUCATIONAL FOUNDATION,
INC., respondents.
Guido Advincula for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General
Insurance and Surety Corporation posted in favor of the Department of Education a
bond, the terms of which read as follows:
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, the Department of Education has required the Central Luzon
Educational Foundation, Inc., operating the Sison & Aruego Colleges, of
Urdaneta, Pangasinan, Philippines, an institution of learning to file a bond
to guarantee the adequate and efficient administration of said school or
college and the observance of all regulations prescribed by the Secretary of
Education and compliance with all obligations, including the payment of
the salaries of all its teachers and employees, past, present, and future,
and the payment of all other obligations incurred by, or in behalf of said
school.
NOW, THEREFORE, in compliance with said requirement, we, CENTRAL
LUZON EDUCATIONAL FOUNDATION, INC., operating the Sison and Aruego
Colleges, represented Dr. Jose Aruego, its Vice-Chairman, as principal, and
the GENERAL INSURANCE AND SURETY CORPORATION, a corporation duly
organized and existing under and by virtue the laws of the Philippines, as
surety, are held and firmly bound, jointly and firmly, unto the Department
of Education of the Republic of the Philippines in the sum of TEN
THOUSAND PESOS (P10,000.00) Philippine currency, for the payment
thereof we bind ourselves, our heirs, executors, administrators, successors,
and assigns, jointly and severally firmly by these presents;
WHEN the Secretary of Education is satisfied that said institution of
learning had defaulted in any of the foregoing particulars, this bond may
immediately thereafter be declared forfeited and for the payment of the
amount above-specified, we bind ourselves, our heirs, executors,
successors, administrators, and assigns, jointly and severally.
We further bind ourselves, by these presents, to give the Department of
Education at least sixty (60) days notice of the intended withdrawal or
cancellation of this bond, in order that the Department can take such
action as may be necessary to protect the interests of such teachers,
employees or creditors of the school and of the Government.
LIABILITY of Surety under this bond will expire on June 15, 1955, unless
sooner revoked.
IN WITNESS WHEREOF, we signed this present guarranty at the City of
Manila, Philippines, this 15th day of May, 1954.
On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc.,
Teofilo Sison and Jose M. Aruego executed an indemnity agreement binding
themselves jointly and severally to indemnify the surety of "any damages,
prejudices, loss, costs, payments, advances and expenses of whatever kind and
nature, including attorney's fees and legal costs, which the COMPANY may, at any
time sustain or incur, as well as to reimburse to said COMPANY all sums and
amounts of money which the COMPANY or its representatives shall or may pay or
cause to be paid or become liable to pay, on account of or arising from the
execution of the above mentioned Bond."
On June 25, 1954, the surety advised the Secretary of Education that it was
withdrawing and cancelling its bond. Copies of the letter were sent to the Bureau of
Private Schools and to the Central Luzon Educational Foundation, Inc.
It appears that on the date of execution of the bond, the Foundation was indebted
to two of its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64,
and to H.B. Arandia, in the sum of P820.00, or a total of P1,505.64.
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Demand for the above amount having been refused, the Solicitor General, in behalf
of the Republic of the Philippines, filed a complaint for the forfeiture of the bond, in
the Court of First Instance of Manila on July 11, 1956.
In due time, the surety filed its answer in which it set up special defenses and a
cross-claim against the Foundation and prayed that the complaint be dismissed and
that it be indemnified by the Foundation of any amount it might be required to pay
the Government, plus attorney's fees.
For its part, the Foundation denied the cross-claim and contended that, because
Remedios Laoag owed Fr. Cinense the amount of P820.65, there was no basis for
the action; that the bond is illegal and that the Government has no capacity to sue.
The surety also filed a third-party complaint against Teofilo Sison and Jose M.
Aruego on the basis of the indemnity agreement. While admitting the allegations of
the third-party complaint, Sison and Aruego claimed that because of the
cancellation and withdrawal of the bond, the indemnity agreement ceased to be of
force and effect.
Hearing was held and on December 18, 1956, the Court of First Instance rendered
judgment holding the principal and the surety jointly and severally liable to the
Government in the sum of P10,000.00 with legal interest from the date of filing of
the complaint, until the sum is fully paid and ordering the principal to reimburse the
surety whatever amount it may be compelled to pay to the Government by reason
of the judgment, with costs against both principal and the surety.
The surety filed a motion for reconsideration and a request to decide the third-
party complaint which the trial court denied.
On appeal, the Court of Appeals rendered a decision, the dispositive portion of
which reads:
WHEREFORE, the appealed judgment is hereby modified in the following
manner:
(a) Ordering Central Luzon Educational Foundation, Inc., and General
Insurance and Surety Corporation to pay jointly and severally the Republic
of the Philippines the sum of P10,000.00, plus costs and legal interests
from July 11, 1956 until fully paid; and
(b) Ordering Central Luzon Educational Foundation, Inc., Teofilo Sison and
Jose M. Aruego to reimburse, jointly an severally, the General Insurance
and Surety Corporation of all amounts it may be forced to pay the Republic
of the Philippines by virtue of this judgment, plus costs and P2,000.00 for
counsel's fees.
From this decision, the surety appealed to this Court by way of certiorari, raising
questions of law.1
In its first four assignments of error, the surety contends that it was no longer liable
on its bond after August 24, 1954 (when the 60-day notice of cancellation and
withdrawal ended), or, at the latest, after June 15, 1955. For support, the surety
invokes the following provisions of the bond:
WE, further bind ourselves, by these presents to give the Department of
Education at least sixty (60) days notice of the intended withdrawal or
cancellation of this bond, in order that the Department can take such
action as may be necessary to protect the interest of such teachers,
employees, Creditors to the government.
LIABILITY of the Surety under this bond will expire on June 15, 1955, unless
sooner revoked.
On the other hand, the Government contends that since the salaries of the teachers
were due and payable when the bond was still in force, the surety has become
liable on its bond from the moment of its execution on May 15,1954.
We agree with this contention of the Government.
It must be remembered that, by the terms of the bond the surety guaranteed to the
Government "compliance (by the Foundation) with all obligations, including the
payment of the salaries of its teachers and employees, past, present and future,
and the payment of all other obligations incurred by, or in behalf of said school."
Now, it is not disputed that even before the execution of the bond the Foundation
was already indebted to two of its teachers for past salaries. From the moment,
therefore, the bond was executed, the right of the Government to proceed against
the bond accrued because since then, there has been violation of the terms of the
bond regarding payment of past salaries of teachers at the Sison and Aruego
Colleges. The fact that the action was filed only on July 11, 1956 does not militate
against this position because actions based on written contracts prescribe in ten
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years. (Art. 1144, par. 1, Civil Code). The surety also cites our decision in the case
of Jollye v. Barcelon and Luzon Surety Co., Inc., 68 Phil. 164 and National Rice & Corn
Corp. (NARIC) v. Rivera, et al., G.R. No. L-4023, February 29, 1952. But there is
nothing in these cases that supports the proposition that the liability of a surety for
obligations arising during the life of a bond ceases upon the expiration of the bond.
In the Jollye case, the bond provided:
Whereas, the above bounded principal, on 13th day of February, 1933
entered into an agreement with H. P. L. Jollye of Manila, P. I., to fully and
faithfully refund to said Mr. H. P. L. Jollye the above stated sum of P7,500
representing the purchase price of the 74 shares of the capital stock of the
North Electric Company (certificate No. 38) paid by said Mr. H. P. L. Jollye
to the undersigned principal, Mr. Emeterio Barcelon, in the event ofthe
title thereto of said Mr. Barcelon is invalidated by any judgement which
may be rendered by the court of Cavite against Vicente Diosomito or in the
event that any of the warranties contained in that certain deed of sale
executed by the undersigned principal on this 13th day of February,
1933,be invalidated, a copy of which is hereto attached and made an
integralpart hereof, market Exhibit A.
Wherefore, the parties respectfully pray that the foregoing stipulation of
facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts. 1äwphï1.ñët
According to the bond, "the liability of Luzon Surety Company, Inc. under this bond
will expire (12) months from date hereof." The date referred to was February 13,
1933. This Court absolved the surety of liability because the acts for which the bond
was posted happened after its expiration. Thus, We held in that case:
... The acts provided therein by reason of which the contract of suretyship
was executed could have taken place within the stipulated period twelve
months. Hence, the parties fixed that period exactly at twelve months,
limiting thereby the obligation of the appellee to answer for the payment
to the appellant of the aforesaid sum of P7,500.00 to not more than the
stipulated period. . . .
Here, on the other hand, the right of the Government to collect on the bond arose
while the bond was in force, because, as earlier noted, even before the execution of
the bond, the principal had already been indebted to its teachers.
Neither does the NARIC case support the surety's position. In that case, the bond
provided that —
This bond expires on March 20th, 1949 and will be cancelled TEN DAYS
after the expiration, unless the surety is notified of any existing obligation
thereunder, or unless the surety renews or extends it in writing for another
term.
and We held that giving notice of existing obligation was a condition precedent to
further liability of the surety and that in default of such notice, liability on the bond
automatically ceased.
Similarly, in the case of Santos, et. al. v. Mejia, et al., G.R. No. L-6383, December 29,
1953, the bond provided that —
Liability of the surety on this bond will expire in THIRTEEN DAYS and said
bond will be cancelled 10 DAYS after its expiration unless surety is notified
of any existing obligation thereunder.
and We held that the surety could not be held liable because the bond was
cancelled when no notice of existing obligations was given within ten days.
In the present case, there is no provision that the bond will be cancelled unless the
surety is notified of any claim and so no condition precedent has to be complied
with by the Government before it can bring an action. Indeed, the provision of the
bond in the NARIC and Santos cases that it would be cancelled ten days after its
expiration unless notice of claim was given was inserted precisely because, without
such a provision, the surety's liability for obligations arising while the bond was in
force would subsist even after its expiration.
Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No. 11, 3490, We held that under a
provision that the surety "will not be liable for any claim not discovered and
presented to the company within three months from the expiration of this bond
and that the obligee hereby waives his right to file any court action against the
surety after the termination of the period of three months above mentioned," the
giving of notice is a condition precedent to be complied with.
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And suppose this action were filed while the bond was in force, as the surety would
have the Government do, but the same remained pending after June 15, 1955,
would the surety suggest that the judgment that may be rendered in such action
could no longer be enforced against it because the bond says that its liability under
it has expired?
And what of the provision on 60-day notice? The surety urges that all actions on the
bond must be brought within that period or they would all be barred. The surety
misread the provision. The 60-day notice is not a period of prescription of action.
The provision merely means that the surety can withdraw — as in fact it did in this
case — even before June 15, 1955 provided it gave notice of its intention to do so at
least 60 days in advance. If at all, the condition is a limitation on the right of the
surety to withdraw rather than a limitation of action on the bond. This is clear also
from the Manual of Information for Private Schools2 which states that "The bond
furnished by a school may not be withdrawn by either or both the bondsmen
except by giving the Director of Private Schools sixty days notice."
In its fifth assignment of error, the surety contends:
1. That the bond is void for being contrary to public policy insofar as it requires the
surety to pay P10,000.00 regardless of the amount of the salaries of the
teachers.3 It is claimed that to enforce forfeiture of the bond for the full amount
would be to allow the Government to enrich itself since the unpaid salaries of the
teachers amount to P1,318.84 only.
2. That, under Article 1311 of the Civil Code,4 since teachers of Sison and Aruego
Colleges are not parties to the bond, "the bond is not effective, and binding upon
the obligors (principal and surety) as far as it guarantees payment of the 'past
salaries' of the teachers of said school." This is the same as saying that the surety is
not liable to teachers of Sison and Aruego Colleges because the latter are not
parties to the bond nor are they beneficiaries of a stipulation pour autrui. But this
argument is based on the false premise that the teachers are trying to enforce the
obligation of the bond, which is not the case here. This is not an action filed by the
teachers against the surety. This is an action brought by the Government, of which
the Department of Education is an instrumentality, to hold the surety liable on its
bond for the same has been violated when the principal failed to comply "with all
obligations, including the payment of salaries of its teachers, past, present and
future."
There is nothing against public policy in forfeiting the bond for the amount. The
bond is penal in nature. Article 1226 of the Code states that in obligation with a
penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to the
contrary, and the party to whom payment is to be made is entitled to recover the
sum stipulated without need of proving damages because one of the primary
purposes of a penalty clause is to avoid such necessity. (Art. 1228, Civil Code;
Lambert v. Fox, 26 Phil. 588; Palacios v. Municipality of Cavite, 12 Phil. 140; Manila
Racing Club v. Manila Jockey Club, 69 Phil. 55). The mere non-performance of the
principal obligation gives rise to the right to the penalty, (IV Tolentino, Civil Code of
the Philippines, p. 247.)
In its first and second "alternative assignments of error," the surety contends that it
was released from its obligation under the bond when on February 4, 1955,
Remedios Laoag and the Foundation agreed that the latter would pay the former's
salaries, which were then already due, on March 1, 1955. In support of this
proposition, the surety cites Article 2079 of the Code which provides as follows:
An extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty. . . .
But the above provision does not apply to this case. The supposed extension of time
was granted not by the Department of Education or the Government but by the
teachers. As already stated, the creditors on the bond are not the teachers but the
Department of Education or the Government.
Even granting that an extension of time was granted without the consent of the
surety, still that fact would not help the surety, because as earlier pointed out, the
Foundation was also arrears in the payment of the salaries of H. B. Arandia. The
case of Arandia alone would be enough basis for the Government to proceed
against the bond.
Lastly, in its third and fourth "alternative assignments of error," the surety contends
that it cannot be made answer for more than the unpaid salaries of H. B. Arandia,
which it claimed amounted to P720.00 only, because Article 2054 states that —
A guarantor may bind himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the
conditions.
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Credit Transactions – 22 July 2019
Should he have bound himself for more, his obligations shall be reduced to For value received we hereby guarantee compliance with the terms and
the limits of that of the debtor. conditions as outlined in the above contract.

What We said about the penal nature of the bond would suffice to dispose of this FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
claim. For whatever may be the amount of salaries due the teachers, the fact
remains that the condition of the bond was violated and so the surety became (Sgd) OTTO VORSTER,
liable for the penalty provided for therein. Vice-President.

WHEREFORE, the decision of the Court of Appeals is hereby affirmed, with costs Machetti constructed the building under the supervision of architects representing
against the surety. the Hospicio de San Jose and, as the work progressed, payments were made to him
from time to time upon the recommendation of the architects, until the entire
Republic of the Philippines contract price, with the exception of the sum of the P4,978.08, was paid.
SUPREME COURT Subsequently it was found that the work had not been carried out in accordance
Manila with the specifications which formed part of the contract and that the workmanship
was not of the standard required, and the Hospicio de San Jose therefore answered
EN BANC the complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement abovementioned, in the total sum
G.R. No. L-16666 April 10, 1922 of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was,
on February 27, 1918, declared insolvent and on March 4, 1918, an order was
entered suspending the proceeding in the present case in accordance with section
ROMULO MACHETTI, plaintiff-appelle,
60 of the Insolvency Law, Act No. 1956.
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity
and Surety Company be made cross-defendant to the exclusion of Machetti and
that the proceedings be continued as to said company, but still remain suspended
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed
Gabriel La O for appellee Hospicio de San Jose.
a complaint against the Fidelity and Surety Company asking for a judgement for
No appearance for the other appellee.
P12,800 against the company upon its guaranty. After trial, the Court of First
Instance rendered judgment against the Fidelity and Surety Company for P12,800 in
OSTRAND, J.:
accordance with the complaint. The case is now before this court upon appeal by
the Fidelity and Surety Company form said judgment.
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a
written agreement undertook to construct a building on Calle Rosario in the city of
As will be seen, the original action which Machetti was the plaintiff and the
Manila for the Hospicio de San Jose, the contract price being P64,000. One of the
Hospicio de San Jose defendant, has been converted into an action in which the
conditions of the agreement was that the contractor should obtain the "guarantee"
Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the original
of the Fidelity and Surety Company of the Philippine Islands to the amount of
plaintiff's guarantor, is the defendant, Machetti having been practically eliminated
P128,800 and the following endorsement in the English language appears upon the
from the case.
contract:
But in this instance the guarantor's case is even stronger than that of an ordinary
MANILA, July 15, 1916.
surety. The contract of guaranty is written in the English language and the terms
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employed must of course be given the signification which ordinarily attaches to
them in that language. In English the term "guarantor" implies an undertaking of
guaranty, as distinguished from suretyship. It is very true that notwithstanding the
use of the words "guarantee" or "guaranty" circumstances may be shown which
convert the contract into one of suretyship but such circumstances do not exist in
the present case; on the contrary it appear affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that its rests
on a separate consideration moving from the principal and that although it is
written in continuation of the contract for the construction of the building, it is a
collateral undertaking separate and distinct from the latter. All of these
circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor
only binds himself to pay if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor. (Saint vs.Wheeler & Wilson
Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins
and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.)
This latter liability is what the Fidelity and Surety Company assumed in the present
case. The undertaking is perhaps not exactly that of a fianza under the Civil Code,
but is a perfectly valid contract and must be given the legal effect if ordinarily
carries. The Fidelity and Surety Company having bound itself to pay only the event
its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until
it is shown that Machetti is unable to pay. Such ability may be proven by the return
of a writ of execution unsatisfied or by other means, but is not sufficiently
established by the mere fact that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent of the insolvent's inability to
pay is not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without
prejudice to such right of action as the cross-complainant, the Hospicio de San Jose,
may have after exhausting its remedy against the plaintiff Machetti. So ordered.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-9353 May 21, 1957
MANILA SURETY AND FIDELITY, INC., plaintiff-appellant,
vs.
BATU CONSTRUCTION AND COMPANY, CARLOS N. BAQUIRAN, GONZALO P.
AMBOY and ANDRES TUNAC, defendants-appellees.
De Santos and Herrera for appellant.
Bienvenido C. Castro and Ruiz, Ruiz, Ruiz and Ruiz for appellees.
PADILLA, J.:
In a complaint filed in the Court of First Instance of Manila, the plaintiff, a domestic
corporation engaged in the bonding business, hereafter called the company, alleges
that the Batu Construction & Company, a partnership the members of which are
the other three defendants, requested it to post, as it did, a surety bond for P8,812
in favor of the Government of the Philippines to secure the faithful Performance of
the construction of the Bacarra Bridge, Project PR-72 (3), in Ilocos Norte,
undertaken by the partnership, as stipulated in a construction on contract entered
into on 11 July 1950 by and between the partnership and the Government of the
Philippines, on condition that the defendants would "indemnify the COMPANY for
any damage, loss, costs, or charges, or expenses of whatever kind and nature,
including counsel or attorney's fees, which the COMPANY may, at any time, sustain
or incur, as a consequence of having become surety upon the above mentioned
bond; said attorney's fees shall not be less than fifteen (15%) per cent of the total
amount claimed in any action which the COMPANY may institute against the
undersigned (the defendants except Andres Tunac) in Court," and that "Said
indemnity shall be paid to the COMPANY as soon as it has become liable for the
payment of any amount, under the above-mentioned bond, whether or not it shall
have paid such sum or sums of money, or any part thereof," as stipulated in a
contract executed on 8 July 1950 (Exhibit B); that on 30 May 1951 because of the
unsatisfactory progress of the work on the bridge, the Director of Public Works,
with the approval of the Secretary of Public Works and Communications, annulled,
the construction contract referred to and notified the plaintiff Company that the
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Government would hold it (the Company) liable for any amount incurred by the
Government for the completion of the bridge, in excess of the contract price
(Exhibit D); that on 19 December 1951 (should be 23 November 1951), Ricardo
Fernandez and 105 other persons brought an action in the Justice of the Peace
Court of Laoag, Ilocos Norte, against the partnership, the individual partners and
the herein plaintiff Company for the collection of unpaid wages amounting to
P5,960.10, lawful interests thereon and costs (Exhibit E); that the defendants are in
imminent danger of becoming insolvent, and are removing and disposing, or about
to remove and dispose, of their properties with intent to defraud their creditors,
particularly the plaintiff Company; and that the latter has no other sufficient
security to protect its rights against the defendants. Upon these allegations, the
plaintiff prays that, upon the approval of a bond and on the strength of the
allegations of the verified complaint, a writ attachment be issued and levied upon
the properties of the defendants; and that after hearing, judgment be rendered "
ordering the defendants to deliver to the plaintiff such sufficient security as shall
protect plaintiff from the any proceedings by the creditors on the Surety Bond
aforementioned and from the danger of insolvency of the defendants; and to allow
costs to the herein plaintiff," and " for such other measures of relief as may be
proper and just in the premises." Attached to the complaint are a verification and
affidavit of attachment; and copies of the surety bond marked Annex A; of the
indemnity contract marked Annex B; and of the letter of the Acting Director of
Public Works to the plaintiff dated 30 May 1951, marked Annex C.
Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3 and 4 of the
complaint, but denies the allegations in paragraphs 5, 6, 7, 8 and 9 of the complaint,
because he has never promised to put up an indemnity bond in favor of the plaintiff
nor has he ever entered into any indemnity agreement with it; because the
partnership or the Batu Construction & Company was fulfilling its obligations in
accordance with the terms of the construction contract; because the Republic of
the Philippines, through the Director of Public, Works, had no authority to annul the
contract at its own initiative; because the Justice of the Peace court of Laoag, Ilocos
Norte had no jurisdiction to hear and decide a case for collection of P5,960.10; and
because the defendants were not in imminent danger of insolvency, neither did
they remove or dispose of their properties with intent to defraud their creditors. By
way of affirmative defenses, he alleges that the signing by Carlos N. Baquiran of the
indemnity agreement for and in behalf of the partnership Batu Construction &
Company did not bind the latter to the plaintiff and as the partnership is not bound,
he (Andres Tunac), as a member thereof, is also not bound; that he not being a
party to the said agreement, the plaintiff has no cause of action against him; that in
the event the partnership is bound by the indemnity agreement he invokes his right
of exhaustion of the property of the partnership before the plaintiff may proceed
against his property. And as a counterclaim he alleges that the plaintiff brought the
action against him maliciously and in bad faith for the purpose of annoying him and
damaging his professional reputation, he having a flourishing and successful
practice as engineer in Ilocos Norte, thereby compelling him to defend himself; that
to secure the issuance of a writ of attachment the plaintiff made false
representations; and that the issuance of the writ upon such false representations
of the plaintiff caused him damages in the sum of P10,000 including expenses of
litigation and attorney's fees. Upon the foregoing he prays that the complaint be
dismissed as to him and the defendant Batu Construction & Company, with costs
against the plaintiff; that the latter be ordered to pay him the sum of P10,000; and
that he be granted such other remedies as may be just, equitable and proper.
Gonzalo P. Amboy denies in his answer the allegations of the complaint, except
those that may be deemed admitted in the special defenses, and alleges that he is
not in imminent danger of insolvency and is not removing and disposing or about to
remove and dispose of his properties, because he has no property; that has been no
liquidation of the expenses incurred in the construction of the Bacarra Bridge,
Project PR-72(3) to determine whether there would be a balance of the contract
price which may be applied to pay the claim for unpaid wages of Ricardo Fernandez
et al. sought to be collected in civil case No. 198 of the Justice of the Peace Court of
Laoag, Ilocos Norte, and not until after such liquidation shall have been made could
his liability and that of his co-defendants be determined and fixed; that if after
proper liquidation's there be a deficit of the contract price the defendants are
willing to pay the claim for unpaid wages of Ricardo Fernandez et al. Upon these
allegations he prays that the issuance of the writ of attachment prayed for by the
plaintiff be held in abeyance until after civil case No. 198 of the Justice of the Peace
Court of Laoag, Ilocos Norte, shall have been disposed of.
Carlos N. Baquiran admits in his answer the allegations in paragraphs 1, 2, 3,4, 5, 6,
and 11 of the complaint but alleges that he has no sufficient knowledge to form a
belief as to the truth of the claim of Ricardo Fernandez et al. set forth in paragraph
7 of the complaint, for there has never been a liquidation between the defendants
and the Bureau of Public Works. He further denies specifically paragraphs 8, 9 and
10 of the complaint. By way of special defenses he alleges that there has been no
liquidation by and between the defendants and the Bureau of Public Works on
Project PR-72(3) to determine whether the total amount spent for the construction
of the bridge exceeded the contract price; that after the determination of the
respective liabilities of the parties in civil case No. 198 of the Justice of the Peace
Court of Laoag, Ilocos Norte, if any there be against the defendants herein, and
such liability could not be paid out of the balance of the contract price of Project
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PR-72(3), the defendants are ready and willing to assume their respective
responsibilities. Upon these allegations he prays that the complaint of the plaintiff
be dismissed; that the issuance of the writ of attachment prayed for be denied; and
that he be granted such other relief as may be just and equitable, with costs against
the plaintiff.
At the hearing, the plaintiff presented its evidence. After the plaintiff had rested its
case, defendant Gonzalo P. Amboy moved for the dismissal of the complaint, on the
ground that the remedy provided for in the last paragraph of article 2071 of the
new Civil Code may be availed of by the guarantor only and not by a surety.
Acting upon this motion to dismiss the trial court made the following findings:
. . . That on July 8, 1950, the defendant Batu Construction & Company, as
principal, and the plaintiff Manila Surety & Fidelity Co. Inc., as surety,
executed a surety bond for the sum of P8,812.00 to insure faithful
performance of the former's obligation as contractor for the construction
of the Bacarra Bridge, Project PR-72 (No. 3) Ilocos Norte Province. On the
same date, July 8,1950, the Batu Construction & Company and the
defendants Carlos N. Baquiran and Gonzales P. Amboy executed an
indemnity agreement to protect the Manila Surety & Fidelity Co. Inc..,
against damage, loss or expenses which it may sustain as a consequence of
the surety bond executed by it jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a notice from the Director
of Public Works (Exhibit B) annulling its contract with the Government for
the construction of the Bacarra Bridge because of its failure to make
satisfactory progress in the execution of the works, with the warning that
,any amount spent by the Government in the continuation of the work, in
excess of the contract price, will be charged against the surety bond
furnished by the plaintiff. It also appears that a complaint by the laborers
in said project of the Batu Construction & Company was filed against it and
the Manila Surety and Fidelity Co., Inc., for unpaid wages amounting to
P5,960.10.
and, being of the opinion that the provisions of article 2071 of the new Civil Code
may be availed of by a guarantor only and not by a surety the complaint, with costs
against the plaintiff.
From this order the plaintiff Company has appealed to this Court, because it
proposes to raise only a question of law.
After the order dismissing the complaint had been entered, on 16 and 20 July 1953,
the defendants Gonzalo P. Amboy and Andres Tunac moved for leave to prove
damages they allegedly suffered as a result of the attachment levied upon their
properties. On 15 August 1953 the Court heard the evidence on damages. On 23
September 1953 the Court found and held that the defendant Gonzalo P. Amboy is
entitled to recover from the plaintiff damages equivalent to 6 per cent interest per
annum on the sum of P35 in possession of the Provincial Treasurer of Ilocos Norte,
which was garnished pursuant to the writ of attachment, from the date of
garnishment until its charge; but the claims for damages of Andres Tunac and
Gonzalo P. Amboy allegedly suffered by them in their business, moral damages and
attorney's fees were without basis in law and in fact. Hence their recovery was
denied. The Court dissolved the writ of attachment. From this last order only the
plaintiff Company has appealed.
The main question to determine is whether the last paragraph of article 2071 of the
new Civil Code taken from article 1843 of the old Civil Code may be availed of by a
surety.
A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the
debt. A guarantor binds himself to pay if the principal is unable to pay; a surety
undertakes to pay if the principal does not pay.1 The reason which could be invoked
for the non-availability to a surety of the provisions of the last paragraph of article
2071 of the new Civil Code would be the fact that guaranty like commodatum2 is
gratuitous. But guaranty could also be for a price or consideration as provided for in
article 2048. So, even if there should be a consideration or price paid to a guarantor
for him to insure the performance of an obligation by the principal debtor, the
provisions of article 2071 would still be available to the guarantor. In suretyship the
surety becomes liable to the creditor without the benefit of the principal debtor's
exclusion of his properties, for he (the surety) maybe sued independently. So, he is
an insurer of the debt and as such he has assumed or undertaken a responsibility or
obligation greater or more onerous than that of guarantor. Such being the case, the
provisions of article 2071, under guaranty, are applicable and available to a surety.
The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book
IV of the new Civil Code, on solidary or several obligations, does not mean that
suretyship which is a solidary obligation is withdrawn from the applicable provisions
governing guaranty.
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The plaintiff's cause of action does not fall under paragraph 2 of article 2071 of the The order appealed from dismissing the complaint is reversed and set aside, and
new Civil Code, because there is no proof of the defendants' insolvency. The fact the case remanded to the court below for determination of the amount of security
that the contract was annulled because of lack of progress in the construction of that would protect the plaintiff Company from any proceedings by the creditor or
the bridge is no proof of such insolvency. It does not fall under paragraph 3, from the danger of insolvency of the defendants, the principal debtors, and
because the defendants have not bound themselves to relieve the plaintiff from the direction to the defendants to put up such amount of security as may be
guaranty within a specified period which already has expired, because the surety established by competent evidence, without pronouncement as to costs.
bond does not fix any period of time and the indemnity agreement stipulates one
year extendible or renewable until the bond be completely cancelled by the person The writ of attachment having been issued improvidently because, although there is
or entity in whose behalf the bond was executed or by a Court of competent an allegation in the verified complaint that the defendants were in imminent
jurisdiction. It does not come under paragraph 4, because the debt has not become danger of insolvency and that they were removing or disposing, or about to remove
demandable by reason of the expiration of the period for payment. It does not or dispose, of their properties, with intent to defraud their creditors, particularly
come under paragraph 5 because of the lapse of 10 years, when the principal the plaintiff Company, still such allegation was not proved, the fact that a complaint
obligation has no period for its maturity, etc., for 10 years have not yet elapsed. It had been filed against the defendants and the plaintiff Company in the Justice of
does not fall under paragraph 6, because there is no proof that "there are the Peace Court of Laoag, Ilocos Norte, for the collection of an amount for unpaid
reasonable grounds to fear that the principal debtor intends to abscond." It does wages of the plaintiffs therein who claimed to have worked in the construction of
not come under paragraph 7, because the defendants, as principal debtors, are not the bridge, being insufficient to prove it, and because the relief prayed for in the
in imminent danger of becoming insolvent, there being no proof to that effect. complaint for security that shall protect it from any proceedings by the creditor and
from the danger of the defendants becoming insolvent is inconsistent with the state
But the plaintiff's cause of action comes under paragraph 1 of article 2071 of the of insolvency of the defendants or their being in imminent danger of insolvency, the
new Civil Code, because the action brought by Ricardo Fernandez and 105 persons order awarding 6 per cent on the sum of P35 in possession of the Provincial
in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for the Treasurer owned by the defendant Gonzalo P. Amboy garnished by virtue of the
collection of unpaid wages amounting to P5,960.10, is in connection with the writ of attachment, from the date of the garnishment until its discharge, and
construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the Batu denying recovery of the amounts of damages claimed to have been suffered by the
Construction & Company, and one of the defendants therein is the herein plaintiff, defendants, is affirmed, the defendants not having appealed therefrom.
the Manila Surety and Fidelity Co., Inc., and paragraph 1 of article 2071 of the new
Civil Code provides that the guarantor, even before having paid, may proceed
against the principal debtor "to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor or from the
danger of insolvency of the debtor, when he (the guarantor) is sued for payment. It
does not provide that the guarantor be sued by the creditor for the payment of the
debt. It simply provides that the guarantor of surety be sued for the payment of an
amount for which the surety bond was put up to secure the fulfillment of the
obligation undertaken by the principal debtor. So, the suit filed by Ricardo
Fernandez and 105 persons in the Justice of the Peace Court of Laoag, province of
Ilocos Norte, for the collection of unpaid wages earned in connection with the work
done by them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit
for the payment of an amount for which the surety bond was put up or posted to
secure the faithful performance of the obligation undertaken by the principal
debtors (the defendants) in favor of the creditor, the Government of the
Philippines.

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