You are on page 1of 106

CREDIT TRANSACTION: Compilation of

Cases
G.R. No. 130886

January 29, 2004

COMMONWEALTH INSURANCE CORPORATION, Petitioner,


vs.
COURT OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari assailing the Decision 1 of the Court of Appeals
(CA), promulgated on May 16, 1997 in CA-G.R. CV No. 44473 2, which modified the decision
dated March 5, 1993 of the Regional Trial Court of Makati (Branch 64); and the Resolution 3
dated September 25, 1997, denying petitioners motion for reconsideration.
The facts of the case as summarized by the Court of Appeals are as follows:
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two export
loan lines, one, for P2,500,000.00 to Jigs Manufacturing Corporation (JIGS) and, the other, for
P1,000,000.00 to Elba Industries, Inc. (ELBA). JIGS and ELBA which are sister corporations
both drew from their respective credit lines, the former in the amount of P2,499,992.00 and
the latter for P998,033.37 plus P478,985.05 from the case-to-case basis and trust receipts.
These loans were evidenced by promissory notes (Exhibits A to L, inclusive JIGS; Exhibits
V to BB, inclusive ELBA) and secured by surety bonds (Exhibits M to Q inclusive JIGS;
Exhibits CC to FF, inclusive ELBA) executed by defendant-appellee Commonwealth
Insurance Company (CIC).
Specifically, the surety bonds issued by appellee CIC in favor of appellant RCBC to secure the
obligations of JIGS totaled P2,894,128.00 while that securing ELBAs obligation was
P1,570,000.00. Hence, the total face value of the surety bonds issued by appellee CIC was
P4,464,128.00.
JIGS and ELBA defaulted in the payment of their respective loans. On October 30, 1984,
appellant RCBC made a written demand (Exhibit N) on appellee CIC to pay JIGs account to
the full extend (sic) of the suretyship. A similar demand (Exhibit O) was made on December
17, 1984 for appellee CIC to pay ELBAs account to the full extend (sic) of the suretyship. In
response to those demands, appellee CIC made several payments from February 25, 1985 to
February 10, 1988 in the total amount of P2,000,000.00. There having been a substantial
balance unpaid, appellant RCBC made a final demand for payment (Exhibit P) on July 7,
1988 upon appellee CIC but the latter ignored it. Thus, appellant RCBC filed the Complaint
for a Sum of Money on September 19, 1988 against appellee CIC. 4
The trial court rendered a decision dated March 5, 1993, the dispositive portion of which
reads as follows:
"WHEREFORE, premises considered, in the light of the above facts, arguments, discussion,
and more important, the law and jurisprudence, the Court finds the defendants
Commonwealth Insurance Co. and defaulted third party defendants Jigs Manufacturing
Corporation, Elba Industries and Iluminada de Guzman solidarily liable to pay herein plaintiff
Rizal Commercial Banking Corporation the sum of Two Million Four Hundred Sixty-Four
Thousand One Hundred Twenty-Eight Pesos (P2,464,128.00), to pay the plaintiff attorneys
fees of P10,000.00 and to pay the costs of suit.
"IT IS SO ORDERED."5

1 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Not satisfied with the trial courts decision, RCBC filed a motion for reconsideration praying
that in addition to the principal sum of P2,464,128.00, defendant CIC be held liable to pay
interests thereon from date of demand at the rate of 12% per annum until the same is fully
paid. However, the trial court denied the motion.
RCBC then appealed to the Court of Appeals.
On May 16, 1997, the CA rendered the herein assailed decision, ruling thus:
...
Being solidarily bound, a suretys obligation is primary so that according to Art. 1216 of the
Civil Code, he can be sued alone for the entire obligation. However, one very important
characteristic of this contract is the fact that a suretys liability shall be limited to the
amount of the bond (Sec. 176, Insurance Code). This does not mean however that even if he
defaults in the performance of his obligation, the extend (sic) of his liability remains to be
the amount of the bond. If he pays his obligation at maturity upon demand, then, he cannot
be made to pay more than the amount of the bond. But if he fails or refuses without
justifiable cause to pay his obligation upon a valid demand so that he is in mora
solvendi (Art. 1169, CC), then he must pay damages or interest in consequence
thereof according to Art. 1170. Even if this interest is in excess of the amount of
the bond, the defaulting surety is liable according to settled jurisprudence.
...
Appellant RCBC contends that when appellee CIC failed to pay the obligation upon
extrajudicial demand, it incurred in delay in consequence of which it became liable to pay
legal interest. The obligation to pay such interest does not arise from the contract
of suretyship but from law as a result of delay or mora. Such an interest is not,
therefore, covered by the limitation of appellees liability expressed in the
contract. Appellee CIC refutes this argument stating that since the surety bonds expressly
state that its liability shall in no case exceed the amount stated therein, then that stipulation
controls. Therefore, it cannot be made to assume an obligation more than what it secured to
pay.
The contention of appellant RCBC is correct because it is supported by Arts. 1169 and 1170
of the Civil Code and the case of Asia Surety & Insurance Co., Inc. and Manila Surety &
Fidelity Co. supra. On the other hand, the position of appellee CIC which upholds the
appealed decision is untenable. The best way to show the untenability of this argument is to
give this hypothetical case situation: Surety issued a bond for P1 million to secure a Debtors
obligation of P1 million to Creditor. Debtor defaults and Creditor demands payment from
Surety. If the theory of appellee and the lower court is correct, then the Surety may just as
well not pay and use the P1 million in the meantime. It can choose to pay only after several
years after all, his liability can never exceed P1 million. That would be absurd and the law
could not have intended it.6 (Emphasis supplied)
and disposed of the case as follows:
WHEREFORE, the appealed Decision is MODIFIED in the manner following:
The appellee Commonwealth Insurance Company shall pay the appellant Rizal Commercial
Banking Corporation:
1. On the account of JIGS, P2,894,128.00 ONLY with 12% legal interest per annum
from October 30, 1984 minus payments made by the latter to the former after that
date; and on the account of ELBA, P1,570,000.00 ONLY with 12% legal interest per

2 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
annum from December 17, 1984 minus payments made by the latter to the former
after that day; respecting in both accounts the applications of payment made by
appellant RCBC on appellee CICs payments;
2. Defendant-appellee Commonwealth Insurance Company shall pay plaintiffappellant RIZAL COMMERCIAL BANKING CORP. and (sic) attorneys fee of P10,000.00
and cost of this suit;
3. The third-party defendants JIGS MANUFACTURING CORPORATION, ELBA
INDUSTRIES and ILUMINADA N. DE GUZMAN shall respectively indemnify
COMMONWEALTH INSURANCE CORPORATION for whatever it had paid and shall pay
to RIZAL COMMERCIAL BANKING CORPORATION of their respective individual
obligations pursuant to this decision.
SO ORDERED.7
CIC filed a motion for reconsideration but the CA denied the same.
Hence, herein petition by CIC raising a single assignment of error, to wit:
Respondent Court of Appeals grievously erred in ordering petitioner to pay respondent RCBC
the amount of the surety bonds plus legal interest of 12% per annum minus payments made
by the petitioner.8
The sole issue is whether or not petitioner should be held liable to pay legal interest over
and above its principal obligation under the surety bonds issued by it.
Petitioner argues that it should not be made to pay interest because its issuance of the
surety bonds was made on the condition that its liability shall in no case exceed the amount
of the said bonds.
We are not persuaded. Petitioners argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee
Co.9 and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co.,
Inc.10, and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance
Company, Inc.11, we have sustained the principle that if a surety upon demand fails to pay,
he can be held liable for interest, even if in thus paying, its liability becomes more than the
principal obligation. The increased liability is not because of the contract but because of the
default and the necessity of judicial collection. 12
Petitioners liability under the suretyship contract is different from its liability under the law.
There is no question that as a surety, petitioner should not be made to pay more than its
assumed obligation under the surety bonds.13 However, it is clear from the above-cited
jurisprudence that petitioners liability for the payment of interest is not by reason of the
suretyship agreement itself but because of the delay in the payment of its obligation under
the said agreement.
Petitioner admits having incurred in delay. Nonetheless, it insists that mere delay does not
warrant the payment of interest. Citing Section 244 of the Insurance Code, 14 petitioner
submits that under the said provision of law, interest shall accrue only when the delay or
refusal to pay is unreasonable; that the delay in the payment of its obligation is not
unreasonable because such delay was brought about by negotiations being made with RCBC
for the amicable settlement of the case.
We are not convinced.

3 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
It is not disputed that out of the principal sum of P4,464,128.00 petitioner was only able to
pay P2,000,000.00. Letters demanding the payment of the respective obligations of JIGS and
ELBA were initially sent by RCBC to petitioner on October 30, 198415 and December 17,
1984.16 Petitioner made payments on an installment basis spanning a period of almost three
years, i.e., from February 25, 1985 until February 10, 1988. On July 7, 1988, or after a period
of almost five months from its last payment, RCBC, thru its legal counsel, sent a final letter
of demand asking petitioner to pay the remaining balance of its obligation including
interest.17 Petitioner failed to pay. As of the date of the filing of the complaint on September
19, 1988, petitioner was even unable to pay the remaining balance of P2,464,128.00 out of
the principal amount it owes RCBC.
Petitioners contention that what prevented it from paying its obligation to RCBC is the fact
that the latter insisted on imposing interest and penalties over and above the principal sum
it seeks to recover is not plausible. Considering that petitioner admits its obligation to pay
the principal amount, then it should have paid the remaining balance of P2,464,128.00,
notwithstanding any disagreements with RCBC regarding the payment of interest. The fact
that the negotiations for the settlement of petitioners obligation did not push through does
not excuse it from paying the principal sum due to RCBC.
The issue of petitioners payment of interest is a matter that is totally different from its
obligation to pay the principal amount covered by the surety bonds it issued. Petitioner
offered no valid excuse for not paying the balance of its principal obligation when demanded
by RCBC. Its failure to pay is, therefore, unreasonable.1wphi1 Thus, we find no error in the
appellate courts ruling that petitioner is liable to pay interest.
As to the rate of interest, we do not agree with petitioners contention that the rate should
be 6% per annum. The appellate court is correct in imposing 12% interest. It is in
accordance with our ruling in Eastern Shipping Lines, Inc. vs. Court of Appeals,18 wherein we
have established certain guidelines in awarding interest in the concept of actual and
compensatory damages, to wit:
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.
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 reasonably established at the

4 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 the 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.
3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.19 (Emphasis supplied)
In the present case, there is no dispute that petitioners obligation consists of a loan or
forbearance of money. No interest has been agreed upon in writing between petitioner and
respondent. Applying the above-quoted rule to the present case, the Court of Appeals
correctly imposed the rate of interest at 12% per annum to be computed from the time the
extra-judicial demand was made. This is in accordance with the provisions of Article 1169 20
of the Civil Code and of the settled rule that where there has been an extra-judicial demand
before action for performance was filed, interest on the amount due begins to run not from
the date of the filing of the complaint but from the date of such extra-judicial demand. 21
RCBCs extra-judicial demand for the payment of JIGS obligation was made on October 30,
1984; while the extra-judicial demand for the payment of ELBAs obligation was made on
December 17, 1984. On the other hand, the complaint for a sum of money was filed by RCBC
with the trial court only on September 19, 1988.
WHEREFORE, the instant petition is DENIED and the assailed Decision and Resolution of the
Court of Appeals are AFFIRMED in toto.
SO ORDERED.
Puno, (Chairman), Quisumbing, Callejo, Sr., and Tinga, JJ., concur.

5 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
G.R. No. 166058

April 4, 2007

EMERITA GARON, Petitioner,


vs.
PROJECT MOVERS REALTY AND DEVELOPMENT CORPORATION and STONGHOLD
INSURANCE COMPANY, INC., Respondents.
DECISION
CALLEJO, SR., J.:
This is a Petition for Review on Certiorari of the Decision 1 of the Court of Appeals (CA) dated
May 7, 2004 in CA-G.R. CV No. 69962, and its Resolution2 dated November 16, 2004. The
assailed Decision affirmed with modification the Order3 dated September 19, 2000 issued by
the Regional Trial Court (RTC), Makati City, Branch 56, in Civil Case No. 99-1051.
Antecedents
On December 19, 1997, Project Movers Realty and Development Corporation (PMRDC)
obtained a loan from Emerita Garon in the amount of P6,088,783.68. The loan was covered
by Promissory Note No. PMRDC-97-12-3324 to mature on December 19, 1998. The stipulated
interest rate, in accordance with the schedule5 of payment attached to the note, was 36%
per annum. To secure the payment of the loan, PMRDC undertook to assign to Garon its
leasehold rights over a space at the Monumento Plaza Commercial Complex, covered by
Original Certificate of Leasehold Title (OCLT) No. 1108. The parties stipulated that failure to
pay the note or any portion thereof, or any interest thereon, shall constitute default, and the
entire obligation shall become due and payable without need of demand.
On December 31, 1997, PMRDC obtained another loan from Garon in the amount of
US$189,418.75, at 17% per annum, to mature on December 31, 1998. The transaction was
covered by Promissory Note No. PMRDC-D97-12-333.6 This loan was secured by an
assignment of leasehold rights over another space of the Monumento Plaza Commercial
Complex covered by OCLT No. 0161.
To secure its obligation to assign the leasehold rights to Garon, PMRDC procured a surety
bond7 from Stronghold Insurance Company, Inc. (SICI). The surety bond was subject to the
following conditions:
WHEREAS, this bond is conditioned to guarantee the assignment of Leasehold Rights of the
Principal at Monumento Plaza Building in favor of the Obligee over the Certain Original
Certificate of Leasehold Title No. 0161 and 0108 (sic).
WHEREAS, the liability of the surety company upon determination under this bond shall in no
case exceed the penal sum of PESOS: TWELVE MILLION SEVEN HUNDRED FIFTY-FIVE
THOUSAND ONE HUNDRED THIRTY-NINE & 85/100 (P12,755,139.85) Only, Philippine
Currency.
xxx
Liability of surety on this bond will expire on November 7, 1998 and said bond will be
cancelled five days after its expiration, unless surety is notified of any existing obligations
thereunder.8

6 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
When PMRDC defaulted in the payment of its obligations, Garon sent a demand letter 9 dated
November 3, 1998, requiring PMRDC to execute and deliver a unilateral Deed of Assignment
of its leasehold rights over the commercial spaces covered by OCLT Nos. 1108 and 0161.
Garon also sent a formal demand letter10 dated November 6, 1998 for SICI to comply with its
obligation under the surety bond.
In view of PMRDCs and SICIs failure to comply with their respective obligations, Garon filed
a Complaint11 for collection before the RTC of Makati City. The case was raffled to Branch 56,
and was docketed as Civil Case No. 99-1051. The complaint contained the following prayer:
WHEREFORE, plaintiff respectfully prays that after hearing on the merits, this Court render[s]
judgment in favor of plaintiff and against defendants as follows:
1. Ordering defendant PMRDC to pay plaintiff the sums of:
1.1. PESOS: Six Million Eighty-Eight Thousand Seven Hundred Eighty-Three
and 68/100 (P6,088,783.68) under PMRDC-97-12-332; and
1.2. DOLLARS: One Hundred Eighty-Nine Thousand Four Hundred Eighteen
and 75/100 (US$189,418.75) under PMRDC-97-12-333.
2. Declaring defendant Stronghold solidarily liable, and ordering it to pay plaintiff the
sum of PESOS: Twelve Million Seven Hundred Fifty-Five Thousand One Hundred ThirtyNine and 85/100 (P12,755,139.85) under SICI Bond No. 67831.
3. Ordering defendant PMRDC to pay:
3.1. Interest at 36% per annum and a penalty of 3% per month until full
payment on the unpaid amount due under PMRDC-97-12-332;
3.2. Interest at 17% per annum and a penalty of 3% per month until full
payment on the unpaid amount due under PMRDC-97-12-333;
3.3. Legal interest on the interest accruing at the time of the filing of the
complaint conformably with Article 2212 of the New Civil Code.
4. On the third cause of action, ordering:
4.1. defendant PMRDC to pay PESOS: Ten Thousand (P10,000.00) as attorneys
fees stipulated in PMRDC-97-12-332;
4.2. defendant PMRDC to pay PESOS: Ten Thousand (P10,000.00) as attorneys
fees stipulated in PMRDC-97-12-333; and
4.3. defendant Stronghold to pay Attorneys fees in the amount of
P200,000.00.
4.4. defendants PMRDC and Stronghold to pay plaintiff such amounts of
litigation expenses and costs of suit as may be proven during trial.
Other reliefs just and equitable under the premises are likewise prayed for. 12
In its Answer,13 SICI averred, as special and affirmative defenses, that the complaint stated
no cause of action and was prematurely filed; its obligation had been extinguished; the
liability on the bond had been discharged by the act of plaintiff and by the act of law; and its
liability on the bond had prescribed.14 It likewise contended that at the time plaintiff sent the

7 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
demand letter, the obligation guaranteed by the bond had not yet matured. 15 It further
claimed that it was misled by plaintiff and PMRDC that the bond guaranteed its investment
with the project of PMRDC at Monumento Plaza. SICI also asserted that Garon did not
exercise the diligence of a good father of a family to avoid or minimize losses since she did
not even require the surrender of the OCLTs before the promissory notes were signed and
the loans released. SICI also set up a cross-claim against PMRDC for the payment of any
amount it may be ordered to pay to Garon, pursuant to the Indemnity Agreement 16 executed
by the latter.17
For its part, PMRDC denied that it executed the above-stated promissory notes and alleged
instead that they were merely roll-overs of PN No. 97-07-228 and 97-08-260. 18 It also alleged
that it had already complied with its undertaking under the promissory notes when it put up
a surety bond;19 and when Garon chose to demand from SICI, she effectively waived the
right to claim from it.20 PMRDC further denied liability on the stipulated interest on the
ground that the same is exorbitant and unconscionable.21 As a counterclaim, PMRDC asked
for moral and exemplary damages, as well as for attorneys fees.22 As and by way of crossclaim against SICI, it likewise demanded the payment of moral damages and attorneys
fees.23
Garon filed her Reply24 and a motion25 to render summary judgment. The RTC granted the
motion and ruled as follows:
WHEREFORE, premises considered, this Court hereby renders judgment in favor of plaintiff
Mrs. Emerita I. Garon as follows:
1. Defendant Project Movers Realty and Development Corporation is hereby directed
to pay plaintiff as follows:
On Promissory Note No. PMRDC 97-12-332:
(A) The sum of PESOS: Six Million Eighty-Eight Thousand Seven Hundred
Eighty-Three and 68/100 (P6,088,783.68) under PMRDC-97-12-332;
(B) Interest thereon at 36% per annum computed from 19 December 1997
until fully paid.
(C) A penalty of 3% per month computed from 03 November 1998 until full
payment on all unpaid amounts consisting of the principal and interest.
On Promissory Note PMRDC No. 97-12-333:
(A) The peso equivalent of the sum of DOLLARS: One Hundred Eighty-Nine
Thousand Four Hundred Eighteen and 75/100 (US$189,418.75) under PMRDC97-12-333.
(B) Interest thereon at the stipulated rate of 17% per annum computed from
31 December 1997;
(C) A penalty of 3% per month computed from 03 November 1998 until full
payment on all unpaid amounts consisting of the principal and interest.
2. Defendant Stronghold Insurance Company, Inc. is hereby held jointly and solidarily
liable to plaintiff Mrs. Garon in the amount of PESOS: TWELVE MILLION SEVEN
HUNDRED FIFTY FIVE THOUSAND ONE HUNDRED THIRTY NINE AND EIGHTY FIVE
CENTAVOS (P12,755,139.85).

8 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
3. Defendants Project Movers Realty and Development Corporation and Stronghold
Insurance Company, Inc. are also ordered to pay plaintiff Mrs. Garon jointly and
severally the sum of PESOS: TWO HUNDRED THOUSAND as attorneys fees plus costs
of suit.
All other claims and counter-claims of the parties are hereby ordered dismissed.
SO ORDERED.26
The RTC found that the assignment of PMRDCs leasehold rights was merely an accessory
obligation and not an alternative one; hence, Garons demand on SICIs obligation on the
surety bond could not be considered a waiver of her right to collect from PMRDC. On SICIs
contention that her claim was premature, the RTC ruled that the formers liability arose upon
PMRDCs failure to assign the leasehold rights, not on the maturity date of the loan. The
court further held that SICIs claim of prescription is without merit because plaintiff made a
demand on November 6, 1998, while the surety bond expired on November 7, 1998.
Garon filed a Motion for Execution Pending Appeal,27 while SICI filed a Motion for
Reconsideration.28 The court denied29 the motion for reconsideration and granted30 the
motion for execution pending appeal. SICI then filed a special civil action for Certiorari with
Temporary Restraining Order (TRO) and/or Writ of Preliminary Injunction31 before the CA,
docketed as CA-G.R. SP No. 63334 assailing the order of the court granting execution
pending appeal. On February 23, 2001, the CA issued a TRO 32 enjoining petitioner from
enforcing the writ of execution pending appeal.
Meanwhile, on October 11, 2000 and February 16, 2001, PMRDC and SICI filed their
respective Notices of Appeal33 which the RTC approved. However, in view of PMRDCs failure
to file its appellants brief, the CA issued a Resolution34 dismissing its appeal for having been
abandoned. The Resolution became final and executory.1awphi1.nt
On the other hand, in its brief, SICI raised the following errors:
I. THE LOWER COURT PALPABLY COMMITTED GRAVE ERROR IN GRANTING APPELLEES
MOTION FOR SUMMARY JUDGMENT, DESPITE LACK OF VALID BASIS THEREFOR.
II. THE LOWER COURT LIKEWISE PALPABLY COMMITTED GRAVE ERROR IN RENDERING
THE SUMMARY JUDGMENT HOLDING APPELLANT STRONGHOLD LIABLE UNDER ITS
SURETY BOND TO APPELLEE DESPITE LACK OF FACTUAL AND LEGAL BASIS FOR ITS
JUDGMENT.35
According to SICI, the RTC erroneously rendered summary judgment notwithstanding the
genuine issues raised by the parties.36 It claimed that its obligations under the surety bond
never became effective because of PMRDCs failure to assign its leasehold rights. It likewise
insisted that when the promissory notes matured, Garon could no longer run after it as its
liability under the surety bond had already expired.
On May 7, 2004, the CA affirmed with modification the decision of the RTC.

37

The fallo reads:

WHEREFORE, foregoing considered, the appealed decision is affirmed with the modification
that defendant-appellant SICI is not liable to plaintiff-appellee.
No pronouncement as to cost.
SO ORDERED.38

9 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
In upholding the propriety of the summary judgment rendered by the RTC, the CA declared
that no genuine issue was raised since the parties admitted executing the promissory notes
and surety bond, and the non-performance of the correlative obligations; the liabilities of the
parties were likewise clearly set forth in the contracts. The CA further affirmed the RTCs
finding that PMRDC was not relieved of its liability despite the enforcement of Garons right
against SICI; so long as the debt has not been fully paid, SICI is still liable.
The CA found, however, that appellant cannot be held liable because its liability had long
expired (on November 7, 1998) prior to the maturity dates of the loans on December 17 and
31, 1998. Thus, at the time PMRDC defaulted, the surety bond had long expired.
Garon, now petitioner, comes before this Court on the sole ground that:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN MODIFYING THE TRIAL COURTS
DECISION AND FINDING THAT PROMISSORY NOTES NO. PMRDC 97-12-332 AND PMRDC NO.
97-12-333 MATURED ONLY ON 17 DECEMBER 1998 AND 31 DECEMBER 1998,
RESPECTIVELY.39
Petitioner avers that it was specifically stated in the promissory notes that failure to pay any
of the note or interest thereon shall constitute default, and the entire obligation shall
immediately become due and payable. In view of PMRDCs default, the entire obligation
became due and demandable. Moreover, the liability of respondent SICI attached the
moment PMRDC failed to assign its leasehold rights. Thus, the CAs ruling that respondent
cannot be held liable because the notes have not yet matured is utterly incorrect.
For its part, respondent SICI avers that petitioner invoked the alleged acceleration clauses of
the promissory notes only before this Court. It likewise argues that the maturity date of the
loan is immaterial because the promissory notes were not guaranteed by the surety bond.
As such, respondent SICI cannot be made to answer for the payment of the loan. 40
In her Reply,41 petitioner asserts that the promissory notes, which explicitly provide for the
acceleration of the maturity dates, are all part of the record. Since respondent SICI did not
deny the authenticity and due execution of the notes, the contents may be read in evidence
in the resolution of the issues. She further states that in view of the admission of respondent
SICI that the leasehold rights of PMRDC were never assigned to petitioner, the SICI should be
held liable.
Thus, the issue in this case is whether respondent SICI is liable to petitioner under its surety
bond.
The present controversy arose from the following contracts: (1) the contracts of loan covered
by promissory notes No. PMRDC-97-12-33242 and PMRDC-D97-12-33343 dated December 19
and 31, 1997, between petitioner and PMRDC; and (2) the surety bond 44 dated November 7,
1997, between PMRDC and respondent SICI.1a\^/phi1.net
In the subject promissory notes, PMRDC undertook to pay the amount of the loan covered by
the two notes, as well as to assign its leasehold rights over two spaces in the Monumento
Plaza Commercial Complex covered by OCLT Nos. 0161 and 1108, as a security for the loan.
To secure PMRDCs obligation to assign its leasehold rights to petitioner, the former procured
the surety bond from respondent SICI subject to the following conditions:
WHEREAS, this bond is conditioned to guarantee the assignment of Leasehold Rights of the
Principal at Monumento Plaza Building in favor of the Obligee over the Certain Original
Certificate of Leasehold Title No. 0161 and 0108 (sic).

10 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
WHEREAS, the liability of the surety company upon determination under this bond shall in no
case exceed the penal sum of PESOS: TWELVE MILLION SEVEN HUNDRED FIFTY FIVE
THOUSAND ONE HUNDRED THIRTY NINE & 85/100 (P12,755,139.85) Only, Philippine
Currency.
xxx
Liability of surety on this bond will expire on November 7, 1998 and said bond will be
cancelled five days after its expiration, unless surety is notified of any existing obligations
thereunder.45
Thus, respondent SICI, in turn, undertook to guarantee the assignment of leasehold rights;
and bound itself to be liable to petitioner in case of PMRDCs failure to assign the leasehold
rights in an amount not exceeding P12,755,139.85. This undertaking, however, was to expire
on November 7, 1998.
It must be stressed that the principal obligation guaranteed by the surety bond is the
assignment of the leasehold rights of PMRDC to petitioner over the subject spaces. Petitioner
made a formal demand on November 3, 1998 for PMRDC to perform the obligation, but the
latter defaulted. As such, PMRDCs liability as principal arose. Consequently, respondents
liability as surety likewise arose. Respondent therefore cannot claim that its obligation arose
only upon the maturity of the subject loans. To sustain this contention would mean that
respondent cannot be held liable under the surety bond, because if demand is made after
the maturity dates of the loans December 19 and 31, 1998 it could again assert that its
liability had expired on November 7, 1998.
Suretyship arises upon the solidary binding of a person (deemed the surety) with the
principal debtor, for the purpose of fulfilling an obligation. 46 A surety is considered in law as
being the same party as the debtor in relation to whatever is adjudged as touching the
obligation of the latter, and their liabilities are interwoven as to be inseparable. 47 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. 48
Notwithstanding the timeliness of the demand on respondent, the latter cannot be held
liable in the instant case. Indeed, the liability of respondent arose the moment PMRDC failed
to assign its leasehold rights; and the demand on respondent was made prior to the
expiration of the surety bond. However, an examination of the terms of the surety bond
clearly shows that respondent guaranteed the assignment of the leasehold rights, not the
payment of a particular sum of money owed by PMRDC to petitioner. The principal obligation
therefore is the assignment of the leasehold right, and the accessory obligation is the surety
agreement.
The Court notes, however, that respondent is a stranger to the contract of loan between
petitioner and PMRDC; it cannot thus be held liable for an obligation which it did not
undertake to perform or at least to guarantee. It is basic that the parties are bound by the
terms of their contract which is the law between them. The extent of a suretys liability is
determined by the language of the suretyship contract or bond itself. It cannot be extended
by implication, beyond the terms of the contract. 49 Contracts have the force of law between
the parties who are free to stipulate any matter not contrary to law, morals, good customs,
public order or public policy.50 If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations shall control. 51
Since respondents undertaking under the surety bond was to guarantee the assignment of
leasehold rights, the security of the principal debt, its obligation cannot extend to the
payment of the principal obligation; to do so would mean going beyond the terms of the
contract.

11 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
The records show that in her demand letters dated November 3 and 6, 1998, petitioner
made formal demands on both PMRDC and respondent for the assignment of PMRDCs
leasehold right. However, in her complaint in Civil Case No. 99-1051 where the present case
arose, petitioner prayed for the payment of the principal debt, not the assignment of
PMRDCs leasehold rights. The pertinent portion of the complaint reads:
WHEREFORE, plaintiff respectfully prays that after hearing on the merits, this court render[s]
judgment in favor of plaintiff and against defendants as follows:
1. Ordering defendant PMRDC to pay plaintiff the sums of:
xxx
2. Declaring defendant Stronghold solidarily liable and ordering it to pay plaintiff the
sum of x x x. (Emphasis supplied)52
It thus shows that petitioner was enforcing her right to collect the debt, rather than her right
to secure it through the assignment of the leasehold right. Respondent is being made
solidarily liable for the payment of such debt which obviously is beyond its undertaking
under the surety bond.
In sum, respondents liability on the bond arose from the time PMRDC failed to comply with
its obligation to assign its leasehold rights over the subject properties as security for the
payment of her debt covered by the promissory notes, not on the maturity of the loan.
However, respondent cannot be held liable to make such payment for the following reasons:
(1) its undertaking under the surety bond was merely to guarantee the assignment of
PMRDCs leasehold rights and not the payment of the principal obligation; and (2) petitioner,
in instituting the instant case, is seeking to enforce her right to collect the principal debt
rather than enforce the security.
IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED. The Decision of the
Court of Appeals dated May 7, 2004, and its Resolution dated November 16, 2004, are
AFFIRMED.
SO ORDERED.
ROMEO J. CALLEJO, SR.
Associate Justice

12 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases

G.R. No. 173526

August 28, 2008

BENJAMIN BITANGA, petitioner,


vs.
PYRAMID CONSTRUCTION ENGINEERING CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Assailed in this Petition for Review under Rule 451 of the Revised Rules of Court are: (1) the
Decision2 dated 11 April 2006 of the Court of Appeals in CA-G.R. CV No. 78007 which
affirmed with modification the partial Decision3 dated 29 November 2002 of the Regional
Trial Court (RTC), Branch 96, of Quezon City, in Civil Case No. Q-01-45041, granting the
motion for summary judgment filed by respondent Pyramid Construction and Engineering
Corporation and declaring petitioner Benjamin Bitanga and his wife, Marilyn Bitanga
(Marilyn), solidarily liable to pay P6,000,000.000 to respondent; and (2) the Resolution 4
dated 5 July 2006 of the appellate court in the same case denying petitioners Motion for
Reconsideration.
The generative facts are:
On 6 September 2001, respondent filed with the RTC a Complaint for specific performance
and damages with application for the issuance of a writ of preliminary attachment against
the petitioner and Marilyn. The Complaint was docketed as Civil Case No. Q-01-45041.
Respondent alleged in its Complaint that on 26 March 1997, it entered into an agreement
with Macrogen Realty, of which petitioner is the President, to construct for the latter the
Shoppers Gold Building, located at Dr. A. Santos Avenue corner Palayag Road, Sucat,
Paraaque City. Respondent commenced civil, structural, and architectural works on the
construction project by May 1997. However, Macrogen Realty failed to settle respondents
progress billings. Petitioner, through his representatives and agents, assured respondent
that the outstanding account of Macrogen Realty would be paid, and requested respondent
to continue working on the construction project. Relying on the assurances made by
petitioner, who was no less than the President of Macrogen Realty, respondent continued the
construction project.
In August 1998, respondent suspended work on the construction project since the conditions
that it imposed for the continuation thereof, including payment of unsettled accounts, had
not been complied with by Macrogen Realty. On 1 September 1999, respondent instituted

13 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
with the Construction Industry Arbitration Commission (CIAC) a case for arbitration against
Macrogen Realty seeking payment by the latter of its unpaid billings and project costs.
Petitioner, through counsel, then conveyed to respondent his purported willingness to
amicably settle the arbitration case. On 17 April 2000, before the arbitration case could be
set for trial, respondent and Macrogen Realty entered into a Compromise Agreement, 5 with
petitioner acting as signatory for and in behalf of Macrogen Realty. Under the Compromise
Agreement, Macrogen Realty agreed to pay respondent the total amount of P6,000,000.00 in
six equal monthly installments, with each installment to be delivered on the 15 th day of the
month, beginning 15 June 2000. Macrogen Realty also agreed that if it would default in the
payment of two successive monthly installments, immediate execution could issue against it
for the unpaid balance, without need of judgment or decree from any court or tribunal.
Petitioner guaranteed the obligations of Macrogen Realty under the Compromise Agreement
by executing a Contract of Guaranty6 in favor of respondent, by virtue of which he
irrevocably and unconditionally guaranteed the full and complete payment of the principal
amount of liability of Macrogen Realty in the sum of P6,000,000.00. Upon joint motion of
respondent and Macrogen Realty, the CIAC approved the Compromise Agreement on 25 April
2000.7
However, contrary to petitioners assurances, Macrogen Realty failed and refused to pay all
the monthly installments agreed upon in the Compromise Agreement. Hence, on 7
September 2000, respondent moved for the issuance of a writ of execution8 against
Macrogen Realty, which CIAC granted.
On 29 November 2000, the sheriff9 filed a return stating that he was unable to locate any
property of Macrogen Realty, except its bank deposit of P20,242.33, with the Planters Bank,
Buendia Branch.
Respondent then made, on 3 January 2001, a written demand 10 on petitioner, as guarantor
of Macrogen Realty, to pay the P6,000,000.00, or to point out available properties of the
Macrogen Realty within the Philippines sufficient to cover the obligation guaranteed. It also
made verbal demands on petitioner. Yet, respondents demands were left unheeded.
Thus, according to respondent, petitioners obligation as guarantor was already due and
demandable. As to Marilyns liability, respondent contended that Macrogen Realty was
owned and controlled by petitioner and Marilyn and/or by corporations owned and controlled
by them. Macrogen Realty is 99% owned by the Asian Appraisal Holdings, Inc. (AAHI), which
in turn is 99% owned by Marilyn. Since the completion of the construction project would
have redounded to the benefit of both petitioner and Marilyn and/or their corporations; and
considering, moreover, Marilyns enormous interest in AAHI, the corporation which controls
Macrogen Realty, Marilyn cannot be unaware of the obligations incurred by Macrogen Realty
and/or petitioner in the course of the business operations of the said corporation.
Respondent prayed in its Complaint that the RTC, after hearing, render a judgment ordering
petitioner and Marilyn to comply with their obligation under the Contract of Guaranty by
paying respondent the amount of P6,000,000.000 (less the bank deposit of Macrogen Realty
with Planters Bank in the amount of P20,242.23) and P400,000.000 for attorneys fees and
expenses of litigation. Respondent also sought the issuance of a writ of preliminary
attachment as security for the satisfaction of any judgment that may be recovered in the
case in its favor.
Marilyn filed a Motion to Dismiss,11 asserting that respondent had no cause of action against
her, since she did not co-sign the Contract of Guaranty with her husband; nor was she a
party to the Compromise Agreement between respondent and Macrogen Realty. She had no
part at all in the execution of the said contracts. Mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock of another corporation is not by
itself a sufficient ground for disregarding the separate personality of the latter corporation.
Respondent misread Section 4, Rule 3 of the Revised Rules of Court.

14 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
The RTC denied Marilyns Motion to Dismiss for lack of merit, and in its Order dated 24
January 2002 decreed that:
The Motion To Dismiss Complaint Against Defendant Marilyn Andal Bitanga filed on
November 12, 2001 is denied for lack of merit considering that Sec. 4, Rule 3, of the
Rules of Court (1997) specifically provides, as follows:
"SEC. 4. Spouses as parties. Husband and wife shall sue or be sued jointly,
except as provided by law."
and that this case does not come within the exception. 12
Petitioner filed with the RTC on 12 November 2001, his Answer 13 to respondents Complaint
averring therein that he never made representations to respondent that Macrogen Realty
would faithfully comply with its obligations under the Compromise Agreement. He did not
offer to guarantee the obligations of Macrogen Realty to entice respondent to enter into the
Compromise Agreement but that, on the contrary, it was respondent that required Macrogen
Realty to offer some form of security for its obligations before agreeing to the compromise.
Petitioner further alleged that his wife Marilyn was not aware of the obligations that he
assumed under both the Compromise Agreement and the Contract of Guaranty as he did not
inform her about said contracts, nor did he secure her consent thereto at the time of their
execution.
As a special and affirmative defense, petitioner argued that the benefit of excussion was still
available to him as a guarantor since he had set it up prior to any judgment against him.
According to petitioner, respondent failed to exhaust all legal remedies to collect from
Macrogen Realty the amount due under the Compromise Agreement, considering that
Macrogen Realty still had uncollected credits which were more than enough to pay for the
same. Given these premise, petitioner could not be held liable as guarantor. Consequently,
petitioner presented his counterclaim for damages.
At the pre-trial held on 5 September 2002, the parties submitted the following issues for the
resolution of the RTC:
(1) whether the defendants were liable under the contract of guarantee dated April
17, 2000 entered into between Benjamin Bitanga and the plaintiff;
(2) whether defendant wife Marilyn Bitanga is liable in this action;
(3) whether the defendants are entitled to the benefit of excussion, the plaintiff on
the one hand claiming that it gave due notice to the guarantor, Benjamin Bitanga,
and the defendants contending that no proper notice was received by Benjamin
Bitanga;
(4) if damages are due, which party is liable; and
(5) whether the benefit of excussion can still be invoked by the defendant guarantor
even after the notice has been allegedly sent by the plaintiff although proper receipt
is denied.14
On 20 September 2002, prior to the trial proper, respondent filed a Motion for Summary
Judgment.15 Respondent alleged therein that it was entitled to a summary judgment on
account of petitioners admission during the pre-trial of the genuineness and due execution
of the Contract of Guaranty. The contention of petitioner and Marilyn that they were entitled
to the benefit of excussion was not a genuine issue. Respondent had already exhausted all
legal remedies to collect from Macrogen Realty, but its efforts proved unsuccessful. Given

15 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
that the inability of Macrogen Realty as debtor to pay the amount of its debt was already
proven by the return of the writ of execution to CIAC unsatisfied, the liability of petitioner as
guarantor already arose.16 In any event, petitioner and Marilyn were deemed to have
forfeited their right to avail themselves of the benefit of excussion because they failed to
comply with Article 206017 of the Civil Code when petitioner ignored respondents demand
letter dated 3 January 2001 for payment of the amount he guaranteed. 18 The duty to collect
the supposed receivables of Macrogen Realty from its creditors could not be imposed on
respondent, since petitioner and Marilyn never informed respondent about such uncollected
credits even after receipt of the demand letter for payment. The allegation of petitioner and
Marilyn that they could not respond to respondents demand letter since they did not receive
the same was unsubstantiated and insufficient to raise a genuine issue of fact which could
defeat respondents Motion for Summary Judgment. The claim that Marilyn never
participated in the transactions that culminated in petitioners execution of the Contract of
Guaranty was nothing more than a sham.
In opposing respondents foregoing Motion for Summary Judgment, petitioner and Marilyn
countered that there were genuinely disputed facts that would require trial on the merits.
They appended thereto an affidavit executed by petitioner, in which he declared that his
spouse Marilyn could not be held personally liable under the Contract of Guaranty or the
Compromise Agreement, nor should her share in the conjugal partnership be made
answerable for the guaranty petitioner assumed, because his undertaking of the guaranty
did not in any way redound to the benefit of their family. As guarantor, petitioner was
entitled to the benefit of excussion, and he did not waive his right thereto. He never received
the respondents demand letter dated 3 January 2001, as Ms. Dette Ramos, the person who
received it, was not an employee of Macrogen Realty nor was she authorized to receive the
letter on his behalf. As a guarantor, petitioner could resort to the benefit of excussion at any
time before judgment was rendered against him. 19 Petitioner reiterated that Macrogen Realty
had uncollected credits which were more than sufficient to satisfy the claim of respondent.
On 29 November 2002, the RTC rendered a partial Decision, the dispositive portion of which
provides:
WHEREFORE, summary judgment is rendered ordering defendants SPOUSES
BENJAMIN BITANGA and MARILYN ANDAL BITANGA to pay the [herein respondent],
jointly and severally, the amount of P6,000,000.00, less P20,242.23 (representing the
amount garnished bank deposit of MACROGEN in the Planters Bank, Buendia Branch);
and the costs of suit.
Within 10 days from receipt of this partial decision, the [respondent] shall inform the
Court whether it shall still pursue the rest of the claims against the defendants.
Otherwise, such claims shall be considered waived.20
Petitioner and Marilyn filed a Motion for Reconsideration of the afore-quoted Decision, which
the RTC denied in an Order dated 26 January 2003.21
In time, petitioner and Marilyn filed an appeal with the Court of Appeals, docketed as CA-G.R.
CV 78007. In its Decision dated 11 April 2006, the appellate court held:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from must be,
as it hereby is, MODIFIED to the effect that defendant-appellant Marilyn Bitanga is
adjudged not liable, whether solidarily or otherwise, with her husband the defendantappellant Benjamin Bitanga, under the compromise agreement or the contract of
guaranty. No costs in this instance.22
In holding that Marilyn Bitanga was not liable, the Court of Appeals cited Ramos v. Court of
Appeals,23 in which it was declared that a contract cannot be enforced against one who is

16 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
not a party to it. The Court of Appeals stated further that the substantial ownership of shares
in Macrogen Realty by Marilyn Bitanga was not enough basis to hold her liable.
The Court of Appeals, in its Resolution dated 5 July 2006, denied petitioners Motion for
Reconsideration24 of its earlier Decision.
Petitioner is now before us via the present Petition with the following assignment of errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE VALIDITY OF THE PARTIAL
SUMMARY JUDGMENT BY THE REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 96,
DESPITE THE CLEAR EXISTENCE OF DISPUTED GENUINE AND MATERIAL FACTS OF THE
CASE THAT SHOULD HAVE REQUIRED A TRIAL ON THE MERITS.
II
THE COURT OF APPEALS GRAVELY ERRED IN NOT UPHOLDING THE RIGHT OF
PETITIONER BENJAMIN M. BITANGA AS A MERE GUARANTOR TO THE BENEFIT OF
EXCUSSION UNDER ARTICLES 2058, 2059, 2060, 2061, AND 2062 OF THE CIVIL CODE
OF THE PHILIPPINES.25
As in the two courts below, it is petitioners position that summary judgment is improper in
Civil Case No. Q-01-45041 because there are genuine issues of fact which have to be
threshed out during trial, to wit:
(A) Whether or not there was proper service of notice to petitioner considering the
said letter of demand was allegedly received by one Dette Ramos at Macrogen office
and not by him at his residence.
(B) Whether or not petitioner is entitled to the benefit of excussion? 26
We are not persuaded by petitioners arguments.
Rule 35 of the Revised Rules of Civil Procedure provides:
Section 1. Summary judgment for claimant. A party seeking to recover upon a
claim, counterclaim, or cross-claim or to obtain a declaratory relief may, at any time
after the pleading in answer thereto has been served, move with supporting
affidavits, depositions or admissions for a summary judgment in his favor upon all or
any part thereof.
For a summary judgment to be proper, the movant must establish two requisites: (a) there
must be no genuine issue as to any material fact, except for the amount of damages; and
(b) the party presenting the motion for summary judgment must be entitled to a judgment
as a matter of law. Where, on the basis of the pleadings of a moving party, including
documents appended thereto, no genuine issue as to a material fact exists, the burden to
produce a genuine issue shifts to the opposing party. If the opposing party fails, the moving
party is entitled to a summary judgment.27
In a summary judgment, the crucial question is: are the issues raised by the opposing party
not genuine so as to justify a summary judgment?28
First off, we rule that the issue regarding the propriety of the service of a copy of the
demand letter on the petitioner in his office is a sham issue. It is not a bar to the issuance of
a summary judgment in respondents favor.

17 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
A genuine issue is an issue of fact which requires the presentation of evidence as
distinguished from an issue which is a sham, fictitious, contrived or false claim. To forestall
summary judgment, it is essential for the non-moving party to confirm the existence of
genuine issues, as to which he has substantial, plausible and fairly arguable defense, i.e.,29
issues of fact calling for the presentation of evidence upon which reasonable findings of fact
could return a verdict for the non-moving party, although a mere scintilla of evidence in
support of the party opposing summary judgment will be insufficient to preclude entry
thereof.
Significantly, petitioner does not deny the receipt of the demand letter from the respondent.
He merely raises a howl on the impropriety of service thereof, stating that "the address to
which the said letter was sent was not his residence but the office of Macrogen Realty, thus
it cannot be considered as the correct manner of conveying a letter of demand upon him in
his personal capacity."30
Section 6, Rule 13 of the Rules of Court states:
SEC. 6. Personal service. Service of the papers may be made by delivering
personally a copy to the party or his counsel, or by leaving it in his office with his
clerk or with a person having charge thereof. If no person is found in his office,
or his office is not known, or he has no office, then by leaving the copy, between the
hours of eight in the morning and six in the evening, at the partys or counsels
residence, if known, with a person of sufficient age and discretion then residing
therein.
The affidavit of Mr. Robert O. Pagdilao, messenger of respondents counsel states in part:
2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one of the Associates of the
ACCRA Law Offices, instructed me to deliver to the office of Mr. Benjamin Bitanga a
letter dated 3 January 2001, pertaining to Construction Industry Arbitration
Commission (hereafter, "CIAC") Case No. 99-56, entitled "Pyramid Construction
Engineering Corporation vs. Macrogen Realty Corporation."
3. As instructed, I immediately proceeded to the office of Mr. Bitanga located at the
12th Floor, Planters Development Bank Building, 314 Senator Gil Puyat Avenue,
Makati City. I delivered the said letter to Ms. Dette Ramos, a person of sufficient age
and discretion, who introduced herself as one of the employees of Mr. Bitanga and/or
of the latters companies.31 (Emphasis supplied.)
We emphasize that when petitioner signed the Contract of Guaranty and assumed obligation
as guarantor, his address in the said contract was the same address where the demand
letter was served.32 He does not deny that the said place of service, which is the office of
Macrogen, was also the address that he used when he signed as guarantor in the Contract of
Guaranty. Nor does he deny that this is his office address; instead, he merely insists that the
person who received the letter and signed the receiving copy is not an employee of his
company. Petitioner could have easily substantiated his allegation by a submission of an
affidavit of the personnel manager of his office that no such person is indeed employed by
petitioner in his office, but that evidence was not submitted. 33 All things are presumed to
have been done correctly and with due formality until the contrary is proved. This juris
tantum presumption stands even against the most well-reasoned allegation pointing to some
possible irregularity or anomaly.34 It is petitioners burden to overcome the presumption by
sufficient evidence, and so far we have not seen anything in the record to support
petitioners charges of anomaly beyond his bare allegation. Petitioner cannot now be heard
to complain that there was an irregular service of the demand letter, as it does not escape
our attention that petitioner himself indicated "314 Sen. Gil Puyat Avenue, Makati City" as
his office address in the Contract of Guaranty.

18 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Moreover, under Section 6, Rule 13 of the Rules of Court, there is sufficiency of service when
the papers, or in this case, when the demand letter is personally delivered to the party or his
counsel, or by leaving it in his office with his clerk or with a person having charge
thereof, such as what was done in this case.
We have consistently expostulated that in summary judgments, the trial court can determine
a genuine issue on the basis of the pleadings, admissions, documents, affidavits or counter
affidavits submitted by the parties. When the facts as pleaded appear uncontested or
undisputed, then there is no real or genuine issue or question as to any fact, and summary
judgment is called for.35
The Court of Appeals was correct in holding that:
Here, the issue of non-receipt of the letter of demand is a sham or pretended issue,
not a genuine and substantial issue. Indeed, against the positive assertion of Mr.
Roberto O. Pagdilao (the private courier) in his affidavit that he delivered the subject
letter to a certain Ms. Dette Ramos who introduced herself as one of the employees
of [herein petitioner] Mr. Benjamin Bitanga and/or of the latters companies, said
[petitioner] merely offered a bare denial. But bare denials, unsubstantiated by facts,
which would be admissible in evidence at a hearing, are not sufficient to raise a
genuine issue of fact sufficient to defeat a motion for summary judgment. 36
We further affirm the findings of both the RTC and the Court of Appeals that, given the
settled facts of this case, petitioner cannot avail himself of the benefit of excussion.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. The guarantor who
pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot
be compelled to pay the creditor unless the latter has exhausted all the property of the
debtor and resorted to all the legal remedies against the debtor. This is what is otherwise
known as the benefit of excussion.37
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may make use of the benefit of excussion, he
must set it up against the creditor upon the latters demand for payment from him,
and point out to the creditor available property of the debtor within Philippine
territory, sufficient to cover the amount of the debt.38
The afore-quoted provision imposes a condition for the invocation of the defense of
excussion. Article 2060 of the Civil Code clearly requires that in order for the guarantor to
make use of the benefit of excussion, he must set it up against the creditor upon the latters
demand for payment and point out to the creditor available property of the debtor within the
Philippines sufficient to cover the amount of the debt. 39
It must be stressed that despite having been served a demand letter at his office, petitioner
still failed to point out to the respondent properties of Macrogen Realty sufficient to cover its
debt as required under Article 2060 of the Civil Code. Such failure on petitioners part
forecloses his right to set up the defense of excussion.
Worthy of note as well is the Sheriffs return stating that the only property of Macrogen
Realty which he found was its deposit of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds application and precludes petitioner from
interposing the defense of excussion. We quote:

19 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an execution on the property of the principal debtor
would not result in the satisfaction of the obligation.
As the Court of Appeals correctly ruled:
We find untenable the claim that the [herein petitioner] Benjamin Bitanga cannot be
compelled to pay Pyramid because the Macrogen Realty has allegedly sufficient
assets. Reason: The said [petitioner] had not genuinely controverted the return made
by Sheriff Joseph F. Bisnar, who affirmed that, after exerting diligent efforts, he was
not able to locate any property belonging to the Macrogen Realty, except for a bank
deposit with the Planters Bank at Buendia, in the amount of P20,242.23. It is
axiomatic that the liability of the guarantor arises when the insolvency or inability of
the debtor to pay the amount of debt is proven by the return of the writ of execution
that had not been unsatisfied.40
WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The
Decision of the Court of Appeals dated 11 April 2006 and its Resolution dated 5 July 2006 are
AFFIRMED. Costs against petitioner.
SO ORDERED.
Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, Reyes, JJ., concur.

Footnotes
1

Appeal by Certiorari to the Supreme Court.

Penned by Associate Justice Renato C. Dacudao with Associate Justices Mario L.


Guaria III and Fernanda Lampas-Peralta, concurring. Rollo, pp. 37-52.
3

Penned by Judge Lucas P. Bersamin (now a Justice of the Court of Appeals).

Rollo, pp. 61-64.

Id. at 93.

GUARANTY
This Guaranty made and executed this 17th day of April 2000 at Makati City,
Philippines, by and between:
Benajamin M. Bitanga, of legal age, Filipino, married, with office address
located at 314 Sen. Gil Puyat Avenue, Makati City (hereafter referred to as the
"Guarantor")
- in favor of
PYRAMID CONSTRUCTION ENGINEERING CORPORATION, a corporation
organized and existing under the laws of the Republic of the Philippines, with
office address located at Pyramid Building, 124 Kaingin Road, Balintawak,

20 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Quezon City, represented herein by its duly authorized representative, Mr.
Engracio Ang, Jr. (hereafter referred to as "PYRAMID").
W I T N E S S E T H: That
WHEREAS, on 17 April 2000, Pyramid and Macrogen Realty Corporation
(hereafter referred to as the "Debtor") executed a Compromise Agreement
(hereafter referred to as "Agreement"), acknowledged before Jose Vicente B.
Salazar Notary Public for Makati City, as Doc. No. 118, Page 25, Book No. 2,
Series of 2000;
WHEREAS, in said Agreement, Macrogen, in order to put an end to CIAC Case
No. 36-99, agreed to pay and Pyramid has agreed to accept the total amount
of SIX MILLION PESOS (P6,000,000.00), payable in six monthly installments,
on the 15th day of each month, beginning in June 15, 2000;
WHEREAS, the Guarantor agrees to execute and deliver to Pyramid an
irrevocable and unconditional guaranty for the due and punctual payment of
the principal amount of Six Million Pesos (P6,000,000.00) due and payable by
the Debtor to Pyramid under the Agreement.
NOW, THEREFORE, for and in consideration of the foregoing and for other
good and valuable consideration, receipt of which is hereby acknowledged by
the Guarantor, the latter agrees as follows:
SECTION 1. SCOPE OF GUARANTY
1.1. The Guarantor hereby absolutely, unconditionally and irrevocably
guarantees to Pyramid the full and complete payment by Debtor of the
principal amount of Six Million pesos (P6,000,000.00).
1.2. The Guarantor irrevocably and unconditionally agrees that this Guaranty
shall be a continuing guaranty and as such shall remain in full force and effect
and be binding on the Guarantor until all sums payable by the Debtor under
and pursuant to the Agreement shall have been fully paid by the Debtor.
(Rollo, pp. 136-137.)

G.R. No. L-46702

October 6, 1939

ALEIDA SAAVEDRA, petitioner,


vs.

21 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
W.S. PRICE, FORTUNATO BORROMEO, Judge of the Court of First Instance of Leyte,
and ANASTACIO AOVER, provincial Sheriff of Leyte, respondents.
RAFAEL MARTINEZ, intervenor.
Gullas, Leuterio, Tanner and Laput for petitioner.
Mateo Canonoy for respondent Price and for respondent Judge.
Vicente J. Francisco for intervenor.
No appearance for the respondent.

IMPERIAL, J.:
This is a proceeding instituted by the petitioner to annul the order of May 8, 1939, entered
by the Court of First Instance of Leyte, which provided for the sale at public auction of the
real property described in Transfer Certificate of Title No. 395 issued in favor of the
petitioner, so that the proceeds thereof may be applied to the payment of the credit of the
respondent W.S. Price in the sum of P15,000.
In civil case No. 3569 of the Court of First Instance of Leyte, Saavedra et al. vs. Martinez et
al. (58 Phil., 767), this court, on appeal, rendered judgment in case which reads as follows,
Wherefore, the judgment appealed from is hereby modified to the effect that the
deed of sale, Exhibit C, executed by Ceferino Ibaez in favor of Rafael Martinez is
declared rescinded and without force and effect, and the register of deeds of Leyte is
hereby ordered to cancel transfer certificate of title No. 294 issued in favor of the
said Martinez, and to issue, in lieu thereof, another transfer certificate of title in favor
of Ceferino Ibaez and his wife, Aleida Saavedra, with a notation thereon of (1) the
mortgage constituted in favor of W.S. Price to secure the payment of the sum of
P15,000 and (2) the judgment rendered by this court in case G.R. No. 33795, civil
case No. 7957 of the Court of First Instance of Cebu; without prejudice to any right of
action which Rafael Martinez may have against Ceferino Ibaez in accordance with
the law. As thus modified, the judgment appealed from is hereby affirmed in all other
respects, with the costs instances against Ceferino Ibaez and Rafael Martinez.
In civil case No. 3707 of the Court of First Instance of Leyte, W.S. Price, plaintiff vs. Ceferino
Ibaez et al., defendants, said court rendered judgment ordering the defendants to pay the
plaintiff within ninety days the sum of P15,000, with the legal interest thereon from January
16, 1934, and in case of default on their part, that the real property subject matter of the
mortgage be sold at public auction so that the proceeds thereof may be applied to the
payment of the sum in question and the interest thereon. On appeal, this court, in case G. R.
No. 44974, (38 Off. Gaz., 2410), modified the judgment of the lower court as follows:
The judgment appealed from is modified and Rafael Martinez and Ceferino Ibaez are
ordered to pay the sum of P15,000 to plaintiff within the period of ninety days to be
counted from the date this decision becomes final, without pronouncement as to
costs.
After the period of ninety days has elapsed and Rafael Martinez and Ceferino Ibaez failed to
pay the sum in question with the interest thereon, the respondent Price filed a motion
praying that the real property mortgaged be sold at public auction for the payment of his
mortgage credit and its interest. The motion was set for hearing on April 22, 1939, but on
motion of the petitioner the court postponed it definitely for May 6, 1939. On the 4th of said
month, the attorneys for the petitioner against sought the postponement of the hearing by
reason of the bad weather then prevailing, but the court proceeded with the hearing of the
motion on the date fixed, and on the 8th of May it entered the order directing the sale of the
mortgaged realty for the payment of the judgment obtained by the respondent W.S. Price.
The petitioner asked for the reconsideration of the order and the court denied the motion
filed to that effect.
The petitioner now claims that the respondent Judge acted with abuse of his discretion in not
transferring the hearing of the motion for the sale of the mortgaged realty and that he
exceeded his jurisdiction in ordering the sale of said property.lwphi1.nt

22 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
In connection with the first contention, we hold that the court made good use of its
discretion in denying the postponement on the ground that said hearing had already been
postponed definitely to another date upon petition of the petitioner herself. Furthermore,
with respect to a mere motion to sell the mortgaged realty, the court could hear it ex parte
without the presence of the petitioner because in the judgment rendered by the court and
affirmed by this court, it had already been ordered previously that if the defendants Rafael
Martinez and Ceferino Ibaez should fail to pay the debt of P15,000 within 90 days, the
mortgaged realty must be sold in accordance with the law (Government of the Philippine
Islands vs. De las Cajigas, 55 Phil., 667).
As to the second point, it is contended that since the petitioner is not the debtor and as she,
on the other hand is the owner of the mortgaged realty, she merely acted as surety to Rafael
Martinez, the principal debtor, and as such she entitled to the benefit of the exhaustion of
the property of the principal debtor, in accordance with the provision of article 1830 of the
Civil Code. Basing her claim on this alleged defense, the petitioner contends that the court
should not have ordered the sale of the real property in question. We are of the opinion that
this last contention is likewise unfounded and untenable. In the first place, this alleged
defense should have been interposed before the judgment was rendered in this case and it
is too late to raise it for the first time as a ground for opposing the motion to sell the real
property in question. In the second place, the contention that the mortgaged real property
belonging to the petitioner cannot be sold to pay the debt for the reason that she is a mere
surety of Rafael Martinez, finds no support in the law. It is a fact that the principal debtors,
according to the judgment of this court, are Rafael Martinez and Ceferino Ibaez and that
the mortgaged property belongs to the petitioner, but the lien imposed upon the property
was legal and valid in accordance with article 1857 (paragraph 3) of the Civil Code, and in
case of default, which took place herein, said property is subject to sale, in accordance with
the provisions of articles 1858 and 1876 of the same Code of sections 256 and 257 of the
Code of Civil Procedure. It is true that the petitioner is a surety with regard to Rafael
Martinez and as such surety she is entitled to resort to the actions and remedies against him
which the law affords her, but we should not lose sight of the fact that she was sued not as a
surety but as a mortgage debtor for being the owner of the mortgaged property.
The order of May 8. 1939, appealed from, being in accordance with law, for the reason that it
was rendered by the respondent Judge in the exercise of his jurisdiction and discretion, the
petition for certiorari is hereby denied, with the costs to the petitioner. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcion, and Moran, JJ., concur.

23 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases

G.R. No. L-12333

February 28, 1959

ASSOCIATED INSURANCE & SURETY CO., INC., plaintiff-appellant,


vs.
BACOLOD-MURCIA MILLING CO., INC., ET AL., defendants-appellees.
Castillo and Fineza for appellant.
Hilado and Hilado for appellee Bacolod-Murcia Milling Co., Inc.
BAUTIUSTA ANGELO, J.:
Plaintiff brought this action before the Court of First Instance of Manila to secure the
cancellation of certain surety bonds executed by it in favor of defendant Bacolod-Murcia
Milling Co., Inc. or, in the alternative, to order defendants Sixto R. Ruiz and Raymundo D.
Dizon to pay to plaintiff the amount of P2,956.60, plus interest thereon, for ultimate delivery
to their co-defendant and to order defendants to pay plaintiff's attorney's fees and costs.
The complaint alleges that defendants Sixto R. Ruiz obtained two crop loans in the
aggregate amount of P11,626.00 from defendant Bacolod-Murcia Milling Co., Inc., a
corporation duly organized under the laws of the Philippines, subject to the condition that he
shall post surety bonds to guarantee the payment of 25% of said crop loans; that in
compliance with said condition, plaintiff, also a corporation, executed in favor of the milling
corporation two surety bonds in the aggregate amount of P2,956.50 for the purpose abovementioned; that said bonds were executed subject to the following conditions: (1) the
creditor shall apply the share of the debtor in the harvest of the crops for which the loans
were granted to the liquidation of said loans and no part thereof shall be applied to other
indebtedness until the loans have been fully liquidated; (2) the creditor shall not grant any
additional loan to the debtor in excess of the latter's share in the crops covered by the bonds
without the prior written consent of the surety; and (3) the liability of the surety will
terminate upon complete payment of the indebtedness guaranteed by the bonds; that
defendant milling company failed to comply with conditions 1 and 2 mentioned above when
it granted to the debtor loans in excess of the latter's share in the harvest of the crops
covered by the bonds without the written consent of plaintiff, and when it failed to notify
plaintiff of the amount the debtor has actually availed himself of the crop loans obtained by
him, thereby depriving plaintiff of its right to be apprised of the loan actually obtained, this
notice being necessary to enable plaintiff to take steps to protect its interest; and that in
view of the violations of the conditions above-mentioned, plaintiff is deemed to have been
relieved of its liability under the bonds.
The complaint, as an alternative cause of action, also alleges that defendant Sixto R. Ruiz, as
debtor, and defendant Raymundo D. Dizon, as surety, executed an indemnity agreement in
favor of plaintiff to indemnify the latter for executed the two surety bonds in favor of the
milling company mentioned in the preceding paragraph; that defendant milling company
notified plaintiff that the debtor has an standing account with said defendant in the amount
of P15,285.72 and demanded that it pay its share thereof in the amount of P2,956.50 as
agreed upon in the surety bonds, and that in the event plaintiff is compelled pay to the
defendant milling company said amount of P2,956.50, plaintiff would have a valid cause of
action against debtor and his surety for the recovery of said amount under the provisions of
the indemnity agreement.
Defendant milling company filed a motion to dismiss on the ground that the complaint fails
to state a cause of action against it for the following reasons: there is no allegation in the
complaint that the plaintiff, as a surety, has paid the obligation it guaranteed, or has been
required to pay the same by said defendant. And granting arguendo that the allegations in
the complaint regarding breach of the conditions of the surety bonds are true, the same
would only be matters of defense which plaintiff could put up should it be made to pay its
obligation under the bonds of defendant milling company.

24 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Despite the opposition of plaintiff to this motion to dismiss, the court granted the same in a
brief order as follows: "Defendants' motion to dismiss on the ground that plaintiff's complaint
states no cause of action being meritorious, the same is granted. This case is hereby
dismissed, with costs against the defendants." Hence this appeal.
There is merit in the appeal. While the order of the lower court does not state the reasons
why it granted the motion to dismiss, for the same is very laconic, it may however be
inferred from its tenor that it agree to the grounds set forth by defendant milling company in
its motion. The reasons advanced for the dismissal of the case are that plaintiff, being a
surety of the debtor who obtained two crops loan from the milling company, has not yet
incurred any plaintiff under its bonds because the complaint contains no allegations that it
has voluntarily paid the obligation or has been made to pay the same to the company in
accordance with the terms of the bonds. It is contended that the allegations of the complaint
concerning breach of the principal conditions of the bonds on the part of defendant milling
company are mere matters of defense which plaintiff could put up when demand for
payment is made upon it by the milling company. And these arguments were found by the
lower court to be meritorious.
With this we disagree. The purpose of the action is not dispute the validity of any demand
for payment that may have been made upon plaintiff by defendant company on the strength
of its liability under the bonds but rather to ask for its release from its liability under the
bonds for certain breach of its conditions committed by the milling company, and it is for the
reason that the action was brought against the milling company. It is true that, as an
alternative action, the debtor and the other surety were also included to exact liability from
them under the indemnity agreement, but that is an action distinct and separate from that
alleged against the milling company and as such it cannot in any way affect the relation of
the latter to the plaintiff. We find therefore immaterial or unnecessary to allege in the
complaint that plaintiff has either paid or been required to pay its obligation under the bonds
by the creditor considering the nature of the main cause of action. It is sufficient if it alleges
therein, as it actually does, that conditions agreed upon in the bonds had been violated. We
therefore conclude that the complaint states a valid cause of action insofar as the milling
company is concerned.
The order appealed from is set aside. The case is remanded to the lower court for further
proceedings, with costs against the appellees.
Bengzon, Padilla, Montemayor, Reyes, A., Labrador, Concepcion and Endencia, JJ., concur.

25 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases

G.R. No. 113931 May 6, 1998


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

MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the decision 1 of the Court of
Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila,
Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as the Resolution 2
dated February 15, 1994 denying the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers,"
applied for a loan with respondent Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos
(P2,875,000.00) to finance the purchase of two (2) maritime barges and one tugboat 3 which
would be used in their molasses business. The loan was granted subject to the condition that
respondent spouses execute a chattel mortgage over the three (3) vessels to be acquired
and that a continuing guarantee be executed by Ayala International Philippines, Inc., now
herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. The respondent spouses agreed to
the arrangement. Consequently, a chattel mortgage and a Continuing Guaranty 4 were
executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence,
on January 31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ
of preliminary attachment, against respondents spouses and petitioner. The case was
docketed as Civil Case No. 91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the
loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued
that it has lost its right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with the appropriate government
agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because
petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:

26 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
After a careful consideration of the matter on hand, the Court finds the ground
of the motion to dismiss without merit. The document referred to as
"Continuing Guaranty" dated August 21, 1985 (Exh. 7) states as follows:
For and in consideration of any existing indebtedness to you of
Agro Brokers, a single proprietorship owned by Mr. Raul Claveria
for the payment of which the undersigned is now obligated to
you as surety and in order to induce you, in your discretion, at
any other manner, to, or at the request or for the account of the
borrower, . . .
The provisions of the document are clear, plain and explicit.
Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the
title of the document is "Continuing Guaranty", the Court's interpretation is
not limited to the title alone but to the contents and intention of the parties
more specifically if the language is clear and positive. The obligation of the
defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply
as it is only for those acting as guarantor. In fact, in the letter of January 31,
1986 of the defendants (spouses and Zobel) to the plaintiff it is requesting
that the chattel mortgage on the vessels and tugboat be waived and/or
rescinded by the bank inasmuch as the said loan is covered by the Continuing
Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition of the
guaranty. In its letter, it said that because of the Continuing Guaranty in favor
of the plaintiff the chattel mortgage is rendered unnecessary and redundant.
With regard to the claim that the failure of the plaintiff to register the chattel
mortgage with the proper government agency, i.e. with the Office of the
Collector of Customs or with the Register of Deeds makes the obligation a
guaranty, the same merits a scant consideration and could not be taken by
this Court as the basis of the extinguishment of the obligation of the
defendant corporation to the plaintiff as surety. The chattel mortgage is an
additional security and should not be considered as payment of the debt in
case of failure of payment. The same is true with the failure to register,
extinction of the liability would not lie.
WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel,
Inc., is ordered to file its answer to the complaint within ten (10) days from
receipt of a copy of this Order. 5
Petitioner moved for reconsideration but was denied on April 26, 1993.

Thereafter, petitioner questioned said Orders before the respondent Court of Appeals,
through a petition for certiorari, alleging that the trial court committed grave abuse of
discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive portion
of which reads:
WHEREFORE, finding that respondent Judge has not committed any grave
abuse of discretion in issuing the herein assailed orders, We hereby DISMISS
the petition.
A motion for reconsideration filed by petitioner was denied for lack of merit on February 15,
1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals
erred in its finding: (1) that Article 2080 of the New Civil Code which provides: "The
guarantors, even though they be solidary, are released from their obligation whenever by
some act of the creditor they cannot be subrogated to the rights, mortgages, and
preferences of the latter," is not applicable to petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3) that the

27 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty"
obligated itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.
A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of
another in case the latter does not pay the debt. 8

Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety is
usually bound with his principal by the same instrument, executed at the same time, and on
the same consideration. He is an original promissor and debtor from the beginning, and is
held, ordinarily, to know every default of his principal. Usually, he will not be discharged,
either by the mere indulgence of the creditor to the principal, or by want of notice of the
default of the principal, no matter how much he may be injured thereby. On the other hand,
the contract of guaranty is the guarantor's own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of the principal, and is often
supported on a separate consideration from that supporting the contract of the principal.
The original contract of his principal is not his contract, and he is not bound to take notice of
its non-performance. He is often discharged by the mere indulgence of the creditor to the
principal, and is usually not liable unless notified of the default of the principal. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to pay if the principal does not
pay. 10
Based on the aforementioned definitions, it appears that the contract executed by petitioner
in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of
surety. The terms of the contract categorically obligates petitioner as "surety" to induce
SOLIDBANK to extend credit to respondent spouses. This can be seen in the following
stipulations.
For and in consideration of any existing indebtedness to you of AGRO
BROKERS, a single proprietorship owned by MR. RAUL P. CLAVERIA, of legal
age, married and with business address . . . (hereinafter called the Borrower),
for the payment of which the undersigned is now obligated to you as surety
and in order to induce you, in your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in any other manner
to, or at the request or for the account of the Borrower, either with or without
purchase or discount, or to make any loans or advances evidenced or secured
by any notes, bills receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness . . . upon which the Borrower is or
may become liable as maker, endorser, acceptor, or otherwise, the
undersigned agrees to guarantee, and does hereby guarantee, the punctual
payment, at maturity or upon demand, to you of any and all such
instruments, loans, advances, credits and/or other obligations herein before
referred to, and also any and all other indebtedness of every kind which is
now or may hereafter become due or owing to you by the Borrower, together
with any and all expenses which may be incurred by you in collecting all or
any such instruments or other indebtedness or obligations hereinbefore
referred to, and or in enforcing any rights hereunder, and also to make or
cause any and all such payments to be made strictly in accordance with the
terms and provisions of any agreement (g), express or implied, which has
(have) been or may hereafter be made or entered into by the Borrower in
reference thereto, regardless of any law, regulation or decree, now or
hereafter in effect which might in any manner affect any of the terms or
provisions of any such agreements(s) or your right with respect thereto as
against the Borrower, or cause or permit to be invoked any alteration in the
time, amount or manner of payment by the Borrower of any such instruments,
obligations or indebtedness; . . . (Emphasis Ours)

28 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
One need not look too deeply at the contract to determine the nature of the undertaking and
the intention of the parties. The contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated itself as an original
promissor. It bound itself jointly and severally to the obligation with the respondent spouses.
In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable for the obligation. This can be gleaned
from a reading of the stipulations in the contract, to wit:
. . . If default be made in the payment of any of the instruments, indebtedness
or other obligation hereby guaranteed by the undersigned, or if the Borrower,
or the undersigned should die, dissolve, fail in business, or become insolvent, .
. ., or if any funds or other property of the Borrower, or of the undersigned
which may be or come into your possession or control or that of any third
party acting in your behalf as aforesaid should be attached of distrained, or
should be or become subject to any mandatory order of court or other legal
process, then, or any time after the happening of any such event any or all of
the instruments of indebtedness or other obligations hereby guaranteed shall,
at your option become (for the purpose of this guaranty) due and payable by
the undersigned forthwith without demand of notice, and full power and
authority are hereby given you, in your discretion, to sell, assign and deliver
all or any part of the property upon which you may then have a lien hereunder
at any broker's board, or at public or private sale at your option, either for
cash or for credit or for future delivery without assumption by you of credit
risk, and without either the demand, advertisement or notice of any kind, all
of which are hereby expressly waived. At any sale hereunder, you may, at
your option, purchase the whole or any part of the property so sold, free from
any right of redemption on the part of the undersigned, all such rights being
also hereby waived and released. In case of any sale and other disposition of
any of the property aforesaid, after deducting all costs and expenses of every
kind for care, safekeeping, collection, sale, delivery or otherwise, you may
apply the residue of the proceeds of the sale and other disposition thereof, to
the payment or reduction, either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned whether or not except
for disagreement such liabilities or obligations would then be due, making
proper allowance or interest on the obligations and liabilities not otherwise
then due, and returning the overplus, if any, to the undersigned; all without
prejudice to your rights as against the undersigned with respect to any and all
amounts which may be or remain unpaid on any of the obligations or liabilities
aforesaid at any time (s).
xxx xxx xxx
Should the Borrower at this or at any future time furnish, or should be
heretofore have furnished, another surety or sureties to guarantee the
payment of his obligations to you, the undersigned hereby expressly waives
all benefits to which the undersigned might be entitled under the provisions of
Article 1837 of the Civil Code (beneficio division), the liability of the
undersigned under any and all circumstances being joint and several;
(Emphasis Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in
business transactions to describe not the security of the debt but an intention to be bound
by a primary or independent obligation. 11 As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but to the contents and intention
of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon
by petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association
vs. Guinhawa, 12 we have ruled that Article 2080 of the New Civil Code does not apply where
the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the
chattel mortgage did not release petitioner from the obligation. In the Continuing Guaranty

29 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the
existence of any collateral. It even released SOLIDBANK from any fault or negligence that
may impair the contract. The pertinent portions of the contract so provides:
. . . the undersigned (petitioner) who hereby agrees to be and remain bound
upon this guaranty, irrespective of the existence, value or condition of any
collateral, and notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application, renewal or extension, and
notwithstanding also that all obligations of the Borrower to you outstanding
and unpaid at any time(s) may exceed the aggregate principal sum herein
above prescribed.
This is a Continuing Guaranty and shall remain in full force and effect until
written notice shall have been received by you that it has been revoked by the
undersigned, but any such notice shall not be released the undersigned from
any liability as to any instruments, loans, advances or other obligations
hereby guaranteed, which may be held by you, or in which you may have any
interest, at the time of the receipt of such notice. No act or omission of any
kind on your part in the premises shall in any event affect or impair this
guaranty, nor shall same be affected by any change which may arise by
reason of the death of the undersigned, of any partner (s) of the undersigned,
or of the Borrower, or of the accession to any such partnership of any one or
more new partners. (Emphasis supplied)
In fine, we find the petition to be without merit as no reversible error was committed by
respondent Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs
against the petitioner.
SO ORDERED.
Regalado, Melo and Puno, JJ., concur.
Mendoza, J., took no part.

G.R. No. 145578 November 18, 2005


JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, Petitioners,
vs.
THE COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS, Respondents.

30 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
DECISION
CARPIO, J.:
The Case
This is a petition for review1 of the Decision2 of the Court of Appeals dated 7 September
2000 and its Resolution dated 18 October 2000. The 7 September 2000 Decision affirmed
the ruling of the Regional Trial Court, Makati, Branch 144 in a case for estafa under Section
13, Presidential Decree No. 115. The Court of Appeals Resolution of 18 October 2000 denied
petitioners motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were Vice-President for
Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation ("El
Oro Corporation"). El Oro Corporation had a contract with the Philippine Army to supply the
latter with "survival bolos."
To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of
El Oro Corporation, applied with respondent Bank of the Philippine Islands ("respondent
bank") for two commercial letters of credit. The letters of credit were in favor of El Oro
Corporations suppliers, Tanchaoco Manufacturing Incorporated3 ("Tanchaoco Incorporated")
and Maresco Rubber and Retreading Corporation4 ("Maresco Corporation"). Respondent bank
granted petitioners application and issued Letter of Credit No. 2-00896-3 for P564,871.05 to
Tanchaoco Incorporated and Letter of Credit No. 2-00914-5 for P294,000 to Maresco
Corporation.
Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in
favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV ("petitioner
Jose Tupaz") signed, in his personal capacity, a trust receipt corresponding to Letter of Credit
No. 2-00896-3 (for P564,871.05). Petitioner Jose Tupaz bound himself to sell the goods
covered by the letter of credit and to remit the proceeds to respondent bank, if sold, or to
return the goods, if not sold, on or before 29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers of El Oro Corporation, a
trust receipt corresponding to Letter of Credit No. 2-00914-5 (for P294,000). Petitioners
bound themselves to sell the goods covered by that letter of credit and to remit the
proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before 8
December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former P564,871.05 and P294,000, respectively.
Petitioners did not comply with their undertaking under the trust receipts. Respondent bank
made several demands for payments but El Oro Corporation made partial payments only. On
27 June 1983 and 28 June 1983, respondent banks counsel 5 and its representative6
respectively sent final demand letters to El Oro Corporation. El Oro Corporation replied that
it could not fully pay its debt because the Armed Forces of the Philippines had delayed
paying for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No.
115 ("Section 13")7 or Trust Receipts Law ("PD 115"). After preliminary investigation, the
then Makati Fiscals Office found probable cause to indict petitioners. The Makati Fiscals
Office filed the corresponding Informations (docketed as Criminal Case Nos. 8848 and 8849)
with the Regional Trial Court, Makati, on 17 January 1984 and the cases were raffled to

31 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Branch 144 ("trial court") on 20 January 1984. Petitioners pleaded not guilty to the charges
and trial ensued. During the trial, respondent bank presented evidence on the civil aspect of
the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on
reasonable doubt. However, the trial court found petitioners solidarily liable with El Oro
Corporation for the balance of El Oro Corporations principal debt under the trust receipts.
The dispositive portion of the trial courts Decision provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C. Tupaz, IV and
Petronila Tupaz based upon reasonable doubt.
However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are hereby
ordered, jointly and solidarily, to pay the Bank of the Philippine Islands the outstanding
principal obligation of P624,129.19 (as of January 23, 1992) with the stipulated interest at
the rate of 18% per annum; plus 10% of the total amount due as attorneys fees; P5,000.00
as expenses of litigation; and costs of the suit.8
In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is deemed impliedly instituted
with the criminal action, as in fact the prosecution thereof was actively handled by the
private prosecutor, the Court believes that the El Oro Engraver Corporation and both
accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily should be held civilly liable
to the Bank of the Philippine Islands. The mere fact that they were unable to collect in full
from the AFP and/or the Department of National Defense the proceeds of the sale of the
delivered survival bolos manufactured from the raw materials covered by the trust receipt
agreements is no valid defense to the civil claim of the said complainant and surely could
not wipe out their civil obligation. After all, they are free to institute an action to collect the
same.9
Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal
"operates to extinguish [their] civil liability" and (2) at any rate, they are not personally
liable for El Oro Corporations debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts ruling.
The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from the violation of the trust
receipt agreement is distinct from the criminal liability imposed therein. In the case of
Vintola vs. Insular Bank of Asia and America, our Supreme Court held that acquittal in the
estafa case (P.D. 115) is no bar to the institution of a civil action for collection. This is
because in such cases, the civil liability of the accused does not arise ex delicto but rather
based ex contractu and as such is distinct and independent from any criminal proceedings
and may proceed regardless of the result of the latter. Thus, an independent civil action to
enforce the civil liability may be filed against the corporation aside from the criminal action
against the responsible officers or employees.
xxx
[W]e hereby hold that the acquittal of the accused-appellants from the criminal charge of
estafa did not operate to extinguish their civil liability under the letter of credit-trust receipt

32 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
arrangement with plaintiff-appellee, with which they dealt both in their personal capacity
and as officers of El Oro Engraver Corporation, the letter of credit applicant and principal
debtor.
Appellants argued that they cannot be held solidarily liable with their corporation, El Oro
Engraver Corporation, alleging that they executed the subject documents including the trust
receipt agreements only in their capacity as such corporate officers. They said that these
instruments are mere pro-forma and that they executed these instruments on the strength
of a board resolution of said corporation authorizing them to apply for the opening of a letter
of credit in favor of their suppliers as well as to execute the other documents necessary to
accomplish the same.
Such contention, however, is contradicted by the evidence on record. The trust receipt
agreement indicated in clear and unmistakable terms that the accused signed the same as
surety for the corporation and that they bound themselves directly and immediately liable in
the event of default with respect to the obligation under the letters of credit which were
made part of the said agreement, without need of demand. Even in the application for the
letter of credit, it is likewise clear that the undertaking of the accused is that of a surety as
indicated [in] the following words: "In consideration of your establishing the commercial
letter of credit herein applied for substantially in accordance with the foregoing, the
undersigned Applicant and Surety hereby agree, jointly and severally, to each and all
stipulations, provisions and conditions on the reverse side hereof."
xxx
Having contractually agreed to hold themselves solidarily liable with El Oro Engraver
Corporation under the subject trust receipt agreements with appellee Bank of the Philippine
Islands, herein accused-appellants may not, therefore, invoke the separate legal personality
of the said corporation to evade their civil liability under the letter of credit-trust receipt
arrangement with said appellee, notwithstanding their acquittal in the criminal cases filed
against them. The trial court thus did not err in holding the appellants solidarily liable with El
Oro Engraver Corporation for the outstanding principal obligation of P624,129.19 (as of
January 23, 1992) with the stipulated interest at the rate of 18% per annum, plus 10% of the
total amount due as attorneys fees, P5,000.00 as expenses of litigation and costs of suit. 10
Hence, this petition. Petitioners contend that:
1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL LIABILITY OF
PETITIONERS[;]
2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION WAS INCURRED BY
THE CORPORATION, THE SAME IS NOT YET DUE AND PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND PAYABLE, xxx
PETITIONERS ARE NOT PERSONALLY LIABLE TO xxx RESPONDENT BANK, SINCE THEY SIGNED
THE LETTER[S] OF CREDIT AS SURETY AS OFFICERS OF EL ORO, AND THEREFORE, AN
EXCLUSIVE LIABILITY OF EL ORO; [AND]
4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED AND VOID. 11
The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro Corporations debts
under the trust receipts;

33 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
(2) If so
(a) whether petitioners liability is solidary with El Oro Corporation; and
(b) whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their civil
liability.
The Ruling of the Court
The petition is partly meritorious. We affirm the Court of Appeals ruling with the
modification that petitioner Jose Tupaz is liable as guarantor of El Oro Corporations debt
under the trust receipt dated 30 September 1981.
On Petitioners Undertaking Under
the Trust Receipts
A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are not
theirs but the direct liability of the corporation they represent. 12 As an exception, directors or
officers are personally liable for the corporations debts only if they so contractually agree or
stipulate.13
Here, the dorsal side of the trust receipts contains the following stipulation:
To the Bank of the Philippine Islands
In consideration of your releasing to under the terms of this Trust
Receipt the goods described herein, I/We, jointly and severally, agree and promise to pay to
you, on demand, whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the
event of default and/or non-fulfillment in any respect of this undertaking on the part of the
said . I/we further agree that my/our liability in this guarantee
shall be DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any
steps or exhaust any legal remedies that you may have against the said
. before making demand upon me/us.14 (Capitalization in the
original)
In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of
El Oro Corporation. Thus, under petitioner Petronila Tupazs signature are the words "VicePresTreasurer" and under petitioner Jose Tupazs signature are the words "Vice-Pres
Operations." By so signing that trust receipt, petitioners did not bind themselves personally
liable for El Oro Corporations obligation. In Ong v. Court of Appeals,15 a corporate
representative signed a solidary guarantee clause in two trust receipts in his capacity as
corporate representative. There, the Court held that the corporate representative did not
undertake to guarantee personally the payment of the corporations debts, thus:
[P]etitioner did not sign in his personal capacity the solidary guarantee clause found on the
dorsal portion of the trust receipts. Petitioner placed his signature after the typewritten
words "ARMCO INDUSTRIAL CORPORATION" found at the end of the solidary guarantee
clause. Evidently, petitioner did not undertake to guaranty personally the payment of the
principal and interest of ARMAGRIs debt under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that they are
not personally liable for El Oro Corporations obligation.

34 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose
Tupaz signed alone, we find that he did so in his personal capacity. Petitioner Jose Tupaz did
not indicate that he was signing as El Oro Corporations Vice-President for Operations.
Hence, petitioner Jose Tupaz bound himself personally liable for El Oro Corporations debts.
Not being a party to the trust receipt dated 30 September 1981, petitioner Petronila Tupaz is
not liable under such trust receipt.
The Nature of Petitioner Jose Tupazs Liability
Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands
In consideration of your releasing to under the terms of this Trust
Receipt the goods described herein, I/We, jointly and severally, agree and promise to pay to
you, on demand, whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this Trust Receipt, in the
event of default and/or non-fulfillment in any respect of this undertaking on the part of the
said . I/we further agree that my/our liability in this guarantee
shall be DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any
steps or exhaust any legal remedies that you may have against the said
. Before making demand upon me/us. (Underlining
supplied; capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily
liable with El Oro Corporation for the latters debt under that trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court,16 the Court interpreted a
substantially identical clause17 in a trust receipt signed by a corporate officer who bound
himself personally liable for the corporations obligation. The petitioner in that case
contended that the stipulation "we jointly and severally agree and undertake" rendered the
corporate officer solidarily liable with the corporation. We dismissed this claim and held the
corporate officer liable as guarantor only. The Court further ruled that had there been more
than one signatories to the trust receipt, the solidary liability would exist between the
guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause "x x x
we jointly and severally agree and undertake x x x," and the concluding sentence on
exhaustion, [respondent] Chis liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty clause yields no other conclusion than
that the obligation of Chi is only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this
case because the space therein for the party whose property may not be exhausted was not
filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct if two (2) guarantors had signed it.
The clause "we jointly and severally agree and undertake" refers to the undertaking of the

35 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
two (2) parties who are to sign it or to the liability existing between themselves. It does not
refer to the undertaking between either one or both of them on the one hand and the
petitioner on the other with respect to the liability described under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should
be resolved against the petitioner. The trust receipt, together with the questioned solidary
guaranty clause, is on a form drafted and prepared solely by the petitioner; Chis
participation therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; as such, it must be strictly construed against the party responsible for
its preparation.18 (Underlining supplied; italicization in the original)
However, respondent banks suit against petitioner Jose Tupaz stands despite the Courts
finding that he is liable as guarantor only. First, excussion is not a pre-requisite to secure
judgment against a guarantor. The guarantor can still demand deferment of the execution of
the judgment against him until after the assets of the principal debtor shall have been
exhausted.19 Second, the benefit of excussion may be waived.20 Under the trust receipt
dated 30 September 1981, petitioner Jose Tupaz waived excussion when he agreed that his
"liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any need whatsoever on
xxx [the] part [of respondent bank] to take any steps or exhaust any legal remedies xxx."
The clear import of this stipulation is that petitioner Jose Tupaz waived the benefit of
excussion under his guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and other
accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust
receipt dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October
1981) provided for payment of attorneys fees equivalent to 10% of the total amount due
and an "interest at the rate of 7% per annum, or at such other rate as the bank may fix,
from the date due until paid xxx."21 In the applications for the letters of credit, the parties
stipulated that drafts drawn under the letters of credit are subject to interest at the rate of
18% per annum.22
The lower courts correctly applied the 18% interest rate per annum considering that the face
value of each of the trust receipts is based on the drafts drawn under the letters of credit.
Based on the guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals,23 the accrued stipulated interest earns
12% interest per annum from the time of the filing of the Informations in the Makati Regional
Trial Court on 17 January 1984. Further, the total amount due as of the date of the finality of
this Decision will earn interest at 18% per annum until fully paid since this was the stipulated
rate in the applications for the letters of credit.24
The accounting of El Oro Corporations debts as of 23 January 1992, which the trial court
used, is no longer useful as it does not specify the amounts owing under each of the trust
receipts. Hence, in the execution of this Decision, the trial court shall compute El Oro
Corporations total liability under each of the trust receipts dated 30 September 1981 and 9
October 1981 based on the following formula:25
TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments
made26
Interest = principal x 18 % per annum x no. of years from due date 27 until finality of
judgment
Interest on interest = interest computed as of the filing of the complaint (17 January 1984) x
12% x no. of years until finality of judgment

36 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Attorneys fees is 10% of the total amount computed as of finality of judgment
Total amount due as of the date of finality of judgment will earn an interest of 18% per
annum until fully paid.
In so delegating this task, we reiterate what we said in Rizal Commercial Banking
Corporation v. Alfa RTW Manufacturing Corporation28 where we also ordered the trial
court to compute the amount of obligation due based on a formula substantially similar to
that indicated above:
The total amount due xxx [under] the xxx contract[] xxx may be easily determined by the
trial court through a simple mathematical computation based on the formula specified
above. Mathematics is an exact science, the application of which needs no further proof
from the parties.
Petitioner Jose Tupazs Acquittal did not
Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal
[w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence is
required in civil cases; where the court expressly declares that the liability of the accused is
not criminal but only civil in nature xxx as, for instance, in the felonies of estafa, theft, and
malicious mischief committed by certain relatives who thereby incur only civil liability (See
Art. 332, Revised Penal Code); and, where the civil liability does not arise from or is not
based upon the criminal act of which the accused was acquitted xxx.29 (Emphasis supplied)
Here, respondent bank chose not to file a separate civil action30 to recover payment under
the trust receipts. Instead, respondent bank sought to recover payment in Criminal Case
Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal
did not extinguish his civil liability. As the Court of Appeals correctly held, his liability arose
not from the criminal act of which he was acquitted (ex delito) but from the trust receipt
contract (ex contractu) of 30 September 1981. Petitioner Jose Tupaz signed the trust receipt
of 30 September 1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that El Oro Corporations
debts under the trust receipts are not yet due and demandable. Alternatively, petitioners
assail the trust receipts as simulated. These assertions have no merit. Under the terms of
the trust receipts dated 30 September 1981 and 9 October 1981, El Oro Corporations debts
fell due on 29 December 1981 and 8 December 1981, respectively.
Neither is there merit to petitioners claim that the trust receipts were simulated. During the
trial, petitioners did not deny applying for the letters of credit and subsequently executing
the trust receipts to secure payment of the drafts drawn under the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the
following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount due under the trust
receipts dated 30 September 1981 and 9 October 1981, as computed by the Regional Trial

37 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Court, Makati, Branch 144, upon finality of this Decision, based on the formula provided
above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations total debt under the
trust receipt dated 30 September 1981 as thus computed by the Regional Trial Court, Makati,
Branch 144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust receipt
dated 9 October 1981.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
HILARIO G. DAVIDE, JR.
Chief Justice
Chairman
LEONARDO A. QUISUMBING, CONSUELO YNARES-SANTIAGO
Associate Justice Associate Justice
ADOLFO S. AZCUNA
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.
HILARIO G. DAVIDE, JR.
Chief Justice

Footnotes
1

Under Rule 45 of the 1997 Rules of Civil Procedure.

Penned by Associate Justice Martin S. Villarama, Jr. with Associate Justices Salome A.
Montoya and Romeo J. Callejo, Sr., concurring.
3

Supplier of 23,524 kilos of high-grade steel bars and 305 high-carbon steel sheets.
Tanchaoco Incorporated is also referred to as Tanchaoco Manufacturing Incorporation
and Tanchaoco Manufacturing Corporation in other parts of the records.
4

Supplier of 9,800 kilos of specialized rubber compound.

38 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
5

Atty. Alfonso Verzosa.

Manuel Maceda. It appears that the letter of 28 June 1983 was also signed by Atty.
Alfonso Verzosa.
7

"Penalty clause. The failure of an entrustee to turn over the proceeds of the sale
of the goods, documents or instruments covered by a trust receipt to the extent of
the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three Hundred and Fifteen, Paragraph One (b) of Act
Numbered Three Thousand Eight Hundred and Fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense."
8

Records, pp. 665-666.

Ibid., p. 665.

10

Rollo, pp. 28-30. (Italicization in the original; internal citations omitted).

11

Ibid., p. 11.

12

MAM Realty Devt. Corp. v. NLRC, 314 Phil. 838 (1995).

13

Ibid.

14

Records, Exhs. "D and M."

15

449 Phil. 691 (2003).

16

G.R. No. 74886, 8 December 1992, 216 SCRA 257. See Ong v. Court of Appeals,
supra note 15.
17

The clause reads: "In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the
said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of
or pertaining to, and/or in any event connected with the default of and/or nonfulfillment in any respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to
take any steps or exhaust its remedy against aforesaid: [___________________________]
before making demand on me/us.["] (Underlining supplied; capitalization in the
original)
18

Prudential Bank v. Intermediate Appellate Court, supra note 16 (internal citations


omitted).
19

Southern Motors, Inc. v. Barbosa, 99 Phil. 263 (1956).

39 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
20

Article 2059 (1) of the Civil Code provides: "[E]xcussion shall not take place:

(1) If the guarantor has expressly renounced it;


xxx"
21

The trust receipts provide (Records, Exhs. "D" and "M"): "Should it become
necessary for the BANK OF THE PHILIPPINE ISLANDS to avail of the services of an
attorney-at-law to enforce any or all of its rights under this contract, I/We, jointly and
severally, shall pay to the BANK OF THE PHILIPPINE ISLANDS, for and as attorneys
fees, a sum equivalent to 10% of the total amount involved, principal and interest,
then unpaid, but in no case less than P100, whether actually incurred or not,
exclusive of all costs or fees allowed by law. All obligations of the undersigned under
this agreement of trust shall bear interest at the rate of 7% per annum, or at such
other rate which the BANK may fix, from the date due until paid, plus all other bank
charges." Although the trust receipts provided for payment of "other bank charges,"
it appears that respondent bank did not present evidence on the rates of such other
charges. What respondent bank presented was the testimony of one Lourdes Palomo
that it imposed penalty charges of 12% per annum allegedly based on the stipulation
in the letters of credit providing payment of "charges and/or other expenses" (TSN
[Lourdes Palomo], 5 August 1985, pp. 9-15; Records, pp. 365-371). Further,
respondent bank did not present proof of disclosure to El Oro Corporation of such
penalty charges, contrary to its undertaking. Significantly, in its statement of account
as of 23 January 1992, respondent bank did not include "other bank charges" but only
took into account the 18% annual interest rate in computing El Oro Corporations
liabilities (Records, p. 645).
22

Records, pp. 218, 229.

23

G.R. No. 97412, 12 July 1994, 234 SCRA 78. "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."
(Emphasis supplied)
24

See Philippine Blooming Mills, Inc. v. Court of Appeals, G.R. No. 142381, 15 October
2003, 413 SCRA 445.
25

See Rizal Commercial Banking Corp. v. Alfa RTW Mfg. Corp., 420 Phil. 702 (2001),
citing Eastern Shipping Lines, Inc. v. Court of Appeals, supra note 23.
26

Taking into account Articles 1252-1254 of the Civil Code.

27

8 December 1981 for the trust receipt dated 9 October 1981 and 29 December
1981 for the trust receipt dated 30 September 1981.
28

Supra note 25. Reported as Rizal Commercial Banking Corp. v. Alfa RTW Mfg. Corp.

29

Padilla, et al. v. CA, 214 Phil. 492 (1984).

30

The action to recover payment under a trust receipt may be instituted separately
under Article 31 of the Civil Code based on the trust receipt contract (Vintola v.
Insular Bank of Asia and America, No. L-78671, 25 March 1988, 159 SCRA 140;

40 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Vintola v. Insular Bank of Asia and America, No. L-73271, 29 May 1987, 150 SCRA
578) or under Article 33 of the Civil Code based on fraud (Prudential Bank v.
Intermediate Appellate Court, supra note 16). The civil action under Article 31 or
Article 33 proceeds independently of the criminal action.

G.R. No. 160324 November 15, 2005


INTERNATIONAL FINANCE CORPORATION, Petitioner,
vs.
IMPERIAL TEXTILE MILLS, INC.,* Respondent.
DECISION

41 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
PANGANIBAN, J.:
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 Decision2 and September 30, 2003 Resolution3 of the Court of Appeals (CA) in CAGR 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) P73,340.00 as attorneys 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 semiannually 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 PPICs obligations under the loan agreement.

42 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
"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 PPICs 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. IFCs bid was
for P99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing exchange
rate of P18.9084 = 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.
"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 attorneys 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 attorneys fees. However, the trial court relieved ITM of
its obligation as guarantor. Hence, the trial court dismissed IFCs 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 PPICs obligation upon default.6 ITM was not discharged from its
obligation as guarantor when PPIC mortgaged the latters properties to IFC. 7 The CA,
however, held that ITMs liability as a guarantor would arise only if and when PPIC could not
pay. Since PPICs 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

43 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the
payment of the loan.
The Courts 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 PPICs
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 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

44 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 solidarily21 liable with PPIC for the latters
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. ITMs liability
commenced only when it guaranteed PPICs 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 obligors
liability. Thus, this Court has ruled in favor of suretyship, even though contracts were
denominated as a "Guarantors 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.

45 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 PPICs 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 ITMs 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
ITMs 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.35 A 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 corporations theory on appeal, in violation
of this Courts 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
Petitioners 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 IFCs 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

46 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 ORDERED to pay International Finance Corporation
the same amounts adjudged against PPIC in the assailed Decision. No costs.
SO ORDERED.

G.R. No. 74231 April 10, 1987


CORAZON J. VIZCONDE, petitioner,
vs.
INTERMEDIATE APPELLATE COURT & PEOPLE OF THE PHILIPPINES, respondents.

NARVASA, J.:
Corazon J. Vizconde has appealed as contrary to law and the evidence, the Decision of the
Court of Appeals 1 affirming her conviction of the crime of estafa by the Court of First
Instance of Rizal Quezon City Branch, in Criminal Case No. Q- 5476.
Vizconde and Pilar A. Pagulayan were charged in the Trial Court with misappropriation and
conversion of an 8-carat diamond ring belonging to Dr. Marylon J. Perlas in an information
which avers that they:
* * * wilfully, unlawfully and feloniously, with intent of gain and with
unfaithfulness and/or abuse of confidence, defraud(ed) DRA. MARYLOU J.

47 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
PERLAS in the following manner, to wit: the said accused received from the
offended party one (1) 8-karat solo diamond ring, white, double cut, brilliant
cut with multiple bentitos, valued at P85,000.00, to be sold by them on
commission basis, with the obligation to tum over the proceeds of the sale to
the offended party, or to return the said ring if unsold, but the Id accused,
once in possession thereof, contrary to their obligation, misapplied,
misappropriated and converted the same to their own personal use and
benefit, and in spite of repeated demands made upon them, both accused
failed, omitted and refused, and still fait omit and refuse up to the present, to
comply with their aforesaid obligation, to the damage and prejudice of the
offended party, in the aforementioned amount of P85,000.00, Philippine
currency. 2
After trial both accused were convicted and each sentenced to serve an indeterminate
prison term of from eight (8) years, four (4) months and one (1) day to ten (10) years and
two (2) months of prision mayor, with the accessory penalties provided by law, and jointly
and severally to indemnify the offended party in the sum of P55,000.00 for the unaccounted
balance of the value of the ring with legal interest from April 22, 1975, the further sum of
P30,000.00 as and for moral damages and the sum of P10,000.00 for attorney's fees. 3
Both accused appealed to the Court of Appeals, but as Pilar A. Pagulayan had evaded
promulgation of sentence in the Trial Court and had appealed only through counsel the
Appellate Court vacated her appeal as ineffectual. 4 On Vizconde's part, the Court of Appeals
affirmed the judgment of the Trial Court in all respects except the penalty of imprisonment,
which it increased to a term of from ten (10) years and one (1) day of prision mayor to
twelve (12) years ten (10) months and twenty-one (21) days of reclusion temporal. A motion
for reconsideration was denied. Vizconde thereafter filed the present petition for review on
certiorari. 5
Required to comment on the petition, the Solicitor General, despite having argued for
affirmance of Vizconde's conviction in the Court of Appeals, now recommends that she be
acquitted, but nonetheless held civilly liable to the complainant in the sum of P55,000.00
(the unaccounted balance of the value of the ring as found by the Trial Court) " * * * or
whatever portion thereof which remains unpaid. * * * 6
From the record and the findings of the courts below, it appears that sometime in the first
week of April, 1975, the complainant, Dr. Marylon J. Perlas, called up the appellant Vizconde,
a long-time friend and former high school classmate, asking her to sen Perlas' 8-carat
diamond ring. Shortly afterwards, Perlas delivered the ring to Vizconde to be sold on
commission for P 85,000.00. Vizconde signed a receipt for the ring. 7
About a week and a half later, Vizconde returned the ring to Perlas, who had asked for it
because she needed to show it to a cousin However, Vizconde afterwards called on Perlas at
the latter's home, with another lady, Pilar A. Pagulayan, who claimed to have a "sure buyer"
for the ring. 8 Perlas was initially hesitant to do so, but she eventually parted with the ring so
that it could be examined privately by Pagulayan's buyer when the latter' gave her a
postdated check for the price (P 85,000.00) and, together with Vizconde, signed a receipt
prepared by Perlas. This receipt-people's Exhibit "A"- reads as follows:
RECEIPT
Received from Dra. Marylon Javier-Perlas one (1) solo 8 karat diamond ring,
white, double cut, brilliant cut with multiple brilliantitos, which I agree to sell
for P85,000.00 (eighty-five thousand pesos) on commission basis and pay her
in the following manner:
P85,000.00 postdated check
PNB check 730297
dated April 26, 1975
for P85,000.00

48 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
It is understood that in the event the above postdated check is dishonored for
any reason whatsoever on its due date, the total payment of the above item
shall become immediately due and demandable without awaiting further
demand.
I guarantee that the above check will be sufficiently funded on the respective
due date.
Quezon City, Philippines
22 April 1975
(SGD.) PILAR A.
PAGULAYAN
PILAR
A.
PAGUL
AYAN
16 Rd.
8
Project
6
I guarantee jointly and severally
(SGD.) CORAZON J.
VIZCONDE
CORAZ
ON J.
VIZCO
NDE 9
After Pagulayan's postdated check matured, Perlas deposited it to her account at Manila
Bank. It was dishonored for the reason, "No arrangement," stated in the debit advice. Perlas
then called up Vizconde to inform her about the dishonor of the check. The latter suggested
that Perlas re-deposit the check while she (Vizconde) followed up the sale of the ring. Perlas
re-deposited the check, but again it was dishonored because drawn against insufficient
funds. 10 So Perlas took the matter to counsel who sent separate letters of demand to
Vizconde and Pagulayan for return of the ring or payment of P85,000.00. 11
After nine days, Vizconde and Pagulayan called on Perlas. Pagulayan paid Perlas P5,000.00
against the value of the ring. She also gave into Perlas' keeping three certificates of title to
real estate to guarantee delivery of the balance of such value. A receipt for the money and
the titles was typed and signed by Perlas, which she also made the two sign. 12 The receipt
Exhibit "D" of the prosecution reads:
Received from Mrs. Pilar Pagulayan, the sum of FIVE THOUSAND PESOS ONLY
(P5,000.00) representing part of the proceeds of the sale of one (1) solo 8
carat diamond ring, white, double cut, brilliant cut w/multiple brilliantitos,
given to Mrs. Pilar Pagulayan and Mrs. Corazon de Jesus Vizconde on 22 April
1975, to be sold on commission basis for eighty- five thousand pesos
(P85,000.00).
Received also owner's duplicate copies of TCT Nos. 434907, 434909, 434910,
which will be returned upon delivery of the remaining balance of the proceeds
of the sale of said diamond ring for eighty five thousand pesos (P85,000.00).
This receipt is being issued without prejudice to legal action.

49 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Quezon City, Philippines
7 May 1975
(Sgd.) Marylon J. Perlas
Dra. Marylon J. Perlas
Conforme:
(Sgd.) Pilar A. Pagulayan
Pilar A. Pagulayan
(Sgd.) Corazon J. Vizconde
Corazon Vizconde 13
Vizconde and Pagulayan having allegedly reneged on a promise to complete payment for the
ring on the very next day, Perlas filed with the Quezon City Fiscal's office a complaint against
them for estafa This notwithstanding, Pagulayan stin paid Perlas various sums totalling
P25,000.00 which, together with the P5,000.00 earlier paid, left a balance of P55,000.00 still
owing. 14
Both the Trial Court and the Court of Appeals found istilln these facts sufficient showing that
Vizconde and Pagulayan had assumed a joint agency in favor of Perlas for the sale of the
latter's ring, which rendered them criminally liable, upon failure to return the ring or deliver
its agreed value, under Art. 315, par. l(b), of the Revised Penal Code, for defraudation
committed " * * * with unfaithfulness or abuse of confidence * * * by misappropriating or
converting, to the prejudice of another, * * * personal property received in trust or on
commission, or under any other obligation involving the duty to make delivery of or to return
the same, * * * " The Solicitor General falling back, as already stated, from an earlier stance,
disagrees and submits in his Comment that the appellant cannot be convicted of estafa
under a correct interpretation of the two principal exhibits of the prosecution, the receipts
Exhibits A" and "D". 15 He is correct.
Nothing in the language of the receipt, Exhibit "A", or in the proven circumstances attending
its execution can logically be considered as evidencing the creation of an agency between
Perlas, as principal, and Vizconde, as agent, for the sale of the former's ring. True, reference
to what may be taken for an agency agreement appears in the clause " * * * which I agree to
sell * * * on commission basis" in the main text of that document. But it is clear that if any
agency was established, it was one between Perlas and Pagulayan only, this being the only
logical conclusion from the use of the singular "I" in said clause, in conjunction with the fact
that the part of the receipt in which the clause appears bears only the signature of
Pagulayan. To warrant anything more than a mere conjecture that the receipt also
constituted Vizconde the agent of Perlas for the same purpose of selling the ring, the cited
clause should at least have used the plural "we," or the text of the receipt containing that
clause should also have carried Vizconde's signature.
As the Solicitor General correctly puts it, the joint and several undertaking assumed by
Vizconde in a separate writing below the main body of the receipt, Exhibit "A", merely
guaranteed the civil obligation of Pagulayan to pay Perlas the value of the ring in the event
of her (Pagulayan's) failure to return said article. It cannot, in any sense, be construed as
assuming any criminal responsibility consequent upon the failure of Pagulayan to return the
ring or deliver its value. It is fundamental that criminal responsibility is personal and that in
the absence of conspiracy, one cannot be held criminally liable for the act or default of
another.
A person to be guilty of crime, must commit the crime himself or he must, in
some manner, participate in its commission or in the fruits thereof. * * * 16

50 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an obligation
more than merely civil in character, and staked her very liberty on Pagulayan's fidelity to her
trust is utterly unacceptable; it strikes at the very essence of guaranty (or suretyship) as
creating purely civil obligations on the part of the guarantor or surety. To render Vizconde
criminally liable for the misappropriation of the ring, more than her mere guarantee written
on Exhibit "A" is necessary. At the least, she must be shown to have acted in concert and
conspiracy with Pagulayan, either in obtaining possession of the ring, or in undertaking to
return the same or delivery its value, or in the misappropriation or conversion of the same.
Now, the information charges conspiracy between Vizconde and Pagulayan, but no adequate
proof thereof has been presented. It is of course true that direct proof of conspiracy is not
essential to convict an alleged conspirator, and that conspiracy may be established by
evidence of acts done in pursuance of a common unlawful purpose. 17 Here, however, the
circumstances from which a reasonable inference of conspiracy might arise, such as the fact
that Vizconde and the complainant were friends of long standing and former classmates,
that it was Vizconde who introduced Pagulayan to Perlas, that Vizconde was present on the
two occasions when the ring was entrusted to Pagulayan and when part payment of
P5,000.00 was made, and that she signed the receipts, Exhibits "A" and "D," on those
occasions are, at best, inconclusive. They are not inconsistent with what Vizconde has
asserted to be an innocent desire to help her friend dispose of the ring; nor do they exclude
every reasonable hypothesis other than complicity in a premeditated swindle. 18
The foregoing conclusion in nowise suffers from the fact that the second receipt, Exhibit "D",
appears to confirm that the ring "* * * was given to Mrs. Pilar Pagulayan and Mrs. Corazon de
Jesus Vizconde on 22 April 1975, to be sold on commission basis for eighty five thousand
pesos (P85,000.00)." 19 The implications and probative value of this writing must be
considered in the context of what had already transpired at the time of its making. The ring
had already been given to Pagulayan, and the check that she had issued in payment
therefor (or to secure payment, as the complainant would have it) had already been
dishonored twice. That the complainant then already entertained serious apprehensions
about the fate of the ring is evident in her having had her lawyers send Vizconde and
Pagulayan demands for restitution or payment, with threat of legal action. Given that
situation, Exhibit "D", insofar as it purports to confirm that Vizconde had also received the
ring in trust, cannot be considered as anything other than an attempt to "cure" the lack of
mention of such an entrustment in the first receipt, Exhibit "A", and thereby bind Vizconde to
a commitment far stronger and more compelling than a mere civil guarantee for the value of
the ring. There is otherwise no explanation for requiring Vizconde and Pagulayan to sign the
receipt, which needed only the signature of Perlas as an acknowledgment of the P5,000.00
given in part payment, and the delivery of the land titles to secure the balance.
The conflict in the recitals of the two receipts insofar as concerns Vizconde's part in the
transaction involving Perlas' ring is obvious and cannot be ignored. Neither, as the Court
sees it, should these writings be read together in an attempt to reconcile what they contain,
since, as already pointed out, the later receipt was made under circumstances which leave
no little doubt of its truth and ;Integrity. What is clear from Exhibit "A" is that the ring was
entrusted to Pilar A. Pagulayan to be sold on commission; there is no mention therein that it
was simultaneously delivered to and received by Vizconde for the same purpose or,
therefore, that Vizconde was constituted, or agreed to act as, agent jointly with Pagulayan
for the sale of the ring. What Vizconde solely undertook was to guarantee the obligation of
Pagulayan to return the ring or deliver its* value; and that guarantee created only a civil
obligation, without more, upon default of the principal. Exhibit "D", on the other hand, would
make out Vizconde an agent for the sale of the ring. The undisputed fact that Exhibit "A" was
executed simultaneously with the delivery of the ring to Pagulayan compellingly argues for
accepting it as a more trustworthy memorial of the real agreement and transaction of the
parties than Exhibit "D" which was executed at a later date and after the supervention of
events rendering it expedient or desirable to vary the terms of that agreement or
transaction.
In view of the conclusions already reached, consideration of the Solicitor General's argument
also quite persuasive that Exhibit "D" in fact evidences a consummated sale of the ring
for an agreed price not fully paid for, which yields the same result, is no longer necessary. It
is, however, at least another factor reinforcing the hypothesis of Vizconde's innocence.

51 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Upon the evidence, appellant Corazon J. Vizconde was a mere guarantor, a solidary one to
be sure, of the obligation assumed by Pilar A. Pagulayan to complainant Marylon J. Perlas for
the return of the latter's ring or the delivery of its value. Whatever liability was incured by
Pagulayan for defaulting on such obligation and this is not inquired into that of
Vizconde consequent upon such default was merely civil, not criminal. It was, therefore,
error to convict her of estafa.
As already stated, the Solicitor General however maintains, on the authority of People vs.
Padilla, 20 that the appellant should be held hable to pay the complainant the amount of
P55,000.00, or whatever part of such amount remains unpaid, for the value of the ring.
Again, this is a correct proposition, there being no question as in fact admitted by her
that the appellant executed the guarantee already referred to.
WHEREFORE, except insofar as it affirms the judgment of the Trial Court ordering appellant
Corazon J. Vizconde, solidarity with Pilar A. Pagulayan, to indemnify the complainant Marylon
J. Perlas in the amount of P55,000.00 for the unaccounted balance of the value of the latter's
ring, the appellant pealed Decision of the Court of Appeals is reversed and set aside, and
said appellant is acquitted, with costs de oficio. As the record indicates that levies on
preliminary attachment and on execution pending appeal have been made on behalf of the
complainant, 21 which may have resulted in further reducing the abovestated balance, the
appellant may, upon remand of this case to the Trial Court, prove any reductions, by the
operation of said levies or otherwise, to which the amount of the indemnity adjudged may
be justly subject.
SO ORDERED.
Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.
Yap (Chairman), J., is on leave.

52 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases

G.R. No. L-40334 February 28, 1985


CENTRAL SURETY and INSURANCE COMPANY, INC., petitioner,
vs.
Hon. ALBERTO Q. UBAY as Judge of the Court of First Instance of Rizal, Caloocan
City, Branch XXXII and ONG CHI, doing business under the Firm Name. "TABLERIA
DE LUXE respondents.
Alfredo Feraren for petitioner.
S.I.A. Gonzales for respondents.

ABAD SANTOS, J.:


Ong Chi, doing business under the firm name "Tableria de Luxe sued Francisco Reyes, Jr. for
a sum of money in the City Court of Caloocan City. Ong Chi applied for a writ of attachment
and upon filing a bond in the amount of P6,464.18, a jeep belonging to Reyes was placed in
custodia legis.
Reyes moved to dissolve the writ of attachment. He posted a counterbond in the amount of
P 6,465.00; his surety was Central Surety and Insurance Co., the petitioner herein. The
condition of the counterbond is that "in consideration of the dissolution of said attachment,
[Francisco Reyes, Jr., as principal and Central Surety and Insurance Co., as surety] hereby
jointly and severally, bind ourselves in the sum of SIX THOUSAND FOUR HUNDRED SIXTY
FIVE ONLY ( P 6,465.00 ) Philippine Currency, under the condition that in the case the plantiff
recovers judgment in the action the defendant will on demand redeliver the attached
property so released to the officer of the Court to be applied to the payment of the judgment
or in default thereof that the defendant and surety will on demand pay to the plaintiff the full
value of the property released." (Rollo, p. 11) The writ of attachment was thereafter lifted
and the jeep was returned to Reyes.
In the course of time, the City Court rendered judgment as follows:
WHEREFORE, judgment is hereby rendered in favor of the Plaintiff and against
the defendant, ordering said defendant to pay plaintiff the sum of P 6,964.18,
with legal interests thereon from the date of the filing of this complaint until
fully paid, plus the sum of P 500. 00, as and by way of attorney's fees, and the
costs of the suit. (Id, p. 14.)
Defendant Reyes appealed to the Court of First Instance of Rizal but said court affirmed the
judgment in toto. (Rollo, p. 16.) Upon finality of the judgment, a writ of execution was issued
against Reyes. The jeep which was the object of the attachment was sold by the sheriff for
P4,000.00 and the amount was credited against the judgment in partial satisfaction thereof.
Soon after the sale of the jeep, Central Surety and Insurance Co. filed a motion to cancel the
counterbond. Ong Chi not only opposed the motion but he also asked that the surety
company pay the deficiency on the judgment in the amount of P5,730. 00 (P9,730.00 as of
the filing of the motion, less P4,000.00 the proceeds of the sale of the jeep). The motion for

53 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
a deficiency judgment was opposed by the surety on the ground that it had fulfilled the
condition of the counterbond. Despite the opposition, the court ordered the surety to pay. A
motion for reconsideration was denied which accounts for the instant petition.
The issue is whether or not the petitioner surety is liable for the deficiency. The petitioner
urges a negative answer; it relies on the terms of the counterbond. Upon the other hand, the
private respondent claims that an affirmative answer is proper, he relies on Section 17 of
Rule 57, Rules of Court which stipulates thus:
SEC. 17. When execution returned unsatisfied, recovery had upon bond. If
the execution be returned unsatisfied in whole or in part, the surety or
sureties on any counterbond given pursuant to the provisions of this rule to
secure the payment of the judgment shall become charged on such
counterbond, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such
surety or sureties after notice and summary hearing in the same action.
The petition is highly impressed with merit.
The stipulation in the counterbond executed by the petitioner is the law between the parties
in this case and not the provisions of the Rules of Court.
Under the counterbond, the petitioner surety company bound itself solidarily with the
principal obligor "in the sum of P 6,465.00 under the condition that in case the plaintiff
recovers judgment in the action, the defendant will, on demand, redeliver the attached
property so released to the officer of the court to be applied to the payment of the judgment
or in default thereof that the defendant and surety will, on demand, pay to the plaintiff the
full value of the property released." The main obligation of the surety was to redeliver the
jeep so that it could be sold in case execution was issued against the principal obligor. The
amount of P6,465.00 was merely to fix the limit of the surety's liability in case the jeep could
not be reached. In the instant case, the jeep was made available for execution of the
judgment by the surety. The surety had done its part; the obligation of the bond had been
discharged; the bond should be cancelled.
The impropriety of the orders of the respondent judge is made more manifest by still another
circumstance. The petitioner's surety bond was for the amount of P6,465.00. So even on the
assumption that the bond was not discharged, since the sale of the jeep yielded P4,000.00,
the surety can be held liable at most for P2,465.00. But the respondent judge ordered the
surety to pay P5,730.00 which is the entire deficiency and is in excess of P2,465.00. It is
axiomatic that the obligation of a surety cannot extend beyond what is stipulated.
WHEREFORE, the petition is granted; the questioned orders of the respondent judge are
hereby set aside and in lieu thereof another is entered cancelling the petitioner's
counterbond, with costs against the private respondent.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion, Jr., Escolin and Cuevas, JJ., concur.

54 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases

G.R. No. 142381

October 15, 2003

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners,


vs.
COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
DECISION
CARPIO, J.:
The Case*
This is a petition for review on certiorari1 to annul the Decision2 dated 16 July 1999 of the
Court of Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17 February 2000
denying the motion for reconsideration. The Court of Appeals affirmed with modification the
Decision3 dated 31 August 1992 rendered by Branch 113 of the Regional Trial Court of Pasay
City ("trial court"). The trial courts Decision declared petitioner Alfredo Ching ("Ching") liable
to respondent Traders Royal Bank ("TRB") for the payment of the credit accommodations
extended to Philippine Blooming Mills, Inc. ("PBM").
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106; 4
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No.
113;5 and
3. P3,500,000 under the trust loan covered by a notarized Promissory Note. 6
Ching was the Senior Vice President of PBM. In his personal capacity and not as a
corporate officer, Ching signed a Deed of Suretyship dated 21 July 1977 binding
himself as follows:

55 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the
TRADERS ROYAL BANK, its successors and assigns, the due and punctual payment by
the following individuals and/or companies/firms, hereinafter called the DEBTOR(S),
of such amounts whether due or not, as indicated opposite their respective names, to
wit:
NAME OF DEBTOR(S)

AMOUNT OF OBLIGATION

PHIL. BLOOMING MILLS CORP.

TEN MILLION PESOS


(P 10,000,000.00)

owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by
all notes, drafts, overdrafts and other credit obligations of every kind and nature
contracted/incurred by said DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said
indebtedness herein secured at maturity, I/We, jointly and severally, agree and
engage to the CREDITOR, its successors and assigns, the prompt payment, without
demand or notice from said CREDITOR, of such notes, drafts, overdrafts and other
credit obligations on which the DEBTOR(S) may now be indebted or may hereafter
become indebted to the CREDITOR, together with all interests, penalty and other
bank charges as may accrue thereon and all expenses which may be incurred by the
latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the
obligations to be performed under any contracts, evidencing
indebtedness/obligations and any supplements, amendments, charges or
modifications made thereto, including but not limited to, the due and punctual
payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and also
presentment, demand, protest and notice of dishonor of any and all such
instruments, loans, advances, credits, or other indebtedness or obligations
hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate
and not contingent upon the pursuit by the CREDITOR, its successors or assigns, of
whatever remedies it or they may have against the DEBTOR(S) or the securities or
liens it or they may possess; and I/WE hereby agree to be and remain bound upon
this suretyship, irrespective of the existence, value or condition of any collateral, and
notwithstanding also that all obligations of the DEBTOR(S) to you outstanding and
unpaid at any time may exceed the aggregate principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor
for and as attorneys fees a sum equivalent to TEN PER CENTUM (10%) of the total
indebtedness (principal and interest) then unpaid, exclusive of all costs or expenses
for collection allowed by law.7 (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of
Ching in his capacity as Senior Vice President of PBM. Ching later accomplished and
delivered to TRB trust receipts, which acknowledged receipt in trust for TRB of the
merchandise subject of the letters of credit. Under the trust receipts, PBM had the
right to sell the merchandise for cash with the obligation to turn over the entire
proceeds of the sale to TRB as payment of PBMs indebtedness. Letter of Credit No.
479 AD, covered by Trust Receipt No. 106, has a face value of US$591,043, while

56 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Letter of Credit No. 563 AD, covered by Trust Receipt No. 113, has a face value of
US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly
provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts shall bear interest
at the rate of __ per centum ( __%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally
undertake and agree to pay on demand on the said BANK, all sums and amounts of
money which said BANK may call upon them to pay arising out of, pertaining to,
and/or in any manner connected with this receipt. In case it is necessary to collect
the draft covered by the Trust Receipt by or through an attorney-at-law, the
undersigned hereby further agree(s) to pay an additional of 10% of the total amount
due on the draft as attorneys fees, exclusive of all costs, fees and other expenses of
collection but shall in no case be less than P200.00"8 (Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as co-maker
in the notarized Promissory Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to
pay the TRADERS ROYAL BANK or order, at its Office in 4th Floor, Kanlaon Towers Bldg.,
Roxas Blvd., Pasay City, the sum of Pesos: THREE MILLION FIVE HUNDRED THOUSAND ONLY
(P3,500,000.00), Philippine Currency, with the interest rate of Eighteen Percent (18%) per
annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally, agree
to pay an additional amount equivalent to two per cent (2%) of the principal sum
per annum, as penalty and collection charges in the form of liquidated damages
until fully paid, and the further sum of ten percent (10%) thereof in full, without any
deduction, as and for attorneys fees whether actually incurred or not, exclusive of costs and
other judicial/extrajudicial expenses; moreover, I/We jointly and severally, further empower
and authorize the TRADERS ROYAL BANK at its option, and without notice to set off or to
apply to the payment of this note any and all funds, which may be in its hands on deposit or
otherwise belonging to anyone or all of us, and to hold as security therefor any real or
personal property which may be in its possession or control by virtue of any other contract. 9
(Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for
P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD) for P1,191,137.13.
PBM also defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the
Securities and Exchange Commission ("SEC"), docketed as SEC Case No. 2250. 10 The petition
sought to suspend payment of PBMs obligations and prayed that the SEC allow PBM to
continue its normal business operations free from the interference of its creditors. One of the
listed creditors of PBM was TRB.11
On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the
rehabilitation receivership of Kalaw, Escaler and Associates.12

57 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership,
TRB filed with the trial court a complaint for collection against PBM and Ching. TRB asked the
trial court to order defendants to pay solidarily the following amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and bank charges [representing
its indebtedness arising from the letters of credit issued to its various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges [due and
owing from the trust loan of 27 April 1981 evidenced by a promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due and
owing from the money market loan of 1 April 1981 evidenced by a promissory note];
(4) To order defendant Ching to pay P10,000,000.00 under the Deed of Suretyship in
the event plaintiff can not recover the full amount of PBMs indebtedness from the
latter;
(5) The sum equivalent to 10% of the total sum due as and for attorneys fees;
(6) Such other amounts that may be proven by the plaintiff during the trial, by way of
damages and expenses for litigation.13
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the
SEC had already placed PBM under receivership.14 The trial court thus dismissed the
complaint against PBM.15
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that
the trial court had no jurisdiction over the subject matter of the case. PBM and Ching
invoked the assumption of jurisdiction by the SEC over all of PBMs assets and liabilities. 16
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in
his personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension
of payments is not binding on TRB; and (3) Presidential Decree No. 1758 ("PD No. 1758"), 17
which Ching relied on to support his assertion that all claims against PBM are suspended,
does not apply to Ching as the decree regulates corporate activities only. 18
In its order dated 15 August 1983,19 the trial court denied the motion to dismiss with respect
to Ching and affirmed its dismissal of the case with respect to PBM. The trial court stressed
that TRB was holding Ching liable under the Deed of Suretyship. As Chings obligation was
solidary, the trial court ruled that TRB could proceed against Ching as surety upon default of
the principal debtor PBM. The trial court also held that PD No. 1758 applied only to
corporations, partnerships and associations and not to individuals.
Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition for
Certiorari and Prohibition20 before the Court of Appeals. The appellate court granted Chings
petition and ordered the dismissal of the case. The appellate court ruled that the SEC
assumed jurisdiction over Ching and PBM to the exclusion of courts or tribunals of coordinate
rank.
TRB assailed the Court of Appeals Decision21 before this Court. In Traders Royal Bank v.
Court of Appeals,22 this Court upheld TRB and ruled that Ching was merely a nominal party
in SEC Case No. 2250. Creditors may sue individual sureties of debtor corporations, like
Ching, in a separate proceeding before regular courts despite the pendency of a case before
the SEC involving the debtor corporation.

58 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation
co-maker of PBM. He claimed that the SEC had already issued a decision 23 approving a
revised rehabilitation plan for PBMs creditors, and that PBM obtained the credit
accommodations for corporate purposes that did not redound to his personal benefit. He
further claimed that even as a surety, he has the right to the defenses personal to PBM.
Thus, his liability as surety would attach only if, after the implementation of payments
scheduled under the rehabilitation plan, there would remain a balance of PBMs debt to
TRB.24 Although Ching admitted PBMs availment of the credit accommodations, he did not
show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and by the
SEC-appointed receiver.25 Thus, the trial court had to resolve the following remaining issues:
1. How much exactly is the corporate defendants outstanding obligation to the
plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how much? 26
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of
TRB, and Ms. Carla Pecson, manager of the International Department of TRB, as witnesses.
Both witnesses testified to the following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for
PBMs liabilities to TRB up to P10,000,000;27
2. The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No.
479 AD for US$591,043, and the actual availment by PBM of the full proceeds of the
credit accommodation;28
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No.
563 AD for US$156,000, and the actual availment by PBM of the full proceeds of the
credit accommodation;29 and
4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory
Note dated 27 April 1981 wherein Ching bound himself solidarily with PBM; 30 and
5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31 October 1991.31
Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the
Human Resources Department of TRB, as witness. Ching sought to establish that TRBs
Board of Directors adopted a resolution fixing the PBM account at an amount lower than
what TRB wanted to collect from Ching. The trial court allowed Atty. Aranda to testify over
TRBs manifestation that the Answer failed to plead the subject matter of his testimony. Atty.
Aranda produced TRB Board Resolution No. 5935, series of 1990, which contained the
minutes of the special meeting of TRBs Board of Directors held on 8 June 1990. 32 In the
resolution, the Board of Directors advised TRBs Management "not to release Alfredo Ching
from his JSS liability to the bank."33 The resolution also stated the following:
a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which
shall be applied directly to the account (as remitted per hereto attached schedule). The
amount of P1.373 million shall be considered as full payment of PBMs account. (The
receiver is amenable to this alternative)
The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon
approval of the above and conforme to PISCOR and PBM. Subsequent deposits shall start on
the 3rd year and annually thereafter (every June 30th of the year) until June 30, 2006.

59 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Failure to pay one annual installment shall make the whole obligation due and demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain
outstanding in the books of the Bank. Said balance will equal the deposits to be remitted to
the Bank for a period of 17 years.34
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never
complied with or implemented. Not only was there no initial deposit of P150,000 as required
in the resolution, TRB also disapproved the document prepared by the receiver, which would
have released Ching from his suretyship.35
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship.
The trial court explained:
[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder
of the Philippine Blooming Mills. Indisputably, under the Deed of Suretyship defendant Ching
unconditionally agreed to assume PBMs liability to the plaintiff in the event PBM defaulted in
the payment of the said obligation in addition to whatever penalties, expenses and bank
charges that may occur by reason of default. Clear enough, under the Deed of Suretyship
(Exh. J), defendant Ching bound himself jointly and severally with PBM in the payment of the
latters obligation to the plaintiff. The obligation being solidary, the plaintiff Bank can hold
Ching liable upon default of the principal debtor. This is explicitly provided in Article 1216 of
the New Civil Code already quoted above.36
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to
plaintiff bank in the amount of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY
THREE THOUSAND FIVE HUNDRED FIFTY EIGHT & 16/100) as of October 31, 1991, and to pay
the legal interest thereon from such date until it is fully paid. To pay plaintiff 5% of the entire
amount by way of attorneys fees.
SO ORDERED.37
The Ruling of the Court of Appeals
On appeal, Ching stated that as surety and solidary debtor, he should benefit from the
changed nature of the obligation as provided in Article 1222 of the Civil Code, which reads:
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all
defenses which are derived from the nature of the obligation and of those which are
personal to him, or pertain to his own share. With respect to those which personally belong
to the others, he may avail himself thereof only as regards that part of the debt for which
the latter are responsible.
Ching claimed that his liability should likewise be reduced since the equitable apportionment
of PBMs remaining assets among its creditors under the rehabilitation proceedings would
have the effect of reducing PBMs liability. He also claimed that the amount for which he was
being held liable was excessive. He contended that the outstanding principal balance, as
stated in TRB Board Resolution No. 5893-1990, was only P5,650,749.09.38 Ching also
contended that he was not liable for interest, as the loan documents did not stipulate the
interest rate, pursuant to Article 1956 of the Civil Code.39 Finally, Ching asserted that the
Deed of Suretyship executed on 21 July 1977 could not guarantee obligations incurred after
its execution.40

60 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the case
for decision.41
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM under
rehabilitation receivership, and if in the affirmative, for how much. 42
The Court of Appeals resolved the first two questions in favor of TRB. The appellate court
stated:
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust
Receipts, Undertaking, Deed of Surety, and the 3.5 Million Peso Promissory Note upon which
TRBs action rested. He is, therefore, presumed to be liable unless he presents evidence
showing payment, partially or in full, of these obligations (Investment and Underwriting
Corporation of the Philippines v. Comptronics Philippines, Inc. and Gene v. Tamesis, 192
SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching can answer
separately for the obligations of debtor PBM (Rizal Banking Corporation v. Court of Appeals,
Philippine Blooming Mills, Inc., and Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal
Bank v. Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788 [1989]).
Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation since the
rehabilitation receivers are limited to the existing assets of the corporation. 43
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect
to the amount of liability of defendant Alfredo Ching which is lowered from P19,333,558.16
to P15,773,708.78 with legal interest of 12% per annum until it is fully paid.
SO ORDERED.44
The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.
Hence, this petition.
Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT PETITIONER
ALFREDO CHING WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER
THE EXECUTION OF THE DEED OF SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE
PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS DESPITE THE FACT THAT
PRIVATE RESPONDENT HAD PREVENTED THEIR FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER
ALFREDO CHING LIABLE FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER
ANNUM UNTIL FULLY PAID DESPITE THE FACT THAT UNDER THE REHABILITATION PLAN

61 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
OF PETITIONER PBM, WHICH WAS APPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, PRIVATE RESPONDENT IS ONLY ENTITLED TO P1,373,415.00.45
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for
obligations not yet in existence at the time of its execution. Specifically, Ching maintained
that the Deed of Suretyship could not answer for debts contracted by PBM in 1980 and 1981.
Ching contended that no accessory contract of suretyship could arise without an existing
principal contract of loan. Ching likewise argued that TRB could no longer claim on the trust
receipts because TRB had already taken the properties subject of the trust receipts. Ching
likewise maintained that his obligation as surety could not exceed the P1,373,415
apportioned to PBM under the SEC-approved rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues not
brought before the trial court. Furthermore, TRB pointed out that Ching never presented
PBMs rehabilitation plan before the trial court. TRB also stated that the Supreme Court
ruling in Traders Royal Bank v. Court of Appeals46 constitutes res judicata between the
parties. Therefore, TRB could proceed against Ching separately from PBM to enforce in full
Chings liability as surety.47
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial courts denial of Chings motion to have the
case dismissed against him. The petition is a thinly veiled attempt to make this Court
reconsider its decision in the prior case of Traders Royal Bank v. Court of Appeals. 48 This
Court has already resolved the issue of Chings separate liability as a surety despite the
rehabilitation proceedings before the SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC
could not assume jurisdiction over his person and properties. The Securities and Exchange
Commission was empowered, as rehabilitation receiver, to take custody and control of the
assets and properties of PBM only, for the SEC has jurisdiction over corporations only [and]
not over private individuals, except stockholders in an intra-corporate dispute (Sec. 5, P.D.
902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Chings
properties were not included in the rehabilitation receivership that the SEC constituted to
take custody of PBMs assets. Therefore, the petitioner bank was not barred from filing a suit
against Ching, as a surety for PBM. An anomalous situation would arise if individual sureties
for debtor corporations may escape liability by simply co-filing with the corporation a
petition for suspension of payments in the SEC whose jurisdiction is limited only to
corporations and their corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for PBM, as
expressly provided by Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its individual
stockholders and members. Being an officer or stockholder of a corporation does not make
ones property the property also of the corporation, for they are separate entities (Adelio
Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the
SEC jurisdiction over his person or property, for jurisdiction does not depend on the consent

62 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
or acts of the parties but upon express provision of law (Tolentino vs. Social Security System,
138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408). (Emphasis
supplied)
Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety of the
credit accommodations TRB extended to PBM. The decision amounts to res judicata 49 which
bars Ching from raising the same issue again. Hence, the only question that remains is the
amount of Chings liability. Nevertheless, we shall resolve the issues Ching has raised in his
attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of
Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after the
execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed
itself, referring to amounts PBM "may now be indebted or may hereafter become indebted"
to TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of the Civil Code
provides:
A guaranty may also be given as security for future debts, the amount of which is not yet
known; there can be no claim against the guarantor until the debt is liquidated. A conditional
obligation may also be secured. (Emphasis supplied)
Furthermore, this Court has ruled in Dio v. Court of Appeals50 that:
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of
which may not be known at the time the guaranty is executed. 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. Otherwise stated, a continuing guaranty is one which covers
all transactions, including those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or termination thereof. A
guaranty shall be construed as continuing when by the terms thereof it is evident that the
object is to give a standing credit to the principal debtor to be used from time to time either
indefinitely or until a certain period; especially if the right to recall the guaranty is expressly
reserved. Hence, where the contract states that the guaranty is to secure advances to be
made "from time to time," it will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such
as payment of "any debt," "any indebtedness," 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.
Whether Chings liability is limited to the amount stated in PBMs rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount stated
in PBMs rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of
the Civil Code which reads:

63 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal to him,
or pertain to his own share. With respect to those which personally belong to the others, he
may avail himself thereof only as regards that part of the debt for which the latter are
responsible.
In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of
the loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of
the surety. Thus, Ching cannot use PBMs failure to pay in full as justification for his own
reduced liability to TRB. As surety, Ching agreed to pay in full PBMs loan in case PBM fails to
pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the entire
amount of PBMs loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all
of them simultaneously. The demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others, so long as the debt has not
been fully collected. (Emphasis supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution
states that PBMs outstanding loans may be reduced to P1.373 million subject to certain
conditions like the payment of P150,000 initial payment.51 The resolution also states that
TRB should not release Chings solidary liability under his surety. The resolution even directs
TRBs management to study Chings criminal liability under the trust documents. 52
Chings own witness testified that Resolution No. 5935 was never implemented. For one,
PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected the
document that PBMs receiver presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his
suretyship.
Chings attempts to have this Court review the factual issues of the case are improper. It is
not a function of the Supreme Court to assess and evaluate again the evidence, testimonial
and evidentiary, adduced by the parties particularly where the findings of both the trial court
and the appellate court coincide on the matter.53
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust
receipts. Other than his bare allegations, Ching has not shown proof of payment or
settlement with TRB. Atty. Vicente Aranda, TRBs corporate secretary and First Vice President
of its Human Resource Management Department, testified that the conditions in the TRB
board resolution presented by Ching were not met or implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I
refer you to condition or step No. 1, which reads: "a) Accept the P1.373 million
deposits remitted over a period of 17 years or until 2006 which shall be applied
directly to the account (as remitted per hereto attached schedule). The amount of
P1.373 million shall be considered as full payment of PBMs account. (The receiver is
amenable to this alternative.) The initial deposit/remittance which amounts to
P150,000.00 shall be remitted upon approval of the above and conforme of PISCOR
[xxx] and PBM. Subsequent deposits shall start on the 3rd year and annually
thereafter (every June 30th of the year) until June 30, 2006.

64 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Failure to pay one annual installment shall make the whole obligation due and
demandable. Now Mr. Witness, would you be in a position to inform [the court] if
these conditions listed in item (a) in Resolution No. 5935, series of 1990, were
implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial
deposit/remittance in the amount of P150,000.00 which have to be done with
approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court if those
conditions were met? Because your initial answer was yes.
A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution which I
read and quote: "Write off immediately P4.278 million. The balance of P1.373 million
to remain outstanding in the books of the bank. Said balance will be remitted to the
Bank for a period of 17 years." Mr. Witness, would you be in a position to inform the
court if the bank implemented that particular condition?
A In the implementation of this settlement the receiver prepared a document for
approval and conformity of the bank. The said document would in effect release the
suretyship of Alfredo Ching and for that reason the bank refused or denied fixing its
conformity and approval with the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did not implement
these conditionalities [sic] was because the former defendant corporation requested
that the suretyship of Alfredo Ching be released, is that correct?
A I did not say that. I said that in effect the document prepared by the lawyer of the
receiver xxx the bank would release the suretyship of Alfredo Ching, that is why the
bank is not amenable to such a document.
Q Despite this approved resolution the bank, because of said requirement or
conformity did not seek to implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed in that
document because it was the condition of the board that the suretyship should not be
released but the document being presented to the bank for signature and conformity
in effect if signed would release the suretyship. So it would be a violation with the
approval of the board so the bank did not sign the conformity.54
Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust
receipts when TRB, together with other creditor banks, took hold of PBMs inventories,
including the goods covered by the trust receipts. Ching asserts that this act of TRB released
him from liability under the suretyship. Ching forgets that he executed, on behalf of PBM,
separate Undertakings for each trust receipt expressly granting to TRB the right to take
possession of the goods at any time to protect TRBs interests. TRB may exercise such right
without waiving its right to collect the full amount of the loan to PBM. The Undertakings also
provide that any suspension of payment or any assignment by PBM for the benefit of
creditors renders the loan due and demandable. Thus, the separate Undertakings uniformly
provide:

65 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
2. That the said BANK may at any time cancel the foregoing trust and take
possession of said merchandise with the right to sell and dispose of the same
under such terms and conditions it may deem best, or of the proceeds of such of
the same as may then have been sold, wherever the said merchandise or proceeds may
then be found and all the provisions of the Trust Receipt shall apply to and be deemed to
include said above-mentioned merchandise if the same shall have been made up or used in
the manufacture of any other goods, or merchandise, and the said BANK shall have the
same rights and remedies against the said merchandise in its manufactured state, or the
product of said manufacture as it would have had in the event that such merchandise had
remained [in] its original state and irrespective of the fact that other and different
merchandise is used in completing such manufacture. In the event of any suspension, or
failure or assignment for the benefit of creditors on the part of the undersigned
or of the non-fulfillment of any obligation, or of the non-payment at maturity of
any acceptance made under said credit, or any other credit issued by the said BANK on
account of the undersigned or of the non-payment of any indebtedness on the part of
the undersigned to the said BANK, all obligations, acceptances, indebtedness and
liabilities whatsoever shall thereupon without notice mature and become due and
payable and the BANK may avail of the remedies provided herein.55 (Emphasis
supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts Law,
expressly allows TRB to take possession of the goods covered by the trust receipts. Thus,
Section of 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds from
the sale of the goods, documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as appears in the trust
receipt, or to the return of the goods, documents or instruments in case of non-sale, and to
the enforcement of all other rights conferred on him in the trust receipt provided such are
not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents
or instruments subject of the trust or of the proceeds realized therefrom at any
time upon default or failure of the entrustee to comply with any of the terms and
conditions of the trust receipt or any other agreement between the entruster and
the entrustee, and the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may, not
less than five days after serving or sending of such notice, sell the goods, documents or
instruments at public or private sale, and the entruster may, at a public sale, become a
purchaser. The proceeds of any such sale, whether public or private, shall be
applied (a) to the payment of the expenses thereof; (b) to the payment of the
expenses of re-taking, keeping and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustees indebtedness to the entruster. The
entrustee shall receive any surplus but shall be liable to the entruster for any
deficiency. Notice of sale shall be deemed sufficiently given if in writing, and either
personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last
known business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and
Ching remained liable for the entire amount of the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Chings credit obligations with TRB,
Chings liability is what the Deed of Suretyship stipulates, plus the applicable interest and
penalties. The trust receipts, as well as the Letter of Undertaking dated 16 April 1980 56
executed by PBM, stipulate in writing the payment of interest without specifying the rate. In
such a case, the applicable interest rate shall be the legal rate, which is now 12% per
annum.57 This is in accordance with Central Bank Circular No. 416, which states:

66 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended,
otherwise known as the "Usury Law," the Monetary Board, in its Resolution No. 1622 dated
July 29, 1974, has prescribed that the rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in judgments, in the absence of express
contract as to such rate of interest, shall be twelve per cent (12%) per annum. (Emphasis
supplied)
On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for
18% interest per annum plus 2% penalty interest per annum in case of default. This
stipulated interest should continue to run until full payment of the P3,500,000 trust loan. In
addition, the accrued interest on all the credit accommodations should earn legal interest
from the date of filing of the complaint pursuant to Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point.
The trial court found and the appellate court affirmed that the outstanding principal amounts
as of the filing of the complaint with the trial court on 13 May 1983 were P959,611.96 under
Trust Receipt No. 106, P1,191,137.13 under Trust Receipt No. 113, and P3,500,000 for the
trust loan. As extracted from TRBs Statement of Account as of 31 October 1991, 58 the
accrued interest on the trust receipts and the trust loan as of the filing of the complaint on
13 May 1983 were P311,387.5159 under Trust Receipt No. 106, P338,739.8160 under Trust
Receipt No. 113, and P1,287,616.4461 under the trust loan. The penalty interest on the trust
loan amounted to P137,315.07.62 Ching did not rebut this Statement of Account which TRB
presented during trial.
Thus, the following is the summary of Chings liability under the suretyship as of 13 May
1983, the date of filing of TRBs complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
Outstanding Principal P 959,611.96
Accrued Interest (12% per annum) 311,387.51
2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)
Outstanding Principal P 1,191,137.13
Accrued Interest (12% per annum) 338,739.82
3. On the Trust Loan (Promissory Note)
Outstanding Principal P 3,500,000.00
Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07
WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION. Petitioner
Alfredo Ching shall pay respondent Traders Royal Bank the following (1) on the credit
accommodations under the trust receipts, the total principal amount of P2,150,749.09 with
legal interest at 12% per annum from 14 May 1983 until full payment; (2) on the trust loan
evidenced by the Promissory Note, the principal sum of P3,500,000 with 20% interest per
annum from 14 May 1983 until full payment; (3) on the total accrued interest as of 13 May
1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until full payment.

67 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Petitioner Alfredo Ching shall also pay attorneys fees to respondent Traders Royal Bank
equivalent to 5% of the total principal and interest.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Vitug and Azcuna, JJ., concur.
Ynares-Santiago, J., on leave.

G.R. No. 140047

July 13, 2004

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,


vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P.

68 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
EUSEBIO; SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND
FIRST INTEGRATED BONDING AND INSURANCE COMPANY, INC., respondents.

DECISION

DAVIDE, JR., C.J.:


This case is an offshoot of a service contract entered into by a Filipino construction firm with
the Iraqi Government for the construction of the Institute of Physical Therapy-Medical
Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No.
91-1906 and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee
Corporation1 (hereinafter Philguarantee) sought reimbursement from the respondents of the
sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for
respondent V.P. Eusebio Construction, Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and
Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy
Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal
Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait
Chamber of Commerce for a total contract price of ID5,416,089/046 (or about
US$18,739,668).2
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of
respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in
construction business, entered into a joint venture agreement with Ajyal wherein the former
undertook the execution of the entire Project, while the latter would be entitled to a
commission of 4% of the contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not
being accredited by or registered with the Philippine Overseas Construction Board (POCB),
assigned and transferred all its rights and interests under the joint venture agreement to
VPECI, a construction and engineering firm duly registered with the POCB. 4 However, on 2
May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project
would be under their joint management. 5
The SOB required the contractors to submit (1) a performance bond of ID271,808/610
representing 5% of the total contract price and (2) an advance payment bond of
ID541,608/901 representing 10% of the advance payment to be released upon signing of the
contract.6 To comply with these requirements, respondents 3-Plex and VPECI applied for the
issuance of a guarantee with petitioner Philguarantee, a government financial institution
empowered to issue guarantees for qualified Filipino contractors to secure the performance
of approved service contracts abroad.7
Petitioner Philguarantee approved respondents' application. Subsequently, letters of
guarantee8 were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of
the performance and advance payment bonds, but they were not accepted by SOB. What
SOB required was a letter-guarantee from Rafidain Bank, the government bank of Iraq.
Rafidain Bank then issued a performance bond in favor of SOB on the condition that another
foreign bank, not Philguarantee, would issue a counter-guarantee to cover its exposure. Al
Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain

69 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three
layers of guarantees had to be arranged.9
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in
favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond
Guarantee) in the amount of ID271,808/610 and Letter of Guarantee No. 81-195-F 11
(Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of eighteen
months from 25 May 1981. These letters of guarantee were secured by (1) a Deed of
Undertaking12 executed by respondents VPECI, Spouses Vicente P. Eusebio and Soledad C.
Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety
bond13 issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI).
The Surety Bond was later amended on 23 June 1981 to increase the amount of coverage
from P6.4 million to P6.967 million and to change the bank in whose favor the petitioner's
guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract 15
for the construction of the Institute of Physical Therapy Medical Rehabilitation Center,
Phase II, in Baghdad, Iraq, wherein the joint venture contractor undertook to complete the
Project within a period of 547 days or 18 months. Under the Contract, the Joint Venture
would supply manpower and materials, and SOB would refund to the former 25% of the
project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to
3.37777 US Dollars.16
The construction, which was supposed to start on 2 June 1981, commenced only on the last
week of August 1981. Because of this delay and the slow progress of the construction work
due to some setbacks and difficulties, the Project was not completed on 15 November 1982
as scheduled. But in October 1982, upon foreseeing the impossibility of meeting the
deadline and upon the request of Al Ahli Bank, the joint venture contractor worked for the
renewal or extension of the Performance Bond and Advance Payment Guarantee. Petitioner's
Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment
Bond) with expiry date of 25 November 1982 were then renewed or extended to 9 February
1983 and 9 March 1983, respectively.17 The surety bond was also extended for another
period of one year, from 12 May 1982 to 12 May 1983.18 The Performance Bond was further
extended twelve times with validity of up to 8 December 1986, 19 while the Advance Payment
Guarantee was extended three times more up to 24 May 1984 when the latter was cancelled
after full refund or reimbursement by the joint venture contractor. 20 The surety bond was
likewise extended to 8 May 1987.21
As of March 1986, the status of the Project was 51% accomplished, meaning the structures
were already finished. The remaining 47% consisted in electro-mechanical works and the
2%, sanitary works, which both required importation of equipment and materials. 22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full
payment of its performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI
requested Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to
recall the telex call on the performance guarantee for being a drastic action in contravention
of its mutual agreement with the latter that (1) the imposition of penalty would be held in
abeyance until the completion of the project; and (2) the time extension would be open,
depending on the developments on the negotiations for a foreign loan to finance the
completion of the project.23 It also wrote SOB protesting the call for lack of factual or legal
basis, since the failure to complete the Project was due to (1) the Iraqi government's lack of
foreign exchange with which to pay its (VPECI's) accomplishments and (2) SOB's
noncompliance for the past several years with the provision in the contract that 75% of the
billings would be paid in US dollars.24 Subsequently, or on 19 November 1986, respondent

70 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts were being exerted
for the amicable settlement of the Project.25
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating
that it had already paid to Rafidain Bank the sum of US$876,564 under its letter of
guarantee, and demanding reimbursement by the petitioner of what it paid to the latter
bank plus interest thereon and related expenses.26
Both petitioner Philguarantee and respondent VPECI sought the assistance of some
government agencies of the Philippines. On 10 August 1987, VPECI requested the Central
Bank to hold in abeyance the payment by the petitioner "to allow the diplomatic machinery
to take its course, for otherwise, the Philippine government , through the Philguarantee and
the Central Bank, would become instruments of the Iraqi Government in consummating a
clear act of injustice and inequity committed against a Filipino contractor." 27
On 27 August 1987, the Central Bank authorized the remittance for its account of the
amount of US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full
payment of the performance counter-guarantee for VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al
Ahli Bank, and reiterated the joint and solidary obligation of the respondents to reimburse
the petitioner for the advances made on its counter-guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January
1988.30 Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the latter bank. 31
On 19 June 1991, the petitioner sent to the respondents separate letters demanding full
payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10%
attorney's fees pursuant to their joint and solidary obligations under the deed of undertaking
and surety bond.32 When the respondents failed to pay, the petitioner filed on 9 July 1991 a
civil case for collection of a sum of money against the respondents before the RTC of Makati
City.
After due trial, the trial court ruled against Philguarantee and held that the latter had no
valid cause of action against the respondents. It opined that at the time the call was made
on the guarantee which was executed for a specific period, the guarantee had already
lapsed or expired. There was no valid renewal or extension of the guarantee for failure of the
petitioner to secure respondents' express consent thereto. The trial court also found that the
joint venture contractor incurred no delay in the execution of the Project. Considering the
Project owner's violations of the contract which rendered impossible the joint venture
contractor's performance of its undertaking, no valid call on the guarantee could be made.
Furthermore, the trial court held that no valid notice was first made by the Project owner
SOB to the joint venture contractor before the call on the guarantee. Accordingly, it
dismissed the complaint, as well as the counterclaims and cross-claim, and ordered the
petitioner to pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and
P100,000 to 3-Plex and the Santos Spouses, plus costs. 33
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision,
ratiocinating as follows:
First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to
1985, having sent some of its people to Baghdad during that period. The successive
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the

71 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
SOB (project owner) which had not anyway complied with its contractual commitment
to tender 75% of payment in US Dollars, and which still retained overdue amounts
collectible by VPECI.

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

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

Fourth, well-apprised of the above conditions obtaining at the Project site and
cognizant of the war situation at the time in Iraq, appellant, though earlier has made
representations with the SOB regarding a possible amicable termination of the Project
as suggested by VPECI, made a complete turn-around and insisted on acting in favor
of the unjustified "call" by the foreign banks.35
The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the
Court of Appeals erred in affirming the trial court's ruling that
I
RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS
COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO RESPONDENTS
WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.
II
PETITIONER CANNOT CLAIM SUBROGATION.
III
IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE
UNDER THEIR DEED OF UNDERTAKING.36
The main issue in this case is whether the petitioner is entitled to reimbursement of what it
paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the
deed of undertaking and surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute, unconditional, and
irrevocable the nature and extent of its liability are analogous to those of suretyship. Its
liability accrued upon the failure of the respondents to finish the construction of the Institute
of Physical Therapy Buildings in Baghdad.

72 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. If a person binds
himself solidarily with the principal debtor, the contract is called suretyship. 37
Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. In both contracts, there is a promise to answer for the debt or default of
another. However, in this jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the same instrument executed at
the same time and on the same consideration. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking often supported by a
consideration separate from that supporting the contract of the principal; the original
contract of his principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while the liability
of a guarantor is conditional depending on the failure of the primary debtor to pay
the obligation.
3. The obligation of a surety is primary, while that of a guarantor is secondary.
4. A surety is an original promissor and debtor from the beginning, while a guarantor
is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal; whereas a
guarantor is not bound to take notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence of the
creditor to the principal or by want of notice of the default of the principal, no matter
how much he may be injured thereby. A guarantor is often discharged by the mere
indulgence of the creditor to the principal, and is usually not liable unless notified of
the default of the principal. 38
In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F,
which provides in part as follows:
In consideration of your issuing the above performance guarantee/counter-guarantee,
we hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F
to pay you on your first written or telex demand Iraq Dinars Two Hundred Seventy
One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610)
representing 100% of the performance bond required of V.P. EUSEBIO for the
construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest
and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the
obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID)
271,808/610 plus interest and other incidental expenses. (Emphasis supplied) 39
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the
factual milieu of this case, we find that the Court of Appeals and the trial court were correct
in ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the
petitioner is unconditional and irrevocable does not make the petitioner a surety. As a
guaranty, it is still characterized by its subsidiary and conditional quality because it does not
take effect until the fulfillment of the condition, namely, that the principal obligor should fail
in his obligation at the time and in the form he bound himself. 40 In other words, an
unconditional guarantee is still subject to the condition that the principal debtor should
default in his obligation first before resort to the guarantor could be had. A conditional

73 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
guaranty, as opposed to an unconditional guaranty, is one which depends upon some
extraneous event, beyond the mere default of the principal, and generally upon notice of the
principal's default and reasonable diligence in exhausting proper remedies against the
principal.41
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default
by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was
simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the
fact that petitioner's guaranty is unconditional does not make it a surety. Besides, surety is
never presumed. A party should not be considered a surety where the contract itself
stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself
solidarily with the principal debtor that the contract becomes one of suretyship. 42
Having determined petitioner's liability as guarantor, the next question we have to grapple
with is whether the respondent contractor has defaulted in its obligations that would justify
resort to the guaranty. This is a mixed question of fact and law that is better addressed by
the lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the findings of fact of the trial court and the Court of
Appeals are binding or conclusive upon this Court unless they are not supported by the
evidence or unless strong and cogent reasons dictate otherwise. 43 The factual findings of the
Court of Appeals are normally not reviewable by us under Rule 45 of the Rules of Court
except when they are at variance with those of the trial court. 44 The trial court and the Court
of Appeals were in unison that the respondent contractor cannot be considered to have
defaulted in its obligations because the cause of the delay was not primarily attributable to
it.
A corollary issue is what law should be applied in determining whether the respondent
contractor has defaulted in the performance of its obligations under the service contract.
The question of whether there is a breach of an agreement, which includes default or
mora,45 pertains to the essential or intrinsic validity of a contract. 46
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The
rule followed by most legal systems, however, is that the intrinsic validity of a contract must
be governed by the lex contractus or "proper law of the contract." This is the law voluntarily
agreed upon by the parties (the lex loci voluntatis) or the law intended by them either
expressly or implicitly (the lex loci intentionis). The law selected may be implied from such
factors as substantial connection with the transaction, or the nationality or domicile of the
parties.47 Philippine courts would do well to adopt the first and most basic rule in most legal
systems, namely, to allow the parties to select the law applicable to their contract, subject
to the limitation that it is not against the law, morals, or public policy of the forum and that
the chosen law must bear a substantive relationship to the transaction. 48
It must be noted that the service contract between SOB and VPECI contains no express
choice of the law that would govern it. In the United States and Europe, the two rules that
now seem to have emerged as "kings of the hill" are (1) the parties may choose the
governing law; and (2) in the absence of such a choice, the applicable law is that of the
State that "has the most significant relationship to the transaction and the parties." 49
Another authority proposed that all matters relating to the time, place, and manner of
performance and valid excuses for non-performance are determined by the law of the place
of performance or lex loci solutionis, which is useful because it is undoubtedly always
connected to the contract in a significant way. 50
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the
parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of
whether respondent VPECI defaulted in its obligations may be determined by the laws of
Iraq. However, since that foreign law was not properly pleaded or proved, the presumption

74 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


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

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

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

75 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


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

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist
the Iraqi government in completing the PROJECT, the Contractor without any
obligation on its part to do so but with the knowledge and consent of SOB and the
Ministry of Housing & Construction of Iraq, offered to arrange on behalf of SOB, a
foreign currency loan, through the facilities of Circle International S.A., the
Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as the
guarantor for this foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June 1985.
SOB is informed of the developments of this negotiation, attached is a copy of the
draft of the loan Agreement between SOB as the Borrower and Agent. The Several
Banks, as Lender, and counter-guaranteed by Istituto Centrale Per II Credito A Medio
Termine (Mediocredito) Sezione Speciale Per L'Assicurazione Del Credito
All'Exportazione (Sace). Negotiations went on and continued until it suddenly
collapsed due to the reported default by Iraq in the payment of its obligations with
Italian government, copy of the news clipping dated June 18, 1986 is hereto attached
as Annex "D" to form an integral part hereof;
15. On September 15, 1986, Contractor received information from Circle International
S.A. that because of the news report that Iraq defaulted in its obligations with
European banks, the approval by Banco di Roma of the loan to SOB shall be deferred
indefinitely, a copy of the letter of Circle International together with the news
clippings are hereto attached as Annexes "F" and "F-1", respectively. 57
As found by both the Court of Appeals and the trial court, the delay or the non-completion of
the Project was caused by factors not imputable to the respondent contractor. It was rather
due mainly to the persistent violations by SOB of the terms and conditions of the contract,
particularly its failure to pay 75% of the accomplished work in US Dollars. Indeed, where
one of the parties to a contract does not perform in a proper manner the prestation which he
is bound to perform under the contract, he is not entitled to demand the performance of the
other party. A party does not incur in delay if the other party fails to perform the obligation
incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings in
purely Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such
posture is quite contrary to its previous representations. In his 26 March 1987 letter to the
Office of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's Executive
Vice-President Jesus M. Taedo stated that while VPECI had taken every possible measure to
complete the Project, the war situation in Iraq, particularly the lack of foreign exchange, was
proving to be a great obstacle; thus:
VPECI has taken every possible measure for the completion of the project but the war
situation in Iraq particularly the lack of foreign exchange is proving to be a great
obstacle. Our performance counterguarantee was called last 26 October 1986 when
the negotiations for a foreign currency loan with the Italian government through
Banco de Roma bogged down following news report that Iraq has defaulted in its
obligation with major European banks. Unless the situation in Iraq is improved as to

76 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
allay the bank's apprehension, there is no assurance that the project will ever be
completed. 58
In order that the debtor may be in default it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor
delays performance; and (3) that the creditor requires the performance because it must
appear that the tolerance or benevolence of the creditor must have ended. 59
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has
not yet itself performed its obligation in a proper manner, particularly the payment of the
75% of the cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in
delay. Even assuming that there was delay and that the delay was attributable to VPECI, still
the effects of that delay ceased upon the renunciation by the creditor, SOB, which could be
implied when the latter granted several extensions of time to the former. 60 Besides, no
demand has yet been made by SOB against the respondent contractor. Demand is generally
necessary even if a period has been fixed in the obligation. And default generally begins
from the moment the creditor demands judicially or extra-judicially the performance of the
obligation. Without such demand, the effects of default will not arise. 61
Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it
cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI has
been exhausted and all legal remedies against the said debtor have been resorted to by the
creditor.62 It could also set up compensation as regards what the creditor SOB may owe the
principal debtor VPECI.63 In this case, however, the petitioner has clearly waived these rights
and remedies by making the payment of an obligation that was yet to be shown to be
rightfully due the creditor and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor
had collectibles from SOB which could be set off with the amount covered by the
performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy
of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing
it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the past due
obligations of the joint venture contractor from the petitioner would "be deducted from the
dues of the two contractors."64
Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the
petitioner raised as among the arguments to be presented in support of the cancellation of
the counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the
Project was more than enough to cover the counter-guarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
The Iraqi Government does not have the foreign exchange to fulfill its
contractual obligations of paying 75% of progress billings in US dollars.

It could also be argued that the amount of ID281,414/066 retained by SOB


from the proposed project is more than the amount of the outstanding
counterguarantee.65
In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from
SOB, it should have set up compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the predicament of the respondents. In
fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:

77 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


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

78 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and
the decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Panganiban, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

79 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
G.R. No. L-29587 November 28, 1975
PHILIPPINE NATIONAL BANK, petitioner,
vs.
LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS, respondent.
Medina and Magtalas for petitioner.
Tolentino, Garcia, Cruz and Reyes for private respondent.

ESGUERRA, J.:
Petitioner Philippine National Bank seeks a review and reversal of the decision dated June
26, 1968, of the Court of Appeals in its case CA-G.R. No. 30282-R, absolving Luzon Surety
Co., Inc. of its liability to said petitioner and thus reversing the decision of the Court of First
Instance of Negros Occidental, the dispositive portion of which reads as follows:
IN VIEW THEREOF, judgment is hereby rendered ordering defendant Augusto
R. Villarosa to pay plaintiff PHILIPPINE NATIONAL BANK the sum of P81,200.00
plus accrued interest of 5% per annum on P63,222.78 from August 31, 1959;
to pay 10% of said amount as attorney's fees and to pay the costs. Defendant
Luzon Surety Co., Inc. is hereby ordered to pay jointly and severally with
defendant Villarosa to the plaintiff the sum of P10,000.00; defendant Central
Surety and Insurance Company jointly and severally with defendant Villarosa
the sum of P20,000 to the plaintiff, and Associated Surety And Insurance Co.
jointly and severally with defendant Villarosa the sum of P15,000.00 to the
plaintiff, with the understanding that should said bonding companies pay the
aforementioned amounts of their respective bonds to the plaintiff, said
amounts should be deducted from the total outstanding obligation of
defendant Villarosa in favor of the plaintiff.
Above-quoted decision was modified in an order of the Court of First Instance dated June 5,
1961, granting petitioner Philippine National Bank (PNB) the right to recover accrued interest
at the rate of 5% per annum from December 24, 1953, from the defendants bonding
companies.
The facts as found by the Court of Appeals are as follows:
... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a
sugar planter adhered to the Lopez Sugar Central Milling Company, Inc.
applied for a crop loan with the plaintiff, Philippine National Bank, Exhibit A;
this application was approved on 6 March, 1952 in the amount of P32,400,
according to the complaint; but the document of approval has not been
exhibited; at any rate, the planter Villarosa executed a Chattel Mortgage on
standing crops to guarantee the crop loan, Exhibit B and as shown in Exhibits
C to C-30 on various dates from 28 January, 1952 to 9 January, 1953, in
consideration of periodical sums of money by him received from PNB, planter
Villarosa executed these promissory notes from which will be seen that the
credit line was that the original amount of P32,400 and was thus maintained
up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards it
was increased and promissory notes Exhibits C-10 to C-30 were based on the
increased credit line; and as of 27 September, 1953 as shown in the accounts,
Exhibits D and D-1, there was a balance of P63,222.78 but as of the date
when the complaint was filed on 8 June, 1960, because of the interest
accrued, it had reached a much higher sum; that was why due to its nonpayment, plaintiff filed this complaint, as has been said, on 8 June, 1960; now
the complaint sought relief not only against the planter but also against the
three (3) bondsmen, Luzon Surety, Central Surety and Associated Surety
because Luzon Surety had filed the bond Exhibit E dated 18 February, 1952 in
the sum of P10,000; Central Surety Exhibit F dated 24 February, 1952 in the
sum of P20,000 and Associated Surety the bond Exhibit G dated 11

80 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
September, 1952 in the sum of P15,000; in gist, the obligation of each of the
bondsmen being to guarantee the faithful performance of the obligation of the
planter with PNB; now each of the defendants in their answers raised various
defenses but as far as principal defendant Augusto R. Villarosa and other
defendants Central Surety and Associated Surety are concerned, their liability
is no longer material because they have not appealed; and in the trial of the
case, plaintiff submitted Exhibits A to J-1 and witness Romanito Brillantes; but
the defense of Luzon Surety thru its witness Jose Arroyo and Exhibits 1 to 3
being 1st that the evidence of the plaintiff did not establish a cause of action
to make Luzon Surety liable and 2ndly, in any case that there had been
material alteration in the principal obligation, if any, guaranteed by it; ... .
Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to this
Court and alleged the following errors.
1. The Court of Appeals erred in the application of the law involved by
invoking Article 2055 of the New Civil Code, which properly should have been
the law on suretyship which are covered by Section 4, Chapter 3, Title 1, Book
IV of the New Civil Code;
2. Consequently, when the Court of Appeals released the surety from liability,
it committed a grave or gross misappreciation of facts amounting to an error
of law;
3. The Court of Appeals erred when it held that there must have been a
principal crop loan contract, guaranteed by the surety bonds;
4. The Court of Appeals erred when it released the surety from liability. The
above assigned errors boil down to the single question of whether or not the
Court of Appeals was justified in absolving Luzon Surety Co., Inc., from liability
to petitioner Philippine National Bank. We have examined the record
thoroughly and found the appealed decision to be erroneous.
Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly provided as
follows:
xxx xxx xxx
1. That the Mortgagor does by these presents grant, cede and convey unto
the Mortgagee by way of First Mortgage free from any encumbrances, all the
crops of the absolute property of the Mortgagor, corresponding to the 1952-53
and subsequent yearly sugar crops agricultural season at present growing in
the Hda. known as San Antonio, Washington (P) Audit 24-124 and 24-16 la and
Hda. Aliwanay (non-quota land); milling with LSMC and CAD Municipality of
Sagay, and Escalante, Province of Negros Occidental covered by cadastral lots
no. Various of the Cadastral Survey at the Municipality of Sagay, Escalante
particularly bounded and described in Transfer Certificate of Title No. Various
issued by the Register of Deeds of said province. The said mortgage crops
consist of all the Mortgagor's first available entire net share of the 1952-53
and subsequent yearly sugar crops thereafter conservatively estimated at but
not less than Three Thousand Four Hundred Twenty and 14/00 (3,420.14)
piculs of export and domestic sugar, including whatever addition thereto, and
such aids, subsidies, indemnity payments and other benefits as maybe
awarded to the Mortgagor, coming from any source, governmental or
otherwise.
xxx xxx xxx
4. This Mortgage is executed to secure payment by the Mortgagor to the
Mortgagee at the latter's office of a loan herein granted to the Mortgagor in
the sum of Thirty Two Thousand Four Hundred (P32,400.00) Pesos, Philippine
Currency, with interest at the rate of five per cent per annum, which loan shall
be given to the Mortgagor either in lump sum or in installments as the

81 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
mortgagee may determine. The Mortgagee may increase or decrease the
amount of the loan as well as the installments as it may deem convenient and
the Mortgagor shall submit such periodical reports on the crops mortgaged as
the Mortgagee may require. In the event that the loan is increased such
increase shall likewise be secured by Mortgage. This Mortgage shall also
secure any other loans or advances that the Mortgagee may extend to the
Mortgagor, including interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or secondary as appears in
the account books and records of the Mortgagee.
xxx xxx xxx
Likewise an extract from the Surety Bond executed by and between the PNB on one hand
and Augusto Villarosa and respondent Luzon Surety Company, Inc. on the other, is hereby
reproduced, viz:
That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety
Company, Inc. a corporation duly organized and existing under and by virtue
of the laws of the Philippines, as surety, are held firmly bound unto Philippine
National Bank, Bacolod City, Philippines, in the sum of Ten Thousand Pesos
(P10,000.00) Philippine Currency, for the payment of which sum, well and
truly to be made, we bind ourselves, our heirs, executors, administrators,
successors, and assigns jointly and severally, firmly by these presents:
The condition of the obligation are as follows:
WHEREAS, the above bounden principal, on the day of February, 1952,
entered into a crop loan contract with obligee Philippine National Bank,
Bacolod Branch of Bacolod City, Philippines to fully and faithfully
Comply with all the terms and condition stipulated in said crop loan contract
which are hereby incorporated as essential parts hereof, and principally to
meet and pay from the proceeds of the sugar produced from his Hda. Antonio
and Hda. Aliwanay, Escalante, Occidental Negros credit advances made by the
Philippine National Bank Bacolod Branch not to exceed P32,800 as stated in
said contract. Provided further that the liability under this bond shall not
exceed the amount of P10,000.00
WHEREAS, said Philippine National Bank Bacolod Branch requires said
principal to give a good and sufficient bond in the above stated sum to secure
the full and faithful performance on his part of said crop loan contract.
NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms and conditions and agreement stipulated in
said crop loan contract then, this obligation shall be null and void, otherwise it
shall remain in full force and effect.
xxx xxx xxx
The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine National
Bank not merely as a guarantor but as surety-liable as a regular party to the undertaking
(Castelvi de Higgins vs. Sellner 41 Phil. 142). The Court of Appeals, however, in absolving
the bonding company ratiocinates that the Surety Bond executed on February 18, 1952,
made specific references to a crop loan contract executed by Augusto Villarosa sometime in
February 1952. And, therefore, the Chattel Mortgage, Exhibit B dated March 6, 1952, could
not have been the obligations guaranteed by the surety bond. Thus the Court of Appeals
stated:
... one is really at a loss to impose any liability upon Luzon Surety in the
absence of the principal obligation which was a crop loan contract executed in
February, 1952, and to which there was made an express reference in the
surety bond, Exhibit E; let it not be overlooked further that one can secure a
crop loan without executing a Chattel Mortgage on his crops because the crop

82 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
loan is the principal obligation while the Chattel Mortgage is only an ancillary
and secondary contract to guarantee fulfillment of a crop loan; stated
otherwise and as Luzon Surety never intervened in the execution of the
Chattel Mortgage, Exhibit B, there is no way under the evidence from which it
can be made to answer for liability to Augusto Villarosa under Exhibit E; ... "
The Court of Appeals, to Our mind did not give credence to an otherwise significant and
unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B was the only
chattel mortgage executed by Augusto Villarosa evidencing the crop loan contract and upon
which Luzon Surety agreed to assume liability up to the amount of P10,000 by posting the
said surety bond. Moreover Article 1354 of our New Civil Code which provides:
Art. 1354. Although the cause is not stated in the contract., it is presumed
that it exist and is lawful, unless the debtor proves the contrary.
bolster petitioner's stand. Considering too that Luzon Surety company is engaged in the
business of furnishing guarantees, for a consideration, there is no reason that it should be
entitled to a rule of strictissimi juris or a strained and over-strict interpretation of its
undertaking. The presumption indulged in by the law in favor of guarantors was premised on
the fact that guarantees were originally gratuitous obligations, which is not true at present,
at least in the great majority of cases. (Aurelio Montinola vs. Alejo Gatila, et al, G.R. No L7558, October 31, 1955).
We have likewise gone over the answer of Luzon Surety Company dated June 17, 1960 (p. 73
Record on Appeal) and noted the following:
xxx xxx xxx
3. Defendant LUZON admits the portion of paragraph 3 referring to the grant
of P32,400 secured by a Chattel Mortgage dated March 6, 1952, copy of which
is attached as Annex "A" of the complaint.
xxx xxx xxx
As special defenses:
8. The terms and conditions of the surety bond as well as the contract it
guaranteed was materially altered and or novated without the knowledge and
consent of the surety thereby releasing the latter from liability.
11. The maximum liability, if any, of defendant LUZON is P10.000.00.
The principal obligation, therefore, has never been put in issue by then defendant now
respondent Luzon Surety Co., Inc. On the other hand it raised as its defense the alleged
material alteration of the terms and conditions of the contract as the basis of its prayer for
release. Even this defense of respondent Luzon Surety Co., Inc. is untenable under the facts
obtaining. As a surety, said bonding company is charged as an original promissory and is an
insurer of the debt. While it is an accepted rule in our jurisdiction that an alteration of the
contract is a ground for release, this alteration, We stress must be material. A cursory
examination of the record shows that the alterations in the form of increases were made
with the full consent of Luzon Surety Co., Inc. Paragraph 4 of the Chattel Mortgage explicitly
provided for this increase(s), viz:
... the Mortgagee may increase or decrease the amount of the loan as well as
the installment as it may deem convenient ...
and this contract, Exhibit "B", was precisely referred to and mentioned in the Surety Bond
itself. In the case of Lim Julian vs. Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718,
this Court held:
It has been decided in many cases that the consideration named in a
mortgage for future advancements does not limit the amount for which such

83 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
contract may stand as security, if from the four corners of the document, the
intent to secure future indebtedness is apparent. Where, by the plain terms of
the contract, such an intent is evident, it will control. ...
The next question to take up is the liability of Luzon Surety Co. for interest which, it
contends, would increase its liability to more than P10,000 which is the maximum of its
bond. We cannot agree to this reasoning. In the cases of Tagawa vs. Aldanese, 43 Phil. 852,
859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery Co., 100 Phil. 679, 682, cited in
Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p. 772, it was held:
If a surety upon demand fails to pay, he can be held liable for interest, even if
in thus paying, the liability becomes more than that in the principal obligation.
The increased liability is not because of the contract but because of the
default and the necessity of judicial collection. It should be noted, however,
that the interest runs from the time the complaint is filed, not from the time
the debt becomes due and demandable.
PREMISES CONSIDERED, the judgment appealed from is reversed and set aside. In lieu
thereof another is rendered reinstating the judgment of the Court of First Instance of Negros
Occidental, 12th Judicial District, dated March 29, 1961, holding Luzon Surety liable for the
amount of P10,000.00 with the modification that interest thereon shall be computed at the
legal rate from June 8, 1960 when the complaint was filed.
SO ORDERED.
Teehankee, Makasiar, Muoz Palma and Martin , JJ., concur.
Castro (Chairman), J., took no part.
G.R. No. 151953

June 29, 2007

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


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, 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 Guaranty 4 was executed by
petitioner Salvador Escao (Escao), while the other5 by petitioner Mario M. Silos (Silos),
Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez
(Rodriguez).

84 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Two years later, an agreement developed to cede control of Falcon to Escao, 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 Escao, 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 Escao, 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 FALCONs 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
P5,031,004.07, 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, Escao, 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, Escao
and Silos, and also manifested his intent to file a third-party complaint against the Scholeys
and Matti.10 The cross-claim lodged against Escao and Silos was predicated on the 1982
Undertaking, wherein they agreed to assume the liabilities of Ortigas with respect to the
PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to
terms with PDCP was Escao, who in December of 1993, entered into a compromise
agreement whereby he agreed to pay the bank P1,000,000.00. In exchange, PDCP waived or
assigned in favor of Escao 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.

85 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Then on 24 February 1994, Ortigas entered into his own compromise agreement 13 with
PDCP, allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed
to pay PDCP P1,300,000.00 as "full satisfaction of the PDCPs claim against Ortigas," 14 in
exchange for PDCPs release of Ortigas from any liability or claim arising from the Falcon
loan agreement, and a renunciation of its claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to
pay P500,000.00 in exchange for PDCPs waiver of its claims against him. 15
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao,
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 Escao. In 1995,
Ortigas filed a motion for Summary Judgment in his favor against Escao, Silos and Matti. On
5 October 1995, the RTC issued the Summary Judgment, ordering Escao, Silos and Matti to
pay Ortigas, jointly and severally, the amount of P1,300,000.00, as well as P20,000.00 in
attorneys 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.
Escao and Silos appealed jointly while Matti appealed by his lonesome. In a Decision 20
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." 21 Thus, 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 Escao 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

86 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 Ortigass "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 Falcons 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 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 P1.3 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

87 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 P1.3 million without petitioners ESCANO and SILOSs 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 FALCONs
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 P1.3 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 Ortigass offer
to pay PDCP was conditioned "without [Ortigass] admitting liability to plaintiff PDCP Banks
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.
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" 37 makes 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.

88 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 (Escao 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 Ortigass argument rests
solely on the solidary nature of the obligation of the surety under Article 2047. In tandem

89 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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).45 However, 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.

90 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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. Tolentinos 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 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 Escao, 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

91 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
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 attorneys fees since the Undertaking
contained no such stipulation for attorneys fees, and that the situation did not fall under the
instances under Article 2208 of the Civil Code where attorneys 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 attorneys fees "[w]hen the defendants 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 Appeals 51 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. 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.

92 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 52
Since what was the constituted in the Undertaking consisted of a payment in a sum of
money, the rate of interest thereon shall be 12% per annum to be computed 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 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 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
P1,300,000.00. 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 P1,300,000.00 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.
DANTE O. TINGA Associate Justice

G.R. No. 138544

October 3, 2000

SECURITY BANK AND TRUST COMPANY, Inc., petitioner,


vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor,
and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play
require the creditor to obtain the consent of the surety to any material alteration in the
principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold
herein respondent liable for loans obtained in excess of the amount or beyond the period
stipulated in the original agreement, absent any clear stipulation showing that the latter
waived his right to be notified thereof, or to give consent thereto. This is especially true
where, as in this case, respondent was no longer the principal officer or major stockholder of
the corporate debtor at the time the later obligations were incurred. He was thus no longer
in a position to compel the debtor to pay the creditor and had no more reason to bind
himself anew to the subsequent obligations.
The Case

93 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
This is the main principle used in denying the present Petition for Review under Rule 45 of
the Rules of Court. Petitioner assails the December 22, 1998 Decision 1 of the Court of
Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense that defendantappellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any
amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack
of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution, 3 which denied petitioners Motion for
Reconsideration.
Modified by the CA was the March 6, 1997 Decision4 of the Regional Trial Court (RTC) of
Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale
Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank &
Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May
10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as
attorneys fees and litigation expenses and to pay the costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows:5
"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale
(Sta. Ines) is a corporation engaged in logging operations. It was a holder of a Timber
License Agreement issued by the Department of Environment and Natural Resources
(DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines
Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos
(P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of
its logging operations.
"The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall
be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at
200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating
therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be maintained at all
times; in this connection, a Makati account shall be opened prior to availment on lines;
4. Lines shall expire on November 30, 1981; and

94 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
5. The bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower. (Emphasis supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned
credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over
some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for
the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity
Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he
solidarily bound himself with SIMC as follows:
xxx

xxx

xxx

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client
(SIMC) in favor of the bank for the payment, upon demand and without the benefit of
excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue
of aforesaid credit accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x . (Emphasis supplied).
"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the
P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with
[Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS3599-81 for said amount (Exhibit C).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board
of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of
[Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative
to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M.
Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the
public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other
loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred
[s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC
executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85,
DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the
abovementioned additional loans against the credit line.
"Appellant SIMC, however, encountered difficulty 6 in making the amortization payments on
its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness.
SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18
February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice
to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due
obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to
defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta.
Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the
indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G,
Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).

95 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
"It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to
[Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix
[m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan
incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the
only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca,
Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together
with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and
DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by
defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security
Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both
dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO.

AMOUNT

RL/74/596/88

P8,800,000.00

RL/74/597/88

P3,400,000.00

TOTAL

P12,200,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).


"To formalize their agreement to restructure the loan obligations of defendant-appellant Sta.
Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan
Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41).
Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of
TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency
(the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the first
tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to
be applied in the manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while
the Second Loan shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I,
p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further
payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred
[f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC,
Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner]
SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were
made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L),
respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC
filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the
merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed."

96 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement
had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines.
Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who
was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable
for the payment of the loans secured by that credit accommodation. It noted that the 1989
Loan Agreement had been executed without notice to, much less consent from, Cuenca who
at the time was no longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had specified that the
credit accommodation was for a total amount of P8 million, and that its expiry date was
November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to
November 30, 1981, and only for an amount not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement
was tantamount to a grant of an extension of time to the debtor without the consent of the
surety. Under Article 2079 of the Civil Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines
decided to materially alter or modify the principal obligation after the expiry date of the
credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our consideration: 8
"A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca
from liability as surety under the Indemnity Agreement for the payment of the principal
amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory
Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9
March 1988, plus stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent
Cuencas liability under the Indemnity Agreement covered only availments on SIMCs
credit line to the extent of eight million pesos (P8,000,000.00) and made on or before
30 November 1981;
ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit accommodation was
tantamount to an extension granted to SIMC without Respondent Cuencas consent,
thus extinguishing his liability under the Indemnity Agreement pursuant to Article
2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit accommodation
constituted a novation of the principal obligation, thus extinguishing Respondent
Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was
extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;

97 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
D. Whether or not service of the Petition by registered mail sufficiently complied with Section
11, Rule 13 of the 1997 Rules of Civil Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989
Loan Agreement novated the original credit accommodation and Cuencas liability under the
Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give
consent to any substitution, renewal, extension, increase, amendment, conversion or revival
of the said credit accommodation. As preliminary matters, the procedural questions raised
by respondent will also be addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in
merely rehashing the arguments already passed upon by the appellate court, was pro forma;
that as such, it did not toll the period for filing the present Petition for Review. 9
Consequently, the Petition was filed out of time.10
We disagree. A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. The Court has explained
that a movant may raise the same arguments, precisely to convince the court that its ruling
was erroneous.11
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo,12 the Court explained that
a pro forma motion had no other purpose than to gain time and to delay or impede the
proceedings. Hence, "where the circumstances of a case do not show an intent on the part
of the movant merely to delay the proceedings, our Court has refused to characterize the
motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for reconsideration
impacts upon the reality and substance of the statutory right of appeal, that doctrine should
be applied reasonably, rather than literally. The right to appeal, where it exists, is an
important and valuable right. Public policy would be better served by according the
appellate court an effective opportunity to review the decision of the trial court on the
merits, rather than by aborting the right to appeal by a literal application of the procedural
rules relating to pro forma motions for reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and
filing of pleadings and other papers shall be done personally. Except with respect to papers
emanating from the court, a resort to other modes must be accompanied by a written
explanation why the service or filing was not done personally. A violation of this Rule may be
cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review does not contain a sufficient
written explanation why it was served by registered mail.

98 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
We do not think so. The Court held in Solar Entertainment v. Ricafort13 that the aforecited
rule was mandatory, and that "only when personal service or filing is not practicable may
resort to other modes be had, which must then be accompanied by a written explanation as
to why personal service or filing was not practicable to begin with."
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines
and Cuenca "by registered mail in lieu of personal service due to limitations in time and
distance."14 This explanation sufficiently shows that personal service was not practicable. In
any event, we find no adequate reason to reject the contention of petitioner and thereby
deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code,
which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the absence of an
express agreement, novation takes place only when the old and the new obligations are
incompatible on every point."15 Indeed, the following requisites must be established: (1)
there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3)
the old contract is extinguished; and (4) there is a valid new contract. 16
Petitioner contends that there was no absolute incompatibility between the old and the new
obligations, and that the latter did not extinguish the earlier one. It further argues that the
1989 Agreement did not change the original loan in respect to the parties involved or the
obligations incurred. It adds that the terms of the 1989 Contract were "not more onerous." 17
Since the original credit accomodation was not extinguished, it concludes that Cuenca is still
liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The
1989 Loan Agreement extinguished the obligation18 obtained under the 1980 credit
accomodation. This is evident from its explicit provision to "liquidate" the principal and the
interest of the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the
Borrowers present total outstanding Indebtedness to the Lender (the "Indebtedness") while
the Second Loan shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness."19 (Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan Agreement
were used "to pay-off" the original indebtedness serves to strengthen this ruling. 21
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation
had stipulated that the amount of loan was not to exceed P8 million,22 the 1989 Agreement
provided that the loan was P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, "positive covenants" and "negative
covenants" not found in the earlier obligation. As an example of a positive covenant, Sta.
Ines undertook "from time to time and upon request by the Lender, [to] perform such further
acts and/or execute and deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions and purposes of this Loan

99 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Agreement."23 Likewise, SIMC agreed that it would not create any mortgage or encumbrance
on any asset owned or hereafter acquired, nor would it participate in any merger or
consolidation.24
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant
to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who did not
give their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8
million original accommodation; it was not a novation.25
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to "liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million credit facility. Hence, his obligation as a
surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which
specifically states that "[a]n extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. x x x." In an earlier case, 26 the Court
explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the principal debtor by
the creditor without the suretys consent would deprive the surety of his right to pay the
creditor and to be immediately subrogated to the creditors remedies against the principal
debtor upon the maturity date. The surety is said to be entitled to protect himself against
the contingency of the principal debtor or the indemnitors becoming insolvent during the
extended period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and that it
was for a period of one year ending on November 30, 1981. Petitioner objects to the
appellate courts reliance on that document, contending that it was not a binding agreement
because it was not signed by the parties. It adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof "evidencing the
accommodation."27 Moreover, in its Petition before this Court, it alluded to the Credit
Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the Bank
a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in
meeting the additional capitalization requirements for its logging operations. For this
purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the P8 million
credit accommodation as contained in the very document it presented to the courts. Indeed,
it cannot take advantage of that document by agreeing to be bound only by those portions
that are favorable to it, while denying those that are disadvantageous.

100 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his
consent to any modification of the credit accommodation or otherwise waived his right to be
notified of, or to give consent to, the same."28 Respondents consent or waiver thereof is
allegedly found in the Indemnity Agreement, in which he held himself liable for the "credit
accommodation including [its] substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the original credit accommodation
by the 1989 Loan Agreement is merely its "renewal," which "connotes cessation of an old
contract and birth of another one x x x."29
At the outset, we should emphasize that an essential alteration in the terms of the Loan
Agreement without the consent of the surety extinguishes the latters obligation. As the
Court held in National Bank v. Veraguth,30 "[i]t is fundamental in the law of suretyship that
any agreement between the creditor and the principal debtor which essentially varies the
terms of the principal contract, without the consent of the surety, will release the surety
from liability."
In this case, petitioners assertion - that respondent consented to the alterations in the
credit accommodation -- finds no support in the text of the Indemnity Agreement, which is
reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products
Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of
the credit accommodation in the total amount of eight million pesos (P8,000,000.00)
granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized
and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati,
Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST
PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated
interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)],
made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s)
himself/themselves jointly and severally with the CLIENT in favor of the BANK for the
payment , upon demand and without benefit of excussion of whatever amount or amounts
the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendment,
conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount
or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or
indirect, principal or secondary, as appears in the accounts, books and records of the BANK,
plus interest and expenses arising from any agreement or agreements that may have
heretofore been made, or may hereafter be executed by and between the parties thereto,
including the substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves
with the CLIENT in favor of the BANK for the faithful compliance of all the terms and
conditions contained in the aforesaid credit accommodation(s), all of which are incorporated
herein and made part hereof by reference."
While respondent held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the P8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the
nature and scope of the original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable. Taking the banks submission to the
extreme, respondent (or his successors) would be liable for loans even amounting to, say,
P100 billion obtained 100 years after the expiration of the credit accommodation, on the
ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against

101 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
enlarging the liability of the surety."31 Likewise, the Court has ruled that "it is a well-settled
legal principle that if there is any doubt on the terms and conditions of the surety
agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts
are construed against the party who caused the ambiguity." 32 In the absence of an
unequivocal provision that respondent waived his right to be notified of or to give consent to
any alteration of the credit accommodation, we cannot sustain petitioners view that there
was such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows that the
bank did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this
condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions
upon written notice to the Borrower."33
We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was
entitled to be notified of any modification in the original loan accommodation. 34 Following
the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were
given; but would still be valid as to respondent to whom no notice need be given. The
latters liability would thus be more burdensome than that of the former. Such untenable
theory is contrary to the principle that a surety cannot assume an obligation more onerous
than that of the principal.35
The present controversy must be distinguished from Philamgen v. Mutuc,36 in which the
Court sustained a stipulation whereby the surety consented to be bound not only for the
specified period, "but to any extension thereafter made, an extension x x x that could be
had without his having to be notified."
In that case, the surety agreement contained this unequivocal stipulation: "It is hereby
further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided without
the necessity of executing another indemnity agreement for the purpose and that we hereby
equally waive our right to be notified of any renewal or extension of the bond which may be
granted under this indemnity agreement."
In the present case, there is no such express stipulation.1wphi1 At most, the alleged basis
of respondents waiver is vague and uncertain. It confers no clear authorization on the bank
or Sta. Ines to modify or extend the original obligation without the consent of the surety or
notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately. 37 In Dino v.
CA,38 the Court held that "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."
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations
of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2)
that the accommodation should expire not later than November 30, 1981. Hence, it was a

102 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
continuing surety only in regard to loans obtained on or before the aforementioned expiry
date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on
November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980
credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed
the 1989 Loan Agreement, which was executed after November 30, 1981 and which
exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the
loan obtained after the payment of the original one, which was covered by a continuing
surety agreement. At the risk of being repetitious, we hold that in Dino, the surety
Agreement specifically provided that "each suretyship is a continuing one which shall remain
in full force and effect until this bank is notified of its revocation." Since the bank had not
been notified of such revocation, the surety was held liable even for the subsequent
obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondents liability was
confined to the 1980 credit accommodation, the amount and the expiry date of which were
set down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary signature") of a major
stockholder or corporate officer, as an additional security for loans granted to corporations.
There are at least two reasons for this. First, in case of default, the creditors recourse, which
is normally limited to the corporate properties under the veil of separate corporate
personality, would extend to the personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose agreed upon, and that it
would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required
the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the
credit accommodation was granted. There was no reason or logic, however, for the bank or
Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement,
because at that time, he was no longer an officer or a stockholder of the debtor-corporation.
Verily, he was not in a position then to ensure the payment of the obligation. Neither did he
have any reason to bind himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent,
without even informing him, smacks of negligence on the part of the bank and bad faith on
that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the
old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines
to ask somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one
who was in a position to ensure the payment of the loan. Even a perfunctory attempt at
credit investigation would have revealed that respondent was no longer connected with the
corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement
in order to collect an obligation that could have been secured by a fairly obtained surety. For
its defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation
under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which
had been an accessory to the 1980 credit accommodation, was also extinguished.
Furthermore, we reject petitioners submission that respondent waived his right to be

103 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
notified of, or to give consent to, any modification or extension of the 1980 credit
accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before
the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.

G.R. No. 160466

January 17, 2005

SPOUSES ALFREDO and SUSANA ONG, petitioners,


vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the
Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming
the decision of the trial court denying petitioners motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the
manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana
Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now EquitablePhilippine 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 issued to secure some of BMCs
loans, totalling five million pesos (P5,000,000.00).

104 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
The complaint alleged that in 1991, BMC needed additional capital for its business and
applied for various loans, amounting to a total of five million pesos, with the respondent
bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory
notes for the purpose. Under the terms of the notes, it was stipulated that respondent bank
may consider debtor BMC in default and demand payment of the remaining balance of the
loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs
insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank
granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments
with the Securities and Exchange Commission (SEC) after its properties were attached by
creditors. Respondent bank considered debtor BMC in default of its obligations and sought to
collect payment thereof from petitioners-spouses as sureties. In due time, petitionersspouses filed their Answer.1awphi1.nt
On October 13, 1992, a Memorandum of Agreement (MOA) 2 was executed by debtor BMC,
the petitioners-spouses as President and Treasurer of BMC, and the consortium of creditor
banks of BMC (of which respondent bank is included). The MOA took effect upon its approval
by the SEC on November 27, 1992.3
Thereafter, petitioners-spouses moved to dismiss4 the complaint. They argued that as
the SEC declared the principal debtor BMC in a state of suspension of payments and, under
the MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any
pending civil action against the debtor BMC, the benefits of the MOA should be extended to
petitioners-spouses who acted as BMCs sureties in their contracts of loan with respondent
bank. Petitioners-spouses averred that respondent bank is barred from pursuing its
collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court
of Appeals which affirmed the trial courts ruling that a creditor can proceed against
petitioners-spouses as surety independently of its right to proceed against the principal
debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent bank
should be dismissed for three (3) reasons: First, the MOA provided that during its effectivity,
there shall be a suspension of filing or pursuing of collection cases against the BMC and this
provision should benefit petitioners as sureties. Second, principal debtor BMC has been
placed under suspension of payment of debts by the SEC; petitioners contend that it would
prejudice them if the principal debtor BMC would enjoy the suspension of payment of its
debts while petitioners, who acted only as sureties for some of BMCs debts, would be
compelled to make the payment; petitioners add that compelling them to pay is contrary to
Article 2063 of the Civil Code which provides that a compromise between the creditor and
principal debtor benefits the guarantor and should not prejudice the latter. Lastly,
petitioners rely on Article 2081 of the Civil Code which provides that: "the guarantor may
set up against the creditor all the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal to the debtor." Petitioners aver
that if the principal debtor BMC can set up the defense of suspension of payment of debts
and filing of collection suits against respondent bank, petitioners as sureties should likewise
be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is
misplaced as these provisions refer to contracts of guaranty. They do not apply to

105 Guaranty and Suretyship Cases

CREDIT TRANSACTION: Compilation of


Cases
suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMCs debts.
There is a sea of difference in the rights and liabilities of a guarantor and a surety. A
guarantor insures the solvency of the debtor while a surety is an insurer of the
debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of
the guarantor. It is only after the creditor has proceeded against the properties of the
principal debtor and the debt remains unsatisfied that a guarantor can be held liable to
answer for any unpaid amount. This is the principle of excussion. In a suretyship contract,
however, the benefit of excussion is not available to the surety as he is principally
liable for the payment of the debt. As the surety insures the debt itself, he obligates
himself to pay the debt if the principal debtor will not pay, regardless of whether or not the
latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the
surety although the principal debtor is solvent and is able to pay or no prior demand is made
on the principal debtor. A surety is directly, equally and absolutely bound with the
principal debtor for the payment of the debt and is deemed as an original
promissor and debtor from the beginning.5
Under the suretyship contract entered into by petitioners-spouses with respondent bank, the
former obligated themselves to be solidarily bound with the principal debtor BMC for the
payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00).
Under Article 1216 of the Civil Code,6 respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of the MOA which provided for the
suspension of payment and filing of collection suits against BMC. Respondent banks right to
collect payment from the surety exists independently of its right to proceed directly against
the principal debtor. In fact, the creditor bank may go against the surety alone without prior
demand for payment on the principal debtor. 7
The provisions of the MOA regarding the suspension of payments by BMC and the
non-filing of collection suits by the creditor banks pertain only to the property of
the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the
properties of BMC were mentioned in the petition with the SEC. 8 Secondly, there is nothing in
the MOA that involves the liabilities of the sureties whose properties are separate and
distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC
and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only
to corporations and corporate assets. It has no jurisdiction over the properties of BMCs
officers or sureties.1awphi1.nt
Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties
can prosper. The trial courts denial of petitioners motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to
costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

106 Guaranty and Suretyship Cases