MARIANO LIM, Petitioner, vs.

SECURITY BANK CORPORATION,* Respondent

FACTS:

Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all types of credit
accommodation that may be granted by the bank hereinto and hereinafter" in favor of Raul Arroyo for the
amount of P2,000,000.00 which is covered by a Credit Agreement/Promissory Note.3 Said promissory
note stated that the interest on the loan shall be 19% per annum, compounded monthly, for the first 30
days from the date thereof, and if the note is not fully paid when due, an additional penalty of 2% per
month of the total outstanding principal and interest due and unpaid, shall be imposed. In turn, the
Continuing Suretyship4 executed by petitioner stipulated that:

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

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

The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a Notice of Final
Demand dated August 2, 2001, informing him that he was liable to pay the loan obtained by Raul and
Edwina Arroyo, including the interests and penalty fees amounting to P7,703,185.54, and demanding
payment thereof. For failure of petitioner to comply with said demand, respondent filed a complaint for
collection of sum of money against him and the Arroyo spouses. Since the Arroyo spouses can no longer
be located, summons was not served on them, hence, only petitioner actively participated in the case.

ISSUE:
Whether petitioner may validly be held liable for the principal debtor's loan obtained six months after the
execution of the Continuing Suretyship.
HELD:

In this case, what petitioner executed was a Continuing Suretyship. The terms of the Continuing
Suretyship executed by petitioner, quoted earlier, are very clear. It states that petitioner, as surety, shall,
without need for any notice, demand or any other act or deed, immediately become liable and shall pay
"all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor
presently or hereafter owing to the Bank, as appears in the accounts, books and records of the Bank,
whether direct or indirect, and (ii) any and all expenses which the Bank may incur in enforcing any of its
rights, powers and remedies under the Credit Instruments as defined hereinbelow."15 Such stipulations
are valid and legal and constitute the law between the parties, as Article 2053 of the Civil Code provides
that "[a] guaranty may also be given as security for future debts, the amount of which is not yet known; x
x x." Thus, petitioner is unequivocally bound by the terms of the Continuing Suretyship. There can be no
cavil then that petitioner is liable for the principal of the loan, together with the interest and penalties due
thereon, even if said loan was obtained by the principal debtor even after the date of execution of the
Continuing Suretyship.

With regard to the award of attorney's fees, it should be noted that Article 2208 of the Civil Code does not
prohibit recovery of attorney's fees if there is a stipulation in the contract for payment of the same. [T]he
attorney's fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a
penal clause. It has been said that so long as such stipulation does not contravene law, morals, or public
order, it is strictly binding upon defendant. The attorney's fees so provided are awarded in favor of the
litigant, not his counsel. On the other hand, the law also allows parties to a contract to stipulate on
liquidated damages to be paid in case of breach. A stipulation on liquidated damages is a penalty clause
where the obligor assumes a greater liability in case of breach of an obligation. The obligor is bound to
pay the stipulated amount without need for proof on the existence and on the measure of damages caused
by the breach. However, even if such attorney's fees are allowed by law, the courts still have the power to
reduce the same if it is unreasonable. The award of attorney's fees amounting to ten percent (10%) of the
principal debt, plus interest and penalty charges, would definitely exceed the principal amount; thus,
making the attorney's fees manifestly exorbitant. Hence, we reduce the amount of attorney's fees to ten
percent (10%) of the principal debt only.

VISAYAN SURETY & INSURANCE CORPORATION, petitioner, vs. THE HONORABLE

COURT OF APPEALS, SPOUSES JUN BARTOLOME+ and SUSAN BARTOLOME and
DOMINADOR V. IBAJAN,+ respondents
+
+FACTS:

The spouses Danilo Ibajan and Mila Ambe Ibajan filed with the Regional Trial Court, Laguna, Bian a complaint
against spouses Jun and Susan Bartolome, for replevin to recover from them the possession of an Isuzu jeepney,
with damages. Plaintiffs Ibajan alleged that they were the owners of an Isuzu jeepney which was forcibly and
unlawfully taken by defendants Jun and Susan Bartolome on December 8, 1992, while parked at their residence.
Plaintiffs filed a replevin bond through petitioner Visayan Surety & Insurance Corporation.

The contract of surety provided thus: WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN
SURETY & INSURANCE CORP., of Cebu, Cebu, with branch office at Manila, jointly and severally bind
ourselves in the sum of Three Hundred Thousand Pesos (P300,000.00) for the return of the property to the
defendant, if the return thereof be adjudged, and for the payment to the defendant of such sum as he/she may
recover from the plaintiff in the action.[3]

On February 8, 1993, the trial court granted issuance of a writ of replevin directing the sheriff to take the Isuzu
jeepney into his custody. Consequently, on February 22, 1993, Sheriff Arnel Magat seized the subject vehicle
and turned over the same to plaintiff spouses Ibajan. On February 15, 1993, the spouses Bartolome filed with the
trial court a motion to quash the writ of replevin and to order the return of the jeepney to them. On May 3, 1993,
Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a motion for leave of court to
intervene, stating that he has a right superior to the plaintiffs over the ownership and possession of the subject
vehicle. The trial court granted the motion to intervene and issued an order granting the motion to quash the writ
of replevin and ordering plaintiff Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan.
The trial court ordered the issuance of a writ of replevin directing the sheriff to take into his custody the subject
motor vehicle and to deliver the same to the intervenor who was the registered owner but it was returned
unsatisfied. Intervenor Dominador Ibajan filed with the trial court a motion/application for judgment against
plaintiffs bond. The trial court rendered judgement in favor of Dominador Ibajan and against Mila Ibajan and the
Visayan Surety and Insurance Corporation ordering them to pay the former jointly and severally the value of the
subject jeepney in the amount of P150,000.00 and such other damages as may be proved by Dominador Ibajan
plus costs. Visayan Surety and Insurance Corporation and Mila Ibajan filed with the trial court their respective
motions for reconsideration. The trial court denied both motions. Visayan Surety and Insurance Corporation
(hereafter Visayan Surety) appealed the decision to the Court of Appeals, Court of Appeals promulgated its
decision affirming the judgment of the trial court. Petitioner filed a motion for reconsideration but was denied for
lack of merit.

Respondent Dominador Ibajan asserts that as intervenor, he assumed the personality of the original defendants in
relation to the plaintiffs bond for the issuance of a writ of replevin. Petitioner Visayan Surety contends that it is
not liable to the intervenor, Dominador Ibajan, because the intervention of the intervenor makes him a party to
the suit, but not a beneficiary to the plaintiffs bond. The intervenor was not a party to the contract of surety,
hence, he was not bound by the contract.

ISSUE:
Whether the surety is liable to an intervenor on a replevin bond posted by petitioner in favor of respondents.
HELD:

The petition is meritorious. An intervenor is a person, not originally impleaded in a proceeding, who has legal
interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or
of an officer thereof.
May an intervenor be considered a party to a contract of surety which he did not sign and which was executed by
plaintiffs and defendants? It is a basic principle in law that contracts can bind only the parties who had entered
into it; it cannot favor or prejudice a third person. Contracts take effect between the parties, their assigns, and
heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law.

A contract of surety is an agreement where a party called the surety guarantees the performance by another party
called the principal or obligor of an obligation or undertaking in favor of a third person called the obligee.
Specifically, suretyship is a contractual relation resulting from an agreement whereby one person, the surety,
engages to be answerable for the debt, default or miscarriage of another, known as the principal. The obligation
of a surety cannot be extended by implication beyond its specified limits. When a surety executes a bond, it does
not guarantee that the plaintiffs cause of action is meritorious, and that it will be responsible for all the costs that
may be adjudicated against its principal in case the action fails. The extent of a suretys liability is determined
only by the clause of the contract of suretyship. A contract of surety is not presumed; it cannot extend to more
than what is stipulated. Since the obligation of the surety cannot be extended by implication, it follows that the
surety cannot be held liable to the intervenor when the relationship and obligation of the surety is limited to the
defendants specified in the contract of surety. WHEREFORE, the Court REVERSES and sets aside the
decision of the Court of Appeals and ruled that petitioner Visayan Surety & Insurance Corporation is not liable
under the replevin bond to the intervenor, respondent Dominador V. Ibajan.

TOWERS ASSURANCE CORPORATION, petitioner, vs. ORORAMA SUPERMART, ITS OWNER-

PROPRIETOR, SEE HONG and JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of First
Instance of Misamis Oriental, Branch I, respondents.

This case is about the liability of a surety in a counterbond for the lifting of a writ of preliminary attachment. On
February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses
Ernesto Ong and Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the sum
of P 58,400 plus litigation expenses and attorney's fees. See Hong asked for a writ of preliminary attachment. On
March 5, 1976, the lower court issued an order of attachment. The deputy sheriff attached the properties of the
Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City. To lift the attachment, the Ong spouses filed on
March 11, 1976 a counterbond in 'the amount of P 58,400 with Towers Assurance Corporation as surety. In that
undertaking, the Ong spouses and Towers Assurance Corporation bound themselves to pay solidarity to See
Hong the sum of P 58,400. On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For non-
appearance at the pre- trial, the Ong spouses were declared in default. On October 25, 1976, the lower court
rendered a decision, ordering not only the Ong spouses but also their surety, Towers Assurance Corporation, to
pay solidarily to See Hong the sum of P 58,400. The court also ordered the Ong spouses to pay P 10,000 as
litigation expenses and attorney's fees. Ernesto Ong manifested that he did not want to appeal. On March 8,
1977, Ororama Supermart filed a motion for execution. The lower court granted that motion. The writ of
execution was issued on March 14 against the judgment debtors and their surety. On March 29, 1977, Towers
Assurance Corporation filed the instant petition for certiorari where it assails the decision and writ of execution.

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

SEC. 17. When execution returned unsatisfied, recovery had upon bound. If the execution be
returned unsatisfied in whole or in part, the surety or sureties on any counterbound given
pursuant to the provisions of this rule to secure the payment of the judgment shall become
charged on such counterbound, and bound to pay to the judgment creditor upon demand, the
amount due under the judgment, which amount may be recovered from such surety or sureties
after notice and summary hearing in the same action.
Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is
necessary (1) that execution be first issued against the principal debtor and that such execution was returned
unsatisfied in whole or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the
judgment, and (3) that the surety be given notice and a summary hearing in the same action as to his liability for
the judgment under his counterbond.

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation
assumed a solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the
properties of the principal debtor. But certainly, the surety is entitled to be heard before an execution can be
issued against him since he is not a party in the case involving his principal. Notice and hearing constitute the
essence of procedural due process.