G.R. No.

L-158025 November 5, 1920

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-appellants,
vs.
GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson and Schwarzkopf for appellants.
William and Ferrier for appellee.

MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant the sum of P10,000. The brief decision of the
trial court held that the suit was premature, and absolved the defendant from the complaint, with the costs
against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant George C. Sellner to John T. Macleod, agent for
Mrs. Horace L. Higgins, on May 31, 1915, of the following tenor:lawph!l.net
DEAR SIR: I hereby obligate and bind myself, my heirs, successors and assigns that if the
promissory note executed the 29th day of May, 1915 by the Keystone Mining Co., W.H. Clarke,
and John Maye, jointly and severally, in your favor and due six months after date for Pesos
10,000 is not fully paid at maturity with interest, I will, within fifteen days after notice of such
default, pay you in cash the sum of P10,000 and interest upon your surrendering to me the three
thousand shares of stock of the Keystone Mining Co. held by you as security for the payment of
said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the determination of defendant's status in the
transaction referred to. Plaintiffs contend that he is a surety; defendant contends that he is a guarantor. Plaintiffs
also admit that if defendant is a guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the Philippine Islands, Title XIV of Book IV is entitled
"De la Fianza." The Spanish word "fianza" is translated in the Washington and Walton editions of the Civil
Code as "security." "Fianza" appears in the Fisher translation as "suretyship." The Spanish world "fiador" is
found in all of the English translations of the Civil Code as "surety." The law of guaranty is not related of by
that name in the Civil Code, although indirect reference to the same is made in the Code of Commerce. In
terminology at least, no distinction is made in the Civil Code between the obligation of a surety and that of a
guarantor.
As has been done in the State of Louisiana, where, like in the Philippines, the substantive law has a civil law
origin, we feel free to supplement the statutory law by a reference to the precepts of the law merchant.
The points of difference between a surety and a guarantor are familiar to American authorities. A surety and a
guarantor are alike in that each promises to answer for the debt or default of another. A surety and a guarantor
are unlike in that the surety assumes liability as a regular party to the undertaking, while the liability as a regular
party to upon an independent agreement to pay the obligation if the primary pay or fails to do so. A surety is
charged as an original promissory; the engagement of the guarantor is a collateral undertaking. The obligation
of the surety is primary; the obligation of the guarantor is secondary. (See U.S. vs. Varadero de la Quinta
[1919], 40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913], 173 Mich., 492;
Brandt, on Suretyship and Guaranty, sec. 1, cited approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according to article 1822 "By fianza (security or
suretyship) one person binds himself to pay or perform for a third person in case the latter should fail to do so."
But "If the surety binds himself in solidum with the principal debtor, the provisions of Section fourth, Chapter
third, Title first, shall be applicable." What the first portion of the cited article provides is, consequently, seen to
be somewhat akin to the contract of guaranty, while what is last provided is practically equivalent to the
contract of suretyship. When in subsequent articles found in section 1 of Chapter II of the title
concerning fianza, the Code speaks of the effects of suretyship between surety and creditor, it has, in
comparison with the common law, the effect of guaranty between guarantor and creditor. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship
existing between codebtors liable in solidum is similar to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was simply that of a guarantor, or, to be more
precise, of the fiador whose responsibility is fixed in the Civil Code. The letter of Mr. Sellner recites that if the
promissory note is not paid at maturity, then, within fifteen days after notice of such default and upon surrender
to him of the three thousand shares of Keystone Mining Company stock, he will assume responsibility. Sellner
is not bound with the principals by the same instrument executed at the same time and on the same
consideration, but his responsibility is a secondary one found in an independent collateral agreement, Neither is
Sellner jointly and severally liable with the principal debtors.
With particular reference, therefore, to appellants assignments of error, we hold that defendant Sellner is a
guarantor within the meaning of the provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces this conclusion. The note executed by the
Keystone Mining Company matured on November 29, 1915. Interest on the note was not accepted by the
makers until September 30, 1916. When the note became due, it is admitted that the shares of stock used as
collateral security were selling at par; that is, they were worth pesos 30,000. Notice that the note had not been
paid was not given to and when the Keyston Mining Company stock was worthless. Defendant, consequently,
through the laches of plaintiff, has lost possible chance to recoup, through the sale of the stock, any amount
which he might be compelled to pay as a surety or guarantor. The "indulgence," as this word is used in the law
of guaranty, of the creditors of the principal, as evidenced by the acceptance of interest, and by failure promptly
to notify the guarantor, may thus have served to discharge the guarantor.
For quite different reasons, which, nevertheless, arrive at the same result, judgment is affirmed, with costs of
this instance against the appellants. So ordered.
Johnson, Araullo, and Villamor, JJ., concur.
Mapa, C.J. and Avanceña, J., concur in the result.
G.R. No. L-16666 April 10, 1922
ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a written agreement undertook to
construct a building on Calle Rosario in the city of Manila for the Hospicio de San Jose, the contract price being
P64,000. One of the conditions of the agreement was that the contractor should obtain the "guarantee" of the
Fidelity and Surety Company of the Philippine Islands to the amount of P128,800 and the following
endorsement in the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions as outlined in the
above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects representing the Hospicio de San Jose and,
as the work progressed, payments were made to him from time to time upon the recommendation of the
architects, until the entire contract price, with the exception of the sum of the P4,978.08, was paid.
Subsequently it was found that the work had not been carried out in accordance with the specifications which
formed part of the contract and that the workmanship was not of the standard required, and the Hospicio de San
Jose therefore answered the complaint and presented a counterclaim for damages for the partial noncompliance
with the terms of the agreement abovementioned, in the total sum of P71,350. After issue was thus joined,
Machetti, on petition of his creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918, an
order was entered suspending the proceeding in the present case in accordance with section 60 of the Insolvency
Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the Fidelity and Surety Company be
made cross-defendant to the exclusion of Machetti and that the proceedings be continued as to said company,
but still remain suspended as to Machetti. This motion was granted and on February 7, 1920, the Hospicio filed
a complaint against the Fidelity and Surety Company asking for a judgement for P12,800 against the company
upon its guaranty. After trial, the Court of First Instance rendered judgment against the Fidelity and Surety
Company for P12,800 in accordance with the complaint. The case is now before this court upon appeal by the
Fidelity and Surety Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio de San Jose defendant,
has been converted into an action in which the Hospicio de San Jose is plaintiff and the Fidelity and Surety
Company, the original plaintiff's guarantor, is the defendant, Machetti having been practically eliminated from
the case.
But in this instance the guarantor's case is even stronger than that of an ordinary surety. The contract of
guaranty is written in the English language and the terms employed must of course be given the signification
which ordinarily attaches to them in that language. In English the term "guarantor" implies an undertaking of
guaranty, as distinguished from suretyship. It is very true that notwithstanding the use of the words "guarantee"
or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such
circumstances do not exist in the present case; on the contrary it appear affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that its rests on a separate consideration
moving from the principal and that although it is written in continuation of the contract for the construction of
the building, it is a collateral undertaking separate and distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if
the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of the debtor.
(Saint vs.Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de
Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.) This latter liability
is what the Fidelity and Surety Company assumed in the present case. The undertaking is perhaps not exactly
that of a fianza under the Civil Code, but is a perfectly valid contract and must be given the legal effect if
ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its principal,
Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to
pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not
sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our
statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his
estate.
The judgment appealed from is therefore reversed without costs and without prejudice to such right of action as
the cross-complainant, the Hospicio de San Jose, may have after exhausting its remedy against the plaintiff
Machetti. So ordered.
Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur.
G.R. No. 34642 September 24, 1931
FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.
Jacinto E. Evidente for appellees.
STREET, J.:
This action was instituted in the Court of First Instance of the Province of Iloilo by Fabiola Severino, with
whom is joined her husband Ricardo Vergara, for the purpose of recovering the sum of P20,000 from Guillermo
Severino and Enrique Echaus, the latter in the character of guarantor for the former. Upon hearing he cause the
trial court gave judgment in favor of the plaintiffs to recover the sum of P20,000 with lawful from November
15, 1929, the date of the filing of the complaint, with costs. But it was declared that execution of this judgment
should issue first against the property of Guillermo Severino, and if no property should be found belonging to
said defendant sufficient to satisfy the judgment in whole or in part, execution for the remainder should be
issued against the property of Enrique Echaus as guarantor. From this judgment the defendant Echaus appealed,
but his principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino, deceased, former
resident of Occidental Negros. Upon the death of Melecio Severino a number of years ago, he left considerable
property and litigation ensued between his widow, Felicitas Villanueva, and Fabiola Severino, on the one part,
and other heirs of the deceased on the other part. In order to make an end of this litigation a compromise was
effected by which Guillermo Severino, a son of Melecio Severino, took over the property pertaining to the
estate of his father at the same time agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This
sum of money was made payable, first, P40,000 in cash upon the execution of the document of compromise,
and the balance in three several payments of P20,000 at the end of one year; two years, and three years
respectively. To this contract the appellant Enrique Echaus affixed his name as guarantor. The first payment of
P40,000 was made on July 11, 1924, the date when the contract of compromise was executed; and of this
amount the plaintiff Fabiola Severino received the sum of P10,000. Of the remaining P60,000, all as yet unpaid,
Fabiola Severino is entitled to the sum of P20,000.
It appears that at the time of the compromise agreement above-mentioned was executed Fabiola Severino had
not yet been judicially recognized as the natural daughter of Melecio Severino, and it was stipulated that the last
P20,000 corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva should retained on
deposit until the definite status of Fabiola Severino as natural daughter of Melecio Severino should be
established. The judicial decree to this effect was entered in the Court of First Instance of Occidental Negros on
June 16, 1925, and as the money which was contemplated to be held in suspense has never in fact been paid to
the parties entitled thereto, it results that the point respecting the deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never been paid and is still owing to the plaintiff; and
the only defense worth noting in this decision is the assertion on the part of Enrique Echaus that he received
nothing for affixing his signature as guarantor to the contract which is the subject of suit and that in effect the
contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same consideration that makes the contract
effective between the principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal
of a lawsuit is recognized in law as a valuable consideration; and the dismissal of the action which Felicitas
Villanueva and Fabiola Severino had instituted against Guillermo Severino was an adequate consideration to
support the promise on the part of Guillermo Severino to pay the sum of money stipulated in the contract which
is the subject of this action. The promise of the appellant Echaus as guarantor therefore binding. It is never
necessary that the guarantor or surety should receive any part of the benefit, if such there be, accruing to his
principal. But the true consideration of this contract was the detriment suffered by the plaintiffs in the former
action in dismissing that proceeding, and it is immaterial that no benefit may have accrued either to the
principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will be affirmed, with costs against the
appellant. So ordered.
Avanceña, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real and Imperial, JJ., concur.
GATEWAY ELECTRONICS G.R. No. 172041
CORPORATION and
GERONIMO B. DELOS REYES, JR.,
Petitioners, Present:
QUISUMBING, J., Chairperson,
- versus - AUSTRIA-MARTINEZ,*
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
ASIANBANK CORPORATION, Promulgated:
Respondent.
December 18, 2008
x-----------------------------------------------------------------------------------------x

DECISION
VELASCO, JR., J.:

This petition for review under Rule 45 seeks to nullify and set aside the Decision[1] dated October 28, 2005 of the
Court of Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution[2] of March 17, 2006 denying petitioners
motion for reconsideration.

The Facts

Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged
in the semi-conductor business. During the period material, petitioner Geronimo B. delos Reyes, Jr. was its
president and one Andrew delos Reyes its executive vice-president.
On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for
Gateway in favor of respondent Asianbank Corporation (Asianbank), pertinently providing:

I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK CORPORATION,

x x x due and punctual payment by the following individuals/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

GATEWAY ELECTRONICS *P10,000,000.00*DOMESTIC BILLS

CORPORATION [PURCHASED LINE]

*US$3,000,000.00*OMNIBUS CREDIT LINE

owing to the said ASIANBANK CORPORATION, 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 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, x x x 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
x x x.

I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations to be
performed under any contracts evidencing indebtedness/obligations and any supplements,
amendments, changes or modifications made thereto, including but not limited to, the due and
punctual payment by the said DEBTOR(S).

MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not
contingent upon the pursuit by the CREDITOR x x x 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, x x x and notwithstanding also that all obligations of
the DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate principal
sum hereinabove stated.[3]
 Later developments saw Asianbank extending to Gateway several export packing loans in the total
aggregate amount of USD 1,700,883.48. This loan package was later consolidated with Dollar Promissory Note
(PN) No. FCD-0599-2749[4] for the amount of USD 1,700,883.48 and secured by a chattel mortgage over
Gateways equipment for USD 2 million.

Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateways
request, Asianbank extended the maturity dates of the loan several times. These extensions bore the conformity
of three of Gateways officers, among them Andrew.

On July 15 and 30, 1999, Gateway issued two Philippine Commercial International Bank checks for the
amounts of USD 40,000 and USD 20,000, respectively, as payment for its arrearages and interests for the periods
June 30 and July 30, 1999; but both checks were dishonored for insufficiency of funds. Asianbanks demands for
payment made upon Gateway and its sureties went unheeded. As of November 23, 1999, Gateways obligation to
Asianbank, inclusive of principal, interest, and penalties, totaled USD 2,235,452.17.

Thus, on December 15, 1999, Asianbank filed with the Regional Trial Court (RTC) in Makati City a
complaint for a sum of money against Gateway, Geronimo, and Andrew. The complaint, as later amended, was
eventually raffled to Branch 60 of the court and docketed as Civil Case No. 99-2102 entitled Asian Bank
Corporation v. Gateway Electronics Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.

In its answer to the amended complaint, Gateway traced the cause of its financial difficulties, described
the steps it had taken to address its mounting problem, and faulted Asianbank for trying to undermine its efforts
toward recovery.

Andrew also filed an answer alleging, among other things, that the deed of suretyship he executed covering
the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line did not include
PN No. FCD-0599-2749, the payment of which was extended several times without his consent.

Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the authenticity of his
signature on it, was signed without his wifes consent and should, thus, be considered as a mere continuing offer.
Like Andrew, Geronimo argued that he ought to be relieved of his liability under the surety agreement inasmuch
as he too never consented to the repeated loan maturity date extensions given by Asianbank to Gateway.

After due hearing, the RTC rendered judgment dated October 7, 2003[5]in favor of Gateway, the
dispositive portion of which states:

WHEREFORE then, in view of the foregoing, judgment is rendered holding defendants

Gateway Electronics Corporation, Geronimo De Los Reyes and Andrew De Los Reyes jointly and
severally liable to pay the plaintiff the following:

a) The sum of $2,235,452.17 United States Currency with interest to be added on at the
prevailing market rate over a given thirty day London Interbank Offered Rate (LIBOR) plus a
spread of 5.5358 percent or ten and [45,455/100,000] percent per annum for the first 35 days
and every thirty days beginning November 23, 1999 until fully paid;
b) a penalty charge after November 23, 1999 of two percent (2%) per month until fully paid;
c) attorneys fees of twenty percent (20%) of the total amount due and unpaid; and
d) costs of the suit.

SO ORDERED.

Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their recourse docketed as CA-G.R. CV No.
80734. Following the filing of its and Geronimos joint appellants brief, Gateway filed on November 10, 2004 a
petition for voluntary insolvency[6] with the RTC in Imus, Cavite, Branch 22, docketed as SEC Case No. 037-04,
in which Asianbank was listed in the attached Schedule of Obligations as one of the creditors. On March 16,
2005, Metrobank, as successor-in-interest of Asianbank, via a Notice of Creditors Claim, prayed that it be allowed
to participate in the Gatewayss creditors meeting.
In its Decision dated October 28, 2005, the CA affirmed the decision of the Makati City RTC. In time, Gateway
and Geronimo interposed a motion for reconsideration. This was followed by a Supplemental Motion for
Reconsideration dated January 20, 2006, stating that in SEC Case No. 037-04, the RTC in Imus, Cavite had issued
an Order dated December 2, 2004, declaring Gateway insolvent and directing all its creditors to appear before the
court on a certain date for the purpose of choosing among themselves the assignee of Gateways estate which the
courts sheriff has meanwhile placed in custodia legis.[7] Gateway and Geronimo thus prayed that the assailed
decision of the Makati City RTC be set aside, the insolvency court having acquired exclusive jurisdiction over
the properties of Gateway by virtue of Section 60 of Act No. 1956, without prejudice to Asianbank pursuing its
claim in the insolvency proceedings.

In its March 17, 2006 Resolution, however, the CA denied the motion for reconsideration and its supplement.

Hence, Gateway and Geronimo filed this petition anchored on the following grounds:

I
The [CA] erred in disregarding the established rule that an action commenced by a creditor
against a judicially declared insolvent for the recovery of his claim should be dismissed and
referred to the insolvency court. Where, therefore, as in this case, petitioner GEC [referring to
Gateway] has been declared insolvent x x x, respondent Asianbanks claim for the payment of
GECs loans should be ventilated before the insolvency court x x x.

II
The [CA] erred in admitting as evidence the Deed of Surety purportedly signed by
petitioner GBR [referring to Geronimo] despite the unexplained failure of respondent Asianbank
to present the originals of the Deed of Surety during the trial.

III
The [CA] erred in holding that the repeated extensions granted by respondent Asianbank
to GEC without notice to and the express consent of petitioner GBR did not discharge petitioner
GBR from his liabilities as surety GEC in that:

A. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty.
B. The [CA] interpreted the supposed Deed of Surety of petitioner GBR as too comprehensive
and all encompassing as to amount to absurdity.
C. The repeated extensions granted by Asianbank to GEC prevented petitioner GBR from
exercising his right of subrogation under Article 2080 of the Civil Code. As such, petitioner
GBR should be released from his obligations as surety of GEC.

IV
It is a well-settled rule that when a bank deviates from normal banking practice in a
transaction and sustains injury as a result thereof, the bank is deemed to have assumed the risk and
no right of payment accrues to the latter against any party to the transaction. By repeatedly
extending the period for the payment of GECs obligations and granting GEC other loans after the
suretyship agreement despite GECs default and in failing to foreclose the chattel mortgage
constituted as security for GECs loan contrary to normal banking practices, Asianbank failed to
exercise reasonable caution for its own protection and assumed the risk of non-payment through
its own acts, and thus has no right to proceed against petitioner GBR as surety for the payment of
GECs loans.

V
In Agcaoili v. GSIS, this Honorable Court had occasion to state that in determining the
precise relief to give, the court will balance the equities or the respective interests of the parties
and take into account the relative hardship that one relief or another may occasion to them. Upon
a balancing of interests of both petitioner GBR and respondent Asianbank, greater and irreparable
harm and injury would be suffered by petitioner GBR than respondent Asianbank if the assailed
Decision and Resolution of the [CA] would be upheld x x x. This Honorable Court x x x should
thus exercise its equity jurisdiction in the instant case to the end that it may render complete justice
to both parties and declare petitioner GBR as released and discharged from any liability in respect
of respondent Asianbanks claims.[8]

The Ruling of the Court

 Gateway May Be Discharged from Liability But Not Geronimo

Gateway, having been declared insolvent, argues that jurisdiction over all claims against all of its
properties and assets properly pertains to the insolvency court. Accordingly, Gateway adds, citing Sec. 60 of Act
No. 1956,[9] as amended, or the Insolvency Law, any pending action against its properties and assets must be
dismissed, the claimant relegated to the insolvency proceedings for the claimants relief.

The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No. 1956, as
couched, the issuance of an order declaring the petitioner insolvent after the insolvency court finds the
corresponding petition for insolvency to be meritorious shall stay all pending civil actions against the petitioners
property. For reference, said Sec. 18, setting forth the effects and contents of a voluntary insolvency
order,[10] pertinently provides:

Section 18. Upon receiving and filing said petition, schedule, and inventory, the court x x
x shall make an order declaring the petitioner insolvent, and directing the sheriff of the province
or city in which the petition is filed to take possession of, and safely keep, until the appointment
of a receiver or assignee, all the deeds, vouchers, books of account, papers, notes, bonds, bills, and
securities of the debtor and all his real and personal property, estate and effects x x x. Said order
shall further forbid the payment to the creditor of any debts due to him and the delivery to the
debtor, or to any person for him, of any property belonging to him, and the transfer of any property
by him, and shall further appoint a time and place for a meeting of the creditors to choose an
assignee of the estate. Said order shall [be published] x x x. Upon the granting of said order, all
civil proceedings pending against the said insolvent shall be stayed. When a receiver is
appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to
such receiver or assignee, as the case may be all the property, assets, and belongings of the
insolvent which have come into his possession x x x. (Emphasis supplied.)

Complementing Sec. 18 which appropriately comes into play upon the granting of [the] order of
insolvency is the succeeding Sec. 60 which properly applies to the period after the commencement of proceedings
in insolvency. The two provisions may be harmonized as follows: Upon the filing of the petition for insolvency,
pending civil actions against the property of the petitioner are not ipso facto stayed, but the insolvent may apply
with the court in which the actions are pending for a stay of the actions against the insolvents property. If the
court grants such application, pending civil actions against the petitioners property shall be stayed; otherwise,
they shall continue. Once an order of insolvency nevertheless issues, all civil proceedings against the petitioners
property are, by statutory command, automatically stayed. Sec. 60 is reproduced below:
SECTION 60. Creditors proving claims cannot sue; Stay of action.No creditor, proving
his debt or claim, shall be allowed to maintain any suit therefor against the debtor, but shall be
deemed to have waived all right of action and suit against him, and all proceedings already
commenced, or any unsatisfied judgment already obtained thereon, shall be deemed to be
discharged and surrendered thereby; and after the debtors discharge, upon proper application and
proof to the court having jurisdiction, all such proceedings shall be, dismissed, and such unsatisfied
judgments satisfied of record: Provided, x x x. A creditor proving his debt or claim shall not be
held to have waived his right of action or suit against the debtor when a discharge has have been
refused or the proceedings have been determined to the without a discharge. No creditor whose
debt is provable under this Act shall be allowed, after the commencement of proceedings in
insolvency, to prosecute to final judgment any action therefor against the debtor until the
question of the debtors discharge shall have been determined, and any such suit proceeding
shall, upon the application of the debtor or of any creditor, or the assignee, be stayed to await
the determination of the court on the question of discharge: Provided, That if the amount due
the creditor is in dispute, the suit, by leave of the court in insolvency, may proceed to
judgment for purpose of ascertaining the amount due, which amount, when adjudged, may be
allowed in the insolvency proceedings, but execution shall be stayed aforesaid. (Emphasis
supplied.)

Applying the aforequoted provisions, it can rightfully be said that the issuance of the insolvency order
of December 2, 2004 had the effect of automatically staying the civil action for a sum of money filed by
Asianbank against Gateway. In net effect, the proceedings before the CA in CA-G.R. CV No. 80734, but only
insofar as the claim against Gateway was concerned, was, or ought to have been, suspended after December 2,
2004, Asianbank having been duly notified of and in fact was a participant in the insolvency proceedings. The
Court of course takes stock of the proviso in Sec. 60 of Act No. 1956 which in a way provided the CA with a
justifying tool to continue and to proceed to judgment in CA-G.R. CV No. 80734, but only for the purpose of
ascertaining the amount due from Gateway. At any event, on the postulate that jurisdiction over the properties of
the insolvent-declared Gateway lies with the insolvency court, execution of the CA insolvency judgment against
Gateway can only be pursued before the insolvency court. Asianbank, no less, tends to agree to this conclusion
when it stated: [E]ven it if is assumed that the declaration of insolvency of petitioner Gateway can be taken
cognizance of, such fact does relieve petitioner Geronimo and/or Andrew delos Reyes from performing their
obligations based on the Deeds of Suretyship x x x.[11]

Geronimo, however, is a different story.

Asianbank argues that the stay of the collection suit against Gateway is without bearing on the liability of
Geronimo as a surety, adding that claims against a surety may proceed independently from that against the
principal debtor. Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway
as a defense to evade liability.

Geronimo counters with the argument that his liability as a surety cannot be separated from Gateways
liability. As surety, he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including
its insolvency, suggesting that if Gateway is eventually released from what it owes Asianbank, he, too, should
also be so relieved.

Geronimos above contention is untenable.

Suretyship is covered by Article 2047 of the Civil Code, which states:

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.

The Courts disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the debt shall be paid x x x. Stated differently, a surety
promises to pay the principals debt if the principal will not pay, while a guarantor agrees that the
creditor, after proceeding against the principal, may proceed against the guarantor if the principal
is unable to pay. A surety binds himself to perform if the principal does not, without regard to his
ability to do so. x x x In other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default x x x.

xxxx

A creditors right to proceed against the surety exists independently of his right to
proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed
against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore,
is that if the obligation is joint and several, the creditor has the right to proceed even against
the surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal
in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety
is the same as that of the principal, then soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had against the principal.
Perforce, x x x a surety is primarily liable, and with the rule that his proper remedy is to pay the
debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by
statute and in the absence of any agreement limiting the application of the security, require the
creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies
against the principal, particularly where both principal and surety are equally bound.[12]

Clearly, Asianbanks right to collect payment for the full amount from Geronimo, as surety, exists
independently of its right against Gateway as principal debtor;[13] it could thus proceed against one of them or file
separate actions against them to recover the principal debt covered by the deed on suretyship, subject to the rule
prohibiting double recovery from the same cause.[14] This legal postulate becomes all the more cogent in case of
an insolvency situation where, as here, the insolvency court is bereft of jurisdiction over the sureties of the
principal debtor. As Asianbank aptly points out, a suit against the surety, insofar as the suretys solidary liability
is concerned, is not affected by an insolvency proceeding instituted by or against the principal debtor. The same
principle holds true with respect to the surety of a corporation in distress which is subject of a rehabilitation
proceeding before the Securities and Exchange Commission (SEC). As we held in Commercial Banking
Corporation v. CA, a surety of the distressed corporation can be sued separately to enforce his liability as such,
notwithstanding an SEC order declaring the former under a state of suspension of payment.[15]

Geronimo also states that, as things stand, his liability, as compared to that of Gateway, is contextually
more onerous and burdensome, precluded as he is from seeking recourse against the insolvent corporation. From
this premise, Geronimo claims that since Gateway cannot, owing to the order of insolvency, be made to pay its
obligation, he, too, being just a surety, cannot also be made to pay, obviously having in mind Art. 2054 of the
Civil Code, as follows:
A guarantor may bind himself for less, but not for more than the principal debtor, both as
regards the amount and the onerous nature of the conditions.

Should he have bound himself for more, his obligations shall be reduced to the limits of
that of the debtor.

The Court is not convinced. The above article enunciates the rule that the obligation of a guarantor may
be less, but cannot be more than the obligation of the principal debtor. The rule, however, cannot plausibly be
stretched to mean that a guarantor or surety is freed from liability as such guarantor or surety in the event the
principal debtor becomes insolvent or is unable to pay the obligation. This interpretation would defeat the very
essence of a suretyship contract which, by definition, refers to an agreement whereunder one person, the surety,
engages to be answerable for the debt, default, or miscarriage of another known as the principal. [16] Geronimos
position that a surety cannot be made to pay when the principal is unable to pay is clearly specious and must be
rejected.

The CA Did Not Err in Admitting

the Deed of Suretyship as Evidence
Going to the next ground, Geronimo maintains that the CA erred in admitting the Deed of Suretyship purportedly
signed by him, given that Asianbank failed to present its original copy.

This contention is bereft of merit.

As may be noted, paragraph 6 of Asianbanks complaint alleged the following:

6. The loan was secured by the Deeds of Suretyship dated July 23, 1996 that were executed by
defendants Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Attached as Annexes B
and C, respectively, are photocopies of the Deeds of Suretyship executed by defendants Geronimo
B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Subsequently, a chattel mortgage over
defendant Gateways equipment for $2 million, United States currency, was executed.[17]

Geronimo traversed in his answer the foregoing allegation in the following wise: 2.5. Paragraph 6 is denied,
subject to the special and affirmative defenses and allegations hereinafter set forth.

The ensuing special and affirmative defenses were raised in Gateways answer:

15. Granting even that [Geronimo] signed the Deed of Suretyship, his wife x x x had not given her
consent thereto. Accordingly, the security created by the suretyship shall be construed only as a
continuing offer on the part of [Geronimo] and plaintiff and may only be perfected as a binding
contract upon acceptance by Mrs. Delos Reyes. x x x

17. Moreover, assuming, gratia argumenti, that [Geronimo] may be bound by the suretyship
agreement, there is no showing that he has consented to the repeated extensions made by plaintiff
in favor of GEC or to a waiver of notice of such extensions. It should be pointed out that Mr.
Geronimo delos Reyes executed the suretyship agreement in his personal capacity and not in his
capacity as Chairman of the Board of GEC. His consent, insofar as the continuing application of
the suretyship agreement to GECs obligations in view of the repeated extension extended by
plaintiff [is concerned], is therefore necessary. Obviously, plaintiff cannot now hold him liable as
a surety to GECs obligations.[18]
The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8, the procedure should a suit or defense is predicated
on a written document, thus:

Sec. 7. Action or defense based on document.Whenever an action or defense is based upon

a written instrument or document, the substance of such instrument or document shall be set forth
in the pleading, and the original or a copy thereof shall be attached to the pleading as an
exhibit, which shall be deemed to be a part of the pleading, or said copy may with like effect be
set forth in the pleading.

Sec. 8. How to contest such documents.When an action or defense is founded upon a

written instrument, copied in or attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of the instrument shall be deemed
admitted unless the adverse party, under oath, specifically denies them, and sets forth what
he claims to be the facts; but the requirement of an oath does not apply when the adverse party
does not appear to be a party to the instrument or when compliance with an order for an inspection
of the original instrument is refused. (Emphasis supplied.)

Given the above perspective, Asianbank, by attaching a photocopy of the Deed of Suretyship to its
underlying complaint, hewed to the requirements of the above twin provisions. Asianbank, thus, effectively
alleged the due execution and genuineness of the said deed. From that point, Geronimo, if he intended to contest
the surety deed, should have specifically denied the due execution and genuineness of the deed in the manner
provided by Sec. 10, Rule 8 of the Rules of Court, thus:

Sec. 10. Specific denial.A defendant must specify each material allegation of fact the
truth of which he does not admit and, whenever practicable, shall set forth the substance of
the matters upon which he relies to support his denial. Where a defendant desires to deny only
a part of an averment, he shall specify so much of it as is true and material and shall deny only the
remainder. Where a defendant is without knowledge or information sufficient to form a belief as
to the truth of a material averment made in the complaint, he shall so state, and this shall have the
effect of a denial. (Emphasis supplied.)

In the instant case, Geronimo should have categorically stated that he did not execute the Deed of
Suretyship and that the signature appearing on it was not his or was falsified. His Answer does not, however,
contain any such statement. Necessarily then, Geronimo had not specifically denied, and, thus, is deemed to have
admitted, the genuineness and due execution of the deed in question. In this regard, Sec. 11, Rule 8 of the Rules
of Court states:

Sec. 11. Allegations not specifically denied deemed admitted.Material averment in the
complaint, other than those as to the amount of unliquidated damages, shall be deemed admitted
when not specifically denied. x x x

Owing to Geronimos virtual admission of the genuineness and due execution of the deed of suretyship,
Asianbank, contrary to the view of Gateway and Geronimo, need not present the original of the deed during the
hearings of the case. Sec. 4, Rule 129 of the Rules says so:
Sec. 4. Judicial admissions.An admission, verbal or written, made by the party in the
course of the proceedings in the same case, does not require proof. The admission may be
contradicted only by showing that it was made through palpable mistake or that no such admission
was made. (Emphasis supplied.)

Geronimo Is Liable for PN No. FCD-0599-2749

under His Deed of Suretyship
This brings us to the third ground which involves the issue of the coverage of the suretyship. Preliminarily,
an overview on the process of taking out loans should first be made. Generally, especially for large loans, banks
first approve a line or facility out of which a client may avail itself of loans in the form of promissory notes
without need of further processing and/or approval every time a draw down is made. In the instant case, Asianbank
approved in favor of Gateway the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus
Credit Line. Asianbank approved these credit lines which were covered by a chattel mortgage as well as the deeds
of suretyship, such that loans extended from these lines would already be secured and pre-approved. In other
words, these facilities are not financial obligations yet. Asianbank did not yet lend out any money to Gateway
with the approval of these lines. The loan transaction occurred or the principal obligation, as secured by a surety
agreement, was born after the execution of loan documents, such as PN No. FCD-0599-2749.
 Geronimo now excepts from the ruling that the deed of suretyship he executed covered PN No. FCD-
0599-2749 which embodied several export packing loans issued by Asianbank to Gateway. He claims that the
deed only secured the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit
Line. Geronimo describes as absurd the notion that a deed of suretyship would secure a loan obligation contracted
three (3) years after the execution of the surety deed.

Geronimos thesis that the deed in question cannot be accorded prospective application is erroneous. To
be sure, the provisions of the subject deed of suretyship indicate a continuing suretyship. In Fortune Motors
(Phils.) v. Court of Appeals,[19] the Court, citing cases, defined and upheld the validity of a continuing suretyship
in this wise:
x x x Of course, a surety is not bound under any particular principal obligation
until that principal obligation is born. But there is no theoretical or doctrinal
difficulty inherent in saying that the suretyship agreement itself is valid and binding
even before the principal obligation intended to be secured thereby is born, any
more than there would be in saying that obligations which are subject to a condition
precedent are valid and binding before the occurrence of the condition precedent.
Comprehensive or continuing surety agreements are in fact quite
commonplace in present day financial and commercial practice. A bank or
financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected
principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor; with
such suretyship agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation extended
to the principal debtor.[20]

In Dio vs. Court of Appeals,[21] we again had occasion to discourse on continuing

guaranty/suretyship thus:

x x x 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 x x x.
In other jurisdictions, it has been held that the use of particular words and
expressions such as payment of any debt, any indebtedness, any deficiency, or any
sum, or the guaranty of any transaction or money to be furnished the principal
debtor at any time, or on such time that the principal debtor may require, have been
construed to indicate a continuing guaranty. (Emphasis supplied.)

By its nature, a continuing suretyship covers current and future loans, provided that, with respect to future
loan transactions, they are, to borrow from Dio, as cited above, within the description or contemplation of the
contract of guaranty. The Deed of Suretyship Geronimo signed envisaged a continuing suretyship when, by the
express terms of the deed, he warranted payment of the PhP 10 million-Domestic Bills Purchased Line and the
USD 3 million-Omnibus Credit Line, as evidenced by:

x x x 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.[22]

Evidently, under the deed of suretyship, Geronimo undertook to secure all obligations obtained under the
Domestic Bills Purchased Line and Omnibus Credit Line, without any specification as to the period of the loan.
 Geronimos application of Garcia v. Court of Appeals, a case covering two separate loans, denominated
as SWAP Loan and Export Loan, is quite misplaced. There, the Court ruled that the continuing suretyship only
covered the SWAP Loan as it was only this loan that was referred to in the continuing suretyship. The Court wrote
in Garcia:

Particular attention must be paid to the statement appearing on the face of the Indemnity
[Suretyship] Agreement x x x evidenced by those certain loan documents dated April 20,
1982 x x x. From this statement, it is clear that the Indemnity Agreement refers only to the loan
document of April 20, 1982 which is the SWAP loan. It did not include the EXPORT loan. Hence,
petitioner cannot be held answerable for the EXPORT loan.[23] (Emphasis supplied.)

The Indemnity Agreement in Garcia specifically identified loan documents evidencing obligations of the
debtor that the agreement was intended to secure. In the present case, however, the suretyship Geronimo assumed
did not limit itself to a specific loan document to the exclusion of another. The suretyship document merely
mentioned the Domestic Bills Purchased Line and Omnibus Credit Line as evidenced by all notes, drafts x x x
contracted/incurred by [Gateway] in favor of [Asianbank].[24] As explained earlier, such credit facilities are not
loans by themselves. Thus, the Deed of Suretyship was intended to secure future loans for which these facilities
were opened in the first place.

Lest it be overlooked, both the trial and appellate courts found the Omnibus Credit Line referred to in the
Deed of Suretyship as covering the export packing credit loans Asianbank extended to Gateway. We agree with
this factual determination. By the very use of the term omnibus, and in practice, an omnibus credit line refers to
a credit facility whence a borrower may avail of various kinds of credit loans. Defined as such, an omnibus line
is broad enough to refer to or cover an export packing credit loan.

Geronimos allegation that an export packing credit loan is separate and distinct from an omnibus credit
line is but a bare and self-serving assertion bereft of any factual or legal basis. One who alleges something must
prove it: a mere allegation is not evidence.[25] Geronimo has not discharged his burden of proof. His contention
cannot be given any weight.

As a final and major ground for his release as surety, Geronimo alleges that Asianbank repeatedly
extended the maturity dates of the obligations of Gateway without his knowledge and consent. Pressing this point,
he avers that, contrary to the findings of the CA, he did not waive his right to notice of extensions of Gateways
obligations.

Such contention is unacceptable as it glosses over the fact that the waiver to be notified of extensions is
embedded in surety document itself, built in the ensuing provision:

In case of default by any and/or all of the DEBTOR(S) to pay the whole 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. [26] (Emphasis
supplied.)

In light of the above provision, Geronimo verily waived his right to notice of the maturity of notes, drafts,
overdraft, and other credit obligations for which Gateway shall become indebted. This waiver necessarily includes
new agreements resulting from the novation of previous agreements due to changes in their maturity dates.

Additionally, Geronimos lament about losing his right to subrogation is erroneous. He argues that by
virtue of the order of insolvency issued by the insolvency court, title and right to possession to all the properties
and assets of Gateway were vested upon Gateways assignee in accordance with Sec. 32 of the Insolvency Law.

The transfer of Gateways property to the insolvency assignee, if this be the case, does not negate
Geronimos right of subrogation, for such right may be had or exercised in the insolvency proceedings. The
possibility that he may only recover a portion of the amount he is liable to pay is the risk he assumed as a surety
of Gateway. Such loss does not, however, render ineffectual, let alone invalidate, his suretyship.

Geronimos other arguments to escape liability are puerile and really partake more of a plea for liberality.
They need not detain us long. In gist, Geronimo argues: first, that he is a gratuitous surety of Gateway; second,
Asianbank deviated from normal banking practice, such as when it extended the period for payment of Gateways
obligation and when it opted not to foreclose the chattel mortgage constituted as guarantee of Gateways loan
obligation; and third, implementing the appealed CAs decision would cause him great harm and injury.

Anent the first argument, suffice it to state that Geronimo was then the president of Gateway and, as such,
was benefited, albeit perhaps indirectly, by the loan thus granted by Asianbank. And as we said in Security Pacific
Assurance Corporation, the surety is liable for the debt of another although the surety possesses no direct or
personal interest over the obligation nor does the surety receive any benefit from it.[27]

Whether or not Asianbank really deviated from normal banking practice by extending the period for
Gateway to comply with its loan obligation or by not going after the chattel mortgage adverted to is really of no
moment. Banks are primarily in the business of extending loans and earn income from their lending operations
by way of service and interest charges. This is why Asianbank opted to give Gateway ample opportunity to pay
its obligations instead of foreclosing the chattel mortgage and in the process holding on to assets of which the
bank has really no direct use.
The following excerpts from Palmares are in point:

We agree with respondent corporation that its mere failure to immediately sue petitioner
on her obligation does not release her from liability. Where a creditor refrains from proceeding
against the principal, the surety is not exonerated. In other words, mere want of diligence or
forbearance does not affect the creditors rights vis--vis the surety, unless the surety requires him
by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not
discharge the surety whether given at the principals request or without it, and whether it is yielded
by the creditor through sympathy or from an inclination to favor the principal x x x. The neglect
of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even
if such delay continues until the principal becomes insolvent. And, in the absence of proof of
resultant injury, a surety is not discharged by the creditors mere statement that the creditor will not
look to the surety, or that he need not trouble himself. The consequences of the delay, such as the
subsequent insolvency of the principal, or the fact that the remedies against the principal may be
lost by lapse of time, are immaterial.[28]

The Courts Equity Jurisdiction

Finds No Application to the Instant Case
Geronimo urges the Court to release and discharge him from any liability arising from Asianbanks claims if what
he terms as complete justice is to be served. He cites, as supporting reference, Agcaoili v. GSIS,[29] presenting in
the same breath the following arguments: first, the Deed of Suretyship is a gratuitous contract from which he did
not benefit; second, Asianbank assured him that the deed would not be enforced against him; third, the
enforcement of the judgment of the CA would reduce Geronimo and his family to a life of penury; and fourth,
Geronimo would be unable to exercise his right of subrogation, Gateway having already been declared as
insolvent.
The first and last arguments have already been addressed and found to be without merit. The second argument is
a matter of defense which has remained unproved and even belied by Asianbank by its filing of the complaint. We
see no need to further belabor any of them.

As regards the third allegation, suffice it to state that the predicament Geronimo finds himself in is his very own
doing. His misfortune is but the result of the implementation of a bona fide contract he freely executed, the terms
of which he is presumed to have thoroughly examined. He was not at all compelled to act as surety; he had a
choice. It may be more offensive to public policy or good customs if he be allowed to go back on his undertaking
under the surety contract. The Court cannot be a party to the contracts impairment and relieve a surety from the
effects of an unwise but nonetheless a valid surety contract.
WHEREFORE, the instant petition is hereby DENIED. The appealed Decision dated October 28, 2005 of the
CA and its March 17, 2006 Resolution in CA-G.R. CV No. 80734 are hereby AFFIRMED with the modification
that any claim of Asianbank or its successor-in-interest against Gateway, if any, arising from the judgment in this
suit shall be pursued before the RTC, Branch 22 in Imus, Cavite as the insolvency court.
Costs against petitioners.
SO ORDERED.
 SECOND DIVISION
[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.
DECISION
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:
"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, x x x
'
"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.[6]
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 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.[7] 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 x x x (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 x x 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; x x x
" (Italics Ours)
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:
'x x x 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, x x x , 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;" (Italics 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 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:
"x x x 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." (Italics 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.
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. 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 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-F11 (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 Undertaking12executed 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 contract15 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 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
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.
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 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 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 SOB54 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.
…
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. Tañedo 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
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:
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 latter67 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.
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.
 SECOND DIVISION
[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 Equitable-Philippine
Commercial International Bank or E-PCIB) filed a case for collection of a sum of money[1] 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).
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, petitioners-spouses filed their Answer.
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 dismiss[4] 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 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.
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.
INTERNATIONAL FINANCE G.R. No. 160324
CORPORATION,
Petitioner, Present:
Panganiban, J.,
Chairman,
- versus - Sandoval-Gutierrez,*
Corona,
Carpio Morales, and
Garcia, JJ
IMPERIAL TEXTILE MILLS, Promulgated:
INC.,**
Respondent. November 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

T 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 Review[1] under Rule 45 of the Rules of Court, assailing the February 28, 2002
Decision[2] and September 30, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 58471. The
challenged Decision disposed as follows:

WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court
is MODIFIED to read as follows:

1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner]

International Finance Corporation, the following amounts:

(a) US$2,833,967.00 with accrued interests as provided in the Loan

Agreement;

(b) Interest of 12% per annum on accrued interest, which shall be counted
from the date of filing of the instant action up to the actual payment;

(c) 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 semi-annually on June 1 and December 1 in
each year and interest for any period less than a year shall accrue and be pro-rated on the basis of
a 360-day year of twelve 30-day months.

On December 17, 1974, a Guarantee Agreement was executed with x x x Imperial Textile
Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties thereto.
ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement.

PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The
payments due on December 1, 1978, June 1, 1979 and December 1, 1979 were rescheduled as
requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC
defaulted. Hence, on April 1, 1985, IFC served a written notice of default to PPIC demanding the
latter to pay the outstanding principal loan and all its accrued interests. Despite such notice, PPIC
failed to pay the loan and its interests.

By virtue of 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 Grandtex[11] are sureties and therefore, jointly and severally liable with
PPIC, for the payment of the loan.

II. Whether or not the Petition raises a question of law.

III. Whether or not the Petition raises a theory not raised in the lower court.[12]
 The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the
loan.

The 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 guarantor[16] 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 Agreed to by ITM

While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was jointly
and severally liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a
primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents
and purposes, it was a surety.
 Indubitably therefore, ITM bound itself to be solidarily[21]liable with PPIC for the 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.

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 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.
 SECOND DIVISION

SALVADOR P. ESCAO G. R. No. 151953

and MARIO M. SILOS,
Petitioners,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
RAFAEL ORTIGAS, JR., VELASCO, JR., JJ.
Respondent.
Promulgated:

June 29, 2007

x---------------------------------------------------------------------------------x

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 other[5] by petitioner Mario M. Silos
(Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, an agreement developed to cede control of Falcon to 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 Judgment[12] dated 6 January 1994.

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 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
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.

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 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.

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 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.
 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.
G.R. No. L-49401 July 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO
CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.

DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge dated October 6, 1978 and November 7, 1978 in
Civil Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filed by private
respondent to dismiss the complaint of petitioner for a sum of money, on the ground that the complaint states no
cause of action as against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a manifestation and motion
requesting the special civil action for certiorari be treated as a petition for review. 1 Said manifestation and
motion was noted in the resolution of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a comprehensive surety
agreements 3 to guaranty among others, any existing indebtedness of Davao Agricultural Industries Corporation
(referred to therein as Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time
to time thereafter, to make loans or advances or to extend credit in other manner to, or at the request, or for the
account of the Borrower, either with or without security, and/or to purchase on discount, or to make any loans
or advances evidenced or secured by any notes, bills, receivables, drafts, acceptances, checks or other evidences
of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable,
provided that the liability shall not exceed at any one time the aggregate principal sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in favor of petitioner payable
on June 13, 1977. Said note was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor. The
promissory note was not fully paid despite repeated demands; hence, on June 30, 1978, petitioner filed a
complaint for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated
September 23, 1978 was filed by respondent Residoro Chua on the ground that the complaint states no cause of
action as against him. 5 It was alleged in the motion that he can not be held liable under the promissory note
because it was only Enrique Go, Sr. who signed the same in behalf of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the execution of the
comprehensive surety agreement, private respondent is liable because said agreement covers not merely the
promissory note subject of the complaint, but is continuing; and it encompasses every other indebtedness the
Borrower may, from time to time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision granting private respondent's motion to dismiss the
complaint. 7 Petitioner filed a motion for reconsideration dated October 12, 1978 and on November 7, 1978
respondent court issued an order denying the said motion. 8
The sole issue resolved by respondent court was the interpretation of the comprehensive surety agreement,
particularly in reference to the indebtedness evidenced by the promissory note involved in the instant case, said
comprehensive surety agreement having been signed by Enrique Go, Sr. and private respondent, binding
themselves as solidary debtors of said corporation not only to existing obligations but to future ones.
Respondent court said that corollary to that agreement must be another instrument evidencing the obligation in a
form of a promissory note or any other evidence of indebtedness without which the said agreement serves no
purpose; that since the promissory notes, which is primarily the basis of the cause of action of petitioner, is not
signed by private respondent, the latter can not be liable thereon.
Contesting the aforecited decision and order of respondent judge, the present petition was filed before this Court
assigning the following as errors committed by respondent court:
1. That the respondent court erred in dismissing the complaint against Chua simply on the
reasons that 'Chua is not a signatory to the promissory note" of April 29, 1977, or that Chua
could not be held liable on the note under the provisions of the comprehensive surety agreement
of October 29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of the Comprehensive Surety
Agreement towards the conclusion that respondent Chua is not liable on the promissory note
because said note is not conformable to the Comprehensive Surety Agreement; and/or
3. That the respondent court erred in ordering that there is no cause of action against respondent
Chua in the petitioner's complaint.
The main issue involved in this case is whether private respondent is liable to pay the obligation evidence by the
promissory note dated April 29,1977 which he did not sign, in the light of the provisions of the comprehensive
surety agreement which petitioner and private respondent had earlier executed on October 19, 1976.
We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua and
Enrique Go, Sr., President and General Manager, respectively of Daicor, on October 19, 1976 to cover existing
as well as future obligations which Daicor may incur with the petitioner bank, subject only to the proviso that
their liability shall not exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I of
the agreement provides:
For and in consideration of any existing indebtedness to you of Davao Agricultural Industries
Corporation with principal place of business and postal address at 530 J. P. Cabaguio Ave.,
Davao City (hereinafter called the "Borrower), and/or 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 he request or for the account of the Borrower, either with or without
security, and/or to purchase or discount or to make any loans or advances evidenced or secured
by any notes, bills, receivables, drafts, acceptances, checks or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become
liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to guarantee, and does
hereby guarantee in joint and several capacity, the punctual payment at maturity 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 an such instruments or other indebtedness or obligations hereinbefore
referred to ..., provided, however, that the liability of the undersigned shag not exceed at any one
time the aggregate principal sum of P100,000.00 ...
The agreement was executed obviously to induce petitioner to grant any application for a loan Daicor may
desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full force and
effect until the bank is notified of its termination.
This is a continuing guaranty and shall remain in fun force and effect until written notice shall
have been received by you that it has been revoked by the undersigned, ... 9
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an
additional capital for buying and selling coco-shell charcoal and importation of activated carbon, 10 the
comprehensive surety agreement was admittedly in full force and effect. The loan was, therefore, covered by
the said agreement, and private respondent, even if he did not sign the promisory note, is liable by virtue of the
surety agreement. The only condition that would make him liable thereunder is that the Borrower "is or may
become liable as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the
promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory
obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as
evidenced by a promissory note. What obviously induced petitioner bank to grant the loan was the surety
agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can be clearly seen that the surety agreement was executed to
guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code.
Thus —
Article 2053. — 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.
In view of the foregoing, the decision (which should have been a mere "order"), dismissing the complaint is
reversed and set side. The case is remanded to the court of origin with instructions to set aside the motion to
dismiss, and to require defendant Residoro Chua to answer the complaint after which the case shall proceed as
provided by the Rules of Court. No costs.
SO ORDERED.
 G.R. No. 89775 November 26, 1992
JACINTO UY DIÑO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND TRUST COMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R. CV No. 17724 1 which reversed the
2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collection suit
entitled "Metropolitan Bank and Trust Company vs. Uy Tiam, doing business under the name of "UY TIAM
ENTERPRISES & FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" and docketed as Civil Case No.
82-9303. They likewise challenge public respondent's Resolution of 21 August 1989 2 denying their motion for
the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services (hereinafter referred to as
UTEFS), thru its representative Uy Tiam, applied for and obtained credit accommodations (letter of
credit and trust receipt accommodations) from the Metropolitan Bank and Trust Company (hereinafter
referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure the
aforementioned credit accommodations Norberto Uy and Jacinto Uy Diño executed separate Continuing
Suretyships (Exhibits "E" and "F" respectively), dated 25 February 1977, in favor of the latter. Under the
aforesaid agreements, Norberto Uy agreed to pay METROBANK any indebtedness of UTEFS up to the
aggregate sum of P300,000.00 while Jacinto Uy Diño agreed to be bound up to the aggregate sum of
P800,000.00.
Having paid the obligation under the above letter of credit in 1977, UTEFS, through Uy Tiam,
obtained another credit accommodation from METROBANK in 1978, which credit accommodation was
fully settled before an irrevocable letter of credit was applied for and obtained by the abovementioned
business entity in 1979 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815,
600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It was
applied for and obtain by UTEFS without the participation of Norberto Uy and Jacinto Uy Diño as they
did not sign the document denominated as "Commercial Letter of Credit and Application." Also, they
were not asked to execute any suretyship to guarantee its payment. Neither did METROBANK nor
UTEFS inform them that the 1979 Letter of Credit has been opened and the Continuing Suretyships
separately executed in February, 1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p.
28).
The 1979 letter of credit (Exhibit "B") was negotiated. METROBANK paid Planters Products
the amount of P815,600.00 which payment was covered by a Bill of Exchange (Exhibit "C"), dated 4
June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed and delivered to METROBANK
and Trust Receipt (Exh. "D"), dated 4 June 1979, whereby the former acknowledged receipt in trust
from the latter of the aforementioned goods from Planters Products which amounted to P815, 600.00.
Being the entrusted, the former agreed to deliver to METROBANK the entrusted goods in the event of
non-sale or, if sold, the proceeds of the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations in the trust receipt. As a
consequence, METROBANK sent letters to the said principal obligor and its sureties, Norberto Uy and
Jacinto Uy Diño, demanding payment of the amount due. Informed of the amount due, UTEFS made
partial payments to the Bank which were accepted by the latter.
Answering one of the demand letters, Diño, thru counsel, denied his liability for the amount
demanded and requested METROBANK to send him copies of documents showing the source of his
liability. In its reply, the bank informed him that the source of his liability is the Continuing Suretyship
which he executed on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held liable for the 1979 credit accommodation
because it is a new obligation contracted without his participation. Besides, the 1977 credit
accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Diño and Uy and finding resort to extrajudicial
remedies to be futile, METROBANK filed a complaint for collection of a sum of money (P613,339.32,
as of January 31, 1982, inclusive of interest, commission penalty and bank charges) with a prayer for the
issuance of a writ of preliminary attachment, against Uy Tiam, representative of UTEFS and impleaded
Diño and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the attachment writ, which writ was
returned unserved and unsatisfied as defendant Uy Tiam was nowhere to be found at his given address
and his commercial enterprise was already non-operational (Original Records, p. 37).
 On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant herein) filed a motion
to dismiss the complaint on the ground of lack of cause of action. They maintained that the obligation
which they guaranteed in 1977 has been extinguished since it has already been paid in the same year.
Accordingly, the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy Tiam's
Letter of Credit obtained in 1979 because a guaranty cannot exist without a valid obligation. It was
further argued that they can not be held liable for the obligation contracted in 1979 because they are not
privies thereto as it was contracted without their participation (Records, pp. 42-46).
On April 24, 1984, METROBANK filed its opposition to the motion to dismiss. Invoking the
terms and conditions embodied in the comprehensive suretyships separately executed by sureties-
defendants, the bank argued that sureties-movants bound themselves as solidary obligors of defendant
Uy Tiam to both existing obligations and future ones. It relied on Article 2053 of the new Civil Code
which provides: "A guaranty may also be given as security for future debts, the amount of which is not
yet known; . . . ." It was further asserted that the agreement was in full force and effect at the time the
letter of credit was obtained in 1979 as sureties-defendants did not exercise their right to revoke it by
giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was held in abeyance pending the
introduction of evidence by the parties as per order dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of the order dated March 7, 1986
within which to file the answer, sureties-defendants filed their responsive pleading which merely
rehashed the arguments in their motion to dismiss and maintained that they are entitled to the benefit of
excussion (Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the complaint against defendant Uy
Tiam on the ground that it has no information as to the heirs or legal representatives of the latter who
died sometime in December, 1986, which motion was granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the obligation contracted
by Uy Tiam under the Letter of Credit (Exh. B) issued on March 30, 1987 by virtue of the
Continuing Suretyships they executed on February 25, 1977?
Under the admitted proven facts, the Court finds that they are not.
a) When Uy and Diño executed the continuing suretyships, exhibits E and F, on February
25, 1977, Uy Tiam was obligated to the plaintiff in the amount of P700,000.00 — and
this was the obligation which both obligation which both defendants guaranteed to pay.
Uy Tiam paid this 1977 obligation –– and such payment extinguished the obligation they
assumed as guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which
covered the 1977 account of Uy Tiam. Thus, the obligation under either is apart and
distinct from the obligation created in the other — as evidenced by the fact that Uy Tiam
had to apply anew for the 1979 transaction (Exh. A). And Diño and Uy, being strangers
thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Diño and Uy when it extended to
Credit — at least to inform them that the continuing suretyships they executed on
February 25, 1977 will be considered by the plaintiff to secure the 1979 transaction of Uy
Tiam.
d) There is no sufficient and credible showing that Diño and Uy were fully informed of
the import of the Continuing Suretyships when they affixed their signatures thereon ––
that they are thereby securing all future obligations which Uy Tiam may contract the
plaintiff. On the contrary, Diño and Uy categorically testified that they signed the blank
forms in the office of Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to
the instruction of Uy Tiam, their former employer. They denied having gone to the office
of the plaintiff to subscribe to the documents (October 1, 1987, tsn, pp. 5-7, 14; October
15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIÑO and NORBERTO UY;
b) ordering the plaintiff to pay to Diño and Uy the amount of P6,000.00 as attorney's fees and
expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or factual basis.
SO ORDERED. (Records, p. 336) 4
From the said Decision, the private respondent appealed to the Court of Appeals. The case was docketed as CA-
G.R. CV No. 17724. In support thereof, it made the following assignment of errors in its Brief:
 I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING AND HOLDING THAT
DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO UY ARE
SOLIDARILY LIABLE TO PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979
BY VIRTUE OF THE CONTINUING SURETYSHIPS THEY EXECUTED ON FEBRUARY
25, 1977.
II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF-APPELLANT IS
ANSWERABLE TO DEFENDANTS-APPELLEES JACINTO UY DIÑO AND NORBERTO
UY FOR ATTORNEY'S FEES AND EXPENSES OF LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED AND
SET, ASIDE. In lieu thereof, another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly
and severally, to appellant METROBANK the amount of P2,397,883.68 which
represents the amount due as of July 17, 1987 inclusive of principal, interest and
charges;
2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly
and severally, appellant METROBANK the accruing interest, fees and charges
thereon from July 18, 1987 until the whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy to pay, jointly
and severally, to plaintiff P20,000.00 as attorney's fees.
With costs against appellees.
SO ORDERED. 6
In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the
Continuing Suretyship Agreements separately executed by the petitioners in 1977 were intended to guarantee
payment of Uy Tiam's outstanding as well as future obligations; each suretyship arrangement was intended to
remain in full force and effect until METROBANK would have been notified of its revocation. Since no such
notice was given by the petitioners, the suretyships are deemed outstanding and hence, cover even the 1979
letter of credit issued by METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision. They questioned the public respondent's
construction of the suretyship agreements and its ruling with respect to the extent of their liability thereunder.
They argued the even if the agreements were in full force and effect when METROBANK granted Uy Tiam's
application for a letter of credit in 1979, the public respondent nonetheless seriously erred in holding them liable
for an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the motion:
. . . considering that the issues raised were substantially the same grounds utilized by the lower
court in rendering judgment for defendants-appellees which We upon appeal found and resolved
to be untenable, thereby reversing and setting aside said judgment and rendering another in favor
of plaintiff, and no new or fresh issues have been posited to justify reversal of Our decision
herein, . . . . 7
Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as
sureties for the obligation contracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of
the Continuing Suretyship Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the Continuing Suretyship Agreements were
automatically extinguished upon payment of the principal obligation secured thereby, i.e., the letter of credit
obtained by Uy Tiam in 1977. They further claim that they were not advised by either METROBANK or Uy
Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation. Moreover, it
is posited that to extend the application of such agreements to the 1979 obligation would amount to a violation
of Article 2052 of the Civil Code which expressly provides that a guaranty cannot exist without a valid
obligation. Petitioners further argue that even granting, for the sake of argument, that the Continuing Suretyship
Agreements still subsisted and thereby also secured the 1979 obligations incurred by Uy Tiam, they cannot be
held liable for more than what they guaranteed to pay because it s axiomatic that the obligations of a surety
cannot extend beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to the petition after considering the allegations,
issues and arguments adduced therein, the Comment thereon by the private respondent and the Reply thereto by
the petitioners; the parties were required to submit their respective Memoranda.
The issues presented for determination are quite simple:
1. Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in
1977; and
2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not
known at the time the guaranty is
executed. 8 This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing
guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its
operation and is generally intended to provide security with respect to future transactions within certain limits,
and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable.9 Otherwise
stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which
are within the description or contemplation of the contract, of guaranty, until the expiration or termination
thereof. 10 A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is
to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain
period, especially if the right to recall the guaranty is expressly reserved. Hence, where the contract of guaranty
states that the same is to secure advances to be made "from time to time" the guaranty will be construed to be a
continuing one. 11
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of "any
debt," "any indebtedness," "any deficiency," or "any sum," or the guaranty of "any transaction" or money to be
furnished the principal debtor "at any time," or "on such time" that the principal debtor may require, have been
construed to indicate a continuing guaranty. 12
In the case at bar, the pertinent portion of paragraph I of the suretyship agreement executed by petitioner Uy
provides thus:
I. For and in consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter
called the "Borrower"), for the payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the BANK, in its discretion, at any
time or from time to time hereafter, to make loans or advances or to extend credit in any other
manner to, or at the request, or for the account of the Borrower, either with or without security,
and/or to purchase or discount, or to make any loans or advances evidence or secured by any
notes, bills, receivables, drafts, acceptances, checks, or other instruments or evidences of
indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become
liable as maker, endorser, acceptor, or otherwise, the SURETY agrees to guarantee, and does
hereby guarantee, the punctual payment at maturity to the loans, advances credits and/or other
obligations hereinbefore referred to, and also any and all other indebtedness of every kind which
is now or may hereafter become due or owing to the BANK by the Borrower, together with any
and all expenses which may be incurred by the BANK in collecting all or any such instruments
or other indebtedness or obligations herein before referred to, and/or in enforcing any rights
hereunder, and the SURETY also agrees that the BANK may make or cause any and all such
payments to be made strictly in accordance with the terms and provisions of any agreement(s)
express or implied, which has (have) been or may hereafter be made or entered into by the
Borrow in reference thereto, regardless of any law, regulation or decree, unless the same is
mandatory and non-waivable in character, nor or hereafter in effect, which might in any manner
affect any of the terms or provisions of any such agreement(s) or the Bank's rights with respect
thereto as against the Borrower, or cause or permit to be invoked any alteration in the time,
amount or manner of payment by the Borrower of any such instruments, obligations or
indebtedness; provided, however, that the liability of the SURETY hereunder shall not exceed at
any one time the aggregate principal sum of PESOS: THREE HUNDRED THOUSAND ONLY
(P300,000.00) (irrespective of the currenc(ies) in which the obligations hereby guaranteed are
payable), and such interest as may accrue thereon either before or after any maturity(ies) thereof
and such expenses as may be incurred by the BANK as referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by petitioner Diño contains identical provisions
except with respect to the guaranteed aggregate principal amount which is EIGHT THOUSAND PESOS
(P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and effect until written notice
shall have been received by the BANK that it has been revoked by the SURETY, but any such
notice shall not release the SURETY, from any liability as to any instruments, loans, advances or
other obligations hereby guaranteed, which may be held by the BANK, or in which the BANK
may have any interest at the time of the receipt (sic) of such notice. No act or omission of any
kind on the BANK'S part in the premises shall in any event affect or impair this guaranty, nor
shall same (sic) be affected by any change which may arise by reason of the death of the
SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any
such partnership of any one or more new partners. 15
The foregoing stipulations unequivocally reveal that the suretyship agreement in the case at bar are continuing
in nature. Petitioners do not deny this; in fact, they candidly admitted it. Neither have they denied the fact that
they had not revoked the suretyship agreements. Accordingly, as correctly held by the public respondent:
Undoubtedly, the purpose of the execution of the Continuing Suretyships was to induce appellant
to grant any application for credit accommodation (letter of credit/trust receipt) UTEFS may
desire to obtain from appellant bank. By its terms, each suretyship is a continuing one which
shall remain in full force and effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained from appellant bank, for
the purpose of obtaining goods (covered by a trust receipt) from Planters Products, the
continuing suretyships were in full force and effect. Hence, even if sureties-appellees did not
sign the "Commercial Letter of Credit and Application, they are still liable as the credit
accommodation (letter of credit/trust receipt) was covered by the said suretyships. What makes
them liable thereunder is the condition which provides that the Borrower "is or may become
liable as maker, endorser, acceptor or otherwise." And since UTEFS which (sic) was liable as
principal obligor for having failed to fulfill the obligatory stipulations in the trust receipt, they as
insurers of its obligation, are liable thereunder. 16
Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the
1979 obligation because the latter was not yet in existence when the agreements were executed in 1977; under
Article 2052 of the Civil Code, a guaranty "cannot exist without a valid obligation." We cannot agree. First of
all, the succeeding article provides that "[a] guaranty may also be given as security for future debts, the amount
of which is not yet known." Secondly, Article 2052 speaks about a valid obligation, as distinguished from
a void obligation, and not an existing or current obligation. This distinction is made clearer in the second
paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee a natural obligation.
As to the amount of their liability under the Continuing Suretyship Agreements, petitioners contend that the
public respondent gravely erred in finding them liable for more than the amount specified in their respective
agreements, to wit: (a) P800,000.00 for petitioner Diño and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be determined from the suretyship agreement each had
signed. It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule
is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the
extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no
farther. 17
Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the aggregate
amount of their liability, at any given time, at P800,000.00 and P300,000.00, respectively. The law is clear that
a guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount
and the onerous nature of the conditions. 18 In the case at bar, both agreements provide for liability for interest
and expenses, to wit:
. . . and such interest as may accrue thereon either before or after any maturity(ies) thereof and
such expenses as may be incurred by the BANK referred to above.19
They further provide that:
In the event of judicial proceedings being instituted by the BANK against the SURETY to
enforce any of the terms and conditions of this undertaking, the SURETY further agrees to pay
the BANK a reasonable compensation for and as attorney's fees and costs of collection, which
shall not in any event be less than ten per cent (10%) of the amount due (the same to be due and
payable irrespective of whether the case is settled judicially or extrajudicially). 20
Thus, by express mandate of the Continuing Suretyship Agreements which they had signed, petitioners
separately bound themselves to pay interest, expenses, attorney's fees and costs. The last two items are
pegged at not less than ten percent (10%) of the amount due.
Even without such stipulations, the petitioners would, nevertheless, be liable for the interest and judicial costs.
Article 2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and cannot extend to more than what
is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal obligation, but also all its
accessories, including the judicial costs, provided with respect to the latter, that the guarantor
shall only be liable for those costs incurred after he has been judicially required to pay.
Interest and damages are included in the term accessories. However, such interest should run only from
the date when the complaint was filed in court. Even attorney's fees may be imposed whenever
appropriate, pursuant to Article 2208 of the Civil Code. Thus, in Plaridel Surety & Insurance Co.,
Inc. vs. P.L. Galang Machinery Co., Inc., 22 this Court held:
 Petitioner objects to the payment of interest and attorney's fees because: (1) they were not
mentioned in the bond; and (2) the surety would become liable for more than the amount stated
in the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the year 1922 this Court held in
Tagawa vs. Aldanese, 43 Phil. 852, that creditors suing on a suretyship bond may recover from
the surety as part of their damages, interest at the legal rate even if the surety would thereby
become liable to pay more than the total amount stipulated in the bond. The theory is that interest
is allowed only by way of damages for delay upon the part of the sureties in making payment
after they should have done so. In some states, the interest has been charged from the date of the
interest has been charged from the date of the judgment of the appellate court. In this
jurisdiction, we rather prefer to follow the general practice, which is to order that interest begin
to run from the date when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure which was subsequently
recognized in the Rules of Court (Rule 53, section 6) and with Article 1108 of the Civil Code
(now Art. 2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of the contract, but by reason of
its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to
obtain payment. It should be observed that interest does not run from the time the obligation
became due, but from the filing of the complaint.
As to attorney's fees. Before the enactment of the New Civil Code, successful litigants could not
recover attorney's fees as part of the damages they suffered by reason of the litigation. Even if
the party paid thousands of pesos to his lawyers, he could not charge the amount to his opponent
(Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees in eleven cases enumerated in
Article 2208, among them, "where the court deems it just and equitable that attorney's (sic) fees
and expenses of litigation should be recovered" or "when the defendant acted in gross and
evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim."
This gives the courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to
MERTOBANK under Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979. In referring to the
last demand letter to Mr. Uy Tiam and the complaint filed in Civil Case No. 82-9303, the public respondent
mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interest commission penalty and
bank charges." 23This is the same amount stated by METROBANK in its Memorandum. 24 However, in
summarizing Uy Tiam's outstanding obligation as of 17 July 1987, public respondent states:
Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding
obligation in the sum of P2,397,883.68 (as of July 17, 1987) — P651,092.82 representing the
principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32, for
penalty charges at 12%per annum (5-31-82 to 7-17-87) as shown in the Statement of Account
(Exhibit I). 25
Since the complaint was filed on 18 May 1982, it is obvious that on that date, the outstanding principal
obligation of Uy Tiam, secured by the petitioners' Continuing Suretyship Agreements, was less than
P613,339.32. Such amount may be fully covered by the Continuing Suretyship Agreement executed by
petitioner Diño which stipulates an aggregate principal sum of not exceeding P800,000.00, and partly
covered by that of petitioner Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have to be modified to conform to the foregoing
exposition, to which extent the instant petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar as the challenged decision has to be modified
with respect to the extend of petitioners' liability. As modified, petitioners JACINTO UY DIÑO and
NORBERTO UY are hereby declared liable for and are ordered to pay, up to the maximum limit only of their
respective Continuing Suretyship Agreement, the remaining unpaid balance of the principal obligation of UY
TIAM or UY TIAM ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter of Credit No. SN-Loc-
309, dated 30 March 1979, together with the interest due thereon at the legal rate commencing from the date of
the filing of the complaint in Civil Case No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as
well as the adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged decision not inconsistent with the above are
affirmed.
SO ORDERED.
 SECOND DIVISION
[G.R. No. 103066. April 25, 1996]
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs. HON. COURT OF APPEALS and
INTERNATIONAL CORPORATE BANK, respondents.
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; FAILURE TO OBJECT TO THE
PRESENTATION OF PAROL EVIDENCE CONSTITUTES A WAIVER THEREOF. - It has been
held that explanatory evidence may be received to show the circumstances under which a document has been
made and to what debt it relates. At all events, Willex Plastic cannot now claim that its liability is limited to
any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as debtor because, by
failing to object to the parol evidence presented, Willex Plastic waived the protection of the parol evidence
rule.
2. ID.; ID.; FINDINGS OF FACT OF THE TRIAL COURT; RULE; APPLICABLE IN CASE AT
BAR. The trial court found that it was to secure the guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC
to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the defendant
Willex Plastic Industries Corporation. Similarly, the Court of Appeals found it to be an undisputed fact that
to secure the guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation granted to
Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendant-appellant to sign a Continuing
Guaranty. These factual findings of the trial court and of the Court of Appeals are binding on us not only
because of the rule that on appeal to the Supreme Court such findings are entitled to great weight and respect
but also because our own examination of the record of the trial court confirms these findings of the two
courts.
3. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; THE CONSIDERATION NECESSARY TO
SUPPORT A SURETY OBLIGATION NEED NOT PASS DIRECTLY TO THE SURETY, A
CONSIDERATION MOVING TO THE PRINCIPAL ALONE IS SUFFICIENT. - Willex Plastic
argues that the Continuing Guaranty, being an accessory contract, cannot legally exist because of the absence
of a valid principal obligation. Its contention is based on the fact that it is not a party either to the Continuing
Surety Agreement or to the loan agreement between Manilabank and Inter-Resin Industrial. Put in another
way the consideration necessary to support a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary
that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.
4. ID.; ID.; ID.; ALTHOUGH A CONTRACT OF SURETY IS ORDINARILY NOT TO BE
CONSTRUED AS RETROSPECTIVE, IN THE END THE INTENTION OF THE PARTIES AS
REVEALED BY THE EVIDENCE IS CONTROLLING. - Willex Plastic contends that the Continuing
Guaranty cannot be retroactively applied so as to secure the payments made by Interbank under the two
Continuing Surety Agreements. Willex Plastic invokes the ruling in El Vencedor v. Canlas (44 Phil. 699
[1923]) and Dio v. Court of Appeals (216 SCRA 9 [1992]) in support of its contention that a contract of
suretyship or guaranty should be applied prospectively. The cases cited are, however, distinguishable from
the present case. In El Vencedor v. Canlas we held that a contract of suretyship is not retrospective and no
liability attaches for defaults occurring before it is entered into unless an intent to be so liable is
indicated. There we found nothing in the contract to show that the parties intended the surety bonds to answer
for the debts contracted previous to the execution of the bonds. In contrast, in this case, the parties to the
Continuing Guaranty clearly provided that the guaranty would cover sums obtained and/or to be obtained by
Inter-Resin Industrial from Interbank. On the other hand, in Dio v. Court of Appeals the issue was whether
the sureties could be held liable for an obligation contracted after the execution of the continuing surety
agreement. It was held that by its very nature a continuing suretyship contemplates a future course of dealing.
It is prospective in its operation and is generally intended to provide security with respect to future
transactions. By no means, however, was it meant in that case that in all instances a contract of guaranty or
suretyship should be prospective in application. Indeed, as we also held in Bank of the Philippine Islands v.
Foerster, (49 Phil. 843 [1926]) although a contract of suretyship is ordinarily not to be construed as
retrospective, in the end the intention of the parties as revealed by the evidence is controlling. What was said
there applies mutatis mutandis to the case at bar: In our opinion, the appealed judgment is erroneous. It is
very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but
that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not
interfere with the use of the ordinary tests and canons of interpretation which apply in regard to other
contracts. In the present case the circumstances so clearly indicate that the bond given by Echevarria was
intended to cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that
we cannot possibly adopt the view of the court below in regard to the effect of the bond.
APPEARANCES OF COUNSEL
Tangle-Chua, Cruz & Aquino for petitioner.
 Fe B. Macalino & Associates for respondent Interbank.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision[1] of the Court of Appeals in C.A.-G.R. CV No.
19094, affirming the decision of the Regional Trial Court of the National Capital Judicial Region, Branch XLV,
Manila, which ordered petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial Corporation,
jointly and severally, to pay private respondent International Corporate Bank certain sums of money, and the
appellate courts resolution of October 17, 1989 denying petitioners motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking
Corporation. To secure payment of the credit accommodation, Inter-Resin Industrial and the Investment and
Underwriting Corporation of the Philippines (IUCP) executed two documents, both entitled Continuing Surety
Agreement and dated December 1, 1978, whereby they bound themselves solidarily to pay Manilabank
obligations of every kind, on which the [Inter-Resin Industrial] may now be indebted or hereafter become indebted
to the [Manilabank]. The two agreements (Exhs. J and K) are the same in all respects, except as to the limit of
liability of the surety, the first surety agreement being limited to US$333,830.00, while the second one is limited
to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp., executed a Continuing
Guaranty in favor of IUCP whereby For and in consideration of the sum or sums obtained and/or to be obtained
by Inter-Resin Industrial Corporation from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally
guaranteed the prompt and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S . . . to the
extent of the aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such
interests, charges and penalties as hereafter may be specified.
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of P4,334,280.61
representing Inter-Resin Industrials outstanding obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium
Capital Corp., which in the meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex
Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid, Atrium filed
this case in the court below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn succeeded Atrium, the sum of
P687,500.00 representing the proceeds of its fire insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the Continuing Guaranty was intended to secure payment
to Atrium of the amount of P4,334,280.61 which the latter had paid to Manilabank. It claimed, however, that it
had already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint and interposed the
following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the formers liability is extinguished due to
the accidental fire that destroyed its premises, which liability is covered by sufficient insurance assigned to
plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its account is now very much
lesser than those stated in the complaint because of some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WILLEX is only a guarantor of the principal obligor, and thus, its liability is only secondary to that of the
principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the principal obligor;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the right to present evidence
for its failure to appear at the hearing despite due notice. On the other hand, Willex Plastic rested its case without
presenting any evidence. Thereafter Interbank and Willex Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly
and severally to pay to Interbank the following amounts:
(a) P3,646,780.61, representing their indebtedness to the plaintiff, with interest of 17% per annum from August
11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 17% of the amount due; and
(c) Attorneys fees and expenses of litigation equivalent to 20% of the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its brief, while
Inter-Resin Industrial presented a Motion to Conduct Hearing and to Receive Evidence to Resolve Factual Issues
and to Defer Filing of the Appellants Brief. After its motion was denied, Inter-Resin Industrial did not file its brief
anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling of the trial court.
 Willex Plastic filed a motion for reconsideration praying that it be allowed to present evidence to show that
Inter-Resin Industrial had already paid its obligation to Interbank, but its motion was denied on December 6,
1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin Industrials motion for
reception of evidence because the situation or situations in which we could exercise the power under B.P. 129
did not exist. Movant here has not presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the resolution
of December 6,1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the Continuing Guaranty signed on April 2, 1979 petitioner Willex
Plastic may be held jointly and severally liable with Inter-Resin Industrial for the amount paid by Interbank to
Manilabank.
As already stated, the amount had been paid by Interbanks predecessor-in-interest, Atrium Capital, to
Manilabank pursuant to the Continuing Surety Agreements made on December 1, 1978. In denying liability to
Interbank for the amount, Willex Plastic argues that under the Continuing Guaranty, its liability is for sums
obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank for the account
of Inter-Resin Industrial. In support of this contention Willex Plastic cites the following portion of the Continuing
Guaranty:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL
CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be
evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter
referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/or
your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by
the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and
penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that evidence aliunde was
introduced in the trial court to explain that it was actually to secure payment to Interbank (formerly IUCP) of
amounts paid by the latter to Manilabank that the Continuing Guaranty was executed. In its complaint below,
Interbanks predecessor-in-interest. Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC
[Inter-Resin Industrial] by Manilabank, the plaintiff required defendant IRIC [Inter-Resin Industrial]
to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the other
defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it had already paid its
obligation in its entirety. On the other hand, Willex Plastic, while denying the allegation in question, merely did
so for lack of knowledge or information of the same. But, at the hearing of the case on September 16, 1986, when
asked by the trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex
Plastics counsel replied in the negative and manifested that the plaintiff in this case [Interbank] is the guarantor
and my client [Willex Plastic] only signed as a guarantor to the guarantee.[2]
For its part Interbank adduced evidence to show that the Continuing Guaranty had been made to guarantee
payment of amounts made by it to Manilabank and not of any sums given by it as loan to Inter-Resin
Industrial. Interbanks witness testified under cross- examination by counsel for Willex Plastic that Willex
guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later be made because of the
guarantee to Manila Banking Corporation.[3]
It has been held that explanatory evidence may be received to show the circumstances under which a
document has been made and to what debt it relates.[4]At all events, Willex Plastic cannot now claim that its
liability is limited to any amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as
debtor because, by failing to object to the parol evidence presented, Willex Plastic waived the protection of the
parol evidence rule.[5]
Accordingly, the trial court found that it was to secure the guarantee made by plaintiff of the credit
accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff required
defendant IRIC to execute a chattel mortgage in its favor and a Continuing Guaranty which was signed by the
defendant Willex Plastic Industries Corporation.[6]
Similarly, the Court of Appeals found it to be an undisputed fact that to secure the guarantee undertaken by
plaintiff-appellee [Interbank] of the credit accommodation granted to Inter-Resin Industrial by Manilabank,
plaintiff-appellee required defendant-appellants to sign a Continuing Guaranty. These factual findings of the trial
court and of the Court of Appeals are binding on us not only because of the rule that on appeal to the Supreme
Court such findings are entitled to great weight and respect but also because our own examination of the record
of the trial court confirms these findings of the two courts.[7]
 Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums
of money from Interbank. It can reasonably be assumed that Inter-Resin Industrial and Willex Plastic intended to
indemnify Interbank for amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was to secure the aforesaid
guarantee, that INTERBANK required principal debtor IRIC [Inter-Resin Industrial] to execute a chattel
mortgage in its favor, and so a Continuing Guaranty was executed on April 2, 1979 by WILLEX PLASTIC
INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in consideration of the
loan obtained by IRIC [Inter-Resin Industrial].
[2] Willex Plastic argues that the Continuing Guaranty, being an accessory contract, cannot legally exist
because of the absence of a valid principal obligation.[8]Its contention is based on the fact that it is not a party
either to the Continuing Surety Agreement or to the loan agreement between Manilabank and Inter-Resin
Industrial.
Put in another way the consideration necessary to support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being sufficient. For a guarantor or surety is bound by the
same consideration that makes the contract effective between the principal parties thereto. . . . It is never necessary
that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.[9] In an
analogous case,[10] this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having an
additional capital for buying and selling coco-shell charcoal and importation of activated carbon, the
comprehensive surety agreement was admittedly in full force and effect.The loan was, therefore, covered by the
said agreement, and private respondent, even if he did not sign the promissory note, is liable by virtue of the
surety agreement. The only condition that would make him liable thereunder is that the Borrower is or may
become liable as maker, endorser, acceptor or otherwise. There is no doubt that Daicor is liable on the
promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory
obligation, it being dependent upon a principal one which, in this case is the loan obtained by Daicor as
evidenced by a promissory note.
[3] Willex Plastic contends that the Continuing Guaranty cannot be retroactively applied so as to secure the
payments made by Interbank under the two Continuing Surety Agreements. Willex Plastic invokes the ruling m
El Vencedor v. Canlas[11] and Dio v. Court of Appeals[12] in support of its contention that a contract of suretyship
or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor v. Canlas we held that a
contract of suretyship is not retrospective and no liability attaches for defaults occurring before it is entered into
unless an intent to be so liable is indicated. There we found nothing in the contract to show that the parties intended
the surety bonds to answer for the debts contracted previous to the execution of the bonds. In contrast, in this
case, the parties to the Continuing Guaranty clearly provided that the guaranty would cover sums obtained and/or
to be obtained by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the sureties could be held liable for an
obligation contracted after the execution of the continuing surety agreement.
It was held that by its very nature a continuing suretyship contemplates a future course of dealing. It is
prospective in its operation and is generally intended to provide security with respect to future transactions. By
no means, however, was it meant in that case that in all instances a contract of guaranty or suretyship should be
prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster,[13] although a contract of suretyship is
ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence
is controlling. What was said there[14] applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or other contracts of suretyship
are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting
parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of
interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by Echevarria was intended to
cover all of the indebtedness of the Arrocera upon its current account with the plaintiff Bank that we cannot
possibly adopt the view of the court below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without first exhausting all property
of Inter-Resin Industrial. Willex Plastic thus claims the benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
xxxxxxxxx
The pertinent portion of the Continuing Guaranty executed by Willex Plastic and Inter-Resin Industrial in
favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly
proceed against Me/Us without first proceeding against and exhausting DEBTOR/s properties in the same
manner as if all such liabilities constituted My/Our direct and primary obligations. (italics supplied)
This stipulation embodies an express renunciation of the right of excussion. In addition, Willex Plastic bound
itself solidarily liable with Inter-Resin Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL
CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s as may be
evidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter
referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you and/ or
your principal/s, successor/s and assigns the prompt and punctual payment at maturity of the NOTE/S issued by
the DEBTOR/S in your and/or your principal/s, successor/s and assigns favor to the extent of the aggregate
principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges and
penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness to Interbank and that
Willex Plastic should have been allowed by the Court of Appeals to adduce evidence to prove this. Suffice it to
say that Inter-Resin Industrial had been given generous opportunity to present its evidence but it failed to make
use of the same. On the other hand, Willex Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but because of its failure to
appear on that date, the hearing was reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of Willex Plastic, the hearings
on March 12 and 26, 1987 were cancelled and reset for the last time on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued the
following order:
Considering that, as shown by the records, the Court had exerted every earnest effort to cause the service of
notice or subpoena on the defendant Inter-Resin Industrial but to no avail, even with the assistance of the
defendant Willex. . . the defendant Inter-Resin Industrial is hereby deemed to have waived the right to present
its evidence.
On the other hand, Willex Plastic announced it was resting its case without presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order and set the hearing
anew on July 23, 1987. But Inter-Resin Industrial again moved for the postponement of the hearing to August 11,
1987. The hearing was, therefore, reset on September 8 and 22, 1987 but the hearings were reset on October
13,1987, this time upon motion of Interbank. To give Interbank time to comment on a motion filed by Inter-Resin
Industrial, the reception of evidence for Inter-Resin Industrial was again reset on November 17, 26 and December
11, 1987.However, Inter-Resin Industrial again moved for the postponement of the hearing.Accordingly, the
hearing was reset on November 26 and December 11, 1987, with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22, 1988 and
February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still failed to present its evidence, it was
declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however, the hearing was postponed
to March 4, 1988. Again Inter-Resin Industrials counsel did not appear. The trial court, therefore, finally declared
Inter-Resin Industrial to have waived the right to present its evidence. On the other hand, Willex Plastic, as before,
manifested that it was not presenting evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the opportunity of showing
that Inter-Resin Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against the petitioner.
SO ORDERED.
 THIRD DIVISION
[G.R. No. 112191. February 7, 1997]
FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L. RODRIGUEZA, petitioners, vs. THE
HONORABLE COURT OF APPEALS and FILINVEST CREDIT CORPORATION, respondents.
DECISION
PANGANIBAN, J.:
To fund their acquisition of new vehicles (which are later retailed or resold to the general public), car dealers
normally enter into wholesale automotive financing schemes whereby vehicles are delivered by the manufacturer
or assembler on the strength of trust receipts or drafts executed by the car dealers, which are backed up by
sureties. These trust receipts or drafts are then assigned and/or discounted by the manufacturer to/with financing
companies, which assume payment of the vehicles but with the corresponding right to collect such payment from
the car dealers and/or the sureties. In this manner, car dealers are able to secure delivery of their stock-in-trade
without having to pay cash therefor; manufacturers get paid without any receivables/collection problems; and
financing companies earn their margins with the assurance of payment not only from the dealers but also from
the sureties. When the vehicles are eventually resold, the car dealers are supposed to pay the financing companies
-- and the business goes merrily on. However, in the event the car dealer defaults in paying the financing company,
may the surety escape liability on the legal ground that the obligations were incurred subsequent to the execution
of the surety contract?
This is the principal legal question raised in this petition for review (under Rule 45 of the Rules of Court)
seeking to set aside the Decision[1] of the Court of Appeals (Tenth Division)[2] promulgated on September 30,
1993 in CA G.R. CV No. 09136 which affirmed in toto the decision[3] of the Regional Trial Court of Manila -
Branch 11[4] in Civil Case No. 83-21994, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, by ordering the
latter to pay, jointly and severally, the plaintiff the following amounts:
1. The sum of P1,348,033.89, plus interest thereon at the rate of P922.53 per day starting April 1, 1985 until the
said principal amount is fully paid;
2. The amount of P50,000.00 as attorneys fees and another P50,000.00 as liquidated damages; and
3. That the defendants, although spared from paying exemplary damages, are further ordered to pay, in solidum,
the costs of this suit.
Plaintiff therein was the financing company and the defendants the car dealer and its sureties.
The Facts
On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza (Petitioner Rodrigueza)
each executed an undated Surety Undertaking[5]whereunder they absolutely, unconditionally and solidarily
guarantee(d) to Respondent Filinvest Credit Corporation (Respondent Filinvest) and its affiliated and subsidiary
companies the full, faithful and prompt performance, payment and discharge of any and all obligations and
agreements of Fortune Motors (Phils.) Corporation (Petitioner Fortune) under or with respect to any and all such
contracts and any and all other agreements (whether by way of guaranty or otherwise) of the latter with Filinvest
and its affiliated and subsidiary companies now in force or hereafter made.
The following year or on April[6] 5, 1982, Petitioner Fortune, Respondent Filinvest and Canlubang
Automotive Resources Corporation (CARCO) entered into an Automotive Wholesale Financing
Agreement[7] (Financing Agreement) under which CARCO will deliver motor vehicles to Fortune for the purpose
of resale in the latters ordinary course of business; Fortune, in turn, will execute trust receipts over said vehicles
and accept drafts drawn by CARCO, which will discount the same together with the trust receipts and invoices
and assign them in favor of Respondent Filinvest, which will pay the motor vehicles for Fortune. Under the same
agreement, Petitioner Fortune, as trustee of the motor vehicles, was to report and remit proceeds of any sale for
cash or on terms to Respondent Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune, and trust receipts covered by
demand drafts and deeds of assignment were executed in favor of Respondent Filinvest. However, when the
demand drafts matured, not all the proceeds of the vehicles which Petitioner Fortune had sold were remitted to
Respondent Filinvest. Fortune likewise failed to turn over to Filinvest several unsold motor vehicles covered by
the trust receipts. Thus, Filinvest through counsel, sent a demand letter[8] dated December 12, 1983 to Fortune for
the payment of its unsettled account in the amount of P1,302,811.00. Filinvest sent similar demand
letters[9]separately to Chua and Rodrigueza as sureties. Despite said demands, the amount was not paid. Hence,
Filinvest filed in the Regional Trial Court of Manila a complaint for a sum of money with preliminary attachment
against Fortune, Chua and Rodrigueza.
In an order dated September 26, 1984, the trial court declared that there was no factual issue to be resolved
except for the correct balance of defendants account with Filinvest as agreed upon by the parties during pre-
trial.[10] Subsequently, Filinvest presented testimonial and documentary evidence. Defendants (petitioners
herein), instead of presenting their evidence, filed a Motion for Judgment on Demurrer to Evidence[11] anchored
principally on the ground that the Surety Undertakings were null and void because, at the time they were executed,
there was no principal obligation existing. The trial court denied the motion and scheduled the case for reception
of defendants evidence. On two scheduled dates, however, defendants failed to present their evidence, prompting
the court to deem them to have waived their right to present evidence. On December 17, 1985, the trial court
rendered its decision earlier cited ordering Fortune, Chua and Rodrigueza to pay Filinvest, jointly and severally,
the sum of P1,348,033.83 plus interest at the rate of P922.53 per day from April 1, 1985 until fully
paid, P50,000.00 in attorneys fees, another P50,000.00 in liquidated damages and costs of suit.
As earlier mentioned, their appeal was dismissed by the Court of Appeals (Tenth Division) which affirmed in
toto the trial courts decision. Hence, this recourse.
Issues
Petitioners assign the following errors in the appealed Decision:
1. that the Court of Appeals erred in declaring that surety can exist even if there was no existing indebtedness at
the time of its execution.
2. that the Court of Appeals erred when it declared that there was no novation.
3. that the Court of Appeals erred when it declared, that the evidence was sufficient to prove the amount of the
claim.[12]
Petitioners argue that future debts which can be guaranteed under Article 2053 of the Civil Code refer only
to debts existing at the time of the constitution of the guaranty but the amount thereof is unknown, and that a
guaranty being an accessory obligation cannot exist without a principal obligation. Petitioners claim that the
surety undertakings cannot be made to cover the Financing Agreement executed by Fortune, Filinvest and
CARCO since the latter contract was not yet in existence when said surety contracts were entered into.
Petitioners further aver that the Financing Agreement would effect a novation of the surety contracts since it
changed the principal terms of the surety contracts and imposed additional and onerous obligations upon the
sureties.
Lastly, petitioners claim that no accounting of the payments made by Petitioner Fortune to Respondent
Filinvest was done by the latter. Hence, there could be no way by which the sureties can ascertain the correct
amount of the balance, if any.
Respondent Filinvest, on the other hand, imputes estoppel (by pleadings or by judicial admission) upon
petitioners when in their Motion to Discharge Attachment, they admitted their liability as sureties thus:
Defendants Chua and Rodrigueza could not have perpetrated fraud because they are only sureties of defendant
Fortune Motors x x x;
x x x The defendants (referring to Rodrigueza and Chua) are not parties to the trust receipts agreements since
they are ONLY sureties x x x.[13]
In rejecting the arguments of petitioners and in holding that they (Fortune and the sureties) were jointly and
solidarily liable to Filinvest, the trial court declared:
As to the alleged non-existence of a principal obligation when the surety agreement was signed, it is enought
(sic) to state that a guaranty may also be given as security for future debts, the amount of which is not known
(Art. 2053, New Civil Code). In the case of NARIC vs. Fojas, L-11517, promulgated April 10, 1958, it was
ruled that a bond posted to secure additional credit that the principal debtor had applied for, is not void just
because the said bond was signed and filed before the additional credit was extended by the creditor. The
obligation of the sureties on future obligations of Fortune is apparent from a proviso under the Surety
Undertakings marked Exhs. B and C that the sureties agree with the plaintiff as follows:
In consideration of your entering into an arrangement with the party (Fortune) named above, x x x x by which
you may purchase or otherwise require from, and or enter into with obligor x x x trust receipt x x x arising out
of wholesale and/or retail transactions by or with obligor, the undersigned x x x absolutely, unconditionally, and
solidarily guarantee to you x x x the full, faithful and prompt performance, payment and discharge of any and
all obligations x x x of obligor under and with respect to any and all such contracts and any and all agreements
(whether by way of guaranty or otherwise) of obligor with you x x x now in force or hereafter
made. (Underlinings supplied).
On the matter of novation, this has already been ruled upon when this Court denied defendants Motion to
dismiss on the argument that what happened was really an assignment of credit, and not a novation of contract,
which does not require the consent of the debtors.The fact of knowledge is enough. Besides, as explained by the
plaintiff, the mother or the principal contract was the Financing Agreement, whereas the trust receipts, the sight
drafts, as well as the Deeds of assignment were only collaterals or accidental modifications which do not
extinguish the original contract by way of novation. This proposition holds true even if the subsequent
agreement would provide for more onerous terms for, at any rate, it is the principal or mother contract that is to
be followed. When the changes refer to secondary agreements and not to the object or principal conditions of
the contract, there is no novation; such changes will produce modifications of incidental facts, but will not
extinguish the original obligation (Tolentino, Commentaries on Jurisprudence of the Civil Code of the
Philippines, 1973 Edition, Vol. IV, page 367; cited in plaintiffs Memorandum of September 6, 1985, p. 3).
On the evidence adduced by the plaintiff to show the status of defendants accounts, which took into
consideration payments by defendants made after the filing of the case, it is enough to state that a statement was
carefully prepared showing a balance of the principal obligation plus interest totalling P1,348,033.89 as of
March 31, 1985 (Exh. M). This accounting has not been traversed nor contradicted by defendants although they
had the opportunity to do so.Likewise, there was absolute silence on the part of defendants as to the correctness
of the previous statement of account made as of December 16, 1983 (referring to Exh. I), but more important,
however, is that defendants received demand letters from the plaintiff stating that, as of December 1983 (Exhs.
J, K and L), this total amount of obligation was P1,302,811,00, and yet defendants were not heard to have
responded to said demand letters, let alone have taken any exception thereto. There is such a thing as evidence
by silence (Sec. 23, Rule 130, Revised Rules of Court).[14]
The Court of Appeals, affirming the above decision of the trial court, further explained:
x x x In the case at bar, the surety undertakings in question unequivocally state that Chua and Rodrigueza
absolutely, unconditionally and solidarily guarantee to Filinvest the full, faithful and prompt performance,
payment and discharge of any and all obligations and agreements of Fortune under or with respect to any and all
such contracts and any and all other agreements (whether by way of guaranty or otherwise) of the latter with
Filinvest in force at the time of the execution of the Surety Undertakings or made thereafter. Indeed, if Chua
and Rodrigueza did not intend to guarantee all of Fortunes future obligation with Filinvest, then they should
have expressly stated in their respective surety undertakings exactly what said surety agreements guaranteed or
to which obligations of Fortune the same were intended to apply.For another, if Chua and Rodrigueza truly
believed that the surety undertakings they executed should not cover Fortunes obligations under the AWFA,
then why did they not inform Filinvest of such fact when the latter sent them the aforementioned demand letters
(Exhs. K and L) urging them to pay Fortunes liability under the AWFA. Instead, quite uncharacteristic of
persons who have just been asked to pay an obligation to which they believe they are not liable, Chua and
Rodrigueza elected or chose not to answer said demand letters. Then, too, considering that appellant Chua is the
corporate president of Fortune and a signatory to the AWFA, he should have simply had it stated in the AWFA
or in a separate document that the Surety Undertakings do not cover Fortunes obligations in the aforementioned
AWFA, trust receipts or demand drafts.
Appellants argue that it was unfair for Filinvest to have executed the AWFA only after two (2) years from the
date of the Surety undertakings because Chua and Rodrigueza were thereby made to wait for said number of
years just to know what kind of obligation they had to guarantee.
The argument cannot hold water. In the first place, the Surety Undertakings did not provide that after a period
of time the same will lose its force and effect. In the second place, if Chua and Rodrigueza did not want to
guarantee the obligations of Fortune under the AWFA, trust receipts and demand drafts, then why did they not
simply terminate the Surety Undertakings by serving ten (10) days written notice to Filinvest as expressly
allowed in said surety agreements. It is highly plausible that the reason why the Surety Undertakings were not
terminated was because the execution of the same was part of the consideration why Filinvest and CARCO
agreed to enter into the AWFA with Fortune.[15]
The Courts Ruling
We affirm the decisions of the trial and appellate courts.
First Issue: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance Corporation vs. Court of Appeals[16] which reiterated
our rulings in National Rice and Corn Corporation (NARIC) vs. Court of Appeals[17] and Rizal Commercial
Banking Corporation vs. Arro.[18] In Atok Finance, Sanyu Chemical as principal, and Sanyu Trading along with
individual private stockholders of Sanyu Chemical, namely, spouses Daniel and Nenita Arrieta, Leopoldo Halili
and Pablito Bermundo, as sureties, executed a continuing suretyship agreement in favor of Atok Finance as
creditor. Under the agreement, Sanyu Trading and the individual private stockholders and officers of Sanyu
Chemical jointly and severally unconditionally guarantee(d) to Atok Finance Corporation (hereinafter called
Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] x
x x to the Creditor.Subsequently, Sanyu Chemical assigned its trade receivables outstanding with a total face
value of P125,871.00 to Atok Finance in consideration of receipt of the amount of P105,000.00. Later, additional
trade receivables with a total face value of P100,378.45 were also assigned. Due to nonpayment upon maturity,
Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Bermundo and Halili to collect
the sum of P120,240.00 plus penalty charges due and payable. The individual private respondents contended that
the continuing suretyship agreement, being an accessory contract, was null and void since, at the time of its
execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance. The trial court rendered a decision
in favor of Atok Finance and ordered defendants to pay, jointly and severally, aforesaid amount to Atok.
On appeal, the then Intermediate Appellate Court reversed the trial court and dismissed the complaint on the
ground that there was no proof that when the suretyship agreement was entered into, there was a pre-existing
obligation which served as the principal obligation between the parties. Furthermore, the future debts alluded to
in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount
thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement.
We ruled then that the appellate court was in serious error. The distinction which said court sought to make
with respect to Article 2053 (that future debts referred to therein relate to debts already existing at the time of the
constitution of the agreement but the amount [of which] is unknown and not to debts not yet incurred and existing
at that time) has previously been rejected, citing the RCBC and NARIC cases. We further said:
x x x Of course, a surety is not bound under any particular principal obligation until that principal obligation is
born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is
valid and binding even before the principal obligation intended to be secured thereby is born, any more than
there would be in saying that obligations which are subject to a condition precedent are valid and binding before
the occurrence of the condition precedent.
Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and
commercial practice. A bank or financing company which anticipates entering into a series of credit transactions
with a particular company, commonly requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal places itself in a position to
enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be
no need to execute a separate surety contract or bond for each financing or credit accommodation extended to
the principal debtor.
In Dio vs. Court of Appeals,[19] we again had occasion to discourse on continuing guaranty/suretyship thus:
x x x 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 of guaranty states that the same is to secure advances to be made from time to time the
guaranty will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of any
debt, any indebtedness, any deficiency, or any sum, or the guaranty of any transaction or money to be furnished
the principal debtor at any time, or on such time that the principal debtor may require, have been construed to
indicate a continuing guaranty.[20]
We have no reason to depart from our uniform ruling in the above-cited cases.The facts of the instant case
bring us to no other conclusion than that the surety undertakings executed by Chua and Rodrigueza were
continuing guaranties or suretyships covering all future obligations of Fortune Motors (Phils.) Corporation with
Filinvest Credit Corporation. This is evident from the written contract itself which contained the words absolutely,
unconditionally and solidarily guarantee(d) to Respondent Filinvest and its affiliated and subsidiary companies
the full, faithful and prompt performance, payment and discharge of any and all obligations and agreements of
Petitioner Fortune under or with respect to any and all such contracts and any and all other agreements (whether
by way of guaranty or otherwise) of the latter with Filinvest and its affiliated and subsidiary companies now in
force or hereafter made.
Moreover, Petitioner Rodrigueza and Joseph Chua knew exactly where they stood at the time they executed
their respective surety undertakings in favor of Fortune. As stated in the petition:
Before the execution of the new agreement, Edgar L. Rodrigueza and Joseph Chua were required to sign blank
surety agreements, without informing them how much amount they would be liable as
sureties. However, because of the desire of petitioners, Chua and Rodrigueza to have the cars delivered to
petitioner, Fortune, they signed the blank promissory notes.[21] (underscoring supplied)
It is obvious from the foregoing that Rodrigueza and Chua were fully aware of the business of Fortune, an
automobile dealer; Chua being the corporate president of Fortune and even a signatory to the Financial Agreement
with Filinvest.[22] Both sureties knew the purpose of the surety undertaking which they signed and they must have
had an estimate of the amount involved at that time. Their undertaking by way of the surety contracts was critical
in enabling Fortune to acquire credit facility from Filinvest and to procure cars for resale, which was the business
of Fortune.Respondent Filinvest, for its part, relied on the surety contracts when it agreed to be the assignee of
CARCO with respect to the liabilities of Fortune with CARCO. After benefiting therefrom, petitioners cannot
now impugn the validity of the surety contracts on the ground that there was no pre-existing obligation to be
guaranteed at the time said surety contracts were executed. They cannot resort to equity to escape liability for
their voluntary acts, and to heap injustice to Filinvest, which relied on their signed word.
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to believe that it can
collect from Chua and/or Rodrigueza in case of Fortunes default. Filinvest relied upon the surety contracts when
it demanded payment from the sureties of the unsettled liabilities of Fortune. A refusal to enforce said surety
contracts would virtually sanction the perpetration of fraud or injustice.[23]
Second Issue: No Novation
Neither do we find merit in the averment of petitioners that the Financing Agreement contained onerous
obligations not contemplated in the surety undertakings, thus changing the principal terms thereof and effecting
a novation.
We have ruled previously that there are only two ways to effect novation and thereby extinguish an
obligation. First, novation must be explicitly stated and declared in unequivocal terms. Novation is never
presumed. Second, the old and new obligations must be incompatible on every point. The test of incompatibility
is whether the two obligations can stand together, each one having its independent existence. If they cannot, they
are incompatible and the latter obligation novates the first.[24] Novation must be established either by the express
terms of the new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old
obligation as a consideration for the emergence of the new one. The will to novate, whether totally or partially,
must appear by express agreement of the parties, or by their acts which are too clear and unequivocal to be
mistaken.[25]
Under the surety undertakings however, the obligation of the sureties referred to absolutely, unconditionally
and solidarily guaranteeing the full, faithful and prompt performance, payment and discharge of all obligations
of Petitioner Fortune with respect to any and all contracts and other agreements with Respondent Filinvest in
force at that time or thereafter made. There were no qualifications, conditions or reservations stated therein as to
the extent of the suretyship. The Financing Agreement, on the other hand, merely detailed the obligations of
Fortune to CARCO (succeeded by Filinvest as assignee). The allegation of novation by petitioners is, therefore,
misplaced. There is no incompatibility of obligations to speak of in the two contracts. They can stand together
without conflict.
Furthermore, the parties have not performed any explicit and unequivocal act to manifest their agreement or
intention to novate their contract. Neither did the sureties object to the Financing Agreement nor try to avoid
liability thereunder at the time of its execution. As aptly discussed by the Court of Appeals:
x x x For another, if Chua and Rodrigueza truly believed that the surety undertakings they executed should not
cover Fortunes obligations under the AWFA (Financing Agreement), then why did they not inform Filinvest of
such fact when the latter sent them the aforementioned demand letters (Exhs. K and L) urging them to pay
Fortunes liability under the AWFA.Instead, quite uncharacteristic of persons who have just been asked to pay
an obligation to which they are not liable, Chua and Rodrigueza elected or chose not to answer said demand
letters. Then, too, considering that appellant Chua is the corporate president of Fortune and a signatory to the
AWFA, he should have simply had it stated in the AWFA or in a separate document that the Surety
Undertakings do not cover Fortunes obligations in the aforementioned AWFA, trust receipts or demand
drafts.[26]
Third Issue: Amount of Claim Substantiated
The contest on the correct amount of the liability of petitioners is a purely factual issue. It is an oft repeated
maxim that the jurisdiction of this Court in cases brought before it from the Court of Appeals under Rule 45 of
the Rules of Court is limited to reviewing or revising errors of law. It is not the function of this Court to analyze
or weigh evidence all over again unless there is a showing that the findings of the lower court are totally devoid
of support or are glaringly erroneous as to constitute serious abuse of discretion. Factual findings of the Court of
Appeals are conclusive on the parties and carry even more weight when said court affirms the factual findings of
the trial court.[27]
In the case at bar, the findings of the trial court and the Court of Appeals with respect to the assigned error
are based on substantial evidence which were not refuted with contrary proof by petitioners. Hence, there is no
necessity to depart from the above judicial dictum.
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of
Appeals concurring with the decision of the trial court is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.