CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 160466 January 17, 2005
SPOUSES ALFREDO and SUSANA ONG, petitioners,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
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 money1 against petitioners-spouses.
Respondent bank sought to hold petitioners-spouses liable as sureties on the
three (3) promissory notes they issued to secure some of BMC’s loans,
totalling five million pesos (₱5,000,000.00).
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 BMC’s insolvency, or if it is declared to be in a state of suspension of
payments. Respondent bank granted BMC’s 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.1awphi1.nét
On October 13, 1992, a Memorandum of Agreement (MOA)2 was executed
by debtor BMC, the petitioners-spouses as President and Treasurer of BMC,
and the consortium of creditor banks of BMC (of which respondent bank is
included). The MOA took effect upon its approval by the SEC on November
27, 1992.3
Thereafter, petitioners-spouses moved to dismiss4 the complaint. They
argued that as the SEC declared the principal debtor BMC in a state of
suspension of payments and, under the MOA, the creditor banks, including
respondent bank, agreed to temporarily suspend any pending civil action
against the debtor BMC, the benefits of the MOA should be extended to
petitioners-spouses who acted as BMC’s 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 court’s 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 BMC’s 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 BMC’s 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 (₱5,000,000.00). Under Article 1216 of
the Civil Code,6 respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of the MOA which
provided for the suspension of payment and filing of collection suits against
BMC. Respondent bank’s right to collect payment from the surety exists
independently of its right to proceed directly against the principal debtor. In
fact, the creditor bank may go against the surety alone without prior demand
for payment on the principal debtor.7
The provisions of the MOA regarding the suspension of payments by BMC
and the non-filing of collection suits by the creditor banks pertain only to
the property of the principal debtor BMC. Firstly, in the rehabilitation
receivership filed by BMC, only the properties of BMC were mentioned in the
petition with the SEC.8Secondly, there is nothing in the MOA that involves the
liabilities of the sureties whose 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 BMC’s officers or sureties.1awphi1.nét
Clearly, the collection suit filed by respondent bank against petitioners-
spouses as sureties can prosper. The trial court’s 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.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
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
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.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. L-158025 November 5, 1920
CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffs-
appellants,
vs.
GEORGE C. SELLNER, defendant-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.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 113931 May 6, 1998
E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the
decision 1 of the Court of Appeals dated July 13, 1993 which affirmed
the Order of the Regional Trial Court of Manila, Branch 51, denying
petitioner's Motion to Dismiss the complaint, as well as the
Resolution 2 dated February 15, 1994 denying the motion for
reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under
the name "Agro Brokers," applied for a loan with respondent
Consolidated Bank and Trust Corporation (now SOLIDBANK) in the
amount of Two Million Eight Hundred Seventy Five Thousand Pesos
(P2,875,000.00) to finance the purchase of two (2) maritime barges
and one tugboat 3 which would be used in their molasses business.
The loan was granted subject to the condition that respondent
spouses execute a chattel mortgage over the three (3) vessels to be
acquired and that a continuing guarantee be executed by Ayala
International Philippines, Inc., now herein petitioner E. Zobel, Inc., in
favor of SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing
Guaranty 4 were executed.
Respondent spouses defaulted in the payment of the entire
obligation upon maturity. Hence, on January 31, 1991, SOLIDBANK
filed a complaint for sum of money with a prayer for a writ of
preliminary attachment, against respondents spouses and
petitioner. The case was docketed as Civil Case No. 91-55909 in the
Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its
liability as guarantor of the loan was extinguished pursuant to Article
2080 of the Civil Code of the Philippines. It argued that it has lost its
right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with the
appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not
applicable because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of
which reads:
After a careful consideration of the matter on hand, the
Court finds the ground of the motion to dismiss without
merit. The document referred to as "Continuing Guaranty"
dated August 21, 1985 (Exh. 7) states as follows:
For and in consideration of any existing
indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for
the payment of which the undersigned is now
obligated to you as surety and in order to induce
you, in your discretion, at any other manner, to,
or at the request or for the account of the
borrower, . . .
The provisions of the document are clear, plain
and explicit.
Clearly therefore, defendant E. Zobel, Inc. signed
as surety. Even though the title of the document
is "Continuing Guaranty", the Court's
interpretation is not limited to the title alone but
to the contents and intention of the parties more
specifically if the language is clear and positive.
The obligation of the defendant Zobel being that
of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor.
In fact, in the letter of January 31, 1986 of the
defendants (spouses and Zobel) to the plaintiff it
is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded
by the bank inasmuch as the said loan is covered
by the Continuing Guaranty by Zobel in favor of
the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an
essential condition of the guaranty. In its letter,
it said that because of the Continuing Guaranty
in favor of the plaintiff the chattel mortgage is
rendered unnecessary and redundant.
With regard to the claim that the failure of the
plaintiff to register the chattel mortgage with the
proper government agency, i.e. with the Office
of the Collector of Customs or with the Register
of Deeds makes the obligation a guaranty, the
same merits a scant consideration and could not
be taken by this Court as the basis of the
extinguishment of the obligation of the
defendant corporation to the plaintiff as surety.
The chattel mortgage is an additional security
and should not be considered as payment of the
debt in case of failure of payment. The same is
true with the failure to register, extinction of the
liability would not lie.
WHEREFORE, the Motion to Dismiss is hereby
denied and defendant E. Zobel, Inc., is ordered
to file its answer to the complaint within ten (10)
days from receipt of a copy of this Order. 5
Petitioner moved for reconsideration but was denied on April 26,
1993. 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
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
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 . . . (hereinafter called the Borrower), for
the payment of which the undersigned is now obligated to
you as surety and in order to induce you, in your discretion,
at any time or from time to time hereafter, to make loans
or advances or to extend credit in any other manner to, or
at the request or for the account of the Borrower, either
with or without purchase or discount, or to make any
loans or advances evidenced or secured by any notes, bills
receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness . . . upon which
the Borrower is or may become liable as maker, endorser,
acceptor, or otherwise, the undersigned agrees to
guarantee, and does hereby guarantee, the punctual
payment, at maturity or upon demand, to you of any and
all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all
other indebtedness of every kind which is now or may
hereafter become due or owing to you by the Borrower,
together with any and all expenses which may be incurred
by you in collecting all or any such instruments or other
indebtedness or obligations hereinbefore referred to, and
or in enforcing any rights hereunder, and also to make or
cause any and all such payments to be made strictly in
accordance with the terms and provisions of any
agreement (g), express or implied, which has (have) been
or may hereafter be made or entered into by the Borrower
in reference thereto, regardless of any law, regulation or
decree, now or hereafter in effect which might in any
manner affect any of the terms or provisions of any such
agreements(s) or your right with respect thereto as against
the Borrower, or cause or permit to be invoked any
alteration in the time, amount or manner of payment by
the Borrower of any such instruments, obligations or
indebtedness; . . . (Emphasis Ours)
One need not look too deeply at the contract to determine the
nature of the undertaking and the intention of the parties. The
contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated
itself as an original promissor. It bound itself jointly and severally to
the obligation with the respondent spouses. In fact, SOLIDBANK
need not resort to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable for the
obligation. This can be gleaned from a reading of the stipulations in
the contract, to wit:
. . . If default be made in the payment of any of the
instruments, indebtedness or other obligation hereby
guaranteed by the undersigned, or if the Borrower, or the
undersigned should die, dissolve, fail in business, or
become insolvent, . . ., or if any funds or other property of
the Borrower, or of the undersigned which may be or
come into your possession or control or that of any third
party acting in your behalf as aforesaid should be attached
of distrained, or should be or become subject to any
mandatory order of court or other legal process, then, or
any time after the happening of any such event any or all
of the instruments of indebtedness or other obligations
hereby guaranteed shall, at your option become (for the
purpose of this guaranty) due and payable by the
undersigned forthwith without demand of notice, and full
power and authority are hereby given you, in your
discretion, to sell, assign and deliver all or any part of the
property upon which you may then have a lien hereunder
at any broker's board, or at public or private sale at your
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

option, either for cash or for credit or for future delivery
without assumption by you of credit risk, and without
either the demand, advertisement or notice of any kind, all
of which are hereby expressly waived. At any sale
hereunder, you may, at your option, purchase the whole
or any part of the property so sold, free from any right of
redemption on the part of the undersigned, all such rights
being also hereby waived and released. In case of any sale
and other disposition of any of the property aforesaid,
after deducting all costs and expenses of every kind for
care, safekeeping, collection, sale, delivery or otherwise,
you may apply the residue of the proceeds of the sale and
other disposition thereof, to the payment or reduction,
either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned
whether or not except for disagreement such liabilities or
obligations would then be due, making proper allowance
or interest on the obligations and liabilities not otherwise
then due, and returning the overplus, if any, to the
undersigned; all without prejudice to your rights as against
the undersigned with respect to any and all amounts
which may be or remain unpaid on any of the obligations
or liabilities aforesaid at any time (s).
xxx xxx xxx
Should the Borrower at this or at any future time furnish,
or should be heretofore have furnished, another surety or
sureties to guarantee the payment of his obligations to
you, the undersigned hereby expressly waives all benefits
to which the undersigned might be entitled under the
provisions of Article 1837 of the Civil Code (beneficio
division), the liability of the undersigned under any and all
circumstances being joint and several; (Emphasis Ours)
compromise, surrender, release, sale,
application, renewal or extension, and
notwithstanding also that all obligations of the
Borrower to you outstanding and unpaid at any
time(s) may exceed the aggregate principal sum
herein above prescribed.
This is a Continuing Guaranty and shall remain in
full force and effect until written notice shall
have been received by you that it has been
revoked by the undersigned, but any such notice
shall not be released the undersigned from any
liability as to any instruments, loans, advances or
other obligations hereby guaranteed, which may
be held by you, or in which you may have any
interest, at the time of the receipt of such
notice. No act or omission of any kind on your
part in the premises shall in any event affect or
impair this guaranty, nor shall same be affected
by any change which may arise by reason of the
death of the undersigned, of any partner (s) of
the undersigned, or of the Borrower, or of the
accession to any such partnership of any one or
more new partners. (Emphasis supplied)
In fine, we find the petition to be without merit as no reversible
error was committed by respondent Court of Appeals in rendering
the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is
hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.

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:

. . . 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,
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. L-20978 February 28, 1966
THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY,
INC., plaintiff-appellant,
vs.
EUGENIO B. RAMOS, and PILAR MIRANDA, defendants-appellees.
Associated Reclamation & Development Corporation executed on March
29, 1961 a promissory note for P11,765.00 in favor of General
Acceptance & Finance Corporation. Philippine American General
Insurance Co., Inc., on the same date, executed a surety bond in the
amount of P11,765.00 to secure payment of the aforementioned
promissory note. Subsequently, on April 5, 1961, the spouses Eugenio
Ramos and Pilar Miranda signed a counter-guaranty agreement with real
estate mortgage, in favor of Philippine American General Insurance Co.,
Inc., against its liability under the surety bond. The next day, April 6,
1961, the Ramos spouses and Associated Reclamation & Development
Corporation executed an indemnity agreement in favor of Philippine
American General Insurance Co., Inc., thereunder binding themselves
"jointly and severally" to indemnify the Philippine American General
Insurance Co., Inc., for whatever it may suffer under its aforesaid surety
bond.
Philippine American General Insurance Co., Inc., on November 3, 1961,
filed a complaint in the Court of First Instance of Bataan against the
Ramos spouses. Attached to the complaint, as parts thereof, were (1)
the surety bond agreement of March 29, 1961 and (2) the counter
guaranty with real estate mortgage agreement of April 5, 1961. Plaintiff
alleged that Associated Reclamation & Development Corporation failed
to pay its obligation under the promissory note, as a result of which
plaintiff paid its liability under its surety bond in the sum of P11,765. It
therefore asked that defendants be ordered jointly and severally to pay
plaintiff P11,765 with the stipulated 12% per annum interest, plus
attorney's fees and costs. In the event of non-payment thereof within 90
days from service of judgment, it was further prayed that the mortgaged
property be sold to realize the aforesaid sum and costs, with a deficiency
judgment if necessary.1äwphï1.ñët
Defendants on January 26, 1962 filed a motion to dismiss, asserting that
the complaint stated no cause of action. It was contended that under
the Agreement of Counter-Guaranty with Real Estate Mortgage, the
defendants were guarantors only so that plaintiff must first exhaust the
properties of the principal debtor, Associated Reclamation &
Development Corporation, before proceeding against defendants.
Plaintiff thereafter filed, on February 10, 1962, an amended complaint.
Incorporated thereto and made parts of said amended complaint were
(1) the surety bond agreement, as Schedule A; (2) the indemnity
agreement of April 6, 1961, as Schedule B; and (3) the Agreement of
Counter-Guaranty with Real Estate Mortgage, as Schedule C. It prayed
for the same relief as the original complaint.
Sustaining the ground of defendants' motion, the Court of First Instance
issued an order on August 31, 1962 dismissing the case. Said court ruled
that, under Schedules B and C of the amended complaint, defendants
cannot be made liable without first proceeding against Associated
Reclamation and Development Corporation.
Plaintiff appealed directly to this Court, no factual question being
involved.
For purposes of a motion to dismiss, allegations of the complaint are
deemed true (Castelvi Raquiza vs. Ofilada, L-17182, September 30,
1963). Assuming, therefore, that, as alleged in the amended complaint,
the parties concerned executed the agreements of surety (Schedule A),
indemnity (Schedule B) and counter-guaranty with real estate mortgage
(Schedule C) that the principal obligation consisting in the promissory
note was not paid upon maturity; and that plaintiff as surety had paid
the obligation thereunder, does plaintiff have a cause of action so as to
proceed against defendants without first proceeding against Associated
Reclamation & Development Corporation?
Schedule B, the indemnity agreement, reads in part as follows:
KNOW ALL MEN BY THESE PRESENTS, THAT,
We, the undersigned ASSOCIATED RECLAMATION &
DEVELOPMENT CORP. represented by its President, Antonio R.
Banzon; and Eugenio B. Ramos and P. Miranda, jointly and
severally bind ourselves unto the PHILIPPINE AMERICAN
GENERAL INSURANCE COMPANY, INC., a corporation duly
organized and existing under and by virtue of the laws of the
Philippines, with head office at Manila, Philippines,
hereinafter called the COMPANY, in the consideration of it
having become SURETY upon a bond in the sum of Pesos
ELEVEN THOUSAND SEVEN HUNDRED SIXTY-FIVE . . .
(P11,765.00), Philippine Currency, in favor of GENERAL
ACCEPTANCE & FINANCING CORPORATION in behalf of
ASSOCIATED RECLAMATION & DEVELOPMENT CORPORATION
. . . subject to the following terms and conditions:
xxx xxx xxx
INDEMNITY:—The undersigned agree at all times to jointly
and severally indemnify the COMPANY and keep it
indemnified and hold and save it harmless from and against
any and all damages, losses, costs, stamps, taxes, penalties,
charges and expenses of whatsoever kind and nature which
the COMPANY shall or may at any time sustain or incur in
consequence of having become surety upon the bond
hereinabove referred to . . . .
xxx xxx xxx
OUR LIABILITY THEREUNDER: — It shall not be necessary for
the COMPANY to bring suit against the principal upon his
default, or exhaust the property of the principal, but the
liability hereunder of the undersigned indemnitors shall be
jointly and severally, a primary one, the same as that of the
principal, and shall be exigible immediately upon the
occurrence of such default. (Record on Appeal, pp. 48-50, 53-
54, Emphasis supplied.)
It is clear from the foregoing that the amended complaint sufficiently
states a cause of action against defendants. For the creditor may
proceed against any one of the solidary debtors or some or all of them
simultaneously (Art. 1216, New Civil Code). It should not be overlooked,
also, that the above-quoted indemnity agreement could not have been
modified by Schedule C, the counter-guaranty agreement, since the
former was executed one day after the latter.
Finally, even under Schedule C, the defendants as counter-guarantors
are not entitled to demand exhaustion of the properties of the principal
debtor. For Schedule C is a counter-guaranty with real estate
mortgage. It is accepted that guarantors have no right to demand
exhaustion of the properties of the principal debtor, under Article 2058
of the New Civil Code, where a pledge or mortgage has been given as a
special security (Saavedra vs. Price, 68 Phil. 688; Southern Motors vs.
Barbosa, 53 O.G. 137).
Wherefore, the order appealed from is hereby reversed and set aside
and the case is remanded to the court a quo for further proceedings.
Costs against defendants-appellees. So ordered.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
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.
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
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
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
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
I 5. A surety is, ordinarily, held to know every default of his
…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.
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
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
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.
…
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
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;
… Banco de Roma bogged down following news report that
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
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
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

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.
… the enforcement of the guaranty.
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

· 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
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.

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
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

G.R. No. L-47495 August 14, 1941
THE TEXAS COMPANY (PHIL.), INC., petitioner,
vs.
TOMAS ALONSO, respondent.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were
sued by the Texas Company (P.I.), Inc. in the Court of First Instance
of Cebu for the recovery of the sum of P629, unpaid balance of the
account of Leonora S. Bantug in connection with the agency contract
with the Texas Company for the faithful performance of which
Tomas Alonso signed the following:
For value received, we jointly and severally do hereby bind
ourselves and each of us, in solidum, with Leonor S.
Bantug the agent named in the within and foregoing
agreement, for full and complete performance of same
hereby waiving notice of non-performance by or demand
upon said agent, and the consent to any and all extensions
of time for performance. Liability under this undertaking,
however, shall not exceed the sum of P2,000, Philippine
currency.
executed at the request of the petitioner by virtue of the following
clause of the agency contract:
Additional Security. — The Agent shall whenever
requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond,
conditioned upon the Agent's faithful performance of this
contract, in such individuals of firms as joint and several
sureties as shall be satisfactory to the Company.
In view of the foregoing clause which should be the law between the
parties, it is obvious that, before a bond is accepted by the
petitioner, it has to be in such form and amount and with such
sureties as shall be satisfactory hereto; in other words, the bond is
subject to petitioner's approval. The logical implication arising from
this requirement is that, if the petitioner is satisfied with any such
bond, notice of its acceptance or approval should necessarily be
given to the property party in interest, namely, the surety or
guarantor. In this connection, we are likewise bound by the finding
of the Court of Appeals that there is no evidence in this case tending
to show that the respondent, Tomas Alonso, ever had knowledge of
any act on the part of petitioner amounting to an implied
acceptance, so as to justify the application of our decision
in National Bank vs. Escueta (50 Phil., 991).

While unnecessary to this decision, we choose to add a few words

Witness the hand and seal of the undersigned affixed in
the presence of two witness, this 12th day of August,
1929.
Leonor S. Bantug was declared in default as a result of her failure to
appear or answer, but Tomas Alonso filed an answer setting up a
general denial and the special defenses that Leonor S. Bantug made
him believe that he was merely a co-security of one Vicente Palanca
and he was never notified of the acceptance of his bond by the
Texas Company. After trial, the Court of First Instance of Cebu
rendered judgment on July 10, 1973, which was amended on
February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to
pay jointly and severally to the Texas Company the sum of P629,
with interest at the rate of six per cent (6%) from the date of filing of
the complaint, and with proportional costs. Upon appeal by Tomas
Alonso, the Court of Appeals modified the judgment of the Court of
First Instance of Cebu in the sense that Leonor S. Bantug was held
solely liable for the payment of the aforesaid sum of P629 to the
Texas Company, with the consequent absolution of Tomas Alonso.
This case is now before us on petition for review by certiorari of the
decision of the Court of Appeals. It is contended by the petitioner
that the Court of Appeals erred in holding that there was merely an
offer of guaranty on the part of the respondent, Tomas Alonso, and
that the latter cannot be held liable thereunder because he was
never notified by the Texas Company of its acceptance.
explanatory of the rule regarding the necessity of acceptance in case
of bonds. Where there is merely an offer of, or proposition for, a
guaranty, or merely a conditional guaranty in the sense that it
requires action by the creditor before the obligation becomes fixed,
it does not become a binding obligation until it is accepted and,
unless there is a waiver of notice of such acceptance is given to, or
acquired by, the guarantor, or until he has notice or knowledge that
the creditor has performed the conditions and intends to act upon
the guaranty. (National Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p.
901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not
necessarily be express or in writing, but may be indicated by acts
amounting to acceptance. (National Bank vs. Escueta, 50 Phil., 991.)
Where, upon the other hand, the transaction is not merely an offer
of guaranty but amounts to direct or unconditional promise of
guaranty, unless notice of acceptance is made a condition of the
guaranty, all that is necessary to make the promise binding is that
the promise should act upon it, and notice of acceptance is not
necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899), the
reason being that the contract of guaranty is unilateral (Visayan
Surety and Insurance Corporation vs. Laperal, G.R. No. 46515,
promulgated June 14, 1940).
The decision appealed from will be, as the same is hereby, affirmed,
with costs of this instance against the petitioner. So ordered.

The Court of Appeals has placed reliance upon our decision

in National Bank vs. Garcia (47 Phil., 662), while the petitioner
invokes the case of National Bank vs. Escueta, (50 Phil., 991). In the
first case, it was held that there was merely an offer to give bond
and, as there was no acceptance of the offer, this court refused to
give effect to the bond. In the second case, the sureties were held
liable under their surety agreement which was found to have been
accepted by the creditor, and it was therein ruled that an
acceptance need not always be express or in writing. For the
purpose of this decision, it is not indispensable for us to invoke one
or the other case above cited. The Court of Appeals found as a fact,
and this is conclusive in this instance, that the bond in question was
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

G.R. No. L-22071 October 9, 1924
THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-cross-
defendant,
vs.
VICENTE ALDANESE, defendant and cross-plaintiff-appellee,
VAMENTA & CO., ISIDORO VAMENTA and THE UNION GUARANTEE CO.,
LTD., cross-defendants;
THE UNION GUARANTEE CO., LTD., appellant.
There arrived at the port of Manila on October 15, 1919, certain merchandise
consigned to the Hong Kong & Shanghai Banking Corporation.
Before the receipt of the bill of lading of the merchandise, Messrs. Vamenta
& Co. and Isidro Vamenta declared that the value of said merchandise was
P6,854.40, and succeeded in withdrawing the merchandise from the
customhouse by giving a bond executed by the Union Guarantee Co., Ltd., as
surety for the sum of P9,450, promising to present the bill of lading within
four months from the date of said bond. The period expired without said bill
of lading having been presented, notwithstanding the repeated demands
made for the purpose.
The cause having been remanded to the court below, according to the
judgment of this court, new trial was held there, whereat the bond given by
Vamenta & Co., and Isidoro Vamenta and the Union Guarantee Co., Ltd., was
presented as evidence. The latter company did not introduce any evidence.
In compliance with the judgment rendered against him, Isidro Vamenta paid
the Collector of Customs P8,000 on account. After a hearing, the court
sentenced Vamenta & Co., Isidro Vamenta and the Union Guarantee Co.,
Ltd., Isidro Vamenta and the Union Guarantee Co., Ltd., to pay the Collector
of Customer jointly and severally the balance of P20,334.91 paid by said
Collector of Customs, after deducting the P8,000 paid to the latter by Isidro
Vamenta, that is, the sum P12,334,91 with legal interest upon the P20,224.91
paid by the Collector of Customs, computed from October 24, 1921, when
said payment was made, and with interest also at the legal rate on the sum
of P12,334.91 from August 30, 1992 by Isidoro Vamenta.
In said judgment, the Union Guarantee Co., Ltd., was sentenced as aforesaid,
but only up to the amount of the bond given, that is, up to the sum of
P9,450. 1awph!l.net
The Union Guarantee Co., Ltd., appeals from this judgment, assigning thereto
the following errors, to wit: (a)The fact that it was sentenced to pay the
aforesaid sum; and (b) the denial of its motion for new trial.

The herein plaintiff corporation presented said bill of lading, with the invoice
In support of the first assignment of error, the appellant alleges that the
annexed thereto, according to which the value of merchandise in question
defendant Aldanese is not entitled to recover, because the money paid by
was P18,681.60, and claimed it from the Collector of Customs, but the latter
him is not his but of the Government. It must be noted that the judgment
could not deliver the same, having delivered it previously to Vamenta & Co.
appealed from is in favor of "Mr. Aldanese in his capacity as Collector of
and Isidro Vamenta as above stated, and an action was brought against him
Customs," and not as private individual.
by the herein plaintiff.

The appellant also alleges that the liability of Vamenta & Co. and Isidro
At the instance of the Collector of Customer, Vamenta & Co., Isidro Vamenta
Vamenta being joint and several, the P8,000 paid by Isidro Vamenta must be
and the surety company, the Union Guarantee Co., Ltd., were included as
applied upon the bond for P9,450 by them. And deducting said P8,000 from
defendants, against whom, as well as against the plaintiff, said Collector of
the amount of the bond, there remains only the sum of P1,450 to be paid by
Customs filed a cross-complaint.
the appellant.

After trial, the court of First Instance of Manila rendered judgment, the
dispositive part of which is as follows:
The defendant Vicente Aldanese, in his capacity as Collector of
Customs, is sentenced to pay the Hong Kong & Shanghai Banking
Corporation the sum of $9,840.80, United States currency, with
costs. Messrs. Vamenta & Co., Isidro Vamenta and Union
Guarantee co., Ltd., are sentenced to pay the same sum to Mr.
Vicente Aldanese in his aforesaid capacity, with the costs. In the
event that the Union Guarantee Co., Ltd., be compelled to pay the
whole or any part of the said sum to the defendant Mr. Aldanese
by reason of insolvency or inability to pay Messrs. Vamenta & Co.
and Isidro Vamenta, the latter are sentenced to pay said surety
company all such sum as it may have paid as aforesaid, together
with the costs. Each and every payment to be made under this
judgment shall be with legal interest at the rate of 6 per centum
per annum from April 29, 1920.
This judgment became final, except as to the Union Guarantee Co., Ltd.,
which appealed from said judgment, as a result of which a decision was
rendered by this court, containing the following disposition:
The fact, however, is that Vamenta & Co. and Isidoro Vamenta incurred and
recognized the obligation to indemnify the Collector of Customs, defendant
herein, for what he has paid, amounting to P20,334.91; and on account of
said liability, Isidoro Vamenta paid said collector of Customs the sum of
P8,000.
There remains, therefore the sum of P12,334.91 for which the Collector of
Customs has the right to be reimbursed. To determine who are liable for this
sum and to what extent, the following must be borne in mind:
For the total sum of P20,334.91, Vamenta & Co. and Isidoro Vamenta are
liable although jointly and severally with the herein appellant up to the sum
of P9,450, the amount of the bond given by them.
From the standpoint of view of Vamenta & Co. and Isidoro Vamenta, their
liability in connection with said total sum is more onerous with regard to the
amount for which they are liable alone and separately from the surety the
Union Guarantee Co., Ltd., that is, the sum of P10,844.91. To this amount,
therefore, must the payment of P8,000 made by them be applied, for it is so
provided by article 1174 of the Civil Code.

. . .We think that this case requires further evidence, and to do
justice to all parties interested, we have decided to remand the
record to the court of origin in order that the proper party may
introduce competent evidence as to the existence, conditions and
amount of the alleged bond given by the Union Guarantee Co.,
Ltd.
The judgment appealed from is reversed and this cause ordered
remanded to the court below for the holding of anew trial for the
purposes above indicated . . . 1
Therefore, Vamenta & Co., Isidro Vamenta and the Union Guarantee Co.,
Ltd., are jointly and severally liable for the balance of P12,334.91 up to the
sum of P9,450, Vamenta & Co. and Isidoro Vamenta being liable only for the
remaining sum, that is, P2,884.91.
As this is the result arrived at in the judgment appealed from, we see no
reason for altering it. The assignments of error not being of any merit, the
judgment appealed from is affirmed, with the costs against the appellant. So
ordered.

The Collector of Customs had already paid to the herein plaintiff the sum of
P20,334.91 as the value of the merchandise in question, with interest
thereon in compliance with the judgment above set out.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

[G.R. No. 46278. October 26, 1939.]
MENZI & CO., INC., Petitioner, v. QUING CHUAN as administrator of
the intestate of Quing Tong Co., Respondent.
SYLLABUS
1. LIABILITY OF A SURETY; ARTICLE 1174 OF THE CIVIL CODE — The
application of payments made by the plaintiff corporation is
erroneous for the reason that, where, as in the present case, there is
more than one indebtedness, the payment or payments made by
the debtor, in the absence of any agreement to the contrary, should
first be applied, under the provisions of article 1174 of the Civil
Code, to the most burdensome of the matured debts. The debt of
P32,453.70 was more burdensome than the old indebtedness of
P3,168.80 because, unlike the latter, it earned interest at 12 per
cent. Moreover, according to the decision of the Court of Appeals,
the period fixed for the payment of the invoices is one week, after
which they become due and payable. Accordingly, the various
payments made by K. M. should have been applied first to the
amount of the goods taken one week earlier. From this it follows
that the amount claimed by the plaintiff is the balance of the former
indebtedness of P3,168.80, for which the surety is not liable because
the bond given by him cannot be extended to debts incurred before
the execution thereof.
1174 of the Civil Code, to the most burdensome of the matured
debts. The debt of P32,453.70 was more burdensome than the old
indebtedness of P3,168.80 because, unlike the latter, it earned
interest at 12 per cent. Moreover, according to the decision of the
Court of Appeals, the period fixed for the payment of the invoices is
one week, after which they become due and payable. Accordingly,
the various payments made by King Meng should have been applied
first to the amount of the goods taken one week earlier. From this it
follows that the amount claimed by the plaintiff is the balance of the
former indebtedness of P3,168.80 from which the surety is not liable
because the bond given by him cannot be extended to debts
incurred before the execution thereof. (El Vencedor v. Canlas, 44
Phil., 699; Asiatic Petroleum Co. v. De Pio, 46 Phil., 167; Socony-
Vacuum Corporation [formerly the Standard Oil Company of New
York] v. Leon C. Miraflores, 37 Off. Gaz., 2807).
Finding no merit in the errors assigned in the petitioner’s brief, the
appealed judgment is affirmed, with the costs to said petitioner. So
ordered.

DECISION

CONCEPCION, J.:

The question to be determined in this appeal has to do with the

extent, or rather the limit, of the liability of a surety. This question
arises from the following facts:chanrob1es virtual 1aw library

King Meng purchased merchandise on credit from the plaintiff-

appellee Menzi & Co., Inc. On October 3, 1932, his account showed a
balance against him in the amount of P3,168.80 The plaintiff
corporation required him to give a bond for P10,000. Quing Tong Co
gave the bond under certain conditions, one of which is that Quing
Tong Co guaranteed the payment of the merchandise and goods
which King Meng should purchase from the plaintiff in his own name
or in that of King Yap Yek, paying in the manner to be set out in the
invoices, with interest at 12 per cent, the value of the merchandise
from the date of maturity. King Meng purchased from the plaintiff
on different dates merchandise and goods totalling P32,453.70.
Adding to this sum the preexisting debt of P3,168.80, gives a total of
P35,622.30. On the other hand, King Meng had made payments
amounting to P35,264.60. The plaintiff corporation applied and
thereafter to the amount of the successive purchases made by King
Meng from October 3, 1932, resulting in a balance in favor of the
plaintiff in the sum of P358, payment of which is claimed, with
interest and attorney’s fees, from the intestate of the surety Quing
Tong Co. The trial court gave judgment for the plaintiff corporation,
but on appeal to the Court of Appeals, the latter reversed the
judgment of the trial court and absolved the administrator of the
intestate of Quing Tong Co from the complaint.

We believe that the application of payments made by the plaintiff

corporation is erroneous for the reason that, where, as in the
present case, there is more than one indebtedness, the payment or
payments made by the debtor, in the absence of any agreement to
the contrary, should first be applied, under the provisions of article
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

G.R. No. L-10168 July 22, 1916 property has proved insufficient. When the suit is brought against
the surety and the principal debtor the plea of discussion does not
JOSE M. A. ARROYO, guardian of Tito Jocsing, an imbecile, plaintiff- require or authorize any suspension of the proceedings; but the
appellee, judgment will be so modified as to require the creditor to proceed
vs. by execution against the property of the principal, and to exhaust it
FLORENTINO HILARIO JUNGSAY, ET AL., defendants-appellants. before resorting to the property of the surety. (Bernard vs. Custis, 4
TRENT, J.: Martin, 215; Banks vs. Brander, 13 La., 276.)

The plaintiff in this case is the guardian of one Tito Jocsing, an
imbecile, appointed by the court to succeed Jungsay, the former
guardian, who absconded with the funds of his ward. The
defendants are the absconding guardian and his bondsmen. From a
judgment in favor of the plaintiff and against the defendants for the
sum of P6,000, together with interest and costs, the bondsmen
appealed.
The principal question presented for our consideration is whether
the appellants should be credited with P4,400, the alleged value of
certain property attached as that of the absconding guardian, all of
which is in the exclusive possession of third parties under claim of
ownership.
The appellants in contending for the credit, rely upon article 1834 of
the Civil Code, which gives to the surety the benefit of a levy
(excusion), even when a judgment is rendered against both the
surety and the principal. But, according t article 1832, before the
surety is entitled to this benefit, he must point out to the creditor
property of the principal debtor which can be sold and which is
sufficient to cover the amount of the debt. Upon this point Manresa,
in vol. 12, pp. 263-265, says:
As explicitly stated in the article under consideration, it is not
sufficient that the surety claim the benefit of discussion in time, nor
that is so doing he designate property of the debtor wherein to
satisfy the debt. It is also necessary that another condition be
fulfilled, to wit, that such property be realizable and that it be
situated in Spanish territory. This is not only logical, but just,
because the attachment of property situated a great distance away
would be a lengthy and extremely difficult proceeding and one that,
if actually not opposed to, yet does not very well accord with the
purpose of the bond, that is, to insure the fulfillment of the
obligation and at the same time furnish the creditor with the means
of obtaining its fulfillment without hindrance or delays. The same
may be said of property that is not readily realizable, and as the
surety is the sole person who benefits by the discussion and the one
most interested in avoiding difficulties in its execution, it is he,
therefore, who should designate the property out of which the
recovery is to be made, it being unquestionably convenient for him
that the property he designates unite the conditions indicated in
order to facilitate the payment of the debt, whereby he will be freed
from the subsidiary obligation inherent in the bond.
In either case, the surety who desires to avail himself of this right
must demand it in limine, `on the institution of proceedings against
him.' He must, moreover, point out to the creditor property of the
principal debtor, not incumbered, subject to seizure; and must
furnish a sufficient sum to have the discussion carried into effect. (R.
C. C., 3045, 3046, 3047.) A plea which does not meet these
requirements must be disregarded. (Robechot vs. Folse, 11 La., 136;
Banks vs. Brander, 13 La., 276.)
The property pointed out by the sureties is not sufficient to pay the
indebtedness; it is not salable; it is so incumbered that third parties
have, as we have indicated, full possession under claim of ownership
without leaving to the absconding guardian a fractional or
reversionary interest without determining first whether the claim of
one or more of the occupants is well founded. In all these respects
the sureties have failed to meet the requirements of article 1832 of
the Civil Code.
Where a guardian absconds or is beyond the jurisdiction of the
court, the proper method, under article 1834 of the Civil Code and
section 577 of the Code of Civil Procedure, in order to ascertain
whether such guardian is liable and to what extent, in order to bind
the sureties on his official bond, is by a proceeding in the nature of a
civil action wherein the sureties are made parties and given an
opportunity to be heard. All this was done in the instant case.
The judgment appealed from, being in accordance with the law, the
same is hereby affirmed, with costs against the appellants. So
ordered.

In Hill & Co. vs. Bourcier and Pond (29 La. Ann., 841), where
provisions similar to our Civil Code were under consideration, the
court said:

The surety has the right, under certain circumstances, to demand

the discussion of the property of the principal debtor. Where suit is
brought against the surety alone, he may interpose the plea, and
compel the creditor to discuss the principal debtor. The effect of this
is to stay proceedings against the surety until judgment has been
obtained against the principal debtor, and execution against his
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE
BANK, respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision1 of the Court of
Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial
Court of the National Capital Judicial Region, Branch XLV, Manila, which
ordered petitioner Willex Plastic Industries Corporation and the Inter-Resin
Industrial Corporation, jointly and severally, to pay private respondent
International Corporate Bank certain sums of money, and the appellate
court's resolution of October 17, 1989 denying petitioner's motion for
reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of
credit with the Manila Banking Corporation. To secure payment of the credit
accomodation, Inter-Resin Industrial and the Investment and Underwriting
Corporation of the Philippines (IUCP) executed two documents, both entitled
"Continuing Surety Agreement" and dated December 1, 1978, whereby they
bound themselves solidarily to pay Manilabank "obligations of every kind, on
which the [Inter-Resin Industrial] may now be indebted or hereafter become
indebted to the [Manilabank]." The two agreements (Exhs. J and K) are the
same in all respects, except as to the limit of liability of the surety, the first
surety agreement being limited to US$333,830.00, while the second one is
limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries
Corp., executed a "Continuing Guaranty" in favor of IUCP whereby "For and
in consideration of the sum or sums obtained and/or to be obtained by Inter-
Resin Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex
Plastic jointly and severally guaranteed "the prompt and punctual payment
at maturity of the NOTE/S issued by the DEBTOR/S . . . to the extent of the
aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine
Currency and such interests, charges and penalties as hereafter may be
specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the
sum of P4,334,280.61 representing Inter-Resin Industrial's outstanding
obligation. (Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp.,
which in the meantime had succeeded IUCP, demanded from Inter-Resin
Industrial and Willex Plastic the payment of what it (IUCP) had paid to
Manilabank. As neither one of the sureties paid, Atrium filed this case in the
court below against Inter-Resin Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,600.00 representing the proceeds of its
fire insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty"
was intended to secure payment to Atrium of the amount of P4,334,280.61
which the latter had paid to Manilabank. It claimed, however, that it had
already fully paid its obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the
complaint and interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the
former's liability is extinguished due to the accidental fire that destroyed its
premises, which liability is covered by sufficient insurance assigned to
plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to
plaintiff, its account is now very much lesser than those stated in the
complaint because of some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is
only secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against
the principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The
case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have
waived the right to present evidence for its failure to appear at the hearing
despite due notice. On the other hand, Willex Plastic rested its case without
presenting any evidence. Thereafter Interbank and Willex Plastic submitted
their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin
Industrial and Willex Plastic jointly and severally to pay to Interbank the
following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with
interest of 17% per annum from August 11, 1982, when Inter-Resin Industrial
paid P687,500.00 to the plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of the total
amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals.
Willex Plastic filed its brief, while Inter-Resin Industrial presented a "Motion
to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and to
Defer Filing of the Appellant's Brief." After its motion was denied, Inter-Resin
Industrial did not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the
ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to
present evidence to show that Inter-Resin Industrial had already paid its
obligation to Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-
Resin Industrial's motion for reception of evidence because the situation or
situations in which we could exercise the power under BP 129 did not exist.
Movant here has not presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of
February 22, 1991 and the resolution of December 6, 1991 of the Court of
Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed
on April 2, 1979 petitioner Willex Plastic may be held jointly and severally
liable with Inter-Resin Industrial for the amount paid by Interbank to
Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-in-
interest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety
Agreements" made on December 1, 1978. In denying liability to Interbank for
the amount, Willex Plastic argues that under the "Continuing Guaranty," its
liability is for sums obtained by Inter-Resin Industrial from Interbank, not for
sums paid by the latter to Manilabank for the account of Inter-Resin
Industrial. In support of this contention Willex Plastic cites the following
portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained by
INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
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, Interbank's predecessor-in-interest, Atrium Capital,
alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff
required defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage
in its favor and a Continuing Guaranty which was signed by the other
defendant WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it
claimed that it had already paid its obligation in its entirety. On the other
hand, Willex Plastic, while denying the allegation in question, merely did so
"for lack of knowledge or information of the same." But, at the hearing of the
case on September 16, 1986, when asked by the trial judge whether Willex
Plastic had not filed a crossclaim against Inter-Resin Industrial, Willex Plastic's
counsel replied in the negative and manifested that "the plaintiff in this case
[Interbank] is the guarantor and my client [Willex Plastic] only signed as a
guarantor to the guarantee."2
For its part Interbank adduced evidence to show that the "Continuing
Guaranty" had been made to guarantee payment of amounts made by it to
Manilabank and not of any sums given by it as loan to Inter-Resin Industrial.
Interbank's witness testified under cross examination by counsel for Willex
Plastic that Willex "guaranteed the exposure/of whatever exposure of ACP
[Atrium Capital] will later be made because of the guarantee to Manila
Banking Corporation."3
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it
relates.4 At all events, Willex Plastic cannot now claim that its liability is
limited to any amount which Interbank, as creditor, might give directly to
Inter-Resin Industrial as debtor because, by failing to object to the parol
evidence presented, Willex Plastic waived the protection of the parol
evidence rule.5
Accordingly, the trial court found that it was "to secure the guarantee made
by plaintiff of the credit accommodation granted to defendant IRIC [Inter-
Resin Industrial] by Manilabank, [that] the plaintiff required defendant IRIC
to execute a chattel mortgage in its favor and a Continuing Guaranty which
was signed by the defendant Willex Plastic Industries Corporation."6
Similarly, the Court of Appeals found it to be an undisputed fact that "to
secure the guarantee undertaken by plaintiff-appellee [Interbank] of the
credit accommodation granted to Inter-Resin Industrial by Manilabank,
plaintiff-appellee required defendant-appellants to sign a Continuing
Guaranty." These factual findings of the trial court and of the Court of
Appeals are binding on us not only because of the rule that on appeal to the
Supreme Court such findings are entitled to great weight and respect but also
because our own examination of the record of the trial court confirms these
findings of the two courts.7
Nor does the record show any other transaction under which Inter-Resin
Industrial may have obtained sums of money from Interbank. It can
reasonably be assumed that Inter-Resin Industrial and Willex Plastic intended
to indemnify Interbank for amounts which it may have paid Manilabank on
behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it
was "to secure the aforesaid guarantee, that INTERBANK required principal
debtor IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor,
and so a "Continuing Guaranty" was executed on April 2, 1979 by WILLEX
PLASTIC INDUSTRIES CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin
Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory
contract, cannot legally exist because of the absence of a valid principal
obligation.8 Its contention is based on the fact that it is not a party either to
the "Continuing Surety Agreement" or to the loan agreement between
Manilabank and Interbank Industrial.
Put in another way the consideration necessary to support a surety
obligation need not pass directly to the surety, a consideration moving to the
principal alone being sufficient. For a "guarantor or surety is bound by the
same consideration that makes the contract effective between the principal
parties thereto. It is never necessary that a guarantor or surety should
receive any part or benefit, if such there be, accruing to his principal."9 In an
analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor,
for the purpose of having an additional capital for buying and selling coco-
shell charcoal and importation of activated carbon, the comprehensive
surety agreement was admittedly in full force and effect. The loan was,
therefore, covered by the said agreement, and private respondent, even if he
did not sign the promissory note, is liable by virtue of the surety agreement.
The only condition that would make him liable thereunder is that the
Borrower "is or may become liable as maker, endorser, acceptor or
otherwise." There is no doubt that Daicor is liable on the promissory note
evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal
one which, in this case is the loan obtained by Daicor as evidenced by a
promissory note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be
retroactivelt applied so as to secure payments made by Interbank under the
two "Continuing Surety Agreements." Willex Plastic invokes the ruling in El
Vencedor v. Canlas 11 and Diño v. Court of Appeals 12 in support of its
contention that a contract of suretyship or guaranty should be applied
prospectively.
The cases cited are, however, distinguishable from the present case. In El
Vencedor v. Canlas we held that a contract of suretyship "is not retrospective
and no liability attaches for defaults occurring before it is entered into unless
an intent to be so liable is indicated." There we found nothing in the contract
to show that the paries intended the surety bonds to answer for the debts
contracted previous to the execution of the bonds. In contrast, in this case,
the parties to the "Continuing Guaranty" clearly provided that the guaranty
would cover "sums obtained and/or to be obtained" by Inter-Resin Industrial
from Interbank.
On the other hand, in Diño v. Court of Appeals the issue was whether the
sureties could be held liable for an obligation contracted after the execution
of the continuing surety agreement. It was held that by its very nature a
continuing suretyship contemplates a future course of dealing. "It is
prospective in its operation and is generallyintended to provide security with
respect to future transactions." By no means, however, was it meant in that
case that in all instances a contrast of guaranty or suretyship should be
prospective in application.
Indeed, as we also held in Bank of the Philippine Islands
v. Foerster, 13 although a contract of suretyship is ordinarily not to be
construed as retrospective, in the end the intention of the parties as revealed
by the evidence is controlling. What was said there 14 applies mutatis
mutandis to the case at bar:
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

In our opinion, the appealed judgment is erroneous. It is very true that bonds
or other contracts of suretyship are ordinarily not to be construed as
retrospective, but that rule must yield to the intention of the contracting
parties as revealed by the evidence, and does not interfere with the use of
the ordinary tests and canons of interpretation which apply in regard to
other contracts.
In the present case the circumstances so clearly indicate that the bond given
by Echevarria was intended to cover all of the indebtedness of the Arrocera
upon its current account with the plaintiff Bank that we cannot possibly
adopt the view of the court below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against
without first exhausting all property of Inter-Resin Industrial. Willex Plastic
thus claims the benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex
Plastic and Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you
and/or your principal/s may directly proceed against Me/Us without first
proceeding against and exhausting DEBTOR/s propertiesin the same manner
as if all such liabilities constituted My/Our direct and primary obligations.
(emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion.
In addition, Willex Plastic bound itself solidarily liable with Inter-Resin
Industrial under the same agreement:
On the other hand, Willex Plastic announced it was resting its case without
presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered
its order and set the hearing anew on July 23, 1987. But Inter-Resin Industrial
again moved for the postponement of the hearing be postponed to August
11, 1987. The hearing was, therefore, reset on September 8 and 22, 1987 but
the hearings were reset on October 13, 1987, this time upon motion of
Interbank. To give Interbank time to comment on a motion filed by Inter-
Resin Industrial, the reception of evidence for Inter-Resin Industrial was again
reset on November 17, 26 and December 11, 1987. However, Inter-Resin
Industrial again moved for the postponement of the hearing. Accordingly the
hearing was reset on November 26 and December 11, 1987, with warning
that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on
January 22, 1988 and February 5, 1988 upon motion of its counsel. As Inter-
Resin Industrial still failed to present its evidence, it was declared to have
waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence,
however, the hearing was postponed to March 4, 1988. Again Inter-Resin
Industrial's counsel did not appear. The trial court, therefore, finally declared
Inter-Resin Industrial to have waived the right to present its evidence. On the
other hand, Willex Plastic, as before, manifested that it was not presenting
evidence and requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given
the opportunity of showing that Inter-Resin Industrial has already paid its
obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs
against the petitioner.

For and in consideration of the sums obtained and/or to be obtained by SO ORDERED.

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 otherhand, Willex
Plastic rested its case without presenting evidence.

The reception of evidence of Inter-Resin Industrial was set on January 29,

1987, but because of its failure to appear on that date, the hearing was reset
on March 12, 26 and April 2, 1987.

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

On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the

trial court issued the following order:

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

[G.R. No. 125625. July 19, 1999] Again, petitioner's contention is untenable. The benefit of exclusion
FELIMON VARONA vs. CA, et al. cannot be availed of by him because he failed to set it up against the
private respondent when the latter demanded payment and point
THIRD DIVISION out sufficient properties of the debtors within the Philippines,
available to cover the debt. Also, exclusion cannot take place in the
present case since the debtor spouses Jenkins have already left the
Gentlemen:
country and cannot therefore be sued here.

Quoted hereunder, for your information, is a resolution of this Court

As regards attorney's fees, suffice it to say that the Court has already
dated JUL 19, 1999.
ruled on the issue in favor of the petitioner in the Resolution sought
to be reconsidered.
G.R. No. 125625 (Felimon Varona, petitioner vs. Court of Appeals and
Cresencia Ong, respondents.)
WHEREFORE, the motion for reconsideration under consideration is
hereby DENIED with finality.
This resolves petitioner's motions for reconsideration of the
Resolution of this Court, dated October 7, 1996, denying the petition
SO ORDERED.
for review of the decision of the Court of Appeals which affirmed the
decision of the trial court, ordering petitioner:

1. To execute the deed of transfer of

the properties in favor of the plaintiff;

2. To deliver the possession of the

properties subject matter of the complaint to the
plaintiff;

3. To pay the plaintiff the sum of

P5,000.00 as attorney's fees and incidental
expenses; and

4. To pay the cost.

Petitioner disagrees with the ruling of this court finding him in

estoppel, reiterating the arguments contained in his petition that
subject properties, being conjugal in character, cannot be bound by
an agreement to which the consent of the other spouse has not
been secured.

It bears stressing that petitioner is estopped from invoking the

nullity of subject agreement after he had freely and voluntarily
entered thereinto and after admitting its authenticity and
genuineness. He cannot be allowed to repudiate his own act and
representation to the prejudice of the private respondents who
relied thereupon. Moreover, the proper party to assail the validity of
the said agreement is the wife of petitioner whose prior consent
thereto has not been obtained pursuant to Article 173 of the Civil
Code,1[Art. 173. The wife may, during the marriage and within ten
years from the transaction questioned, ask the courts for the
annulment of any contract of the husband entered into without her
consent, when such consent, when such consent is required, or any
act or contract of the husband which tends to defraud her or impair
her interest in the conjugal property. Should the wife fail to exercise
this right, she or her heirs, after the dissolution of the marriage, may
demand the value of property fraudulently alienated by the
husband.]

Petitioner also seeks reconsideration of the ruling of the Court - that

he cannot be extended the benefit of exclusion; theorizing that as
guarantor, he cannot be compelled to pay unless the creditor has
exhausted all the properties of, and exerted all the legal remedies
against the debtor Jenkins, which step the private respondent
allegedly failed to take.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 154183 August 7, 2003
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,
vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION,
KENNETH NG LI and MA. VICTORIA NG LI, respondents.
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an
"omnibus line" credit facility worth P10 million in favor of respondent
First Business Paper Corporation (FBPC). The terms and conditions of the
agreement as well as the checklist of documents necessary to open the
credit line were stipulated in a "letter-advise" of the Bank dated 16 May
1993 addressed to FBPC and to its President, respondent Kenneth Ng
Li.1 The "letter-advise"2was effective upon "compliance with the
documentary requirements."3
The documents essential for the credit facility and submitted for this
purpose were the (a) Board Resolution or excerpts of the Board of
Directors Meeting, duly ratified by a Notary Public, authorizing the loan
and security arrangement as well as designating the officers to negotiate
and sign for FBPC specifically stating authority to mortgage, pledge
and/or assign the properties of the corporation; (b) agreement to
purchase Domestic Bills; and, (c) Continuing Guaranty for any and all
amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and
respondent-spouses Kenneth and Ma. Victoria Ng Li.4 The spouses Luis
Toh and Vicky Tan Toh were then Chairman of the Board and Vice-
President, respectively, of FBPC, while respondent-spouses Kenneth Ng
Li and Ma. Victoria Ng Li were President and General Manager,
respectively, of the same corporation.5
It is not disputed that the credit facility as well as its terms and
conditions was not cancelled or terminated, and that there was no prior
notice of such fact as required in the "letter-advise," if any was done.
On 10 May 1993, more than thirty (30) days from date of the "letter-
advise," petitioner-spouses Luis Toh and Vicky Tan Toh and respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the required
Continuing Guaranty, which was embodied in a public document
prepared solely by respondent Bank.6 The terms of the instrument
defined the contract arising therefrom as a surety agreement and
provided for the solidary liability of the signatories thereto for and in
consideration of "loans or advances" and "credit in any other manner to,
or at the request or for the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on the
indebtedness that respondent FBPC may incur and for which the sureties
may be liable, stating that the credit facility "covers any and all existing
indebtedness of, and such other loans and credit facilities which may
hereafter be granted to FIRST BUSINESS PAPER CORPORATION." The
surety also contained a de facto acceleration clause if "default be made
in the payment of any of the instruments, indebtedness, or other
obligation" guaranteed by petitioners and respondents. So as to
strengthen this security, the Continuing Guaranty waived rights of the
sureties against delay or absence of notice or demand on the part of
respondent Bank, and gave future consent to the Bank's action to
"extend or change the time payment, and/or the manner, place or terms
of payment," including renewal, of the credit facility or any part thereof
in such manner and upon such terms as the Bank may deem proper
without notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any
event or cause other than the written revocation thereof with notice to
the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility
and procure letters of credit.7 On 17 November 1993 FBPC opened
thirteen (13) letters of credit and obtained loans totaling
P15,227,510.00.8 As the letters of credit were secured, FBPC through its
officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as
signatories executed a series of trust receipts over the goods allegedly
purchased from the proceeds of the loans.9
On 13 January 1994 respondent Bank received information that
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had
fraudulently departed from their conjugal home.10 On 14 January 1994
the Bank served a demand letter upon FBPC and petitioner Luis Toh
invoking the acceleration clause11 in the trust receipts of FBPC and
claimed payment for P10,539,758.68 as unpaid overdue accounts on the
letters of credit plus interests and penalties within twenty-four (24)
hours from receipt thereof.12 The Bank also invoked the Continuing
Guaranty executed by petitioner-spouses Luis Toh and Vicky Tan Toh
who were the only parties known to be within national jurisdiction to
answer as sureties for the credit facility of FBPC.13
On 17 January 1994 respondent Bank filed a complaint for sum of money
with ex parte application for a writ of preliminary attachment against
FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and spouses Luis
Toh and Vicky Tan Toh, docketed as Civil Case No. 64047 of RTC-Br. 161,
Pasig City.14 Alias summonses were served upon FBPC and spouses Luis
Toh and Vicky Tan Toh but not upon Kenneth Ng Li and Ma. Victoria Ng
Li who had apparently absconded.15
Meanwhile, with the implementation of the writ of preliminary
attachment resulting in the impounding of purported properties of FBPC,
the trial court was deluged with third-party claims contesting the
propriety of the attachment.16In the end, the Bank relinquished
possession of all the attached properties to the third-party claimants
except for two (2) insignificant items as it allegedly could barely cope
with the yearly premiums on the attachment bonds.17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the
complaint where they admitted being part of FBPC from its
incorporation on 29 August 1991, which was then known as "MNL Paper,
Inc.," until its corporate name was changed to "First Business Paper
Corporation."18 They also acknowledged that on 6 March 1992 Luis Toh
was designated as one of the authorized corporate signatories for
transactions in relation to FBPC's checking account with respondent
Bank.19 Meanwhile, for failing to file an answer, respondent FBPC was
declared in default.20
Petitioner-spouses however could not be certain whether to deny or
admit the due execution and authenticity of the Continuing
Guaranty.21 They could only allege that they were made to sign papers in
blank and the Continuing Guaranty could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for them to
have freely and consciously executed the surety on 10 May 1993, the
date appearing on its face22 since beginning March of that year they had
already divested their shares in FBPC and assigned them in favor of
respondent Kenneth Ng Li although the deeds of assignment were
notarized only on 14 June 1993.23 Petitioners also contended that
through FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh
was removed as an authorized signatory for FBPC and replaced by
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li and Redentor
Padilla for all the transactions of FBPC with respondent Bank.24 They
even resigned from their respective positions in FBPC as reflected in the
12 June 1993 Secretary's Certificate submitted to the Securities and
Exchange Commission25 as petitioner Luis Toh was succeeded as
Chairman by respondent Ma. Victoria Ng Li, while one Mylene C. Padilla
took the place of petitioner Vicky Tan Toh as Vice-President.26
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
Finally, petitioners averred that sometime in June 1993 they obtained
from respondent Kenneth Ng Li their exclusion from the several surety
agreements they had entered into with different banks, i.e., Hongkong
and Shanghai Bank, China Banking Corporation, Far East Bank and Trust
Company, and herein respondent Bank.27 As a matter of record, these
other banks executed written surety agreements that showed
respondent Kenneth Ng Li as the only surety of FBPC's indebtedness.28
On 16 May 1996 the trial court promulgated its Decision in Civil Case No.
64047 finding respondent FBPC liable to pay respondent Solid Bank
Corporation the principal of P10,539,758.68 plus twelve percent (12%)
interest per annum from finality of the Decision until fully paid, but
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability
to respondent Bank.29 The court a quo found that petitioners
"voluntarily affixed their signature[s]" on the Continuing Guaranty and
were thus "at some given point in time willing to be liable under those
forms,"30 although it held that petitioners were not bound by the surety
contract since the letters of credit it was supposed to secure were
opened long after petitioners had ceased to be part of FBPC. 31
The trial court described the Continuing Guaranty as effective only while
petitioner-spouses were stockholders and officers of FBPC since
respondent Bank compelled petitioners to underwrite FBPC's
indebtedness as sureties without the requisite investigation of their
personal solvency and capability to undertake such risk.32 The lower
court also believed that the Bank knew of petitioners' divestment of
their shares in FBPC and their subsequent resignation as officers thereof
as these facts were obvious from the numerous public documents that
detailed the changes and substitutions in the list of authorized
signatories for transactions between FBPC and the Bank, including the
many trust receipts being signed by persons other than petitioners, 33 as
well as the designation of new FBPC officers which came to the notice of
the Bank's Vice-President Jose Chan Jr. and other officers.34
On 26 September 1996 the RTC-Br. 161 of Pasig City denied
reconsideration of its Decision.35
On 9 October 1996 respondent Bank appealed the Decision to the Court
of Appeals, docketed as CA-G.R. CV No. 55957.36 Petitioner-spouses did
not move for reconsideration nor appeal the finding of the trial court
that they voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held that
by signing the Continuing Guaranty, petitioner-spouses became solidarily
liable with FBPC to pay respondent Bank the amount of P10,539,758.68
as principal with twelve percent (12%) interest per annum from finality
of the judgment until completely paid.37 The Court of Appeals
ratiocinated that the provisions of the surety agreement did not
"indicate that Spouses Luis and Vicky Toh x x x signed the instrument in
their capacities as Chairman of the Board and Vice-President,
respectively, of FBPC only."38 Hence, the court a quo deduced, "[a]bsent
any such indication, it was error for the trial court to have presumed that
the appellees indeed signed the same not in their personal
capacities."39 The appellate court also ruled that as petitioners failed to
execute any written revocation of the Continuing Guaranty with notice
to respondent Bank, the instrument remained in full force and effect
when the letters of credit were availed of by respondent FBPC.40
Finally, the Court of Appeals rejected petitioners' argument that there
were "material alterations" in the provisions of the "letter-advise," i.e.,
that only domestic letters of credit were opened when the credit facility
was for importation of papers and other materials, and that marginal
deposits were not paid, contrary to the requirements stated in the
"letter-advise."41 The simple response of the appellate court to this
challenge was, first, the "letter-advise" itself authorized the issuance of
domestic letters of credit, and second, the several waivers extended by
petitioners in the Continuing Guaranty, which included changing the
time and manner of payment of the indebtedness, justified the action of
respondent Bank not to charge marginal deposits.42
Petitioner-spouses moved for reconsideration of the Decision, and after
respondent Bank's comment, filed a lengthy Reply with Motion for Oral
Argument.43 On 2 July 2002 reconsideration of the Decision was denied
on the ground that no new matter was raised to warrant the reversal or
modification thereof.44 Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of
Appeals denied them due process when it did not grant their motion for
reconsideration and without "bother[ing] to consider
[their] Reply with Motion for Oral Argument." They maintain that the
Continuing Guaranty is not legally valid and binding against them for
having been executed long after they had withdrawn from FBPC. Lastly,
they claim that the surety agreement has been extinguished by the
material alterations thereof and of the "letter-advise" which were
allegedly brought about by (a) the provision of an acceleration clause in
the trust receipts; (b) the flight of their co-sureties, respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit facility
despite the non-payment of marginal deposits in an amount beyond the
credit limit of P10 million pesos; (d) the inordinate delay of the Bank in
demanding the payment of the indebtedness; (e) the presence of ghost
deliveries and fictitious purchases using the Bank's letters of credit and
trust receipts; (f) the extension of the due dates of the letters of credit
without the required 25% partial payment per extension; (g) the
approval of another letter of credit, L/C 93-0042, even after respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li had defaulted on their
previous obligations; and, (h) the unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that the appellate
court is presumed to have passed upon all points raised by
petitioners' Reply with Motion for Oral Argument as this pleading
formed part of the records of the appellate court. It also debunks the
claim of petitioners that they were inexperienced and ignorant parties
who were taken advantage of in the Continuing Guaranty since
petitioners are astute businessmen who are very familiar with the "ins"
and "outs" of banking practice. The Bank further argues that the
notarization of the Continuing Guaranty discredits the uncorroborated
assertions against the authenticity and due execution thereof, and that
the Decision of the trial court in the civil case finding the surety
agreement to be valid and binding is now res judicata for failure of
petitioners to appeal therefrom. As a final point, the Bank refers to the
various waivers made by petitioner-spouses in the Continuing Guaranty
to justify the extension of the due dates of the letters of credit.
To begin with, we find no merit in petitioners' claim that the Court of
Appeals deprived them of their right to due process when the court a
quo did not address specifically and explicitly their Reply with Motion for
Oral Argument. While the Resolution of the appellate court of 2 July
2002 made no mention thereof in disposing of their arguments on
reconsideration, it is presumed that "all matters within an issue raised in
a case were laid before the court and passed upon it."45 In the absence
of evidence to the contrary, we must rule that the court a
quo discharged its task properly. Moreover, a reading of the
assailed Resolution clearly makes reference to a "careful review of the
records," which undeniably includes the Reply with Motion for Oral
Argument, hence there is no reason for petitioners to asseverate
otherwise.
This Court holds that the Continuing Guaranty is a valid and binding
contract of petitioner-spouses as it is a public document that enjoys the
presumption of authenticity and due execution. Although petitioners as
appellees may raise issues that have not been assigned as errors by
respondent Bank as party-appellant, i.e., unenforceability of the surety
contract, we are bound by the consistent finding of the courts a quo that
petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed their
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
signature[s]" on the surety agreement and were thus "at some given
point in time willing to be liable under those forms."46 In the absence of
clear, convincing and more than preponderant evidence to the contrary,
our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility
thereon so long as they were corporate officers and stockholders of
FBPC. Nothing in the Continuing Guaranty restricts their contractual
undertaking to such condition or eventuality. In fact the obligations
assumed by them therein subsist "upon the undersigned, the heirs,
executors, administrators, successors and assigns of the undersigned,
and shall inure to the benefit of, and be enforceable by you, your
successors, transferees and assigns," and that their commitment "shall
remain in full force and effect until written notice shall have been
received by [the Bank] that it has been revoked by the undersigned."
Verily, if petitioners intended not to be charged as sureties after their
withdrawal from FBPC, they could have simply terminated the
agreement by serving the required notice of revocation upon the Bank
as expressly allowed therein.47 In Garcia v. Court of Appeals[48] we ruled
– the terms of his contract, and while he is liable to the full extent thereof,
Regarding the petitioner's claim that he is liable only as a
corporate officer of WMC, the surety agreement shows that
he signed the same not in representation of WMC or as its
president but in his personal capacity. He is therefore
personally bound. There is no law that prohibits a corporate
officer from binding himself personally to answer for a
corporate debt. While the limited liability doctrine is intended
to protect the stockholder by immunizing him from personal
liability for the corporate debts, he may nevertheless divest
himself of this protection by voluntarily binding himself to the
payment of the corporate debts. The petitioner cannot
therefore take refuge in this doctrine that he has by his own
acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety
agreement they signed so must we also hold respondent Bank to its
representations in the "letter-advise" of 16 May 1993. Particularly, as to
the extension of the due dates of the letters of credit, we cannot exclude
from the Continuing Guaranty the preconditions of the Bank that were
plainly stipulated in the "letter-advise." Fairness and justice dictate our
doing so, for the Bank itself liberally applies the provisions of cognate
agreements whenever convenient to enforce its contractual rights, such
as, when it harnessed a provision in the trust receipts executed by
respondent FBPC to declare its entire indebtedness as due and
demandable and thereafter to exact payment thereof from petitioners
as sureties.49 In the same manner, we cannot disregard the provisions of
the "letter-advise" in sizing up the panoply of commercial obligations
between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that
respondent Bank "may at any time, or from time to time, in [its]
discretion x x x extend or change the time payment," this provision even
if understood as a waiver is confined per se to the grant of an extension
and does not surrender the prerequisites therefor as mandated in the
"letter-advise." In other words, the authority of the Bank to defer
collection contemplates only authorized extensions, that is, those that
meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its discretion
pursuant to the Continuing Guaranty, it should nonetheless comply with
the requirements that domestic letters of credit be supported by fifteen
percent (15%) marginal deposit extendible three (3) times for a period of
thirty (30) days for each extension, subject to twenty-five percent (25%)
partial payment per extension. This reading of the Continuing Guaranty
is consistent with Philippine National Bank v. Court of Appeals50 that any
doubt on the terms and conditions of the surety agreement should be
resolved in favor of the surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty
that "[n]o act or omission of any kind on [the Bank's] part in the
premises shall in any event affect or impair this guaranty"51 must also be
read "strictissimi juris" for the reason that petitioners are only
accommodation sureties, i.e., they received nothing out of the security
contract they signed.52 Thus said, the acts or omissions of the Bank
conceded by petitioners as not affecting nor impairing the surety
contract refer only to those occurring "in the premises," or those that
have been the subject of the waiver in the Continuing Guaranty, and
stretch to no other. Stated otherwise, an extension of the period for
enforcing the indebtedness does not by itself bring about the discharge
of the sureties unless the extra time is not permitted within the terms of
the waiver, i.e., where there is no payment or there is deficient
settlement of the marginal deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension releases the sureties.
Under Art. 2055 of the Civil Code, the liability of a surety is measured by
his accountability is strictly limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the trial court
that several letters of credit were irrevocably extended for ninety (90)
days with alarmingly flawed and inadequate consideration - the
indispensable marginal deposit of fifteen percent (15%) and the twenty-
five percent (25%) prerequisite for each extension of thirty (30) days. It
bears stressing that the requisite marginal deposit and security for every
thirty (30) - day extension specified in the "letter-advise" were not set
aside or abrogated nor was there any prior notice of such fact, if any was
done.
Moreover, these irregular extensions were candidly admitted by Victor
Ruben L. Tuazon, an account officer and manager of respondent Bank
and its lone witness in the civil case –
Q: You extended it even if there was no marginal deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
Q: You have repeatedly extended despite the
insufficiency partial payment requirement?
A: I would say yes.53
The foregoing extensions of the letters of credit made by respondent
Bank without observing the rigid restrictions for exercising the privilege
are not covered by the waiver stipulated in the Continuing Guaranty.
Evidently, they constitute illicit extensions prohibited under Art. 2079 of
the Civil Code, "[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty." This
act of the Bank is not mere failure or delay on its part to demand
payment after the debt has become due, as was the case in unpaid five
(5) letters of credit which the Bank did not extend, defer or put off,54 but
comprises conscious, separate and binding agreements to extend the
due date, as was admitted by the Bank itself –
Q: How much was supposed to be paid on 14 September
1993, the original LC of P1,655,675.13?
A: Under LC 93-0017 first matured on 14 September
1993. We rolled it over, extended it to December 13, 1993 but
they made partial payment that is why we extended it.
Q: The question to you now is how much was paid? How
much is supposed to be paid on September 14, 1993 on the
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

basis of the original amount of P1,655,675.13?
A: Whenever this obligation becomes due and
demandable except when you roll it over so there is novation
there on the original obligations55 (underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis Toh and
Vicky Tan Toh are relieved of their obligations as sureties of respondent
FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate against
the enforcement of the Continuing Guaranty against the
accommodation sureties. Firstly, the guaranty was executed more than
thirty (30) days from the original acceptance period as required in the
"letter-advise." Thereafter, barely two (2) days after the Continuing
Guaranty was signed, corporate agents of FBPC were replaced on 12
May 1993 and other adjustments in the corporate structure of FBPC
ensued in the month of June 1993, which the Bank did not investigate
although such were made known to it.
By the same token, there is no explanation on record for the utter
worthlessness of the trust receipts in favor of the Bank when these
documents ought to have added more security to the indebtedness of
FBPC. The Bank has in fact no information whether the trust receipts
were indeed used for the purpose for which they were obtained.56 To be
sure, the goods subject of the trust receipts were not entirely lost since
the security officer of respondent Bank who conducted surveillance of
FBPC even had the chance to intercept the surreptitious transfer of the
items under trust: "We saw two (2) delivery vans with Plates Nos. TGH
257 and PAZ 928 coming out of the compound x x x [which were] taking
out the last supplies stored in the compound."57 In addition, the
attached properties of FBPC, except for two (2) of them, were
perfunctorily abandoned by respondent Bank although the bonds
therefor were considerably reduced by the trial court.58
alteration of the principal contract, i.e., the "letter-advise," and
consequently releases the surety.61 This inference was admitted by the
Bank through the testimony of its lone witness that "[w]henever this
obligation becomes due and demandable, except when you roll it over,
(so) there is novation there on the original obligations." As has been
said, "if the suretyship contract was made upon the condition that the
principal shall furnish the creditor additional security, and the security
being furnished under these conditions is afterwards released by the
creditor, the surety is wholly discharged, without regard to the value of
the securities released, for such a transaction amounts to an alteration
of the main contract."62
WHEREFORE, the instant Petition for Review is GRANTED. The Decision
of the Court of Appeals dated 12 December 2001 in CA-G.R. CV No.
55957, Solid Bank Corporation v. First Business Paper Corporation,
Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding
petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable with First
Business Paper Corporation to pay Solid Bank Corporation the amount of
P10,539,758.68 as principal with twelve percent (12%) interest per
annum until fully paid, and its Resolution of 2 July 2002 denying
reconsideration thereof are REVERSED and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case
No. 64047, Solid Bank Corporation v. First Business Paper Corporation,
Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding
First Business Paper Corporation liable to pay respondent Solid Bank
Corporation the principal of P10,539,758.68 plus twelve percent (12%)
interest per annum until fully paid, but absolving petitioner-spouses Luis
Toh and Vicky Tan Toh of any liability to respondent Solid Bank
Corporation is REINSTATED and AFFIRMED. No costs.
SO ORDERED

The consequence of these omissions is to discharge the surety,

petitioners herein, under Art. 2080 of the Civil Code,59 or at the very
least, mitigate the liability of the surety up to the value of the property
or lien released –

If the creditor x x x has acquired a lien upon the property of a

principal, the creditor at once becomes charged with the duty
of retaining such security, or maintaining such lien in the
interest of the surety, and any release or impairment of this
security as a primary resource for the payment of a debt, will
discharge the surety to the extent of the value of the property
or lien released x x x x [for] there immediately arises a trust
relation between the parties, and the creditor as trustee is
bound to account to the surety for the value of the security in
his hands.60

For the same reason, the grace period granted by respondent Bank
represents unceremonious abandonment and forfeiture of the fifteen
percent (15%) marginal deposit and the twenty-five percent (25%)
partial payment as fixed in the "letter-advise." These payments are
unmistakably additional securities intended to protect both respondent
Bank and the sureties in the event that the principal debtor FBPC
becomes insolvent during the extension period. Compliance with these
requisites was not waived by petitioners in the Continuing Guaranty. For
this unwarranted exercise of discretion, respondent Bank bears the loss;
due to its unauthorized extensions to pay granted to FBPC, petitioner-
spouses Luis Toh and Vicky Tan Toh are discharged as sureties under the
Continuing Guaranty.

Finally, the foregoing omission or negligence of respondent Bank in

failing to safe-keep the security provided by the marginal deposit and
the twenty-five percent (25%) requirement results in the material
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 42829 September 30, 1935
RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,
vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.
GODDARD, J.:
This is an appeal from decision of the Court of First Instance of the
City of Manila the dispositive part of which reads:
In view of all the foregoing, judgment is hereby rendered
in favor of the plaintiff Radio Corporation of the
Philippines and against the defendants Jesus R. Roa,
Ramon Chavez, Andes Roa and Manuel Roa: (a) Ordering
the defendant Jesus R. Roa to pay the plaintiff the sum of
P22,935, plus P99.64, with legal interest thereon from the
date of the filing of the complaint until fully paid: (b) that
upon failure of the defendant Jesus Roa to pay the said
sum indicated, the chattel described in the second cause
of action shall be sold at public auction to be applied to
the satisfaction of the amount of this judgment; (c) that
the defendants Jesus R. Roa, Ramon Chavez, Andres Roa
and Manuel Roa pay jointly and severally to the plaintiff
the amount of P10,000; (d) and that Jesus R. Roa pay to
the plaintiff the amount equivalent to 10 per cent of
P22,935, as attorney's fees, and that all the defendants in
this case pay the costs of this action.
The defendants Ramon Chavez, Andres Roa and Manuel Roa have
appealed from the judgment against them for P10,00 and costs.
These appellants make the following assignments of error:
1. The court below erred in not finding that the balance of
the total indebtedness became immediately due and
demandable upon the failure of the defendant Jesus R.
Roa to pay any installment on his note.
2. The court below erred in not finding that defendant
Jesus R. Roa defaulted in the payment of the installment
due on February 27,1932, and that plaintiff corporation
gave him an extension of time for the payment of said
installment.
3. The court below erred in not finding that the extension
of time given to defendant Jesus R. Roa for the payment of
an overdue installment served as a release of defendant
sureties from liability on all the subsequent installments.
4. The court below erred in not finding that the sureties
were discharged from their bond when the plaintiff
authorized Jesus R. Roa to remove the photophone
equipment from Cagayan, Misamis Oriental, to Silay,
Occidental Negros, without the knowledge or consent of
said sureties.
5. The court below erred in condemning Ramon Chavez,
Andres Roa and Manuel Roa to pay jointly and severally
the sum of P10,000 to the Radio Corporation of the
Philippines.
The defendant Jesus R. Roa became indebted to the Philippine
Theatrical Enterprises, Inc., in the sum of P28,400 payable in
seventy-one equal monthly installments at the rate of P400 a month
commencing thirty days after December 11, 1931, with five days
grace monthly until complete payment of said sum. On that same
date the Philippine Theatrical Enterprises, Inc., assigned all its right
and interest in that contract to the Radio Corporation of the
Philippines.
The paragraph of that contract in which the accelerating clause
appears reads as follows:
In case the vendee-mortgagor fails to make any of the
payments as hereinbefore provided, the whole amount
remaining unpaid under this mortgage shall immediately
become due and payable and this mortgage on the
property herein mentioned as well as the Luzon Surety
Bond may be foreclosed by the vendor-mortgagee; and, in
such case, the vendee-mortgager further agrees to pay the
vendor- mortgagee an additional sum equivalent to 25 per
cent of the principal due unpaid as costs, expenses and
liquidated damages, which said sum, shall be added to the
principal sum for which this mortgage is given as security,
and shall become a part, thereof.
On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as
attorney-in-fact of the Radio Corporation of the Philippines wrote
the following letter (Exhibit 13) to the principal debtor Jesus R. Roa:
Mr. JESUS R. ROA
Cagayan, Oriental Misamis
Attention of Mrs. Amparo Chavez de Roa
DEAR SIR: We acknowledge with thanks the receipt of your
letter of March 9th together with your remittance of P200
for which we enclose receipt No. 7558. We are applying
this amount to the balance of your January installment.
We have no objection to the extension requested by you
to pay the February installment by the first week of April.
We would, however, urge you to make every efforts to
bring the account up-to date as we are given very little
discretion by the RCP in giving extension of payment.
Very truly yours,
RADIO CORP. OF THE PHIL.
By: ERLANGER & GALINGER, INC.
(Sgd.) H.N. SALET
Vice-President
Under the above assignments of error the principal question to be
decided is whether or not the extension granted in the above copied
letter by the plaintiff, without the consent of the guarantors, the
herein appellants, extinguishes the latter's liability not only as to the
installments due at that time, as held by the trial court, but also as
to the whole amount of their obligation. Articles 1851 of the Civil
Code reads as follows:
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
ART. 1851. An extension grated to the debtor by the
creditor, without the consent of the guarantor,
extinguishes the latter's liability.
This court has held that mere delay in suing for the collection of the
does not release the sureties. (Sons of I. de la Rama vs. Estate of
Benedicto, 5 Phil., 512; Banco Español Filipino vs. Donaldson Sim &
Co., 5 Phil., 418; Manzano vs. Tan Suanco, 13 Phil., 183; Hongkong &
Shanghai Baking Corporation vs. Aldecoa & Co., 30 Phil., 255.) In the
case of Villa vs. Garcia Bosque (49 Phil., 126, 134, 135), this court
stated:
. . . The rule that an extension of time granted to the
debtor by the creditor, without the consent of the
sureties, extinguishes the latter's liability is common both
to Spanish jurisprudence and the common law; and it is
well settled in English and American jurisprudence that
where a surety is liable for different payments, such as
installments of rent, or upon a series of promissory notes,
an extension of time as to one or more will not affect the
liability of the surety for the others. . . .
There is one stipulation in the contract (Exhibit A) which,
at first blush, suggests a doubt as to the propriety of
applying the doctrine above stated to the case before us.
We refer to clause (f) which declares that the non-
fulfillment on the part of the debtors of the stipulation
with respect to the payment of any installment of the
indebtedness, with interest, will give to the creditor the
right to treat and declare all of said installments as
immediately due. If the stipulation had been to the effect
that the failure to pay any installment when due
would ipso facto cause the other installments to fall due at
once, it might be plausibly contended that after default of
the payment of one installment the act of the creditor in
extending the time as to such installment would interfere
with the right of the surety to exercise his legal rights
against the debtor, and that the surety would in such case
be discharged by the extension of time, in conformity with
article 1851 and 1852 of the Civil Code. But it will be noted
that in the contract now under consideration the
stipulation is not that the maturity of the latter
installments shall be ipso facto accelerated by default in
the payment of a prior installment, but only that it shall
give the creditor a right treat the subsequent installments
as due; and in this case it does not appear that the creditor
has exercised this election. On the contrary, this action
was not instituted until after all of the installments had
fallen due in conformity with original contract. It results
that the stipulation contained in paragraph (f) does not
effect the application of the doctrine above enunciated to
the case before us.
The stipulation in the contract under consideration, copied above, is
to the effect that upon failure to pay any installment when due the
other installments ipso facto become due and payable. In view of of
the fact that under the express provision of the contract, quoted
above, the whole unpaid balance automatically becomes due and
payable upon failure to pay one installment, the act of the plaintiff in
extending the payment of the installment corresponding to
February, 1932, to April, 1932, without the consent of the
guarantors, constituted in fact an extension of the payment of the
whole amount of the indebtedness, as by that extension the plaintiff
could not have filed an action for the collection of the whole amount
until after April, 1932. Therefore appellants' contention that after
default of the payment of one installment the act of the herein
creditor in extending the time of payment discharges them as
guarantors in conformity with articles 1851 and 1852 of the Civil
Code is correct.
It is a familiar rule that if a creditor, by positive contract
with the principal debtor, and without the consent of the
surety, extends the time of payment, he thereby
discharges the surety. . . . The time of payment may be
quite as important a consideration to the surety as the
amount he has promised conditionally to pay. . . .Again, a
surety has the right, on payment of the debt, to be
subrogated to all the rights of the creditor, and to proceed
at once to collect it from the principal; but if the creditor
has tied own hands from proceeding promptly, by
extending the time of collection, the hands of the surety
will equally be bound; and before they are loosed, by the
expiration of the extended credit, the principal debtor may
have become insolvent and the right of subrogation
rendered worthless. It should be observed, however, that
it is really unimportant whewther the extension given has
actually proved prejudicial to the surety or not. The rule
stated is quite independent of the event, and the fact that
the principal is insolvent or that the extension granted
promised to be beneficial to the surety would give no right
to the creditor to change the terms of the contract without
the knowledge or consent of the surety. Nor does it matter
for how short a period the time of payment may be
extended. The principle is the same whether the time is
long or short. The creditor must be in such a situation that
when the surety comes to be substituted in his place by
paying the debt, he may have an immediate right of action
against the principal. The suspension of the right to sue for
a month, or even a day, is as effectual to release the surety
as a year or two years. (21 R.C.L., 1018-1020.)
Plaintiff's contention that the enforcement of the accelerating clause
is potestative on the part of the obligee, and not self-executing, is
clearly untenable from a simple reading of the clause copied above.
What is potestative on the part of the obligee is the foreclosure of
the mortgage and not the accelerating clause.
Plaintiff-appellee contends that there was no consideration for the
extension granted the principal debtor. Article 1277 of the Civil Code
provides that "even though the consideration should be expressed in
the contract, it shall be presumed that a consideration exists and
that it is licit, unless the debtor proves the contrary." It was
incumbent upon the plaintiff to prove that there was no valid
consideration for the extension granted.
In view of the forgoing the judgment of the trial court is reversed as
to the appellants Ramon Chavez, Andres Roa and Manuel Roa,
without costs.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. L-41795 August 30, 1935
J.W. SHANNON and MRS. J.W. SHANNON, plaintiffs-appellees,
vs.
THE PHILIPPINE LUMBER & TRANSPORTATION CO., INC., and E.E.
ELSER, defendants.
E.E. ELSER, appellant.
IMPERIAL, J.:
On March 1, 1926, the Philippine Lumber & Transportation Co., Inc.,
obtained a loan of P12,000 from Mrs. J.W. Shannon and executed a
note promising to pay the said sum to the creditor or to her
husband, J.W. Shannon, on or before March 1, 1927, with interest at
10 per cent per annum, payable monthly and in advance on the first
day of each month. The obligation with its terms was secured, jointly
and severally, by Walter E. Jones and E.E. Elser who signed the note.
This note was ratified before the notary public, Juan L. Diaz, in the
City of Manila, on March 22, 1926. The principal was not paid on its
due date or thereafter, but the stipulated interest up to October,
1929, inclusive, was paid. Walter E. Jones died on November 24,
1929, and the plaintiffs filed a claim and recovered from his estate
P1,062 in part payment of occurred interest due.
On August 1, 1927, while the principal obligation was pending
payment, J.W. Shannon obtained a loan of P1,000 from Walter E.
Jones; on April 9, 1928, he obtained another loan of P2,000, and on
April 28, 1928, he made Jones pay on his account a certain bill of
exchange drawn upon him in the sum of P1,656, making Shannon's
total loan from Jones P4,656. Both agreed that this amount should
be paid at the rate of P125 a month, with 10 per cent interest per
annum, failing which, Jones was authorized to retain and apply to
the monthly payments whatever amounts he might have belonging
to Shannon or to his wife. Jones did not receive monthly payments
from Shannon under this agreement, but instead he deducted them
from the monthly interest which, on the other hand, the Philippine
Lumber & Transportation Co., Inc., of which he was the president,
was bound to pay. These operations were entered in the books of
said corporation.
As the Philippine Lumber & Transportation Co., Inc., and its sureties
had not paid the principal and the stipulated interest from
November 1, 1929, the Shannons brought suit against the debtor
corporation and the surety, E.E. Elser, for the recovery of said
amounts. The Philippine Lumber & Transportation Co., Inc., neither
appeared nor answered the complaint, and it was declared in
default. Neither did it intervene nor defend itself at the trial. E.E.
Elser appealed from the judgment ordering the Philippine Lumber &
Transportation Co., Inc., to pay to the plaintiff the sum of P12,000
with interest at 10 per cent annum from November 1, 1929, minus
the sum of P1,062 which had been recovered from the estate of the
deceased Walter E. Jones, plus another 10 per cent as attorney's
fees, and the costs, and likewise requiring the said E.E. Elser to pay
to the plaintiffs one-half of all the aforesaid sums of money, except
attorney's fees, which the Philippine Lumber & Transportation Co.,
Inc., should fail to pay.
The appellant argues that the judgment is erroneous: in not holding
that after the note became due, the plaintiffs had received from the
Philippine Lumber & Transportation Co., Inc., payments in advance
of the stipulated interest for a relatively long period of time, and
that, consequently, said plaintiffs, as creditors, extended the period
fixed for the payment of the principal without his consent; in not
permitting him to adduce evidence on his defense of laches whereby
he attempted to show that in 1927 and 1928 the principal debtor
had property and money with which to pay its entire obligation; in
not holding that the plaintiffs were guilty of unreasonable delay in
bringing their action, thereby causing him damages, and in not
absolving him from the complaint.
The first assigned error relates to the loans made by Jones to
Shannon up to the amount of P4,656. The appellant contends that
these loans were in truth payments in advance of the stipulated
interest which the principal debtor had to pay monthly and which
had the effect of extending the stated period for the payment of the
indebtedness, thereby relieving him of his obligation as surety under
article 1851 of the Civil Code, because his consent was not first
obtained; and in support of his contention cites the decision of this
court in Banco Español Filipino vs. Donaldson Sim & Co. (5 Phil., 418).
The facts, as we find them, do not support the contention. It
indisputably appears that those amounts of money were obtained
by Shannon not as payments in advance of the interest which the
principal debtor was bound to pay, but as independent loans which
Jones granted to him. The only connection of these loans with the
interest of the indebtedness of the Philippine Lumber &
Transportation Co., Inc., consisted in the agreement between Jones
and Shannon to the effect that in case the latter should fail to pay
the monthly interest, the former was authorized to deduct it from
any amount which he might have at his disposal belonging to
Shannon or to his wife. As, on the other hand, Jones was the
president of the principal debtor, and the latter had to pay monthly
interest on its indebtedness, Jones deducted monthly from this last
interest that which Shannon failed to pay. It is therefore, evident
that neither the provisions of article 1851 of the Civil Code nor the
doctrine on the matter enunciated in the Banco Español Filipino case
is squarely in point.
The appellant attempted to prove at the trial that the plaintiffs had
been guilty of laches and had brought their action against him
tardily, because in 1927 and 1928 the principal debtor had sufficient
property and money with which it could have fully paid its
obligation, and in so acting the plaintiffs caused him damages. This
kind of evidence was timely objected to, and the objection was
sustained by the court. This ruling is the subject of the second and
third assigned errors. We hold that the judgment is not erroneous
on these grounds. True, the plaintiffs let pass some years from the
maturity of the note before bringing the action for the recovery of
its amount. But we hold that the delay does not constitute laches in
the sense that it had the effect of releasing both the principal debtor
and its sureties from their obligations, nor did it occasion loss of
rights and privileges of such moment as to give rise to the discharge
of the obligation contracted by the appellant. In the aforecited
Banco Español Filipino case, in ruling upon a similar question, we
said: "The decision en casacion of the Supreme Court of Spain is
jurisprudence properly interpreting the Spanish Civil Code. The
following doctrine is laid down in the judgment of March 22, 1901:
`The court which pronounced sentence in this case has not violated
article 1851 of the Civil Code, because the mere circumstance that
the creditor does not demand the compliance with the obligation
immediately upon the same becoming due, and that he more or less
delays his action, does not mean or reveal an intention to grant an
extension to the debtor, as according to article 1847 the obligation
of the surety extinguishes at the same time as that of the debtor,
and for the same causes as the other obligations. ...' Deferring the
filing of the action does not imply a change in the efficacy of the
contract or liability of any kind on the part of the debtor. It is merely,
without demonstration or proof to the contrary, respite, waiting,
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

courtesy, leniency, passivity, inaction. It does not constitute forbearance. This theory, however, is not generally accepted and the
novation, because this must be express. It does not engender courts almost universally consider it essentially inconsistent with the
liability, because on the part of the creditor such can not arise relation of the parties to the note. (21 R.C.L., 1032-1034.)"
except from delay, and for this class of delay interpellation on the
part of the party who considers himself injured thereby is necessary. And in Ibañez de Aldecoa vs. Hongkong & Shanghai Banking
In order that this waiting or inaction, of itself beneficial to the Corporation (42 Phil., 1000; 246 U.S., 627; 62 Law. ed., 907), the
parties obligated, can be interpreted as injurious to any of them, it is Supreme Court of the United States in affirming a decision of this
altogether necessary that this be represented by means of a protest court on the same legal question, said: "The appellant Isabel Palet
or interpellation against the delay. Without action of this kind it assigns as error that the Supreme Court failed to hold (1) that her
continues to be what it is merely a failure of the creditor to act, liability as surety of Aldecoa and Company had been extinguished in
which it itself does not create liability. It can not do so, as we see in accordance with the provisions of article 1851 of the Civil Code,
the aforesaid sentencia de casacion. `.... In accordance with the which provides that `the extension granted to a debtor by the
provisions of number 4 of article 1843, the surety, even before creditor, without the consent of the surety, extinguishes the
payment, may proceed against the principal debtor when the debt security.' (2) Refused to order for her benefit that the property of
has become demandable because the term in which it should have the company should be exhausted before resort be had to her
been paid has expired.' In view of this action, which is a protection property for satisfaction of the bank's claim. It will be observe at
against the risk of possible insolvency on the part of the principal once that the defense have some dependence upon questions of
debtor, it is very clearly seen that the law does not even grant the fact upon which the two courts below concurred. From article 1851
surety the right to sue the creditor for delay, as protection against of the Civil Code, abstractly considered, nothing can be deduced.
the risks of possible insolvency on the part of the debtor; but in view Both the trial and supreme courts held that `the mere failure to
of the efficacy of the action of the contract against the surety, bring an action upon a credit, as soon as the same or any part of it
beginning with the date when the obligation becomes due, his matures, does not constitute an extension of the term of the
vigilance must be exercised rather against the principal debtor." (5 obligation.' And it was further held that the extension, to produce
Phil., 422, 423.) the extinction of the liability, `must be based on some new
agreement by which the creditor deprives himself of the right to
In Clark vs. Sellner (42 Phil., 384), this court had occasion to reiterate immediately enforce the claim.' This interpretation of the local
the same doctrine as follows: "The trial judge took into account the courts of the local law we defer to. The construction, moreover,
fact that at the time of the maturity of the note, the collateral expresses the rule that obtains in other jurisdictions."
security given to guarantee the payment was worth more than what
was due on the note, but is depreciated to such an extent that, at The last ground of the remedy requires no extended consideration.
the time of the institution of this action, it was entirely valueless. Under the conclusions we have arrived at, it is evident that the
And taking this circumstance, together with the fact that this case judgment is not erroneous is not absolving the appellant.
was not commenced until after the lapse of four years from the date
on which the payment fell due, and with the further fact that the
The plaintiffs suggest in their brief that we amend the appealed
defendant had not received any part of the amount mentioned in
judgment by ordering the appellant to pay one-half of the attorney's
the note, he was of the opinion, and so decided, that the defendant
fees which the principal debtor should fail to pay. We are of the
could not be held liable. The theory of the judge a quo was that the
opinion that the contention is untenable because the plaintiffs did
plaintiff's failure to enforce the guaranty for the payment of the
not appeal from the judgment but accepted and abided by it.
debt, and his delay in instituting this action constitute laches, which
had the effect of extinguishing his right of action. We see no
sufficient ground for applying such a theory to the case before us. As In view of the foregoing, the appealed judgment is affirmed, with
stated, the defendant's position being, as it is, that of a joint surety, the costs of this instance to the appellant. So ordered.
he may, at any time after the maturity of the note, make payment,
thus subrogating himself in the place of the creditor with the right to
enforce the guaranty against the other signers of the note for the
reimbursement of what he is entitled to recover from them. The
mere delay of the creditor in enforcing the guaranty has not by any
means impaired his action against the defendant. It should not be
lost sight of that the defendant's signature on the note is an
assurance to the creditor that the collateral guaranty will remain
good, and that otherwise, he, the defendant, will be personally
responsible for the payment. True, that if the creditor had done any
act whereby the guaranty was impaired in its value, or discharged,
such an act would have wholly or partially released the surety; but it
must be borne in mind that it is a recognized doctrine in the matter
of suretyship that with respect to the surety, the creditor is under no
obligation to display any diligence in the enforcement of his rights as
a creditor. His mere inaction, indulgence, passiveness, or delay in
proceeding against the principal debtor, or the fact that he did not
enforce the guaranty or apply on the payment of such funds as were
available, constitute no defense at all for the surety, unless the
contract expressly requires diligence and promptness on the part of
the creditor, which is not the case in the present action. There is in
some decisions a tendency toward holding that the creditor's laches
may discharge the surety, meaning by laches a negligent
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 157309 March 28, 2008
MARLOU L. VELASQUEZ, Petitioner,
vs.
SOLIDBANK CORPORATION, Respondent.
DECISION
REYES, R.T., J.:
PARTIES may not impugn the effectivity of a contract, after much
benefit has been gained to the prejudice of another. They are bound
by the obligations they expressly set out to do.
Before Us is a petition for review on certiorari of the Decision1 of the
Court of Appeals (CA) which affirmed with modification that of the
Regional Trial Court (RTC) in Cebu City,2 holding petitioner Marlou
Velasquez liable under his letter of undertaking to respondent
Solidbank Corporation.
The Facts
Petitioner is engaged in the export business operating under the
name Wilderness Trading. Respondent is a domestic banking
corporation organized under Philippine laws.
The case arose out of a business transaction for the sale of dried sea
cucumber for export to South Korea between Wilderness Trading, as
seller, and Goldwell Trading of Pusan, South Korea, as buyer. To
facilitate payment of the products, Goldwell Trading opened a letter
of credit in favor of Wilderness Trading in the amount of
US$87,500.003with the Bank of Seoul, Pusan, Korea.
On November 12, 1992, petitioner applied for credit accommodation
with respondent bank for pre-shipment financing. The credit
accommodation was granted. Petitioner was successful in his first
two export transactions both drawn on the letter of credit. The third
export shipment, however, yielded a different result.
On February 22, 1993, petitioner submitted to respondent the
necessary documents for his third shipment. Wanting to be paid the
value of the shipment in advance, petitioner negotiated for a
documentary sight draft to be drawn on the letter of credit,
chargeable to the account of Bank of Seoul. The sight draft
represented the value of the shipment in the amount of
US$59,640.00.4
As a condition for the issuance of the sight draft, petitioner executed
a letter of undertaking in favor of respondent. Under the terms of
the letter of undertaking, petitioner promised that the draft will be
accepted and paid by Bank of Seoul according to its tenor. Petitioner
also held himself liable if the sight draft was not accepted. The letter
of undertaking provided:
SOLIDBANK CORPORATION Feb. 22, 1993
32 Borromeo Street
Cebu City
Gentlemen: Re: PURCHASE OF ONE DOC. SIGHT DRAFT DRAWN
UNDER LC#M2073210NS00040 FOR US$59,640.00 UNDER OUR
CEBP93/102.
In consideration of your negotiating the above described draft(s), we
hereby warrant that the above referred to draft(s) and
accompanying documents are genuine and accurately represent the
facts stated therein and that the draft(s) will be accepted and paid in
accordance with its/their tenor. We further undertake and agree,
jointly and severally, to hold you free and harmless from and to
defend all actions, claims and demands whatsoever, and to pay on
demand all damages, actual or compensatory, including attorney’s
fees, in case of suit, at least equal to __% of the amount due, which
you may suffer arising by reason of or on account of your
negotiating the above draft(s) because of the following
discrepancies or reasons or any other discrepancy or reason
whatever:
1) B/L MARKED "SAID TO CONTAIN" & "SHIPPER’S LOAD,
STOWAGE & COUNT."
2) LATE SHIPMENT.
3) QUANTITY SHIPPED @ US$14.00 OVERDRAWN BY 0.06
TON.
4) NO INSPECTION CERTIFICATE PRESENTED.
We hereby undertake to pay on demand the full amount of the
draft(s) or any unpaid balance of the draft(s), with interest at the
prevailing rate of today from the date of negotiation, plus all charges
and expenses whatsoever incurred in connection therewith. You
shall neither be obligated to contest or dispute any refusal to accept
or to pay the whole or any part of the above draft(s) nor to proceed
in anyway against the drawee thereof, the issuing bank, or against
any indorser thereof before making a demand on us for the payment
of the whole or any unpaid balance of the draft(s).5 (Emphasis
added)
By virtue of the letter of undertaking, respondent advanced the
value of the shipment which, at the current rate of exchange at that
time was ₱1,495,115.16, less bank charges, to petitioner.
Respondent then sent all the documents pertinent to the export
transaction to the Bank of Seoul.
Respondent failed to collect on the sight draft as it was dishonored
by non-acceptance by the Bank of Seoul. The reasons given for the
dishonor were late shipment, forged inspection certificate, and
absence of countersignature of the negotiating bank on the
inspection certificate.6 Goldwell Trading likewise issued a stop
payment order on the sight draft because most of the bags of dried
sea cucumber exported by petitioner contained soil.
Due to the dishonor of the sight draft and the stop payment order,
respondent demanded restitution of the sum advanced.7 Petitioner
failed to heed the demand.
On June 3, 1993, respondent filed a complaint for recovery of sum of
money8 with the RTC in Cebu City. In his answer, petitioner alleged
that his liability under the sight draft was extinguished when
respondent failed to protest its non-acceptance, as required under
the Negotiable Instruments Law (NIL). He also alleged that the letter
of undertaking is not binding because it is a superfluous document,
and that he did not violate any of the provisions of the letter of
credit.9
RTC and CA Dispositions
On September 25, 1996, the RTC rendered judgment10 in favor of
respondent with the following fallo:
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering
the defendant:
(1) to pay the plaintiff the principal sum of ₱1,495, 115.16
plus interest at 20% per annum counted from February 22,
1993 up to the time the entire amount shall have been
fully paid;
(2) to pay attorney’s fees equivalent to 10% of the total
amount due the plaintiff; and
(3) to pay the costs.
SO ORDERED.11
The RTC ratiocinated:
This court is not convinced with the defendant’s argument that
because of plaintiff’s failure to protest the dishonor of the sight
draft, his liability is extinguished because his liability remains under
the letter of undertaking which he signed and without which plaintiff
would not have advanced or credited to him the amount.
Section 152 of the Negotiable Instruments Law under which
defendant claims extinguishment of his liability to plaintiff is not a
bar to the filing of other appropriate remedies which the aggrieved
party may pursue to vindicate his rights and in this instant case,
plaintiff wants his right vindicated by virtue of the letter of
undertaking which defendant signed. By the letter of undertaking,
defendant bound himself to pay on demand all damages including
attorney’s fees which plaintiff may suffer arising by reason of or on
account of negotiating the above draft because of the following
discrepancies or any other discrepancy or reasons whatsoever and
further to pay on demand full amount of any unpaid balance with
interest at the prevailing rate. He should be bound to the fulfillment
of what he expressly obligated himself to do and perform in the
letter of undertaking without which, plaintiff would not have
advance (sic) and credited to him the amount in the draft. He should
not enrich himself at the expense of plaintiff.12(Emphasis added)
Disagreeing, petitioner elevated the matter to the CA.
On June 27, 2002, the CA affirmed with modification the RTC
decision, disposing as follows:
WHEREFORE, premises considered, the assailed Decision is hereby
AFFIRMED with MODIFICATION. Defendant-appellant Marlou L.
Velasquez is hereby ordered to pay plaintiff-appellee Solidbank
Corporation, the following: (1) the principal amount of One Million
Four Hundred Ninety-Five Thousand One Hundred Fifteen and
Sixteen Centavos (₱1,495,115.16) plus interest at twelve percent
(12%) per annum from February 22, 1993 until fully paid, (2)
attorney’s fees equivalent to five percent (5%) of the total amount
due, and (3) costs of the suit.
SO ORDERED.13
In ruling against petitioner, the CA opined:
The fact that said draft was dishonored and not paid by the Bank of
Seoul-Korea, (sic) it is incumbent upon defendant-appellant
Velasquez to comply with his obligation under the Letter of
Undertaking. He cannot be allowed to impugn the contract of
undertaking he entered into by saying that it was a superfluous
document, and therefore, not binding on him. The contract of
undertaking is the law between them, and must be enforced
accordingly. This is in accord with Article 1159 of the New Civil Code,
which provides that "obligations arising from contracts have the
force of law between the contracting parties and should be complied
with in good faith." And parties to a contract are bound to the
fulfillment of what has expressly been stipulated therein, regardless
of the fact that it turn (sic) out to be financially disadvantageous.14
xxxx
The fact that Defendant-appellant benefited from the advance
payment made by Plaintiff appellee, (sic) it is incumbent upon him to
return what he received because the purpose of the advance
payment was not attained and/or realized, as the sight draft was not
paid accordingly, otherwise, it will result to unjust enrichment on
the part of Defendant-appellant at the expense of Plaintiff-appellee,
in violation of Articles 19 and 22 of the New Civil Code. The doctrine
of unjust enrichment and restitution simply means that "the exercise
of a right ends when the right disappears, and it disappears when it
is abused, especially to the prejudice of others."15 (Emphasis added)
Petitioner moved for reconsideration16 but his motion was
denied.17 Hence, the present recourse.
Issues
Petitioner raises twin issues for Our consideration, to wit:
THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE,
NOT HERETOFORE DETERMINED BY THIS HONORABLE COURT, OR
HAS DECIDED IT IN A WAY PROBABLY NOT IN ACCORD WITH LAW OR
WITH THE APPLICABLE DECISIONS OF THIS HONORABLE COURT, IN
THAT:
I.
THE COURT OF APPEALS RULED THAT PETITIONER IS
LIABLE ON THE ACCESSORY CONTRACT, THE LETTER OF
UNDERTAKING, DESPITE THE FACT THAT PETITIONER WAS
ALREADY RELEASED FROM LIABILITY UNDER THE SIGHT
DRAFT, THE PRINCIPAL CONTRACT, UNDER THE
PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW AND
THE CIVIL CODE.
II.
THE COURT OF APPEALS HELD PETITIONER LIABLE UNDER
THE ACCESSORY CONTRACT, THE LETTER OF
UNDERTAKING, DESPITE THE FACT THAT THERE WAS NO
PROOF WHATSOEVER THAT PETITIONER VIOLATED EITHER
THE PRINCIPAL CONTRACT, THE SIGHT DRAFT, OR EVEN
THE LETTER OF UNDERTAKING.18 (Underscoring supplied)
The main issue is whether or not petitioner should be held liable to
respondent under the sight draft or the letter of undertaking. There
is no dispute that petitioner duly signed and executed these
documents. It is likewise admitted that the sight draft was
dishonored by non acceptance by the Bank of Seoul.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
Our Ruling
The petition is without merit.
Petitioner is not liable under the sight draft but he is liable under his
letter of undertaking; liability under the letter of undertaking was
not extinguished by non-protest of the dishonor of the sight draft.
Petitioner argues that he cannot be held liable under either the sight
draft or the letter of undertaking. He claims that the failure of
respondent to protest the dishonor of the sight draft under Section
152 of the NIL discharged him from liability under the negotiable
instrument. It is also contended that his liability under the letter of
undertaking is that of a mere guarantor; that the letter of
undertaking is only an accessory contract to the sight draft. Since he
was discharged from liability under the sight draft, he cannot be held
liable under the letter of undertaking.
For its part, respondent counters that petitioner’s liability springs
from the letter of undertaking, independently of the sight draft. It
would not have advanced the amount without the letter of
undertaking. According to respondent, the letter of undertaking is
an independent agreement and not merely an accessory contract.
To permit petitioner to escape liability under the letter of
undertaking would result in unjust enrichment.1avvphi1
Petitioner’s liability under the letter of undertaking is independent
from his liability under the sight draft. He may be held liable under
either the sight draft or the letter of undertaking or both.
Admittedly, petitioner was discharged from liability under the sight
draft when respondent failed to protest it for non-acceptance by the
Bank of Seoul. A sight draft made payable outside the Philippines is a
foreign bill of exchange.19When a foreign bill is dishonored by non-
acceptance or non-payment, protest is necessary to hold the drawer
and indorsers liable. Verily, respondent’s failure to protest the non-
acceptance of the sight draft resulted in the discharge of petitioner
from liability under the instrument.
Section 152 of the NIL is explicit:
Section 152. In what cases protest necessary. – Where a foreign bill
appearing on its face to be such is dishonored by non-acceptance, it
must be duly protested for non-acceptance, and where such a bill
which has not been previously dishonored by non-acceptance, is
dishonored by non-payment, it must be duly protested for non-
payment. If it is not so protested, the drawer and indorsers are
discharged. Where a bill does not appear on its face to be a foreign
bill, protest thereof in case of dishonor is unnecessary. (Emphasis
added)
Petitioner, however, can still be made liable under the letter of
undertaking. It bears stressing that it is a separate contract from the
sight draft. The liability of petitioner under the letter of undertaking
is direct and primary. It is independent from his liability under the
sight draft. Liability subsists on it even if the sight draft was
dishonored for non-acceptance or non-payment.
Respondent agreed to purchase the draft and credit petitioner its
value upon the undertaking that he will reimburse the amount in
case the sight draft is dishonored. The bank would certainly not have
agreed to grant petitioner an advance export payment were it not
for the letter of undertaking. The consideration for the letter of
undertaking was petitioner’s promise to pay respondent the value of
the sight draft if it was dishonored for any reason by the Bank of
Seoul.
We cannot accept petitioner’s thesis that he is only a mere
guarantor under the letter of credit.1avvphi1 Petitioner cannot be
both the primary debtor and the guarantor of his own debt. This is
inconsistent with the very purpose of a guarantee which is for the
creditor to proceed against a third person if the debtor defaults in
his obligation. Certainly, to accept such an argument would make a
mockery of commercial transactions.
Petitioner bound himself liable to respondent under the letter of
undertaking if the sight draft is not accepted. He also warranted that
the sight draft is genuine; will be paid by the issuing bank in
accordance with its tenor; and that he will be held liable for the full
amount of the draft upon demand, without necessity of proceeding
against the drawee bank.20 Petitioner breached his undertaking
when the Bank of Seoul dishonored the sight draft and Goldwell
Trading ordered a stop payment order on it for discrepancies in the
export documents.
Petitioner is liable without need for respondent to establish
collateral facts such as violations of the letter of credit.
It is also argued that petitioner cannot be held liable under the letter
of undertaking because respondent failed to prove that he violated
any of the provisions in the letter of credit or that sixty (60) of the
seventy-one (71) bags shipped to Goldwell Trading contained soil
instead of dried sea cucumber.
We cannot agree. Respondent need not prove that petitioner
violated the provisions of the letter of credit in order to be held
liable under the letter of undertaking. Parties are bound to fulfill
what has been expressly stipulated in the contract.21 Petitioner’s
liability under the letter of undertaking is clear. He is liable to
respondent if the sight draft is not accepted by the Bank of Seoul.
Mere non-acceptance of the sight draft is sufficient for liability to
attach. Here, the sight draft was dishonored for non-acceptance. The
non-acceptance of the sight draft triggered petitioner’s liability
under the letter of undertaking.
Records also show that the Bank of Seoul found discrepancies in the
documents submitted by petitioner. Goldwell Trading issued a stop
payment order because the products shipped were defective. It
found that most of the bags shipped contained soil instead of dried
sea cucumber. If petitioner disputes the finding of Goldwell Trading,
he can file a case against said company but he cannot dispute his
liability under either the sight draft or the letter of undertaking.
As We see it, this is a straightforward case of collection of sum of
money on the basis of a letter of undertaking. Respondent advanced
the export payment to petitioner on the understanding that the
draft will be honored and paid. The draft was dishonored. Justice
and equity dictate that petitioner be held liable to respondent bank.
WHEREFORE, the petition is DENIED for lack of merit. The Decision
of the Court of Appeals dated June 27, 2002 is hereby AFFIRMED.
SO ORDERED.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 166662 June 27, 2008
AUTOCORP GROUP and PETER Y. RODRIGUEZ, petitioner,
vs.
INTRA STRATA ASSURANCE CORPORATION and BUREAU OF
CUSTOMS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari from the Decision1 of the Court
of Appeals dated 30 June 2004 in CA-G.R. CV No. 62564 which affirmed
with modification the Decision2 of the Regional Trial Court (RTC) of
Makati City, Branch 150 in Civil Case No. 95-1584 dated 16 September
1998.
The factual and procedural antecedents of this case are as follows:
On 19 August 1990, petitioner Autocorp Group, represented by its
President, petitioner Peter Y. Rodriguez, secured an ordinary re-export
bond, Instrata Bond No. 5770, from private respondent Intra Strata
Assurance Corporation (ISAC) in favor of public respondent Bureau of
Customs (BOC), in the amount of P327,040.00, to guarantee the re-
export of one unit of Hyundai Excel 4-door 1.5 LS and/or to pay the taxes
and duties thereon.
On 21 December 1990, petitioners obtained another ordinary re-export
bond, Instrata Bond No. 7154, from ISAC in favor of the BOC, in the
amount of P447,671.00, which was eventually increased to P707,609.00
per Bond Endorsement No. BE-0912/91 dated 10 January 1991, to
guarantee the re-export of one unit of Hyundai Sonata 2.4 GLS and/or to
pay the taxes and duties thereon.
Petitioners executed and signed two Indemnity Agreements with
identical stipulations in favor of ISAC, agreeing to act as surety of the
subject bonds. Petitioner Rodriguez signed the Indemnity Agreements
both as President of the Autocorp Group and in his personal capacity.
Petitioners thus agreed to the following provisions:
INDEMNITY: - The undersigned agree at all times to jointly and
severally indemnify the COMPANY and keep it indemnified
and hold and save it harmless from and against any and all
damages, losses, costs, stamps, taxes, penalties, charges and
expenses of whatsoever kind and nature including counsel or
attorney’s fee which the COMPANY shall or may at any time
sustain or incur in consequence of having become surety upon
the bond herein above referred to or any extension, renewal,
substitution or alteration thereof, made at the instance of the
undersigned or any of them, or any other bond executed on
behalf of the undersigned or any of them, and to pay;
reimburse and make good to the COMPANY, its successors
and assigns, alls sums and amounts of money which it or its
representatives shall pay or cause to be paid, or become liable
to pay on accounts of the undersigned or any of them, of
whatsoever kind and nature, including 25% of the amount
involved in the litigation or other matters growing out of or
connected therewith, for and as attorney’s fees, but in no case
less than P300.00 and which shall be payable whether or not
the case be extrajudicially settled, it being understood that
demand made upon anyone of the undersigned herein is
admitted as demand made on all of the signatories hereof. It
is hereby further agreed that in case of any extension or
renewal of the bond, we equally bind ourselves to the
COMPANY under the same terms and conditions as therein
provided without the necessity of executing another
indemnity agreement for the purpose and that we may be
granted under this indemnity agreement.
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH
AND ACCRUAL OF ACTION: - Notwithstanding of (sic) the next
preceding paragraph where the obligation involves a
liquidated amount for the payment of which the COMPANY
has become legally liable under the terms of the obligation
and its suretyship undertaking, or by the demand of the
obligee or otherwise and the latter has merely allowed the
COMPANY’s aforesaid liability irrespective of whether or not
payment has actually been made by the COMPANY, the
COMPANY for the protection of its interest may forthwith
proceed against the undersigned or either of them by court
action or otherwise to enforce payment, even prior to making
payment to the obligee which may hereafter be done by the
COMPANY.
INTEREST IN CASE OF DELAY: - In the event of delay in
payment of the said sum or sums by the undersigned they will
pay interest at the rate of 12% per annum or same, which
interest, if not paid, will be liquidated and accumulated to the
capital quarterly, and shall earn the same interest as the
capital; all this without prejudice to the COMPANY’s right to
demand judicially or extrajudicially the full payment of its
claims.
INCONTESTABILITY OF PAYMENT MADE BY THE COMPANY: -
Any payment or disbursement made by the COMPANY on
account of the above-mentioned Bond, its renewals,
extensions or substitutions, replacement or novation in the
belief either that the COMPANY was obligated to make such
payment or that said payment was necessary in order to avoid
greater losses or obligations for which the COMPANY might be
liable by virtue of the terms of the above-mentioned Bond, its
renewal, extensions or substitutions, shall be final and will not
be disputed by the undersigned, who bind themselves to
jointly and severally indemnify the COMPANY of any such
payments, as stated in the preceding clauses:
WAIVER OF VENUE OF ACTION: - We hereby agree that any
question which may arise between the COMPANY and the
undersigned by reason of this document and which has to be
submitted for decision to a court of justice shall be brought
before the court of competent jurisdiction in Makati, Rizal,
waiving for this purpose any other venue.
WAIVER: - The undersigned hereby waive all the rights[,]
privileges and benefits that they have or may have under
Articles 2077, 2078, 2079, 2080 and 2081, of the Civil Code of
the Philippines.
The undersigned, by this instrument, grant a special power of
attorney in favor of all or any of the other undersigned so that
any of the undersigned may represent all the others in all
transactions related to this Bond, its renewals, extensions, or
any other agreements in connection with this Counter-
Guaranty, without the necessity of the knowledge or consent
of the others who hereby promise to accept as valid each and
every act done or executed by any of the attorney’s-in-fact by
virtue of the special power of attorney.
OUR LIABILITY HEREUNDER: - It shall not be necessary for the
COMPANY to bring suit against the principal upon his default
or to exhaust the property of the principal, but the liability
hereunder of the undersigned indemnitors shall be jointly and
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
severally, a primary one, the same as that of the principal, and
shall be exigible immediately upon the occurrence of such
default.
CANCELLATION OF BOND BY THE COMPANY: - The COMPANY
may at any time cancel the above-mentioned Bond, its
renewals, extensions or substitutions, subject to any liability
which might have accrued prior to the date of cancellation
refunding the proportionate amount of the premium
unearned on the date of cancellation.
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The
undersigned hereby empower and authorize the COMPANY to
grant or consent to the granting of any extension,
continuation, increase, modification, change, alteration
and/or renewal of the original bond herein referred to, and to
execute or consent to the execution of any substitution for
said Bond with the same or different, conditions and parties,
and the undersigned hereby hold themselves jointly and
severally liable to the COMPANY for the original Bond herein
above-mentioned or for any extension, continuation, increase,
modification, change, alteration, renewal or substitution
thereof without the necessary of any new indemnity
agreement being executed until the full amount including
principal, interest, premiums, costs, and other expenses due
to the COMPANY thereunder is fully paid up.
SEVERABILITY OF PROVISIONS: - It is hereby agreed that
should any provision or provisions of this agreement be
declared by competent public authority to be invalid or
otherwise unenforceable, all remaining provisions herein
contained shall remain in full force and effect.
NOTIFICATION: - The undersigned hereby accept due notice of
that the COMPANY has accepted this guaranty, executed by
the undersigned in favor of the COMPANY.3
In sum, ISAC issued the subject bonds to guarantee compliance by
petitioners with their undertaking with the BOC to re-export the
imported vehicles within the given period and pay the taxes and/or
duties due thereon. In turn, petitioners agreed, as surety, to indemnify
ISAC for the liability the latter may incur on the said bonds.
Petitioner Autocorp Group failed to re-export the items guaranteed by
the bonds and/or liquidate the entries or cancel the bonds, and pay the
taxes and duties pertaining to the said items despite repeated demands
made by the BOC, as well as by ISAC. By reason thereof, the BOC
considered the two bonds, with a total face value of P1,034,649.00,
forfeited.
Failing to secure from petitioners the payment of the face value of the
two bonds, despite several demands sent to each of them as surety
under the Indemnity Agreements, ISAC filed with the RTC on 24 October
1995 an action against petitioners to recover the sum of P1,034,649.00,
plus 25% thereof or P258,662.25 as attorney’s fees. ISAC impleaded the
BOC "as a necessary party plaintiff in order that the reward of money or
judgment shall be adjudged unto the said necessary plaintiff."4 The case
was docketed as Civil Case No. 95-1584.
Petitioners filed a Motion to Dismiss on 11 December 1995 on the
grounds that (1) the Complaint states no cause of action; and (2) the
BOC is an improper party.
The RTC, in an Order5 dated 27 February 1996, denied petitioners’
Motion to Dismiss. Petitioners thus filed their Answer to the Complaint,
claiming that they sought permission from the BOC for an extension of
time to re-export the items covered by the bonds; that the BOC has yet
to issue an assessment for petitioners’ alleged default; and that the
claim of ISAC for payment is premature as the subject bonds are not yet
due and demandable.
During the pre-trial conference, petitioners admitted the genuineness
and due execution of Instrata Bonds No. 5770 and No. 7154, but
specifically denied those of the corresponding Indemnity Agreements.
The parties agreed to limit the issue to "whether or not these bonds are
now due and demandable."
On 16 September 1998, the RTC rendered its Decision ordering
petitioners to pay ISAC and/or the BOC the face value of the subject
bonds in the total amount of P1,034,649.00, and to pay
ISAC P258,662.25 as attorney’s fees, thus:
WHEREFORE, judgment is hereby rendered in favor of the
[herein private respondent ISAC] and as against the [herein
petitioners] who are ordered to pay the [private respondent]
Intra Strata Assurance Corporation and/or the Bureau of
Customs the amount of P1,034,649.00 which is the equivalent
amount of the subject bonds as well as to pay the plaintiff
corporation the sum of P258,662.25 as and for attorney’s
fees.6
Petitioners’ Motion for Reconsideration was denied by the RTC in a
Resolution dated 15 January 1999.7
Petitioners appealed to the Court of Appeals. On 30 June 2004, the Court
of Appeals rendered its Decision affirming the RTC Decision, only
modifying the amount of the attorney’s fees awarded:
WHEREFORE, the appealed 16 September 1998 Decision is
MODIFIED to reduce the award of attorney’s fees to One
Hundred Three Thousand Four Hundred Sixty Four Pesos &
Ninety Centavos (P103,464.90). The rest is affirmed in toto.
Costs against [herein petitioners].8
In a Resolution dated 5 January 2005, the Court of Appeals refused to
reconsider its Decision.
Petitioners thus filed the instant Petition for Review on Certiorari,
assigning the following errors allegedly committed by the Court of
Appeals:
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
RENDERING JUDGMENT AGAINST PETITIONERS BASED ON A
PREMATURE ACTION AND/OR RULING IN FAVOR OF
RESPONDENTS WHO HAVE NO CAUSE OF ACTION AGAINST
PETITIONERS.
II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
AFFIRMING THE DECISION OF BRANCH 150, REGIONAL TRIAL
COURT OF MAKATI CITY BASED ON MISAPPREHENSION OF
FACTS, UNSUPPORTED BY EVIDENCE ON RECORD &
CONTRARY TO LAW.
III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
NOT GIVING MERIT TO THE ISSUE RAISED BY PETITIONERS
THAT THE BUREAU OF CUSTOMS IS IMPROPERLY IMPLEADED
BY INTRA STRATA.
IV. THE HONORABLE COURT OF APPEALS GRAVELY ERRED [IN]
AFFIRMING THE PORTION OF THE DECISION HOLDING
PETITIONER PETER Y. RODRIGUEZ AS JOINTLY LIABLE WHEN
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
AMENDMENTS WERE INTRODUCED, WITHOUT HIS CONSENT
AND APPROVAL.9
The present Petition is without merit.
Absence of actual forfeiture of the subject bonds
Petitioners contend that their obligation to ISAC is not yet due and
demandable. They cannot be made liable by ISAC in the absence of an
actual forfeiture of the subject bonds by the BOC and/or an explicit
pronouncement by the same bureau that ISAC is already liable on the
said bonds. In this case, there is yet no actual forfeiture of the bonds,
but merely a recommendation of forfeiture, for no writ of execution has
been issued against such bonds.10Hence, Civil Case No. 95-1584 was
prematurely filed by ISAC. Petitioners further argue that:
Secondly, it bears emphasis that as borne by the records, not
only is there no writ of forfeiture against Surety Bond No.
7154, there is likewise no evidence adduced on record to prove
that respondent Intra Strata has made legal demand against
Surety Bond No. 5770 neither is there a showing that
respondent BOC initiated a demand or issued notice for its
forfeiture and/or confiscation.11
The Court of Appeals, in its assailed Decision, already directly addressed
petitioners’ arguments by ruling that an actual forfeiture of the subject
bonds is not necessary for petitioners to be liable thereon to ISAC as
surety under the Indemnity Agreements.
According to the relevant provision of the Indemnity Agreements
executed between petitioner and ISAC, which reads:
[W]here the obligation involves a liquidated amount for the
payment of which [ISAC] has become legally liable under the
terms of the obligation and its suretyship undertaking or by
the demand of the [BOC] or otherwise and the latter has
merely allowed the [ISAC’s] aforesaid liability, irrespective of
whether or not payment has actually been made by the
[ISAC], the [ISAC] for the protection of its interest may
forthwith proceed against [petitioners Autocorp Group and
Rodriguez] or either of them by court action or otherwise to
enforce payment, even prior to making payment to the [BOC]
which may hereafter be done by [ISAC][,]12
petitioners’ obligation to indemnify ISAC became due and demandable
the moment the bonds issued by ISAC became answerable for
petitioners’ non-compliance with its undertaking with the BOC. Stated
differently, petitioners became liable to indemnify ISAC at the same time
the bonds issued by ISAC were placed at the risk of forfeiture by the BOC
for non-compliance by petitioners with its undertaking.
The subject bonds, Instrata Bonds No. 5770 and No. 7154, became due
and demandable upon the failure of petitioner Autocorp Group to
comply with a condition set forth in its undertaking with the BOC,
specifically to re-export the imported vehicles within the period of six
months from their date of entry. Since it issued the subject bonds, ISAC
then also became liable to the BOC. At this point, the Indemnity
Agreements already give ISAC the right to proceed against
petitioners via court action or otherwise.
The Indemnity Agreements, therefore, give ISAC the right to recover
from petitioners the face value of the subject bonds plus attorney’s fees
at the time ISAC becomes liable on the said bonds to the BOC, regardless
of whether the BOC had actually forfeited the bonds, demanded
payment thereof and/or received such payment. It must be pointed out
that the Indemnity Agreements explicitly provide that petitioners shall
be liable to indemnify ISAC "whether or not payment has actually been
made by the [ISAC]" and ISAC may proceed against petitioners by court
action or otherwise "even prior to making payment to the [BOC] which
may hereafter be done by [ISAC]."
Even when the BOC already admitted that it not only made a demand
upon ISAC for the payment of the bond but even filed a complaint
against ISAC for such payment,13 such demand and complaint are not
necessary to hold petitioners liable to ISAC for the amount of such
bonds. Petitioners’ attempts to prove that there was no actual forfeiture
of the subject bonds are completely irrelevant to the case at bar.
It is worthy to note that petitioners did not impugn the validity of the
stipulation in the Indemnity Agreements allowing ISAC to proceed
against petitioners the moment the subject bonds become due and
demandable, even prior to actual forfeiture or payment thereof. Even if
they did so, the Court would be constrained to uphold the validity of
such a stipulation for it is but a slightly expanded contractual expression
of Article 2071 of the Civil Code which provides, inter alia, that the
guarantor may proceed against the principal debtor the moment the
debt becomes due and demandable. Article 2071 of the Civil Code
provides:
Art. 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such nature
that it cannot be extinguished except within a period longer
than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from
the danger of insolvency of the debtor. (Emphases ours.)
Petitioners also invoke the alleged lack of demand on the part of ISAC on
petitioners as regards Instrata Bond No. 5770 before it instituted Civil
Case No. 95-1584. Even if proven true, such a fact does not carry much
weight considering that demand, whether judicial or extrajudicial, is not
required before an obligation becomes due and demandable. A demand
is only necessary in order to put an obligor in a due and demandable
obligation in delay,14which in turn is for the purpose of making the
obligor liable for interests or damages for the period of delay.15 Thus,
unless stipulated otherwise, an extrajudicial demand is not required
before a judicial demand, i.e., filing a civil case for collection, can be
resorted to.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
Inclusion of the Bureau of Customs as a party to the case
ISAC included the BOC "as a necessary party plaintiff in order that the
reward of money or judgment shall be adjudged unto the said necessary
plaintiff."16
Petitioners assail this inclusion of the BOC as a party in Civil Case No. 95-
1584 on the ground that it was not properly represented by the Solicitor
General. Petitioners also contend that the inclusion of the BOC as a party
in Civil Case No. 95-1584 "is highly improper and should not be
countenanced as the net result would be tantamount to collusion
between Intra Strata and the Bureau of Customs which would deny and
deprive petitioners their personal defenses against the BOC."17
In its assailed Decision, the Court of Appeals did not find merit in
petitioners’ arguments on the matter, holding that when the BOC
forfeited the subject bonds issued by ISAC, subrogation took place so
that whatever right the BOC had against petitioners were eventually
transferred to ISAC. As ISAC merely steps into the shoes of the BOC,
whatever defenses petitioners may have against the BOC would still be
available against ISAC.
The Court likewise cannot sustain petitioners’ position.
The misjoinder of parties does not warrant the dismissal of the action.
Section 11, Rule 3 of the Rules of Court explicitly states:
SEC. 11. Misjoinder and non-joinder of parties.—Neither
misjoinder nor non-joinder of parties is ground for dismissal
of an action. Parties may be dropped or added by order of the
court on motion of any party or on its own initiative at any
stage of the action and on such terms as are just. Any claim
against a misjoined party may be severed and proceeded with
separately.
Consequently, the purported misjoinder of the BOC as a party cannot
result in the dismissal of Civil Case No. 95-1584. If indeed the BOC was
improperly impleaded as a party in Civil Case No. 95-1584, at most,
it may be dropped by order of the court, on motion of any party or on its
own initiative, at any stage of the action and on such terms as are just.
Should the BOC then be dropped as a party to Civil Case No. 95-1584?
ISAC alleged in its Complaint18 that the BOC is being joined as a
necessary party in Civil Case No. 95-1584.
A necessary party is defined in Section 8, Rule 3 of the Rules of Court as
follows:
SEC. 8. Necessary party.—A necessary party is one who is not
indispensable but who ought to be joined as a party if
complete relief is to be accorded as to those already parties,
or for a complete determination or settlement of the claim
subject of the action.
The subject matter of Civil Case No. 95-1584 is the liability of Autocorp
Group to the BOC, which ISAC is also bound to pay as the guarantor who
issued the bonds therefor. Clearly, there would be no complete
settlement of the subject matter of the case at bar – the liability of
Autocorp Group to the BOC – should Autocorp Group be merely ordered
to pay its obligations with the BOC to ISAC. BOC is, therefore, a
necessary party in the case at bar, and should not be dropped as a party
to the present case.
It can only be conceded that there was an irregularity in the manner the
BOC was joined as a necessary party in Civil Case No. 95-1584. As the
BOC, through the Solicitor General, was not the one who initiated Civil
Case No. 95-1584, and neither was its consent obtained for the filing of
the same, it may be considered an unwilling co-plaintiff of ISAC in said
action. The proper way to implead the BOC as a necessary party to Civil
Case No. 95-1584 should have been in accordance with Section 10, Rule
3 of the Rules of Court, viz:
SEC. 10. Unwilling co-plaintiff.— If the consent of any party
who should be joined as plaintiff can not be obtained, he may
be made a defendant and the reason therefor shall be stated
in the complaint.
Nonetheless, the irregularity in the inclusion of the BOC as a party to
Civil Case No. 95-1584 would not in any way affect the disposition
thereof. As the Court already found that the BOC is a necessary party to
Civil Case No. 95-1584, it would be a graver injustice to drop it as a party.
Petitioners’ argument that the inclusion of the BOC as a party to this
case would deprive them of their personal defenses against the BOC is
utterly baseless.
First, as ruled by the Court of Appeals, petitioners’ defenses against the
BOC are completely available against ISAC, since the right of the latter to
seek indemnity from petitioner depends on the right of the BOC to
proceed against the bonds.
 The Court, however, deems it essential to qualify that ISAC’s
right to seek indemnity from petitioners does not constitute
subrogation under the Civil Code, considering that there has
been no payment yet by ISAC to the BOC. There are indeed
cases in the aforementioned Article 2071 of the Civil Code
wherein the guarantor or surety, even before having paid,
may proceed against the principal debtor, but in all these
cases, Article 2071 of the Civil Code merely grants the
guarantor or surety an action "to obtain release from the
guaranty, or to demand a security that shall protect him from
any proceedings by the creditor and from the danger of
insolvency of the debtor." The benefit of subrogation, an
extinctive subjective novation by a change of creditor, which
"transfers to the person subrogated, the credit and all the
rights thereto appertaining, either against the debtor or
against third persons,"19 is granted by the Article 2067 of the
Civil Code only to the "guarantor (or surety) who pays."20
ISAC cannot be said to have stepped into the shoes of the BOC, because
the BOC still retains said rights until it is paid. ISAC’s right to file Civil
Case No. 95-1584 is based on the express provision of the Indemnity
Agreements making petitioners liable to ISAC at the very moment ISAC’s
bonds become due and demandable for the liability of Autocorp Group
to the BOC, without need for actual payment by ISAC to the BOC. But it
is still correct to say that all the defenses available to petitioners against
the BOC can likewise be invoked against ISAC because the latter’s
contractual right to proceed against petitioners only arises when the
Autocorp Group becomes liable to the BOC for non-compliance with its
undertakings. Indeed, the arguments and evidence petitioners can
present against the BOC to prove that Autocorp Group’s liability to the
BOC is not yet due and demandable would also establish that
petitioners’ liability to ISAC under the Indemnity Agreements has not yet
arisen.
Second, making the BOC a necessary party to Civil Case No. 95-1584
actually allows petitioners to simultaneously invoke its defenses against
both the BOC and ISAC. Instead of depriving petitioners of their personal
defenses against the BOC, Civil Case No. 95-1584 actually gave them the
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
opportunity to kill two birds with one stone: to disprove its liability to
the BOC and, thus, negate its liability to ISAC.
Liability of petitioner Rodriguez
Petitioner Rodriguez posits that he is merely a guarantor, and that his
liability arises only when the person with whom he guarantees the
credit, Autocorp Group in this case, fails to pay the obligation. Petitioner
Rodriguez invokes Article 2079 of the Civil Code on Extinguishment of
Guaranty, which states:
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension of time referred to herein.
Petitioner Rodriguez argues that there was an amendment as to the
effectivity of the bonds, and this constitutes a modification of the
agreement without his consent, thereby exonerating him from any
liability.
We must take note at this point that petitioners have not presented any
evidence of this alleged amendment as to the effectivity of the
bonds.21 Be that as it may, even if there was indeed such an amendment,
such would not cause the exoneration of petitioner Rodriguez from
liability on the bonds.
The Court of Appeals, in its assailed Decision, held that the use of the
term guarantee in a contract does not ipso facto mean that the contract
is one of guaranty. It thus ruled that both petitioners assumed liability as
a regular party and obligated themselves as original promissors, i.e.,
sureties, as shown in the following provisions of the Indemnity
Agreement:
INDEMNITY: - The undersigned [Autocorp Group and
Rodriguez] agree at all times to jointly and severally
indemnify the COMPANY [ISAC] and keep it indemnified and
hold and save it harmless from and against any and all
damages, losses, costs, stamps, taxes, penalties, charges and
expenses of whatsoever kind and nature including counsel or
attorney’s fee which the COMPANY [ISAC] shall or may at any
time sustain or incur in consequence of having become surety
upon the bond herein above referred to x x x
xxxx
OUR LIABILITY HEREUNDER: - It shall not be necessary for the
COMPANY [ISAC] to bring suit against the principal [Autocorp
Group] upon his default or to exhaust the property of the
principal [Autocorp Group], but the liability hereunder of the
undersigned indemnitors [Rodriguez] shall be jointly and
severally, a primary one, the same as that of the principal
[Autocorp Group], and shall be exigible immediately upon
the occurrence of such default. (Emphases supplied.)
The Court of Appeals concluded that since petitioner Rodriguez was a
surety, Article 2079 of the Civil Code does not apply. The appellate court
further noted that both petitioners authorized ISAC to consent to the
granting of an extension of the subject bonds.
The Court of Appeals committed a slight error on this point. The
provisions of the Civil Code on Guarantee, other than the benefit of
excussion, are applicable and available to the surety.22 The Court finds
no reason why the provisions of Article 2079 would not apply to a
surety.
This, however, would not cause a reversal of the Decision of the Court of
Appeals. The Court of Appeals was correct that even
granting arguendo that there was a modification as to the effectivity of
the bonds, petitioners would still not be absolved from liability since
they had authorized ISAC to consent to the granting of any extension,
modification, alteration and/or renewal of the subject bonds, as
expressly set out in the Indemnity Agreements:
RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The
undersigned [Autocorp Group and Rodriguez] hereby
empower and authorize the COMPANY [ISAC] to grant or
consent to the granting of any extension, continuation,
increase, modification, change, alteration and/or renewal of
the original bond herein referred to, and to execute or
consent to the execution of any substitution for said Bond
with the same or different, conditions and parties, and the
undersigned [Autocorp Group and Rodriguez] hereby hold
themselves jointly and severally liable to the COMPANY
[ISAC] for the original Bond herein above-mentioned or for
any extension, continuation, increase, modification, change,
alteration, renewal or substitution thereof without the
necessary of any new indemnity agreement being
executed until the full amount including principal, interest,
premiums, costs, and other expenses due to the COMPANY
[ISAC] thereunder is fully paid up.23 (Emphases supplied.)
The foregoing provision in the Indemnity Agreements clearly authorized
ISAC to consent to the granting of any extension, modification, alteration
and/or renewal of the subject bonds.
There is nothing illegal in such a provision. In Philippine American
General Insurance Co., Inc. v. Mutuc,24 the Court held that an agreement
whereby the sureties bound themselves to be liable in case of an
extension or renewal of the bond, without the necessity of executing
another indemnity agreement for the purpose and without the necessity
of being notified of such extension or renewal, is valid; and that there is
nothing in it that militates against the law, good customs, good morals,
public order or public policy.
WHEREFORE, the instant Petition for Review on Certiorari is DENIED.
The Decision of the Court of Appeals dated 30 June 2004 in CA-G.R. CV
No. 62564 which affirmed with modification the Decision of the Regional
Trial Court of Makati City, in Civil Case No. 95-1584 dated 16 September
1998 is AFFIRMED in toto. Costs against petitioners.
SO ORDERED.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. 173526 August 28, 2008
BENJAMIN BITANGA, petitioner,
vs.
PYRAMID CONSTRUCTION ENGINEERING CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Assailed in this Petition for Review under Rule 451 of the Revised Rules
of Court are: (1) the Decision2 dated 11 April 2006 of the Court of
Appeals in CA-G.R. CV No. 78007 which affirmed with modification the
partial Decision3 dated 29 November 2002 of the Regional Trial Court
(RTC), Branch 96, of Quezon City, in Civil Case No. Q-01-45041, granting
the motion for summary judgment filed by respondent Pyramid
Construction and Engineering Corporation and declaring petitioner
Benjamin Bitanga and his wife, Marilyn Bitanga (Marilyn), solidarily liable
to pay P6,000,000.000 to respondent; and (2) the Resolution4 dated 5
July 2006 of the appellate court in the same case denying petitioner’s
Motion for Reconsideration.
The generative facts are:
On 6 September 2001, respondent filed with the RTC a Complaint for
specific performance and damages with application for the issuance of a
writ of preliminary attachment against the petitioner and Marilyn. The
Complaint was docketed as Civil Case No. Q-01-45041.
Respondent alleged in its Complaint that on 26 March 1997, it entered
into an agreement with Macrogen Realty, of which petitioner is the
President, to construct for the latter the Shoppers Gold Building, located
at Dr. A. Santos Avenue corner Palayag Road, Sucat, Parañaque City.
Respondent commenced civil, structural, and architectural works on the
construction project by May 1997. However, Macrogen Realty failed to
settle respondent’s progress billings. Petitioner, through his
representatives and agents, assured respondent that the outstanding
account of Macrogen Realty would be paid, and requested respondent
to continue working on the construction project. Relying on the
assurances made by petitioner, who was no less than the President of
Macrogen Realty, respondent continued the construction project.
In August 1998, respondent suspended work on the construction project
since the conditions that it imposed for the continuation thereof,
including payment of unsettled accounts, had not been complied with by
Macrogen Realty. On 1 September 1999, respondent instituted with the
Construction Industry Arbitration Commission (CIAC) a case for
arbitration against Macrogen Realty seeking payment by the latter of its
unpaid billings and project costs. Petitioner, through counsel, then
conveyed to respondent his purported willingness to amicably settle the
arbitration case. On 17 April 2000, before the arbitration case could be
set for trial, respondent and Macrogen Realty entered into a
Compromise Agreement,5 with petitioner acting as signatory for and in
behalf of Macrogen Realty. Under the Compromise Agreement,
Macrogen Realty agreed to pay respondent the total amount
of P6,000,000.00 in six equal monthly installments, with each installment
to be delivered on the 15th day of the month, beginning 15 June 2000.
Macrogen Realty also agreed that if it would default in the payment of
two successive monthly installments, immediate execution could issue
against it for the unpaid balance, without need of judgment or decree
from any court or tribunal. Petitioner guaranteed the obligations of
Macrogen Realty under the Compromise Agreement by executing a
Contract of Guaranty6 in favor of respondent, by virtue of which he
irrevocably and unconditionally guaranteed the full and complete
payment of the principal amount of liability of Macrogen Realty in the
sum of P6,000,000.00. Upon joint motion of respondent and Macrogen
Realty, the CIAC approved the Compromise Agreement on 25 April
2000.7
However, contrary to petitioner’s assurances, Macrogen Realty failed
and refused to pay all the monthly installments agreed upon in the
Compromise Agreement. Hence, on 7 September 2000, respondent
moved for the issuance of a writ of execution8 against Macrogen Realty,
which CIAC granted.
On 29 November 2000, the sheriff9 filed a return stating that he was
unable to locate any property of Macrogen Realty, except its bank
deposit of P20,242.33, with the Planters Bank, Buendia Branch.
Respondent then made, on 3 January 2001, a written demand10 on
petitioner, as guarantor of Macrogen Realty, to pay the P6,000,000.00,
or to point out available properties of the Macrogen Realty within the
Philippines sufficient to cover the obligation guaranteed. It also made
verbal demands on petitioner. Yet, respondent’s demands were left
unheeded.
Thus, according to respondent, petitioner’s obligation as guarantor was
already due and demandable. As to Marilyn’s liability, respondent
contended that Macrogen Realty was owned and controlled by
petitioner and Marilyn and/or by corporations owned and controlled by
them. Macrogen Realty is 99% owned by the Asian Appraisal Holdings,
Inc. (AAHI), which in turn is 99% owned by Marilyn. Since the completion
of the construction project would have redounded to the benefit of both
petitioner and Marilyn and/or their corporations; and considering,
moreover, Marilyn’s enormous interest in AAHI, the corporation which
controls Macrogen Realty, Marilyn cannot be unaware of the obligations
incurred by Macrogen Realty and/or petitioner in the course of the
business operations of the said corporation.
Respondent prayed in its Complaint that the RTC, after hearing, render a
judgment ordering petitioner and Marilyn to comply with their
obligation under the Contract of Guaranty by paying respondent the
amount of P6,000,000.000 (less the bank deposit of Macrogen Realty
with Planter’s Bank in the amount of P20,242.23) and P400,000.000 for
attorneys fees and expenses of litigation. Respondent also sought the
issuance of a writ of preliminary attachment as security for the
satisfaction of any judgment that may be recovered in the case in its
favor.
Marilyn filed a Motion to Dismiss,11 asserting that respondent had no
cause of action against her, since she did not co-sign the Contract of
Guaranty with her husband; nor was she a party to the Compromise
Agreement between respondent and Macrogen Realty. She had no part
at all in the execution of the said contracts. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital
stock of another corporation is not by itself a sufficient ground for
disregarding the separate personality of the latter corporation.
Respondent misread Section 4, Rule 3 of the Revised Rules of Court.
The RTC denied Marilyn’s Motion to Dismiss for lack of merit, and in its
Order dated 24 January 2002 decreed that:
The Motion To Dismiss Complaint Against Defendant Marilyn
Andal Bitanga filed on November 12, 2001 is denied for lack of
merit considering that Sec. 4, Rule 3, of the Rules of Court
(1997) specifically provides, as follows:
"SEC. 4. Spouses as parties. – Husband and wife
shall sue or be sued jointly, except as provided by
law."
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
and that this case does not come within the exception.12
Petitioner filed with the RTC on 12 November 2001, his Answer13 to
respondent’s Complaint averring therein that he never made
representations to respondent that Macrogen Realty would faithfully
comply with its obligations under the Compromise Agreement. He did
not offer to guarantee the obligations of Macrogen Realty to entice
respondent to enter into the Compromise Agreement but that, on the
contrary, it was respondent that required Macrogen Realty to offer
some form of security for its obligations before agreeing to the
compromise. Petitioner further alleged that his wife Marilyn was not
aware of the obligations that he assumed under both the Compromise
Agreement and the Contract of Guaranty as he did not inform her about
said contracts, nor did he secure her consent thereto at the time of their
execution.
As a special and affirmative defense, petitioner argued that the benefit
of excussion was still available to him as a guarantor since he had set it
up prior to any judgment against him. According to petitioner,
respondent failed to exhaust all legal remedies to collect from Macrogen
Realty the amount due under the Compromise Agreement, considering
that Macrogen Realty still had uncollected credits which were more than
enough to pay for the same. Given these premise, petitioner could not
be held liable as guarantor. Consequently, petitioner presented his
counterclaim for damages.
At the pre-trial held on 5 September 2002, the parties submitted the
following issues for the resolution of the RTC:
(1) whether the defendants were liable under the contract of
guarantee dated April 17, 2000 entered into between
Benjamin Bitanga and the plaintiff;
(2) whether defendant wife Marilyn Bitanga is liable in this
action;
(3) whether the defendants are entitled to the benefit of
excussion, the plaintiff on the one hand claiming that it gave
due notice to the guarantor, Benjamin Bitanga, and the
defendants contending that no proper notice was received by
Benjamin Bitanga;
(4) if damages are due, which party is liable; and
(5) whether the benefit of excussion can still be invoked by
the defendant guarantor even after the notice has been
allegedly sent by the plaintiff although proper receipt is
denied.14
On 20 September 2002, prior to the trial proper, respondent filed a
Motion for Summary Judgment.15Respondent alleged therein that it was
entitled to a summary judgment on account of petitioner’s admission
during the pre-trial of the genuineness and due execution of the
Contract of Guaranty. The contention of petitioner and Marilyn that they
were entitled to the benefit of excussion was not a genuine issue.
Respondent had already exhausted all legal remedies to collect from
Macrogen Realty, but its efforts proved unsuccessful. Given that the
inability of Macrogen Realty as debtor to pay the amount of its debt was
already proven by the return of the writ of execution to CIAC unsatisfied,
the liability of petitioner as guarantor already arose.16 In any event,
petitioner and Marilyn were deemed to have forfeited their right to avail
themselves of the benefit of excussion because they failed to comply
with Article 206017 of the Civil Code when petitioner ignored
respondent’s demand letter dated 3 January 2001 for payment of the
amount he guaranteed.18 The duty to collect the supposed receivables of
Macrogen Realty from its creditors could not be imposed on respondent,
since petitioner and Marilyn never informed respondent about such
uncollected credits even after receipt of the demand letter for payment.
The allegation of petitioner and Marilyn that they could not respond to
respondent’s demand letter since they did not receive the same was
unsubstantiated and insufficient to raise a genuine issue of fact which
could defeat respondent’s Motion for Summary Judgment. The claim
that Marilyn never participated in the transactions that culminated in
petitioner’s execution of the Contract of Guaranty was nothing more
than a sham.
In opposing respondent’s foregoing Motion for Summary Judgment,
petitioner and Marilyn countered that there were genuinely disputed
facts that would require trial on the merits. They appended thereto an
affidavit executed by petitioner, in which he declared that his spouse
Marilyn could not be held personally liable under the Contract of
Guaranty or the Compromise Agreement, nor should her share in the
conjugal partnership be made answerable for the guaranty petitioner
assumed, because his undertaking of the guaranty did not in any way
redound to the benefit of their family. As guarantor, petitioner was
entitled to the benefit of excussion, and he did not waive his right
thereto. He never received the respondent’s demand letter dated 3
January 2001, as Ms. Dette Ramos, the person who received it, was not
an employee of Macrogen Realty nor was she authorized to receive the
letter on his behalf. As a guarantor, petitioner could resort to the benefit
of excussion at any time before judgment was rendered against
him.19 Petitioner reiterated that Macrogen Realty had uncollected
credits which were more than sufficient to satisfy the claim of
respondent.
On 29 November 2002, the RTC rendered a partial Decision, the
dispositive portion of which provides:
WHEREFORE, summary judgment is rendered ordering
defendants SPOUSES BENJAMIN BITANGA and MARILYN
ANDAL BITANGA to pay the [herein respondent], jointly and
severally, the amount of P6,000,000.00, less P20,242.23
(representing the amount garnished bank deposit of
MACROGEN in the Planters Bank, Buendia Branch); and the
costs of suit.
Within 10 days from receipt of this partial decision, the
[respondent] shall inform the Court whether it shall still
pursue the rest of the claims against the defendants.
Otherwise, such claims shall be considered waived.20
Petitioner and Marilyn filed a Motion for Reconsideration of the afore-
quoted Decision, which the RTC denied in an Order dated 26 January
2003.21
In time, petitioner and Marilyn filed an appeal with the Court of Appeals,
docketed as CA-G.R. CV 78007. In its Decision dated 11 April 2006, the
appellate court held:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from must be, as it hereby is, MODIFIED to the
effect that defendant-appellant Marilyn Bitanga is adjudged
not liable, whether solidarily or otherwise, with her husband
the defendant-appellant Benjamin Bitanga, under the
compromise agreement or the contract of guaranty. No costs
in this instance.22
In holding that Marilyn Bitanga was not liable, the Court of Appeals cited
Ramos v. Court of Appeals,23 in which it was declared that a contract
cannot be enforced against one who is not a party to it. The Court of
Appeals stated further that the substantial ownership of shares in
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
Macrogen Realty by Marilyn Bitanga was not enough basis to hold her
liable.
The Court of Appeals, in its Resolution dated 5 July 2006, denied
petitioner’s Motion for Reconsideration24 of its earlier Decision.
Petitioner is now before us via the present Petition with the following
assignment of errors:
I non-moving party, although a mere scintilla of evidence in support of the
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE
VALIDITY OF THE PARTIAL SUMMARY JUDGMENT BY THE
REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 96,
DESPITE THE CLEAR EXISTENCE OF DISPUTED GENUINE AND
MATERIAL FACTS OF THE CASE THAT SHOULD HAVE REQUIRED
A TRIAL ON THE MERITS.
II
THE COURT OF APPEALS GRAVELY ERRED IN NOT UPHOLDING
THE RIGHT OF PETITIONER BENJAMIN M. BITANGA AS A MERE
GUARANTOR TO THE BENEFIT OF EXCUSSION UNDER
ARTICLES 2058, 2059, 2060, 2061, AND 2062 OF THE CIVIL
CODE OF THE PHILIPPINES.25
As in the two courts below, it is petitioner’s position that summary
judgment is improper in Civil Case No. Q-01-45041 because there are
genuine issues of fact which have to be threshed out during trial, to wit:
(A) Whether or not there was proper service of notice to
petitioner considering the said letter of demand was allegedly
received by one Dette Ramos at Macrogen office and not by
him at his residence.
(B) Whether or not petitioner is entitled to the benefit of
excussion?26
We are not persuaded by petitioner’s arguments.
Rule 35 of the Revised Rules of Civil Procedure provides:
Section 1. Summary judgment for claimant. – A party seeking
to recover upon a claim, counterclaim, or cross-claim or to
obtain a declaratory relief may, at any time after the pleading
in answer thereto has been served, move with supporting
affidavits, depositions or admissions for a summary judgment
in his favor upon all or any part thereof.
For a summary judgment to be proper, the movant must establish two
requisites: (a) there must be no genuine issue as to any material fact,
except for the amount of damages; and (b) the party presenting the
motion for summary judgment must be entitled to a judgment as a
matter of law. Where, on the basis of the pleadings of a moving party,
including documents appended thereto, no genuine issue as to a
material fact exists, the burden to produce a genuine issue shifts to the
opposing party. If the opposing party fails, the moving party is entitled to
a summary judgment.27
In a summary judgment, the crucial question is: are the issues raised by
the opposing party not genuine so as to justify a summary judgment?28
First off, we rule that the issue regarding the propriety of the service of a
copy of the demand letter on the petitioner in his office is a sham issue.
It is not a bar to the issuance of a summary judgment in respondent’s
favor.
A genuine issue is an issue of fact which requires the presentation of
evidence as distinguished from an issue which is a sham, fictitious,
contrived or false claim. To forestall summary judgment, it is essential
for the non-moving party to confirm the existence of genuine issues, as
to which he has substantial, plausible and fairly arguable
defense, i.e.,29 issues of fact calling for the presentation of evidence
upon which reasonable findings of fact could return a verdict for the
party opposing summary judgment will be insufficient to preclude entry
thereof.
Significantly, petitioner does not deny the receipt of the demand letter
from the respondent. He merely raises a howl on the impropriety of
service thereof, stating that "the address to which the said letter was
sent was not his residence but the office of Macrogen Realty, thus it
cannot be considered as the correct manner of conveying a letter of
demand upon him in his personal capacity."30
Section 6, Rule 13 of the Rules of Court states:
SEC. 6. Personal service. – Service of the papers may be made
by delivering personally a copy to the party or his counsel, or
by leaving it in his office with his clerk or with a person
having charge thereof. If no person is found in his office, or
his office is not known, or he has no office, then by leaving the
copy, between the hours of eight in the morning and six in the
evening, at the party’s or counsel’s residence, if known, with a
person of sufficient age and discretion then residing therein.
The affidavit of Mr. Robert O. Pagdilao, messenger of respondent’s
counsel states in part:
2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one
of the Associates of the ACCRA Law Offices, instructed me to
deliver to the office of Mr. Benjamin Bitanga a letter dated 3
January 2001, pertaining to Construction Industry Arbitration
Commission (hereafter, "CIAC") Case No. 99-56, entitled
"Pyramid Construction Engineering Corporation vs. Macrogen
Realty Corporation."
3. As instructed, I immediately proceeded to the office of Mr.
Bitanga located at the 12th Floor, Planters Development Bank
Building, 314 Senator Gil Puyat Avenue, Makati City. I
delivered the said letter to Ms. Dette Ramos, a person of
sufficient age and discretion, who introduced herself as one of
the employees of Mr. Bitanga and/or of the latter’s
companies.31 (Emphasis supplied.)
We emphasize that when petitioner signed the Contract of Guaranty and
assumed obligation as guarantor, his address in the said contract was
the same address where the demand letter was served.32 He does not
deny that the said place of service, which is the office of Macrogen, was
also the address that he used when he signed as guarantor in the
Contract of Guaranty. Nor does he deny that this is his office address;
instead, he merely insists that the person who received the letter and
signed the receiving copy is not an employee of his company. Petitioner
could have easily substantiated his allegation by a submission of an
affidavit of the personnel manager of his office that no such person is
indeed employed by petitioner in his office, but that evidence was not
submitted.33All things are presumed to have been done correctly and
with due formality until the contrary is proved. This juris
tantum presumption stands even against the most well-reasoned
allegation pointing to some possible irregularity or anomaly.34 It is
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

petitioner’s burden to overcome the presumption by sufficient evidence,
and so far we have not seen anything in the record to support
petitioner’s charges of anomaly beyond his bare allegation. Petitioner
cannot now be heard to complain that there was an irregular service of
the demand letter, as it does not escape our attention that petitioner
himself indicated "314 Sen. Gil Puyat Avenue, Makati City" as his office
address in the Contract of Guaranty.
Moreover, under Section 6, Rule 13 of the Rules of Court, there is
sufficiency of service when the papers, or in this case, when the demand
letter is personally delivered to the party or his counsel, or by leaving it
in his office with his clerk or with a person having charge thereof, such
as what was done in this case.
It must be stressed that despite having been served a demand letter at
his office, petitioner still failed to point out to the respondent properties
of Macrogen Realty sufficient to cover its debt as required under Article
2060 of the Civil Code. Such failure on petitioner’s part forecloses his
right to set up the defense of excussion.
Worthy of note as well is the Sheriff’s return stating that the only
property of Macrogen Realty which he found was its deposit
of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds application and precludes
petitioner from interposing the defense of excussion. We quote:

Art. 2059. This excussion shall not take place:

We have consistently expostulated that in summary judgments, the trial
court can determine a genuine issue on the basis of the pleadings,
admissions, documents, affidavits or counter affidavits submitted by the
parties. When the facts as pleaded appear uncontested or undisputed,
then there is no real or genuine issue or question as to any fact, and
summary judgment is called for.35
The Court of Appeals was correct in holding that:
Here, the issue of non-receipt of the letter of demand is a
sham or pretended issue, not a genuine and substantial issue.
Indeed, against the positive assertion of Mr. Roberto O.
Pagdilao (the private courier) in his affidavit that he delivered
the subject letter to a certain Ms. Dette Ramos who
introduced herself as one of the employees of [herein
petitioner] Mr. Benjamin Bitanga and/or of the latter’s
companies, said [petitioner] merely offered a bare denial. But
bare denials, unsubstantiated by facts, which would be
admissible in evidence at a hearing, are not sufficient to raise
a genuine issue of fact sufficient to defeat a motion for
summary judgment.36
We further affirm the findings of both the RTC and the Court of Appeals
that, given the settled facts of this case, petitioner cannot avail himself
of the benefit of excussion.
Under a contract of guarantee, the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so. The guarantor who pays for a debtor, in turn, must
be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the
property of the debtor and resorted to all the legal remedies against the
debtor. This is what is otherwise known as the benefit of excussion. 37
xxxx
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of the
obligation.
As the Court of Appeals correctly ruled:
We find untenable the claim that the [herein petitioner]
Benjamin Bitanga cannot be compelled to pay Pyramid
because the Macrogen Realty has allegedly sufficient assets.
Reason: The said [petitioner] had not genuinely controverted
the return made by Sheriff Joseph F. Bisnar, who affirmed
that, after exerting diligent efforts, he was not able to locate
any property belonging to the Macrogen Realty, except for a
bank deposit with the Planter’s Bank at Buendia, in the
amount of P20,242.23. It is axiomatic that the liability of the
guarantor arises when the insolvency or inability of the debtor
to pay the amount of debt is proven by the return of the writ
of execution that had not been unsatisfied.40
WHEREFORE, premises considered, the instant petition is DENIED for
lack of merit. The Decision of the Court of Appeals dated 11 April 2006
and its Resolution dated 5 July 2006 are AFFIRMED. Costs against
petitioner.
SO ORDERED.

Article 2060 of the Civil Code reads:

Art. 2060. In order that the guarantor may make use of the
benefit of excussion, he must set it up against the creditor
upon the latter’s demand for payment from him, and point
out to the creditor available property of the debtor within
Philippine territory, sufficient to cover the amount of the
debt.38

The afore-quoted provision imposes a condition for the invocation of the

defense of excussion. Article 2060 of the Civil Code clearly requires that
in order for the guarantor to make use of the benefit of excussion, he
must set it up against the creditor upon the latter’s demand for payment
and point out to the creditor available property of the debtor within the
Philippines sufficient to cover the amount of the debt.39
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. L-7721 March 25, 1914
INCHAUSTI & CO., plaintiff-appellant,
vs.
GREGORIO YULO, defendant-appellee.
ARELLANO, C.J.:
This suit is brought for the recovery of a certain sum of money, the
balance of a current account opened by the firm of Inchausti & Company
with Teodoro Yulo and after his death continued with his widow and
children, whose principal representative is Gregorio Yulo. Teodoro Yulo,
a property owner of Iloilo, for the exploitation and cultivation of his
numerous haciendas in the province of Occidental Negros, had been
borrowing money from the firm of Inchausti & Company under specific
conditions. On April 9, 1903; Teodoro Yulo died testate and for the
execution of the provisions of his will he had appointed as
administrators his widow and five of his sons, Gregorio Yulo being one of
the latter. He thus left a widow, Gregoria Regalado, who died on
October 22d of the following year, 1904, there remaining of the
marriage the following legitimate children: Pedro, Francisco, Teodoro,
Manuel, Gregorio, Mariano, Carmen, Concepcion, and Jose Yulo y
Regalado. Of these children Concepcion and Jose were minors, while
Teodoro was mentally incompetent. At the death of their predecessor in
interest, Teodoro Yulo, his widow and children held the conjugal
property in common and at the death of this said widow, Gregoria
Regalado, these children preserved the same relations under the name
of Hijos de T. Yulo continuing their current account with Inchausti &
Company in the best and most harmonious reciprocity until said balance
amounted to two hundred thousand pesos. In for the payment of the
disbursements of money which until that time it had been making in
favor of its debtors, the Yulos.
First. Gregorio Yulo, for himself and in representation of his brothers
Pedro Francisco, Manuel, Mariano, and Carmen, executed on June 26,
1908, a notarial document (Exhibit S) whereby all admitted their
indebtedness to Inchausti & Company in the sum of P203,221.27 and, in
order to secure the same with interest thereon at 10 per cent per
annum, they especially mortgaged an undivided six-ninth of their thirty-
eight rural properties, their remaining urban properties, lorchas, and
family credits which were listed, obligating themselves to make a forma
inventory and to describe in due form all the said properties, as well as
to cure all the defects which might prevent the inscription of the said
instrument in the registry of property and finally to extend by the
necessary formalities the aforesaid mortgage over the remaining three-
ninths part of all the property and rights belonging to their other
brothers, the incompetent Teodoro, and the minors Concepcion and
Jose.
Second. On January 11, 1909, Gregorio Yulo in representation of Hijos de
T. Yulo answered a letter of the firm of Inchausti & Company in these
terms: "With your favor of the 2d inst. we have received an abstract of
our current account with your important firm, closed on the 31st of last
December, with which we desire to express our entire conformity as also
with the balance in your favor of P271,863.12." On July 17, 1909,
Inchausti & Company informed Hijos de T. Yulo of the reduction of the
said balance to P253,445.42, with which balance Hijos de T. Yulo
expressed its conformity by means of a letter of the 19th of the same
month and year. Regarding this conformity a new document evidencing
the mortgage credit was formalized.
Third. On August 12, 1909, Gregorio Yulo, for himself and in
representation of his brother Manuel Yulo, and in their own behalf
Pedro Yulo, Francisco Yulo, Carmen Yulo, and Concepcion Yulo, the latter
being of age at the time, executed the notarial instrument (Exhibit X).
Through this, the said persons, including Concepcion Yulo ratified all the
contents of the prior document of June 26, 1908, severally and jointly
acknowledged and admitted their indebtedness to Inchausti & Company
for the net amount of two hundred fifty-three thousand four hundred
forty-five pesos and forty-two centavos (P253,445.42) which they
obligated themselves to pay, with interest at ten per cent per annum, in
five installments at the rate of fifty thousand pesos (P50,000), except the
last, this being fifty-three thousand four hundred forty-five pesos and
forty-two centavos (P53,445.42), beginning June 30, 1910, continuing
successively on the 30th of each June until the last payment on June 30,
1914. Among other clauses, they expressly stipulated the following:
Fifth. The default in payment of any of the installments
established in clause 3, or the noncompliance of any of the
other obligations which by the present document and that of
June 26, 1908, we, the Yulos, brothers and sisters, have
assumed, will result in the maturity of all the said installments,
and as a consequence thereof, if they so deem expedient
Messrs. Inchausti & Company may exercise at once all the
rights and actions which to them appertain in order to obtain
the immediate and total payment of our debt, in the same
manner that they would have so done at the maturity of the
said installments.
Fifteenth. All the obligations which by this, as well as by the
document of June 26, 1908, concern us, will be understood as
having been contradicted in solidum by all of us, the Yulos,
brothers and sisters.
Sixteenth. It is also agreed that this instrument shall be
confirmed and ratified in all its parts, within the present week,
by our brother Don Mariano Yulo y Regalado who resides in
Bacolod, otherwise it will not be binding on Messrs. Inchausti
& Company who can make use of their rights to demand and
obtain immediate payment of their credit without any further
extension or delay, in accordance with what we have agreed.
Fourth. This instrument was neither ratified nor confirmed by Mariano
Yulo.
Fifth. The Yulos, brothers and sisters, who executed the preceding
instrument, did not pay the first installment of the obligation.
Sixth. Therefore, on March 27, 1911, Inchausti & Company brought an
ordinary action in the Court of First Instance of Iloilo, against Gregorio
Yulo for the payment of the said balance due of two hundred fifty-three
thousand, four hundred forty-five pesos and forty-two centavos
P253,445.42) with interest at ten per cent per annum, on that date
aggregating forty-two thousand, nine hundred forty-four pesos and
seventy-six centavos (P42,944.76)
Seventh. But, on May 12, 1911, Francisco, Manuel, and Carmen Yulo y
Regalado executed in favor Inchausti & Company another notarial
instrument in recognition of the debt and obligation of payment in the
following terms: "First, the debt is reduce for them to two hundred
twenty-five thousand pesos (P225,000); second, the interest is likewise
reduced for them to 6 percent per annum, from March 15, 1911; third,
the installments are increase to eight, the first of P20,000, beginning on
June 30, 1911, and the rest of P30,000 each on the same date of each
successive year until the total obligation shall be finally and satisfactorily
paid on June 30, 1919," it being expressly agreed "that if any of the
partial payments specified in the foregoing clause be not paid at its
maturity, the amount of the said partial payment together with its
interest shall bear interest at the rate of 15 per cent per annum from the
date of said maturity, without the necessity of demand until its complete
payment;" that "if during two consecutive years the partial payments
agreed upon be not made, they shall lose the right to make use of the
period granted to them for the payment of the debt or the part thereof
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
which remains unpaid, and that Messrs. Inchausti & Company may
consider the total obligation due and demandable, and proceed to
collect the same together with the interest for the delay above
stipulated through all legal means." (4th clause.)
Thus was it stipulated between Inchausti & Company and the said three
Yulos, brothers and sisters — by way of compromise so that Inchausti &
Company might, as it did, withdraw the claims pending in the special
proceedings for the probate of the will of Don Teodoro Yulo and of the
intestacy of Doña Gregoria Regalado — stipulating expressly however in
the sixth clause that "Inchausti & Company should include in their suit
brought in the Court of First Instance of Iloilo against Don Gregorio Yulo,
his brother and joint co-obligee, Don Pedro Yulo, and they will procure
by all legal means and in the least time possible a judgment in their favor
against the said Don Gregorio and Don Pedro, sentencing the later to
pay the total amount of the obligation acknowledged by them in the
aforementioned instrument of August 12, 1909; with the understanding
that if they should deem it convenient for their interests, Don Francisco,
Don Manuel, and Doña Carmen Yulo may appoint an attorney to
cooperate with the lawyers of Inchausti & Company in the proceedings
of the said case."
Eighth. Matters being thus on July 10, 1911, Gregorio Yulo answered the
complaint and alleged as defenses; first, that an accumulation of interest
had taken place and that compound interest was asked for the
Philippine currency at par with Mexican; second, that in the instrument
of August 21, 1909, two conditions were agreed one of which ought to
be approved by the Court of First Instance, and the other ratified and
confirmed by the other brother Mariano Yulo, neither of which was
complied with; third , that with regard to the same debt claims were
presented before the commissioners in the special proceedings over the
inheritances of Teodoro Yulo and Gregoria Regalado, though later they
were dismissed, pending the present suit; fourth and finally, that the
instrument of August 12, 1909, was novated by that of May 12, 1911,
executed by Manuel, Francisco and Carmen Yulo.
Ninth. The Court of First Instance of Iloilo decided the case "in favor of
the defendant without prejudice to the plaintiff's bringing within the
proper time another suit for his proportional part of the joint debt, and
that the plaintiff pay the costs." (B. of E., 21.)
The plaintiff appealed from this judgment by bill of exceptions and
before this court made the following assignment of errors:
I. That the court erred in considering the contract of May 12, 1911, as
constituting a novation of that of August 12, 1909.
II. That the court erred in rendering judgment in favor of the defendant.
III. And that the court erred n denying the motion for a new trial.
"No one denies in this case," says the trial judge, "that the estate of
Teodoro Yulo or his heirs owe Inchausti & Company an amount of
money, the object of this action, namely, P253,445.42" (B. of E. 18). "The
fact is admitted," says the defendant, "that the plaintiff has not collected
the debt, and that the same is owing" (Brief, 33). "In the arguments of
the attorneys," the judge goes on, "it was really admitted that the
plaintiff had a right to bring an action against Gregorio Yulo, as one of
the conjoint and solidary obligors in the contract of August 12, 1909; but
the defendant says that the plaintiff has no right to sue him alone, since
after the present suit was brought, the plaintiff entered into a
compromise with the other conjoint and solidary debtors, the result
being the new contract of May 12, 1911, by virtue of which the
payments were extended, the same constituting a novation of the
contract which gave him the same privileges that were given his conjoint
and solidary codebtors. This (the judge concludes) is the only question
brought up by the parties." (B. of E., 19.)
And this is the only one which the Supreme Court has to solve by virtue
of the assignments of errors alleged. Consequently, there is no need of
saying anything regarding the first three defenses of the answer, nor
regarding the lack of the signature of Mariano Yulo ratifying and
confirming the instrument of August 12, 1909, upon which the appellee
still insists in his brief for this appeal; although it will not be superfluous
to state the doctrine that a condition, such as is contained in the
sixteenth clause of the said contract (third point in the statement of
facts), is by no means of suspensive but a resolutory condition; the
effect of the failure of compliance with the said clause, that is to say, the
lack of the ratification and confirmance by Mariano Yulo being not to
suspend but to resolve the contract, leaving Inchausti & Company at
liberty, as stipulated, "to make use of its rights to demand and obtain
the immediate payment of its credit."
The only question indicated in the decision of the inferior court involves,
however, these others: First, whether the plaintiff can sue Gregorio Yulo
alone, there being other obligors; second, if so, whether it lost this right
by the fact of its having agreed with the other obligors in the reduction
of the debt, the proroguing of the obligation and the extension of the
time for payment, in accordance with the instrument of May 12, 1911;
third, whether this contract with the said three obligors constitutes a
novation of that of August 12, 1909, entered into with the six debtors
who assumed the payment of two hundred fifty-three thousand and
some odd pesos, the subject matter of the suit; and fourth, if not so,
whether it does have any effect at all in the action brought, and in this
present suit.
With respect to the first it cannot be doubted that, the debtors having
obligated themselves in solidum, the creditor can bring its action in
toto against any one of them, inasmuch as this was surely its purpose in
demanding that the obligation contracted in its favor should be solidary
having in mind the principle of law that, "when the obligation is
constituted as a conjoint and solidary obligation each one of the debtors
is bound to perform in full the undertaking which is the subject matter of
such obligation." (Civil Code, articles 1137 and 1144.)
And even though the creditor may have stipulated with some of the
solidary debtors diverse installments and conditions, as in this case,
Inchausti & Company did with its debtors Manuel, Francisco, and
Carmen Yulo through the instrument of May 12, 1911, this does not lead
to the conclusion that the solidarity stipulated in the instrument of
August 12, 1909 is broken, as we already know the law provides that
"solidarity may exist even though the debtors are not bound in the same
manner and for the same periods and under the same conditions." (Ibid,
article 1140.) Whereby the second point is resolved.
With respect to the third, there can also be no doubt that the contract of
May 12, 1911, does not constitute a novation of the former one of
August 12, 1909, with respect to the other debtors who executed this
contract, or more concretely, with respect to the defendant Gregorio
Yulo: First, because "in order that an obligation may be extinguished by
another which substitutes it, it is necessary that it should be so expressly
declared or that the old and the new be incompatible in all points" (Civil
Code, article 1204); and the instrument of May 12, 1911, far from
expressly declaring that the obligation of the three who executed it
substitutes the former signed by Gregorio Yulo and the other debtors,
expressly and clearly stated that the said obligation of Gregorio Yulo to
pay the two hundred and fifty-three thousand and odd pesos sued for
exists, stipulating that the suit must continue its course and, if necessary,
these three parties who executed the contract of May 12, 1911, would
cooperate in order that the action against Gregorio Yulo might prosper
(7th point in the statement of facts), with other undertakings concerning
the execution of the judgment which might be rendered against
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
Gregorio Yulo in this same suit. "It is always necessary to state that it is
the intention of the contracting parties to extinguish the former
obligation by the new one" (Judgment in cassation, July 8, 1909). There
exist no incompatibility between the old and the new obligation as will
be demonstrated in the resolution of the last point, and for the present
we will merely reiterate the legal doctrine that an obligation to pay a
sum of money is not novated in a new instrument wherein the old is
ratified, by changing only the term of payment and adding other
obligations not incompatible with the old one. (Judgments in cassation
of June 28, 1904 and of July 8, 1909.)
With respect to the last point, the following must be borne in mind:
Facts. — First. Of the nine children of T. Yulo, six executed the mortgage
of August 12, 1909, namely, Gregorio, Pedro, Francisco, Manuel,
Carmen, and Concepcion, admitting a debt of P253,445.42 at 10 per cent
per annum and mortgaging six-ninths of their hereditary properties.
Second. Of those six children, Francisco, Manuel and Carmen executed
the instrument of May 12, 1911, wherein was obtained a reduction of
the capital to 225,000 pesos and of the interest to 6 per cent from the
15th of March of the same year of 1911. Third. The other children of T.
Yulo named Mariano, Teodoro, and Jose have not taken part in these
instruments and have not mortgaged their hereditary portions. Fourth.
By the first instrument the maturity of the first installment was June 30,
1910, whereas by the second instrument, Francisco, Manuel, and
Carmen had in their favor as the maturity of the first installment of their
debt, June 30, 1912, and Fifth, on March 27, 1911, the action against
Gregorio Yulo was already filed and judgment was pronounced on
December 22, 1911, when the whole debt was not yet due nor even the
first installment of the same respective the three aforesaid debtors,
Francisco, Manuel, and Carmen.
In jure it would follow that by sentencing Gregorio Yulo to pay 253,445
pesos and 42 centavos of August 12, 1909, this debtor, if he should pay
all this sum, could not recover from his joint debtors Francisco, Manuel,
and Carmen their proportional parts of the P253,445.42 which he had
paid, inasmuch as the three were not obligated by virtue of the
instrument of May 12, 1911, to pay only 225,000 pesos, thus
constituting a violation of Gregorio Yulo's right under such hypothesis, of
being reimbursed for the sum paid by him, with the interest of the
amounts advanced at the rate of one-sixth part from each of his five
codebtors. (Civ. Code, article 1145, par. 2). This result would have been a
ponderous obstacle against the prospering of the suit as it had been
brought. It would have been very just then to have absolved the solidary
debtor who having to pay the debt in its entirety would not be able to
demand contribution from his codebtors in order that they might
reimburse him pro rata for the amount advanced for them by him. But
such hypothesis must be put out of consideration by reason of the fact
that occurred during the pendency of the action, which fact the judge
states in his decision. "In this contract of May last," he says, "the amount
of the debt was reduced to P225,000 and the attorney of the plaintiff
admits in his plea that Gregorio Yulo has a right to the benefit of this
reduction." (B. of E., 19.) This is a fact which this Supreme Court must
hold as firmly established, considering that the plaintiff in its brief, on
page 27, corroborates the same in these words: "What effect," it says,
"could this contract have over the rights and obligations of the
defendant Gregorio Yulo with respect to the plaintiff company? In the
first place, we are the first to realize that it benefits him with respect to
the reduction of the amount of the debt. The obligation being solidary,
the remission of any part of the debt made by a creditor in favor of one
or more of the solidary debtors necessarily benefits the others, and
therefore there can be no doubt that, in accordance with the provision
of article 1143 of the Civil Code, the defendant has the right to enjoy the
benefits of the partial remission of the debt granted by the creditor."
Wherefore we hold that although the contract of May 12, 1911, has not
novated that of August 12, 1909, it has affected that contract and the
outcome of the suit brought against Gregorio Yulo alone for the sum of
P253,445.42; and in consequence thereof, the amount stated in the
contract of August 12, 1909, cannot be recovered but only that stated in
the contract of May 12, 1911, by virtue of the remission granted to the
three of the solidary debtors in this instrument, in conformity with what
is provided in article 1143 of the Civil Code, cited by the creditor itself.
If the efficacy of the later instrument over the former touching the
amount of the debt had been recognized, should such efficacy not
likewise be recognized concerning the maturity of the same? If
Francisco, Manuel, and Carmen had been included in the suit, they could
have alleged the defense of the nonmaturity of the installments since
the first installment did not mature until June 30, 1912, and without the
least doubt the defense would have prospered, and the three would
have been absolved from the suit. Cannot this defense of the
prematurity of the action, which is implied in the last special defense set
up in the answer of the defendant Gregorio Yulo be made available to
him in this proceeding?
The following commentary on article 1140 of the Civil Code sufficiently
answers this question: ". . . . Before the performance of the condition, or
before the execution of a term which affects one debtor alone
proceedings may be had against him or against any of the others for the
remainder which may be already demandable but the conditional
obligation or that which has not yet matured cannot be demanded from
any one of them. Article 1148 confirms the rule which we now enunciate
inasmuch as in case the total claim is made by one creditor, which we
believe improper if directed against the debtor affected by the condition
or the term, the latter can make use of such exceptions as are peculiarly
personal to his own obligation; and if against the other debtors,
they might make use of those exceptions, even though they are personal
to the other, inasmuch as they alleged they are personal to the other,
inasmuch as they alleged them in connection with that part of the
responsibility attaching in a special manner to the other." (8 Manresa,
Sp. Civil Code, 196.)
Article 1148 of the Civil Code. — "The solidary debtor may utilize against
the claims of the creditor of the defenses arising from the nature of the
obligation and those which are personal to him. Those personally
pertaining to the others may be employed by him only with regard to
the share of the debt for which the latter may be liable."
Gregorio Yulo cannot allege as a defense to the action that it is
premature. When the suit was brought on March 27, 1911, the first
installment of the obligation had already matured of June 30, 1910, and
with the maturity of this installment, the first not having been paid, the
whole debt had become mature, according to the express agreement of
the parties, independently of the resolutory condition which gave the
creditor the right to demand the immediate payment of the whole debt
upon the expiration of the stipulated term of one week allowed to
secure from Mariano Yulo the ratification and confirmation of the
contract of August 12, 1909.
Neither could he invoke a like exception for the shares of his solidary
codebtors Pedro and Concepcion Yulo, they being in identical condition
as he.
But as regards Francisco, Manuel, and Carmen Yulo, none of the
installments payable under their obligation, contracted later, had as yet
matured. The first payment, as already stated, was to mature on June
30, 1912. This exception or personal defense of Francisco, Manuel, and
Carmen Yulo "as to the part of the debt for which they were
responsible" can be sent up by Gregorio Yulo as a partial defense to the
action. The part of the debt for which these three are responsible is
three-sixths of P225,000 or P112,500, so that Gregorio Yulo may claim
that, even acknowledging that the debt for which he is liable is
P225,000, nevertheless not all of it can now be demanded of him, for
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
that part of it which pertained to his codebtors is not yet due, a state of
affairs which not only prevents any action against the persons who were
granted the term which has not yet matured, but also against the other
solidary debtors who being ordered to pay could not now sue for a
contribution, and for this reason the action will be only as to the
P112,500.
Against the propriety and legality of a judgment against Gregorio Yulo
for this sum, to wit, the three-sixths part of the debt which forms the
subject matter of the suit, we do not think that there was any reason or
argument offered which sustains an opinion that for the present it is not
proper to order him to pay all or part of the debt, the object of the
action.
It has been said in the brief of the appellee that the prematurity of the
action is one of the defenses derived from the nature of the obligation,
according to the opinion of the commentator of the Civil Code, Mucius
Scaevola, and consequently the defendant Gregorio Yulo may make use
of it in accordance with article 1148 of the said Code. It may be so and
yet, taken in that light, the effect would not be different from that
already stated in this decision; Gregorio Yulo could not be freed from
making any payment whatever but only from the payment of that part
of the debt which corresponds to his codebtors Francisco, Manuel, and
Carmen. The same author, considering the case of the opposing
contention of two solidary debtors as to one of whom the obligation is
pure and unconditional and as to the other it is conditional and is not yet
demandable, and comparing the disadvantages which must flow from
holding that the obligation is demandable with these which must follow
if the contrary view is adopted, favors this solution of the problem:
There is a middle ground, (he says), from which we can safely
set out, to wit, that the creditor may of course, demand the
payment of his credit against the debtor not favored by any
condition or extension of time." And further on, he decides
the question as to whether the whole debt may be recovered
or only that part unconditionally owing or which has already
matured, saying, "Without failing to proceed with juridical
rigor, but without falling into extravagances or monstrosities,
we believe that the solution of the difficulty is perfectly
possible. How? By limiting the right of the creditor to the
recovery of the amount owed by the debtors bound
unconditionally or as to whom the obligation has matured,
and leaving in suspense the right to demand the payment of
the remainder until the expiration of the term of the
fulfillment of the condition. But what then is the effect of
solidarity? How can this restriction of right be reconciled with
the duty imposed upon each one of the debtors to answer for
the whole obligation? Simply this, by recognizing in the
creditor the power, upon the performance of the condition or
the expiration of the term of claiming from any one or all of
the debtors that part of the obligation affected by those
conditions. (Scaevola, Civil Code, 19, 800 and 801.)
It has been said also by the trial judge in his decision that if a judgment
be entered against Gregorio Yulo for the whole debt of P253,445.42, he
cannot recover from Francisco, Manuel, and Carmen Yulo that part of
the amount which is owed by them because they are obliged to pay only
225,000 pesos and this is eight installments none of which was due. For
this reason he was of the opinion that he (Gregorio Yulo) cannot be
obliged to pay his part of the debt before the contract of May 12, 1911,
may be enforced, and "consequently he decided the case in favor of the
defendant, without prejudice to the plaintiff proceeding in due time
against him for his proportional part of the joint debt." (B. of E., 21 and
22.)
But in the first place, taking into consideration the conformity of the
plaintiff and the provision of article 1143 of the Civil Code, it is no longer
possible to sentence the defendant to pay the P253,445.42 of the
instrument of August 12, 1909, but, if anything, the 225,000 of the
instrument of May 12, 1911.
In the second place, neither is it possible to curtail the defendant's right
of recovery from the signers of the instrument of May 12, 1911, for he
was justly exonerated from the payment of that part of the debt
corresponding to them by reason of there having been upheld in his
favor the exception of an unmatured installment which pertains to
them.
In the third place, it does not seem just, Mucius Scaevola considers it
"absurd," that, there being a debtor who is unconditionally obligated as
to when the debt has matured, the creditor should be forced to await
the realization of the condition (or the expiration of the term.) Not only
is there no reason for this, as stated by the author, but the court would
even fail to consider the special law of the contract, neither repealed nor
novated, which cannot be omitted without violating article 1091 of the
Civil Code according to which "the obligations arising from contracts
have the force of law between the contracting parties and must be
complied with in accordance with the tenor of the same." Certain it is
that the trial court, in holding that this action was premature but might
be brought in the time, regarded the contract of August 12, 1909, as
having been expressly novated; but it is absolutely impossible in law to
sustain such supposed novation, in accordance with the legal principles
already stated, and nevertheless the obligation of the contract of May
12, 1911, must likewise be complied with in accordance with its tenor,
which is contrary in all respects to the supposed novation, by obliging
the parties who signed the contract to carry on the suit brought against
Gregorio Yulo. The contract of May 12, 1911, has affected the action and
the suit, to the extent that Gregorio Yulo has been able to make in his
favor the defense of remission of part of the debt, thanks to the
provision of article 1148, because it is a defense derived from the nature
of the obligation, so that although the said defendant was not party to
the contract in question, yet because of the principle of solidarity he was
benefited by it.
The defendant Gregorio Yulo cannot be ordered to pay the P253,445.42
claimed from him in the suit here, because he has been benefited by the
remission made by the plaintiff to three of his codebtors, many times
named above.
Consequently, the debt is reduced to 225,000 pesos.
But, as it cannot be enforced against the defendant except as to the
three-sixths part which is what he can recover from his joint codebtors
Francisco, Manuel, and Carmen, at present, judgment can be rendered
only as to the P112,500.
We therefore sentence the defendant Gregorio Yulo to pay the plaintiff
Inchausti & Company P112,500, with the interest stipulated in the
instrument of May 12, 1911, from March 15, 1911, and the legal interest
on this interest due, from the time that it was claimed judicially in
accordance with article 1109 of the Civil Code, without any special
finding as to costs. The judgment appealed from is reversed. So ordered.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

G.R. No. L-24543 July 12, 1926 previously conferred on Pirretas by the plaintiff "in order that," so
the document runs, "they may be able to effect the collection of
ROSA VILLA MONNA, plaintiff-appellee, such sums of money as may be due to the plaintiff by reason of the
vs. sale of the bookstore and printing establishment already mentioned,
GUILLERMO GARCIA BOSQUE, ET AL., defendants. issuing for such purpose the receipts, vouchers, letters of payment,
GUILLERMO GARCIA BOSQUE, F. H. GOULETTE, and R. G. and other necessary documents for whatever they shall have
FRANCE, appellants. received and collected of the character indicated."

STREET, J.: When the time came for the payment of the second installment and
accrued interest due at the time, the purchasers were unable to
comply with their obligation, and after certain negotiations between
This action was instituted in the Court of First Instance of Manila by
said purchasers and one Alfredo Rocha, representative of Figueras
Rosa Villa y Monna, widow of Enrique Bota, for the purpose of
Hermanos, acting as attorney in fact for the plaintiff, an agreement
recovering from the defendants, Guillermo Garcia Bosque and Jose
was reached, whereby Figueras Hermanos accepted the payment of
Romar Ruiz, as principals, and from the defendants R. G. France and
P5,800 on November 10, 1920, and received for the balance five
F. H. Goulette, as solidary sureties for said principals, the sum of
promissory notes payable, respectively, on December 1, 1920,
P20,509.71, with interest, as a balance alleged to be due to the
January 1, 1921, February 1, 1921, March 1, 1921, and April 1, 1921.
plaintiff upon the purchase price of a printing establishment and
The first three of these notes were in the amount of P1,000 each,
bookstore located at 89 Escolta, Manila, which had been sold to
and the last two for P2,000 each, making a total of P7,000. It was
Bosque and Ruiz by the plaintiff, acting through her attorney in fact,
furthermore agreed that the debtors should pay 9 per centum per
one Manuel Pirretas y Monros. The defendant Ruiz put in no
annum on said deferred installments, instead of the 7 per centum
appearance, and after publication judgment by default was entered
mentioned in the contract of sale. These notes were not paid
against him. The other defendants answered with a general denial
promptly at maturity but the balance due upon them was finally
and various special defenses. Upon hearing the cause the trial judge
paid in full by Bosque on December 24, 1921.
gave judgment in favor of the plaintiff, requiring all of the
defendants, jointly and severally, to pay to the plaintiff the sum of
P19,230.01, as capital, with stipulated interest at the rate of 7 per About this time the owners of the business La Flor de Cataluña,
centum per annum, plus the further sum of P1,279.70 as interest appear to have converted it into a limited partnership under the
already accrued and unpaid upon the date of the institution of the style of Guillermo Garcia Bosque, S. en C.;" and presently a
action, with interest upon the latter amount at the rate of 6 per corporation was formed to take over the business under the name
centum per annum. From this judgment Guillermo Garcia Bosque, as "Bota Printing Company, Inc." By a document executed on April 21,
principal, and R. G. France and F.H. Goulette, as sureties. appealed. 1922, the partnership appears to have conveyed all its assets to this
corporation for the purported consideration of P15,000, Meanwhile
the seven notes representing the unpaid balance of the second
It appears that prior to September 17, 1919, the plaintiff, Rosa Villa y
installment and interest were failing due without being paid.
Monna, viuda de E. Bota, was the owner of a printing establishment
Induced by this dilatoriness on the part the debtor and supposedly
and bookstore located at 89 Escolta, Manila, and known as La Flor de
animated by a desire to get the matter into better shape, M. T.
Cataluna, Viuda de E. Bota, with the machinery, motors, bindery,
Figueras entered into the agreement attached as Exhibit 1 to the
type material furniture, and stock appurtenant thereto. Upon the
answer of Bosque. In this document it is recited that Guillermo
date stated, the plaintiff, then and now a resident of Barcelona,
Garcia Bosque. S. en C., is indebted to Rosa Villa, viuda de E. Bota, in
Spain, acting through Manuel Pirretas, as attorney in fact, sold the
the amount of P32,000 for which R. G. France and F. H. Goulette are
establishment above-mentioned to the defendants Guillermo Garcia
bound as joint and several sureties, and that the partnership
Bosque and Jose Pomar Ruiz, residents of the City of Manila, for the
mentioned had transferred all its assets to the Bota Printing
stipulated sum of P55,000, payable as follows: Fifteen thousand
Company, Inc., of which one George Andrews was a principal
pesos (P15,000) on November 1, next ensuing upon the execution of
stockholder. It is then stipulated that France and Goulette shall be
the contract, being the date when the purchasers were to take
relieved from all liability on their contract as sureties and that in lieu
possession; ten thousand pesos (P10,000) at one year from the same
thereof the creditor, Doña Rosa Villa y Monna, accepts the Bota
date; fifteen thousand pesos (P15,000) at two years; and the
Printing Company, Inc., as debtor to the extent of P20,000, which
remaining fifteen thousand pesos (P15,000) at the end of three
indebtedness was expressly assumed by it, and George Andrews as
years. By the contract of sale the deferred installments bear interest
debtor to the extent of P12,000, which he undertook to pay at the
at the rate of 7 per centum per annum. In the same document the
rate of P200 per month thereafter. To this contract the name of the
defendants France and Goulette obligated themselves as solidary
partnership Guillermo Garcia Bosque, S. en C., was affixed by
sureties with the principals Bosque and Ruiz, to answer for any
Guillermo Garcia Bosque while the name of the Bota Printing
balance, including interest, which should remain due and unpaid
Company, Inc., was signed by G. Andrews, the latter also signing in
after the dates stipulated for payment of said installments, expressly
his individual capacity. The name of the plaintiff was affixed by M.T.
renouncing the benefit of exhaustion of the property of the
Figueras in the following style: "p.p. Rosa Villa, viuda de E. Bota, M.
principals. The first installment of P15,000 was paid conformably to
T. Figueras, party of the second part."
agreement.

No question is made as to the authenticity of this document or as to

In the year 1920, Manuel Pirretas y Monros, the attorney in fact of
the intention of Figueras to release the sureties; and the latter rely
the plaintiff, absented himself from the Philippine Islands on a
upon the discharge as complete defense to the action. The
prolonged visit to Spain; and in contemplation of his departure he
defendant Bosque also relies upon the same agreement as
executed a document, dated January 22, 1920, purporting to be a
constituting a novation such as to relieve him from personal liability.
partial substitution of agency, whereby he transferred to "the
All of the defendants furthermore maintain that even supposing that
mercantile entity Figueras Hermanos, or the person, or persons,
M. T. Figueras authority to novate the original contract and
having legal representation of the same," the powers that had been
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
discharge the sureties therefrom, nevertheless the plaintiff has
ratified the agreement by accepting part payment of the amount
due thereunder with full knowledge of its terms. In her amended
complaint the plaintiff asserts that Figueras had no authority to
execute the contract containing the release (Exhibit 1) and that the
same had never been ratified by her.
The question thus raised as to whether the plaintiff is bound by
Exhibit 1 constitutes the main controversy in the case, since if this
point should be determined in the affirmative the plaintiff obviously
has no right of action against any of the defendants. We accordingly
address ourselves to this point first.
The partial substitution of agency (Exhibit B to amended complaint)
purports to confer on Figueras Hermanos or the person or persons
exercising legal representation of the same all of the powers that
had been conferred on Pirretas by the plaintiff in the original power
of attorney. This original power of attorney is not before us, but
assuming, as is stated in Exhibit B, that this document contained a
general power to Pirretas to sell the business known as La Flor de
Cataluña upon conditions to be fixed by him and power to collect
money due to the plaintiff upon any account, with a further power
of substitution, yet it is obvious upon the face of the act of
substitution (Exhibit B) that the sole purpose was to authorize
Figueras Hermanos to collect the balance due to the plaintiff upon
the price of La Flor de Cataluña, the sale of which had already been
affected by Pirretas. The words of Exhibit B on this point are quite
explicit ("to the end that the said lady may be able to collect the
balance of the selling price of the Printing Establishment and
Bookstore above-mentioned, which has been sold to Messrs. Bosque
and Pomar"). There is nothing here that can be construed to
authorize Figueras Hermanos to discharge any of the debtors
without payment or to novate the contract by which their obligation
was created. On the contrary the terms of the substitution shows
the limited extent of the power. A further noteworthy feature of the
contract Exhibit 1 has reference to the personality of the purported
attorney in fact and the manner in which the contract was signed.
Under the Exhibit B the substituted authority should be exercised by
the mercantile entity Figueras Hermanos or the person duly
authorized to represent the same. In the actual execution of Exhibit
1, M. T. Figueras intervenes as purpoted attorney in fact without
anything whatever to show that he is in fact the legal representative
of Figueras Hermanos or that he is there acting in such capacity. The
act of substitution conferred no authority whatever on M. T.
Figueras as an individual. In view of these defects in the granting and
exercise of the substituted power, we agree with the trial judge that
the Exhibit 1 is not binding on the plaintiff. Figueras had no authority
to execute the contract of release and novation in the manner
attempted; and apart from this it is shown that in releasing the
sureties Figueras acted contrary to instructions. For instance, in a
letter from Figueras in Manila, dated March 4, 1922, to Pirretas,
then in Barcelona, the former stated that he was attempting to
settle the affair to the best advantage and expected to put through
an arrangement whereby Doña Rosa would receive P20,000 in cash,
the balance to be paid in installments, "with the guaranty of France
and Goulette." In his reply of April 29 to this letter, Pirretas
expresses the conformity of Doña Rosa in any adjustment of the
claim that Figueras should see fit to make, based upon payment of
P20,000 in cash, the balance in installments, payable in the shortest
practicable periods, it being understood, however, that the guaranty
of Messrs. France and Goulette should remain intact. Again, on May
9, Pirretas repeats his assurance that the plaintiff would be willing to
accept P20,000 down with the balance in interest-bearing
installments "with the guaranty of France and Goulette." From this it
is obvious that Figueras had no actual authority whatever to release
the sureties or to make a novation of the contract without their
additional guaranty.
But it is asserted that the plaintiff ratified the contract (Exhibit 1) by
accepting and retaining the sum of P14,000 which, it is asserted, was
paid by the Bota Printing Co., Inc., under that contract. In this
connection it should be noted that when the firm of Guillermo
Garcia Bosque, S. en C., conveyed all it assets on April 21, 1922 to
the newly formed corporation, Bota Printing Co., Inc., the latter
obligated itself to pay al the debts of the partnership, including the
sum of P32,000 due to the plaintiff. On April 23, thereafter, Bosque,
acting for the Bota Printing Co., Inc., paid to Figueras the sum of
P8,000 upon the third installment due to the plaintiff under the
original contract of sale, and the same was credited by Figueras
accordingly. On May 16 a further sum of P5,000 was similarly paid
and credited; and on May 25, a further sum of P200 was likewise
paid, making P14,000 in all. Now, it will be remembered that in the
contract (Exhibit 1), executed on May 17, 1922, the Bota Printing
Co., Inc., undertook to pay the sum of P20,00; and the parties to the
agreement considered that the sum of P13,800 then already paid by
the Bota Printing Co., Inc., should be treated as a partial satisfaction
of the larger sum of P20,000 which the Bota Printing Co., Inc., had
obligated itself to pay. In the light of these facts the proposition of
the defendants to the effect that the plaintiff has ratified Exhibit 1
by retaining the sum of P14,000, paid by the Bota Printing Co., Inc.,
as above stated, is untenable. By the assumption of the debts of its
predecessor the Bota Printing Co., Inc., had become a primary
debtor to the plaintiff; and she therefore had a right to accept the
payments made by the latter and to apply the same to the
satisfaction of the third installment of the original indebtedness.
Nearly all of this money was so paid prior to the execution of Exhibit
1 and although the sum of P200 was paid a few days later, we are of
the opinion that the plaintiff was entitled to accept and retain the
whole, applying it in the manner above stated. In other words the
plaintiff may lawfully retain that money notwithstanding her refusal
to be bound by Exhibit 1.
A contention submitted exclusively in behalf of France and Goulette,
the appellant sureties, is that they were discharged by the
agreement between the principal debtor and Figueras Hermanos, as
attorney in fact for the plaintiff, whereby the period for the payment
of the second installment was extended, without the assent of the
sureties, and new promissory notes for unpaid balance were
executed in the manner already mentioned in this opinion. The
execution of these new promissory notes undoubtedly constituted
and extension of time as to the obligation included therein, such as
would release a surety, even though of the solidary type, under
article 1851 of the Civil Code. Nevertheless it is to be borne in mind
that said extension and novation related only to the second
installment of the original obligation and interest accrued up to that
time. Furthermore, the total amount of these notes was afterwards
paid in full, and they are not now the subject of controversy. It
results that the extension thus effected could not discharge the
sureties from their liability as to other installments upon which
alone they have been sued in this action. The rule that an extension
of time granted to the debtor by the creditor, without the consent of
the sureties, extinguishes the latter's liability is common both to
Spanish jurisprudence and the common law; and it is well settled in
English and American jurisprudence that where a surety is liable for
different payments, such as installments of rent, or upon a series of
promissory notes, an extension of time as to one or more will not
affect the liability of the surety for the others. (32 Cyc., 196; Hopkirk
vs. McConico, 1 Brock., 220; 12 Fed. Cas., No. 6696; Coe vs. Cassidy,
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

72 N. Y., 133; Cohn vs. Spitzer, 129 N. Y. Supp., 104; Shephard Land
Co. vs. Banigan, 36 R. I., 1; I. J. Cooper Rubber Co. vs. Johnson, 133
Tenn., 562; Bleeker vs. Johnson, 190, N. W. 1010.) The contention of
the sureties on this point is therefore untenable.

There is one stipulation in the contract (Exhibit A) which, at first

suggests a doubt as to propriety of applying the doctrine above
stated to the case before us. We refer to cause (f) which declares
that the non-fulfillment on the part of the debtors of the stipulation
with respect to the payment of any installment of the indebtedness,
with interest, will give to the creditor the right to treat and declare
all of said installments as immediately due. If the stipulation had
been to the effect that the failure to pay any installment when due
would ipso facto cause to other installments to fall due at once, it
might be plausibly contended that after default of the payment of
one installment the act of the creditor in extending the time as to
such installment would interfere with the right of the surety to
exercise his legal rights against the debtor, and that the surety
would in such case be discharged by the extension of time, in
conformity with articles 1851 and 1852 of the Civil Code. But it will
be noted that in the contract now under consideration the
stipulation is not that the maturity of the later installments shall
be ipso facto accelerated by default in the payment of a prior
installment, but only that it shall give the creditor a right to treat the
subsequent installments as due, and in this case it does not appear
that the creditor has exercised this election. On the contrary, this
action was not instituted until after all of the installments had fallen
due in conformity with the original contract. It results that the
stipulation contained in paragraph (f) does not affect the application
of the doctrine above enunciated to the case before us.

Finally, it is contended by the appellant sureties that they were

discharged by a fraud practiced upon them by the plaintiff in failing
to require the debtor to execute a mortgage upon the printing
establishment to secure the debt which is the subject of this suit. In
this connection t is insisted that at the time France and Goulette
entered into the contract of suretyship, it was represented to them
that they would be protected by the execution of a mortgage upon
the printing establishment by the purchasers Bosque and Pomar. No
such mortgage was in fact executed and in the end another creditor
appears to have obtained a mortgage upon the plant which is
admitted to be superior to the claim of the plaintiff. The failure of
the creditor to require a mortgage is alleged to operate as a
discharge of the sureties. With this insistence we are unable to
agree, for the reason that the proof does not show, in our opinion,
that the creditor, on her attorney in fact, was a party to any such
agreement. On the other hand it is to be collected from the evidence
that the suggestion that a mortgage would be executed on the plant
to secure the purchase price and that this mortgage would operate
for the protection of the sureties came from the principal and not
from any representative of the plaintiff.

As a result of our examination of the case we find no error in the

record prejudicial to any of the appellants, and the judgment
appealed from will be affirmed, So ordered, with costs against the
appellants.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. L-20588 December 17, 1923
THE ASIATIC PETROLEUM COMPANY (PHILIPPINE ISLANDS),
LTD., plaintiff-appellant,
vs.
FRANCISCO HIZON Y SINGIAN and JUSTINO A. DAVID, defendants.
FRANCISCO HIZON Y SINGIAN,defendant-appellant.
STREET, J.:
This civil action was instituted in the Court of First Instance of the
Province of Pampanga by the Asiatic Petroleum Company (Philippine
Islands), Ltd., to recover of Justino A. David, as principal, and of
Francisco Hizon y Singian, as security, the sum of P51,560.12, an
alleged balance due upon liquidation of accounts between the
plaintiff and said David, and for which Francisco Hizon y Singian is
alleged to be obligated as joint and several surety with the principal
debtor. At the hearing judgment was rendered in favor of the
plaintiff to recover of Justino A. David, as principal, the sum
P40,786.98, and of Francisco Hizon y Singian, as surety, a portion of
the same debt not to exceed the sum of P5,000. From this judgment
Justino A. David did not appeal, and his obligation, as principal
debtor, to the extent adjudged by the trial court, is not now in
question. As regards the liability declared by the trial court against
Francisco Hizon y Singian, an appeal was taken both by the plaintiff
and by said Hizon, the plaintiff contending that the court should
have held Hizon jointly and severally responsible for the entire sum
adjudged against the principal debtor, while Hizon claims that he
should have been wholly absolved.
It appears in evidence that the plaintiff is a corporation lawfully
engaged in the selling of petroleum products in the Philippine
Islands. In the year 1916 the plaintiff made a contract (Exhibit B)
with Justino A. David, whereby the latter became the selling agent of
the plaintiff at San Fernando, in the Province of Pampanga, with
authority extending not only over the municipality of San Fernando
but over the neighboring places of Guagua, Angeles, San Simon,
Capas, Magalang, and Mabalakat, in the same province. In
accordance with this contract and in conformity with the practices of
the contracting parties thereunder, the said Justino A. David from
time to time over a period of about five years received for sale and
distribution at the places mentioned various consignments of
kerosene, gasoline, and similar petroleum products, which were sold
and disposed of by Justino A. David as selling agent. The relation
thus established was continued without interruption until in the year
1921, when all the transactions between the two parties were gone
over, and it was found that David was indebted to the plaintiff in the
amount of nearly P60,000, a sum which, by subsequent payments,
was reduced to P40,786.98, as found and adjudged by the trial
court.
The alleged liability of the appellant, Francisco Hizon y Singian, is
planted upon a document (Exhibit B-1), which, as appearing in
evidence, is pasted to the Exhibit B. By the said exhibit B-1, Francisco
Hizon y Singian obligates himself to answer jointly and severally with
the agent (Justino A. David) for all the obligations contracted or to
be contracted by the latter in accordance with the terms of the
contract of agency (Exhibit B), and the said Francisco Hizon y Singian
further agrees finally to answer for any balance that should be due
to the plaintiff from said agent upon liquidation of the account, or
accounts, between said two parties.
The contract of suretyship (Exhibit B-1) consists of a single sheet of
paper and the agreement therein expressed consists of a printed
form completed by the interpolation, with pen and ink, of the names
of the parties and the date of the transaction. It purports to have
been signed on November 13, 1916, but the notarial
acknowledgment appended thereto bears date of November 17,
1916, which is the same as the date upon which the contract Exhibit
B was acknowledged. As already stated the document B-1 is pasted
to the contract Exhibit B, also made upon a printed form, but the
two documents do not form integral parts of the same sheet, or
sheets. However, the document B-1 refers to the contract of agency
to which it is appended; and when the two are considered together,
it would appear that the contract Exhibit B is the identical
instrument referred to in Exhibit B-1 and that the former was
executed in relation with the latter. Upon this point, however, a
question is made, which constitutes in our opinion the decisive
feature of the case.1awphi1.net
As already stated the contract Exhibit B declares that David shall
serve the plaintiff company as its only selling agent at San Fernando,
Guagua, Angeles, San Simon, Capas, Magalang, and Mabalakat, in
the Province of Pampanga; and the indebtedness which is the
subject of this action was incurred by said David as selling agent of
the plaintiff at all the places named.
From the time demand was first made upon the present appellant,
Hizon, for the satisfaction of the balance due to the plaintiff upon
liquidation of the account of David, the appellant has insisted that
he had obligated himself to answer for indebtedness to be incurred
by David as selling agent at and for the town of San Fernando and
that he had been given to understand, at the time he contracted the
obligation, that the indebtedness so incurred would not be in excess
of P5,000.
The representation as to the amount into which the indebtedness
would run — a representation which seems to have come
exclusively from David — we consider unimportant, since the
written contract places no limit upon the amount of the obligation;
but the defendant's contention concerning the place, or places, over
which David's agency extended is of a more serious character.
In this connection it is important to note that in the principal
contract (Exhibit B), as submitted in evidence, the words "Guagua,
Angeles, San Simon, Capas, Magalang, Mabalakat" (after the words
San Fernando), have been inserted in the printed form by means of a
typewriting machine, and owing to lack of space in the printed form,
it was necessary for the typist to interline the words "Guagua,
Angeles, and San Simon." Furthermore, the word "Mabalakat" as
written by the typist, overlaps and obscures the succeeding printed
words, "in the," standing before "Province of Pampanga." There is of
course nothing particularly suspicious about this, but the situation
thus revealed suggests the possibility that the words Guagua,
Angeles, San Simon, Capas, Magalang, and Mabalakat may have
been inserted after the contract of suretyship had been signed and
acknowledged by the appellant Hizon. Conclusive proof on this point
comes, however, from another quarter and from a source not at all
dependent upon the credibility of the oral testimony of the
appellant Hizon. Said proof consists in the fact now to be stated.
It appears that at the time the appellant acknowledged the contract
of suretyship (Exhibit B-1), duplicate copies of the principal contract
were produced before the notary public and were there present for
the inspection of the parties. The notary who acted in the matter
was one A.E. Cuyugan, an attorney, who, at the time of the incident
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
now in question, was engaged in the exercise of the legal profession,
and at the time he was examined as a witness was filing the office of
assistant attorney of the Bureau of Justice. This witness was
introduced by the plaintiff, and his testimony has every appearance
of being candid and truthful. He states that the two copies of the
principal contract which were produced at the time the
acknowledgment of Hizon to the contract of suretyship was taken
were the same.
Now, after the principal contract had been acknowledged by Justino
A. David, as appears from the notarial certificate appended thereto,
and after the contract of suretyship had been at the same time
acknowledged by the appellant, as appears from the
contemporaneous notarial certificate appended thereto, the notary
public delivered to David one copy of the principal contract,
together with one copy of the contract of suretyship acknowledged
by the appellant; and these two documents went to the hands of the
plaintiff and have appeared in evidence as Exhibits B and B-1, as
already stated. The other copy of the principal contract was retained
in possession of the notary, in accordance with notarial usage in
such matters. It thus became a part of his official records and, with
other documents, was afterwards delivered by the notary to the
clerk of court, of the Province of Pampanga, by whom it was
transmitted to the division of archives of the Philippine Library and
Museum.
In the course of the trial of this case, a duly authenticated copy of
said contract, as appearing in the official archives of said division,
was introduced in evidence in this case; and upon comparison of
said copy with the Exhibit B, the two documents are found to differ
in the sole circumstance that the words Guagua, Angeles, San Simon,
Capas, Magalang, and Mabalakat, are wanting in the instrument now
preserved in the division of archives.
Upon this circumstance, in relation with the testimony of the notary
public and the appellant, the trial judge reached the conclusion that
at the time the appellant signed and acknowledged the contract of
suretyship the principal contract made no mention of other places
than San Fernando, had been interpolated in the document Exhibit B
after the contract of suretyship had been acknowledged. We believe
that there can be little doubt as to the correctness of this conclusion,
and it completely bears out the contention of the appellant to the
effect that he really obligated himself only to answer for such
indebtedness as might be incurred by David as agent at San
Fernando. We may add that no witness was produced by the
plaintiff for the purpose of explaining in any way the discrepancy
between the two documents above referred to.
The circumstance should not pass unnoticed that the appellant's
contention concerning the extent of the agency at the time he
obligated himself was formulated at a time when he did not know of
the existence of a copy of the contract of agency in the files of the
division of archives; and the subsequent discovery of this piece of
evidence is strongly suggestive of the appellant's good faith in
claiming that he had obligated himself only for the results of an
agency to be established at San Fernando. Our conclusion upon a
careful consideration of the evidence is that, when the appellant
acknowledged the contract of suretyship, the principal contract was
limited to the agency at that place and that the document Exhibit B
was subsequently amended by agreement between the plaintiff and
Justino A. David, but without the knowledged or consent of the
appellant, by the insertion therein of the names of the other places
mentioned in said exhibit.
It is fundamental in the law of suretyship that any agreement
between the creditor and the principal debtor which essentially
varies the terms of the principal contract, without the consent of the
surety, will release the surety from liability. (21 R.C.L., 1004.) This
principle is equally valid under the civil as under the common law;
and though not specifically expressed in the Civil Code, it may be
deduced, so far as its application to the facts of this case is
concerned, from the second paragraph of article 1822 in relation
with article 1143 of the same Code. It requires no argument to show
that the increase of liability incident to the extension of the agency
to other places that San Fernando was prejudicial to the interest of
the appellant, and the change could not be lawfully made without
his consent.
The trial judge was therefore not in error in holding that the
appellant was in effect discharged from liability under the contract
of suretyship (Exhibit B-1); but his Honor nevertheless gave
judgment against the defendant for the sum of P5,000. In doing so
he proceeded upon the idea that the defendant admitted that he
had intended to obligate himself to the extent of P5,000, and his
Honor concluded that by entering into the contract of suretyship the
defendant had induced the plaintiff to make the contract of agency
— which appears to have been signed by the representative of the
plaintiff after it had been signed and acknowledged by David; for
which reason his Honor considered it just to hold the defendant to
the extent at least in which he had intended to bind himself. The
validity of this conclusion cannot be admitted. The only obligation
which was created on the part of the defendant was the contract of
suretyship (Exhibit B-1), and when that obligation was nullified by
the subsequent alteration of the principal contract, the appellant
was discharged in toto.
In the course of this decision the fact has not escaped our attention
that the answer of the appellant does not specially plead the
alteration of the contract of agency. But this is sufficiently explained
by the circumstance that the document which conclusively proves
the fact of alteration had not been discovered in the division of
archives at the time the answer was filed. We note further that
when a copy of said document was finally produced, it was
introduced in evidence and admitted without question. Upon this
state of facts it would be permissible, if necessary, for this court to
direct an amendment of the answer, as was done in Harty vs.
Macabuhay (39 Phil., 495). But as the point is purely defensive and
the right clear, we consider it unnecessary to require the appellant
to go through the form of this technicality.
In the light of what has been said it becomes necessary to reverse
the appealed judgment in so far as it awards the sum of P5,000
against the appellant Francisco Hizon y Singian, and he will be
completely absolved from the complaint.
So ordered, without special pronouncement as to costs.
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. L-28700 March 30, 1970
MABUHAY INSURANCE AND GUARANTY, INC., petitioner,
vs.
HON. COURT OF APPEALS, HON. JESUS P. MORFE, ET
AL., respondents.
TEEHANKEE, J.:
In this appeal from the decision of the Court of Appeals sustaining
on certiorari the questioned orders of the lower Court ordering the
confiscation and execution of the bail bond, we reiterate the
doctrine that courts upon rendering judgments of conviction in
criminal cases have the discretion to postpone, until the last day for
the perfection of appeal by the accused, the determination of the
question whether or not they should order the accused's detention
or execution of the judgment of conviction.
Petitioner, a surety company, originally instituted in 1967, a special
civil action for certiorari in the Court of Appeals to annul the
questioned orders of the Court of First Instance of Manila, directing
the confiscation of the bail bond posted by petitioner for the
provisional release of the accused in a criminal case and directing
the execution of its order of confiscation of the bond.
The antecedent facts, as narrated by the Court of Appeals in its
decision dismissing the petitioner's said action for certiorari follow:
"Abdurakman Assih y Jamlaila was charged of and tried before the
Court of First Instance of Manila for the crime of illegal possession of
firearm and ammunition. The herein petitioner posted a bond for
the provisional release of the accused in the sum of P3,000.00,
conditioned that 'Abdurakman Assih will appear and answer the
charge ... in whatever Court it may be tried, and with at all times
hold himself amenable to the orders and processes of the Court, and
if convicted will appear for judgment and render himself to the
execution thereof ....'
During the trial, petitioner presented or caused to be
presented the body and person of the accused before the
trial Court. On November 2, 1966, said court rendered its
judgment finding accused Abduralkman Assih guilty as
charged, and sentenced him to an indeterminate penalty
ranging from a minimum of ONE (1) year and ONE (1) day
to TWO (2) years imprisonment. The accused voluntarily
presented himself before the Court for the reading of the
sentence on December 5, 1966. After the sentence was
read, the accused, in his own behalf, prayed in open court
that he be allowed 15 days within which to decide whether
or not to appeal from the judgment. Said prayer was
granted in the Order dated December 5, 1966, as was
accused's motion to be allowed out on bail 'in the
meantime under his original bond.' At the same time, the
court fixed a new bond for his provisional liberty in case of
appeal. The lower court further ordered that the
bondsman of the accused be notified to produce the
person of the accused on December 20, 1966 at 9:00 A.M.,
either to serve his sentence or to perfect an appeal, as the
case may be. It is not disputed that copy of this order was
served on and received by petitioner Mabuhay Insurance
& Guaranty Co., Inc.
On December 20, 1966, the last day for perfecting his
appeal, Abdurakman Assih merely filed his notice of appeal
with the trial court without himself appearing in person.
For this failure to appear in person on the date set by the
order of December 5, 1966, the respondent Judge, on
January 17, 1967, issued an order declaring Abdurakman
Assih a fugitive from justice; deferred action on his notice
of appeal until he shall have re-submitted himself to
effective order of the Court by voluntary surrender and
purged himself of the taint of being a fugitive from justice;
declared the bond of the accused forfeited; and gave the
petitioner bondsman 30 days within which to show cause,
if any, why judgment, should not be issued against its
bond.
The petitioner took no steps to produce the person of the
accused Abdurakman Assih in court within the period set
by the said court in its order dated January 17, 1967, nor
did the petitioner show cause why judgment should not be
rendered against the bond. Hence, on March 3, 1967, the
court issued an order directing immediate execution of the
judgment rendered against said bond which order was
received by the petitioner on March 9, 1967.
Instead of taking an appeal, the petitioner filed a Motion
for Reconsideration of the Order dated March 3, 1967,
praying that the writ of execution be set aside, only on
May 11, 1967, or more than 60 days after notice of said
order. In an Order dated May 12, 1967, the respondent
judge denied the motion for lack of merit ....
... there is no evidence on record showing that the accused
Abdurakman Assih has voluntarily surrendered or has been
surrendered by the petitioner to the court a quo. Up to
this moment, it is not known by this Court whether he is in
the custody of the proper authorities or not.1
We find no merit in the present appeal seeking reversal of the Court
of Appeals' decision dismissing petitioner's action, by a four-to-one
vote.
1. Petitioner's contention based on the dissenting appellate justice's
opinion that after the sentence of conviction is read to the accused,
the accused should be deemed placed under the custody of the trial
court to serve the sentence and his bail bond is deemed
automatically cancelled, finds no support in law nor in our
jurisprudence.
The office of bail in criminal cases is "to secure the due attendance
of the party accused to answer the indictment and to submit to trial
and judgment of the court thereon."2 The accused has fifteen days
from promulgation or reading of the judgment of conviction by the
Court of First Instance within which to take an appeal to the higher
courts under Rule 122, Section 6 of the Rules of Court. The trial
court's duty to place the accused under custody and detention for
service of his sentence and consequent cancellation of his bail bond
does not arise until after the judgment becomes final upon the lapse
of the fifteen-day period for perfecting an appeal (Rule 120, Secs. 7
and 8).
The trial court therefore properly acted within its jurisdiction in
giving the accused the benefit of the fifteen day period within which
to decide whether or not to appeal the judgment of conviction after
the same was read on December 5, 1966 and to order that
petitioner as bondsman of the accused be notified to produce the
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

person of the accused on the fifteenth day, i.e., December 20, 1966,
either to serve his sentence or to perfect an appeal as the case may
be.
2. Under the very terms of the bail bond posted by petitioner
whereby it undertook that the accused will 'appear and answer the
charge ... and will at all times hold himself amenable to the orders
and processes of the court, and if convicted will appear for judgment
and render himself to the execution thereof ...," it was clearly the
duty of petitioner as bondsman to produce the person of the
accused on December 20, 1966, in accordance with the trial court's
order of December 5, 1966 when the judgment of conviction was
promulgated and notice of which was duly served upon and received
by petitioner. In other words, petitioner's responsibility under its bail
bond subsisted for as long as the case was under the jurisdiction and
control of the trial court and said jurisdiction would only be lost
upon surrender of the accused for execution of the judgment of
conviction or upon due perfection of an appeal from the judgment.
Petitioner's bail bond necessarily subsisted and was effective up to
December 20, 1966, which was the last day of the fifteen-day period
for the perfection of an appeal by the accused. If the accused
presented his notice of appeal, the trial Court then would order his
being taken into custody in the absence of a new bail bond on
appeal duly allowed and approved by it. It cannot be contended,
therefore, that the trial Court's action requiring petitioner as
bondsman to produce the person of the accused on the fifteenth
day from promulgation of sentence for the perfection of his appeal
or for service of sentence with the lapse of the period for appeal
amounted to an extension of the terms of the bail bond without the
knowledge or consent of petitioner-bondsman and was beyond the
jurisdiction of the trial court.
3. The question herein presented has heretofore been resolved by
the Court in the same manner as here, and no valid reason has been
presented by petitioner for revision or modification of our previous
rulings. In People vs. Valle,3 the Court, speaking through the Chief
Justice, thus dismissed similar contentions of the therein bondsman-
appellant.
The first assignment of error4 has nothing to do with the
propriety or validity of the order of confiscation of the
bond. Moreover, since the defendant was entitled to
appeal, the lower court had the discretion to postpone,
until the last day for the perfection of such appeal, the
determination of the question whether it should or should
not order defendant's detention or the execution of the
decision of conviction.
granted the accused ten days within which to comply with
the judgment, nor the fact that his attorney guaranteed
said compliance, relieves his sureties from their liability in
case of noncompliance with said judgment, because, as we
have already seen, in order to be relieved from the
obligation contracted by them by virtue of their bond, a
judicial order relieving them of their liability is necessary.'
4. A bondsman who wishes to be relieved from his
undertaking as such should petition the Court for his
discharge as a surety in accordance with the provisions of
Rule 114, section 16 of the Rules of Court.
Sec. 16. Discharge of Surties. — Upon application filed with
the court and after due notice to the fiscal, the bail bond
shall be cancelled and the sureties discharged from liability
(a) where the sureties so request upon surrender of the
defendant to the court; (b) where the defendant is re-
arrested or ordered into custody on the same charge or for
the same offense; (c) where the defendant is discharged
by the court at any stage of the proceedings, or acquitted,
or is convicted and surrendered to serve the sentence; and
(d) where the defendant dies during the pendency of the
action.
Petitioner did not avail itself of the above-quoted provision and ask
for its discharge as a surety nor did it manifest to the trial Court at
the promulgation of sentence its wish to be relieved of its
responsibility for the custody of the accused. Under the above-
quoted Rule, petitioner could very well have asked the trial court to
relieve it as the jailer and custodian of the accused by surrendering
the person of the accused to the said court and asking for the
cancellation of its bail bond.
5. Finally, it should be noted that petitioner filed a motion for
reconsideration of the trial Court's order of March 3, 1967 for
execution of the judgment against the bond only on May 11, 1967 or
more than 60 days from its receipt on March 9, 1967 of said order,
which motion for reconsideration was in due course denied by the
trial court. Petitioner having failed to file a timely appeal from the
Court's order could no longer avail of the remedy of the special civil
action for certiorari in lieu of its lost right of appeal, since no errors
of jurisdiction were committed by the trial court.6
ACCORDINGLY, the appealed judgment of the Court of Appeals is
affirmed and the petition is dismissed. With costs against petitioner.

With respect to the other alleged errors5 assigned by

appellant, it should be noted that its liability, under the
bond, continued until after the accused had been
surrendered and the court had ordered the cancellation of
said bond. Thus, in People vs. Lorredo (50 Phil. 218) it was
held:

'Moreover, one of the conditions of the bond subscribed

by the appellants is that if the accused is convicted, he will
render himself amenable to the judgment as well as to the
execution thereof. After notification of the judgment, the
accused had fifteen days within which to perfect his
appeal, and it is only after the expiration of the said fifteen
days, without the accused having made use of his right,
that the said judgment becomes final. (Sec. 47, General
Orders No. 58). Neither the fact, then, that the court
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)
G.R. No. L-27249 July 31, 1970
MANILA SURETY & FIDELITY CO., INC., plaintiff-appellant,
vs.
NOEMI ALMEDA, doing business under the name and style of
ALMEDA TRADING, GENEROSO ESQUILLO and NATIONAL
MARKETING CORPORATION, defendants-appellees.
REYES, J.B.L., J.:
This is an appeal from the ruling of the Court of First Instance of
Manila, rendered in Civil Case No. 62518, that the insolvency of a
debtor-principal does not release the surety from its obligation to
the creditor under the bond.
The lower court found that on 4 December 1961, Noemi Almeda,
married to Generoso Esquillo, and doing business under the name
and style of Almeda Trading, entered into a contract with the
National Marketing Corporation (NAMARCO) for the purchase of
goods on credit, payable in 30 days from the dates of deliveries
thereof. As required by' the NAMARCO, a bond for P5,000.00,
undertaken by the Manila Surety & Fidelity Co., Inc. (Exhibit "A"),
was posted by the purchaser to secure the latter's faithful
compliance with the terms of the contract. The agreement was later
supplemented on 17 October 1962 and a new bond for the same
amount of P5,000.00, also undertaken by the Manila Surety &
Fidelity Co., Inc. (Exhibit "C"),1 was given in favor of the NAMARCO
The bonds uniformly contained the following provisions:
2. Should the Principal's account on any
purchase be not paid on time, then the Surety,
shall, upon demand, pay said account
immediately to the NAMARCO;
3. Should the account of the Principal exceed the
amount of FIVE THOUSAND (P5,000.00) PESOS,
Philippine Currency, such excess up to twenty
(20%) per cent of said amount shall also be
deemed secured by this Bond;
4. The Surety expressly waives its right to
demand payment and notice of non-payment
and agreed that the liability of the Surety shall
be direct and immediate and not contingent
upon the exhaustion by the NAMARCO of
whatever remedies it may have against the
Principal and same shall be valid and continuous
until the obligation so guaranteed is paid in full;
and
5. The Surety also waives its right to be notified
of any extension of the terms of payment which
the NAMARCO may give to the Principal, it being
understood that were extension is given to
satisfy the account, that such extension shall not
extinguish the guaranty unless the same is made
against the express wish of the Surety.
The records show that on 8 June 1965, the marketing firm
demanded from the purchaser Almeda Trading the settlement of its
back accounts which, as of 15 May 1965, allegedly amounted to
P16,335.09. Furnished with copy of the NAMARCO's demand- letter,
the surety company thereafter also wrote to the said purchaser
urging it to liquidate its unsettled accounts with the NAMARCO
(Exhibit "E-1"). It appears, however, that previous to this, or on 26
March 1965, Generoso Esquillo instituted voluntary insolvency
proceeding in the Court of First Instance of Laguna (Sp. Proc. No. SP-
181), and by order of said court of 6 April 1965, he was declared
insolvent, with listed credits amounting to P111,873.002 and
properties valued at P39,0,00.00. In the meeting of the named
creditors of the insolvent held on 14 May 1965 for the purpose of
electing the assignee of his properties, the NAMARCO was
represented and its contingent claim duly registered.3
On 10 September 1965, the Manila Surety & Fidelity Co., Inc.,
commenced in the Court of First Instance of Manila Civil Case No.
62518 against the spouses Noemi Almeda and Generoso Esquillo,
and the NAMARCO, to secure its release from liability under the
bonds executed in favor of NAMARCO. The action was based on the
allegation that the defendant spouses had become insolvent and
that defendant NAMARCO had rescinded its agreement with them
and had already demanded payment of the outstanding accounts of
the couple.
Defendant NAMARCO filed its answer denying the averments of the
complaint and setting up, as affirmative defenses, lack of cause of
action and the court's want of jurisdiction. On 16 December 1966,
the court rendered judgment sustaining NAMARCO's contention that
the insolvency of the debtor-principal did not discharge the surety's
liability under the bond. Thus, the complaint was dismissed and
plaintiff surety company was ordered to pay off the indebtedness of
the defendant spouses to the NAMARCO to the extent of its (the
Surety's) undertaking, plus attorneys' fees and costs. From this
decision, plaintiff surety interposed the present appeal.
Plaintiff-appellant's action to secure its discharge from the
suretyship was based on Article 2071 of the Civil Code,4Which
provides the surety with certain protective remedies that may be
resorted to before he has paid, but after he has become liable to do
so.5
Upon the other hand, the lower court's ruling, now on appeal, is
anchored on an equally explicit provision of the Insolvency law ( Act
1956, as amended), to writ:.
SEC. 68. ...
No discharge (of the insolvent from his
obligations) shall release, discharge or affect any
person liable for the same debt, for or with the
debtor, either as partner, joint contractor,
indorser, surety, or otherwise.
The issue posed by this appeal, therefore, is whether a surety can
avail itself of the relief, specifically afforded in Article 2071 of the
Civil Code and be released from its liability under the bonds,
notwithstanding a prior declaration of the insolvency of the debtor-
principal in an insolvency proceeding.
We see no reversible error in the decision appealed.
There is no question that under the bonds posted in favor of the
NAMARCO in this case, the surety company assumed to make
immediate payment to said firm of any due and unsettled accounts
of the debtor-principal, even without demand and notice of the
debtor's non-payment, the surety, in fact, agreeing that its liability
CREDIT TRANSCATIONS (GUARANTY AND SURETYSHIP)

to the creditor shall be direct, without benefit of exhaustion of the
debtor's properties, and to remain valid and continuous until the
guaranteed obligation is fully satisfied. In short, appellant secured to
the creditor not just the payment by the debtor-principal of his
accounts, but the payment itself of such accounts. Clearly, a contract
of suretyship was thus created, the appellant becoming the insurer,
not merely of the debtor's solvency or ability to pay, but of the debt
itself.6 Under the Civil Code, with the debtor's insolvency having
been judicially recognized, herein appellant's resort to the courts to
be released from the undertaking thus assumed would have been
appropriate.7 Nevertheless, the guarantor's action for release can
only be exercised against the principal debtor and not against the
creditor, as is apparent from the precise terms of the legal provision.
"The guarantor" (says Article 2071 of the Civil Code of the
Philippines) "even before having paid, may proceed against the
principal debtor ------------------ to obtain a release from the guaranty
---------------." The juridical rule grants no cause of action against the
creditor for a release of the guaranty, before payment of the credit,
for a plain reason: the creditor is not compellable to release the
guaranty (which is a property right) against his will. For, the release
of the guarantor imports an extinction of his obligation to the
creditor; it connotes, therefore, either a remission or a novation by
subrogation, and either operation requires the creditor's assent for
its validity (See Article 1270 and Article 1301). Especially should this
be the case where the principal debtor has become insolvent, for
the purpose of a guaranty is exactly to protect the creditor against
such a contingency.
In what manner, then, can the article operate? Where the debtor
can not make full payment, the release of the guarantor can only be
obtained with the assent of the creditor, by persuading the latter to
accept an equally safe security, either another suitable guaranty or
else a pledge or mortgage. Absent the creditor's consent, the
principal debtor may only proceed to protect the demanding
guarantor by a counterbond or counter guaranty, as is authorized by
the codal precept (Article 2071 in fine). To this effect is the opinion
of the Spanish commentator, Scaevola, in his explanations to Article
1843 of the Spanish Civil Code (from which Article 2071 of our Code
is derived). Says Scaevola:
such guarantor or surety are not to be barred by the subsequent
discharge of the insolvent debtor from all his liabilities.9
In the case at bar, it is true that the guaranteed claim of NAMARCO
was registered or filed in the insolvency proceeding. But appellant
can not utilize this fact in support of its petition for release from the
assumed undertaking. For one thing, it is almost a certainty that
creditor NAMARCO can not secure full satisfaction of its credit out of
the debtor's properties brought into the insolvency proceeding.
Considering that under the contract of suretyship, which remains
valid and subsisting, the entire obligation may even be demanded
directly against the surety itself, the creditor's act in resorting first to
the properties of the insolvent debtor is to the surety's advantage At
least, the latter would be answerable only for whatever amount may
remain not covered or unsatisfied by the disposition of the
insolvent's properties, 1 0 with the right to go against debtor-
principal after it has made the necessary payment to the creditor.
For another, the fact that the debtor- principal may be discharged
from all his outstanding obligations in the insolvency case would not
benefit the surety, as to relieve it of its liability under the surety
agreement. That is so provided in Section 68 of the Insolvency Act
which shall be controlling in the case.
Finally, even supposing that the present action is not blocked by the
insolvency proceedings because it does not aim at reducing the
insolvent's assets, but only at having the suretyship substituted by
other equivalent security, still it is difficult to see how the principal
debtor, with his business, property and assets impounded by the
insolvency court, can obtain other securities with which to replace
the guaranty given by the plaintiff-appellant. The action at bar would
seem, under the circumstances, destined to end in futility.
WHEREFORE, with the modification that appellant's liability shall be
limited to the payment of whatever amount may remain due to the
appellee NAMARCO and is unsatisfied in the insolvency proceeding,
but not to exceed the amount of the surety's undertaking under the
bonds, the decision appealed from is affirmed in all other respects.
Costs against appellant surety company.

Como se prestaran tales garantias al fiador? Lo

contesta el aludido parrafo final del Articulo
1843. Se hara por uno de estos dos modos: ora
consiguiendo el deudor que el acreedor
abandone libremente aquella fianza, lo cual
ocurrira dandole el deudor otra garantia
analoga, ya por razon de la persona fiadora, ya
ofreciendole el deudor al mismo fiador, pero
continuando este como tal, una garantia que lo
ponga a cubierto de los procedimientos del
acreedor y del peligro de insolvencia del deudor.
(Scaevola Codigo Civil, 2d Ed., Vol. 28, pp.
651652).

The appellant's troubles are compounded by the fact that when the
complaint for release from suretyship was filed in the Manila court
on 10 September 1965, the insolvency case in the Laguna court was
already pending and the debtor-principal Generoso Esquillo had
been judicially declared an insolvent. By the time the appellant sued,
therefore, the insolvency court had already acquired jurisdiction
over all the debtor's properties and of all claims by and against him,
to the exclusion of any other court.8 In the circumstances, the lawful
recourse of the guarantor of an obligation of the insolvent would be
to file a contingent claim in the insolvency proceeding, if his rights as