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CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 1 of 21

CONTRACTS OF SECURITY
MACHETTI VS HOSPICIO DE SAN JOSE
GUARANTY AND SURETYSHIP
FACTS:
PACIFIC BANKING CORP VS IAC Machetti undertook to construct a building for Hospicio de San Jose. In
accordance with the latter’s requirement, Surety Company guaranteed
compliance with the terms and conditions of the contract. Hospicio sued
FACTS:
Machetti for failure to meet the standard required in the construction.
Celia obtained from Pacific Banking (Pacific) a credit card. Her husband, Robert,
Machetti was declared insolvent. Hospicio now goes after the Surety Company
executed a “Guarantor’s Undertaking” in favor of Pacific, whereupon he
alone.
agreed “jointly and severally” of his wife to pay Pacific upon demand of any
liability due. It was further agreed that novation of terms shall not release
ISSUE:
Robert from responsibility. When Cecilia repeatedly failed to settle her
What is the nature of the Surety Company’s liability?
account for purchases made through the subject credit card, Pacific sent
demand letter to the spouses, and subsequently filed an action.
HELD:
While a surety undertakes to pay if the principal does not pay, the guarantor
ISSUE:
only binds himself to pay if the principal cannot pay. The one is the insurer of
What is the nature of the undertaking signed by Robert?
the debt, the other an insurer of the solvency of the debtor. This latter liability
is what the Surety Company assumed in the present case.
HELD:
It is a contract of surety (although denominated as “Guarantor’s Undertaking”).
It appears affirmatively that the contract is the guarantor's separate
In contract of guaranty, the guarantor binds himself to the creditor to fulfill the
undertaking in which the principal does not join, that its rests on a separate
obligation of the principal debtor only when the principal debtor failed to do
consideration and that although it is written in continuation of the contract for
so. On the other hand, contract of suretyship contemplates that the surety
the construction of the building, it is a collateral undertaking separate and
binds himself solidarily with the principal debtor. In the case at bar, Robert as a
distinct from the latter. Surety Company having bound itself to pay only the
surety bound himself jointly and severally with the debtor Celia. Moreover, it is
event its principal, Machetti, cannot pay; it follows that it cannot be compelled
true that under Article 2054 of the Civil Code, a guarantor may bind himself for
to pay until it is shown that Machetti is unable to pay. Such ability may be
less, but not for more than the principal debtor, both as regards the amount
proven by the return of a writ of execution unsatisfied or by other means, but
and the onerous nature of the conditions.
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 credit limit granted to Celia Regala was P2, 000.00 per month. However,
the insolvent's inability to pay is not determined until the final liquidation of
the husband’s liability should not be limited to that extent. As surety of his
his estate.
wife, he expressly bound himself up to the extent of the wife’s indebtedness,
likewise expressly waiving any "discharge in case of any change or novation of
the terms and conditions in connection with the issuance of the Pacificard TITLE XV- GUARANTY
credit card. The husband in fact, made his commitment as a surety a
continuing one, binding upon himself until all the liabilities of Celia Regala CHAPTER I- NATURE AND EXTENT OF GUARANTY
have been fully paid.
GUARANTY VS SURETYSHIP
E. ZOBEL INC VS CA
ONG vs PCIB
FACTS:
Solidbank filed a complaint for sum of money against Claverias (respondent FACTS:
spouses) who failed to pay loan secured by a chattel mortgage and a Facts: PCIB filed a case for collection of sum of money against Ong as surety on
Continuing Guaranty of E. Zobel (petitioner). E. Zobel contended that pursuant the promissory note that Ong issued to secure Baliwag Company’s (Baliwag)
to Article 2080 of the Civil Code, his liability is extinguished because it has lost loan. Under the terms of notes, PCIB may consider debtor Baliwag in default
its right to subrogate the chattel mortgage due to Solidbank’s failure to and demand payment of the balance of loan upon levy of its properties or
register the mortgage with the proper agency. upon Baliwag’s insolvency, or if it is in a state of suspension of payments.
Baliwag filed a petition for rehabilitation and suspension of payments with SEC
ISSUE: after its properties were attached by creditors.
What is the nature of contract executed by E. Zobel?
PCIB sought payment from Ong as surety. Baliwag executed a MOA—that
HELD: creditor banks agreed to temporarily suspend any pending civil action against
It is a contract of surety (albeit denominated as Continuing Guaranty). The Baliwag; that such benefit extends to Ong who acted as surety. Ong averred
terms of the contract categorically obligates petitioner as "surety" to induce that PCIB is then barred to pursue its claim against them.
SOLIDBANK to extend credit to respondent spouses. Likewise, the contract
clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular ISSUES:
party to the undertaking and obligated itself as an original promissor. It bound 1. Whether Ong is a surety of Baliwag.
itself jointly and severally to the obligation with the respondent spouses. In 2. Are the provisions of the MOA regarding the suspension of
fact, SOLIDBANK need not resort to all other legal remedies or exhaust payments by Baliwag and the non-filing of collection suits by the
respondent spouses' properties before it can hold petitioner liable for the creditor banks pertain only to the property of the principal debtor
obligation. Thus, having established that petitioner is a surety, Article 2080 of Baliwag?
the Civil Code, relied upon by petitioner, finds no application to the case at bar.
In Bicol Savings and Loan Association vs. Guinhawa, the Court ruled that HELD:
Article 2080 of the New Civil Code does not apply where the liability is as a 1. Ong is a surety of Baliwag’s debts, not a guaranty.
surety, not as a guarantor. 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.
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 2 of 21
A contract of guaranty gives rise to a subsidiary obligation on the part of the independent collateral agreement. Neither is Sellner jointly and severally liable
guarantor. It is only after the creditor has proceeded against the properties of with the principal debtors.
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. A surety and a guarantor are alike in that each promises to answer for the debt
In a suretyship contract, however, the benefit of excussion is not available to or default of another. However, they are unlike in that the surety assumes
the surety as he is principally liable for the payment of the debt. As the surety liability as a regular party to the undertaking, while the liability as a regular
insures the debt itself, he obligates himself to pay the debt if the principal party to upon an independent agreement to pay the obligation if the primary
debtor will not pay, regardless of whether or not the latter is financially pay or fails to do so. A surety is charged as an original promissory while the
capable to fulfill his obligation. Thus, a creditor can go directly against the engagement of the guarantor is a collateral undertaking. The obligation of the
surety although the principal debtor is solvent and is able to pay or no prior surety is primary, while the obligation of the guarantor is secondary.
demand is made on the principal debtor.
Commentary of judge:
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 However, take note that it does not mean that if the undertaking is
from the beginning. Under the suretyship contract entered into Ong with contained in the same document containing the principal obligation, that the
respondent bank, the former obligated to be solidarily bound with the undertaking is automatically that of a surety. There can be instances when
principal debtor Baliwag for the payment of its. Under Article 1216 of the Civil you have a principal obligation secured by an ordinary guaranty only. What is
Code, respondent bank as creditor may proceed against petitioners-spouses as important is that the undertaking is clearly specified whether it is of an
ordinary guarantor or that of a surety.
sureties despite the execution of the MOA which provided for the suspension
of payment and filing of collection suits against Baliwag.

Respondent bank's right to collect payment from the surety exists SOLIDARY GUARANTOR VS SOLIDARY CO-DEBTOR
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 ESCANO VS ORTIGAS
for payment on the principal debtor.
FACTS:
2. Yes. Firstly, in the rehabilitation receivership filed by Baliwag, only the
PDCP entered into a loan agreement with Falcon whereby Falcon borrows
properties of Baliwag were mentioned in the petition with the SEC. Secondly,
320k USD. Ortigas executed Assumption of Solidary Liability with Falcon. One
there is nothing in the MOA that involves the liabilities of the sureties whose
separate guaranty was executed by Escano for the same loan. Falcon
properties are separate and distinct from that of the debtor Baliwag. Lastly, it
transferred control of its company to Escano and contracts were executed
bears to stress that the MOA executed by Baliwag and signed by the
whereby Ortigas assigned his shares of stock in Falcon to Escano (so that
creditor-banks was approved by the SEC whose jurisdiction is limited only to
Ortigas will be relieved of liability from the loan). When Falcon defaulted its
corporations and corporate assets. It has no jurisdiction over the properties of
payment, PDCP filed a complaint for sum of money against Falcon, Ortigas and
BMC's officers or sureties. Clearly, the collection suit filed by respondent bank
Escano.
against petitioners-spouses as sureties can prosper.
ISSUE:
Is there a difference between a Solidary guarantor and solidary co-debtor?
GUARANTOR VS SURETY
HELD:
CASTELVI DE HIGGINS vs SELLNER Yes. Dr. Tolentino explains the differences between a solidary co-debtor and a
surety:
FACTS:
A guarantor who binds himself in solidum with the principal
Castellvi sued Sellner (defendant) for payment of 10k. Trial court held the suit
debtor under the provisions of the second paragraph does not become
as premature. The basis of Castellvi’s claim is a letter written by Sellner to
a solidary co-debtor to all intents and purposes. There is a difference
Macleod (agent of Higgins):
between a solidary co-debtor and a fiador in solidum (surety). The latter,
outside of the liability he assumes to pay the debt before the property
DEAR SIR: I hereby obligate and bind myself… that if the promissory
of the principal debtor has been exhausted, retains all the other rights,
note executed by 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,
actions and benefits which pertain to him by reason of thefiansa; while
I will, within fifteen days after notice of such default, pay you in cash the sum a solidary co-debtor has no other rights than those bestowed upon him
of P10,000 and interest upon your surrendering to me the three thousand in Section 4, Chapter 3, Title I, Book IV of the Civil Code.
shares of stock of the Keystone Mining Co. held by you as security for the
payment of said note. The second paragraph of [Article 2047] is practically equivalent to
the contract of suretyship. The civil law suretyship is, accordingly, nearly
Respectfully, synonymous with the common law guaranty; and the civil law
(Sgd.) GEO. C. SELLNER.” relationship existing between the co-debtors liable in solidum is similar
to the common law suretyship.
Castellvi contends that Sellner is a surety.
In the case of joint and several debtors, Article 1217 makes plain that the
ISSUE: solidary debtor who effected the payment to the creditor "may claim from his
Issue: Is Sellner a surety? co-debtors only the share which corresponds to each, with the interest for the
payment already made." Such solidary debtor will not be able to recover from
HELD: the co-debtors the full amount already paid to the creditor, because the right
The obligation assumed by defendant Sellner was simply that of a guarantor. to recovery extends only to the proportional share of the other co-debtors,
The letter of Mr. Sellner recites that if the promissory note is not paid at and not as to the particular proportional share of the solidary debtor who
maturity, then, within fifteen days after notice of such default and upon already paid. In contrast, even as the surety is solidarily bound with the
surrender to him of the three thousand shares of Keystone Mining Company principal debtor to the creditor, the surety who does pay the creditor has the
stock, he will assume responsibility. Sellner is not bound with the principals by right to recover the full amount paid, and not just any proportional share,
the same instrument executed at the same time and on the same from the principal debtor or debtors. Such right to full reimbursement falls
consideration, but his responsibility is a secondary one found in an within the other rights, actions and benefits which pertain to the surety by
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 3 of 21
reason of the subsidiary obligation assumed by the surety. principal debtors. Again petitioner offered to pay but the amount offered was
way below the amount computed. The trial court dismissed the complaint and
Commentary of judge: ruled that the complaint against the petitioner amounted to a discharge of a
prior party, that the offer to pay made by petitioner who is secondarily liable
Even if a person binds himself solidary with the principal debtor, and to the instrument discharged petitioner. The Court of Appeals, reversing the
therefore governed by the rules of solidary obligation, it does not erase the trial court, ruled that petitioner is solidarily liable with the principal debtors
fact that he is a guarantor. and may be sued for the entire obligation.

If you are a surety and you pay the obligation, you can recover the ISSUE:
entire amount from the debtor. Unlike in the rules of solidary obligation What is the nature of liability of Palmares?
where a solidary debtor can recover only the portion paid which is the share
of the co-debtor. In here, the solidary guarantor can recover the entire
HELD:
amount from the debtor, in the sense that he was not obligated in the
original obligation. He is just a solidary guarantor.
Where petitioner expressly binds herself to be jointly and severally or
solidarily liable with the principal maker of the note, her liability is that of a
But we are more interested in this statement:“The solidary guarantor surety and is bound equally and absolutely with the principal. Having entered
has an action for counter bond while a solidary debtor is limited only to an into a contract with full knowledge of its terms and conditions, petitioner is
action contribution by the other co-debtor” estopped to assert that she did so in ignorance of their legal effect. The
obligee is entitled to demand fulfillment of the obligation or performance
Ex. X owes you 1M. I bind myself solidary with X as a solidary stipulated, hence, an offer to pay obligation in an amount less or different
guarantor. Take note that I am not a principal debtor, it is X who is the from that due does not discharge liability.
principal debtor. I am just a solidary guarantor.

What is my right? To recover the full amount that if ever I am to be DISMISSAL OF COMPLAINT BY VIRTUE OF COMPROMISE
made to pay the obligation. AGREEMENT WHERE PAYMENT OF BALANCE WAS
GUARANTEED
How will I be assured that I will be reimbursed?
I will require X to put up another security that I can go after in case I SEVERINO VS SEVERINO
will not be reimbursed. So you have a main guaranty which I made in favor of
X, and a sub-guaranty made by X in my favor, in case I will not be reimbursed.
This is a counter bond or indemnity agreement. FACTS:
The plaintiff Fabiola Severino is the recognized natural daughter of Melecio
Severino, deceased. Upon the death of Melecio Severino a number of years
LIABILITY WHERE COMPANY PRESIDENT ago, he left considerable property and litigation ensued between his widow,
SIGNED AS GUARANTOR Felicitas Villanueva, and Fabiola Severino, on the one part, and other heirs of
the deceased on the other part.
PICZON VS PICZON
In order to make an end of this litigation a compromise was effected by which
Guillermo Severino, a son of Melecio Severino, took over the property
FACTS AND APPLICABLE LAW:
pertaining to the estate of his father at the same time agreeing to pay
Under the terms of the contract, Esteban Piczon expressly bound himself only
P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of money was
as guarantor, and there are no circumstances in the record from which it can
made payable, first, P40,000 in cash upon the execution of the document of
be deduced that his liability could be that of a surety. A guaranty must be
compromise, and the balance in three several payments of P20,000 at the end
express, (Article 2055, Civil Code) and it would be violative of the law to
of one year; two years, and three years respectively.
consider a party to be bound as a surety when the very word used in the
agreement is "guarantor."
To this contract the appellant Enrique Echaus affixed his name as guarantor.
The first payment of P40,000 was made on the date when the contract of
Commentary of Judge:
compromise was executed; and of this amount the plaintiff Fabiola Severino
The mere fact that you are the President and at the same time a
received the sum of P10,000. Of the remaining P60,000, all as yet unpaid,
majority stockholder, does not automatically make you a surety, if you Fabiola Severino is entitled to the sum of P20,000. It appears that at the time
merely signed as a guarantor. Also, there is this principle in corporation law of the compromise agreement above-mentioned was executed Fabiola
called Doctrine of Separate Entity which means that the debt of the Severino had not yet been judicially recognized as the natural daughter of
corporation is not the debt of its officers or stockholders. Melecio Severino, and it was stipulated that the last P20,000 corresponding to
Fabiola and the last P5,000 corresponding to Felicitas Villanueva should
retained on deposit until the definite status of Fabiola Severino as natural
daughter of Melecio Severino should be established.
SOLIDARY GUARANTOR DOES NOT LOSE HIS CHARACTER AS
SUCH VIS-A-VIS THE DEBTOR The judicial decree to this effect was entered in the Court of First Instance of
Occidental Negros on June 16, 1925, and as the money which was
PALMARES VS CA contemplated to be held in suspense has never in fact been paid to the parties
entitled thereto, it results that the point respecting the deposit referred to has
FACTS: ceased to be of moment. The proof shows that the money claimed in this
Palmares (petitioner) signed as comaker in a loan. A promissory note was action has never been paid and is still owing to the plaintiff; and the only
executed whereby she acknowledged her joint and several (solidary) liability defense worth noting in this decision is the assertion on the part of Enrique
with the principal, that the creditor may demand payment in case of default, Echaus that he received nothing for affixing his signature as guarantor to the
and that she fully understood the contents thereof. Petitioner, when informed contract which is the subject of suit and that in effect the contract was lacking
that the debtors defaulted, requested that creditor try to collect from her in consideration as to him.
principal first and offered to settle the obligation in case the creditor fails to
collect. She also offered a parcel of land to settle the obligation which the HELD:
creditor refused. The point is not well taken. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties
Thereafter, a complaint was filed against petitioner to the exclusion of the thereto. The compromise and dismissal of a lawsuit is recognized in law as a
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 4 of 21
valuable consideration; and the dismissal of the action which Felicitas has been beneficial to the latter."
Villanueva and Fabiola Severino had instituted against Guillermo Severino was
an adequate consideration to support the promise on the part of Guillermo Although Lucero executed the bond without his (Santos) knowledge,
Severino to pay the sum of money stipulated in the contract which is the nevertheless he did not object thereto or repudiate the same at any time. The
subject of this action. bond was filed to release the attached properties, and to return to their
respective owners. He eventually had knowledge of the bond because the said
The promise of the appellant Echaus as guarantor is therefore binding. It is properties were returned to him and in receiving them he was necessarily
never necessary that the guarantor or surety should receive any part of the apprised of the fact that a bond had been filed to discharge the attachment.
benefit, if such there be, accruing to his principal. But the true consideration
of this contract was the detriment suffered by the plaintiffs in the former BY THE LIABILITY OF THE GUARANTOR
action in dismissing that proceeding, and it is immaterial that no benefit may
have accrued either to the principal or his guarantor.
MACHETTI VS HOSPICIO DE SAN JOSE
\

I- KINDS OF GUARANTY FACTS:


Machetti, by contract in writing, agreed to erect a building for the Hospicio de
SUIT TO RECOVER FROM PRINCIPAL DEBTOR WHO DID NOT San Jose. One of the conditions was that Machetti obtain the guarantee of
CONSENT TO THE GUARANTY Fidelity and Surety Co. The defendant Surety Company made the following
endorsement in the English language upon the contract:
DE GUZMAN VS SANTOS
"For value received we hereby guarantee compliance with the
terms and conditions as outlined in the above contract."
FACTS:
Toole, Abad and Santos formed a general mercantile partnership under the Subsequently it was found that the work had not been carried out in
style Philippine-American Construction Company, capital of which were taken accordance with the specifications. Hospicio de San Jose therefore refused to
by way of loan from Paulino Candelaria. The PARTNERSHIP AND CO-PARTNERS pay the balance of the contract price. Hospicio presented counterclaim for
undertook to pay. Having violated the conditions of the loan, Candelaria sued damages. Machetti was declared insolvent. The original action has been
for recovery of the loan plus interest and atty’s fees. Court sentenced debtors converted into an action in which the Hospicio de San Jose is plaintiff and the
to pay. Fidelity and Surety Company, the original plaintiff's guarantor, is the defendant,
Machetti having been practically eliminated from the case.
Candelaria obtained writ of attachment. Sheriff attached properties of the
co-partners. Philippine-American Construction Company as principal, then ISSUE: Was the obligation a guaranty or a suretyship?
represented by the partner Antonio K. Abad, Santiago Lucero and Meliton
Carlos, as guarantors, executed a bond for P10,000 in favor of Paulino HELD:
Candelaria for the lifting of the attachment. Upon the approval of the bond, It was a guaranty.
the attachment was discharged and the attached properties were returned to The terms of the endorsement must be given the signification which ordinarily
their owners. attaches to them in the language in which the endorsement was written and
that the obligation of the Surety Company was one of GUARANTY and not of
When the sheriff attempted to execute the judgment and looked for the suretyship or fianza solidaria.
discharged properties, he found that they had disappeared, for which reason
the court subsequently issued a writ of execution against the guarantors. As a The Surety Company having bound itself to pay only in the event its principal,
result of this last execution, the plaintiff (administratrix of deceased Lucero) Machetti, cannot pay it follows that it cannot be compelled to pay until it is
was forced to pay and in fact paid the said sum to the creditor Candelaria. shown that Machetti is unable to pay. Such inability may be proven by the
return of a writ of execution unsatised or by other means, but is not
Plaintiff demanded the return of said sum from Santos. sufficiently established by the mere fact that he has been declared insolvent in
insolvency proceedings under our statutes, in which the extent of the
ISSUE: insolvent's inability to pay is not determined until the final liquidation of his
Whether Anastacio Santos is bound to pay plaintiff administratrix what he estate.
advanced to Candelaria upon the bond which deceased Lucero had executed.
DISTINCTION BETWEEN GUARANTOR AND SURETY.
HELD: — A guarantor is the insurer of the solvency of the debtor; a surety is an
Yes. He is legally bound to pay what the plaintiff had advanced to the creditor insurer of the debt. A guarantor binds himself to pay if the principal is unable
upon the judgment, notwithstanding the fact that the bond had been given to pay; a surety undertakes to pay if the principal does not pay.
without his knowledge.
LIABILITY OF GUARANTOR; INSOLVENCY OF PRINCIPAL.
Article 1822 of the Civil Code, by guaranty one person binds — A guarantor cannot be compelled to pay until it is shown that the principal
himself to pay or perform for a third person in case the latter should fail is unable to pay and such inability is not sufficiently shown by the mere fact
to do so; and that he has been declared insolvent under the present Insolvency Law in
which the extent of the insolvent's inability to pay is not determined until the
Article 1838 provides that any guarantor who pays for the debtor final liquidation of his estate.
shall be indemnified by the latter even should the guaranty have been
undertaken without the knowledge of the debtor.
PNB VS LUZON SURETY CO.
Article 1158 provides that "payment may be made by any person,
whether he has an interest in the performance of the obligation or not,
FACTS:
and whether the payment is known and approved by the debtor or
To guarantee the P32,400-crop loan obtained from the Philippine National
whether he is unaware of it. Any person who makes a payment for the
Bank (PNB) by Augusto R. Villarosa, the latter, as principal, and Luzon Surety,
account of another may recover from the debtor the amount of the
as surety, executed a P10,000-bond in favor of said bank.
payment, unless it was made against the express will of the latter. In the
latter case he can only recover from the debtor in so far as the payment
Later Villarosa executed a chattel mortgage in favor of PNB in consideration of
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 5 of 21
periodical sums of money received by him. The chattel mortgage stipulated ISSUE:
that the "mortgagee may increase or decrease the amount of the loan as well Will the bank’s claim against the spouses as sureties prosper despite execution
as the installments as it may deem convenient," and that "in the event the of MOA?
loan is increased such increase shall likewise be secured by Mortgage."
HELD:
The bond executed by Luzon Surety undertook to "comply with all the terms YES. Under the suretyship contract entered into by petitioners-spouses with
and conditions stipulated in said crop loan contract," the same being respondent bank, the former obligated themselves to be solidarily bound with
incorporated in the bond as essential part thereof. The credit line of P32,400 the principal debtor BMC for the payment of its debts to respondent bank
was later increased, so that as of September, 1953, there was a balance of amounting to ve million pesos (P5,000,000.00).
P63,222.75. 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.
For failure of Villarosa to pay the obligation, PNB sued him and his sureties,
including the Luzon Surety. The trial court adjudged in favor of the PNB, but A guarantor insures the solvency of the debtor while a surety is an insurer of
the Court of Appeals reversed the judgment, and absolved the surety on the the debt itself. A contract of guaranty gives rise to a subsidiary obligation on
ground that PNB's evidence did not establish a cause of action, since the bond the part of the guarantor. It is only after the creditor has proceeded against
made references to a crop loan contract executed in February, 1952, and the properties of the principal debtor and the debt remains unsatisfied that a
therefore the chattel mortgage dated March 6, 1962 could not have been the guarantor can be held liable to answer for any unpaid amount. This is the
obligation guaranteed by the surety bond; and that there had been material principle of excussion.
alterations in the principal obligation, if any, guaranteed by it.
In a suretyship contract, however, the benefit of excussion is not available to
ISSUE: Is the liability that of a surety or guarantor? 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
HELD: SURETY. debtor will not pay, regardless of whether or not the latter is financially
Where the surety bond executed between the creditor on one hand and the capable to fulfill his obligation Thus, a creditor can go directly against the
debtor and the bonding company of the other stipulated that the debtor and surety although the principal debtor is solvent and is able to pay or no prior
the bonding company "are held and firmly bound unto" the creditor "in the demand is made on the principal debtor.
sum of ten Thousand Pesos (P10,000)" for payment of which sum, well and
truly to be made, we bind ourselves, our heirs, executors, administrators, Clearly, the collection suit led by respondent bank against petitioners-spouses
successors, and assigns jointly and severally, firmly," to comply with all the as sureties can prosper.
terms and conditions stipulated in said crop loan contract which are hereby
incorporated as essential part hereof" the liability of the bonding company to
the creditor is not merely as a guarantor but as surety — liable as a regular INTERNATIONAL FINANCE CORP VS IMPERIAL TEXTILE
party to the undertaking.

As a surety, a bonding company is charged as an original promissor and is an FACTS:


insurer of the debt. While it is an accepted rule in our jurisdiction that an IFC extended to PPIC a loan. A 'Guarantee Agreement' was executed with
alteration of the contract is a ground for release, this alteration must be Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation
material. Alterations in the form of increases in the credit line made with the (Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to guarantee
full consent of the bonding company cannot be the basis of the company's PPIC's obligations under the loan agreement.
claim for release.
The obligations of the guarantors were agreed as follows:
If a surety upon demand fails to pay, he can be held liable for interest, even if
in thus paying, the liability becomes more than in the principal obligation. The “The Guarantors jointly and severally, irrevocably, absolutely and
increased liability is not because of the contract but because of the default unconditionally guarantee, as primary obligors and not as sureties merely,
and the necessity of judicial collection. The interest however, runs from the the due and punctual payment of the principal of, and interest and
time the complaint is filed, not from the time the debt becomes due and commitment charge on, the Loan, and the principal of, and interest on, the
Notes, whether at stated maturity or upon prematuring, all as set forth in
demandable.
the Loan Agreement and in the Notes."

By virtue of PPIC's failure to pay, IFC, together with DBP, applied for the
ONG VS PCIB extrajudicial foreclosure of mortgages on the real estate, buildings, machinery,
equipment plant and all improvements owned by PPIC. There was a balance
FACTS: despite the sale, and PPIC still failed to pay.
Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in
the manufacture and export of finished wood products. Petitioners-spouses Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay
Alfredo and Susana Ong are its President and Treasurer, respectively. the outstanding balance. However, despite the demand made by IFC, the
outstanding balance remained unpaid.
BMC needed additional capital. Obtained a loan from E-PCIB with spouses
acting as sureties. BMC filed a petition for rehabilitation and suspension of ISSUE:
payments with the Securities and Exchange Commission (SEC). Bank Whether or not ITM and Grandtex are sureties and therefore, jointly and
considered debtor BMC in default of its obligations and sought to collect severally liable with PPIC, for the payment of the loan.
payment thereof from petitioners-spouses as sureties.
HELD:
A Memorandum of Agreement (MOA) was executed by debtor BMC, the YES. The terms of a contract govern the rights and obligations of the
petitioners-spouses as President and Treasurer of BMC, and the consortium of contracting parties. When the obligor undertakes to be "jointly and severally"
creditor banks of BMC (of which respondent bank is included). The MOA took liable, it means that the obligation is solidary. If solidary liability was instituted
effect upon its approval by the SEC, agreeing to temporarily suspend CD any to "guarantee" a principal obligation, the law deems the contract to be one of
pending civil action against the debtor BMC. suretyship.

The creditor in the present Petition was able to show convincingly that,
although denominated as a "Guarantee Agreement," the Contract was actually
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 6 of 21
a surety. Notwithstanding the use of the words "guarantee" and "guarantor,"
the subject Contract was indeed a surety, because its terms were clear and left
no doubt as to the intention of the parties. EFFECT IF PRINCIPAL HAS NOT PAID PREMIUM

PHIL. PRYCE ASSURANCE CORP VS CA

ELEMENTS OF GUARANTY:
(1) PARTIES FACTS:
(PRINCIPAL- Sagum Gen M.; SURETY- Pryce)
CONSENT- RULE WHERE THERE IS MERELY AN
Gegroco Inc. filed collection for sum of money against petitioner Philippine
OFFER OF GUARANTY
Pryce Assurance Corporation. The complaint alleged that petitioner issued two
surety bonds in behalf of its principal Sagum General Merchandise.
TEXAS CO. INC. VS ALONZO
Pryce Assurance admitted having executed the said bonds, but denied liability
because allegedly 1) the checks which were to pay for the premiums bounced
FACTS: and were dishonored hence there is no contract to speak of between
Leonor S. Bantug and Tomas Alonso were sued by the Texas Company (P. I.) petitioner and its supposed principal; and 2) that the bonds were merely to
for the recovery of the sum of P629, unpaid balance of the account of Leonor guarantee payment of its principal's obligation, thus, excussion is necessary.
S. Bantug in connection with her agency contract with the Texas Company for
the faithful performance of which Tomas Alonso signed the following: ISSUE:
Was there a contract of surety even if the principal has not paid the premium?
“For value received, we jointly and severally do hereby bind ourselves
and each of us, in solidum, with Leonor S. Bantug the agent xxx” HELD:
YES. The Insurance Code states that:
The bond in question was executed at the request of the petitioner by virtue
of the following clause of the agency contract: "SECTION 177. The surety is entitled to payment of the premium as
soon as the contract of suretyship or bond is perfected and delivered to the
"Additional Security. — The Agent shall whenever requested by the obligor. No contract of suretyship or bonding shall be valid and binding
Company in addition to the guaranty herewith provided, furnish further unless and until the premium therefor has been paid, except where the
guaranty or bond, conditioned upon the Agent's faithful performance of this obligee has accepted the bond, in which case, the bond becomes valid and
contract, in such form and amount and with such bank as surety or with such enforceable irrespective of whether or not the premium has been paid by
individuals or firms as joint and several sureties as shall be satisfactory to the the obligor to the surety.
company."
Here, respondent accepted the bond, and presented evidence that Sagum Gen.
ISSUE: Merchandise submitted the required surety bonds. Likewise presented are delivery
WON there was merely an offer of guaranty on the part of Alonso, so that he invoices addressed to Sagum General Merchandise proving that parts were
cannot be held liable thereunder because he was never notified by the Texas purchased, delivered and received.
Co. Of its acceptance.
In the first place, petitioner, in its answer, admitted to have issued the bonds
HELD: subject matter of the original action. Also, Petitioner's defense that it did not
There was merely an offer of guaranty. have authority to issue a Surety Bond when it did is an admission of fraud
In view of the foregoing clause which should be the law between the parties, it committed against respondent. No person can claim benefit from the wrong
is obvious that, before a bond is accepted by the petitioner, it has to be in such he himself committed. A representation made is rendered conclusive upon the
form and amount and with such sureties as shall be satisfactory thereto; in person making it and cannot be denied or disproved as against the person
other words, the bond is subject to petitioner's approval. relying thereon.

The logical implication arising from this requirement is that, if the petitioner is ELEMENTS OF GUARANTY:
satisfied with any such bond, notice of its acceptance or approval should (2) SUBJECT MATTER AND CONDITIONS
necessarily be given to the proper party in interest, namely, the surety or
guarantor. There is no evidence in this case tending to show that the
DEBTS THAT MAY BE GUARANTEED
respondent, T. Alonso, ever had knowledge of any act on the part of the
petitioner amounting to an implied acceptance.
MUNICIPALITY OF GASAN VS MARASIGAN
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 FACTS:
the obligation becomes fixed, it does not become a binding obligation until it is M. Marasigan enjoyed the privilege of gathering whitefish spawn in the
accepted and, unless there is a waiver of notice, until notice of such jurisdictional waters of Gasan, evidenced by his sales of whitefish spawn
acceptance is given to, or acquired by, the guarantor, or until he has notice or during a certain period. Consequently, he owes and is bound to pay to the
knowledge that the creditor has performed the conditions and intends to act plaintiff, for said privilege, license fees. To secure his compliance with the
upon the guaranty. The acceptance need not necessarily be express or in terms of the contract, Miguel Marasigan filed the bond subscribed by Sevilla
writing, but may be indicated by acts amounting to acceptance. and Luna, who bound themselves in said document to pay to the plaintiff if
Miguel Marasigan failed to deposit one-fourth of P4,200 quarterly in advance
Where, upon the other hand, the transaction is not merely an offer of in the municipal treasury of Gasan.
guaranty but amounts to a direct or unconditional promise of guaranty,
unless notice of acceptance is made a condition of the guaranty, all that is The fishing privilege was later cancelled upon the protest of another bidder,
necessary to make the promise binding is that the promisee should act upon it, but evidence shows that he was in fact enjoying the privilege for a period
and notice of acceptance is not necessary, the reason being that the contract equivalent to one and one-third quarter.
of guaranty is unilateral.

ISSUE:
WON the surety agreement still subsists despite the cancellation of the fishing
privilege.
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 7 of 21

HELD: ISSUE:
NO. Between MM and the Municipality, there was a tacit contract for the Was the debt considered liquidated and therefore the debtor can be declared
privilege of gathering whitefish spawn in the jurisdictional waters of the in default?
municipality of Gasan, but without the intervention of the sureties-appellants,
for one and one-third quarter. HELD:
Petitioners’ Debt are considered liquidated despite the alleged lack of
The subsequent fishing privilege contract entered into by the plaintiff and the accounting. A debt is liquidated when the amount is known or is determinable
appellant M.M. on December 11, 1930, not only was not consummated but by inspection of the terms and conditions of the relevant promissory notes
was cancelled. This being so, neither the appellant M.M. nor his sureties or the and related documentation. Failure to furnish a debtor a detailed statement of
other appellants were bound to comply with the terms of their respective account does not ipso facto result in an unliquidated obligation.
contracts of fishing privilege and suretyship. This is so, particularly with
respect to the sureties-appellants, because suretyship cannot exist without a It is in fact clear from the agreement of the parties that when the payment is
valid obligation (art. 1824 of the Civil Code), the obligation arising from a accelerated due to an event of default, the penalty charge shall be based on
cancelled contract not being a valid obligation. the total principal amount outstanding, to be computed from the date of
acceleration until the obligation is paid in full. 63 Their Credit Agreement even
The obligation whose compliance by the appellant M.M. was guaranteed by provides for the application of payments. 64 It appears from the agreements
the sureties-appellants A.S. and G.L., was exclusively that which should begin that the amount of total obligation is known or, at the very least,
on January 1, 1931, not on the 14th of said month and year, a subsequent determinable.
contract which the plaintiff and M.M. might have entered into. However,
guaranty is not presumed; it must be express and cannot be extended Moreover, when they made their partial payment, petitioners did not question
beyond its specified limits. the principal, interest or penalties demanded from them. They only sought
additional time to update their interest payments or to negotiate a possible
SC absolves the sureties Angel R. Sevilla and Gonzalo L. Luna from the restructuring of their account. 65 Hence, there is no basis for their allegation
complaint and orders the defendant-appellant Miguel Marasigan to pay the that a statement of account was necessary for them to know their obligation.
sum of P140 to the plaintiff municipality. We cannot impair respondent's right to foreclose the properties on the basis
of their unsubstantiated allegation of a violation of due process.

FUTURE DEBTS- WHEN DEBT IS CONSIDERED LIQUIDATED FUTURE DEBTS- COMPREHENSIVE SURETY AGREEMENT TO
COVER EXISTING AND FUTURE DEBTS
SELEGNA MGT and DEVT CO. VS UCPB
RCBC VS ARRO

FACTS: A continuing suretyship agreement may be executed to cover existing and


Petitioners Selegna Management and Development Corporation and Spouses future debts.
Edgardo and Zenaida Angeles were granted a credit facility in the amount of
P70 million by Respondent United Coconut Planters Bank (UCPB). FACTS:
Residoro Chua and Enrique Go, Sr. jointly executed a comprehensive surety
As security for this credit facility, petitioners executed real estate mortgages agreement to guaranty any existing or future obligation of Davao Agricultural
over several parcels of land and a promissory note in favor of respondent Industries Corporation (DAICOR) with Rizal Commercial Banking Corporation
every time they availed of the credit facility. As required in these notes, they (RCBC). The purpose of the agreement is to guaranty any existing
paid the interest in monthly amortizations. indebtedness of DAICOR and/or to induce RCBC at any time thereafter to
extend credit to DAICOR, provided that the liability shall not exceed at any one
The parties stipulated in their Credit Agreement dated September 19, 1995, time the aggregate principal sum of P100,000.00.
that failure to pay "any availment of the accommodation or interest, or any
sum due" shall constitute an event of default which shall consequently allow Thereafter, a promissory note in the amount of P100,000.00 was issued in
respondent bank to "declare [as immediately due and payable] all outstanding favor of RCBC which was signed solely by Enrique Go, Sr. in his personal
availments of the accommodation together with accrued interest and any capacity and in behalf of DAICOR. When despite repeated demands the note
other sum payable." was not fully paid, RCBC filed a complaint against DAICOR, Chua and Enrique
Go, Sr. A motion to dismiss was filed by Chua on the ground that the complaint
In need of further business capital, petitioners obtained from UCPB an states no cause of action against him as he cannot be held liable under the
increase in their credit facility. promissory note because he did not sign the same.

UCPB sent petitioners a demand letter invoking the acceleration provision in ISSUE:
their Credit Agreement. Whether Chua is liable to pay the obligation evidence by the promissory note
which he did not sign, in the light of the provisions of the comprehensive
In response, petitioners paid respondent the amount of P10,199,473.96 as surety agreement that they had earlier executed.
partial payment of the accrued interests. Apparently unsatisfied, UCPB applied
for extrajudicial foreclosure of petitioners' mortgaged properties. HELD:
Yes. The comprehensive surety agreement was jointly executed by Chua and
In order to forestall the extrajudicial foreclosure scheduled for May 31, 1999, Enrique Go, Sr. (President and General Manager respectively of DAICOR). The
petitioners filed a Complaint 16 (docketed as Civil Case No. 99-1061) for surety agreement was executed to guarantee existing as well as future debts
"Damages, Annulment of Interest, Penalty Increase and Accounting with which DAICOR may incur from RCBC, as is legally allowable under the Civil
Prayer for Temporary Restraining Order/Preliminary Injunction." Code.
"Article 2053. — A guaranty may also be given as security for future
Petitioners assert, that they have a right to a detailed accounting before they debts, the amount of which is not yet known; there can be no claim against
can be declared in default. As regards the three requisites of default, they say the guarantor until the debt is liquidated. A conditional obligation may also
that the first requisite — liquidated debt — is absent. Continuing with be secured."
foreclosure on the basis of an unliquidated obligation allegedly violates their
right to due process. It was subject only to the proviso that their liability shall not exceed at any one
time the aggregate principal sum of P100,000.00. The guaranty is a continuing
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 8 of 21
one which shall remain in full force and effect until the bank is notified of its apart and distinct from the obligation created in the other, as evidenced by the
termination. fact that Uy Tiam had to apply anew for the 1979 transaction. Diño and Uy,
being strangers thereto, cannot be held liable under it.
At the time the loan of P100,000.00 was obtained by DAICOR, the
comprehensive surety agreement was still in full force and effect. What Metrobank did not serve notice to Diño and Uy Diño when it extended to Uy
obviously induced RCBC to grant the loan was the surety agreement whereby Tiam the 1979 Letter of Credit at least to inform them that the continuing
Go and Chua bound themselves solidarily to guaranty the punctual payment of suretyships they executed in 1977 will be considered by it to secure the 1979
the loan at maturity. The loan was, therefore, covered by the said agreement transaction of Uy Tiam. Furthermore, there is no sufficient and credible
and Chua is liable by virtue of the surety agreement even if he did not sign the showing that Diño and Uy Diño were fully informed of the import of the
promissory note. Continuing Suretyships when they affixed their signatures thereon, that they
are thereby securing all future obligations which Uy Tiam may contract with
FUTURE DEBTS- WHEN GUARANTY IS CONSTRUED AS
Metrobank. On the contrary, Diño and Uy Diño categorically testified that they
CONTINUING
signed the blank forms in the office of Uy Tiam in obedience to the instruction
of Uy Tiam, their former employer.
DINO VS CA

A continuing suretyship agreement may be executed to cover existing and


BANK OF COMMERCE VS FLORES
future debts.
A continuing guaranty is a recognized exception to the rule that an action to
FACTS: foreclose a mortgage must be limited to the amount mentioned in the
In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), through Uy Tiam, mortgage contract.
obtained credit accommodations from Metrobank in the sum of P700,000.00
To secure it, Norberto Uy and Jacinto Uy Diño executed separate Continuing FACTS:
Suretyships in favor of Metrobank. Sps Flores borrowed money from Bank of Commerce in the amount of
P900,000.00. They executed a Real Estate Mortgage over their condominium
The obligation under the first letter of credit was paid. Thereafter, Uy Tiam unit as collateral, and the same was annotated at the back of Condominium
obtained another credit accommodation from Metrobank in 1979. It was Certificate of Title (CCT). After 2 years, they again borrowed P1,100,000.00
applied for and obtained without the participation of Uy and Uy Diño as they from the bank, which was also secured by a mortgage over the same property
did not sign the document denominated as 'Commercial Letter of Credit and annotated at the back of CCT.
Application.' They were also not asked to execute any suretyship to guarantee
its payment. Neither did Metrobank nor Uy Tiam inform them that the 1979 The next year, Sps Flores paid P1,011,555.54 to the bank. On the face of the
Letter of Credit has been opened and that the Continuing Suretyships shall receipt, it was written that the payment was "in full payment of the loan and
guarantee its payment. interest." They then asked the bank to cancel the mortgage annotations on the
CCT since the loans secured by the real estate mortgage were already paid in
Upon maturity of the loan, Metrobank filed a complaint for collection of a sum full. However, the bank refused to cancel the same and demanded payment of
of money and impleaded Diño and Uy Diño as parties-defendants. Diño and Uy P 4,633,916.67, representing the outstanding obligation of respondents as of
Diño filed a motion to dismiss the complaint on the ground of lack of cause of that time.
action, maintaining that the obligation which they guaranteed in 1977 has
been extinguished since it has already been paid in the same year. Accordingly, Sps Flores requested for an accounting which would explain how the said
the Continuing Suretyships executed in 1977 cannot be availed of to secure Uy amount was arrived at. However, instead of heeding their request, the bank
Tiam's Letter of Credit obtained in 1979 because a guaranty cannot exist applied for extra-judicial foreclosure of the mortgages over the condominium
without a valid obligation. Moreover, they cannot be held liable for the unit. The public auction sale was then scheduled. So they filed a suit assailing
obligation contracted in 1979 because they are not privies thereto as it was the validity of the foreclosure and auction sale of the property.
contracted without their participation.
The bank admitted that there were only 2 mortgage loans annotated at the
Metrobank filed its opposition to the motion to dismiss, relying on Article back of the CCT No. 2130, but it denied that Sps Flores had already fully
2053 of the Civil Code which provides: settled their outstanding obligations. Several credit lines were granted to the
sps that were secured by promissory notes, and which were either increased
"Article 2053. — A guaranty may also be given as security for future or extended from time to time. The loan that was paid in the amount of
debts, the amount of which is not yet known; there can be no claim against P1,011,555.54 was only one of their loans with the bank. There were
the guarantor until the debt is liquidated. A conditional obligation may also remaining loans already due and demandable, and had not been paid by them
be secured."
despite repeated demands. The remaining loans, although not availed of at
the same time, were similarly secured by the subject real estate mortgage as
Metrobank asserted that the agreement was in full force and effect at the time
provided in the continuing guaranty agreement therein.
the letter of credit was obtained in 1979 as Diño and Uy did not exercise their
right to revoke it by giving notice to the bank.
ISSUE:
Whether the real estate mortgage over the subject condominium unit is a
ISSUE:
continuing guaranty for the future loans of Sps Flores.
Whether or not Diño and Uy Diño are liable for the obligation contracted by
Uy Tiam under the Letter of Credit issued in 1979 by virtue of the Continuing
HELD:
Suretyships they executed in 1977?
Yes. A continuing guaranty is a recognized exception to the rule that an action
to foreclose a mortgage must be limited to the amount mentioned in the
HELD:
mortgage contract. Under-
No. When Uy and Diño executed the continuing suretyships in 1977, Uy Tiam
was obligated to the Metrobank in the amount of P700,000.00 — and this was
"Article 2053. — A guaranty may also be given as security for future
the obligation which Diño and Uy Diño guaranteed to pay. Uy Tiam paid this debts, the amount of which is not yet known; there can be no claim against
1977 obligation — and such payment extinguished the obligation they the guarantor until the debt is liquidated. A conditional obligation may also
assumed as guarantors/sureties. be secured."

The 1979 Letter of Credit is different from the 1977 Letter of Credit which A continuing guaranty is not limited to a single transaction, but contemplates a
covered the 1977 account of Uy Tiam. Thus, the obligation under either is future course of dealing, covering a series of transactions, generally for an
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 9 of 21
indefinite time or until revoked. It contemplates a succession of liabilities, for
which, as they accrue, the guarantor becomes liable. By its very nature, a continuing suretyship contemplates a future course of
dealing. Generally, it is prospective in its operation and is intended to provide
A guaranty shall be construed as continuing when, by the terms thereof, it is security with respect to future transactions.
evident that the object is to give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a certain period, especially if However, although a contract of suretyship is ordinarily not to be construed as
the right to recall the guaranty is expressly reserved. retrospective, that rule must yield to the intention of the contracting parties as
revealed by the evidence.
In this case, the language of the real estate mortgage unambiguously reveals
that the security provided in the real estate mortgage is continuing in nature.
Thus, it was intended as security for the payment of the loans annotated at ELEMENTS OF GUARANTY:
the back of the CCT, and as security for all amounts that the spouses may owe (3) FORM
the bank.
WRITTEN UNDERTAKING TO GUARANTEE PAYMENT OF
A mortgage given to secure advancements is a continuing security and is not
ANOTHER PERSON’S OBLIGATION
discharged by repayment of the amount named in the mortgage until the full
amounts of the advancements are paid. The sps’ full payment of the loans MACONDRAY & CO. INC. VS PINON
annotated on the title of the property shall not effect the release of the
mortgage because, by the express terms of the mortgage, it was meant to A contract of guaranty is not a formal contract and shall be valid in whatever
secure all future debts of the spouses and such debts had been obtained and form it may be, provided that it complies with the statute of frauds
remain unpaid. Unless full payment is made by the spouses of all the amounts
that they have incurred from petitioner bank, the property is burdened by the FACTS:
mortgage. Piring and Piñon, transacting business under a common name known as "All
Stars Productions," requested Kangleon, then a member of the Senate, to help
them buy on credit from the Macondray some cinematographic films. To
accommodate them, Kangleon wrote a letter to Macondray. On the strength of
FUTURE DEBTS- RETROSPECTIVE APPLICATION OF GUARANTY
the letter, Macondray sold on credit and delivered to the Piring and Piñon 127
rolls of cinematographic films.
WILLEX PLASTIC INDUSTRIES CORP. VS CA

Generally, a continuing suretyship is prospective in its operation and is Piring and Piñon failed to pay their obligation on the due date and even after
intended to provide security with respect to future transactions. However, as several demands were made. Thus, Macondray filed this case against Piring
an exception, this rule must yield to the intention of the contracting parties as and Piñon, impleading Kangleon as their guarantor.
revealed by the evidence.
Kangleon set up the defense that the letter he had written to Macondray was
FACTS: only to introduce his co-defendants. That assuming that there was an intent on
Inter-Resin Industrial Corporation opened a letter of credit with the Manila his part to guarantee payment of his co-defendant's obligation, the said letter
Banking Corporation. To secure payment of the credit accommodation, was but an offer to act as guarantor of his co-defendants. That as the
Inter-Resin and Industrial and the Investment and Underwriting Corporation of acceptance of his offer to act as guarantor for his co-defendants has not been
the Philippines (IUCP) executed two documents, both entitled "Continuing actually made known to him by Macondray, the contract of guaranty between
Surety Agreement", whereby they bound themselves solidarily to pay them has not been perfected.
Manilabank. Subsequently, Inter-Resin and Willex Plastic Industries Corp., also
executed a "Continuing Guaranty" in favor of IUCP. ISSUE:
Whether the letter sent by Kangleon to Macondray constitutes as an offer of
Following demand upon it, IUCP paid to Manilabank Inter-Resin's outstanding guaranty.
obligation. IUCP then demanded from Inter-Resin and Willex the payment of
what it had paid to Manilabank. As neither one of the sureties paid, IUCP filed HELD:
this case against Inter-Resin and Willex. Yes. A cursory reading of the letter belies Kangleon’s assertion that it was
merely a letter of introduction and not an offer of guaranty. While in his
In denying liability to IUCP, Willex argues that under the "Continuing opening sentence he says that "This will introduce to you the bearers, Messrs.
Guaranty," its liability is for sums obtained by Inter-Resin from IUCP, not for Conrado Piring and Perfecto Piñon . . . ," who "wish to place an order for"
sums paid by the latter to Manilabank for the account of Inter-Resin. cinematographic films, yet in the later part he says that "for which by their
guaranty I pledge payment." This can only mean that he undertakes to
Willex also contended that the "Continuing Guaranty" cannot be retroactively guarantee payment of the principal debtors' obligation should they fail to pay.
applied so as to secure the payments made by IUCP under the two
"Continuing Surety Agreements”. "Contracts shall be obligatory in whatever form they may have been entered
into, provided all the essential requisites for their validity are present." A
ISSUE: contract of guaranty is not a formal contract and shall be valid in whatever
Whether under the "Continuing Guaranty" Willex may be held jointly and form it may be, provided that it complies with the statute of frauds.
severally liable with Inter-Resin for the amount borrowed by the latter from
Manilabank. Kangleon insists that he should have been notified by Macondray of the
acceptance of his offer of guaranty. In the first place, his letter already
HELD: constitutes his undertaking of guaranty. In the second place, the contract
Yes. Evidence showed that the "Continuing Guaranty" had been made to entered into by and between Macondray and the principal debtors is the
guarantee payment of amounts made by IUCP to Manilabank, and not of any principal contract and the contract entered into by and between Kangleon and
sums given by it as loan to Inter-Resin. Macondray is subsidiary to the principal contract. Since the principal contract
had already been perfected, the subsidiary contract of guaranty became
Nor does the record show any other transaction under which Inter-Resin may binding upon effectivity of the principal contract. Hence no notice of
have obtained sums of money from IUCP. It can reasonably be assumed that acceptance by Macondray to Kangleon is necessary for its validity.
Inter-Resin and Willex intended to indemnify IUCP for amounts which it may
have paid Manilabank on behalf of Inter-Resin.
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 10 of 21
ISSUE:
Whether or not the Deed of Sale is simulated.

GUARANTY AND SURETYSHIP MUST BE EXPRESS AND CANNOT


HELD:
BE PRESUMED
No. The transfer of the land in question made by Eugenio to Apolonia had
taken place long before the commencement of the suit of Macleod & Co.
against Montalban, as principal, and Eugenio, as surety.
WISE & CO. VS TANGLAO

An agreement constituting a suretyship must be express and cannot be Moreover, when Eugenio bound himself as surety for Montalban for the
presumed. payment to Macleod & Company of the amount of P5,000 which Montalban
owed to the latter, he limited himself to giving as security, by way of mortgage,
FACTS: the land described as lot No. 892. It is not possible that Macleod & Company
Wise & Co. instituted a civil case for the recovery of a certain sum of money could have ever contemplated bringing an action against Eugenio to obtain
against Cornelio David. In said case, Wise & Co. obtained a preliminary possession not only of the land expressly mortgaged to it, but also of any
attachment of David's property. To avoid the execution of said attachment, other belonging to him specifically lot No. 903, for the purpose of collecting its
David succeeded in having his lawyer, Atty. Tanglao, execute a special power of credit. Macleod & Company would have known better than anyone else that
attorney in his favour. The SPA allowed David to sign for Atty. Tanglao as his the contract of suretyship cannot make Eugenio Solon liable for an amount
surety and to mortgage Atty. Tanglao’s lot to guarantee the said obligations to greater than P5,000 and that it could require him to pay Montalban's
Wise & Co. Because of this, a Compromise Agreement was entered into indebtedness, should the latter fail to do so, with lands other than that he had
between David and Wise & Co. wherein several real properties, including the mortgaged.
lot owned by Atty. Tanglao, was mortgaged to secure David’s obligation.
The clauses of a contract of suretyship determine the extent of the liability of
Thereafter, David paid the sum of P343.47 to Wise & Co., on account of the the surety. Said liability should not be extended farther than the clear terms of
P640 which he bound himself to pay under the Compromise Agreement, the contract of guarantee by mere implications. The surety should be liable
leaving an unpaid balance of P296.53. Wise & Co. now instituted this case only in the manner and to the extent, and under the circumstances pointed
against Atty. Tanglao for the recovery of said balance. out in the contract of suretyship or which may be clearly deduced therefrom.

ISSUE:
Whether Atty. Tanglao may be held liable as a guarantor for the indebtedness
CHAPTER II- EFFECTS OF GUARANTY
of David to Wise & Co.
SECTION I- EFFECTS OF GUARANTY BETWEEN THE
HELD:
GUARANTOR AND THE CREDITOR
No. There is no doubt that under the SPA, Atty. Tanglao empowered David, in
his name, to enter into a contract of suretyship and a contract of mortgage,
with Wise & Co. However, David used the SPA only to mortgage the property
and did not enter into the contract of suretyship. Nothing is stated in the WHAT IS TO BE PAID
Compromise Agreement to the effect that Atty. Tanglao became David's surety
for the payment of the sum in question. Neither is this inferable from any of EXTENT OF LIABILITY WHEN THE BOND IS PENAL IN NATURE
the clauses thereof, and even if it is inferable, it would be insufficient to create
an obligation of suretyship which, under the law, must be express and cannot
GEN INSURANCE AND SURETY CORP VS REPUBLIC
be presumed.
In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of non-compliance, if there
is no stipulation to the contrary.
THE TERMS OF A CONTRACT OF SURETYSHIP DETERMINE THE
SURETY’S LIABILITY AND CANNOT EXTEND TO MORE THAN
FACTS:
WHAT IS STIPULATED THEREIN
Central Luzon Educational Foundation, Inc. (CLEFI) and
the General Insurance and Surety Corporation (GISC) posted in favor of the
SOLON VS SOLON
Department of Education a bond to secure “the observance of all regulations
The clauses of a contract of suretyship determine the extent of the liability of prescribed by the Secretary of Education and compliance with all obligations,
the surety. Said liability should not be extended farther than the clear terms of including the payment of the salaries of all its teachers and employees, past,
the contract of guarantee by mere implications. present, and future, and the payment of all other obligations incurred by, or in
behalf of said school.”
FACTS:
In his lifetime Eugenio Solon bought on installments from the Bureau of Lands It was subsequently found out that on the date of execution of the bond, the
Lot No. 903 of the Banilad Friar Lands Estate. After securing the consent and Foundation was indebted to two of its teachers for salaries. Thus, the
approval of the Bureau of Lands, Eugenio sold and conveyed all his rights, title government demanded payment from CLEFI and GISC. The demand having
and interest in the land acquired by him to Apolonia Solon, who agreed to pay been refused, the Solicitor General, in behalf of the Republic of the Philippines,
the installments still owing to the Bureau of Lands. filed a complaint for the forfeiture of the bond.

The next year, Eugenio Solon died leaving no will. Two years later, the RD of GISC contended that the bond is void for being contrary to public policy insofar
Cebu issued transfer certificate of title in the name of Apolonia. as it requires the surety to pay P10,000.00 regardless of the amount of the
salaries of the teachers. It is claimed that to enforce forfeiture of the bond for
The heirs of Eugenio filed a case against Apolonia, maintaining that the Deed the full amount would allow the Government to enrich itself since the unpaid
of Sale is false and stimulated because it was only made for the sole purpose salaries of the teachers amounted to P1,318.84 only.
of placing the land beyond the reach of any action that might be brought by
Macleod & Company against Eugenio for being the surety in the obligation ISSUE:
incurred by a certain Montalban. Whether the forfeiture of the bond for the full amount is proper.
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 11 of 21
HELD: Comment: “Art. 2055. A guaranty is not presumed; it must be express and
Yes. There is nothing against public policy in forfeiting the bond for the full cannot extend to more than what is stipulated therein.
amount. The bond is penal in nature. Under-
If it be simple or indefinite, it shall comprise not only the principal obligation,
“Article 1226 - In obligations with a penal clause, the penalty shall but also all its accessories, including the judicial costs, provided with respect to
substitute the indemnity for damages and the payment of interests in case of the latter, that the guarantor shall only be liable for those costs incurred after
non-compliance, if there is no stipulation to the contrary…” he has been judicially required to pay.”

The party to whom payment is to be made is entitled to recover the sum The guarantor shall answer for such judicial costs only as have been incurred
stipulated without need of proving damages because one of the primary after he has been judicially required to pay. From the time the guarantor has
purposes of a penalty clause is to avoid such necessity. been judicially required to pay, all of the cost that arise depend upon his
exclusive will and are, therefore attributable to his fault if he does not do so.

WHEN SURETY IS LIABLE FOR INTEREST


BENEFIT OF EXHAUSTION
PNB VS LUZON SURETY (SUPRA)
EFFECT OF WRIT OF EXECUTION AGAINST SURETY
WHO WAS NOT IMPLEADED
COMMONWEALTH INSURANCE CO. VS CA
TOWERS ASSURANCE CORP. VS ORORAMA SPMKT
Guarantor is liable for judicial cost only when they are incurred after he has
been judicially required to pay. Surety is entitled to be heard before an execution can be issued against him
especially if he is not a party in the case involving his principal.
FACTS:
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) FACTS:
granted two export loan lines, one, for P2,500,000.00 to Jigs Manufacturing On February 17, 1976 See Hong, the proprietor of Ororama Supermart in
Corporation (JIGS) and, the other, for P1,000,000.00 to Elba Industries, Inc. Cagayan de Oro City, sued the spouses Ernosto Ong and Conching Ong in the
(ELBA). JIGS and ELBA which are sister corporations both drew from their CFI of Misamis Oriental for the collection of P 58,400 plus litigation expenses
respective credit lines, the former in the amount of P2,499,992.00 and the and attorney’s fees.
latter for P998,033.37 plus P478,985.05 from the case-to-case basis and trust
receipts. These loans were evidenced by promissory notes and secured by See Hong ask for a writ of preliminary attachment. On March 5, 1976, the
surety bonds executed by defendant-appellee Commonwealth Insurance lower court issued an order of attachment. The deputy sheriff attached the
Company (CIC). properties of the Ong spouses and Towers Assurance Corporation as surety. In
that undertaking, the Ong spouses and Towers assurance Corporation bound
JIGS and ELBA defaulted in the payment of their respective loans. On October themselves to pay solidarily to See Hong the sum of P 58, 400.
30, 1984, appellant RCBC made a written demand on appellee CIC to pay JIG’s
account to the full extend of the suretyship. A similar demand was made on HELD:
December 17, 1984 for appellee CIC to pay ELBA’s account to the full extend of We hold that the lower court acted with grave abuse of discretion in issuing a
the suretyship. In response to those demands, appellee CIC made several writ of execution against the surety without first giving it an opportunity to be
payments from February 25, 1985 to February 10, 1988 in the total amount of heard as required in Rule 57 of the Rules of Court which provides:
P2,000,000.00. There having been a substantial balance unpaid, appellant
RCBC made a final demand for payment on July 7, 1988 upon appellee CIC but Sec.17. when execution returned unsatisfied, recovery had upon
the latter ignored it. Thus, appellant RCBC filed the Complaint for a Sum of bond.- if the execution be returned unsatisfied in whole or in part, the
Money on September 19, 1988 against appellee CIC. surety or sureties on any counterbond given pursuant to the provisions
of this rule to secure the payment of the judgment shall become
ISSUE: charged on such counterbond and bond to pay the judgment, which
Whether or not petitioner should be held liable to pay legal interest over and amount may be recovered from such surety or sureties after notice and
above its principal obligation under the surety bonds issued by it. summary hearing in the same action.

HELD: Under Sec. 17, in order that the judgment creditor might recover from the
The principle that if a surety upon demand fails to pay, he can be held liable surety on the counterbond, it is necessary (1) that the execution be first issued
for interest, even if in thus paying, its liability becomes more than the principal against the principal debtor and that such execution was returned unsatisfied
obligation. The increased liability is not because of the contract but because of in whole or in part; (2) that the creditor made demand upon the surety for the
the default and the necessity of judicial collection satisfaction of the judgment and (3) that the surety be given notice and a
summary hearing in the same action as to his liability for the judgment under
Petitioner’s liability under the suretyship contract is different from its liability his counterbond.
under the law. There is no question that as a surety, petitioner should not be
made to pay more than its assumed obligation under the surety bonds. The first requisite mentioned above is not applicable to this case because
However, it is clear from the above-cited jurisprudence that petitioner’s Towers Assurance Corporation assumed a solidary liability for the fulfillment of
liability for the payment of interest is not by reason of the suretyship the judgment. A surety is not entitled to the exhaustion of the properties of
agreement itself but because of the delay in the payment of its obligation the principal debtor.
under the said agreement.
But certainly the surety is entitled to be heard before an execution can be
The issue of petitioner’s payment of interest is a matter that is totally different issued against him since he is not a party in the case involving his principal.
from its obligation to pay the principal amount covered by the surety bonds it Notice and hearing constitute the essence of procedural due process.
issued. Petitioner offered no valid excuse for not paying the balance of its
principal obligation when demanded by RCBC. Its failure to pay is, therefore, Comment: The creditor must sue the principal alone. The guarantor cannot be
unreasonable. sued with his principal, much less alone except in the cases mentioned in
Article 2059.
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 12 of 21
“Art. 2059. This excussion shall not take place: xxx (2) if he has FACTS:
bound himself solidarily with the debtor; xxx.” If the guarantor binds On 13 December 1979, petitioner JN Development Corporation (“JN”) and
himself solidarily with the principal debtor, he becomes a surety with Traders Royal Bank (TRB) entered into an agreement whereby TRB would
primary liability as a solidary co-debtor. In effect, he renounces the extend to JN an Export Packing Credit Line for Two Million Pesos
benefit of exhaustion. (P2,000,000.00). The loan was covered by several securities, including a real
estate mortgage and a letter of guarantee from respondent Philippine Export
and Foreign Loan Guarantee Corporation (“PhilGuarantee”), now Trade and
WHERE SURETY WAS IMPLEADED BUT DECLARED IN DEFAULT
Investment Development Corporation of the Philippines, covering seventy
percent (70%) of the credit line. With PhilGuarantee issuing a guarantee in
favor of TRB, JN, petitioner spouses Rodrigo and Leonor Sta. Ana and
FINMAN GEN ASSURANCE CORP VS SALIK
petitioner Narciso Cruz executed a Deed of Undertaking[7] (Undertaking) to
Surety is considered in law as being the same party as the debtor in relation to assure repayment to PhilGuarantee.
whatever is adjudged touching the obligation of the latter.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8
FACTS: October 1980 TRB requested PhilGuarantee to make good its guarantee.
Abdulgani Salik, et.al private respondents allegedly applied with Pan Pacific PhilGuarantee informed JN about the call made by TRB, and inquired about
Overseas Recruiting Services, Inc. on April 22, 1987 and were assured the action of JN to settle the loan. Having received no response from JN, on 10
employment abroad by a certain Mrs. Normita Egil. In consideration thereof, March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight
they allegedly paid fees totaling P30,000.00. but despite numerous assurances Hundred Twenty Four Pesos and Thirty Four Centavos (P934,824.34).
of employment abroad given by Celia Arandia and Mrs. Egil, they were not Subsequently, PhilGuarantee made several demands on JN, but the latter
employed. failed to pay. On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to
settle the obligation “by way of development and sale” of the mortgaged
Accordingly they filed a joint complaint with the Philippine Overseas property. PhilGuarantee, however, rejected the proposal.
Employment Administration against Pan Pacific for violation of Articles 32 and
34 of the Labor Code, as amended with claim or refund of a total amount of PhilGuarantee thus filed a Complaint for collection of money and damages
P30,000.00. against herein petitioners.

The POEA motu proprio impleaded and summoned herein petitioner surety ISSUE:
Finman General Assurance Corp. in the latter’s capacity as Pan Pacific’s Whether or not PhilGuarantee is entitled to reimbursement.
bonding company.
HELD:
On October 9, 1987, a hearing was called, but only the private respondents PhilGuarantee maintains that the date of default, not the actual date of
appeared. Despite being deemed in default or failing to answer, both Finman payment, determines the liability of the guarantor and that having paid TRB
and Pan Pacific were still notified of the scheduled hearing. Again they failed when the loan became due, it should be indemnified by petitioners.[30] It
to appear. Thus ex-parte proceeding ensued. argues that, contrary to petitioners’ claim, there could be no waiver of its right
to excussion more explicit than its act of payment to TRB very directly.[31]
HELD: Besides, the right to excussion is for the benefit of the guarantor and is not a
The nature of Finman’s obligation under the Suretyship agreement makes it defense for the debtor to raise and use to evade liability. Finally, PhilGuarantee
privy to the proceeding against the principal. As such Finman is bound, in the maintains that there is no sufficient evidence proving the alleged forgery of
absence of collusion, by a judgment against the principal even though it was Cruz’s signature on the Undertaking, which is a notarized document and as
not a party to the proceedings. In some cases the court ruled that were the such must be accorded the presumption of regularity.
surety bound itself solidarily with the principal obligor, the former is so
dependent on the principal debtor “that the surety is considered in law as The Court finds for PhilGuarantee.
being the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter”. 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
Applying the foregoing principles to the case at bar, it can be very well said so. The guarantor who pays for a debtor, in turn, must be indemnified by the
that even if herein Finman was not impleaded in the instant case, still it can be latter. However, the guarantor cannot be compelled to pay the creditor unless
held jointly and severally liable for all claims arising from the recruitment the latter has exhausted all the property of the debtor and resorted to all the
violation of Pan Pacific. Moreover as correctly stated by the Solicitor General, legal remedies against the debtor. This is what is otherwise known as the
private respondents have a legal claim against Pan Pacific and its insurer for benefit of excussion.
the placement and processing fees they paid, so much so that in order to
provide a complete relief to private respondents, petitioner have to be It is clear that excussion may only be invoked after legal remedies against the
impleaded in the case. principal debtor have been expanded. Thus, it was held that the creditor must
first obtain a judgment against the principal debtor before assuming to run
Comment: “Art. 2062. In every action by the creditor, which must be against after the alleged guarantor, “for obviously the ‘exhaustion of the principal’s
the principal debtor alone, except in the cases mentioned in Article 2059, the property’ cannot even begin to take place before judgment has been
former shall ask the court to notify the guarantor of the action. xxx” In obtained.” The law imposes conditions precedent for the invocation of the
suretyship, the surety is solidarily liable with the principal debtor, thus, the defense. Thus, in order that the guarantor may make use of the benefit of
creditor must implead both. 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.
EFFECT WHEN DEBTOR INVOKES NON-EXHAUSTION
While a guarantor enjoys the benefit of excussion, nothing prevents him from
BY THE GUARANTOR
paying the obligation once demand is made on him. Excussion, after all, is a
right granted to him by law and as such he may opt to make use of it or waive
JN DEVT CORP VS PHIL EXPORT AND FOREIGN LOAN
it. PhilGuarantee’s waiver of the right of excussion cannot prevent it from
Right to excussion is for the benefit of the guarantor and is not a defense for demanding reimbursement from petitioners. The law clearly requires the
the debtor to raise and use to evade liability. debtor to indemnify the guarantor what the latter has paid.
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 13 of 21
Petitioners’ claim that PhilGuarantee had no more obligation to pay TRB
because of the alleged expiration of the contract of guarantee is WHEN BENEFIT OF EXHAUSTION NOT AVAILABLE
untenable. What is controlling is that default and demand on PhilGuarantee
had taken place while the guarantee was still in force.
TUPAZ VS CA

The benefit of excussion, as well as the requirement of consent to extensions The benefit of excussion is not a prerequisite to secure judgment against a
of payment, is a protective device pertaining to and conferred on the guarantor.
guarantor. These may be invoked by the guarantor against the creditor as
defenses to bar the unwarranted enforcement of the guarantee. However, FACTS:
PhilGuarantee did not avail of these defenses when it paid its obligation Jose C. Tupaz IV and Petronila C. Tupaz were Vice-President for Operations
according to the tenor of the guarantee once demand was made on it. What is and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (“El
peculiar in the instant case is that petitioners, the principal debtors Oro Corporation”). El Oro Corporation had a contract with the Philippine Army
themselves, are muddling the issues and raising the same defenses against the to supply the latter with “survival bolos.”
guarantor, which only the guarantor may invoke against the creditor, to avoid
payment of their own obligation to the guarantor. The Court cannot To finance the purchase of the raw materials for the survival bolos, petitioners,
countenance their self-seeking desire to be exonerated from the duty to on behalf of El Oro Corporation, applied with respondent Bank of the
reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly Philippine Islands (“respondent bank”) for two commercial letters of credit.
enrich themselves at the expense of PhilGuarantee. The letters of credit were in favor of El Oro Corporation’s suppliers, Tanchaoco
Manufacturing Incorporated Simultaneous with the issuance of the letters of
Comment: General Rule: “Art. 2058. The guarantor cannot be compelled to credit, petitioners signed trust receipts in favor of respondent bank. On 30
pay the creditor unless the latter has exhausted all the property of the debtor, September 1981, petitioner Jose C. Tupaz IV (“petitioner Jose Tupaz”) signed,
and has resorted to all the legal remedies against the debtor.” This rule arises in his personal capacity, a trust receipt corresponding to Letter of Credit No.
from the character of the contract of guaranty which is accessory and 2-00896-3 (for P564,871.05).
subsidiary. Thus, the guarantor is only obliged to pay the creditor when the
principal debtor fails to fulfill his obligation. Petitioners did not comply with their undertaking under the trust receipts.
Respondent bank made several demands for payments but El Oro Corporation
Exception: “Art. 2059. This excussion shall not take place: (1) if made partial payments only. On 27 June 1983 and 28 June 1983, respondent
the guarantor has expressly renounced it; xxx” the benefit of excussion bank’s counsel and its representative respectively sent final demand letters to
is personal right recognized in a guarantor. Its waiver is valid. El Oro Corporation. El Oro Corporation replied that it could not fully pay its
debt because the Armed Forces of the Philippines had delayed paying for the
survival bolos.
NO EXECUTION UNTIL WRIT IS RETURNED UNSATISFIED
ISSUE:
Whether or not Tupaz can escape liability in violation of the Trust Receipt Law
MACHETTI (SUPRA)
by the delayed payment of the bolo.
The demand for payment by the creditor upon the guarantor, under the
benefit of excussion, can only be made after court judgment. HELD:
Under Article 2058 of the Civil Code, the defense of exhaustion (excussion)
HELD: may be raised by a guarantor before he may be held liable for the obligation.
The contract of guarantee is given in English, and the terms employed must be Petitioner likewise admits that the questioned provision is a solidary
given the significance which, ordinarily attaches to them in the language used. guaranty clause, thereby clearly distinguishing it from a contract of surety. It,
In English, the term “guarantor” implies an undertaking of guaranty as however, described the guaranty as solidary between the guarantors; this
distinguished from suretyship. It is true that notwithstanding the use of the would have been correct if two (2) guarantors had signed it. The clause “we
words “guarantee” or “guaranty” circumstances may be shown which convert jointly and severally agree and undertake” refers to the undertaking of the two
the contract into one of suretyship, but such circumstances do not exist in the (2) parties who are to sign it or to the liability existing between themselves. It
present case. On the contrary it appears affirmatively that the contract is the does not refer to the undertaking between either one or both of them on the
guarantor’s separate undertaking in which the principal does not join, that it one hand and the petitioner on the other with respect to the liability
rest on a separate consideration moving from the principal, and that although described under the trust receipt. xxx
it is written in continuation of the contract for the construction of the building,
it is collateral undertaking separate and distinct from the latter. All of these Jose Tupaz bound himself personally liable for El Oro Corporation’s debts.
circumstances are distinguishing features of contracts of guaranty. 1. First, excussion is not a pre-requisite to secure judgment against a
guarantor. The guarantor can still demand deferment of the execution of the
While a surety undertakes to pay if the principal does not pay, a guarantor only judgment against him until after the assets of the principal debtor shall have
binds himself to pay if the principal cannot pay. A surety is insurer of the debt; been exhausted.
the guarantor is the insurer of the solvency of the debtor. The latter liability is
what Fidelity & Surety Co. assumed in the present case. Fidelity & Surety Co. 2. Second, the benefit of excussion may be waived. Under the trust receipt
having bound itself to pay only in the event it’s principal, Machetti cannot pay, dated 30 September 1981, petitioner Jose Tupaz waived excussion when he
it follows that it cannot be compelled to pay until it is shown that Machetti is agreed that his “liability in [the] guaranty shall be DIRECT AND IMMEDIATE,
unable to pay. Such inability to pay may be proven by the return of a writ of without any need whatsoever on xxx [the] part [of respondent bank] to take
execution unsatisfied or by other means, but it is not sufficiently established any steps or exhaust any legal remedies xxx.” The clear import of this
by the mere fact that Machetti has been declared insolvent in an insolvency stipulation is that petitioner Jose Tupaz waived the benefit of excussion under
proceeding in which the extent of the insolvent’s liability to pay is not his guarantee.
determined until the final liquidation of his estate.
Comment: a corporate representative signed a solidary guarantee clause in
two trust receipts in his capacity as corporate representative. There, the Court
Surety Guarantor held that the corporate representative did not undertake to guarantee
undertakes to pay if the principal guarantor only binds himself to pay personally the payment of the corporation’s debts. . As an exception, directors
does not pay if the principal cannot pay or officers are personally liable for the corporation’s debts only if they so
contractually agree or stipulate.
insurer of the debt insurer of the solvency of the
debtor
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 14 of 21

BITANGA VS PYRAMID CONSTRUCTION ENGINEERING


the benefit of excussion.

Benefit of excussion shall not take place when the properties of the principal “Art. 2060. In order that the guarantor may make use of the
debtor would not result in the satisfaction of the obligation. 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
FACTS: available property of the debtor within Philippine territory, sufficient to
Pyramid filed with the RTC a Complaint for specific performance and damages cover the amount of the debt”
with application for the issuance of a writ of preliminary attachment against
the petitioner and wife Marilyn. 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
Respondent alleged in its Complaint that, it entered into an agreement with Macrogen Realty sufficient to cover its debt as required under Article 2060 of
Macrogen Realty, of which Bitanga is the President, to construct for the latter the Civil Code. Such failure on petitioner’s part forecloses his right to set up
the Shoppers Gold Building located in Parañaque City. Respondent the defense of excussion.
commenced civil, structural, and architectural works on the construction
project. However, Macrogen failed to settle respondent’s progress billings. Worthy of note as well is the Sheriff’s return stating that the only property of
Petitioner, through his representatives and agents, assured respondent that Macrogen Realty which he found was its deposit of P20,242.23 with the
the outstanding account of Macrogen would be paid and relying on the Planters Bank.
assurances made by petitioner, respondent continued the construction
project. Article 2059(5) of the Civil Code thus finds application and precludes
petitioner from interposing the defense of excussion. We quote:
Later, respondent suspended work on the construction project since the
conditions that it imposed for the continuation thereof, including payment of Art. 2059. This excussion shall not take place:
unsettled accounts, had not been complied with by Macrogen. Respondent xxxx
instituted with the Construction Industry Arbitration Commission (CIAC) a case (5) If it may be presumed that an execution on the
for arbitration against Macrogen Realty seeking payment by the latter of its property of the principal debtor would not result in the
unpaid billings and project costs. Before the arbitration case could be set for satisfaction of the obligation.
trial, Pyramid and Macrogen entered into a Compromise Agreement, with
petitioner acting as signatory for and in behalf of Macrogen Realty. As the Court of Appeals correctly ruled:

Under the Compromise Agreement, Macrogen Realty agreed to pay We find untenable the claim that the Bitanga cannot be compelled to pay
respondent the total amount of P6,000,000.00 by installments. Petitioner Pyramid because the Macrogen Realty has allegedly sufficient assets. Reason:
guaranteed the obligations of Macrogen Realty under the Compromise The said [petitioner] had not genuinely controverted the return made by
Agreement by executing a Contract of Guaranty in favor of respondent, by Sheriff Bisnar, who affirmed that, after exerting diligent efforts, he was not
virtue of which he irrevocably and unconditionally guaranteed the full and able to locate any property belonging to the Macrogen Realty, except for a
complete payment of the principal amount of liability of Macrogen. Upon joint bank deposit with the Planter’s Bank at Buendia, in the amount of P20,242.23.
motion of respondent and Macrogen Realty, the CIAC approved the It is axiomatic that the liability of the guarantor arises when the insolvency or
Compromise Agreement. 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.
Macrogen Realty failed and refused to pay all the monthly installments agreed
upon in the Compromise Agreement. Hence respondent moved for the Comment: If the creditor wants to hold the guarantor liable, he must resort to
issuance of a writ of execution against Macrogen, which CIAC granted. all legal remedies (including judicial action) against the debtor and exhaust his
The sheriff filed a return stating that he was unable to locate any property of properties (Art. 2058). But if such judicial action including execution would not
Macrogen Realty, except its bank deposit of P20,242.33, with the Planters satisfy the obligation, the guarantor can no longer require the creditor to
Bank, Buendia Branch. resort to all such legal remedies against the debtor as the same would be but a
useless formality.
Respondent then made, a written demand on petitioner, as guarantor of
Macrogen to pay the liability or to point out available properties of the
Macrogen within the Philippines sufficient to cover the obligation guaranteed.
BENEFIT OF DIVISION
It also made verbal demands on petitioner. Yet, respondent’s demands were
left unheeded.
EFFECT IF ONE OF THE TWO GUARANTORS PAID
HALF OF THE JUDGMENT DEBT
Petitioner filed with the RTC his Answer to respondent’s Complaint. 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 DE GUZMAN VS SANTOS
to any judgment against him. According to petitioner, respondent failed to Any person who makes a payment for the account of another may recover
exhaust all legal remedies to collect from Macrogen the amount due under the from the debtor the amount payment, unless it was made against the express
Compromise Agreement, considering that Macrogen Realty still will of the latter
had uncollected credits which were more than enough to pay for the same.
Given these premise, petitioner could not be held liable as guarantor. FACTS:
A mercantile partnership, Phil-Am Constructions Co., with Toole, Abad and
ISSUE: Santos as co-partners, was formed with P10,000 of its capital secured by way
WON petitioner can avail of the benefit of excussion. of a loan from Paulino Candelaria. The partnership and the co-partnership
bound themselves solidarily to pay said indebtedness. Having violated the
HELD: conditions of the contract, Candelaria filed an action against PACC and the
NO. Under a contract of guarantee, the guarantor binds himself to the creditor co-partners for the recovery of the loan. Candelaria obtained a writ of
to fulfill the obligation of the principal debtor in case the latter should fail to attachment against the co-partners by virtue of which the sheriif attached the
do so. The guarantor who pays for a debtor, in turn, must be indemnified by co-partnership properties. No property of the PACC was attached. To discharge
the latter. However, the guarantor cannot be compelled to pay the creditor the attachment, PACC as principal and Santiago Lucero and Meliton Carlos as
unless the latter has exhausted all the property of the debtor and resorted to guarantors executed a bond in favor of Candelaria. Defendant Santos neither
all the legal remedies against the debtor. This is what is otherwise known as intervened nor signed individually in the bond. Attachment was discharged
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 15 of 21
and attached properties were returned to their owners. Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the
Tobacconist an additional bond of P2,000, and in compliance with that
Trial court rendered judgment ordering the co-partners to pay the judgment requirement the defendant Manila Compañia de Seguros, on October 16, 1940,
creditor the amount of the loan. Writ of execution having been returned executed a bond of P2,000 with the same terms and conditions (except as to
unsatisfied, said writ was issued against the guarantors upon the motion of the amount) as the bond of the Provident Insurance Co.
Candelaria. Lucero and Carlos, as guarantors, paid P5,000 plus. Plaintiff de
Guzman as, in her capacity as judicial administrator of the estate of the On June 1, 1941, a final and complete liquidation was made of the
deceased Lucero, sought to recover from Santos what the estate had paid to transactions between Mira Hermanos and the Tobacconists, as a result of
Candelaria from defendant. Trial court decided for plaintiff. Defendant Santos which there was found a balance due from the latter to the former of
appealed contending that he is not liable because he neither applied for P2,272.79, which indebtedness the Tobacconists recognized but was unable to
nor intervened in the bond any capacity. pay. Thereupon Mira Hermanos made a demand upon the two surety
companies for the payment of said sum.
ISSUE:
WON Santos is legally bound to pay what the plaintiff had advanced to The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of
Candelaria even if it was given without his knowledge. the amount owned by the Tobacconists to Mira Hermanos, alleging that the
remaining 40% should be paid by the other surety, Manila Compañia de
HELD: Seguros, in accordance with article 1837 of the Civil Code. The Manila
Under Article 1822 of the Civil Code, by guaranty one person binds himself Compañia de Seguros refused to pay the balance, contending that so long as
to pay or perform for a third person in case the latter should failed to do so, the liability of the Tobacconists did not exceed P3,000, it was not bound to pay
and Article 1838 of the Civil Code provides that any guarantor who pays anything because its bond referred only to the obligation of the Tobacconists
for the debtor shall be indemnified by the latter even if the guaranty have in excess of P3,000 and up to P5,000.
been undertaken without the debtor’s knowledge. Applying the cited
provisions, it is obvious that Santos is legally bound to pay the plaintiff what he ISSUE:
has advanced to Candelaria upon judgment, notwithstanding the fact that the Whether or not Provident Insurance Co is entitled to the "benefit of division"
bond was given without his knowledge. provided in article 1837 of the Civil Code.

Defendant’s obligation to pay what the plaintiff had advanced is further HELD:
sanctioned by the general provisions of the Civil Code regarding obligations. The "benefit of division" provided in article 1837 of the Civil Code reads as
Article 1158 of the Civil Code provides that the payment made by any person follows:
whether he has an interest in the performance of the obligation or not, and
whether the payment is known and approved by the debtor or whether he is Art. 1837. Should there be several sureties of only one debtor for
unaware of it, may be recovered from said debtor. the same debt, the liability therefor shall be divided among them all.
The creditor can claim from each surety only his proportional part
Any person who makes a payment for the account of another may recover unless liability in solidum has been expressly stipulated.
from the debtor the amount payment, unless it was made against the express
will of the latter. In the latter case, he can only recover from the debtor in so The right to the benefit of division against the co-sureties for
far as the payment has been beneficial to the latter. According to this legal their respective shares ceases in the same cases and for the same
provision, it is evident that the defendant is bound to pay to the plaintiff what reason as that to an exhaustion of property against the principal debtor.
the latter had advanced to Candelaria, and this is more so because it appears
that although Lucero executed the bond without his, knowledge, nevertheless The statement of the trial court to the effect that the bond of P3,000
he did not object thereto or repudiate the same at any time. responded for the obligation of the Tobacconists up to the sum of P3,000 and
the bond of P2,000 responded for the obligation of the Tobacconists only
And it cannot be logically deduced that the defendant did not have knowledge insofar as it might exceed P3,000 and up to P5,000, is a finding of fact based
of the bond, firstly, because his properties were attached and attachment upon the undisputed testimony of the witnesses called by the defendant
could not have been levied without his knowledge, and secondly, because said Manila Compañia de Seguros in support of its special defense hereinbefore
properties were returned to him and in receiving them he was necessarily quoted. While on its face the bond given by the Manila Compañia de Seguros
apprised of the fact that a bond had been filed to discharge the attachment. contains the same terms and conditions (except as to the amount) as those of
Judgment affirmed. the bond given by the Provident Insurance Co., nevertheless it was pleaded by
the Manila Compañia de Seguros and found proven by the trial court .

The evidence upon which that finding is based is not only undisputed but
WHEN RULE APPLIES
perfectly reasonable and convincing. For, as the trial court observed, there
would have been no need for the additional bond of P2,000 if its purpose were
MIRA HERMANOS VS MANILA TOBACCONISTS to cover the first P2,000 already covered by the P3,000 bond of the Provident
The benefit of division shall only take place when there are several guarantors Insurance Co. Indeed, we might add, if the purpose of the additional bond of
of only one debtor and for the same debt. P2,000 were to cover not the excess over and above P3,000 but the first
P2,000 of the obligation of the principal debtor like the bond of P3,000 which
FACTS: covered only the first P3,000 of said obligation, then it would result that had
By virtue of a written contract entered into between Mira Hermanos, Inc., and the obligation of the Tobacconists exceeded P3,000, neither of the two bonds
Manila Tobacconists, Inc., the former agreed to deliver to the latter would have responded for the excess, and that was precisely the event against
merchandise for sale on consignment under certain specified terms and the which Mira Hermanos wanted to protect itself by demanding the additional
latter agreed to pay to the former on or before the 20th day of each month bond of P2,000. When the Provident gave its bond and fixed the premiums
the invoice value of all the merchandise sold during the preceding month. thereon it assumed an obligation of P3,000 in solidum with the Tobacconists
Mira Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of without any expectation of any benefit of division with any other surety. The
P3,000, which was executed by the Provident Insurance Co., on September 2, additional bond of P2,000 was, more than a year later, required by the creditor
1939, to secure the fulfillment of the obligation of the Tobacconists under the of the principal debtor for the protection of said creditor and certainly not for
contract up to the sum of P3,000. the benefit of the original surety, which was not entitled to expect any such
benefit.
In the month of October, 1940, the volume of the business of the Tobacconists
having increased so that the merchandise received by it on consignment from
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 16 of 21
The foregoing considerations, which fortify the trial court's conclusion as to proceedings by the creditors on the Surety Bond aforementioned and from the
the real intent and agreement of the parties with regard to the bond of P2,000 danger of insolvency of the defendants; and to allow costs to the herein
given by the Manila Compañia de Seguros, destroys at the same time the plaintiff," and " for such other measures of relief as may be proper and just in
theory of the appellant regarding the applicability of article 1837 of the Civil the premises."
Code.
ISSUE:
That article refers to several sureties of only one debtor for the same debt. In Whether the last paragraph of article 2071 of the New Civil Code Code may be
the instant case, altho the two bonds on their face appear to guarantee the availed of by a surety.
same debt co-extensively up to P2,000 — that of the Provident Insurance Co.
alone extending beyond that sum up to P3,000 — it was pleaded and RULING:
conclusively proven that in reality said bonds, or the two sureties, do not A guarantor is the insurer of the solvency of the debtor; a surety is an insurer
guarantee the same debt because the Provident Insurance Co. guarantees only of the debt. A guarantor binds himself to pay if the principal is unable to pay; a
the first P3,000 and the Manila Compañia de Seguros, only the excess over and surety undertakes to pay if the principal does not pay.
above said amount up to P5,000. Article 1837 does not apply to this factual
situation. The reason which could be invoked for the non-availability to a surety of the
provisions of the last paragraph of article 2071 of the new Civil Code would be
Comment: In the benefit of division, there are several guarantors of only one the fact that guaranty like commodatum is gratuitous. But guaranty could also
debtor and for the same debt. The liability fo several guarantors is only joint, be for a price or consideration as provided for in article 2048. So, even if there
that is, the obligation to answer for the debt is divided among all of them. should be a consideration or price paid to a guarantor for him to insure the
Therefore, the guarantors are not liable to the creditor beyond the shares performance of an obligation by the principal debtor, the provisions of article
which they are respectively bound to pay. Except, when solidarity has been 2071 would still be available to the guarantor.
expressly stipulated and under any of those circumstances enumerated in Art
2059. In suretyship the surety becomes liable to the creditor without the benefit of
the principal debtor's exclusion of his properties, for he (the surety) maybe
sued independently. So, he is an insurer of the debt and as such he has
SECTION II- EFFECTS OF GUARANTY BETWEEN THE
assumed or undertaken a responsibility or obligation greater or more onerous
DEBTOR AND THE GUARANTOR
than that of guarantor. Such being the case, the provisions of article 2071,
under guaranty, are applicable and available to a surety. The reference in
RIGHT OF SURETY TO INVOKE PROVISIONS OF 2071
article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the
new Civil Code, on solidary or several obligations, does not mean that
suretyship which is a solidary obligation is withdrawn from the applicable
MANILA SURETY AND FIDELITY CO. VS BATU CONSTRUCTION
provisions governing guaranty.
The surety is an insurer of the debt and as such he has assumed or undertaken
a responsibility or obligation greater or more onerous than that of guarantor, The plaintiff's cause of action does not fall under paragraph 2 of article 2071 of
thus, the provisions of article 2071, under guaranty, are applicable and the new Civil Code, because there is no proof of the defendants' insolvency.
available to a surety. The fact that the contract was annulled because of lack of progress in the
construction of the bridge is no proof of such insolvency. It does not fall under
FACTS: paragraph 3, because the defendants have not bound themselves to relieve
The plaintiff, a domestic corporation engaged in the bonding business, the plaintiff from the guaranty within a specified period which already has
hereafter called the company, alleges that the Batu Construction & Company, expired, because the surety bond does not fix any period of time and the
a partnership, the members of which are the other three defendants, indemnity agreement stipulates one year extendible or renewable until the
requested it to post, as it did, a surety bond for P8,812 in favor of the bond be completely cancelled by the person or entity in whose behalf the
Government of the Philippines to secure the faithful Performance of the bond was executed or by a Court of competent jurisdiction. It does not come
construction of the Bacarra Bridge, Project PR-72 (3), in Ilocos Norte, under paragraph 4, because the debt has not become demandable by reason
undertaken by the partnership. of the expiration of the period for payment. It does not come under paragraph
5 because of the lapse of 10 years, when the principal obligation has no period
On 30 May 1951 because of the unsatisfactory progress of the work on the for its maturity, etc., for 10 years have not yet elapsed. It does not fall under
bridge, the Director of Public Works, with the approval of the Secretary of paragraph 6, because there is no proof that "there are reasonable grounds to
Public Works and Communications, annulled, the construction contract fear that the principal debtor intends to abscond." It does not come under
referred to and notified the plaintiff Company that the Government would paragraph 7, because the defendants, as principal debtors, are not in
hold it (the Company) liable for any amount incurred by the Government for imminent danger of becoming insolvent, there being no proof to that effect.
the completion of the bridge, in excess of the contract price.
But the plaintiff's cause of action comes under paragraph 1 of article 2071 of
On 19 December 1951 (should be 23 November 1951), Ricardo Fernandez and the new Civil Code, because the action brought by Ricardo Fernandez and 105
105 other persons brought an action in the Justice of the Peace Court of Laoag, persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for
Ilocos Norte, against the partnership, the individual partners and the herein the collection of unpaid wages amounting to P5,960.10, is in connection with
plaintiff Company for the collection of unpaid wages amounting to P5,960.10, the construction of the Bacarra Bridge, Project PR-72 (3), undertaken by the
lawful interests thereon and costs. Batu Construction & Company, and one of the defendants therein is the herein
plaintiff, the Manila Surety and Fidelity Co., Inc., and paragraph 1 of article
The defendants are in imminent danger of becoming insolvent, and are 2071 of the new Civil Code provides that the guarantor, even before having
removing and disposing, or about to remove and dispose, of their properties paid, may proceed against the principal debtor "to obtain release from the
with intent to defraud their creditors, particularly the plaintiff Company; and guaranty, or to demand a security that shall protect him from any proceedings
that the latter has no other sufficient security to protect its rights against the by the creditor or from the danger of insolvency of the debtor, when he (the
defendants. guarantor) is sued for payment. It does not provide that the guarantor be sued
by the creditor for the payment of the debt. It simply provides that the
Upon these allegations, the plaintiff prays that, upon the approval of a bond guarantor of surety be sued for the payment of an amount for which the
and on the strength of the allegations of the verified complaint, a writ surety bond was put up to secure the fulfillment of the obligation undertaken
attachment be issued and levied upon the properties of the defendants; and by the principal debtor. So, the suit filed by Ricardo Fernandez and 105
that after hearing, judgment be rendered " ordering the defendants to deliver persons in the Justice of the Peace Court of Laoag, province of Ilocos Norte, for
to the plaintiff such sufficient security as shall protect plaintiff from the any the collection of unpaid wages earned in connection with the work done by
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 17 of 21
them in the construction of the Bacarra Bridge, Project PR-72(3), is a suit for not bound to take notice of its non-performance. He is often discharged by the
the payment of an amount for which the surety bond was put up or posted to mere indulgence of the creditor to the principal, and is usually not liable
secure the faithful performance of the obligation undertaken by the principal unless notified of the default of the principal.
debtors (the defendants) in favor of the creditor, the Government of the
Philippines. 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
Comment: As a rule, the guarantor has no cause of action against the debtor unable to pay while a surety is the insurer of the debt, and he obligates
until after the former has paid the obligation (Art. 2066). himself to pay if the principal does not pay.

Art. 2071 is the remedy of the guarantor that he may proceed against the Based on the aforementioned definitions, it appears that the contract
debtor before payment. For in certain cases, the guarantor cannot claim the executed by petitioner in favor of SOLIDBANK, albeit denominated as a
benefit of excussion and in such cases it is but proper that the guarantor be "Continuing Guaranty," is a contract of surety. The terms of the contract
given the right to proceed against the debtor. Take Note: guarantor canot categorically obligates petitioner as "surety" to induce SOLIDBANK to extend
demand reimbursement or indemnity because he has not paid the obligation. credit to respondent spouses. . This can be gleaned from a reading of the
His remedy is to obtain release from the guaranty or demand a security. stipulations in the contract, to wit:

For and in consideration of any existing indebtedness to you of


CHAPTER III-EXTINGUISHMENT OF GUARANTY
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
NEGLIGENCE OF THE CREDITOR
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
EFFECT IF THERE IS IMPOSSIBILITY OF SUBROGATION 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
E. ZOBEL VS CA purchase or discount, or to make any loans or advances evidenced or
secured by any notes, bills receivable, drafts, acceptances, checks or
FACTS: other instruments or evidences of indebtedness . . . upon which the
Spouses Raul and Elea Claveria, doing business under the name "Agro Borrower is or may become liable as maker, endorser, acceptor, or
Brokers," applied for a loan with respondent Consolidated Bank and Trust otherwise, the undersigned agrees to guarantee, and does hereby
Corporation (now SOLIDBANK) to finance the purchase of two (2) maritime guarantee, the punctual payment, at maturity or upon demand, to you
barges and one tugboat 3 which would be used in their molasses business. The of any and all such instruments, loans, advances, credits and/or other
loan was granted subject to the condition that respondent spouses execute a obligations herein before referred to, and also any and all other
chattel mortgage over the three (3) vessels to be acquired and that a indebtedness of every kind which is now or may hereafter become due
continuing guarantee be executed by Ayala International Philippines, Inc., now or owing to you by the Borrower, together with any and all expenses
herein petitioner E. Zobel, Inc., in favor of SOLIDBANK. which may be incurred by you in collecting all or any such instruments
or other indebtedness or obligations hereinbefore referred to xxx xxx.
Spouses defaulted in the payment of the entire obligation upon maturity
hence, SOLIDBANK filed a complaint for sum of money with a prayer for a writ The use of the term "guarantee" does not ipso facto mean that the contract is
of preliminary attachment, against the spouses and petitioner. Petitioner one of guaranty. Authorities recognize that the word "guarantee" is frequently
moved to dismiss the complaint on the ground that its liability as guarantor of employed in business transactions to describe not the security of the debt but
the loan was extinguished pursuant to Article 2080 of the Civil Code of the an intention to be bound by a primary or independent obligation. As aptly
Philippines. It argued that it has lost its right to be subrogated to the first observed by the trial court, the interpretation of a contract is not limited to
chattel mortgage in view of SOLIDBANK's failure to register the chattel the title alone but to the contents and intention of the parties. Having thus
mortgage with the appropriate government agency. SOLIDBANK opposed the established that petitioner is a surety, Article 2080 of the Civil Code, relied
motion contending that Article 2080 is not applicable because petitioner is not upon by petitioner, finds no application to the case at bar.
a guarantor but a surety.

ISSUE: EXTENSION OF PAYMENT


Whether or not petitioner under the "Continuing Guaranty" obligated itself to
SOLIDBANK as a guarantor or a surety. EFFECT OF EXTENSION OF ONE INSTALLMENT

HELD: VILLA VS GARCIA BOSQUE


The obligation if the debtor does not. A contract of guaranty, on the other
hand, is a collateral undertaking to pay the debt of another in case the latter
does not pay the debt. FACTS:
Rosa Villa y Monna, viuda de E. Bota, was the owner of a printing
Strictly speaking, guaranty and surety are nearly related, and many of the establishment and bookstore located at 89 Escolta, Manila, and known as La
principles are common to both. However, under our civil law, they may be Flor de Cataluna, Viuda de E. Bota, with the machinery, motors, bindery, type
distinguished thus: A surety is usually bound with his principal by the same material furniture, and stock appurtenant thereto. The plaintiff, then and now
instrument, executed at the same time, and on the same consideration. He is a resident of Barcelona, Spain, acting through Manuel Pirretas, as attorney in
an original promissor and debtor from the beginning, and is held, ordinarily, to fact, sold the establishment above-mentioned to the defendants Guillermo
know every default of his principal. Usually, he will not be discharged, either Garcia Bosque and Jose Pomar Ruiz. In the same document the defendants
by the mere indulgence of the creditor to the principal, or by want of notice of France and Goulette obligated themselves as solidary sureties with the
the default of the principal, no matter how much he may be injured thereby. principals Bosque and Ruiz, to answer for any balance, including interest,
On the other hand, the contract of guaranty is the guarantor's own separate which should remain due and unpaid after the dates stipulated for payment of
undertaking, in which the principal does not join. said installments, expressly renouncing the benefit of exhaustion of the
property of the principals. T
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 he first installment was paid conformably to agreement. The second
the principal. The original contract of his principal is not his contract, and he is installment was paid partially, and promissory notes were executed for the
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 18 of 21
remaining balance. France and Goulette contended that they are released
from liability as sureties because of the extension of time of the second In case the vendee-mortgagor fails to make any of the payments as
installment due. hereinbefore provided, the whole amount remaining unpaid under this
mortgage shall immediately become due and payable and this mortgage on
HELD: the property herein mentioned as well as the Luzon Surety Bond may be
A contention submitted exclusively in behalf of France and Goulette, the foreclosed by the vendor-mortgagee; and, in such case, the
appellant sureties, is that they were discharged by the agreement between vendee-mortgager further agrees to pay the vendor- mortgagee an
additional sum equivalent to 25 per cent of the principal due unpaid as costs,
the principal debtor and Figueras Hermanos, as attorney in fact for the plaintiff,
expenses and liquidated damages, which said sum, shall be added to the
whereby the period for the payment of the second installment was extended,
principal sum for which this mortgage is given as security, and shall become a
without the assent of the sureties, and new promissory notes for unpaid part, thereof.
balance were executed in the manner already mentioned in this opinion.
Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of the Radio
The execution of these new promissory notes undoubtedly constituted and Corporation of the Philippines wrote the following letter to the principal
extension of time as to the obligation included therein, such as would release debtor Jesus R. Roa:
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 Mr. JESUS R. ROA
only to the second installment of the original obligation and interest accrued Cagayan, Oriental Misamis
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. Attention of Mrs. Amparo Chavez de Roa
It results that the extension thus effected could not discharge the sureties DEAR SIR: We acknowledge with thanks the receipt of your letter
from their liability as to other installments upon which alone they have been of March 9th together with your remittance of P200 for which we
sued in this action. The rule that an extension of time granted to the debtor by enclose receipt No. 7558. We are applying this amount to the balance of
the creditor, without the consent of the sureties, extinguishes the latter's your January installment.
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 We have no objection to the extension requested by you to pay
liable for different payments, such as installments of rent, or upon a series of the February installment by the first week of April. We would, however,
promissory notes, an extension of time as to one or more will not affect the urge you to make every efforts to bring the account up-to date as we
liability of the surety for the others. The contention of the sureties on this are given very little discretion by the RCP in giving extension of
point is therefore untenable. payment.
There is one stipulation in the contract which, at first suggests a doubt as to ISSUE:
propriety of applying the doctrine above stated to the case before us. We refer Whether or not the extension granted in the above copied letter by the
to cause (f) which declares that the non-fulfillment on the part of the debtors plaintiff, without the consent of the guarantors, the herein appellants,
of the stipulation with respect to the payment of any installment of the extinguishes the latter's liability not only as to the installments due at that
indebtedness, with interest, will give to the creditor the right to treat and time, as held by the trial court, but also as to the whole amount of their
declare all of said installments as immediately due. If the stipulation had been obligation. Articles 1851 of the Civil Code.
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 HELD:
that after default of the payment of one installment the act of the creditor in The stipulation in the contract under consideration, copied above, is to the
extending the time as to such installment would interfere with the right of the effect that upon failure to pay any installment when due the other
surety to exercise his legal rights against the debtor, and that the surety would installments ipso facto become due and payable. In view of of the fact that
in such case be discharged by the extension of time, in conformity with articles under the express provision of the contract, quoted above, the whole unpaid
1851 and 1852 of the Civil Code. But it will be noted that in the contract now balance automatically becomes due and payable upon failure to pay one
under consideration the stipulation is not that the maturity of the later installment, the act of the plaintiff in extending the payment of the installment
installments shall be ipso facto accelerated by default in the payment of a corresponding to February, 1932, to April, 1932, without the consent of the
prior installment, but only that it shall give the creditor a right to treat the guarantors, constituted in fact an extension of the payment of the whole
subsequent installments as due, and in this case it does not appear that the amount of the indebtedness, as by that extension the plaintiff could not have
creditor has exercised this election. On the contrary, this action was not filed an action for the collection of the whole amount until after April, 1932.
instituted until after all of the installments had fallen due in conformity with Therefore appellants' contention that after default of the payment of one
the original contract. It results that the stipulation contained in paragraph (f) installment the act of the herein creditor in extending the time of payment
does not affect the application of the doctrine above enunciated to the case discharges them as guarantors in conformity with articles 1851 and 1852 of
before us. the Civil Code is correct.

EFFECT OF ACCLERATION CLAUSE Plaintiff's contention that the enforcement of the accelerating clause is
potestative on the part of the obligee, and not self-executing, is clearly
RADIO CORP VS ROA 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.
FACTS:
The defendant Jesus R. Roa became indebted to the Philippine Theatrical Plaintiff-appellee contends that there was no consideration for the extension
Enterprises, Inc., in the sum of P28,400 payable in seventy-one equal monthly granted the principal debtor. Article 1277 of the Civil Code provides that "even
installments at the rate of P400 a month commencing thirty days after though the consideration should be expressed in the contract, it shall be
December 11, 1931, with five days grace monthly until complete payment of presumed that a consideration exists and that it is licit, unless the debtor
said sum. On that same date the Philippine Theatrical Enterprises, Inc., proves the contrary." It was incumbent upon the plaintiff to prove that there
assigned all its right and interest in that contract to the Radio Corporation of was no valid consideration for the extension granted.
the Philippines.

The paragraph of that contract in which the accelerating clause appears reads
as follows:
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 19 of 21

EFFECT OF EXTENSION OF TIME OF PAYMENT EFFECT ON ACCOMMODATION PARTY

PHIL. GEN. INSURANCE VS MUTUC PRUDENTIAL VS CA

FACTS: FACTS:
Manuel C. Mutuc as principal and as surety, executed a surety bond in behalf Prudencio, et al. are accommodation parties who signed the “Amendment of
of defendant Mutuc and in favor of the Maersk Line, in which the surety Real Estate Mortgage.” Mortgaging their property to the PNB to guaranty the
company guaranteed the faithful performance by said Manuel C. Mutuc of his loan extended to the Concepcion Construction Company. On the same date
duties in connection with his employment as crewmember of the vessel of the Jose Toribio, in the same capacity as attorney-in-fact of the Company, executed
Maersk Line, and that he would not desert said vessel while he was engaged also the “Deed of Assignment” assigning all payments to be made by the
as such crewmember while outside of the Philippines. Bureau of Public Works to the Concepcion Construction Company on account
of the contract for the construction of the Puerto Princesa building in favor of
To protect the plaintiff company, on July 17, 1957, in consideration of the PNB. This assignment of credit to the contrary notwithstanding, the
plaintiff's becoming surety of the defendant Manuel C. Mutuc, under the Bureau, with approval, of the PNB made three payments to the Company on
bond, ... the defendant Manuel C. Mutuc, Doroteo Q. Mojica, and Fausto S. account of the contract price totaling P11,234.40.
Alberto, executed an indemnity agreement in favor of the plaintiff, ... . The
duration of the surety bond, ... was for the period beginning July 16, 1957 to On November 14, 1958, appellants Prudencio wrote the PNB contending that
July 17, 1958, but at the instance of the defendant, Manuel C. Mutuc, it was since the PNB authorized payments to the Company instead of to PNB on
renewed for three successive one year periods, the last period of which was account of the loan guaranteed by the mortgage, there was a change in the
from July 17, 1960 to July 17, 1961. conditions of the contract without the knowledge of appellants, which entitled
the latter to a cancellation of their mortgage contract. Failing in their bid to
The prior consent of the defendant Fausto S. Alberto to the aforesaid renewal have the REM cancelled, appellants filed this action against the PNB, the
extension was not obtained by the defendant Manuel C. Mutuc or by the latter’s attorney in fact Jose Toribio, and the District Engineer of Puerto
plaintiff. According to the letter of the Immigration and Naturalization Service, Princesa, Palawan, seeking the cancellation of their mortgage.
United States Department of Justice, ... Manuel C. Mutuc was not aboard the
vessel M/S Merit Maersk when it departed from New York at 3:00 o'clock P.M. HELD:
for Charleston, South Carolina, and was presumed to be a deserter. The Deed of Assignment notwithstanding, PNB approved the Bureau’s release
of three payments directly to the Company instead of paying the same to the
The Compania General de Tabacos de Filipinas which represented the Maersk Bank. This approval was in violation of the Deed of Assignment and without
Lines forwarded this letter to the plaintiff and asked for the remittance of the any notice to the petitioners who stood to lose their property once the
forfeited bond. On October 6, 1960, the plaintiff wrote a letter to the promissory note falls due without the same having been paid because of the
defendants Doroteo Q. Mojica and Fausto S. Alberto demanding the payment PNB, in effect, waived payments of the first three releases. The third payment
of the amount in accordance with the indemnity agreement. On October 25, to the Company in the amount of P4,293.60 was approved by PNB although
1960, plaintiff paid the Tabacalera the sum of P5,000 in full settlement of the the promissory note was almost a month overdue, an act which is clearly
latter's claim against the bond ... .This action is for the recovery of the amount detrimental to the petitioner’s sureties.
of P1,000 against the defendants Mojica and Alberto based on the indemnity
agreement ... . From the judgment against them by the Municipal Court, The PNB, in authorizing the third payment to the Companyafter the
defendant Alberto appealed alleging that the renewal was made without his promissory note became due, in effect, extended the term of the payment of
consent. the note without the consent of the accommodation makers who stand as
sureties to the accommodated party and to all other parties who are not
HELD: holders in due course or who do not derive their right from the same,
The lower court after referring to the above stipulation as to "Renewals" which including PNB. True, if the Bank had not been the assignee, then the
refers not to a single extension but to "any extension" agreed to in advance by petitioners would be obliged to pay the Bank as their creditor on the
defendant, now appellant, found for plaintiff, now appellee. As set forth in the promissory note, irrespective of whether or not the deed of assignment had
decision: "The defendant having expressly empowered or authorized his been violated. However, the assignee and the creditor in this case are one and
principal to the granting of any extension, his liability under the indemnity the same-the Bank itself.
agreement necessarily follows." 4 It is from that decision in favor of plaintiff
that this appeal is taken. As set forth at the outset, there is no legal ground for When the Bank violated the deed of assignment, it prejudiced itself because
a reversal. Appellant was not compelled to enter into an indemnity agreement. its very violation was the reason why it was not paid on time in its capacity as
He did so of his own free will. He agreed to hold himself liable for the amount creditor in the promissory note. It would be unfair to make the petitioners
therein specified. What is more, he did consent likewise to be so bound not now answer for the debt or to foreclose on their property. The petitioners who
only for the one year period specified but to any extension thereafter made, are the accommodation parties/sureties are absolved from liability on the
an extension moreover that could be had without his having to be notified. promissory note and under the mortgage contract. The PNB is ordered to
release the real estate mortgage constituted on the property of the
That was what the contract provided. He gave his plighted word. The terms petitioners.
were definite and certain. There was no ambiguity. All that was necessary was
to see its enforcement. The Civil Code explicitly provides: "If the terms of a
contract are clear and leave no doubt upon the intention of the contracting MERE FAILURE TO DEMAND
parties, the literal meaning of its interpretation shall control." that was how
it was worded under the Civil Code of Spain of 1899 formerly in force in this
SHANNON VS PHIL LUMBER & TRANS CO.
jurisdiction.

FACTS:
The Philippine Lumber & Transportation Co., Inc., obtained a loan 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
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 20 of 21
ratified before the notary public. The principal was not paid on its due date or parties so far as the PNB was concerned and any extension of time
thereafter, but the stipulated interest up to October, 1929, inclusive, was paid. granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety
Walter E. Jones died on November 24, 1929, and the plaintiffs filed a claim and and the trustors[s]) could not prejudice the secondtier parties.
recovered from his estate P1,062 in part payment of occurred interest due.
There is no other reason why petitioner Villanueva's contention must fail.
While the principal obligation was pending payment, J.W. Shannon obtained a PNB's undertaking under the Trust Agreement "to hold in abeyance any action
loan from Walter E. Jones 656, making Shannon's total loan from Jones P4,656. to enforce its claims" against R & B Surety did not extend the maturity of R & B
Jones did not receive monthly payments from Shannon under this agreement, Surety's obligation under the Surety Bond. The Principal Obligation had in fact
but instead he deducted them from the monthly interest which, on the other already matured, along with that of R &B Surety, by the time the Trust
hand, the Philippine Lumber & Transportation Co., Inc., of which he was the Agreement was entered into. Petitioner's Obligation had in fact already
president, was bound to pay. These operations were entered in the books of matured, for those obligations were to mature "as soon as [R & B Surety]
said corporation. became liable to make payment of any sum under the terms of the [Surety
Bond] — whether the said sum or sums or part thereof have been actually
As the Philippine Lumber & Transportation Co., Inc., and its sureties had not paid or 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, Thus, the situation was that precisely envisaged in Article 2079:
for the recovery of said amounts. [t]he mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
HELD: extension of the referred to herein.
It indisputably appears that those amounts of money were obtained by
Shannon not as payments in advance of the interest which the principal The theory behind Article 2079 is that an extension of time given to the
debtor was bound to pay, but as independent loans which Jones granted to principal debtor by the creditor without the surety of his right to pay the
him. The only connection of these loans with the interest of the indebtedness creditor and to be immediately subrogated to the creditor's remedies against
of the Philippine Lumber & Transportation Co., Inc., consisted in the the principal debtor upon the original maturity date. The surety is said to be
agreement between Jones and Shannon to the effect that in case the latter entitled to protect himself against the principal debtor upon the original
should fail to pay the monthly interest, the former was authorized to deduct it maturity date. The surety is said to be entitled to protect himself against the
from any amount which he might have at his disposal belonging to Shannon or contingency of the principal debtor or the indemnitors becoming insolvent
to his wife. As, on the other hand, Jones was the president of the principal during the extended period.
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 The underlying rationale is not present in the instant case. As this Court has
therefore, evident that neither the provisions of article 1851 of the Civil Code held, merely delay or negligence in proceeding against the principal will not
nor the doctrine on the matter enunciated in the Banco Español Filipino case is discharge a surety unless there is between the creditor and the principal
squarely in point. debtor a valid and binding agreement therefor, one which tends to prejudice
[the surety] or to deprive it of the power of obtaining indemnity by presenting
The mere circumstance that the creditor does not demand the compliance a legal objection for the time, to the prosecution of an action on the original
with the obligation immediately upon the same becoming due, and that he security.
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 In the instant case, there was nothing to prevent the petitioners from
surety extinguishes at the same time as that of the debtor, and for the same tendering payment, if they were so minded, to PNB of the matured obligation
causes as the other obligations. ...' Deferring the filing of the action does not on behalf of R & B Surety and thereupon becoming subrogated to such
imply a change in the efficacy of the contract or liability of any kind on the part remedies as R & B Surety may have against PAGRICO.
of the debtor. It is merely, without demonstration or proof to the contrary,
respite, waiting, courtesy, leniency, passivity, inaction. It does not constitute
novation, because this must be express. PAYMENT OF THE PRINCIPAL DEBT BY DEBTOR

HONG KONG-SHANGHAI BANKING CORP VS ALDANESE


UNDERTAKING TO HOLD IN ABEYANCE ANY ACTION

FACTS:
COCHINGYAN JR. VS. R&B SURETY AND INS CO.
Collector of Customs released the goods of HSBC to others who presented a
bill of lading and executed a bond. HSBC was able to seek from the Collector
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly payment of the value of the goods. The Collector impleaded his sureties. The
and severally (in solidum) to the R & B Surety] — to become SURETY upon a Collector paid the amount to HSBC and now wishes to be reimbursed by his
SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] sureties.
for the faithful compliance of the terms and conditions set forth in said
SURETY BOND — ." This part of the Agreement suggests that the indemnitors HELD:
(including the petitioners) would become co-sureties on the Security Bond in The fact, however, is that Vamenta & Co. and Isidoro Vamenta incurred and
favor of PNB. The record, however, is bereft of any indication that the recognized the obligation to indemnify the Collector of Customs, defendant
petitioners indemnitors ever in fact became co-sureties of R & B Surety visa- herein, for what he has paid, amounting to P20,334.91; and on account of said
vis the PNB. 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
The petitioners, so far as the record goes, remained simply indemnitors bound Customs has the right to be reimbursed. To determine who are liable for this
to R & B Surety but not to PNB, such that PNB could not have directly sum and to what extent, the following must be borne in mind: For the total
demanded payment of the Principal Obligation from the petitioners. 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
Thus, we do not see how Article 2079 of the Civil Code-which provides in part amount of the bond given by them.
that
"[a]n extension granted to the debtor by the creditor without the From the standpoint of view of Vamenta & Co. and Isidoro Vamenta, their
consent of the guarantor extinguishes the guaranty" could apply in the liability in connection with said total sum is more onerous with regard to the
instant case. The petitioner-indemnitors are, as, it were, second-tier amount for which they are liable alone and separately from the surety the
CREDIT TRANSACTIONS CONTRACTS OF SECURITY-TITLE XV: GUARANTY CASE DIGESTS Page 21 of 21
Union Guarantee Co., Ltd., that is, the sum of P10,844.91. To this amount, himself to the creditor to fulfill the obligation of the principal debtor in
therefore, must the payment of P8,000 made by them be applied, for it is so case the latter should fail to do so.
provided by article 1174 of the Civil Code. Therefore, Vamenta & Co., Isidro
Vamenta and the Union Guarantee Co., Ltd., are jointly and severally liable for
"If a person binds himself solidarily with the principal debtor, the
the balance of P12,334.91 up to the sum of P9,450, Vamenta & Co. and Isidoro
provisions of Section 4,17 Chapter 3, Title I of this Book shall be observed.
Vamenta being liable only for the remaining sum, that is, P2,884.91.
In such case the contract is called a suretyship."
The principal debtor having paid an amount on account of the debt, the surety
is under obligation to pay the balance up to the amount secured by the bond xxxxxxxxx
executed by him. Where in a bond the debtor and surety have bound
themselves solidarily, but limiting the liability of the surety to a lesser amount "Art. 1216. The creditor may proceed against any one of the
than that due from the principal debtor, any such payment as the latter may solidary debtors or some or all of them simultaneously. The demand
have made on account of such obligation must be applied first to the made against one of them shall not be an obstacle to those which may
unsecured portion of the debt, for, as regards the principal debtor, the subsequently be directed against the others, so long as the debt has not
obligation is more onerous as to the amount not secured. been fully collected."

DEATH OF THE DEBTOR

STRONGHOLD INSURANCE CO VS REPUBLIC-ASAHI

FACTS:
Asahi Glass Corporation (Republic-Asahi) entered into a contract with Jose D.
Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of
roadways and a drainage system in Republic-Asahi’s compound where
respondent was to pay JDS five million three hundred thousand pesos
(P5,300,000.00) inclusive of value added tax for said construction, which was
supposed to be completed within a period of two hundred forty (240) days. In
order ‘to guarantee the faithful and satisfactory performance of its
undertakings’ x x x JDS, shall post a performance bond of seven hundred
ninety five thousand pesos (P795,000.00). x x x JDS executed, jointly and
severally with [petitioner] Stronghold Insurance Co., Inc. (SICI).

Dissatisfied with the progress of the work undertaken by JDS, [respondent]


Republic-Asahi extrajudicially rescinded the contract, and wrote a letter to JDS
informing the latter of such rescission. Such rescission, according to the
contract shall not be construed as a waiver of [respondent’s] right to recover
damages from JDS and the latter’s sureties. So there was a claim for damages
and to forfeit the performance bond. Stronghold refused to pay. Stronghold’s
main defense is that the principal debtor JDS died, so the accessory obligation
of surety is also extinguished.

ISSUE:
Whether petitioner’s liability under the performance bond was automatically
extinguished by the death of Santos, the principal.

HELD:
As a general rule, the death of either the creditor or the debtor does not
extinguish the obligation. Obligations are transmissible to the heirs, except
when the transmission is prevented by the law, the stipulations of the parties,
or the nature of the obligation.9 Only obligations that are personal or are
identified with the persons themselves are extinguished by death. Section 5 of
Rule 86 of the Rules of Court expressly allows the prosecution of money claims
arising from a contract against the estate of a deceased debtor.

Evidently, those claims are not actually extinguished. What is extinguished is


only the obligee’s action or suit filed before the court, which is not then acting
as a probate court. In the present case, whatever monetary liabilities or
obligations Santos had under his contracts with respondent were not
intransmissible by their nature, by stipulation, or by provision of law. Hence,
his death did not result in the extinguishment of those obligations or liabilities,
which merely passed on to his estate. Death is not a defense that he or his
estate can set up to wipe out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to escape its monetary
obligation under its performance bond.

As a surety, petitioner is solidarily liable with Santos in accordance with the


Civil Code, which provides as follows:

"Art. 2047. By guaranty a person, called the guarantor, binds