G.R. No. 113931. May 6, 1998.*
Authorities recognize that the word “guarantee” is
E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST CORPORATION, and
SPOUSES RAUL and ELEA R. CLAVERIA, respondents.
Obligations; Contracts; Surety; Guaranty; Words and Phrases;
“Surety” and “Guaranty,” Explained.—A contract of surety is an
accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the
obligation if the debtor does not. A contract of guaranty, on
the other hand, is a collateral undertaking to pay the debt of
another in case the latter does not pay the debt.
Same; Same; Same; Same; Same; “Surety” and “Guaranty,”
Distinguished; Simply put, a surety is distinguished from a
guaranty in that a guarantor is the insurer of the solvency of
the debtor and thus binds himself to pay if the principal is
unable to pay while a surety is the insurer of the debt, and he
obligates himself to pay if the principal does not pay.—Strictly
speaking, guaranty and surety are nearly related, and many of
the principles are common to both. However, under our civil
law, they may be distinguished thus: A surety is usually bound
with his principal by the same instrument, executed at the
same time, and on the same consideration. He is an original
promissor and debtor from the beginning, and is held,
ordinarily, to know every default of his principal. Usually, he
will not be discharged, either by the mere indulgence of the
creditor to the principal, or by want of notice of the default of
the principal, no matter how much he may be injured thereby.
On the other hand, the contract of guaranty is the guarantor’s
own separate undertaking, in which the principal does not join.
It is usually entered into before or after that of the principal,
and is often supported on a separate consideration from that
supporting the contract of the principal. The original contract
of his principal is not his contract, and he is not bound to take
notice of its non-performance. He is often discharged by the
mere indulgence of the creditor to the principal, and is usually
not liable unless notified of the default of the principal. Simply
put, a surety is distinguished from a guaranty in that a
guarantor is the insurer of the solvency of the debtor and thus
binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to
pay if the principal does not pay.
Same; Same; Same; Same; Same; The use of the term
“guarantee” does not ipso facto mean that the contract is one
of guaranty—authorities recognize that the word “guarantee”
is frequently employed in business transactions to describe not
the security of the debt but an intention to be bound by a
primary or independent obligation.—The use of the term
“guarantee” does not ipso facto mean that the contract is one
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
of guaranty.
frequently employed in business transactions to describe not
the security of the debt but an intention to be bound by a
primary or independent obligation. As aptly observed by the
trial court, the interpretation of a contract is not limited to the
title alone but to the contents and intention of the parties.
Same; Same; Same; Same; Article 2080 of the New Civil Code
does not apply where the liability is as a surety, not as a
guarantor.—Having thus established that petitioner is a surety,
Article 2080 of the Civil Code, relied upon by petitioner, finds
no application to the case at bar. In Bicol Savings and Loan
Association vs. Guinhawa, we have ruled that Article 2080 of
the New Civil Code does not apply where the liability is as a
surety, not as a guarantor.
Same; Same; Same; Same; Chattel Mortgages; A creditor’s
failure to register the chattel mortgage did not release a
guarantor from his obligation where in the Continuing
Guaranty the latter bound itself to the contract irrespective of
the existence of any collateral.—But even assuming that Article
2080 is applicable, SOLIDBANK’s failure to register the chattel
mortgage did not release petitioner from the obligation. In the
Continuing Guaranty executed in favor of SOLIDBANK,
petitioner bound itself to the contract irrespective of the
existence of any collateral. It even released SOLIDBANK from
any fault or negligence that may impair the contract.
PETITION for review on certiorari of a decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Herrera, Teehankee & Faylona Law Offices for petitioner.
De los Reyes, Banaga, Briones & Associates for SOLIDBANK.
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the
decision1 of the Court of Appeals dated July 13, 1993 which
affirmed the Order of the Regional Trial Court of Manila,
Branch 51, denying petitioner’s Motion to Dismiss the
complaint, as well as the Resolution2 dated February 15, 1994
denying the motion for reconsideration thereto. The facts are
as follows:
1
Respondent spouses Raul and Elea Claveria, doing business
under the name “Agro Brokers,” applied for a loan with
respondent Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of Two Million Eight Hundred
Seventy Five Thousand Pesos (P2,875,000.00) to finance the
purchase of two (2) maritime barges and one tugboat3 which
would be used in their molasses business. The loan was
granted subject to the condition that respondent spouses
execute a chattel mortgage over the three (3) vessels to be
acquired and that a continuing guarantee be executed by Ayala
International Philippines, Inc., now herein petitioner E. Zobel,
Inc., in favor of SOLIDBANK. The respondent spouses agreed to
the arrangement. Consequently, a chattel mortgage and a
Continuing Guaranty4 were executed.
Respondent spouses defaulted in the payment of the entire
obligation upon maturity. Hence, on January 31, 1991,
SOLIDBANK filed a complaint for sum of money with a prayer
for a writ of preliminary attachment, against respondents
spouses and petitioner. The case was docketed as Civil Case No.
91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that
its liability as guarantor of the loan was extinguished pursuant
to Article 2080 of the Civil Code of the Philippines. It argued
that it has lost its right to be subrogated to the first chattel
mortgage in view of SOLIDBANK’s failure to register the chattel
mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080
is not applicable because petitioner is not a guarantor but a
surety.
On February 18, 1993, the trial court issued an Order, portions
of which reads: “After a careful consideration of the matter on
hand, the Court finds the ground of the motion to dismiss
without merit. The document referred to as ‘Continuing
Guaranty’ dated August 21, 1985 (Exh. 7) states as follows:
‘For and in consideration of any existing indebtedness to you
of Agro Brokers, a single proprietorship owned by Mr. Raul
Claveria for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your
discretion, at any other manner, to, or at the request or for the
account of the borrower, x x x’
“The provisions of the document are clear, plain and explicit.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
“Clearly therefore, defendant E. Zobel, Inc. signed as surety.
Even though the title of the document is ‘Continuing
Guaranty,’ the Court’s interpretation is not limited to the title
alone but to the contents and intention of the parties more
specifically if the language is clear and positive. The obligation
of the defendant Zobel being that of a surety, Art. 2080 New
Civil Code will not apply as it is only for those acting as
guarantor. In fact, in the letter of January 31, 1986 of the
defendants (spouses and Zobel) to the plaintiff it is requesting
that the chattel mortgage on the vessels and tugboat be
waived and/or rescinded by the bank inasmuch as the said
loan is covered by the Continuing Guaranty by Zobel in favor of
the plaintiff thus thwarting the claim of the defendant now
that the chattel mortgage is an essential condition of the
guaranty. In its letter, it said that because of the Continuing
Guaranty in favor of the plaintiff the chattel mortgage is
rendered unnecessary and redundant.
“With regard to the claim that the failure of the plaintiff to
register the chattel mortgage with the proper government
agency, i.e. with the Office of the Collector of Customs or with
the Register of Deeds makes the obligation a guaranty, the
same merits a scant consideration and could not be taken by
this Court as the basis of the extinguishment of the obligation
of the defendant corporation to the plaintiff as surety. The
chattel mortgage is an additional security and should not be
considered as payment of the debt in case of failure of
payment. The same is true with the failure to register,
extinction of the liability would not lie.
“WHEREFORE, the Motion to Dismiss is hereby denied and
defendant E. Zobel, Inc., is ordered to file its answer to the
complaint within ten (10) days from receipt of a copy of this
Order.” Petitioner moved for reconsideration but was denied
on April 26, 1993.6
Thereafter, petitioner questioned said Orders before the
respondent Court of Appeals, through a petition for certiorari,
alleging that the trial court committed grave abuse of
discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed
decision the dispositive portion of which reads:
“WHEREFORE, finding that respondent Judge has not
committed any grave abuse of discretion in issuing the herein
assailed orders, We hereby DISMISS the petition.”
2
A motion for reconsideration filed by petitioner was denied for
lack of merit on February 15, 1994.
Petitioner now comes to us via this petition arguing that the
respondent Court of Appeals erred in its finding: (1) that Article
2080 of the New Civil Code which provides: “The guarantors,
even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot
be subrogated to the rights, mortgages and preferences of the
latter,” is not applicable to petitioner; (2) that petitioner’s
obligation to respondent SOLIDBANK under the continuing
guaranty is that of a surety; and (3) that the failure of
respondent SOLIDBANK to register the chattel mortgage did
not extinguish petitioner’s liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner
under the “Continuing Guaranty” obligated itself to
SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person
binds himself for another already bound, and agrees with the
creditor to satisfy the obligation if the debtor does not.7 A
contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter does
not pay the debt.8
Strictly speaking, guaranty and surety are nearly related, and
many of the principles are common to both. However, under
our civil law, they may be distinguished thus: A surety is usually
bound with his principal by the same instrument, executed at
the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held,
ordinarily, to know every default of his principal. Usually, he
will not be discharged, either by the mere indulgence of the
creditor to the principal, or by want of notice of the default of
the principal, no matter how much he may be injured thereby.
On the other hand, the contract of guaranty is the guarantor’s
own separate undertaking, in which the principal does not join.
It is usually entered into before or after that of the principal,
and is often supported on a separate consideration from that
supporting the contract of the principal. The original contract
of his principal is not his contract, and he is not bound to take
notice of its non-performance. He is often discharged by the
mere indulgence of the creditor to the principal, and is usually
not liable unless notified of the default of the principal.9
Simply put, a surety is distinguished from a guaranty in that a
guarantor is the insurer of the solvency of the debtor and thus
binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to
pay if the principal does not pay.10
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Based on the aforementioned definitions, it appears that the
contract executed by petitioner in favor of SOLIDBANK, albeit
denominated as a “Continuing Guaranty,” is a contract of
surety. The terms of the contract categorically obligates
petitioner as “surety” to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following
stipulations:
“For and in consideration of any existing indebtedness to you
of AGRO BROKERS, a single proprietorship owned by MR. RAUL
P. CLAVERIA, of legal age, married and with business address x
x x (hereinafter called the Borrower), for the payment of which
the undersigned is now obligated to you as surety and in order
to induce you, in your discretion, at any time or from time to
time hereafter, to make loans or advances or to extend credit
in any other manner to, or at the request or for the account of
the Borrower, either with or without purchase or discount, or
to make any loans or advances evidenced or secured by any
notes, bills receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness x x upon which the
Borrower is or may become liable as maker, endorser,
acceptor, or otherwise, the undersigned agrees to guarantee,
and does hereby guarantee, the punctual payment, at maturity
or upon demand, to you of any and all such instruments, loans,
advances, credits and/or other obligations herein before
referred to, and also any and all other indebtedness of every
kind which is now or may hereafter become due or owing to
you by the Borrower, together with any and all expenses which
may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations hereinbefore
referred to, and or in enforcing any rights hereunder, and also
to make or cause any and all such payments to be made strictly
in accordance with the terms and provisions of any agreement
(g), express or implied, which has (have) been or may hereafter
be made or entered into by the Borrower in reference thereto,
regardless of any law, regulation or decree, now or hereafter in
effect which might in any manner affect any of the terms or
provisions of any such agreement(s) or your right with respect
thereto as against the Borrower, or cause or permit to be
invoked any alteration in the time, amount or manner of
payment by the Borrower of any such instruments, obligations
or indebtedness; x x x” (Italics Ours)
One need not look too deeply at the contract to determine the
nature of the undertaking and the intention of the parties. The
contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and
obligated itself as an original promissor. It bound itself jointly
and severally to the obligation with the respondent spouses.
In fact, SOLIDBANK need not resort to all other legal remedies
or exhaust respondent spouses’ properties before it can hold
3
petitioner liable for the obligation. This can be gleaned from a
reading of the stipulations in the contract, to wit:
‘x x x If default be made in the payment of any of the
instruments, indebtedness or other obligation hereby
guaranteed by the undersigned, or if the Borrower, or the
undersigned should die, dissolve, fail in business or become
insolvent, x x x, or if any funds or other property of the
Borrower, or of the undersigned which may be or come into
your possession or control or that of any third party acting in
your behalf as aforesaid should be attached or distrained, or
should be or become subject to any mandatory order of court
or other legal process, then, or any time after the happening of
any such event any or all of the instruments of indebtedness or
other obligations hereby guaranteed shall, at your option
become (for the purpose of this guaranty) due and payable by
the undersigned forthwith without demand of notice, and full
power and authority are hereby given you, in your discretion,
to sell, assign and deliver all or any part of the property upon
which you may then have a lien hereunder at any broker’s
board, or at public or private sale at your option, either for
cash or for credit or for future delivery without assumption by
you of credit risk, and without either the demand,
advertisement or notice of any kind, all of which are hereby
expressly waived. At any sale hereunder, you may, at your
option, purchase the whole or any part of the property so sold,
free from any right of redemption on the part of the
undersigned, all such rights being also hereby waived and
released. In case of any sale and other disposition of any of the
property aforesaid, after deducting all costs and expenses of
every kind for care, safekeeping, collection, sale, delivery or
otherwise, you may apply the residue of the proceeds of the
sale and other disposition thereof, to the payment or
reduction, either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned whether
or not except for disagreement such liabilities or obligations
would then be due, making proper allowance or interest on
the obligations and liabilities not otherwise then due, and
returning the overplus, if any, to the undersigned; all without
prejudice to your rights as against the undersigned with
respect to any and all amounts which may be or remain unpaid
on any of the obligations or liabilities aforesaid at any time(s)”
xxx xxx xxx
‘Should the Borrower at this or at any future time furnish, or
should be heretofore have furnished, another surety or
sureties to guarantee the payment of his obligations to you,
the undersigned hereby expressly waives all benefits to which
the undersigned might be entitled under the provisions of
Article 1837 of the Civil Code (beneficio division), the liability of
the undersigned under any and all circumstances being joint
and several”; (Italics Ours)
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
The use of the term “guarantee” does not ipso facto mean that
the contract is one of guaranty. Authorities recognize that the
word “guarantee” is frequently employed in business
transactions to describe not the security of the debt but an
intention to be bound by a primary or independent
obligation.11 As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but
to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080
of the Civil Code, relied upon by petitioner, finds no application
to the case at bar. In Bicol Savings and Loan Association vs.
Guinhawa,12 we have ruled that Article 2080 of the New Civil
Code does not apply where the liability is as a surety, not as a
guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK’s
failure to register the chattel mortgage did not release
petitioner from the obligation. In the Continuing Guaranty
executed in favor of SOLIDBANK, petitioner bound itself to the
contract irrespective of the existence of any collateral. It even
released SOLIDBANK from any fault or negligence that may
impair the contract. The pertinent portions of the contract so
provides:
“x x x the undersigned (petitioner) who hereby agrees to be
and remain bound upon this guaranty, irrespective of he
existence, value or condition of any collateral, and
notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application, renewal or
extension, and notwithstanding also that all obligations of the
Borrower to you outstanding and unpaid at any time(s) may
exceed the aggregate principal sum herein above prescribed.
‘This is a Continuing Guaranty and shall remain in full force and
effect until written notice shall have been received by you that
it has been revoked by the undersigned, but any such notice
shall not be released the undersigned from any liability as to
any instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may
have any interest, at the time of the receipt of such notice. No
act or omission of any kind on your part in the premises shall in
any event affect or impair this guaranty, nor shall same be
affected by any change which may arise by reason of the death
of the undersigned, of any partner(s) of the undersigned, or of
the Borrower, or of the accession to any such partnership of
any one or more new partners.” (Italics supplied)
4
In fine, we find the petition to be without merit as no
reversible error was committed by respondent Court of
Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals
is hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
Regalado (Chairman), Melo and Puno, JJ.,
concur. Mendoza, J., No part, having concurred in the
decision of the Court of Appeals when I was a member of that
court.
Judgment affirmed.
Notes.—Where obligee has accepted the surety bond, it
becomes valid and enforceable irrespective of whether or not
the premium has been paid by the obligor to the surety.
(Philippine Pryce Assurance Corporation vs. Court of Appeals,
230 SCRA 164 [1994])
The consideration necessary to support a surety obligation
need not pass directly to the surety, a consideration moving to
the principal alone being sufficient—a guarantor or surety is
bound by the same consideration that makes the contract
effective between the principal parties thereto. (Willex Plastic
Industries Corporation vs. Court of Appeals, 256 SCRA 478
[1996])
SECOND DIVISION
G.R. No. 113931 May 6, 1998
E. ZOBEL, INC., petitioner,
vs.
THE COURT OF APPEALS, CONSOLIDATED BANK AND
TRUST CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the
decision of the Court of Appeals dated July 13, 1993 which
1
affirmed the Order of the Regional Trial Court of Manila, Branch
51, denying petitioner's Motion to Dismiss the complaint, as well
as the Resolution dated February 15, 1994 denying the motion
2
for reconsideration thereto.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business
under the name "Agro Brokers," applied for a loan with
respondent Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of Two Million Eight Hundred
Seventy Five Thousand Pesos (P2,875,000.00) to finance the
purchase of two (2) maritime barges and one tugboat which 3
would be used in their molasses business. The loan was granted
subject to the condition that respondent spouses execute a
chattel mortgage over the three (3) vessels to be acquired and
that a continuing guarantee be executed by Ayala International
Philippines, Inc., now herein petitioner E. Zobel, Inc., in favor of
SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently, a chattel mortgage and a Continuing
Guaranty were executed.
4
Respondent spouses defaulted in the payment of the entire
obligation upon maturity. Hence, on January 31, 1991,
SOLIDBANK filed a complaint for sum of money with a prayer for
a writ of preliminary attachment, against respondents spouses
and petitioner. The case was docketed as Civil Case No.
91-55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its
liability as guarantor of the loan was extinguished pursuant to
Article 2080 of the Civil Code of the Philippines. It argued that it
has lost its right to be subrogated to the first chattel mortgage in
view of SOLIDBANK's failure to register the chattel mortgage with
the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is
not applicable because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of
which reads:
After a careful consideration of the matter on hand, the Court
finds the ground of the motion to dismiss without merit. The
document referred to as "Continuing Guaranty" dated August 21,
1985 (Exh. 7) states as follows:
For and in consideration of any existing indebtedness to you of
Agro Brokers, a single proprietorship owned by Mr. Raul Claveria
for the payment of which the undersigned is now obligated to you
as surety and in order to induce you, in your discretion, at any
other manner, to, or at the request or for the account of the
borrower, . . .
The provisions of the document are clear, plain and explicit.
Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even
though the title of the document is "Continuing Guaranty", the
Court's interpretation is not limited to the title alone but to the
contents and intention of the parties more specifically if the
language is clear and positive. The obligation of the defendant
Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the
letter of January 31, 1986 of the defendants (spouses and Zobel)
to the plaintiff it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by the bank
inasmuch as the said loan is covered by the Continuing Guaranty
by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition
of the guaranty. In its letter, it said that because of the Continuing
5
Guaranty in favor of the plaintiff the chattel mortgage is rendered
unnecessary and redundant.
With regard to the claim that the failure of the plaintiff to register
the chattel mortgage with the proper government agency, i.e. with
the Office of the Collector of Customs or with the Register of
Deeds makes the obligation a guaranty, the same merits a scant
consideration and could not be taken by this Court as the basis of
the extinguishment of the obligation of the defendant corporation
to the plaintiff as surety. The chattel mortgage is an additional
security and should not be considered as payment of the debt in
case of failure of payment. The same is true with the failure to
register, extinction of the liability would not lie.
WHEREFORE, the Motion to Dismiss is hereby denied and
defendant E. Zobel, Inc., is ordered to file its answer to the
complaint within ten (10) days from receipt of a copy of this
Order. 5
Petitioner moved for reconsideration but was denied on April 26,
1993. 6
Thereafter, petitioner questioned said Orders before the
respondent Court of Appeals, through a petition for certiorari,
alleging that the trial court committed grave abuse of discretion in
denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed
decision the dispositive portion of which reads:
WHEREFORE, finding that respondent Judge has not committed
any grave abuse of discretion in issuing the herein assailed
orders, We hereby DISMISS the petition.
A motion for reconsideration filed by petitioner was denied for lack
of merit on February 15, 1994.
Petitioner now comes to us via this petition arguing that the
respondent Court of Appeals erred in its finding: (1) that Article
2080 of the New Civil Code which provides: "The guarantors,
even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated
to the rights, mortgages, and preferences of the latter," is not
applicable to petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing guaranty is that of
a surety; and (3) that the failure of respondent SOLIDBANK to
register the chattel mortgage did not extinguish petitioner's liability
to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under
the "Continuing Guaranty" obligated itself to SOLIDBANK as a
guarantor or a surety.
A contract of surety is an accessory promise by which a person
binds himself for another already bound, and agrees with the
creditor to satisfy the obligation if the debtor does not. A contract
7
of guaranty, on the other hand, is a collateral undertaking to pay
the debt of another in case the latter does not pay the debt. 8
Strictly speaking, guaranty and surety are nearly related, and
many of the principles are common to both. However, under our
civil law, they may be distinguished thus: A surety is usually
bound with his principal by the same instrument, executed at the
same time, and on the same consideration. He is an original
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
promissor and debtor from the beginning, and is held, ordinarily,
to know every default of his principal. Usually, he will not be
discharged, either by the mere indulgence of the creditor to the
principal, or by want of notice of the default of the principal, no
matter how much he may be injured thereby. On the other hand,
the contract of guaranty is the guarantor's own separate
undertaking, in which the principal does not join. It is usually
entered into before or after that of the principal, and is often
supported on a separate consideration from that supporting the
contract of the principal. The original contract of his principal is
not his contract, and he is not bound to take notice of its
non-performance. He is often discharged by the mere indulgence
of the creditor to the principal, and is usually not liable unless
notified of the default of the principal.
9
Simply put, a surety is distinguished from a guaranty in that a
guarantor is the insurer of the solvency of the debtor and thus
binds himself to pay if the principal is unable to pay while a surety
is the insurer of the debt, and he obligates himself to pay if the
principal does not pay. 10
Based on the aforementioned definitions, it appears that the
contract executed by petitioner in favor of SOLIDBANK, albeit
denominated as a "Continuing Guaranty," is a contract of surety.
The terms of the contract categorically obligates petitioner as
"surety" to induce SOLIDBANK to extend credit to respondent
spouses. This can be seen in the following stipulations.
For and in consideration of any existing indebtedness to you of
AGRO BROKERS, a single proprietorship owned by MR. RAUL P.
CLAVERIA, of legal age, married and with business address . . .
(hereinafter called the Borrower), for the payment of which
the undersigned is now obligated to you as surety and in order to
induce you, in your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request or for the account of the
Borrower, either with or without purchase or discount, or to make
any loans or advances evidenced or secured by any notes, bills
receivable, drafts, acceptances, checks or other instruments or
evidences of indebtedness . . . upon which the Borrower is or may
become liable as maker, endorser, acceptor, or otherwise, the
undersigned agrees to guarantee, and does hereby guarantee,
the punctual payment, at maturity or upon demand, to you of any
and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter
become due or owing to you by the Borrower, together with any
and all expenses which may be incurred by you in collecting all or
any such instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights hereunder,
and also to make or cause any and all such payments to be made
strictly in accordance with the terms and provisions of any
agreement (g), express or implied, which has (have) been or may
hereafter be made or entered into by the Borrower in reference
thereto, regardless of any law, regulation or decree, now or
hereafter in effect which might in any manner affect any of the
terms or provisions of any such agreements(s) or your right with
respect thereto as against the Borrower, or cause or permit to be
invoked any alteration in the time, amount or manner of payment
by the Borrower of any such instruments, obligations or
indebtedness; . . . (Emphasis Ours)
One need not look too deeply at the contract to determine the
nature of the undertaking and the intention of the parties. The
contract clearly disclose that petitioner assumed liability to
SOLIDBANK, as a regular party to the undertaking and obligated
itself as an original promissor. It bound itself jointly and severally
6
to the obligation with the respondent spouses. In fact,
SOLIDBANK need not resort to all other legal remedies or
exhaust respondent spouses' properties before it can hold
petitioner liable for the obligation. This can be gleaned from a
reading of the stipulations in the contract, to wit:
. . . If default be made in the payment of any of the instruments,
indebtedness or other obligation hereby guaranteed by the
undersigned, or if the Borrower, or the undersigned should die,
dissolve, fail in business, or become insolvent, . . ., or if any funds
or other property of the Borrower, or of the undersigned which
may be or come into your possession or control or that of any
third party acting in your behalf as aforesaid should be attached of
distrained, or should be or become subject to any mandatory
order of court or other legal process, then, or any time after the
happening of any such event any or all of the instruments of
indebtedness or other obligations hereby guaranteed shall, at
your option become (for the purpose of this guaranty) due and
payable by the undersigned forthwith without demand of notice,
and full power and authority are hereby given you, in your
discretion, to sell, assign and deliver all or any part of the property
upon which you may then have a lien hereunder at any broker's
board, or at public or private sale at your option, either for cash or
for credit or for future delivery without assumption by you of credit
risk, and without either the demand, advertisement or notice of
any kind, all of which are hereby expressly waived. At any sale
hereunder, you may, at your option, purchase the whole or any
part of the property so sold, free from any right of redemption on
the part of the undersigned, all such rights being also hereby
waived and released. In case of any sale and other disposition of
any of the property aforesaid, after deducting all costs and
expenses of every kind for care, safekeeping, collection, sale,
delivery or otherwise, you may apply the residue of the proceeds
of the sale and other disposition thereof, to the payment or
reduction, either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned whether or
not except for disagreement such liabilities or obligations would
then be due, making proper allowance or interest on the
obligations and liabilities not otherwise then due, and returning
the overplus, if any, to the undersigned; all without prejudice to
your rights as against the undersigned with respect to any and all
amounts which may be or remain unpaid on any of the obligations
or liabilities aforesaid at any time (s).
xxx xxx xxx
Should the Borrower at this or at any future time furnish, or should
be heretofore have furnished, another surety or sureties to
guarantee the payment of his obligations to you, the undersigned
hereby expressly waives all benefits to which the undersigned
might be entitled under the provisions of Article 1837 of the Civil
Code (beneficio division), the liability of the undersigned under
any and all circumstances being joint and several; (Emphasis
Ours)
The use of the term "guarantee" does not ipso facto mean that the
contract is one of guaranty. Authorities recognize that the word
"guarantee" is frequently employed in business transactions to
describe not the security of the debt but an intention to be bound
by a primary or independent obligation. As aptly observed by
11
the trial court, the interpretation of a contract is not limited to the
title alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of
the Civil Code, relied upon by petitioner, finds no application to
the case at bar. In Bicol Savings and Loan Association
vs. Guinhawa, we have ruled that Article 2080 of the New Civil
12
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Code does not apply where the liability is as a surety, not as a
guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's
failure to register the chattel mortgage did not release petitioner
from the obligation. In the Continuing Guaranty executed in favor
of SOLIDBANK, petitioner bound itself to the contract irrespective
of the existence of any collateral. It even released SOLIDBANK
from any fault or negligence that may impair the contract. The
pertinent portions of the contract so provides:
. . . the undersigned (petitioner) who hereby agrees to be and
remain bound upon this guaranty, irrespective of the existence,
value or condition of any collateral, and notwithstanding any such
change, exchange, settlement, compromise, surrender, release,
sale, application, renewal or extension, and notwithstanding also
that all obligations of the Borrower to you outstanding and unpaid
at any time(s) may exceed the aggregate principal sum herein
above prescribed.
This is a Continuing Guaranty and shall remain in full force and
effect until written notice shall have been received by you that it
has been revoked by the undersigned, but any such notice shall
not be released the undersigned from any liability as to any
instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have
any interest, at the time of the receipt of such notice. No act or
omission of any kind on your part in the premises shall in any
event affect or impair this guaranty, nor shall same be affected by
any change which may arise by reason of the death of the
undersigned, of any partner (s) of the undersigned, or of the
Borrower, or of the accession to any such partnership of any one
or more new partners. (Emphasis supplied)
In fine, we find the petition to be without merit as no reversible
error was committed by respondent Court of Appeals in rendering
the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is
hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
EN BANC
G.R. No. L-16666 April 10, 1922
ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE
ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo
Machetti, by a written agreement undertook to construct a
building on Calle Rosario in the city of Manila for the Hospicio de
7
San Jose, the contract price being P64,000. One of the conditions
of the agreement was that the contractor should obtain the
"guarantee" of the Fidelity and Surety Company of the Philippine
Islands to the amount of P128,800 and the following endorsement
in the English language appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee
compliance with the terms and conditions as
outlined in the above contract.
FIDELITY AND SURETY COMPANY OF
THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of
architects representing the Hospicio de San Jose and, as the
work progressed, payments were made to him from time to time
upon the recommendation of the architects, until the entire
contract price, with the exception of the sum of the P4,978.08,
was paid. Subsequently it was found that the work had not been
carried out in accordance with the specifications which formed
part of the contract and that the workmanship was not of the
standard required, and the Hospicio de San Jose therefore
answered the complaint and presented a counterclaim for
damages for the partial noncompliance with the terms of the
agreement abovementioned, in the total sum of P71,350. After
issue was thus joined, Machetti, on petition of his creditors, was,
on February 27, 1918, declared insolvent and on March 4, 1918,
an order was entered suspending the proceeding in the present
case in accordance with section 60 of the Insolvency Law, Act No.
1956.
The Hospicio de San Jose on January 29, 1919, filed a motion
asking that the Fidelity and Surety Company be made
cross-defendant to the exclusion of Machetti and that the
proceedings be continued as to said company, but still remain
suspended as to Machetti. This motion was granted and on
February 7, 1920, the Hospicio filed a complaint against the
Fidelity and Surety Company asking for a judgement for P12,800
against the company upon its guaranty. After trial, the Court of
First Instance rendered judgment against the Fidelity and Surety
Company for P12,800 in accordance with the complaint. The case
is now before this court upon appeal by the Fidelity and Surety
Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff
and the Hospicio de San Jose defendant, has been converted
into an action in which the Hospicio de San Jose is plaintiff and
the Fidelity and Surety Company, the original plaintiff's guarantor,
is the defendant, Machetti having been practically eliminated from
the case.
But in this instance the guarantor's case is even stronger than
that of an ordinary surety. The contract of guaranty is written in
the English language and the terms employed must of course be
given the signification which ordinarily attaches to them in that
language. In English the term "guarantor" implies an undertaking
of guaranty, as distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or "guaranty"
circumstances may be shown which convert the contract into one
of suretyship but such circumstances do not exist in the present
case; on the contrary it appear affirmatively that the contract is the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
guarantor's separate undertaking in which the principal does not
join, that its rests on a separate consideration moving from the
principal and that although it is written in continuation of the
contract for the construction of the building, it is a collateral
undertaking separate and distinct from the latter. All of these
circumstances are distinguishing features of contracts of
guaranty.
Now, while a surety undertakes to pay if the principal does not
pay, the guarantor only binds himself to pay if the principal cannot
pay. The one is the insurer of the debt, the other an insurer of the
solvency of the debtor. (Saint vs. Wheeler & Wilson Mfg. Co., 95
Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de
Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero
de la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity
and Surety Company assumed in the present case. The
undertaking is perhaps not exactly that of a fianza under the Civil
Code, but is a perfectly valid contract and must be given the legal
effect if ordinarily carries. The Fidelity and Surety Company
having bound itself to pay only the event its principal, Machetti,
cannot pay it follows that it cannot be compelled to pay until it is
shown that Machetti is unable to pay. Such ability may be proven
by the return of a writ of execution unsatisfied or by other means,
but is not sufficiently established by the mere fact that he has
been declared insolvent in insolvency proceedings under our
statutes, in which the extent of the insolvent's inability to pay is
not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs
and without prejudice to such right of action as the
cross-complainant, the Hospicio de San Jose, may have after
exhausting its remedy against the plaintiff Machetti. So ordered.
SECOND DIVISION
G.R. No. 160466 January 17, 2005
SPOUSES ALFREDO and SUSANA ONG, petitioners,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court to set aside the Decision of the Court of Appeals in
CA-G.R. SP No. 39255, dated February 17, 2003, affirming the
decision of the trial court denying petitioners’ motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic
corporation engaged in the manufacture and export of finished
wood products. Petitioners-spouses Alfredo and Susana Ong are
its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial
International Bank (now Equitable-Philippine Commercial
International Bank or E-PCIB) filed a case for collection of a sum
of money1 against petitioners-spouses. Respondent bank sought
to hold petitioners-spouses liable as sureties on the three (3)
8
promissory notes they issued to secure some of BMC’s loans,
totalling five million pesos (₱5,000,000.00).
The complaint alleged that in 1991, BMC needed additional
capital for its business and applied for various loans, amounting
to a total of five million pesos, with the respondent bank.
Petitioners-spouses acted as sureties for these loans and issued
three (3) promissory notes for the purpose. Under the terms of the
notes, it was stipulated that respondent bank may consider debtor
BMC in default and demand payment of the remaining balance of
the loan upon the levy, attachment or garnishment of any of its
properties, or upon BMC’s insolvency, or if it is declared to be in a
state of suspension of payments. Respondent bank granted
BMC’s loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and
suspension of payments with the Securities and Exchange
Commission (SEC) after its properties were attached by creditors.
Respondent bank considered debtor BMC in default of its
obligations and sought to collect payment thereof from
petitioners-spouses as sureties. In due time, petitioners-spouses
filed their Answer.
1awphi1 .nét
On October 13, 1992, a Memorandum of Agreement (MOA)2 was
executed by debtor BMC, the petitioners-spouses as President
and Treasurer of BMC, and the consortium of creditor banks of
BMC (of which respondent bank is included). The MOA took
effect upon its approval by the SEC on November 27, 1992.3
Thereafter, petitioners-spouses moved to dismiss4 the
complaint. They argued that as the SEC declared the principal
debtor BMC in a state of suspension of payments and, under the
MOA, the creditor banks, including respondent bank, agreed to
temporarily suspend any pending civil action against the debtor
BMC, the benefits of the MOA should be extended to
petitioners-spouses who acted as BMC’s sureties in their
contracts of loan with respondent bank. Petitioners-spouses
averred that respondent bank is barred from pursuing its
collection case filed against them.
The trial court denied the motion to dismiss.
Petitioners-spouses appealed to the Court of Appeals which
affirmed the trial court’s ruling that a creditor can proceed against
petitioners-spouses as surety independently of its right to proceed
against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against
them by respondent bank should be dismissed for three (3)
reasons: First, the MOA provided that during its effectivity, there
shall be a suspension of filing or pursuing of collection cases
against the BMC and this provision should benefit petitioners as
sureties. Second, principal debtor BMC has been placed under
suspension of payment of debts by the SEC; petitioners contend
that it would prejudice them if the principal debtor BMC would
enjoy the suspension of payment of its debts while petitioners,
who acted only as sureties for some of BMC’s debts, would be
compelled to make the payment; petitioners add that compelling
them to pay is contrary to Article 2063 of the Civil Code which
provides that a compromise between the creditor and principal
debtor benefits the guarantor and should not prejudice the latter.
Lastly, petitioners rely on Article 2081 of the Civil Code which
provides that: "the guarantor may set up against the creditor all
the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal to
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
the debtor." Petitioners aver that if the principal debtor BMC can
set up the defense of suspension of payment of debts and filing of
collection suits against respondent bank, petitioners as sureties
should likewise be allowed to avail of these defenses.
We find no merit in petitioners’ contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of
the Civil Code is misplaced as these provisions refer to
contracts of guaranty. They do not apply to suretyship
contracts. Petitioners-spouses are not guarantors but sureties of
BMC’s debts. There is a sea of difference in the rights and
liabilities of a guarantor and a surety. A guarantor insures the
solvency of the debtor while a surety is an insurer of the debt
itself. A contract of guaranty gives rise to a subsidiary
obligation on the part of the guarantor. It is only after the
creditor has proceeded against the properties of the principal
debtor and the debt remains unsatisfied that a guarantor can be
held liable to answer for any unpaid amount. This is the principle
of excussion. In a suretyship contract, however, the benefit of
excussion is not available to the surety as he is principally
liable for the payment of the debt. As the surety insures the
debt itself, he obligates himself to pay the debt if the principal
debtor will not pay, regardless of whether or not the latter is
financially capable to fulfill his obligation. Thus, a creditor can go
directly against the surety although the principal debtor is solvent
and is able to pay or no prior demand is made on the principal
debtor. A surety is directly, equally and absolutely bound
with the principal debtor for the payment of the debt and is
deemed as an original promissor and debtor from the
beginning.5
Under the suretyship contract entered into by petitioners-spouses
with respondent bank, the former obligated themselves to be
solidarily bound with the principal debtor BMC for the payment of
its debts to respondent bank amounting to five million pesos
(₱5,000,000.00). Under Article 1216 of the Civil
Code,6 respondent bank as creditor may proceed against
petitioners-spouses as sureties despite the execution of the MOA
which provided for the suspension of payment and filing of
collection suits against BMC. Respondent bank’s right to collect
payment from the surety exists independently of its right to
proceed directly against the principal debtor. In fact, the creditor
bank may go against the surety alone without prior demand for
payment on the principal debtor.7
The provisions of the MOA regarding the suspension of
payments by BMC and the non-filing of collection suits by
the creditor banks pertain only to the property of the
principal debtor BMC. Firstly, in the rehabilitation receivership
filed by BMC, only the properties of BMC were mentioned in the
petition with the SEC.8 Secondly, there is nothing in the MOA that
involves the liabilities of the sureties whose properties are
separate and distinct from that of the debtor BMC. Lastly, it bears
to stress that the MOA executed by BMC and signed by the
creditor-banks was approved by the SEC whose jurisdiction is
limited only to corporations and corporate assets. It has no
jurisdiction over the properties of BMC’s officers or sureties.1awphi1.nét
Clearly, the collection suit filed by respondent bank against
petitioners-spouses as sureties can prosper. The trial court’s
denial of petitioners’ motion to dismiss was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit.
No pronouncement as to costs.
9
SO ORDERED.
EN BANC
G.R. No. L-158025 November 5, 1920
CARMEN CASTELLVI DE HIGGINS and HORACE L.
HIGGINS, plaintiffs-appellants,
vs.
GEORGE C. SELLNER, defendant-appellee.
Wolfson, Wolfson and Schwarzkopf for appellants.
William and Ferrier for appellee.
MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant
the sum of P10,000. The brief decision of the trial court held that
the suit was premature, and absolved the defendant from the
complaint, with the costs against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant
George C. Sellner to John T. Macleod, agent for Mrs. Horace L.
Higgins, on May 31, 1915, of the following tenor: lawph!l.n et
DEAR SIR: I hereby obligate and bind myself,
my heirs, successors and assigns that if the
promissory note executed the 29th day of
May, 1915 by the Keystone Mining Co., W.H.
Clarke, and John Maye, jointly and severally,
in your favor and due six months after date
for Pesos 10,000 is not fully paid at maturity
with interest, I will, within fifteen days after
notice of such default, pay you in cash the
sum of P10,000 and interest upon your
surrendering to me the three thousand
shares of stock of the Keystone Mining Co.
held by you as security for the payment of
said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the
determination of defendant's status in the transaction referred to.
Plaintiffs contend that he is a surety; defendant contends that he
is a guarantor. Plaintiffs also admit that if defendant is a guarantor,
articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the
Philippine Islands, Title XIV of Book IV is entitled "De la Fianza."
The Spanish word "fianza" is translated in the Washington and
Walton editions of the Civil Code as "security." "Fianza" appears
in the Fisher translation as "suretyship." The Spanish
world "fiador" is found in all of the English translations of the Civil
Code as "surety." The law of guaranty is not related of by that
name in the Civil Code, although indirect reference to the same is
made in the Code of Commerce. In terminology at least, no
distinction is made in the Civil Code between the obligation of a
surety and that of a guarantor.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
As has been done in the State of Louisiana, where, like in the
Philippines, the substantive law has a civil law origin, we feel free
to supplement the statutory law by a reference to the precepts of
the law merchant.
The points of difference between a surety and a guarantor are
familiar to American authorities. A surety and a guarantor are
alike in that each promises to answer for the debt or default of
another. A surety and a guarantor are unlike in that the surety
assumes liability as a regular party to the undertaking, while the
liability as a regular party to upon an independent agreement to
pay the obligation if the primary pay or fails to do so. A surety is
charged as an original promissory; the engagement of the
guarantor is a collateral undertaking. The obligation of the surety
is primary; the obligation of the guarantor is secondary. (See
U.S. vs. Varadero de la Quinta [1919], 40 Phil., 48;
Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley
[1913], 173 Mich., 492; Brandt, on Suretyship and Guaranty, sec.
1, cited approvingly by many authorities.)
Turning back again to our Civil Code, we first note that according
to article 1822 "By fianza (security or suretyship) one person
binds himself to pay or perform for a third person in case the latter
should fail to do so." But "If the surety binds himself in
solidum with the principal debtor, the provisions of Section fourth,
Chapter third, Title first, shall be applicable." What the first portion
of the cited article provides is, consequently, seen to be
somewhat akin to the contract of guaranty, while what is last
provided is practically equivalent to the contract of suretyship.
When in subsequent articles found in section 1 of Chapter II of the
title concerning fianza, the Code speaks of the effects of
suretyship between surety and creditor, it has, in comparison with
the common law, the effect of guaranty between guarantor and
creditor. The civil law suretyship is, accordingly, nearly
synonymous with the common law guaranty; and the civil law
relationship existing between codebtors liable in solidum is similar
to the common law suretyship.
It is perfectly clear that the obligation assumed by defendant was
simply that of a guarantor, or, to be more precise, of
the fiador whose responsibility is fixed in the Civil Code. The letter
of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and
upon surrender to him of the three thousand shares of Keystone
Mining Company stock, he will assume responsibility. Sellner is
not bound with the principals by the same instrument executed at
the same time and on the same consideration, but his
responsibility is a secondary one found in an independent
collateral agreement, Neither is Sellner jointly and severally liable
with the principal debtors.
With particular reference, therefore, to appellants assignments of
error, we hold that defendant Sellner is a guarantor within the
meaning of the provisions of the Civil Code.
There is also an equitable aspect to the case which reenforces
this conclusion. The note executed by the Keystone Mining
Company matured on November 29, 1915. Interest on the note
was not accepted by the makers until September 30, 1916. When
the note became due, it is admitted that the shares of stock used
as collateral security were selling at par; that is, they were worth
pesos 30,000. Notice that the note had not been paid was not
given to and when the Keyston Mining Company stock was
worthless. Defendant, consequently, through the laches of
plaintiff, has lost possible chance to recoup, through the sale of
the stock, any amount which he might be compelled to pay as a
surety or guarantor. The "indulgence," as this word is used in the
10
law of guaranty, of the creditors of the principal, as evidenced by
the acceptance of interest, and by failure promptly to notify the
guarantor, may thus have served to discharge the guarantor.
For quite different reasons, which, nevertheless, arrive at the
same result, judgment is affirmed, with costs of this instance
against the appellants. So ordered.
SECOND DIVISION
G.R. No. 151953 June 29, 2007
SALVADOR P. ESCAÑO and MARIO M. SILOS, petitioner,
vs.
RAFAEL ORTIGAS, JR., respondent.
DECISION
TINGA, J.:
The main contention raised in this petition is that petitioners are
not under obligation to reimburse respondent, a claim that can be
easily debunked. The more perplexing question is whether this
obligation to repay is solidary, as contended by respondent and
the lower courts, or merely joint as argued by petitioners.
On 28 April 1980, Private Development Corporation of the
Philippines (PDCP)1 entered into a loan agreement with Falcon
Minerals, Inc. (Falcon) whereby PDCP agreed to make available
and lend to Falcon the amount of US$320,000.00, for specific
purposes and subject to certain terms and conditions. 2 On the
same day, three stockholders-officers of Falcon, namely:
respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and
George T. Scholey executed an Assumption of Solidary Liability
whereby they agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment"
of the loan contracted by Falcon with PDCP.3 In the meantime,
two separate guaranties were executed to guarantee the payment
of the same loan by other stockholders and officers of Falcon,
acting in their personal and individual capacities. One
Guaranty4 was executed by petitioner Salvador Escaño (Escaño),
while the other5 by petitioner Mario M. Silos (Silos), Ricardo C.
Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J.
Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of
Falcon to Escaño, Silos and Joseph M. Matti (Matti). Thus,
contracts were executed whereby Ortigas, George A. Scholey,
Inductivo and the heirs of then already deceased George T.
Scholey assigned their shares of stock in Falcon to Escaño, Silos
and Matti.6 Part of the consideration that induced the sale of stock
was a desire by Ortigas, et al., to relieve themselves of all liability
arising from their previous joint and several undertakings with
Falcon, including those related to the loan with PDCP. Thus, an
Undertaking dated 11 June 1982 was executed by the concerned
parties,7 namely: with Escaño, Silos and Matti identified in the
document as "SURETIES," on one hand, and Ortigas, Inductivo
and the Scholeys as "OBLIGORS," on the other. The Undertaking
reads in part:
3. That whether or not SURETIES are able to immediately cause
PDCP and PAIC to release OBLIGORS from their said
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs’ said guarantees [sic] to
PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from
PDCP and/or PAIC for the payment of FALCON’s obligations with
it, any of [the] OBLIGORS shall immediately inform SURETIES
thereof so that the latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any
and/or all of OBLIGORS for collection of said loans and/or credit
facilities, SURETIES agree to defend OBLIGORS at their own
expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims of PDCP
and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason
made to pay any amount to PDCP and/or PAIC, SURETIES shall
reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all
fees which may be due from FALCON arising out of, or in
connection with, their said guarantees[sic].8
Falcon eventually availed of the sum of US$178,655.59 from the
credit line extended by PDCP. It would also execute a Deed of
Chattel Mortgage over its personal properties to further secure
the loan. However, Falcon subsequently defaulted in its payments.
After PDCP foreclosed on the chattel mortgage, there remained a
subsisting deficiency of ₱5,031,004.07, which Falcon did not
satisfy despite demand.9
On 28 April 1989, in order to recover the indebtedness, PDCP
filed a complaint for sum of money with the Regional Trial Court of
Makati (RTC) against Falcon, Ortigas, Escaño, Silos, Silverio and
Inductivo. The case was docketed as Civil Case No. 89-5128. For
his part, Ortigas filed together with his answer a cross-claim
against his co-defendants Falcon, Escaño and Silos, and also
manifested his intent to file a third-party complaint against the
Scholeys and Matti.10 The cross-claim lodged against Escaño and
Silos was predicated on the 1982 Undertaking, wherein they
agreed to assume the liabilities of Ortigas with respect to the
PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with
PDCP. The first to come to terms with PDCP was Escaño, who in
December of 1993, entered into a compromise agreement
whereby he agreed to pay the bank ₱1,000,000.00. In exchange,
PDCP waived or assigned in favor of Escaño one-third (1/3) of its
entire claim in the complaint against all of the other defendants in
the case.11 The compromise agreement was approved by the
RTC in a Judgment12 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own
compromise agreement13 with PDCP, allegedly without the
knowledge of Escaño, Matti and Silos. Thereby, Ortigas agreed to
pay PDCP ₱1,300,000.00 as "full satisfaction of the PDCP’s claim
against Ortigas,"14 in exchange for PDCP’s release of Ortigas
from any liability or claim arising from the Falcon loan agreement,
and a renunciation of its claims against Ortigas.
11
In 1995, Silos and PDCP entered into a Partial Compromise
Agreement whereby he agreed to pay ₱500,000.00 in exchange
for PDCP’s waiver of its claims against him.15
In the meantime, after having settled with PDCP, Ortigas pursued
his claims against Escaño, Silos and Matti, on the basis of the
1982 Undertaking. He initiated a third-party complaint against
Matti and Silos,16 while he maintained his cross-claim against
Escaño. In 1995, Ortigas filed a motion for Summary Judgment in
his favor against Escaño, Silos and Matti. On 5 October 1995, the
RTC issued the Summary Judgment, ordering Escaño, Silos and
Matti to pay Ortigas, jointly and severally, the amount of
₱1,300,000.00, as well as ₱20,000.00 in attorney’s fees.17 The
trial court ratiocinated that none of the third-party defendants
disputed the 1982 Undertaking, and that "the mere denials of
defendants with respect to non-compliance of Ortigas of the terms
and conditions of the Undertaking, unaccompanied by any
substantial fact which would be admissible in evidence at a
hearing, are not sufficient to raise genuine issues of fact
necessary to defeat a motion for summary judgment, even if such
facts were raised in the pleadings."18 In an Order dated 7 March
1996, the trial court denied the motion for reconsideration of the
Summary Judgment and awarded Ortigas legal interest of 12%
per annum to be computed from 28 February 1994.19
From the Summary Judgment, recourse was had by way of
appeal to the Court of Appeals. Escaño and Silos appealed jointly
while Matti appealed by his lonesome. In a Decision20 dated 23
January 2002, the Court of Appeals dismissed the appeals and
affirmed the Summary Judgment. The appellate court found that
the RTC did not err in rendering the summary judgment since the
three appellants did not effectively deny their execution of the
1982 Undertaking. The special defenses that were raised,
"payment and excussion," were characterized by the Court of
Appeals as "appear[ing] to be merely sham in the light of the
pleadings and supporting documents and affidavits."21 Thus, it
was concluded that there was no genuine issue that would still
require the rigors of trial, and that the appealed judgment was
decided on the bases of the undisputed and established facts of
the case.
Hence, the present petition for review filed by Escaño and
Silos.22 Two main issues are raised. First, petitioners dispute that
they are liable to Ortigas on the basis of the 1982 Undertaking, a
document which they do not disavow and have in fact annexed to
their petition. Second, on the assumption that they are liable to
Ortigas under the 1982 Undertaking, petitioners argue that they
are jointly liable only, and not solidarily. Further assuming that
they are liable, petitioners also submit that they are not liable for
interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition
or their memorandum before the Court, the appropriateness of
the summary judgment as a relief favorable to Ortigas. Under
Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary
judgment may avail if the pleadings, supporting affidavits,
depositions and admissions on file show that, except as to the
amount of damages, there is no genuine issue as to any material
fact and that the moving party is entitled to a judgment as a matter
of law. Petitioner have not attempted to demonstrate before us
that there existed a genuine issue as to any material fact that
would preclude summary judgment. Thus, we affirm with ease the
common rulings of the lower courts that summary judgment is an
appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners
were correctly held liable to Ortigas on the basis of the 1982
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Undertaking in this Summary Judgment. An examination of the
document reveals several clauses that make it clear that the
agreement was brought forth by the desire of Ortigas, Inductivo
and the Scholeys to be released from their liability under the loan
agreement which release was, in turn, part of the consideration
for the assignment of their shares in Falcon to petitioners and
Matti. The whereas clauses manifest that Ortigas had bound
himself with Falcon for the payment of the loan with PDCP, and
that "amongst the consideration for OBLIGORS and/or their
principals aforesaid selling is SURETIES’ relieving OBLIGORS of
any and all liability arising from their said joint and several
undertakings with FALCON."23 Most crucial is the clause in
Paragraph 3 of the Undertaking wherein petitioners "irrevocably
agree and undertake to assume all of OBLIGORs’ said
guarantees [sic] to PDCP x x x under the following terms and
conditions."24
At the same time, it is clear that the assumption by petitioners of
Ortigas’s "guarantees" [sic] to PDCP is governed by stipulated
terms and conditions as set forth in sub-paragraphs (a) to (c) of
Paragraph 3. First, upon receipt by "any of OBLIGORS" of any
demand from PDCP for the payment of Falcon’s obligations with it,
"any of OBLIGORS" was to immediately inform "SURETIES"
thereof so that the latter can timely take appropriate measures.
Second, should "any and/or all of OBLIGORS" be impleaded by
PDCP in a suit for collection of its loan, "SURETIES agree[d] to
defend OBLIGORS at their own expense, without prejudice to any
and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief" 25 in respect to
any of the claims of PDCP. Third, if any of the "OBLIGORS is for
any reason made to pay any amount to [PDCP], SURETIES
[were to] reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment."26
Petitioners claim that, contrary to paragraph 3(c) of the
Undertaking, Ortigas was not "made to pay" PDCP the amount
now sought to be reimbursed, as Ortigas voluntarily paid PDCP
the amount of ₱1.3 Million as an amicable settlement of the
claims posed by the bank against him. However, the subject
clause in paragraph 3(c) actually reads "[i]n the event that any of
OBLIGORS is for any reason made to pay any amount to PDCP x
x x"27 As pointed out by Ortigas, the phrase "for any reason"
reasonably includes any extra-judicial settlement of obligation
such as what Ortigas had undertaken to pay to PDCP, as it is
indeed obvious that the phrase was incorporated in the clause to
render the eventual payment adverted to therein unlimited and
unqualified.
The interpretation posed by petitioners would have held water
had the Undertaking made clear that the right of Ortigas to seek
reimbursement accrued only after he had delivered payment to
PDCP as a consequence of a final and executory judgment. On
the contrary, the clear intent of the Undertaking was for
petitioners and Matti to relieve the burden on Ortigas and his
fellow "OBLIGORS" as soon as possible, and not only after
Ortigas had been subjected to a final and executory adverse
judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all
efforts to cause PDCP x x x to within a reasonable time release all
the OBLIGORS x x x from their guarantees [sic] to PDCP x x
x"28 In the event that Ortigas and his fellow "OBLIGORS" could
not be released from their guaranties, paragraph 2 commits
petitioners and Matti to cause the Board of Directors of Falcon to
make a call on its stockholders for the payment of their unpaid
subscriptions and to pledge or assign such payments to Ortigas,
et al., as security for whatever amounts the latter may be held
12
liable under their guaranties. In addition, paragraph 1 also makes
clear that nothing in the Undertaking "shall prevent OBLIGORS,
or any one of them, from themselves negotiating with PDCP x x x
for the release of their said guarantees [sic]."29
There is no argument to support petitioners’ position on the import
of the phrase "made to pay" in the Undertaking, other than an
unduly literalist reading that is clearly inconsistent with the thrust
of the document. Under the Civil Code, the various stipulations of
a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken
jointly.30 Likewise applicable is the provision that if some
stipulation of any contract should admit of several meanings, it
shall be understood as bearing
that import which is most adequate to render it effectual. 31 As a
means to effect the general intent of the document to relieve
Ortigas from liability to PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of
the other conditions set in paragraph 3, as they claim. Following
the general assertion in the petition that Ortigas violated the terms
of the Undertaking, petitioners add that Ortigas "paid PDCP
BANK the amount of ₱1.3 million without petitioners ESCANO
and SILOS’s knowledge and consent."32 Paragraph 3(a) of the
Undertaking does impose a requirement that any of the
"OBLIGORS" shall immediately inform "SURETIES" if they
received any demand for payment of FALCON’s obligations to
PDCP, but that requirement is reasoned "so that the [SURETIES]
can timely take appropriate measures"33 presumably to settle the
obligation without having to burden the "OBLIGORS." This notice
requirement in paragraph 3(a) is markedly way off from the
suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under
the 1982 Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to
Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the
first place. They note that Ortigas had, in his answer, denied any
liability to PDCP and had alleged that he signed the Assumption
of Solidary Liability not in his personal capacity, but as an officer
of Falcon. However, such position, according to petitioners, could
not be justified since Ortigas later voluntarily paid PDCP the
amount of ₱1.3 Million. Such circumstances, according to
petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still
erroneous. The Partial Compromise Agreement between PDCP
and Ortigas expressly stipulated that Ortigas’s offer to pay PDCP
was conditioned "without [Ortigas’s] admitting liability to plaintiff
PDCP Bank’s complaint, and to terminate and dismiss the said
case as against Ortigas solely."34 Petitioners profess it is
"unthinkable" for Ortigas to have voluntarily paid PDCP without
admitting his liability,35 yet such contention based on assumption
cannot supersede the literal terms of the Partial Compromise
Agreement.
Petitioners further observe that Ortigas made the payment to
PDCP after he had already assigned his obligation to petitioners
through the 1982 Undertaking. Yet the fact is PDCP did pursue a
judicial claim against Ortigas notwithstanding the Undertaking he
executed with petitioners. Not being a party to such Undertaking,
PDCP was not precluded by a contract from pursuing its claim
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
against Ortigas based on the original Assumption of Solidary
Liability.
At the same time, the Undertaking did not preclude Ortigas from
relieving his distress through a settlement with the creditor bank.
Indeed, paragraph 1 of the Undertaking expressly states that
"nothing herein shall prevent OBLIGORS, or any one of them,
from themselves negotiating with PDCP x x x for the release of
their said guarantees [sic]."36 Simply put, the Undertaking did not
bar Ortigas from pursuing his own settlement with PDCP. Neither
did the Undertaking bar Ortigas from recovering from petitioners
whatever amount he may have paid PDCP through his own
settlement. The stipulation that if Ortigas was "for any reason
made to pay any amount to PDCP[,] x x x SURETIES shall
reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment"37 makes it clear that
petitioners remain liable to reimburse Ortigas for the sums he
paid PDCP.
We now turn to the set of arguments posed by petitioners, in the
alternative, that is, on the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not
solidarily, liable to Ortigas, claiming that the Undertaking did not
provide for express solidarity. They cite Article 1207 of the New
Civil Code, which states in part that "[t]here is a solidary liability
only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly
and severally liable for the Undertaking, as the language used in
the agreement "clearly shows that it is a surety
agreement"38 between the obligors (Ortigas group) and the
sureties (Escaño group). Ortigas points out that the Undertaking
uses the word "SURETIES" although the document, in describing
the parties. It is further contended that the principal objective of
the parties in executing the Undertaking cannot be attained
unless petitioners are solidarily liable "because the total loan
obligation can not be paid or settled to free or release the
OBLIGORS if one or any of the SURETIES default from their
obligation in the Undertaking."39
In case, there is a concurrence of two or more creditors or of two
or more debtors in one and the same obligation, Article 1207 of
the Civil Code states that among them, "[t]here is a solidary
liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity." Article 1210
supplies further caution against the broad interpretation of
solidarity by providing: "The indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility."
These Civil Code provisions establish that in case of concurrence
of two or more creditors or of two or more debtors in one and the
same obligation, and in the absence of express and indubitable
terms characterizing the obligation as solidary, the presumption is
that the obligation is only joint. It thus becomes incumbent upon
the party alleging that the obligation is indeed solidary in
character to prove such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the
petitioners agreed "to bind themselves jointly and severally" in
their obligations to the Ortigas group, or any such terms to that
effect. Hence, such obligation established in the Undertaking is
presumed only to be joint. Ortigas, as the party alleging that the
obligation is in fact solidary, bears the burden to overcome the
13
presumption of jointness of obligations. We rule and so hold that
he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and
Matti identified themselves in the Undertaking as "SURETIES", a
term repeated no less than thirteen (13) times in the document.
Ortigas claims that such manner of identification sufficiently
establishes that the obligation of petitioners to him was joint and
solidary in nature.
The term "surety" has a specific meaning under our Civil Code.
Article 2047 provides the statutory definition of a surety
agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
[Emphasis supplied]40
As provided in Article 2047 in a surety agreement the surety
undertakes to be bound solidarily with the principal debtor. Thus,
a surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigas’s
argument rests solely on the solidary nature of the obligation of
the surety under Article 2047. In tandem with the nomenclature
"SURETIES" accorded to petitioners and Matti in the Undertaking,
however, this argument can only be viable if the obligations
established in the
Undertaking do partake of the nature of a suretyship as defined
under Article 2047 in the first place. That clearly is not the case
here, notwithstanding the use of the nomenclature "SURETIES"
in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a
principal debtor to whom the surety is solidarily bound by way of
an ancillary obligation of segregate identity from the obligation
between the principal debtor and the creditor. The suretyship
does bind the surety to the creditor, inasmuch as the latter is
vested with the right to proceed against the former to collect the
credit in lieu of proceeding against the principal debtor for the
same obligation.41 At the same time, there is also a legal tie
created between the surety and the principal debtor to which the
creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal
debtor, such obligation is extinguished.42 At the same time, the
surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact "become subrogated to all
the rights and remedies of the creditor."43
Note that Article 2047 itself specifically calls for the application of
the provisions on joint and solidary obligations to suretyship
contracts.44 Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who
paid (i.e., the surety).45 However, a significant distinction still lies
between a joint and several debtor, on one hand, and a surety on
the other. Solidarity signifies that the creditor can compel any one
of the joint and several debtors or the surety alone to answer for
the entirety of the principal debt. The difference lies in the
respective faculties of the joint and several debtor and the surety
to seek reimbursement for the sums they paid out to the creditor.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Dr. Tolentino explains the differences between a solidary
co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor and a fiador in solidum
(surety). The latter, outside of the liability he assumes to pay the
debt before the property of the principal debtor has been
exhausted, retains all the other rights, actions and benefits which
pertain to him by reason of the fiansa; while a solidary co-debtor
has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to
the contract of suretyship. The civil law suretyship is, accordingly,
nearly synonymous with the common law guaranty; and the civil
law relationship existing between the co-debtors liable in solidum
is similar to the common law suretyship.46
In the case of joint and several debtors, Article 1217 makes plain
that the solidary debtor who effected the payment to the creditor
"may claim from his co-debtors only the share which corresponds
to each, with the interest for the payment already made." Such
solidary debtor will not be able to recover from the co-debtors the
full amount already paid to the creditor, because the right to
recovery extends only to the proportional share of the other
co-debtors, and not as to the particular proportional share of the
solidary debtor who already paid. In contrast, even as the surety
is solidarily bound with the principal debtor to the creditor, the
surety who does pay the creditor has the right to recover the full
amount paid, and not just any proportional share, from the
principal debtor or debtors. Such right to full reimbursement falls
within the other rights, actions and benefits which pertain to the
surety by reason of the subsidiary obligation assumed by the
surety.
What is the source of this right to full reimbursement by the surety?
We find the right under Article 2066 of the Civil Code, which
assures that "[t]he guarantor who pays for a debtor must be
indemnified by the latter," such indemnity comprising of, among
others, "the total amount of the debt."47 Further, Article 2067 of
the Civil Code likewise establishes that "[t]he guarantor who pays
is subrogated by virtue thereof to all the rights which the creditor
had against the debtor."48
Articles 2066 and 2067 explicitly pertain to guarantors, and one
might argue that the provisions should not extend to sureties,
especially in light of the qualifier in Article 2047 that the provisions
on joint and several obligations should apply to sureties. We
reject that argument, and instead adopt Dr. Tolentino’s
observation that "[t]he reference in the second paragraph of
[Article 2047] to the provisions of Section 4, Chapter 3, Title I,
Book IV, on solidary or several obligations, however, does not
mean that suretyship is withdrawn from the applicable provisions
governing guaranty."49 For if that were not the implication, there
would be no material difference between the surety as defined
under Article 2047 and the joint and several debtors, for both
classes of obligors would be governed by exactly the same rules
and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and
2067 extend as well to sureties as defined under Article 2047.
These rights granted to the surety who pays materially differ from
14
those granted under Article 1217 to the solidary debtor who pays,
since the "indemnification" that pertains to the latter extends "only
[to] the share which corresponds to each [co-debtor]." It is for this
reason that the Court cannot accord the conclusion that because
petitioners are identified in the Undertaking as "SURETIES," they
are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of
the general presumption favoring joint liability, the Court would
have to be satisfied that among the petitioners and Matti, there is
one or some of them who stand as the principal debtor to Ortigas
and another as surety who has the right to full reimbursement
from the principal debtor or debtors. No suggestion is made by
the parties that such is the case, and certainly the Undertaking is
not revelatory of such intention. If the Court were to give full
fruition to the use of the term "sureties" as conclusive indication of
the existence of a surety agreement that in turn gives rise to a
solidary obligation to pay Ortigas, the necessary implication
would be to lay down a corresponding set of rights and obligations
as between the "SURETIES" which petitioners and Matti did not
clearly intend.
It is not impossible that as between Escaño, Silos and Matti, there
was an agreement whereby in the event that Ortigas were to seek
reimbursement from them per the terms of the Undertaking, one
of them was to act as surety and to pay Ortigas in full, subject to
his right to full reimbursement from the other two obligors. In such
case, there would have been, in fact, a surety agreement which
evinces a solidary obligation in favor of Ortigas. Yet if there was
indeed such an agreement, it does not appear on the record.
More consequentially, no such intention is reflected in the
Undertaking itself, the very document that creates the conditional
obligation that petitioners and Matti reimburse Ortigas should he
be made to pay PDCP. The mere utilization of the term
"SURETIES" could not work to such effect, especially as it does
not appear who exactly is the principal debtor whose obligation is
"assured" or "guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires
"solidary obligation of the Sureties," since the Undertaking
expressly seeks to "reliev[e] obligors of any and all liability arising
from their said joint and several undertaking with [F]alcon," and
for the "sureties" to "irrevocably agree and undertake to assume
all of obligors said guarantees to PDCP."50 We do not doubt that a
finding of solidary liability among the petitioners works to the
benefit of Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that
establishes petitioners’ obligation to Ortigas as solidary. Moreover,
the aims adverted to by Ortigas do not by themselves establish
that the nature of the obligation requires solidarity. Even if the
liability of petitioners and Matti were adjudged as merely joint, the
full relief and reimbursement of Ortigas arising from his payment
to PDCP would still be accomplished through the complete
execution of such a judgment.
Petitioners further claim that they are not liable for attorney’s fees
since the Undertaking contained no such stipulation for attorney’s
fees, and that the situation did not fall under the instances under
Article 2208 of the Civil Code where attorney’s fees are
recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the
petitioners led to his being impleaded in the suit filed by PDCP.
The Undertaking was precisely executed as a means to obtain
the release of Ortigas and the Scholeys from their previous
obligations as sureties of Falcon, especially considering that they
were already divesting their shares in the corporation. Specific
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
provisions in the Undertaking obligate petitioners to work for the
release of Ortigas from his surety agreements with Falcon.
Specific provisions likewise mandate the immediate repayment of
Ortigas should he still be made to pay PDCP by reason of the
guaranty agreements from which he was ostensibly to be
released through the efforts of petitioners. None of these
provisions were complied with by petitioners, and Article 2208(2)
precisely allows for the recovery of attorney’s fees "[w]hen the
defendant’s act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest."
Finally, petitioners claim that they should not be liable for interest
since the Undertaking does not contain any stipulation for interest,
and assuming that they are liable, that the rate of interest should
not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals51 set forth the rules with respect to the manner of
computing legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit.52
Since what was the constituted in the Undertaking consisted of a
payment in a sum of money, the rate of interest thereon shall be
12% per annum to be computed from default, i.e., from judicial or
15
extrajudicial demand. The interest rate imposed by the RTC is
thus proper. However, the computation should be reckoned from
judicial or extrajudicial demand. Per records, there is no indication
that Ortigas made any extrajudicial demand to petitioners and
Matti after he paid PDCP, but on 14 March 1994, Ortigas made a
judicial demand when he filed a Third-Party Complaint praying
that petitioners and Matti be made to reimburse him for the
payments made to PDCP. It is the filing of this Third Party
Complaint on 14 March 1994 that should be considered as the
date of judicial demand from which the computation of interest
should be reckoned.53 Since the RTC held that interest should be
computed from 28 February 1994, the appropriate redefinition
should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of
the Regional Trial Court dated 5 October 1995 is modified by
declaring that petitioners and Joseph M. Matti are only jointly
liable, not jointly and severally, to respondent Rafael Ortigas, Jr.
in the amount of ₱1,300,000.00. The Order of the Regional Trial
Court dated 7 March 1996 is MODIFIED in that the legal interest
of 12% per annum on the amount of ₱1,300,000.00 is to be
computed from 14 March 1994, the date of judicial demand, and
not from 28 February 1994 as directed in the Order of the lower
court. The assailed rulings are affirmed in all other respects.
Costs against petitioners.
SO ORDERED.
SECOND DIVISION
G.R. No. L-29139 November 15, 1974
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.
ALCANTARA, plaintiffs-appellants,
vs.
ESTEBAN PICZON and SOSING-LOBOS & CO.,
INC., defendants-appellees.
Vicente C. Santos for plaintiffs-appellants.
Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.
BARREDO, J.:p
Appeal from the decision of the Court of First Instance of Samar in its
Civil Case No. 5156, entitled Consuelo P. Piczon, et al. vs. Esteban
Piczon, et al., sentencing defendants-appellees, Sosing Lobos and
Co., Inc., as principal, and Esteban Piczon, as guarantor, to pay
plaintiffs-appellants "the sum of P12,500.00 with 12% interest from
August 6, 1964 until said principal amount of P12,500.00 shall have
been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held on
August 22, 1967, the trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and defendants
through their lawyers, appeared and entered into the following
agreement:
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
1. That defendants admit the due execution of Annexes "A" and
"B" of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc. binds
itself to the plaintiffs for P12,500.00, the same to be paid on or
before October 31, 1967 together with the interest that this court
may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00
commence to run from August 6, 1964 when plaintiffs made the
first demand or from August 29, 1956 when the obligation
becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a surety?
That the parties are hereby required to file their respective
memorandum if they so desire on or before September 15, 1967
to discuss the legal issues and therewith the case will be
considered submitted for decision.
WHEREFORE, the instant case is hereby considered submitted
based on the aforesaid facts agreed upon and upon submission
of the parties of their respective memorandum on or before
September 15, 1967.
SO ORDERED. (Record on Appeal pp. 28-30.)
1
Annex "A", the actionable document of appellants reads thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and
resident of and with postal address in the municipality of
Catbalogan, Province of Samar, Philippines, in my capacity as the
President of the corporation known as the "SOSING-LOBOS and
CO., INC.," as controlling stockholder, and at the same time as
guarantor for the same, do by these presents contract a loan of
Twelve Thousand Five Hundred Pesos (P12,500.00), Philippine
Currency, the receipt of which is hereby acknowledged, from the
"Piczon and Co., Inc." another corporation, the main offices of the
two corporations being in Catbalogan, Samar, for which I
undertake, bind and agree to use the loan as surety cash deposit
for registration with the Securities and Exchange Commission of
the incorporation papers relative to the "Sosing-Lobos and Co.,
Inc.," and to return or pay the same amount with Twelve Per Cent
(12%) interest per annum, commencing from the date of
execution hereof, to the "Piczon and Co., Inc., as soon as the said
incorporation papers are duly registered and the Certificate of
Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in
Catbalogan, Samar, Philippines, this 28th day of September,
1956.
(Sgd.) ESTEBAN PICZON
(Record on Appeal, pp. 6-7.)
16
The trial court having rendered judgment in the tenor aforequoted,
appellants assign the following alleged errors:
I is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF
12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM
AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28,
1956, WHEN ANNEX "A" WAS DULY EXECUTED.
II
THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT
ESTEBAN PICZON AS GUARANTOR ONLY AND NOT AS
SURETY.
III
THE TRIAL COURT ERRED IN NOT ADJUDICATING
DAMAGES IN FAVOR OF THE PLAINTIFFS-APPELLANTS.
(Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of
requiring appellees to pay interest at 12% only from August 6,
1964, the trial court should have adhered to the terms of the
agreement which plainly provides that Esteban Piczon had
obligated Sosing-Lobos and Co., Inc. and himself to "return or pay
(to Piczon and Co., Inc.) the same amount (P12,500.00) with
Twelve Per Cent (12%) interest per annum commencing from the
date of the execution hereof", Annex A, which was on September
28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation
consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six
per cent per annum." In the case at bar, the "interest agreed
upon" by the parties in Annex A was to commence from the
execution of said document.
Appellees' contention that the reference in Article 2209 to delay
incurred by the debtor which can serve as the basis for liability for
interest is to that defined in Article 1169 of the Civil Code reading
thus:
Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation
it appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.
that the article cited by appellees (which was Article 1100 of the
Old Civil Code read in relation to Art. 1101) is applicable only
when the obligation is to do something other than the payment of
money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado,
104 Phil. 920, the Court squarely ruled that if the contract
stipulates from what time interest will be counted, said stipulated
time controls, and, therefore interest is payable from such time,
and not from the date of the filing of the complaint (at p. 925).
Were that not the law, there would be no basis for the provision of
Article 2212 of the Civil Code providing that "(I)nterest due shall
earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point." Incidentally,
appellants would have been entitled to the benefit of this article,
had they not failed to plead the same in their complaint. Their
prayer for it in their brief is much too late. Appellees had no
opportunity to meet the issue squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose
cannot be sustained. Under the terms of the contract, Annex A,
Esteban Piczon expressly bound himself only as guarantor, and
there are no circumstances in the record from which it can be
deduced that his liability could be that of a surety. A guaranty
must be express, (Article 2055, Civil Code) and it would be
violative of the law to consider a party to be bound as a surety
when the very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms
of the pre-trial order, appellants accepted the express assumption
of liability by Sosing-Lobos & Co., Inc. for the payment of the
obligation in question, thereby modifying their original posture that
inasmuch as that corporation did not exist yet at the time of the
agreement, Piczon necessarily must have bound himself as
insurer.
As already explained earlier, appellants' prayer for payment of
legal interest upon interest due from the filing of the complaint can
no longer be entertained, the same not having been made an
issue in the pleadings in the court below. We do not believe that
such a substantial matter can be deemed included in a general
prayer for "any other relief just and equitable in the premises",
especially when, as in this case, the pre-trial order does not
mention it in the enumeration of the issues to be resolved by the
court.
PREMISES CONSIDERED, the judgment of the trial court is
modified so as to make appellees liable for the stipulated interest
of 12% per annum from September 28, 1956, instead of August 6,
1964. In all other respects, said judgment is affirmed. Costs
against appellees.
SECOND DIVISION
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES, petitioner,
vs.
17
COURT OF APPEALS and M.B. LENDING secondarily liable on the instrument; and that the promissory note
CORPORATION, respondents. is a contract of adhesion.

REGALADO, J.: Respondent Court of Appeals, however, reversed the decision of

the trial court, and rendered judgment declaring herein petitioner
Palmares liable to pay respondent corporation:
Where a party signs a promissory note as a co-maker and binds
herself to be jointly and severally liable with the principal debtor in
case the latter defaults in the payment of the loan, is such 1. The sum of P13,700.00 representing the outstanding balance
undertaking of the former deemed to be that of a surety as an still due and owing with interest at six percent (6%) per month
insurer of the debt, or of a guarantor who warrants the solvency of computed from the date the loan was contracted until fully paid;
the debtor?
2. The sum equivalent to the stipulated penalty of three percent
Pursuant to a promissory note dated March 13, 1990, private (3%) per month, of the outstanding balance;
respondent M.B. Lending Corporation extended a loan to the
spouses Osmeña and Merlyn Azarraga, together with petitioner
3. Attorney's fees at 25% of the total amount due per stipulations;
Estrella Palmares, in the amount of P30,000.00 payable on or
before May 12, 1990, with compounded interest at the rate of
6% per annum to be computed every 30 days from the date 4. Plus costs of suit. 7

thereof. On four occasions after the execution of the promissory

1

note and even after the loan matured, petitioner and the Azarraga Contrary to the findings of the trial court, respondent appellate
spouses were able to pay a total of P16,300.00, thereby leaving a court declared that petitioner Palmares is a surety since she
balance of P13,700.00. No payments were made after the last bound herself to be jointly and severally or solidarily liable with the
payment on September 26, 1991. 2
principal debtors, the Azarraga spouses, when she signed as a
co-maker. As such, petitioner is primarily liable on the note and
Consequently, on the basis of petitioner's solidary liability under hence may be sued by the creditor corporation for the entire
the promissory note, respondent corporation filed a obligation. It also adverted to the fact that petitioner admitted her
complaint against
3
petitioner Palmares as the lone liability in her Answer although she claims that the Azarraga
party-defendant, to the exclusion of the principal debtors, spouses should have been impleaded. Respondent court ordered
allegedly by reason of the insolvency of the latter. the imposition of the stipulated 6% interest and 3% penalty
charges on the ground that the Usury Law is no longer
enforceable pursuant to Central Bank Circular No. 905. Finally, it
In her Amended Answer with Counterclaim, petitioner alleged
4
rationalized that even if the promissory note were to be
that sometime in August 1990, immediately after the loan matured,
considered as a contract of adhesion, the same is not entirely
she offered to settle the obligation with respondent corporation
prohibited because the one who adheres to the contract is free to
but the latter informed her that they would try to collect from the
reject it entirely; if he adheres, he gives his consent.
spouses Azarraga and that she need not worry about it; that there
has already been a partial payment in the amount of P17,010.00;
that the interest of 6% per month compounded at the same rate Hence this petition for review on certiorari wherein it is asserted
per month, as well as the penalty charges of 3% per month, are that:
usurious and unconscionable; and that while she agrees to be
liable on the note but only upon default of the principal debtor, A. The Court of Appeals erred in ruling that Palmares acted as
respondent corporation acted in bad faith in suing her alone surety and is therefore solidarily liable to pay the promissory note.
without including the Azarragas when they were the only ones
who benefited from the proceeds of the loan.
1. The terms of the promissory note are vague. Its conflicting
provisions do not establish Palmares' solidary liability.
During the pre-trial conference, the parties submitted the
following issues for the resolution of the trial court: (1) what the
rate of interest, penalty and damages should be; (2) whether the 2. The promissory note contains provisions which establish the
liability of the defendant (herein petitioner) is primary or subsidiary; co-maker's liability as that of a guarantor.
and (3) whether the defendant Estrella Palmares is only a
guarantor with a subsidiary liability and not a co-maker with 3. There is no sufficient basis for concluding that Palmares'
primary liability.
5
liability is solidary.

Thereafter, the parties agreed to submit the case for decision 4. The promissory note is a contract of adhesion and should be
based on the pleadings filed and the memoranda to be submitted construed against M. B. Lending Corporation.
by them. On November 26, 1992, the Regional Trial Court of Iloilo
City, Branch 23, rendered judgment dismissing the complaint
5. Palmares cannot be compelled to pay the loan at this point.
without prejudice to the filing of a separate action for a sum of
money against the spouses Osmeña and Merlyn Azarraga who
are primarily liable on the instrument. This was based on the
6 B. Assuming that Palmares' liability is solidary, the Court of
findings of the court a quo that the filing of the complaint against Appeals erred in strictly imposing the interests and penalty
herein petitioner Estrella Palmares, to the exclusion of the charges on the outstanding balance of the promissory note.
Azarraga spouses, amounted to a discharge of a prior party; that
the offer made by petitioner to pay the obligation is considered a The foregoing contentions of petitioner are denied and
valid tender of payment sufficient to discharge a person's contradicted in their material points by respondent corporation.
secondary liability on the instrument; as co-maker, is only They are further refuted by accepted doctrines in the American
jurisdiction after which we patterned our statutory law on surety
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 18
and guaranty. This case then affords us the opportunity to make
an extended exposition on the ramifications of these two
specialized contracts, for such guidance as may be taken
therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory
note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted
loan, have fully understood the contents of this Promissory Note
for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and
severally or solidarily liable with the above principal maker of this
note;
That in fact, I hereby agree that M.B. LENDING CORPORATION
may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment of
the note subject to the same conditions above-contained. 8
Petitioner contends that the provisions of the second and third
paragraph are conflicting in that while the second paragraph
seems to define her liability as that of a surety which is joint and
solidary with the principal maker, on the other hand, under the
third paragraph her liability is actually that of a mere guarantor
because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which is the essence of a
contract of guaranty. More simply stated, although the second
paragraph says that she is liable as a surety, the third paragraph
defines the nature of her liability as that of a guarantor. According
to petitioner, these are two conflicting provisions in the promissory
note and the rule is that clauses in the contract should be
interpreted in relation to one another and not by parts. In other
words, the second paragraph should not be taken in isolation, but
should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two
provisions, petitioner avers that she could be held liable only as a
guarantor for several reasons. First, the words "jointly and
severally or solidarily liable" used in the second paragraph are
technical and legal terms which are not fully appreciated by an
ordinary layman like herein petitioner, a 65-year old housewife
who is likely to enter into such transactions without fully realizing
the nature and extent of her liability. On the contrary, the wordings
used in the third paragraph are easier to comprehend. Second,
the law looks upon the contract of suretyship with a jealous eye
and the rule is that the obligation of the surety cannot be
extended by implication beyond specified limits, taking into
consideration the peculiar nature of a surety agreement which
holds the surety liable despite the absence of any direct
consideration received from either the principal obligor or the
creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation.
The note was brought to petitioner partially filled up, the contents
thereof were never explained to her, and her only participation
was to sign thereon. Thus, any apparent ambiguity in the contract
should be strictly construed against private respondent pursuant
to Art. 1377 of the Civil Code.9
Petitioner accordingly concludes that her liability should be
deemed restricted by the clause in the third paragraph of the
promissory note to be that of a guarantor.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Moreover, petitioner submits that she cannot as yet be compelled
to pay the loan because the principal debtors cannot be
considered in default in the absence of a judicial or extrajudicial
demand. It is true that the complaint alleges the fact of demand,
but the purported demand letters were never attached to the
pleadings filed by private respondent before the trial court. And,
while petitioner may have admitted in her Amended Answer that
she received a demand letter from respondent corporation
sometime in 1990, the same did not effectively put her or the
principal debtors in default for the simple reason that the latter
subsequently made a partial payment on the loan in September,
1991, a fact which was never controverted by herein private
respondent.
Finally, it is argued that the Court of Appeals gravely erred in
awarding the amount of P2,745,483.39 in favor of private
respondent when, in truth and in fact, the outstanding balance of
the loan is only P13,700.00. Where the interest charged on the
loan is exorbitant, iniquitous or unconscionable, and the
obligation has been partially complied with, the court may
equitably reduce the penalty on grounds of substantial justice.
10
More importantly, respondent corporation never refuted
petitioner's allegation that immediately after the loan matured, she
informed said respondent of her desire to settle the obligation.
The court should, therefore, mitigate the damages to be paid
since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we
are constrained to dismiss the petition for lack of merit, but to
except therefrom the issue anent the propriety of the monetary
award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even
assuming arguendo that the promissory note executed between
the parties is a contract of adhesion, it has been the consistent
holding of the Court that contracts of adhesion are not invalid per
se and that on numerous occasions the binding effects thereof
have been upheld. The peculiar nature of such contracts
necessitate a close scrutiny of the factual milieu to which the
provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such
contracts, the Court has construed obscurities and ambiguities in
the restrictive provisions of contracts of adhesion strictly albeit not
unreasonably against the drafter thereof when justified in light of
the operative facts and surrounding circumstances. The factual
12
scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the
terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its
stipulation shall control. In the case at bar, petitioner expressly
13
bound herself to be jointly and severally or solidarily liable with the
principal maker of the note. The terms of the contract are clear,
explicit and unequivocal that petitioner's liability is that of a surety.
19
Her pretension that the terms "jointly and severally or solidarily
liable" contained in the second paragraph of her contract are
technical and legal terms which could not be easily understood by
an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the
contents" of the promissory note and that she is "fully aware" of
her solidary liability with the principal maker. Petitioner admits that
she voluntarily affixed her signature thereto; ergo, she cannot
now be heard to claim otherwise. Any reference to the existence
of fraud is unavailing. Fraud must be established by clear and
convincing evidence, mere preponderance of evidence not even
being adequate. Petitioner's attempt to prove fraud must,
therefore, fail as it was evidenced only by her own uncorroborated
and, expectedly, self-serving allegations. 14
Having entered into the contract with full knowledge of its terms
and conditions, petitioner is estopped to assert that she did so
under a misapprehension or in ignorance of their legal effect, or
as to the legal effect of the undertaking. The rule that ignorance
15
of the contents of an instrument does not ordinarily affect the
liability of one who signs it also applies to contracts of suretyship.
And the mistake of a surety as to the legal effect of her obligation
is ordinarily no reason for relieving her of liability. 16
Petitioner would like to make capital of the fact that although she
obligated herself to be jointly and severally liable with the principal
maker, her liability is deemed restricted by the provisions of the
third paragraph of her contract wherein she agreed "that M.B.
Lending Corporation may demand payment of the above loan
from me in case the principal maker, Mrs. Merlyn Azarraga
defaults in the payment of the note," which makes her contract
one of guaranty and not suretyship. The purported discordance is
more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an
insurer of the solvency of the debtor. A suretyship is an
17
undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. Stated differently, a surety
18
promises to pay the principal's debt if the principal will not pay,
while a guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the guarantor if the
principal is unable to pay. A surety binds himself to perform if the
19
principal does not, without regard to his ability to do so. A
guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. In other words, a
20
surety undertakes directly for the payment and is so responsible
at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be
made out of the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the
principal debtor does not automatically remove it from the ambit
of a contract of suretyship. The second and third paragraphs of
the aforequoted portion of the promissory note do not contain any
other condition for the enforcement of respondent corporation's
right against petitioner. It has not been shown, either in the
contract or the pleadings, that respondent corporation agreed to
proceed against herein petitioner only if and when the defaulting
principal has become insolvent. A contract of suretyship, to repeat,
is that wherein one lends his credit by joining in the principal
debtor's obligation, so as to render himself directly and primarily
responsible with him, and without reference to the solvency of the
principal.
22
In a desperate effort to exonerate herself from liability, petitioner
erroneously invokes the rule on strictissimi juris, which holds that
when the meaning of a contract of indemnity or guaranty has
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
once been judicially determined under the rule of reasonable
construction applicable to all written contracts, then the liability of
the surety, under his contract, as thus interpreted and construed,
is not to be extended beyond its strict meaning. The rule, 23
however, will apply only after it has been definitely ascertained
that the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determining whether a
party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no
doubt that the stipulation contained in the third paragraph of the
controverted suretyship contract merely elucidated on and made
more specific the obligation of petitioner as generally defined in
the second paragraph thereof. Resultantly, the theory advanced
by petitioner, that she is merely a guarantor because her liability
attaches only upon default of the principal debtor, must
necessarily fail for being incongruent with the judicial
pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of
the contracting parties, their contemporaneous and subsequent
acts shall also be principally considered. Several attendant
24
factors in that genre lend support to our finding that petitioner is a
surety. For one, when petitioner was informed about the failure of
the principal debtor to pay the loan, she immediately offered to
settle the account with respondent corporation. Obviously, in her
mind, she knew that she was directly and primarily liable upon
default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made,
from the time of initial payment up to the last, which were all
issued in her name and of the Azarraga spouses. This can only
25
be construed to mean that the payments made by the principal
debtors were considered by respondent corporation as creditable
directly upon the account and inuring to the benefit of petitioner.
The concomitant and simultaneous compliance of petitioner's
obligation with that of her principals only goes to show that, from
the very start, petitioner considered herself equally bound by the
contract of the principal makers.
In this regard, we need only to reiterate the rule that a surety is
bound equally and absolutely with the principal, and as such is
26
deemed an original promisor and debtor from the beginning. This 27
is because in suretyship there is but one contract, and the surety
is bound by the same agreement which binds the principal. In 28
essence, the contract of a surety starts with the
agreement, which is precisely the situation obtaining in this case
29
before the Court.
It will further be observed that petitioner's undertaking as
co-maker immediately follows the terms and conditions stipulated
between respondent corporation, as creditor, and the principal
obligors. A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same
consideration; he is an original debtor, and his liability is
immediate and direct. Thus, it has been held that where a written
30
agreement on the same sheet of paper with and immediately
following the principal contract between the buyer and seller is
executed simultaneously therewith, providing that the signers of
the agreement agreed to the terms of the principal contract, the
signers were "sureties" jointly liable with the buyer. A surety 31
usually enters into the same obligation as that of his principal, and
the signatures of both usually appear upon the same instrument,
and the same consideration usually supports the obligation for
both the principal and the surety. 32
There is no merit in petitioner's contention that the complaint was
prematurely filed because the principal debtors cannot as yet be
20
considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation. Petitioner
has agreed that respondent corporation may demand payment of
the loan from her in case the principal maker defaults, subject to
the same conditions expressed in the promissory note.
Significantly, paragraph (G) of the note states that "should I fail to
pay in accordance with the above schedule of payment, I hereby
waive my right to notice and demand." Hence, demand by the
creditor is no longer necessary in order that delay may exist since
the contract itself already expressly so declares. As a surety,
33
petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not
necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand. On this point,
34
it may be worth mentioning that a surety is not even entitled, as a
matter of right, to be given notice of the principal's default.
Inasmuch as the creditor owes no duty of active diligence to take
care of the interest of the surety, his mere failure to voluntarily
give information to the surety of the default of the principal cannot
have the effect of discharging the surety. The surety is bound to
take notice of the principal's default and to perform the obligation.
He cannot complain that the creditor has not notified
him in the absence of a special agreement to that effect in the
contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of
demand on the principal debtors, by not attaching copies thereof
to its pleadings, is likewise immaterial. In the absence of a
statutory or contractual requirement, it is not necessary that
payment or performance of his obligation be first demanded of the
principal, especially where demand would have been useless; nor
is it a requisite, before proceeding against the sureties, that the
principal be called on to account. The underlying principle
36
therefor is that a suretyship is a direct contract to pay the debt of
another. A surety is liable as much as his principal is liable, and
absolutely liable as soon as default is made, without any demand
upon the principal whatsoever or any notice of default. As an 37
original promisor and debtor from the beginning, he is held
ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely
against her to the exclusion of the principal debtors who allegedly
were the only ones who benefited from the proceeds of the loan.
What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the
principal before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists
independently of his right to proceed against the principal. Under
39
Article 1216 of the Civil Code, the creditor may proceed against
any one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the obligation is joint
and several, the creditor has the right to proceed even against the
surety alone. Since, generally, it is not necessary for the creditor
40
to proceed against a principal in order to hold the surety liable,
where, by the terms of the contract, the obligation of the surety is
the same that of the principal, then soon as the principal is in
default, the surety is likewise in default, and may be sued
immediately and before any proceedings are had against the
principal. Perforce, in accordance with the rule that, in the
41
absence of statute or agreement otherwise, a surety is primarily
liable, and with the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the surety cannot at
law, unless permitted by statute and in the absence of any
agreement limiting the application of the security, require the
creditor or obligee, before proceeding against the surety, to resort
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
to and exhaust his remedies against the principal, particularly
where both principal and surety are equally bound. 42
We agree with respondent corporation that its mere failure to
immediately sue petitioner on her obligation does not release her
from liability. Where a creditor refrains from proceeding against
the principal, the surety is not exonerated. In other words, mere
want of diligence or forbearance does not affect the creditor's
rights vis-a-vis the surety, unless the surety requires him by
appropriate notice to sue on the obligation. Such gratuitous
indulgence of the principal does not discharge the surety whether
given at the principal's request or without it, and whether it is
yielded by the creditor through sympathy or from an inclination to
favor the principal, or is only the result of passiveness. The
neglect of the creditor to sue the principal at the time the debt falls
due does not discharge the surety, even if such delay continues
until the principal becomes insolvent. And, in the absence of
43
proof of resultant injury, a surety is not discharged by the
creditor's mere statement that the creditor will not look to the
surety, or that he need not trouble himself. The consequences
44 45
of the delay, such as the subsequent insolvency of the
principal, or the fact that the remedies against the principal may
46
be lost by lapse of time, are immaterial. 47
The raison d'être for the rule is that there is nothing to prevent the
creditor from proceeding against the principal at any time. At any
48
rate, if the surety is dissatisfied with the degree of activity
displayed by the creditor in the pursuit of his principal, he may pay
the debt himself and become subrogated to all the rights and
remedies of the creditor. 49
It may not be amiss to add that leniency shown to a debtor in
default, by delay permitted by the creditor without change in the
time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the
surety. In order to constitute an extension discharging the surety,
50
it should appear that the extension was for a definite period,
pursuant to an enforceable agreement between the principal and
the creditor, and that it was made without the consent of the
surety or with a reservation of rights with respect to him. The
contract must be one which precludes the creditor from, or at
least hinders him in, enforcing the principal contract within the
period during which he could otherwise have enforced it, and
which precludes the surety from paying the debt. 51
None of these elements are present in the instant case. Verily, the
mere fact that respondent corporation gave the principal debtors
an extended period of time within which to comply with their
obligation did not effectively absolve here in petitioner from the
consequences of her undertaking. Besides, the burden is on the
surety, herein petitioner, to show that she has been discharged by
some act of the creditor, herein respondent corporation, failing in
52
which we cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that her liability is
solidary, the interests and penalty charges on the outstanding
balance of the loan cannot be imposed for being illegal and
unconscionable. Petitioner additionally theorizes that respondent
corporation intentionally delayed the collection of the loan in order
that the interests and penalty charges would accumulate. The
statement, likewise traversed by said respondent, is misleading.
In an affidavit executed by petitioner, which was attached to her
53
petition, she stated, among others, that:
21
8. During the latter part of 1990, I was surprised to learn that
Merlyn Azarraga's loan has been released and that she has not
paid the same upon its maturity. I received a telephone call from
Mr. Augusto Banusing of MB Lending informing me of this fact
and of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and
Osmeña Azarraga. At the same time, I offered to pay MB Lending
the outstanding balance of the principal obligation should he fail
to collect from Merlyn and Osmeña Azarraga. Mr. Banusing
advised me not to worry because he will try to collect first from
Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the
secretary of Mr. Banusing who reminded that the loan of Merlyn
and Osmeña Azarraga, together with interest and penalties
thereon, has not been paid. Since I had no available funds at that
time, I offered to pay MB Lending by delivering to them a parcel of
land which I own. Mr. Banusing's secretary, however, refused my
offer for the reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the
complaint filed against me by MB Lending before the RTC-Iloilo.
After learning that a complaint was filed against me, I instructed
Sheila Gatia to go to MB Lending and reiterate my first offer to
pay the outstanding balance of the principal obligation of Merlyn
Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred
her to Atty. Venus, counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr.
Banusing if my offer to pay the outstanding balance of the
principal obligation loan (sic) of Merlyn and Osmeña Azarraga is
acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is
not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed
sufficient and substantial in order to effectively discharge her from
liability. There are a number of circumstances which conjointly
inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately
demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first,
and she offered to pay only in case the creditor fails to collect.
The delay, if any, was occasioned by the fact that respondent
corporation merely acquiesced to the request of petitioner. At any
rate, there was here no actual offer of payment to speak of but
only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by
offering a parcel of land which she owned. Respondent
corporation was acting well within its rights when it refused to
accept the offer. The debtor of a thing cannot compel the creditor
to receive a different one, although the latter may be of the same
value, or more valuable than that which is due. The obligee is
54
entitled to demand fulfillment of the obligation or performance as
stipulated. A change of the object of the obligation would
constitute novation requiring the express consent of the parties. 55
3. After the complaint was filed against her, petitioner reiterated
her offer to pay the outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise rejected. Again,
respondent corporation cannot be blamed for refusing the amount
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
being offered because it fell way below the amount it had
computed, based on the stipulated interests and penalty charges,
as owing and due from herein petitioner. A debt shall not be
understood to have been paid unless the thing or service in which
the obligation consists has been completely delivered or rendered,
as the case may be. In other words, the prestation must be
56
fulfilled completely. A person entering into a contract has a right to
insist on its performance in all particulars.
57
Petitioner cannot compel respondent corporation to accept the
amount she is willing to pay because the moment the latter
accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, then
the obligation shall be deemed fully complied with. Precisely, this
58
is what respondent corporation wanted to avoid when it
continually refused to settle with petitioner at less than what was
actually due under their contract.
This notwithstanding, however, we find and so hold that the
penalty charge of 3% per month and attorney's fees equivalent to
25% of the total amount due are highly inequitable and
unreasonable.
It must be remembered that from the principal loan of P30,000.00,
the amount of P16,300.00 had already been paid even before the
filing of the present case. Article 1229 of the Civil Code provides
that the court shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by
the debtor. And, even if there has been no performance, the
penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved
private respondent M.B. Lending Corporation, and which is
substantially on all fours with the one at bar, we decided to
eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of
Appeals that the economic impact of the penalty interest of three
percent (3 %) per month on total amount due but unpaid should
be equitably reduced. The purpose for which the penalty interest
is intended — that is, to punish the obligor — will have been
sufficiently served by the effects of compounded interest. Under
the exceptional circumstances in the case at bar, e.g., the original
amount loaned was only P15,000.00; partial payment of
P8,600.00 was made on due date; and the heavy (albeit still
lawful) regular compensatory interest, the penalty interest
stipulated in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further by
eliminating such penalty interest altogether. 59
Accordingly, the penalty interest of 3% per month being imposed
on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between
the parties, the court may nevertheless reduce such attorney's
fees fixed in the contract when the amount thereof appears to be
unconscionable or unreasonable. To that end, it is not even
60
necessary to show, as in other contracts, that it is contrary to
morals or public policy. The grant of attorney's fees equivalent to
61
25% of the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and
the extent of the work involved in this simple action for collection
of a sum of money. We, therefore, hold that the amount of
22
P10,000.00 as and for attorney's fee would be sufficient in this
case.62
WHEREFORE, the judgment appealed from is hereby
AFFIRMED, subject to the MODIFICATION that the penalty
interest of 3% per month is hereby deleted and the award of
attorney's fees is reduced to P10,000.00.
SO ORDERED.
EN BANC
G.R. No. 34642 September 24, 1931
FABIOLA SEVERINO, accompanied by her husband
RICARDO VERGARA, plaintiffs-appellees,
vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
R. Nepomuceno for appellant.
Jacinto E. Evidente for appellees.
STREET, J.:
This action was instituted in the Court of First Instance of the
Province of Iloilo by Fabiola Severino, with whom is joined her
husband Ricardo Vergara, for the purpose of recovering the sum
of P20,000 from Guillermo Severino and Enrique Echaus, the
latter in the character of guarantor for the former. Upon hearing
he cause the trial court gave judgment in favor of the plaintiffs to
recover the sum of P20,000 with lawful from November 15, 1929,
the date of the filing of the complaint, with costs. But it was
declared that execution of this judgment should issue first against
the property of Guillermo Severino, and if no property should be
found belonging to said defendant sufficient to satisfy the
judgment in whole or in part, execution for the remainder should
be issued against the property of Enrique Echaus as guarantor.
From this judgment the defendant Echaus appealed, but his
principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter
of Melecio Severino, deceased, former resident of Occidental
Negros. Upon the death of Melecio Severino a number of years
ago, he left considerable property and litigation ensued between
his widow, Felicitas Villanueva, and Fabiola Severino, on the one
part, and other heirs of the deceased on the other part. In order to
make an end of this litigation a compromise was effected by
which Guillermo Severino, a son of Melecio Severino, took over
the property pertaining to the estate of his father at the same time
agreeing to pay P100,000 to Felicitas Villanueva and Fabiola
Severino. This sum of money was made payable, first, P40,000 in
cash upon the execution of the document of compromise, and the
balance in three several payments of P20,000 at the end of one
year; two years, and three years respectively. To this contract the
appellant Enrique Echaus affixed his name as guarantor. The first
payment of P40,000 was made on July 11, 1924, the date when
the contract of compromise was executed; and of this amount the
plaintiff Fabiola Severino received the sum of P10,000. Of the
remaining P60,000, all as yet unpaid, Fabiola Severino is entitled
to the sum of P20,000.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
It appears that at the time of the compromise agreement
above-mentioned was executed Fabiola Severino had not yet
been judicially recognized as the natural daughter of Melecio
Severino, and it was stipulated that the last P20,000
corresponding to Fabiola and the last P5,000 corresponding to
Felicitas Villanueva should retained on deposit until the definite
status of Fabiola Severino as natural daughter of Melecio
Severino should be established. The judicial decree to this effect
was entered in the Court of First Instance of Occidental Negros
on June 16, 1925, and as the money which was contemplated to
be held in suspense has never in fact been paid to the parties
entitled thereto, it results that the point respecting the deposit
referred to has ceased to be of moment.
The proof shows that the money claimed in this action has never
been paid and is still owing to the plaintiff; and the only defense
worth noting in this decision is the assertion on the part of Enrique
Echaus that he received nothing for affixing his signature as
guarantor to the contract which is the subject of suit and that in
effect the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the
same consideration that makes the contract effective between the
principal parties thereto. (Pyle vs. Johnson, 9 Phil., 249.) The
compromise and dismissal of a lawsuit is recognized in law as a
valuable consideration; and the dismissal of the action which
Felicitas Villanueva and Fabiola Severino had instituted against
Guillermo Severino was an adequate consideration to support the
promise on the part of Guillermo Severino to pay the sum of
money stipulated in the contract which is the subject of this action.
The promise of the appellant Echaus as guarantor therefore
binding. It is never necessary that the guarantor or surety should
receive any part of the benefit, if such there be, accruing to his
principal. But the true consideration of this contract was the
detriment suffered by the plaintiffs in the former action in
dismissing that proceeding, and it is immaterial that no benefit
may have accrued either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the
same will be affirmed, with costs against the appellant. So
ordered.
EN BANC
G.R. No. L-45571 June 30, 1939
FLORENTINA DE GUZMAN, as administratrix of the intestate
estate of the deceased Santiago Lucero, plaintiff-appellee,
vs.
ANASTACIO R. SANTOS, defendant-appellant.
E.V. Filamor appellant.
Antonio G. Lucero for appellee.
IMPERIAL, J.:
This is an appeal taken by the defendant from the decision of the
Court of First Instance of Nueva Ecija which sentenced him to pay
the plaintiff the sum of P3,665.55, plus legal interest thereon from
February 10, 1932, until fully paid, and the costs.
23
On October 28, 1924, Jerry O. Toole, Antonio K. Abad and
Anastacio R. Santos, the defendant, formed a general mercantile
partnership under the style Philippine-American Construction
Company, with a capital of P14,000, P10,000 of which were taken
by way of loan from Paulino Candelaria. The partnership and the
co-partners undertook and bound themselves to pay, jointly and
severally, the said indebtedness in or before June, 1925. Having
violated the conditions of the contract executed for the purpose,
Paulino Candelaria brought civil case No. 3838 of the Court of
First Instance of Nueva Ecija on May 15, 1925, against the
Philippine-American Construction Company and its co-partners,
for the recovery of the loan, plus interest thereon and stipulated
attorney's fees. On January 25, 1926, the said court rendered
judgment therein sentencing all the defendants to pay the plaintiff,
jointly and severally, the sum of P9,317, with legal interest
thereon from the filing of the complaint, plus P500 as liquidated
damages and P1,000 as attorney's fees. On appeal this judgment
was affirmed by this court on December 17, 1926 (G.R. No.
26131). A writ of execution of the affirmed judgment having been
issued, the herein plaintiff, in her capacity as judicial
administratrix of the deceased Santiago Lucero, on February 10,
1932, paid to be creditor Paulino Candelaria the sum of
P5,665.55 on account of the judgment.
Upon filing of the complaint in civil case No. 3838, Paulino
Candeleria obtained a writ of attachment against the then
defendants by virtue of which the sheriff attached properties of
Jerry O. Toole valued at P50; of Antonio K. Abad valued at
P12,150; and of Anastacio R. Santos valued at P2,733. No
property of the partnership Philippine-American Construction
Company was attached. In view of these attachments, the
Philippine-American Construction Company moved for the
discharge of the attached properties and offered to post a bond
for P10,000. The court granted the motion and fixed the bond at
the amount offered. On May 29, 1925, the Philippine-American
Construction Company, as principal, then represented by the
partner Antonio K. Abad, and Santiago Lucero and Meliton Carlos,
as guarantors, executed a bond for P10,000 in favor of Paulino
Candelaria for the lifting of the attachment under section 440 of
the Code of Civil Procedure. In the bond thus executed, the
defendant Anastacio R. Santos neither intervened nor signed
individually, but Abad testified that the former was the one who
induced him to get the signature of Lucero by taking advantage of
his good relations with him. Upon the approval of the bond, the
attachment was discharged and the attached properties were
returned to their owners.
After the issuance of the writ for the execution of the judgment
rendered in civil case No. 3838, the sheriff returned the same with
the statement that the writ could not be executed as he found no
property of the judgment debtors. In view of this, Paulino
Candelaria moved for the issuance of a writ of execution against
the guarantors of the defendants. The court granted the motion
and issued a writ of execution against the plaintiff, as judicial
administratrix of the deceased Santiago Lucero, and the other
guarantor Meliton Carlos. The plaintiff tenaciously refused to pay
the judgment obtained by Paulino Candelaria, but after all her
efforts had failed, she was eventually compelled to pay to said
creditor the sum of P5,565.55, the co-guarantor Meliton Carlos
also paid upon the bond signed by him the sum of P5,135. The
plaintiff and Carlos later recovered from Antonio K. Abad, one of
the defendants in the said civil case, the sum of P3,800 which
they divided equally. It thus appears that the payment made by
the plaintiff to Candelaria was reduced to the sum of P3,665.55.
The plaintiff, in her said capacity, demanded of the defendant
Anastacio R. Santos the return of the aforesaid sum and, upon
the latter's refusal, she brought the action which culminated in the
appealed judgment.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
The four errors assigned by the appellant raise only one legal
question, namely, whether under the proven facts admitted by the
parties, he is bound to pay to the plaintiff what the latter had
advanced to Paulino Candelaria upon the bond which the
deceased Santiago Lucero had executed. The appellant
vigorously insists that he is not so bound under the law, because
he neither applied for nor intervened in the bond in any capacity.
It is beyond question that the appellant neither intervened nor
signed the bond which was filed to discharge the attachment of
the properties of the judgment debtors, but it is clear, and this is
admitted, that the bond was filed to release the attached
properties, it was approved by the court and it resulted in the
discharge of the attachment and the return of the attached
properties to their respective owners. When the sheriff attempted
to execute judgment and looked for the discharged properties, he
found that they had disappeared, for which reason the court
subsequently issued a writ of execution against the guarantors.
As a result of this last execution, the plaintiff was forced to pay
and in fact paid the said sum to the creditor Candelaria. Now,
then, under article 1822 of the Civil Code, by guaranty one person
binds himself to pay or perform for a third person in case the latter
should fail to do so; and the article 1838 provides that any
guarantor who pays for the debtor shall be indemnified by the
latter even should the guaranty have been undertaken without the
knowledge of the debtor. In the present case, the guarantor was
the deceased Santiago Lucero, now represented by the plaintiff in
her capacity as judicial administratrix, and the debtor is the
defendant-appellant. Applying the provision of the last cited article,
it is obvious that the appellant is legally bound to pay what the
plaintiff had advanced to the creditor upon the judgment,
notwithstanding the fact that the bond had given without his
knowledge.
The obligation of the appellant to pay the plaintiff what the latter
had advanced is further sanctioned by the general provisions of
the Civil Code regarding obligations. Article 1158 provides that
"payment may be made by any person, 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 unaware of it. Any person who makes a payment for the
account of another may recover from the debtor the amount of the
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 has been beneficial to the latter." According to this
legal provision, it is evident that the plaintiff-appellant is bound to
pay to the plaintiff what the latter had advanced to the creditor
upon the judgment, and this is the more so because it appears
that although Lucero executed the bond without his knowledge,
nevertheless he did not object thereto or repudiate the same at
any time. From the proven facts it cannot logically be deduced
that the appellant did not have knowledge of the bond, first,
because his properties were attached and the attachment could
not have been levied without his knowledge, and, secondly,
because the said properties were returned to him and in receiving
them he was necessarily apprized of the fact that a bond had
been filed to discharge the attachment.
The appellant questions the application by the court of article 127
of the Code of Commerce, overlooking article 128. This
assignment of error is of no consequence and does not affect the
result of the case. As already stated, the rights of the parties must
be governed by the aforesaid articles of the Civil Code. Assuming
the inapplicability of article 127 of the Code of Commerce, in view
of the fact that the action is not addressed to the appellant as
general partner of the Philippine-American Construction
Company, it nevertheless appears that his liability to the plaintiff,
as debtor in solidum of Paulino Candelaria, is recognized and
countenanced by articles 1158 and 1838 of the Civil Code.
24
In view of the foregoing, the appealed judgment is affirmed, with
costs of this instance to the defendant appellant. So ordered.
FIRST DIVISION
G.R. No. L-29587 November 28, 1975
PHILIPPINE NATIONAL BANK, petitioner,
vs.
LUZON SURETY CO., INC. and THE HONORABLE COURT OF
APPEALS, respondent.
Medina and Magtalas for petitioner.
Tolentino, Garcia, Cruz and Reyes for private respondent.
ESGUERRA, J.:
Petitioner Philippine National Bank seeks a review and reversal of
the decision dated June 26, 1968, of the Court of Appeals in its
case CA-G.R. No. 30282-R, absolving Luzon Surety Co., Inc. of
its liability to said petitioner and thus reversing the decision of the
Court of First Instance of Negros Occidental, the dispositive
portion of which reads as follows:
IN VIEW THEREOF, judgment is hereby rendered ordering
defendant Augusto R. Villarosa to pay plaintiff PHILIPPINE
NATIONAL BANK the sum of P81,200.00 plus accrued interest of
5% per annum on P63,222.78 from August 31, 1959; to pay 10%
of said amount as attorney's fees and to pay the costs. Defendant
Luzon Surety Co., Inc. is hereby ordered to pay jointly and
severally with defendant Villarosa to the plaintiff the sum of
P10,000.00; defendant Central Surety and Insurance Company
jointly and severally with defendant Villarosa the sum of P20,000
to the plaintiff, and Associated Surety And Insurance Co. jointly
and severally with defendant Villarosa the sum of P15,000.00 to
the plaintiff, with the understanding that should said bonding
companies pay the aforementioned amounts of their respective
bonds to the plaintiff, said amounts should be deducted from the
total outstanding obligation of defendant Villarosa in favor of the
plaintiff.
Above-quoted decision was modified in an order of the Court of
First Instance dated June 5, 1961, granting petitioner Philippine
National Bank (PNB) the right to recover accrued interest at the
rate of 5% per annum from December 24, 1953, from the
defendants bonding companies.
The facts as found by the Court of Appeals are as follows:
... sometime prior to 27 November 1951, defendant Augusto R.
Villarosa, a sugar planter adhered to the Lopez Sugar Central
Milling Company, Inc. applied for a crop loan with the plaintiff,
Philippine National Bank, Exhibit A; this application was approved
on 6 March, 1952 in the amount of P32,400, according to the
complaint; but the document of approval has not been exhibited;
at any rate, the planter Villarosa executed a Chattel Mortgage on
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
standing crops to guarantee the crop loan, Exhibit B and as
shown in Exhibits C to C-30 on various dates from 28 January,
1952 to 9 January, 1953, in consideration of periodical sums of
money by him received from PNB, planter Villarosa executed
these promissory notes from which will be seen that the credit line
was that the original amount of P32,400 and was thus maintained
up to the promissory note Exhibit C-9 dated 30 May, 1952 but
afterwards it was increased and promissory notes Exhibits C-10
to C-30 were based on the increased credit line; and as of 27
September, 1953 as shown in the accounts, Exhibits D and D-1,
there was a balance of P63,222.78 but as of the date when the
complaint was filed on 8 June, 1960, because of the interest
accrued, it had reached a much higher sum; that was why due to
its non-payment, plaintiff filed this complaint, as has been said, on
8 June, 1960; now the complaint sought relief not only against the
planter but also against the three (3) bondsmen, Luzon Surety,
Central Surety and Associated Surety because Luzon Surety had
filed the bond Exhibit E dated 18 February, 1952 in the sum of
P10,000; Central Surety Exhibit F dated 24 February, 1952 in the
sum of P20,000 and Associated Surety the bond Exhibit G dated
11 September, 1952 in the sum of P15,000; in gist, the obligation
of each of the bondsmen being to guarantee the faithful
performance of the obligation of the planter with PNB; now each
of the defendants in their answers raised various defenses but as
far as principal defendant Augusto R. Villarosa and other
defendants Central Surety and Associated Surety are concerned,
their liability is no longer material because they have not
appealed; and in the trial of the case, plaintiff submitted Exhibits A
to J-1 and witness Romanito Brillantes; but the defense of Luzon
Surety thru its witness Jose Arroyo and Exhibits 1 to 3 being 1st
that the evidence of the plaintiff did not establish a cause of action
to make Luzon Surety liable and 2ndly, in any case that there had
been material alteration in the principal obligation, if any,
guaranteed by it; ... .
Unable to obtain reconsideration of the decision of the Appellate
Court, PNB came to this Court and alleged the following errors.
1. The Court of Appeals erred in the application of the law
involved by invoking Article 2055 of the New Civil Code, which
properly should have been the law on suretyship which are
covered by Section 4, Chapter 3, Title 1, Book IV of the New Civil
Code;
2. Consequently, when the Court of Appeals released the surety
from liability, it committed a grave or gross misappreciation of
facts amounting to an error of law;
3. The Court of Appeals erred when it held that there must have
been a principal crop loan contract, guaranteed by the surety
bonds;
4. The Court of Appeals erred when it released the surety from
liability. The above assigned errors boil down to the single
question of whether or not the Court of Appeals was justified in
absolving Luzon Surety Co., Inc., from liability to petitioner
Philippine National Bank. We have examined the record
thoroughly and found the appealed decision to be erroneous.
Excerpt of the Chattel Mortgage executed to guarantee the crop
loan clearly provided as follows:
xxx xxx xxx
1. That the Mortgagor does by these presents grant, cede and
convey unto the Mortgagee by way of First Mortgage free from
25
any encumbrances, all the crops of the absolute property of the
Mortgagor, corresponding to the 1952-53 and subsequent yearly
sugar crops agricultural season at present growing in the Hda.
known as San Antonio, Washington (P) Audit 24-124 and 24-16 la
and Hda. Aliwanay (non-quota land); milling with LSMC and CAD
Municipality of Sagay, and Escalante, Province of Negros
Occidental covered by cadastral lots no. Various of the Cadastral
Survey at the Municipality of Sagay, Escalante particularly
bounded and described in Transfer Certificate of Title No. Various
issued by the Register of Deeds of said province. The said
mortgage crops consist of all the Mortgagor's first available entire
net share of the 1952-53 and subsequent yearly sugar crops
thereafter conservatively estimated at but not less than Three
Thousand Four Hundred Twenty and 14/00 (3,420.14) piculs of
export and domestic sugar, including whatever addition thereto,
and such aids, subsidies, indemnity payments and other benefits
as maybe awarded to the Mortgagor, coming from any source,
governmental or otherwise.
xxx xxx xxx
4. This Mortgage is executed to secure payment by the Mortgagor
to the Mortgagee at the latter's office of a loan herein granted to
the Mortgagor in the sum of Thirty Two Thousand Four Hundred
(P32,400.00) Pesos, Philippine Currency, with interest at the rate
of five per cent per annum, which loan shall be given to the
Mortgagor either in lump sum or in installments as the mortgagee
may determine. The Mortgagee may increase or decrease the
amount of the loan as well as the installments as it may deem
convenient and the Mortgagor shall submit such periodical
reports on the crops mortgaged as the Mortgagee may require. In
the event that the loan is increased such increase shall likewise
be secured by Mortgage. This Mortgage shall also secure any
other loans or advances that the Mortgagee may extend to the
Mortgagor, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary as appears in the account books and
records of the Mortgagee.
xxx xxx xxx
Likewise an extract from the Surety Bond executed by and
between the PNB on one hand and Augusto Villarosa and
respondent Luzon Surety Company, Inc. on the other, is hereby
reproduced, viz:
That we Augusto Villarosa of Bacolod City, as principal and Luzon
Surety Company, Inc. a corporation duly organized and existing
under and by virtue of the laws of the Philippines, as surety, are
held firmly bound unto Philippine National Bank, Bacolod City,
Philippines, in the sum of Ten Thousand Pesos (P10,000.00)
Philippine Currency, for the payment of which sum, well and truly
to be made, we bind ourselves, our heirs, executors,
administrators, successors, and assigns jointly and severally,
firmly by these presents:
The condition of the obligation are as follows:
WHEREAS, the above bounden principal, on the — day of
February, 1952, entered into a crop loan contract with obligee
Philippine National Bank, Bacolod Branch of Bacolod City,
Philippines to fully and faithfully —
Comply with all the terms and condition stipulated in said crop
loan contract which are hereby incorporated as essential parts
hereof, and principally to meet and pay from the proceeds of the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
sugar produced from his Hda. Antonio and Hda. Aliwanay,
Escalante, Occidental Negros credit advances made by the
Philippine National Bank Bacolod Branch not to exceed P32,800
as stated in said contract. Provided further that the liability under
this bond shall not exceed the amount of P10,000.00
WHEREAS, said Philippine National Bank Bacolod Branch
requires said principal to give a good and sufficient bond in the
above stated sum to secure the full and faithful performance on
his part of said crop loan contract.
NOW, THEREFORE, if the principal shall well and truly perform
and fulfill all the undertakings, covenants, terms and conditions
and agreement stipulated in said crop loan contract then, this
obligation shall be null and void, otherwise it shall remain in full
force and effect.
xxx xxx xxx
The foregoing evidences clearly the liability of Luzon Surety to
petitioner Philippine National Bank not merely as a guarantor but
as surety-liable as a regular party to the undertaking (Castelvi de
Higgins vs. Sellner 41 Phil. 142). The Court of Appeals, however,
in absolving the bonding company ratiocinates that the Surety
Bond executed on February 18, 1952, made specific references
to a crop loan contract executed by Augusto Villarosa sometime
in February 1952. And, therefore, the Chattel Mortgage, Exhibit B
dated March 6, 1952, could not have been the obligations
guaranteed by the surety bond. Thus the Court of Appeals stated:
... one is really at a loss to impose any liability upon Luzon Surety
in the absence of the principal obligation which was a crop loan
contract executed in February, 1952, and to which there was
made an express reference in the surety bond, Exhibit E; let it not
be overlooked further that one can secure a crop loan without
executing a Chattel Mortgage on his crops because the crop loan
is the principal obligation while the Chattel Mortgage is only an
ancillary and secondary contract to guarantee fulfillment of a crop
loan; stated otherwise and as Luzon Surety never intervened in
the execution of the Chattel Mortgage, Exhibit B, there is no way
under the evidence from which it can be made to answer for
liability to Augusto Villarosa under Exhibit E; ... "
The Court of Appeals, to Our mind did not give credence to an
otherwise significant and unrebutted testimony of petitioner's
witness, Romanito Brillantes, that Exhibit B was the only chattel
mortgage executed by Augusto Villarosa evidencing the crop loan
contract and upon which Luzon Surety agreed to assume liability
up to the amount of P10,000 by posting the said surety bond.
Moreover Article 1354 of our New Civil Code which provides:
Art. 1354.— Although the cause is not stated in the contract., it is
presumed that it exist and is lawful, unless the debtor proves the
contrary.
bolster petitioner's stand. Considering too that Luzon Surety
company is engaged in the business of furnishing guarantees, for
a consideration, there is no reason that it should be entitled to a
rule of strictissimi juris or a strained and over-strict interpretation
of its undertaking. The presumption indulged in by the law in favor
of guarantors was premised on the fact that guarantees were
originally gratuitous obligations, which is not true at present, at
least in the great majority of cases. (Aurelio Montinola vs. Alejo
Gatila, et al, G.R. No L-7558, October 31, 1955).
26
We have likewise gone over the answer of Luzon Surety
Company dated June 17, 1960 (p. 73 Record on Appeal) and
noted the following:
xxx xxx xxx
3. Defendant LUZON admits the portion of paragraph 3 referring
to the grant of P32,400 secured by a Chattel Mortgage dated
March 6, 1952, copy of which is attached as Annex "A" of the
complaint.
xxx xxx xxx
As special defenses:
8. The terms and conditions of the surety bond as well as the
contract it guaranteed was materially altered and or novated
without the knowledge and consent of the surety thereby
releasing the latter from liability.
11. The maximum liability, if any, of defendant LUZON is
P10.000.00.
The principal obligation, therefore, has never been put in issue by
then defendant now respondent Luzon Surety Co., Inc. On the
other hand it raised as its defense the alleged material alteration
of the terms and conditions of the contract as the basis of its
prayer for release. Even this defense of respondent Luzon Surety
Co., Inc. is untenable under the facts obtaining. As a surety, said
bonding company is charged as an original promissory and is an
insurer of the debt. While it is an accepted rule in our jurisdiction
that an alteration of the contract is a ground for release, this
alteration, We stress must be material. A cursory examination of
the record shows that the alterations in the form of increases were
made with the full consent of Luzon Surety Co., Inc. Paragraph 4
of the Chattel Mortgage explicitly provided for this increase(s), viz:
... the Mortgagee may increase or decrease the amount of the
loan as well as the installment as it may deem convenient ...
and this contract, Exhibit "B", was precisely referred to and
mentioned in the Surety Bond itself. In the case of Lim Julian vs.
Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718, this Court
held:
It has been decided in many cases that the consideration named
in a mortgage for future advancements does not limit the amount
for which such contract may stand as security, if from the four
corners of the document, the intent to secure future indebtedness
is apparent. Where, by the plain terms of the contract, such an
intent is evident, it will control. ...
The next question to take up is the liability of Luzon Surety Co. for
interest which, it contends, would increase its liability to more than
P10,000 which is the maximum of its bond. We cannot agree to
this reasoning. In the cases of Tagawa vs. Aldanese, 43 Phil. 852,
859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery
Co., 100 Phil. 679, 682, cited in Paras Civil Code of the
Philippines, Vol. V, 7th Ed. 1972, p. 772, it was held:
If a surety upon demand fails to pay, he can be held liable for
interest, even if in thus paying, the liability becomes more than
that in the principal obligation. The increased liability is not
because of the contract but because of the default and the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
necessity of judicial collection. It should be noted, however, that
the interest runs from the time the complaint is filed, not from the
time the debt becomes due and demandable.
PREMISES CONSIDERED, the judgment appealed from is
reversed and set aside. In lieu thereof another is rendered
reinstating the judgment of the Court of First Instance of Negros
Occidental, 12th Judicial District, dated March 29, 1961, holding
Luzon Surety liable for the amount of P10,000.00 with the
modification that interest thereon shall be computed at the legal
rate from June 8, 1960 when the complaint was filed.
SO ORDERED.
THIRD DIVISION
G.R. No. 160324 November 15, 2005
INTERNATIONAL FINANCE CORPORATION, Petitioner,
vs.
IMPERIAL TEXTILE MILLS, INC., Respondent.
*
DECISION
PANGANIBAN, J.:
he terms of a contract govern the rights and obligations of the
contracting parties. When the obligor undertakes to be "jointly and
severally" liable, it means that the obligation is solidary.
If solidary liability was instituted to "guarantee" a principal
obligation, the law deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly
that, although denominated as a "Guarantee Agreement," the
Contract was actually a surety. Notwithstanding the use of the
words "guarantee" and "guarantor," the subject Contract was
indeed a surety, because its terms were clear and left no doubt as
to the intention of the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, assailing the February 28, 2002 Decision2 and September
30, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR CV
No. 58471. The challenged Decision disposed as follows:
"WHEREFORE, the appeal is PARTIALLY GRANTED. The
decision of the trial court is MODIFIED to read as follows:
"1. Philippine Polyamide Industrial Corporation is ORDERED to
pay [Petitioner] International Finance Corporation, the following
amounts:
‘(a) US$2,833,967.00 with accrued interests as provided in the
Loan Agreement;
‘(b) Interest of 12% per annum on accrued interest, which shall be
counted from the date of filing of the instant action up to the actual
payment;
27
‘(c) ₱73,340.00 as attorney’s fees; "The trial court held PPIC liable for the payment of the
outstanding loan plus interests. It also ordered PPIC to pay IFC its
claimed attorney’s fees. However, the trial court relieved ITM of
‘(d) Costs of suit.’
its obligation as guarantor. Hence, the trial court dismissed IFC’s
complaint against ITM.
"2. The guarantor Imperial Textile Mills, Inc. together with
Grandtex is HELD secondarily liable to pay the amount herein
xxxxxxxxx
adjudged to [Petitioner] International Finance Corporation."4

"Thus, apropos the decision dismissing the complaint against ITM,

The assailed Resolution denied both parties’ respective Motions
IFC appealed [to the CA]."5
for Reconsideration.

Ruling of the Court of Appeals

The Facts

The CA reversed the Decision of the trial court, insofar as the

The facts are narrated by the appellate court as follows:
"On December 17, 1974, [Petitioner] International Finance
Corporation (IFC) and [Respondent] Philippine Polyamide
Industrial Corporation (PPIC) entered into a loan agreement
wherein IFC extended to PPIC a loan of US$7,000,000.00,
payable in sixteen (16) semi-annual installments of
US$437,500.00 each, beginning June 1, 1977 to December 1,
1984, with interest at the rate of 10% per annum on the principal
amount of the loan advanced and outstanding from time to time.
The interest shall be paid in US dollars semi-annually on June 1
and December 1 in each year and interest for any period less
than a year shall accrue and be pro-rated on the basis of a
360-day year of twelve 30-day months.
"On December 17, 1974, a ‘Guarantee Agreement’ was executed
with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile
Manufacturing Corporation (Grandtex) and IFC as parties thereto.
ITM and Grandtex agreed to guarantee PPIC’s obligations under
the loan agreement.
latter exonerated ITM from any obligation to IFC. According to the
appellate court, ITM bound itself under the "Guarantee
Agreement" to pay PPIC’s obligation upon default.6 ITM was not
discharged from its obligation as guarantor when PPIC
mortgaged the latter’s properties to IFC.7 The CA, however, held
that ITM’s liability as a guarantor would arise only if and when
PPIC could not pay. Since PPIC’s inability to comply with its
obligation was not sufficiently established, ITM could not
immediately be made to assume the liability.8
The September 30, 2003 Resolution of the CA denied
reconsideration.9 Hence, this Petition.10
The Issues
Petitioner states the issues in this wise:
"I. Whether or not ITM and Grandtex11 are sureties and therefore,
jointly and severally liable with PPIC, for the payment of the loan.

"PPIC paid the installments due on June 1, 1977, December 1,

1977 and June 1, 1978. The payments due on December 1, 1978,
June 1, 1979 and December 1, 1979 were rescheduled as
requested by PPIC. Despite the rescheduling of the installment
payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC
served a written notice of default to PPIC demanding the latter to
pay the outstanding principal loan and all its accrued interests.
Despite such notice, PPIC failed to pay the loan and its interests.
"II. Whether or not the Petition raises a question of law.
"III. Whether or not the Petition raises a theory not raised in the
lower court."12
The main issue is whether ITM is a surety, and thus solidarily
liable with PPIC for the payment of the loan.

"By virtue of PPIC’s failure to pay, IFC, together with DBP, The Court’s Ruling
applied for the extrajudicial foreclosure of mortgages on the real
estate, buildings, machinery, equipment plant and all
improvements owned by PPIC, located at Calamba, Laguna, with The Petition is meritorious.
the regional sheriff of Calamba, Laguna. On July 30, 1985, the
deputy sheriff of Calamba, Laguna issued a notice of extrajudicial Main Issue:
sale. IFC and DBP were the only bidders during the auction sale.
IFC’s bid was for ₱99,269,100.00 which was equivalent to
Liability of Respondent Under
US$5,250,000.00 (at the prevailing exchange rate of ₱18.9084 =
US$1.00). The outstanding loan, however, amounted to
US$8,083,967.00 thus leaving a balance of US$2,833,967.00. the Guarantee Agreement
PPIC failed to pay the remaining balance.
The present controversy arose from the following Contracts: (1)
"Consequently, IFC demanded ITM and Grandtex, as guarantors the Loan Agreement dated December 17, 1974, between IFC and
of PPIC, to pay the outstanding balance. However, despite the PPIC;13 and (2) the Guarantee Agreement dated December 17,
demand made by IFC, the outstanding balance remained unpaid. 1974, between ITM and Grandtex, on the one hand, and IFC on
the other.14
"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC
of Manila against PPIC and ITM for the payment of the IFC claims that, under the Guarantee Agreement, ITM bound
outstanding balance plus interests and attorney’s fees. itself as a surety to PPIC’s obligations proceeding from the Loan
Agreement.15 For its part, ITM asserts that, by the terms of the

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 28

Guarantee Agreement, it was merely a guarantor16 and not a
surety. Moreover, any ambiguity in the Agreement should be
construed against IFC -- the party that drafted it.17
Language of the
Contract
The premise of the Guarantee Agreement is found in its
preambular clause, which reads:
"Whereas,
"(A) By an Agreement of even date herewith between IFC and
PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION (herein
called the Company), which agreement is herein called the Loan
Agreement, IFC agrees to extend to the Company a loan (herein
called the Loan) of seven million dollars ($7,000,000) on the
terms therein set forth, including a provision that all or part of the
Loan may be disbursed in a currency other than dollars, but only
on condition that the Guarantors agree to guarantee the
obligations of the Company in respect of the Loan as hereinafter
provided.
"(B) The Guarantors, in order to induce IFC to enter into the Loan
Agreement, and in consideration of IFC entering into said
Agreement, have agreed so to guarantee such obligations of the
Company."18
The obligations of the guarantors are meticulously expressed in
the following provision:
"Section 2.01. The Guarantors jointly and severally, irrevocably,
absolutely and unconditionally guarantee, as primary obligors and
not as sureties merely, the due and punctual payment of the
principal of, and interest and commitment charge on, the Loan,
and the principal of, and interest on, the Notes, whether at stated
maturity or upon prematuring, all as set forth in the Loan
Agreement and in the Notes."19
The Agreement uses "guarantee" and "guarantors," prompting
ITM to base its argument on those words. 20 This Court is not
convinced that the use of the two words limits the Contract to a
mere guaranty. The specific stipulations in the Contract show
otherwise.
Solidary Liability
Agreed to by ITM
While referring to ITM as a guarantor, the Agreement specifically
stated that the corporation was "jointly and severally" liable. To
put emphasis on the nature of that liability, the Contract further
stated that ITM was a primary obligor, not a mere surety. Those
stipulations meant only one thing: that at bottom, and to all legal
intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily21 liable with
PPIC for the latter’s obligations under the Loan Agreement with
IFC. ITM thereby brought itself to the level of PPIC and could not
be deemed merely secondarily liable.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Initially, ITM was a stranger to the Loan Agreement between
PPIC and IFC. ITM’s liability commenced only when it guaranteed
PPIC’s obligation. It became a surety when it bound itself
solidarily with the principal obligor. Thus, the applicable law is as
follows:
"Article 2047. By guaranty, a person, called the guarantor binds
himself to the creditor to fulfill the obligation of the principal in
case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract shall be called suretyship." 22
The aforementioned provisions refer to Articles 1207 to 1222 of
the Civil Code on "Joint and Solidary Obligations." Relevant to
this case is Article 1216, which states:
"The creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt
has not been fully collected."
Pursuant to this provision, petitioner (as creditor) was justified in
taking action directly against respondent.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of the
Guarantee Agreement. When qualified by the term "jointly and
severally," the use of the word "guarantor" to refer to a "surety"
does not violate the law.23 As Article 2047 provides, a suretyship
is created when a guarantor binds itself solidarily with the
principal obligor. Likewise, the phrase in the Agreement -- "as
primary obligor and not merely as surety" -- stresses that ITM is
being placed on the same level as PPIC. Those words emphasize
the nature of their liability, which the law characterizes as a
suretyship.
The use of the word "guarantee" does not ipso facto make the
contract one of guaranty.24 This Court has recognized that the
word is frequently employed in business transactions to describe
the intention to be bound by a primary or an independent
obligation.25 The very terms of a contract govern the obligations of
the parties or the extent of the obligor’s liability. Thus, this Court
has ruled in favor of suretyship, even though contracts were
denominated as a "Guarantor’s Undertaking" 26 or a "Continuing
Guaranty."27
Contracts have the force of law between the parties,28 who are
free to stipulate any matter not contrary to law, morals, good
customs, public order or public policy.29 None of these
circumstances are present, much less alleged by respondent.
Hence, this Court cannot give a different meaning to the plain
language of the Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the premise
provided in the "Whereas" clause of the Guarantee Agreement.
The execution of the Agreement was a condition precedent for
the approval of PPIC’s loan from IFC. Consistent with the position
of IFC as creditor was its requirement of a higher degree of
29
liability from ITM in case PPIC committed a breach. ITM agreed
with the stipulation in Section 2.01 and is now estopped from
feigning ignorance of its solidary liability. The literal meaning of
the stipulations control when the terms of the contract are clear
and there is no doubt as to the intention of the parties.30
We note that the CA denied solidary liability, on the theory that
the parties would not have executed a Guarantee Agreement if
they had intended to name ITM as a primary obligor.31 The
appellate court opined that ITM’s undertaking was collateral to
and distinct from the Loan Agreement. On this point, the Court
stresses that a suretyship is merely an accessory or a collateral to
a principal obligation.32 Although a surety contract is secondary to
the principal obligation, the liability of the surety is direct, primary
and absolute; or equivalent to that of a regular party to the
undertaking.33 A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal
interest in the obligations constituted by the latter.34
ITM’s Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA
erred in declaring the former secondarily liable.35 A surety is
considered in law to be on the same footing as the principal
debtor in relation to whatever is adjudged against the
latter.36 Evidently, the dispositive portion of the assailed Decision
should be modified to require ITM to pay the amount adjudged in
favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities
allegedly justifying the denial of the present Petition. Before the
trial court and the CA, IFC had allegedly instituted different
arguments that effectively changed the corporation’s theory on
appeal, in violation of this Court’s previous
pronouncements.37 ITM further
claims that the main issue in the present case is a question of fact
that is not cognizable by this Court.38
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal
Petitioner’s arguments before the trial court (that ITM was a
"primary obligor") and before the CA (that ITM was a "surety")
were related and intertwined in the action to enforce the solidary
liability of ITM under the Guarantee Agreement. We emphasize
that the terms "primary obligor" and "surety" were premised on
the same stipulations in Section 2.01 of the Agreement. Besides,
both terms had the same legal consequences. There was
therefore effectively no change of theory on appeal. At any rate,
ITM failed to show to this Court a disparity between IFC’s
allegations in the trial court and those in the CA. Bare allegations
without proof deserve no credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a
Petition for Review,39 the Court has recognized exceptions,40 one
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
of which applies to the present case. The assailed Decision was
based on a misapprehension of facts,41 which particularly related
to certain stipulations in the Guarantee Agreement -- stipulations
that had not been disputed by the parties. This circumstance
compelled the Court to review the Contract firsthand and to make
its own findings and conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the
assailed Decision and Resolution MODIFIED in the sense that
Imperial Textile Mills, Inc. is declared a surety to Philippine
Polyamide Industrial Corporation. ITM is ORDERED to pay
International Finance Corporation the same amounts adjudged
against PPIC in the assailed Decision. No costs. SO ORDERED.
EN BANC
G.R. No. L-47495 August 14, 1941
THE TEXAS COMPANY (PHIL.), INC., petitioner,
vs.
TOMAS ALONSO, respondent.
C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL, J.:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were
sued by the Texas Company (P.I.), Inc. in the Court of First
Instance of Cebu for the recovery of the sum of P629, unpaid
balance of the account of Leonora S. Bantug in connection with
the agency contract with the Texas Company for the faithful
performance of which Tomas Alonso signed the following:
For value received, we jointly and severally do hereby bind
ourselves and each of us, in solidum, with Leonor S. Bantug the
agent named in the within and foregoing agreement, for full and
complete performance of same hereby waiving notice of
non-performance by or demand upon said agent, and the consent
to any and all extensions of time for performance. Liability under
this undertaking, however, shall not exceed the sum of P2,000,
Philippine currency.
Witness the hand and seal of the undersigned affixed in the
presence of two witness, this 12th day of August, 1929.
Leonor S. Bantug was declared in default as a result of her failure
to appear or answer, but Tomas Alonso filed an answer setting up
a general denial and the special defenses that Leonor S. Bantug
made him believe that he was merely a co-security of one Vicente
Palanca and he was never notified of the acceptance of his bond
by the Texas Company. After trial, the Court of First Instance of
Cebu rendered judgment on July 10, 1973, which was amended
on February 1, 1938, sentencing Leonor S. Bantug and Tomas
Alonso to pay jointly and severally to the Texas Company the sum
of P629, with interest at the rate of six per cent (6%) from the date
of filing of the complaint, and with proportional costs. Upon appeal
by Tomas Alonso, the Court of Appeals modified the judgment of
the Court of First Instance of Cebu in the sense that Leonor S.
Bantug was held solely liable for the payment of the aforesaid
sum of P629 to the Texas Company, with the consequent
absolution of Tomas Alonso. This case is now before us on
30
petition for review by certiorari of the decision of the Court of
Appeals. It is contended by the petitioner that the Court of
Appeals erred in holding that there was merely an offer of
guaranty on the part of the respondent, Tomas Alonso, and that
the latter cannot be held liable thereunder because he was never
notified by the Texas Company of its acceptance.
The Court of Appeals has placed reliance upon our decision
in National Bank vs. Garcia (47 Phil., 662), while the petitioner
invokes the case of National Bank vs. Escueta, (50 Phil., 991). In
the first case, it was held that there was merely an offer to give
bond and, as there was no acceptance of the offer, this court
refused to give effect to the bond. In the second case, the sureties
were held liable under their surety agreement which was found to
have been accepted by the creditor, and it was therein ruled that
an acceptance need not always be express or in writing. For the
purpose of this decision, it is not indispensable for us to invoke
one or the other case above cited. The Court of Appeals found as
a fact, and this is conclusive in this instance, that the bond in
question was executed at the request of the petitioner by virtue of
the following clause of the agency contract:
Additional Security. — The Agent shall whenever requested by
the Company in addition to the guaranty herewith provided,
furnish further guaranty or bond, conditioned upon the Agent's
faithful performance of this contract, in such individuals of firms as
joint and several sureties as shall be satisfactory to the Company.
In view of the foregoing clause which should be the law between
the parties, it is obvious that, before a bond is accepted by the
petitioner, it has to be in such form and amount and with such
sureties as shall be satisfactory hereto; in other words, the bond
is subject to petitioner's approval. The logical implication arising
from this requirement is that, if the petitioner is satisfied with any
such bond, notice of its acceptance or approval should
necessarily be given to the property party in interest, namely, the
surety or guarantor. In this connection, we are likewise bound by
the finding of the Court of Appeals that there is no evidence in this
case tending to show that the respondent, Tomas Alonso, ever
had knowledge of any act on the part of petitioner amounting to
an implied acceptance, so as to justify the application of our
decision in National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few
words explanatory of the rule regarding the necessity of
acceptance in case of bonds. Where there is merely an offer of, or
proposition for, a guaranty, or merely a conditional guaranty in the
sense that it requires action by the creditor before the obligation
becomes fixed, it does not become a binding obligation until it is
accepted and, unless there is a waiver of notice of such
acceptance is given to, or acquired by, the guarantor, or until he
has notice or knowledge that the creditor has performed the
conditions and intends to act upon the guaranty. (National
Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am. Jur.,
sec. 37, p. 899.) The acceptance need not necessarily be express
or in writing, but may be indicated by acts amounting to
acceptance. (National Bank vs. Escueta, 50 Phil., 991.) Where,
upon the other hand, the transaction is not merely an offer of
guaranty but amounts to direct or unconditional promise of
guaranty, unless notice of acceptance is made a condition of the
guaranty, all that is necessary to make the promise binding is that
the promise should act upon it, and notice of acceptance is not
necessary (28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899),
the reason being that the contract of guaranty is unilateral
(Visayan Surety and Insurance Corporation vs. Laperal, G.R. No.
46515, promulgated June 14, 1940).
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
The decision appealed from will be, as the same is hereby,
affirmed, with costs of this instance against the petitioner. So
ordered.
SECOND DIVISION
G.R. No. 107062 February 21, 1994
PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, (Fourteenth Division) and
GEGROCO, INC., respondents.
Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for
petitioner.
A.M. Sison, Jr. & Associates for private respondent.
NOCON, J.:
Two purely technical, yet mandatory, rules of procedure frustrated
petitioner's bid to get a favorable decision from the Regional Trial
Court and then again in the Court of Appeals. These are1
non-appearance during the pre-trial despite due notice, and
non-payment of docket fees upon filing of its third-party complaint.
Just how strict should these rules be applied is a crucial issue in
this present dispute.
Petitioner, Interworld Assurance Corporation (the company now
carries the corporate name Philippine Pryce Assurance
Corporation), was the butt of the complaint for collection of sum of
money, filed on May 13, 1988 by respondent, Gegroco, Inc.
before the Makati Regional Trial Court, Branch 138. The
complaint alleged that petitioner issued two surety bonds (No.
0029, dated July 24, 1987 and No. 0037, dated October 7, 1987)
in behalf of its principal Sagum General Merchandise for FIVE
HUNDRED THOUSAND (P500,000.00) PESOS and ONE
MILLION (1,000,000.00) PESOS, respectively.
On June 16, 1988, summons, together with the copy of the
complaint, was served on petitioner. Within the reglementary
period, two successive motions were filed by petitioner praying for
a total of thirty (30) days extention within which to file a
responsible pleading.
In its Answer, dated July 29, 1988, but filed only on August 4,
1988, petitioner admitted having executed the said bonds, but
denied liability because allegedly 1) the checks which were to pay
for the premiums bounced and were dishonored hence there is no
contract to speak of between petitioner and its supposed principal;
and 2) that the bonds were merely to guarantee payment of its
principal's obligation, thus, excussion is necessary. After the
issues had been joined, the case was set for pre-trial conference
on September 29, 1988. the petitioner received its notice on
September 9, 1988, while the notice addressed to its counsel was
returned to the trial court with the notation "Return to Sender,
Unclaimed." 2
On the scheduled date for pre-trial conference, only the counsel
for petitioner appeared while both the representative of
respondent and its counsel were present. The counsel for
petitioner manifested that he was unable to contract the
31
Vice-President for operations of petitioner, although his client
intended to file a third party complaint against its principal. Hence,
the pre-trial was re-set to October 14, 1988. 3
On October 14, 1988, petitioner filed a "Motion with Leave to
Admit Third-Party Complaint" with the Third-Party Complaint
attached. On this same day, in the presence of the representative
for both petitioner and respondent and their counsel, the pre-trial
conference was re-set to December 1, 1988. Meanwhile on
November 29, 1988, the court admitted the Third Party Complaint
and ordered service of summons on third party defendants. 4
On scheduled conference in December, petitioner and its counsel
did not appear notwithstanding their notice in open court. The 5
pre-trial was nevertheless re-set to February 1, 1989. However,
when the case was called for pre-trial conference on February 1,
1989, petitioner was again nor presented by its officer or its
counsel, despite being duly notified. Hence, upon motion of
respondent, petitioner was considered as in default and
respondent was allowed to present evidence ex-parte, which was
calendared on February 24, 1989. Petitioner received a copy of
6
the Order of Default and a copy of the Order setting the reception
of respondent's evidence ex-parte, both dated February 1, 1989,
on February 16, 1989. 7 Second, in the regular course of events, the third-party
On March 6, 1989, a decision was rendered by the trial court, the
dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant Interworld Assurance
Corporation to pay the amount of P1,500,000.00 representing the
principal of the amount due, plus legal interest thereon from April
7, 1988, until date of payment; and P20,000.00 as and for
attorney's fees. 8
Petitioner's "Motion for Reconsideration and New Trial" dated
April 17, 1989, having been denied it elevated its case to the
Court of Appeals which however, affirmed the decision of the trial
court as well as the latter's order denying petitioner's motion for
reconsideration.
Before us, petitioner assigns as errors the following:
I. The respondent Court of Appeals gravely erred in declaring that
the case was already ripe for pre-trial conference when the trial
court set it for the holding thereof.
II. The respondent Court of Appeals gravely erred in affirming the
decision of the trial court by relying on the ruling laid down by this
Honorable Court in the case of Manchester Development
Corporation v. Court of Appeals, 149 SCRA 562, and
disregarding the doctrine laid down in the case of Sun Insurance
Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274.
III. The respondent Court of Appeals gravely erred in declaring
that it would be useless and a waste of time to remand the case
for further proceedings as defendant-appellant has no meritorious
defense.
We do not find any reversible error in the conclusion reached by
the court a quo.
Relying on Section 1, Rule 20 of the Rules of court, petitioner
argues that since the last pleading, which was supposed to be the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
third-party defendant's answer has not been filed, the case is not
yet ripe for pre-trial. This argument must fail on three points. First,
the trial court asserted, and we agree, that no answer to the third
party complaint is forthcoming as petitioner never initiated the
service of summons on the third party defendant. The court
further said:
. . . Defendant's claim that it was not aware of the Order admitting
the third-party complaint is preposterous. Sec. 8, Rule 13 of the
Rules, provides:
Completeness of service — . . . Service by registered mail is
complete upon actual receipt by the addressee, but if he fails to
claim his mail from the post office within five (5) days from the
date of first notice of the postmaster, service shall take effect at
the expiration of such time. 9
Moreover, we observed that all copies of notices and orders
issued by the court for petitioner's counsel were returned with the
notation "Return to Sender, Unclaimed." Yet when he chose to,
he would appear in court despite supposed lack of notice.
defendant's answer would have been regarded as the last
pleading referred to in Sec. 1, Rule 20. However, petitioner
cannot just disregard the court's order to be present during the
pre-trial and give a flimsy excuse, such as that the answer has yet
to be filed.
The pre-trial is mandatory in any action, the main objective being
to simplify, abbreviate and expedite trial, if not to fully dispense
with it. Hence, consistent with its mandatory character the Rules
oblige not only the lawyers but the parties as well to appear for
this purpose before the Court and when a party fails to appear
10
at a pre-trial conference he may be non-suited or considered as in
default.11
Records show that even at the very start, petitioner could have
been declared as in default since it was not properly presented
during the first scheduled pre-trial on September 29, 1988.
Nothing in the record is attached which would show that
petitioner's counsel had a special authority to act in behalf of his
client other than as its lawyer.
We have said that in those instances where a party may not
himself be present at the pre-trial, and another person substitutes
for him, or his lawyer undertakes to appear not only as an
attorney but in substitution of the client's person, it is imperative
for that representative or the lawyer to have "special authority" to
enter into agreements which otherwise only the client has the
capacity to make. 12
Third, the court of Appeals properly considered the third-party
complaint as a mere scrap of paper due to petitioner's failure to
pay the requisite docket fees. Said the court a quo:
A third-party complaint is one of the pleadings for which Clerks of
court of Regional Trial Courts are mandated to collect docket fees
pursuant to Section 5, Rule 141 of the Rules of Court. The record
is bereft of any showing tha(t) the appellant paid the
corresponding docket fees on its third-party complaint. Unless
and until the corresponding docket fees are paid, the trial court
would not acquire jurisdiction over the third-party complaint
(Manchester Development Corporation vs. Court of Appeals, 149
SCRA 562). The third-party complaint was thus reduced to a
32
mere scrap of paper not worthy of the trial court's attention.
Hence, the trial court can and correctly set the case for pre-trial
on the basis of the complaint, the answer and the answer to the
counterclaim. 13
It is really irrelevant in the instant case whether the ruling in Sun
Insurance Office, Ltd. (SIOL) v. Asuncion or that in Manchester
14
to be insufficient considering the amounts of the reliefs sought in
their complaints. In the present case, petitioner did not and never
attempted to pay the requisite docket fee. Neither is there any
showing that petitioner even manifested to be given time to pay
the requisite docket fee, as in fact it was not present during the
scheduled pre-trial on December 1, 1988 and then again on
February 1, 1989. Perforce, it is as if the third-party complaint was

never filed.
Development Corp. v. C.A. was applied. Sun Insurance and
15

Manchester are mere reiteration of old jurisprudential

pronouncements on the effect of non-payment of docket fees. In
previous cases, we have consistently ruled that the court cannot
acquire jurisdiction over the subject matter of a case, unless the
docket fees are paid.
Moreover, the principle laid down in Manchester could have very
well been applied in Sun Insurance. We then said:
16
Finally, there is reason to believe that partitioner does not really
have a good defense. Petitioner hinges its defense on two
arguments, namely: a) that the checks issued by its principal
which were supposed to pay for the premiums, bounced, hence
there is no contract of surety to speak of; and 2) that as early as
1986 and covering the time of the Surety Bond, Interworld
Assurance Company (now Phil. Pryce) was not yet authorized by
the insurance Commission to issue such bonds.

The principle in Manchester [Manchester Development Corp. v.

The Insurance Code states that:
C.A., 149 SCRA 562 (1987)] could very well be applied in the
present case. The pattern and the intent to defraud the
government of the docket fee due it is obvious not only in the filing Sec. 177. The surety is entitled to payment of the premium as
of the original complaint but also in the filing of the second soon as the contract of suretyship or bond is perfected and
amended complaint. delivered to the obligor. No contract of suretyship or bonding shall
be valid and binding unless and until the premium therefor has
been paid, except where the obligee has accepted the bond, in
xxx xxx xxx
which case the bond becomes valid and enforceable irrespective
of whether or not the premium has been paid by the obligor to the
In the present case, a more liberal interpretation of the rules is surety. . . . (emphasis added)
called for considering that, unlike Manchester, private respondent
demonstrated his willingness to abide by the rules by paying the
The above provision outrightly negates petitioner's first defense.
additional docket fees as required. The promulgation of the
In a desperate attempt to escape liability, petitioner further
decision in Manchester must have had that sobering influence on
asserts that the above provision is not applicable because the
private respondent who thus paid the additional docket fee as
respondent allegedly had not accepted the surety bond, hence
ordered by the respondent court. It triggered his change of stance
could not have delivered the goods to Sagum Enterprises. This
by manifesting his willingness to pay such additional docket fees
as may be ordered. 17
statement clearly intends to muddle the facts as found by the trial
court and which are on record.

Thus, we laid down the rules as follows:

In the first place, petitioner, in its answer, admitted to have issued
the bonds subject matter of the original action. Secondly, the
19

1. It is not simply the filing of the complaint or appropriate testimony of Mr. Leonardo T. Guzman, witness for the respondent,
initiatory pleading, but the payment of the prescribed docket fee, reveals the following:
that vests a trial court with jurisdiction over the subject-matter or
nature of the action. Where the filing of the initiatory pleading is
Q. What are the conditions and terms of sales you extended to
not accompanied by payment of the docket fee, the court may
Sagum General Merchandise?
allow payment of the fee within a reasonable time, but in no case
beyond the applicable prescriptive or reglamentary period.
A. First, we required him to submit to us Surety Bond to guaranty
payment of the spare parts to be purchased. Then we sell to them
2. The same rule applies to permissive counterclaims, third-party
on 90 days credit. Also, we required them to issue post-dated
claims and similar pleadings, which shall not be considered filed
until and unless the filing fee prescribed therefor is paid. The court checks.
may also allow payment of said fee within a prescriptive or
reglementary period. Q. Did Sagum General merchandise comply with your surety
bond requirement?
3. Where the trial court acquires jurisdiction over a claim by the
filing of the appropriate pleading and payment of the prescribed A. Yes. They submitted to us and which we have accepted two
filing fee, but subsequently, the judgment awards a claim nor surety bonds.
specified in the pleading, or if specified the same has not been left
for determination by the court, the additional filing fee therefor
Q Will you please present to us the aforesaid surety bonds?
shall constitute a lien on the judgment. It shall be the
responsibility of the clerk of court or his duly authorized deputy to
enforce said lien and assess and collect the additional A. Interworld Assurance Corp. Surety Bond No. 0029 for
fee.18 P500,000 dated July 24, 1987 and Interworld Assurance Corp.
Surety Bond No. 0037 for P1,000.000 dated October 7, 1987. 20

It should be remembered that both in Manchester and Sun

Insurance plaintiffs therein paid docket fees upon filing of their Likewise attached to the record are exhibits C to
respective pleadings, although the amount tendered were found C-18 consisting of delivery invoices addressed to Sagum
21

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 33

General Merchandise proving that parts were purchased,
delivered and received.
On the other hand, petitioner's defense that it did not have
authority to issue a Surety Bond when it did is an admission of
fraud committed against respondent. No person can claim benefit
from the wrong he himself committed. A representation made is
rendered conclusive upon the person making it and cannot be
denied or disproved as against the person relying thereon. 22
WHEREFORE, in view of the foregoing, the decision of the Court
of Appeals dismissing the petition before them and affirming the
decision of the trial court and its order denying petitioner's Motion
for Reconsideration are hereby AFFIRMED. The present petition
is DISMISSED for lack of merit. SO ORDERED.
EN BANC
G.R. No. 43486 September 30, 1936
THE MUNICIPALITY OF GASAN, plaintiff-appellee,
vs.
MIGUEL MARASIGAN, ANGEL R. SEVILLA and GONZALO L.
LUNA, defendants-appellants.
Luis Atienza Bijis for appellants.
Provincial Fiscal Noel of Marinduque for appellee.
DIAZ, J.:
This is an action brought by the municipality of Gasan of the
Province of Marinduque, against Miguel Marasigan, Angel R.
Sevilla and Gonzalo L. Luna, to recover from them the sum of
P3,780, alleging that it forms a part of the license fees which
Miguel Marasigan failed to pay for the privilege granted him of
gathering whitefish spawn (semillas de bañgus) in the
jurisdictional waters of the plaintiff municipality during the period
from January 1, 1931, to December 31 of said year.
The Court of First Instance of Marinduque, which tried the case,
rendered a decision adverse to the defendants, sentencing them
to pay jointly to the plaintiff said sum of P3,780 with legal interest
thereon from August 19, 1932, until fully paid, plus the costs of
the suit. From said judgment, the defendants appealed to this
court, attributing to the lower court the five alleged errors relied
upon in their brief, as follows:
I. The court a quo erred in holding and maintaining that,
notwithstanding the fact that resolution No. 161 of the municipal
council of Gasan which gave rise to the contract and bond,
Exhibits A and B, respectively, of the complaint, has been
declared null and void by the provincial board and by the
Executive Bureau, the contract and bond in question are valid and,
consequently, enforceable on the ground that said resolution No.
161 is within or had been adopted within the powers of the
council.
II. The court a quo erred in holding that even granting that the
contract Exhibit A is not valid de jure, it is a de facto contract as to
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
the defendants, particularly the defendant-grantee Miguel
Marasigan.
III. The court a quo erred in not absolving the defendants Angel R.
Sevilla and Gonzalo L. Luna, sureties of the defendant Miguel
Marasigan, notwithstanding the fact that resolution No. 161, by
virtue of which said defendant subscribed the bond Exhibit B of
the complaint, had been declared null and void by the provincial
board and by the Executive Bureau.
IV. The court a quo erred in holding that the herein defendant
Miguel Marasigan had taken advantage of the privilege to catch
or gather whitefish spawn in the jurisdictional waters of the
municipality of Gasan, during the period from January 1, to
December 31, 1931, notwithstanding the fact that counsel for the
plaintiff municipality failed to present evidence, either
documentary or oral, to justify said fact.
V. The court a quo erred in not absolving each and every one of
the herein defendants from the complaint, and in not ordering the
plaintiff municipality to return to the defendant Miguel Marasigan
the sums of four hundred twenty pesos (P420) and eight hundred
forty pesos (P840) deposited with said plaintiff, with interest
thereon from the respective dates of their deposit, until their
return.
The case was tried by the lower court with no other evidence than
the admissions made by the parties in the stipulation of facts
mentioned in the body of the decision, the pertinent parts of which
will be discussed later. Said stipulation and the attached papers
forming a part thereof enables this court to narrate the material
facts of the case, as follows:
The plaintiff-appellee municipality, on December 9, 1930, put up
at auction the privilege of gathering whitefish spawn in its
jurisdictional waters for the period of one year from January 1,
1931. Two bidders, Graciano Napa and Miguel Marasigan,
appeared at the auction. Both attached to their respective bids the
certificate of not being behind in the payment of any tax, issued
by the municipal treasurer of Gasan, Marinduque, as required by
the provisions of resolution No. 42, series of 1930, of the council
of said municipality. Graciano Napa proposed to accept the
privilege by paying P5,000 therefor, Miguel Marasigan proposed
to do likewise, but by paying only P4,200.
The council of the plaintiff-appellee municipality, in its resolution
No. 161 (Exhibit 1) of December 11, 1930 rejected Graciano
Napa's bid and accepted that of the appellant Miguel Marasigan,
granting and selling to the latter the privilege put up at auction for
the sum of P4,200, payable quarterly in advance at the rate of
P1,050 a quarter (Exhibit A). To secure his compliance with the
terms of the contract which was immediately formalized by him
and the plaintiff, and pursuant to the provisions of section 8 of
resolution No. 128, series of 1925, of the council of said plaintiff,
Miguel Marasigan filed the bond, Exhibit B, subscribed on
December 15, 1930, by the defendants-appellants Angel R.
Sevilla and Gonzalo L. Luna, who bound themselves in said
document to pay to the plaintiff the sum of P8,400, if Miguel
Marasigan failed to deposit one-fourth of P4,200 quarterly in
advance in the municipal treasury of Gasan, in violation of the
terms of the contract executed and entered into by him and the
plaintiff on December 11, 1930 (Exhibit A), for the compliance
with which they became sureties.
Before the plaintiff municipality and Miguel Marasigan entered
into their contract, and also before the latter's sureties executed
34
the above-stated bond, Graciano Napa, whose bid was rejected
for the reason that he had not attached thereto the certificate that
he is not behind in the payment of any tax which he should have
obtained from the municipal treasurer of Lemery, his native town,
forwarded a protest (Exhibit 4) to the provincial board, which
protest was later indorsed by said provincial board to the Chief of
the Executive Bureau, alleging that the plaintiff municipality
violated the provisions of section 2323 of the Administrative Code
in rejecting his bid.
The provincial board, passing upon Graciano Napa's protest and
acting under the authority which, in its opinion, was granted to it
by section 2233 of the Administrative Code, held that resolution
No. 161, series of 1930, by virtue of which the municipal council
of Gasan rejected Graciano Napa's bid and accepted that of
Miguel Marasigan, notwithstanding the fact that the latter offered
to pay less, was invalid, and suggested that the privilege should
be, awarded to Graciano Napa who, in its opinion, appeared to be
the highest bidder in accordance with the provisions of sections
2323 and 2319 of the Administrative Code (Exhibit 9). The
Executive Bureau, concurring with the provincial board's points of
view, declared, in turn, that the concession made to Marasigan
was illegal in view of the fact that Graciano Napa was the highest
bidder (Exhibit 13).
The plaintiff municipality, through its municipal council, exerted
efforts to obtain the reconsideration of the decisions of the
provincial board of Marinduque and of the Executive Bureau but,
as these two entities maintained their decisions (Exhibits 14, 15,
16, 17 and 18), it decided, in its resolution No. 11, series of 1931
(Exhibit 19), to award the privilege of gathering whitefish spawn
within its waters to Graciano Napa, giving him a period of six days,
which was later extended to seven days, from January 8, 1931
(Exhibit 19-A), to deposit the sum of P500, equivalent to 10 per
cent of his bid of P5,000, with the municipal treasurer of Gasan,
so as to comply with the provisions of section 8 of the conditions
of the public auction at which he was a bidder, warning him that if
he failed to do so, the contract entered into by the plaintiff,
through its president, and the appellant Miguel Marasigan (Exhibit
A), would automatically take effect. Graciano Napa not only failed
to make the deposit required by the plaintiff in its two
above-stated resolutions Nos. 11 and 12, series of 1931 (Exhibits
19 and 19-A), but he formally declared, through his duly
authorized representative, that he yielded the privilege granted
him to Miguel Marasigan or to any other person selected by the
municipal authorities (Exhibit 20).
One day later, or on January 15, 1931, the president of the
plaintiff-appellee municipality sent the letter Exhibit 21 to Miguel
Marasigan, which reads:
SIR:
By virtue of Res. No. 11, c. s., as amended by Res. No. 12, same
series, and communication of Mr. J. Zaguirre dated January 14,
1931 copy of which is hereto attached, you are hereby advised
that the contract entered into between you and the municipality of
Gasan for the lease of the bañgus fishery privilege for the year
1931 becomes effective on January 14, 1931, to run until
December 31, 1931.
You are hereby requested to appear before the session of the
Municipal Council to be held at the office of the undersigned
tomorrow, January 16, 1931, bringing with yourself the contract
and bond executed in your favor for ratification.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
You are further informed that you are given 10 days from the date
hereof, within which time you are to pay the amount of P1,050, as
per tax corresponding to the first quarter, 1931.
Prior to this, but after the adoption by the municipal council of
Gazan of its resolution No. 163 (Exhibit 7) on December 16, 1930,
and two days before the provincial board declared said council's
resolutions Nos. 161 and 163 invalid, the president of the
plaintiff-appellee municipality notified the appellant Miguel
Marasigan that the contract whereby he was granted the privilege
of gathering whitefish spawn during the year 1931, upon his offer
to pay P4,200 a year therefor, was suspended and that he should
consider it ineffective in the meantime in view of the fact that the
question whether he (Miguel Marasigan) or Graciano Napa was
the highest bidder still remained undecided by the provincial
board of Marinduque and by the Executive Bureau. The English
translation of the letter sent by the municipal president to Miguel
Marasigan, which was written in Tagalog (Exhibit 8), reads:
SIR:
In view of the fact that the whitefish (bañgus) case has not been
decided or determined by the provincial board and is still pending
action to date, and in view of the instructions given me by the
representative of the Executive Bureau, Mr. Jose Zaguirre, I beg
to inform you, with due respect, that you should refrain from
carrying out and giving efficacy to the contract signed by me in
the name of the municipality, relative to the privilege of gathering
whitefish in your favor, from this date until further notice, because
this case is still pending action.
Knowing the above-stated facts, let us now turn to the
consideration of the alleged errors attributed to the lower court by
the appellants.
The first and third errors should be considered jointly on account
of the close relation existing between them. The determination of
one depends upon that of the other.
This court believes that there is no necessity of even discussing
the first error because the plaintiff itself accepted the conclusions
and decision of the provincial board and of the Executive Bureau,
so much so that in its resolution No. 11, series of 1931, it
thereafter considered Graciano Napa as the highest bidder, going
to the extent of requiring him, as it in fact required him, to make
the deposit of P500 prescribed by the conditions of the auction
sale in which he had intervened, and granting him a period of
seven days to comply with said requirement (Exhibits 19 and
19-A). Furthermore, when the plaintiff received Graciano Napa's
notice informing it that he ceded the privilege just granted him to
appellant Miguel Marasigan or to any other person that it might
choose, said plaintiff, through its municipal president, required
Miguel Marasigan to appear before its municipal council to
present his formerly prepared contract as well as his bond in
order that both documents might be ratified (Exhibit 21). It should
be added to the foregoing that on December 18, 1930, the plaintiff,
also through its municipal president notified appellant Marasigan
that his contract should, in the meantime, be considered
ineffectual and that he should do nothing to put it in execution
because the case was still undecided by the provincial board and
by the Executive Bureau (Exhibit 8). It is clear that it may be
logically inferred from these facts that the contract regarding
fishing privilege entered into between the plaintiff and appellant
Marasigan on December 11, 1930 (Exhibit A), not only was not
consummated but was cancelled. Consequently, it now appears
useless and futile to discuss whether or not resolution No. 161
35
(Exhibit 1) is valid and legal. In either case, it is a fact that, said
contract ceased to have life or force to bind each of the
contracting parties. It ceased to be valid from the time it was
cancelled and this being so, neither the appellant Marasigan nor
his sureties or the appellants were bound to comply with the
terms of their respective contracts of fishing privilege and
suretyship. This is so, particularly with respect to the
sureties-appellants, because suretyship cannot exist without a
valid obligation (art. 1824 of the Civil Code). The obligation whose
compliance by the appellant Marasigan was guaranteed by the
sureties-appellants, was exclusively that appearing in Exhibit A,
which should begin on January 1, 1931, not on the 14th of said
month and year, and end on December 31st next. They
intervened in no other subsequent contract which the plaintiff and
Miguel Marasigan might have entered into on or after January 14,
1931. Guaranty is not, presume; it must be expressed and cannot
be extended beyond its specified limits (art. 1827 of the Civil
Code). Therefore, after eliminating the obligation for which said
sureties-appellants desired to answer with their bond, the bond
necessarily ceased and it ceases to have effects. Consequently,
said errors I and III are true and well founded.
As to the second error it must be known that among the
stipulations contained in the stipulation of facts submitted to the
court are the following:
21. That on July 20, 1931, Miguel Marasigan paid the sum of
P16.20 to the municipal treasurer of Gasan, as internal revenue
tax on sales of whitefish (bañgus) spawn amounting to P1,080
during the months of April, May and June, 1931; and that on
August 22, 1931, said Miguel Marasigan presented his sales book
to the municipal treasurer of Gasan, Mr. Gregorio D. Chavez, it
appearing therein that said Miguel Marasigan, in the month of
July, 1931, sold whitefish spawn amounting to P85; in the month
of August, 1931, none, and in the month of September, 1931,
none.
22. That Miguel Marasigan is he concessionaire of the privilege to
gather whitefish spawn in the jurisdictional waters of the
municipality of Boac, Marinduque, during the period from January
1, 1931, to December 31 of said year, and that during said period
of time he had paid the sales tax on the whitefish spawn in
question only in the municipality of Gasan, without having made
any payment in the municipality of Boac.
23. That defendant Miguel Marasigan, as bidder at the auction of
December 9, 1930, deposited in the municipal treasury of Gasan
the sum of P420, equivalent to 10 per cent of his bid at said
auction, and that said sum has not yet been returned to him to
date.
24. That on June 29, 1931, said Miguel Marasigan delivered
another sum of P840 to the municipal treasurer of Gasan, making
the total amount delivered by him to said municipal treasurer
P1,260, the corresponding receipt having been issued to Miguel
Marasigan to that effect.
The facts resulting from the stipulations in question warrant and
justify the inference that the appellant Miguel Marasigan
practically enjoyed the privilege of gathering whitefish spawn in
the jurisdictional waters of the municipality of Gasan, under the
terms of the contract executed by him on December 11, 1930, but
which was cancelled later by virtue of Graciano Napa's protest, at
least from the month of April to the month of July, 1931, inclusive.
If this were not true, he would not have paid, as he spontaneously
paid to the municipal treasurer of Gasan, the following sums:
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
P840 on June 29, 1931, and P16.20 on July 20 of said year, nor
presented, as he in fact presented to said official for inspection,
his sales book wherein it appears that his sales of whitefish
spawn during the month of July of said year amounted to P85.
The stipulation of facts, however, is silent as to whether or not he
enjoyed the privilege in question during the rest of the year. On
the contrary, it states he sold no whitefish spawn in August or
September.
The excuse now offered by appellant Marasigan in his brief that
the above-stated amounts were on account of license fees or
taxes on the privilege of gathering whitefish spawn in the
jurisdictional waters of Boac, obtained by him from said
municipality, is not supported by the evidence. If the payments
made by him as he claims them to be, he would have so stated in
the stipulations of facts. Not having done so and, furthermore, the
practice generally observed being to pay an obligation in the
municipality where the payment is due, the only conclusion
possible is that said appellant made all such payments on
account of the-tacit contract entered into by him and the plaintiff
after he had received the letter of January 15, 1931 (Exhibit 21),
sent to him by said plaintiff through its municipal president. This
conclusion is all the more logical because appellant Marasigan
insisted in his answer, and still continues to insist in his brief, that
the plaintiff is obliged to refund to him the amount of P1,260 which
he claims to have paid to it, and which is no other than the
amount of the two sums of P420 and P840 stated in the last two
paragraphs of the abovestated stipulation of facts. If it were really
true, as said appellant contends, that the sum of P840 was paid
by him on account of his contract for privilege of gathering
whitefish spawn, executed in his favor by the municipality of Boac,
he would not have insisted in his answer, nor would he now insist
in his brief, that said sum be refunded to him, because in the
absence of evidence to the contrary, it must be presumed that it
was transmitted by the municipal treasurer of Gasan to that of
Boac, inasmuch as accepting his contention, he was obliged to
pay something to the latter municipality by virtue of his alleged
contract with it.
For the foregoing reasons, the conclusion of this court with
respect to the second error attributed to the lower court by
appellant Marasigan is that said error is without merit. The truth is
that between him and the plaintiff, there was a tacit contract for
the privilege of gathering whitefish spawn in he jurisdictional
waters of the municipality of Gasan, based upon Exhibit A but
without the intervention of the sureties-appellants, for the
above-stated period, or from April to July, 1931, inclusive, which
is equivalent to one and one-third quarter. Said contract was one
which, by its nature, need not be in writing (sec. 335 of Act No.
190); but it is binding because it has all the essential requisites of
a valid contract (art. 1278 of the Civil Code).
The fourth error is practically disposed of by the same reasons
stated in passing upon the second error.
As to the fifth error, it must be stated that appellant Marasigan
really deposited in the municipal treasury of Gasan, as stated in
paragraph 23 of the stipulation of facts, the sum of P420 on
account of his cancelled original contract (Exhibit A), and that said
deposit has not yet been returned to him. Therefore, he is entitled
to be credited with said sum.
Summarizing all that has been stated heretofore, this court holds
that appellant Miguel Marasigan owes and is bound to pay to the
plaintiff municipality the proceeds of one and one-third quarter, for
the privilege of gathering whitefish spawn enjoyed by him in 1931,
at the rate of P4,200 a year or P1,400 (P1,050 for one quarter and
36
P350 for one-third of a quarter); but he is, in turn, entitled to be
credited with the sum of P420 deposited by him on December 9,
1930, and P840 paid by him on June 29, 1931, or the total
amount of P1,260. In other words, appellant Marasigan is bound
to pay the sum of P140 to the plaintiff.
In view of the foregoing considerations, this court absolves the
defendants-appellants Angel R. Sevilla and Gonzalo L. Luna from
the complaint and orders the defendant-appellant Miguel
Marasigan to pay the sum of P140 to the plaintiff municipality.
It is considered unnecessary to expressly mention appellant
Miguel Marasigan's counterclaim because, as may be seen, he is
credited in this judgment with the sum of P1,260 which is all that
he claims therein, without special pronouncement as to costs. So
ordered.
FIRST DIVISION
G.R. No. 165662 May 3, 2006
SELEGNA MANAGEMENT AND DEVELOPMENT
CORPORATION; and Spouses EDGARDO and ZENAIDA
ANGELES, Petitioners,
vs.
UNITED COCONUT PLANTERS BANK,* Respondent.
DECISION
PANGANIBAN, CJ:
A writ of preliminary injunction is issued to prevent an extrajudicial
foreclosure, only upon a clear showing of a violation of the
mortgagor’s unmistakable right. Unsubstantiated allegations of
denial of due process and prematurity of a loan are not sufficient
to defeat the mortgagee’s unmistakable right to an extrajudicial
foreclosure.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, assailing the May 4, 2004 Amended Decision2 and the
October 12, 2004 Resolution3 of the Court of Appeals (CA) in
CA-GR SP No. 70966. The challenged Amended Decision
disposed thus:
"WHEREFORE, the Motion for Reconsideration is GRANTED.
The July 18, 2003 Decision is hereby REVERSED and SET
ASIDE and another one entered GRANTING the petition and
REVERSING and SETTING ASIDE the March 15, 2002 Order of
the Regional Trial Court, Branch 58, Makati City in Civil Case No.
99-1061."4
The assailed Resolution denied reconsideration.
The Facts
On September 19, 1995, Petitioners Selegna Management and
Development Corporation and Spouses Edgardo and Zenaida
Angeles were granted a credit facility in the amount of P70 million
by Respondent United Coconut Planters Bank (UCPB). As
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
security for this credit facility, petitioners executed real estate
mortgages over several parcels of land located in the cities of
Muntinlupa, Las Piñas, Antipolo and Quezon; and over several
condominium units in Makati. Petitioners were likewise required
to execute a promissory note in favor of respondent every time
they availed of the credit facility. As required in these notes, they
paid the interest in monthly amortizations.
The parties stipulated in their Credit Agreement dated September
19, 1995,5 that failure to pay "any availment of the
accommodation or interest, or any sum due" shall constitute an
event of default,6 which shall consequently allow respondent bank
to "declare [as immediately due and payable] all outstanding
availments
of the accommodation together with accrued interest and any
other sum payable." 7
In need of further business capital, petitioners obtained from
UCPB an increase in their credit facility.8 For this purpose, they
executed a Promissory Note for P103,909,710.82, which was to
mature on March 26, 1999.9 In the same note, they agreed to an
interest rate of 21.75 percent per annum, payable by monthly
amortizations.
On December 21, 1998, respondent sent petitioners a demand
letter, worded as follows:
"Gentlemen:
"With reference to your loan with principal outstanding balance of
[P103,909,710.82], it appears from the records of United Coconut
Planters Bank that you failed to pay interest amortizations
amounting to [P14,959,525.10] on the Promissory Note on its due
date, 30 May 1998.
"x x x xxx
xxx
"Accordingly, formal demand is hereby made upon you to pay
your outstanding obligations in the total amount of
P14,959,525.10, which includes unpaid interest and penalties as
of 21 December 1998 due on the promissory note, eight (8) days
from date hereof."10
Respondent decided to invoke the acceleration provision in their
Credit Agreement. Accordingly, through counsel, it relayed its
move to petitioners on January 25, 1999 in a letter, which we
quote:
"Gentlemen:
"x x x xxx
xxx
"It appears from the record of [UCPB] that
you failed to pay the monthly interest due on
said obligation since May 30, 1998 as well as
the penalty charges due thereon. Despite
repeated demands, you refused and
continue to refuse to pay the same. Under
the Credit Agreements/Letter Agreements
you executed, failure to pay when due any
37
 installments of the loan or interest or any
sum due thereunder, is an event of default.
"Consequently, we hereby inform you that
our client has declared your principal
obligation in the amount of
[P103,909,710.82], interest and sums
payable under the Credit Agreement/Letter
Agreement/Promissory Note to be
immediately due and payable.
"Accordingly, formal demand is hereby made
upon you to please pay within five (5) days
from date hereof or up to January 29, 1999
the principal amount of [P103,909,710.82],
with the interest, penalty and other charges
due thereon, which as of January 25, 1999
amounts to [P17,351,478.55]."11
Respondent sent another letter of demand on March 4, 1999. It
contained a final demand on petitioners "to settle in full
[petitioners’] said past due obligation to [UCPB] within five (5)
days from [petitioners’] receipt of [the] letter."12
In response, petitioners paid respondent the amount of
P10,199,473.96 as partial payment of the accrued
interests.13 Apparently unsatisfied, UCPB applied for extrajudicial
foreclosure of petitioners’ mortgaged properties.
When petitioners received the Notice of Extra Judicial
Foreclosure Sale on May 18, 1999, they requested UCPB to give
them a period of sixty (60) days to update their accrued interest
charges; and to restructure or, in the alternative, to negotiate for a
takeout of their account.14
On May 25, 1999, the Bank denied petitioners’ request in these
words:
"This is to reply to your letter dated May 20, 1999, which confirms
the request you made the previous day when you paid us a visit.
"As earlier advised, your account has been referred to external
counsel for appropriate legal action. Demand has also been made
for the full settlement of your account.
"We regret that the Bank is unable to grant your request unless a
definite offer is made for settlement."15
In order to forestall the extrajudicial foreclosure scheduled for
May 31, 1999, petitioners filed a Complaint16 (docketed as Civil
Case No. 99-1061) for "Damages, Annulment of Interest, Penalty
Increase and Accounting with Prayer for Temporary Restraining
Order/Preliminary Injunction." All subsequent proceedings in the
trial court and in the CA involved only the propriety of issuing a
TRO and a writ of preliminary injunction.
Judge Josefina G. Salonga,17 then executive judge of the
Regional Trial Court (RTC) of Makati City, denied the Urgent
Ex-parte Motion for Immediate Issuance of a Temporary
Restraining Order (TRO), filed by petitioners. Judge Salonga
denied their motion on the ground that no great or irreparable
injury would be inflicted on them if the parties would first be
heard.18 Unsatisfied, petitioners filed an Ex-Parte Motion for
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Reconsideration, by reason of which the case was eventually
raffled to Branch 148, presided by Judge Oscar B. Pimentel. 19
After due hearing, Judge Pimentel issued an Order dated May 31,
1999, granting a 20-day TRO on the scheduled foreclosure of the
Antipolo properties, on the ground that the Notice of Foreclosure
had indicated an inexistent auction venue.20 To resolve that issue,
respondent filed a Manifestation21 that it would withdraw all its
notices relative to the foreclosure of the mortgaged properties,
and that it would re-post or re-publish a new set of notices.
Accordingly, in an Order dated September 6, 1999,22 Judge
Pimentel denied petitioners’ application for a TRO for having been
rendered moot by respondent’s Manifestation.23
Subsequently, respondent filed new applications for foreclosure in
the cities where the mortgaged properties were located.
Undaunted, petitioners filed another Motion for the Issuance of a
TRO/Injunction and a Supplementary Motion for the Issuance of
TRO/Injunction with Motion to Clarify Order of September 6,
1999.24
On October 27, 1999, Judge Pimentel issued an Order25 granting
a 20-day TRO in favor of petitioners. After several hearings, he
issued his November 26, 1999 Order,26 granting their prayer for a
writ of preliminary injunction on the foreclosures, but only for a
period of twenty (20) days. The Order states:
"Admitted by defendant witness is the fact that in all the notices of
foreclosure sale of the properties of the plaintiffs x x x it is stated
in each notice that the property will be sold at public auction to
satisfy the mortgage indebtedness of plaintiffs which as of August
31, 1999 amounts to P131,854,773.98.
"x x x xxx
xxx
"As the court sees it, this is the problem that should be addressed
by the defendant in this case and in the meantime, the notice of
foreclosure sale should be held in abeyance until such time as
these matters are clarified and cleared by the defendants x x x
Should the defendant be able to remedy the situation this court
will have no more alternative but to allow the defendant to
proceed to its intended action.
"x x x xxx
xxx
"WHEREFORE, premises considered, and finding compelling
reason at this point in time to grant the application for preliminary
injunction, the same is hereby granted upon posting of a
preliminary injunction bond in the amount of P3,500,000.00 duly
approved by the court, let a writ of preliminary injunction be
issued."27
The corresponding Writ of Preliminary Injunction28 was issued on
November 29, 1999.
Respondent moved for reconsideration. On the other hand,
petitioners filed a Motion to Clarify Order of November 26, 1999.
Conceding that the November 26 Order had granted an injunction
during the pendency of the case, respondent contended that the
injunctive writ merely restrained it for a period of 20 (twenty) days.
38
On December 29, 2000, Judge Pimentel issued an
Order29 granting respondent’s Motion for Reconsideration and
clarifying his November 26, 1999 Order in this manner:
"There may have been an error in the Writ of Preliminary
Injunction issued dated November 29, 1999 as the same
[appeared to be actually] an extension of the TRO issued by this
Court dated 27 October 1999 for another 20 days period.
Plaintiff’s seeks to enjoin defendants for an indefinite period
pending trial of the case.
"Be that as it may, the Court actually did not have any intention of
restraining the defendants from foreclosing plaintiff[s’] property for
an indefinite period and during the entire proceeding of the case x
x x.
The aggrieved respondent filed before the Court of Appeals a
Petition for Certiorari, seeking the nullification of the RTC Order
dated March 15, 2002, on the ground that it was issued with grave
abuse of discretion.38
The Special Fifteenth Division, speaking through Justice Rebecca
de Guia-Salvador, affirmed the ruling of Judge Dumayas. It held
that petitioners had a clear right to an injunction, based on the fact
that respondent had kept them in the dark as to how and why their
principal obligation had ballooned to almost P132 million. The CA
held that respondent’s refusal to give them a detailed accounting
had prevented the determination of the maturity of the obligation
and precluded the possibility of a foreclosure of the mortgaged
properties. Moreover, their payment of P10 million had the effect
of updating, and thereby averting the maturity of, the outstanding
obligation.39

"x x x xxx
Respondent filed a Motion for Reconsideration, which was
xxx
granted by a Special Division of Five of the Former Special
Fifteenth Division.
"What the [c]ourt wanted the defendants to do was to merely
modify the notice of [the] auction sale in order that the amount of
Ruling of the Court of Appeals
P131,854,773.98 x x x would not appear to be the value of each
property being sold on auction. x x x.30
Citing China Banking Corporation v. Court of Appeals, 40 the
appellate court held in its Amended Decision41 that the
"WHEREFORE, premises considered and after finding merit on
foreclosure proceedings should not be enjoined in the light of the
the arguments raised by herein defendants to be impressed with
clear failure of petitioners to meet their obligations upon
merit, and having stated in the Order dated 26 November 1999
maturity.42
that no other alternative recourse is available than to allow the
defendants to proceed with their intended action, the Court
hereby rules: Also citing Zulueta v. Reyes,43 the CA, through Justice Jose
Catral Mendoza, went on to say that a pending question on
accounting did not warrant an injunction on the foreclosure.
"1.] To give due course to defendant[‘]s motion for
reconsideration, as the same is hereby GRANTED, however, with
reservation that this Order shall take effect upon after its[] Parenthetically, the CA added that petitioners were not without
finality[.]"31 recourse or protection. Further, it noted their pending action for
annulment of interest, damages and accounting. It likewise said
that they could protect themselves by causing the annotation of lis
Consequently, respondent proceeded with the foreclosure sale of
pendens on the titles of the mortgaged or foreclosed properties.
some of the mortgaged properties. On the other hand, petitioners
filed an "[O]mnibus [M]otion [for Reconsideration] and to [S]pecify
the [A]pplication of the P92 [M]illion [R]ealized from the In his Separate Concurring Opinion,44 Justice Magdangal M. de
[F]oreclosure [S]ale x x x."32 Before this Omnibus Motion could be Leon added that a prior accounting was not essential to
resolved, Judge Pimentel inhibited himself from hearing the extrajudicial foreclosure. He cited Abaca Corporation v.
case.33 Garcia,45 which had ruled that Act No. 3135 did not require
mortgaged properties to be sold by lot or by only as much as
would cover just the obligation. Thus, he concluded that a request
The case was then re-raffled to Branch 58 of the RTC of Makati
for accounting -- for the purpose of determining whether the
City, presided by Judge Escolastico U. Cruz.34 The proceedings
proceeds of the auction would suffice to cover the indebtedness --
before him were, however, all nullified by the Supreme Court in its
would not justify an injunction on the foreclosure.
En Banc Resolution dated September 18, 2001.35 He was
eventually dismissed from service.36
Petitioners filed a Motion for Reconsideration dated May 31, 2004,
which the appellate court denied.46
The case was re-raffled to the pairing judge of Branch 58,
Winlove M. Dumayas. On March 15, 2002, Judge Dumayas
granted petitioners’ Omnibus Motion for Reconsideration and Hence, this Petition.47
Specification of the Foreclosure Proceeds, as follows:
Issues
"WHEREFORE, premises considered, the Motion to Reconsider
the Order dated December 29, 2000 is hereby granted and the
Petitioners raise the following issues for our consideration:
Order of November 26, 1999 granting the preliminary injunction is
reinstated subject however to the condition that all properties of
plaintiffs which were extrajudicially foreclosed though public p align="center">"I
bidding are subject to an accounting. [A]nd for this purpose
defendant bank is hereby given fifteen (15) days from notice "Whether or not the Honorable Court of
hereof to render an accounting on the proceeds realized from the Appeals denied the petitioners of due
foreclosure of plaintiffs’ mortgaged properties located in Antipolo, process.
Makati, Muntinlupa and Las Piñas."37
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 39
 "II
"Whether or not the Honorable Court of
Appeals supported its Amended Decision by
invoking jurisprudence not applicable and
completely identical with the instant case.
"III
"Whether or not the Honorable Court of
Appeals failed to establish its finding that
RTC Judge Winlove Dumayas has acted with
grave abuse of discretion."48
The resolution of this case hinges on two issues: 1) whether
petitioners are in default; and 2) whether there is basis for
preliminarily enjoining the extrajudicial foreclosure. The other
issues raised will be dealt with in the resolution of these two main
questions.
The Court’s Ruling
The Petition has no merit.
First Issue:
Default
The resolution of the present controversy necessarily begins with
a determination of respondent’s right to foreclose the mortgaged
properties extrajudicially.
It is a settled rule of law that foreclosure is proper when the
debtors are in default of the payment of their obligation. In fact,
the parties stipulated in their credit agreements, mortgage
contracts and promissory notes that respondent was authorized
to foreclose on the mortgages, in case of a default by petitioners.
That this authority was granted is not disputed.
Mora solvendi, or debtor’s default, is defined as a delay49 in the
fulfillment of an obligation, by reason of a cause imputable to the
debtor.50 There are three requisites necessary for a finding of
default. First, the obligation is demandable and liquidated; second,
the debtor delays performance; third, the creditor judicially or
extrajudicially requires the debtor’s performance.51
Mortgagors’ Default of Monthly Interest Amortizations
In the present case, the Promissory Note executed on March 29,
1998, expressly states that petitioners had an obligation to pay
monthly interest on the principal obligation. From respondent’s
demand letter,52 it is clear and undisputed by petitioners that they
failed to meet those monthly payments since May 30, 1998. Their
nonpayment is defined as an "event of default" in the parties’
Credit Agreement, which we quote:
"Section 8.01. Events of Default. Each of the following events and
occurrences shall constitute an Event of Default of this
AGREEMENT:
"1. The CLIENT shall fail to pay, when due, any availment of the
Accommodation or interest, or any other sum due thereunder in
accordance with the terms thereof; 1avvphil. net
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
"x x x xxx
x x x"
"Section 8.02. Consequences of Default. (a) If an Event of Default
shall occur and be continuing, the Bank may:
"1. By written notice to the CLIENT, declare all outstanding
availments of the Accommodation together with accrued interest
and any other sum payable hereunder to be immediately due and
payable without presentment, demand or notice of any kind, other
than the notice specifically required by this Section, all of which
are expressly waived by the CLIENT[.]"53
Considering that the contract is the law between the
parties,54 respondent is justified in invoking the acceleration
clause declaring the entire obligation immediately due and
payable.55 That clause obliged petitioners to pay the entire loan
on January 29, 1999, the date fixed by respondent.56
Petitioners’ failure to pay on that date set into effect Article IX of
the Real Estate Mortgage,57 worded thus:
"If, at any time, an event of default as defined in the credit
agreements, promissory notes and other related loan documents
referred to in paragraph 5 of ARTICLE I hereof (sic), or the
MORTGAGOR and/or DEBTOR shall fail or refuse to pay the
SECURED OBLIGATIONS, or any of the amortization of such
indebtedness when due, or to comply any (sic) of the conditions
and stipulations herein agreed, x x x then all the obligations of the
MORTGAGOR secured by this MORTGAGE and all the
amortizations thereof shall immediately become due, payable and
defaulted and the MORTGAGEE may immediately foreclose this
MORTGAGE judicially in accordance with the Rules of Court, or
extrajudicially in accordance with Act No. 3135, as amended, and
Presidential Decree No. 385. For the purpose of extrajudicial
foreclosure, the MORTGAGOR hereby appoints the
MORTGAGEE his/her/its attorney-in-fact to sell the property
mortgaged under Act No. 3135, as amended, to sign all
documents and perform any act requisite and necessary to
accomplish said purpose and to appoint its substitutes as such
attorney-in-fact with the same powers as above specified. x x
x[.]"58
The foregoing discussion satisfactorily shows that UCPB had
every right to apply for extrajudicial foreclosure on the basis of
petitioners’ undisputed and continuing default.
Petitioners’ Debt Considered Liquidated Despite the Alleged
Lack of Accounting
Petitioners do not even attempt to deny the aforementioned
matters. They assert, though, that they have a right to a detailed
accounting before they can be declared in default. As regards the
three requisites of default, they say that the first requisite --
liquidated debt -- is absent. Continuing with foreclosure on the
basis of an unliquidated obligation allegedly violates their right to
due process. They also maintain that their partial payment of P10
million averted the maturity of their obligation.59
On the other hand, respondent asserts that questions regarding
the running balance of the obligation of petitioners are not valid
reasons for restraining the foreclosure. Nevertheless, it maintains
that it has furnished them a detailed monthly statement of
account.
40
A debt is liquidated when the amount is known or is determinable
by inspection of the terms and conditions of the relevant
promissory notes and related documentation.60 Failure to furnish
a debtor a detailed statement of account does not ipso facto result
in an unliquidated obligation.
Petitioners executed a Promissory Note, in which they stated that
their principal obligation was in the amount of P103,909,710.82,
subject to an interest rate of 21.75 percent per annum.61 Pursuant
to the parties’ Credit Agreement, petitioners likewise know that
any delay in the payment of the principal obligation will subject
them to a penalty charge of one percent per month, computed
from the due date until the obligation is paid in full.62
It is in fact clear from the agreement of the parties that when the
payment is accelerated due to an event of default, the penalty
charge shall be based on 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 provides for the
application of payments.64 It appears from the agreements that
the amount of total obligation is known or, at the very least,
determinable.
Moreover, when they made their partial payment, petitioners did
not question the principal, interest or penalties demanded from
them. They only sought additional time to update their interest
payments or to negotiate a possible restructuring of their
account.65 Hence, there is no basis for their allegation that a
statement of account was necessary for them to know their
obligation. We cannot impair respondent’s right to foreclose the
properties on the basis of their unsubstantiated allegation of a
violation of due process.
In Spouses Estares v. CA,66 we did not find any justification to
grant a preliminary injunction, even when the mortgagors were
disputing the amount being sought from them. We held in that
case that "[u]pon the nonpayment of the loan, which was secured
by the mortgage, the mortgaged property is properly subject to a
foreclosure sale."67
Compared with Estares, the denial of injunctive relief in this case
is even more imperative, because the present petitioners do not
even assail the amounts due from them. Neither do they contend
that a detailed accounting would show that they are not in default.
A pending question regarding the due amount was not a sufficient
reason to enjoin the foreclosure in Estares. Hence, with more
reason should injunction be denied in the instant case, in which
there is no dispute as to the outstanding obligation of petitioners.
At any rate, whether respondent furnished them a detailed
statement of account is a question of fact that this Court need not
and will not resolve in this instance. As held in Zulueta v.
Reyes,68 in which there was no genuine controversy as to the
amounts due and demandable, the foreclosure should not be
restrained by the unnecessary question of accounting.
Maturity of the Loan Not Averted by Partial Compliance with
Respondent’s Demand
Petitioners allege that their partial payment of P10 million on
March 25, 1999, had the effect of forestalling the maturity of the
loan;69 hence the foreclosure proceedings are premature. 70 We
disagree.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
To be sure, their partial payment did not extinguish the obligation.
The Civil Code states that a debt is not paid "unless the thing x x x
in which the obligation consists has been completely delivered x x
x."71 Besides, a late partial payment could not have possibly
forestalled a long-expired maturity date.
The only possible legal relevance of the partial payment was to
evidence the mortgagee’s amenability to granting the mortgagor a
grace period. Because the partial payment would constitute a
waiver of the mortgagee’s vested right to foreclose, the grant of a
grace period cannot be casually assumed;72 the bank’s
agreement must be clearly shown. Without a doubt, no express
agreement was entered into by the parties. Petitioners only
assumed that their partial payment had satisfied respondent’s
demand and obtained for them more time to update their
account.73
Petitioners are mistaken. When creditors receive partial payment,
they are not ipso facto deemed to have abandoned their prior
demand for full payment. Article 1235 of the Civil Code provides:
"When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest
or objection, the obligation is deemed fully complied with."
Thus, to imply that creditors accept partial payment as complete
performance of their obligation, their acceptance must be made
under circumstances that indicate their intention to consider the
performance complete and to renounce their claim arising from
the defect.74
There are no circumstances that would indicate a renunciation of
the right of respondent to foreclose the mortgaged properties
extrajudicially, on the basis of petitioners’ continuing default. On
the contrary, it asserted its right by filing an application for
extrajudicial foreclosure after receiving the partial payment.
Clearly, it did not intend to give petitioners more time to meet their
obligation.
Parenthetically, respondent cannot be reproved for accepting
their partial payment. While Article 1248 of the Civil Code states
that creditors cannot be compelled to accept partial payments, it
does not prohibit them from accepting such payments.
Second Issue:
Enjoining the Extrajudicial Foreclosure
A writ of preliminary injunction is a provisional remedy that may
be resorted to by litigants, only to protect or preserve their rights
or interests during the pendency of the principal action. To
authorize a temporary injunction, the plaintiff must show, at least
prima facie, a right to the final relief.75 Moreover, it must show that
the invasion of the right sought to be protected is material and
substantial, and that there is an urgent and paramount necessity
for the writ to prevent serious damage.76
In the absence of a clear legal right, the issuance of the injunctive
writ constitutes grave abuse of discretion. Injunction is not
designed to protect contingent or future rights. It is not proper
when the complainant’s right is doubtful or disputed.77
As a general rule, courts should avoid issuing this writ, which in
effect disposes of the main case without trial. 78 In Manila
41
International Airport Authority v. CA,79 we urged courts to exercise
caution in issuing the writ, as follows:
"x x x. We remind trial courts that while generally the grant of a
writ of preliminary injunction rests on the sound discretion of the
court taking cognizance of the case, extreme caution must be
observed in the exercise of such discretion. The discretion of the
court a quo to grant an injunctive writ must be exercised based on
the grounds and in the manner provided by law. Thus, the Court
declared in Garcia v. Burgos:
‘It has been consistently held that there is no power the exercise
of which is more delicate, which requires greater caution,
deliberation and sound discretion, or more dangerous in a
doubtful case, than the issuance of an injunction. It is the strong
arm of equity that should never be extended unless to cases of
great injury, where courts of law cannot afford an adequate or
commensurate remedy in damages.
‘Every court should remember that an injunction is a limitation
upon the freedom of action of the defendant and should not be
granted lightly or precipitately. It should be granted only when the
court is fully satisfied that the law permits it and the emergency
demands it.’"80 (Citations omitted)
Petitioners do not have any clear right to be protected. As shown
in our earlier findings, they failed to substantiate their allegations
that their right to due process had been violated and the maturity
of their obligation forestalled. Since they indisputably failed to
meet their obligations in spite of repeated demands, we hold that
there is no legal justification to enjoin respondent from enforcing
its undeniable right to foreclose the mortgaged properties.
In any case, petitioners will not be deprived outrightly of their
property. Pursuant to Section 47 of the General Banking Law of
2000,81 mortgagors who have judicially or extrajudicially sold their
real property for the full or partial payment of their obligation have
the right to redeem the property within one year after the sale.
They can redeem their real estate by paying the amount due, with
interest rate specified, under the mortgage deed; as well as all the
costs and expenses incurred by the bank.82
Moreover, in extrajudicial foreclosures, petitioners have the right
to receive any surplus in the selling price. This right was
recognized in Sulit v. CA,83 in which the Court held that "if the
mortgagee is retaining more of the proceeds of the sale than he is
entitled to, this fact alone will not affect the validity of the sale but
simply gives the mortgagor a cause of action to recover such
surplus."84
Petitioners failed to demonstrate the prejudice they would
probably suffer by reason of the foreclosure. Also, it is clear that
they would be adequately protected by law. Hence, we find no
legal basis to reverse the assailed Amended Decision of the CA
dated May 4, 2004.
WHEREFORE, the Petition is DENIED and the assailed
Amended Decision and Resolution AFFIRMED. Costs against
petitioners. SO ORDERED.
SECOND DIVISION
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
G.R. No. L-49401 July 30, 1982
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance of
Davao, and RESIDORO CHUA, respondents.
Laurente C. Ilagan for petitioner.
Victor A. Clapano for respondents.
DE CASTRO, J.:
Petition for certiorari to annul the orders of respondent judge
dated October 6, 1978 and November 7, 1978 in Civil Case No.
11-154 of the Court of First Instance of Davao, which granted the
motion filed by private respondent to dismiss the complaint of
petitioner for a sum of money, on the ground that the complaint
states no cause of action as against private respondent.
After the petition had been filed, petitioner, on December 14,
1978 mailed a manifestation and motion requesting the special
civil action for certiorari be treated as a petition for review. 1 Said
manifestation and motion was noted in the resolution
of January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua
and Enrique Go, Sr. executed a comprehensive
surety agreements 3 to guaranty among others, any
existing indebtedness of Davao Agricultural
Industries Corporation (referred to therein as
Borrower, and as Daicor in this decision), and/or
induce the bank at any time or from time to time
thereafter, to make loans or advances or to extend
credit in other manner to, or at the request, or for the
account of the Borrower, either with or without
security, and/or to purchase on discount, or to make
any loans or advances evidenced or secured by any
notes, bills, receivables, drafts, acceptances, checks
or other evidences of indebtedness (all hereinafter
called "instruments") upon which the Borrower is or
may become liable, provided that the liability shall
not exceed at any one time the aggregate principal
sum of P100,000.00.
in the amount of
On April 29, 1977 a promissory note 4
P100,000.00 was issued in favor of petitioner
payable on June 13, 1977. Said note was signed by
Enrique Go, Sr. in his personal capacity and in
behalf of Daicor. The promissory note was not fully
paid despite repeated demands; hence, on June 30,
1978, petitioner filed a complaint for a sum of money
against Daicor, Enrique Go, Sr. and Residoro Chua.
A motion to dismiss dated September 23, 1978 was
filed by respondent Residoro Chua on the ground
42
that the complaint states no cause of action as
against him. 5 It was alleged in the motion that he
can not be held liable under the promissory note
because it was only Enrique Go, Sr. who signed the
same in behalf of Daicor and in his own personal
capacity.
In an opposition dated September 26, 1978 6petitioner
alleged that by virtue of the execution of the
comprehensive surety agreement, private
respondent is liable because said agreement covers
not merely the promissory note subject of the
complaint, but is continuing; and it encompasses
every other indebtedness the Borrower may, from
time to time incur with petitioner bank.
On October 6, 1978 respondent court rendered a decision
granting private respondent's motion to dismiss the
complaint. 7 Petitioner filed a motion for
reconsideration dated October 12, 1978 and on
November 7, 1978 respondent court issued an order
denying the said motion. 8
The sole issue resolved by respondent court was the
interpretation of the comprehensive surety agreement,
particularly in reference to the indebtedness evidenced by the
promissory note involved in the instant case, said comprehensive
surety agreement having been signed by Enrique Go, Sr. and
private respondent, binding themselves as solidary debtors of
said corporation not only to existing obligations but to future ones.
Respondent court said that corollary to that agreement must be
another instrument evidencing the obligation in a form of a
promissory note or any other evidence of indebtedness without
which the said agreement serves no purpose; that since the
promissory notes, which is primarily the basis of the cause of
action of petitioner, is not signed by private respondent, the latter
can not be liable thereon.
Contesting the aforecited decision and order of respondent judge,
the present petition was filed before this Court assigning the
following as errors committed by respondent court:
1. That the respondent court erred in dismissing the complaint
against Chua simply on the reasons that 'Chua is not a signatory
to the promissory note" of April 29, 1977, or that Chua could not
be held liable on the note under the provisions of the
comprehensive surety agreement of October 29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of
the Comprehensive Surety Agreement towards the conclusion
that respondent Chua is not liable on the promissory note
because said note is not conformable to the Comprehensive
Surety Agreement; and/or
3. That the respondent court erred in ordering that there is no
cause of action against respondent Chua in the petitioner's
complaint.
The main issue involved in this case is whether private
respondent is liable to pay the obligation evidence by the
promissory note dated April 29,1977 which he did not sign, in the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
light of the provisions of the comprehensive surety agreement
which petitioner and private respondent had earlier executed on
October 19, 1976.
We find for the petitioner. The comprehensive surety agreement
was jointly executed by Residoro Chua and Enrique Go, Sr.,
President and General Manager, respectively of Daicor, on
October 19, 1976 to cover existing as well as future obligations
which Daicor may incur with the petitioner bank, subject only to
the proviso that their liability shall not exceed at any one time the
aggregate principal sum of P100,000.00. Thus, paragraph I of the
agreement provides:
For and in consideration of any existing indebtedness to you of
Davao Agricultural Industries Corporation with principal place of
business and postal address at 530 J. P. Cabaguio Ave., Davao
City (hereinafter called the "Borrower), and/or in order to induce,
you in your discretion, at any time or from time to time hereafter,
to make loans or advances or to extend credit in any other
manner to, or at he request or for the account of the Borrower,
either with or without security, and/or to purchase or discount or to
make any loans or advances evidenced or secured by any notes,
bills, receivables, drafts, acceptances, checks or other
instruments or evidences of indebtedness (all hereinafter called
"instruments") upon which the Borrower is or may become liable
as maker, endorser, acceptor, or otherwise) the undersigned
agrees to guarantee, and does hereby guarantee in joint and
several capacity, the punctual payment at maturity to you of any
and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter
become due or owing to you by the Borrower, together with any
and all expenses which may be incurred by you in collecting an
such instruments or other indebtedness or obligations
hereinbefore referred to ..., provided, however, that the liability of
the undersigned shag not exceed at any one time the aggregate
principal sum of P100,000.00 ...
The agreement was executed obviously to induce petitioner to
grant any application for a loan Daicor may desire to obtain from
petitioner bank. The guaranty is a continuing one which shall
remain in full force and effect until the bank is notified of its
termination.
This is a continuing guaranty and shall remain in fun force and
effect until written notice shall have been received by you that it
has been revoked by the undersigned, ... 9
At the time the loan of P100,000.00 was obtained from petitioner
by Daicor, for the purpose of having an additional capital for
buying and selling coco-shell charcoal and importation of
activated carbon, 10 the comprehensive surety
agreement was admittedly in full force and effect.
The loan was, therefore, covered by the said
agreement, and private respondent, even if he did
not sign the promisory note, is liable by virtue of the
surety agreement. The only condition that would
make him liable thereunder is that the Borrower "is
or may become liable as maker, endorser, acceptor
or otherwise". There is no doubt that Daicor is liable
on the promissory note evidencing the
indebtedness.
43
The surety agreement which was earlier signed by Enrique Go, Sr.
and private respondent, is an accessory obligation, it being
dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note. What
obviously induced petitioner bank to grant the loan was the surety
agreement whereby Go and Chua bound themselves solidarily to
guaranty the punctual payment of the loan at maturity. By terms
that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil
Code. Thus —
Article 2053. — A guaranty may also be given as security for
future debts, the amount of which is not yet known; there can be
no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.
In view of the foregoing, the decision (which should have been a
mere "order"), dismissing the complaint is reversed and set side.
The case is remanded to the court of origin with instructions to set
aside the motion to dismiss, and to require defendant Residoro
Chua to answer the complaint after which the case shall proceed
as provided by the Rules of Court. No costs. SO ORDERED.
THIRD DIVISION
G.R. No. 89775 November 26, 1992
JACINTO UY DIÑO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN BANK AND
TRUST COMPANY, respondents.
DAVIDE, JR., J.:
Continuing Suretyship Agreements signed by the petitioners set
off this present controversy.
Petitioners assail the 22 June 1989 Decision of the Court in
CA-G.R. CV No. 17724 which reversed the 2 December 1987
1
Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a
collection suit entitled "Metropolitan Bank and Trust Company vs. Uy
Tiam, doing business under the name of "UY TIAM ENTERPRISES &
FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" and
docketed as Civil Case No. 82-9303. They likewise challenge public
respondent's Resolution of 21 August 1989 denying their motion for
2 source of his liability is the Continuing Suretyship which he
the reconsideration of the former.
The impugned Decision of the Court summarizes the antecedent
facts as follows:
It appears that in 1977, Uy Tiam Enterprises and Freight Services
(hereinafter referred to as UTEFS), thru its representative Uy
Tiam, applied for and obtained credit accommodations (letter of
credit and trust receipt accommodations) from the Metropolitan
Bank and Trust Company (hereinafter referred to as
METROBANK) in the sum of P700,000.00 (Original Records, p.
333). To secure the aforementioned credit accommodations
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Norberto Uy and Jacinto Uy Diño executed separate Continuing
Suretyships (Exhibits "E" and "F" respectively), dated 25 February
1977, in favor of the latter. Under the aforesaid agreements,
Norberto Uy agreed to pay METROBANK any indebtedness of
UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy
Diño agreed to be bound up to the aggregate sum of
P800,000.00.
Having paid the obligation under the above letter of credit in 1977,
UTEFS, through Uy Tiam, obtained another credit
accommodation from METROBANK in 1978, which credit
accommodation was fully settled before an irrevocable letter of
credit was applied for and obtained by the abovementioned
business entity in 1979 (September 8, 1987, tsn, pp. 14-15).
The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30,
1979, in the sum of P815, 600.00, covered UTEFS' purchase of
"8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It
was applied for and obtain by UTEFS without the participation of
Norberto Uy and Jacinto Uy Diño as they did not sign the
document denominated as "Commercial Letter of Credit and
Application." Also, they were not asked to execute any suretyship
to guarantee its payment. Neither did METROBANK nor UTEFS
inform them that the 1979 Letter of Credit has been opened and
the Continuing Suretyships separately executed in February,
1977 shall guarantee its payment (Appellees brief, pp. 2-3; rollo, p.
28).
The 1979 letter of credit (Exhibit "B") was negotiated.
METROBANK paid Planters Products the amount of P815,600.00
which payment was covered by a Bill of Exchange (Exhibit "C"),
dated 4 June 1979, in favor of (Original Records, p. 331).
Pursuant to the above commercial transaction, UTEFS executed
and delivered to METROBANK and Trust Receipt (Exh. "D"),
dated 4 June 1979, whereby the former acknowledged receipt in
trust from the latter of the aforementioned goods from Planters
Products which amounted to P815, 600.00. Being the entrusted,
the former agreed to deliver to METROBANK the entrusted goods
in the event of non-sale or, if sold, the proceeds of the sale
thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory stipulations
in the trust receipt. As a consequence, METROBANK sent letters
to the said principal obligor and its sureties, Norberto Uy and
Jacinto Uy Diño, demanding payment of the amount due.
Informed of the amount due, UTEFS made partial payments to
the Bank which were accepted by the latter.
Answering one of the demand letters, Diño, thru counsel, denied
his liability for the amount demanded and requested
METROBANK to send him copies of documents showing the
source of his liability. In its reply, the bank informed him that the
executed on February 25, 1977.
As a rejoinder, Diño maintained that he cannot be held liable for
the 1979 credit accommodation because it is a new obligation
contracted without his participation. Besides, the 1977 credit
accommodation which he guaranteed has been fully paid.
Having sent the last demand letter to UTEFS, Diño and Uy and
finding resort to extrajudicial remedies to be futile, METROBANK
filed a complaint for collection of a sum of money (P613,339.32,
as of January 31, 1982, inclusive of interest, commission penalty
and bank charges) with a prayer for the issuance of a writ of
44
preliminary attachment, against Uy Tiam, representative of
UTEFS and impleaded Diño and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the
attachment writ, which writ was returned unserved and
unsatisfied as defendant Uy Tiam was nowhere to be found at his
given address and his commercial enterprise was already
non-operational (Original Records, p. 37).
On April 11, 1984, Norberto Uy and Jacinto Uy Diño
(sureties-defendant herein) filed a motion to dismiss the
complaint on the ground of lack of cause of action. They
maintained that the obligation which they guaranteed in 1977 has
been extinguished since it has already been paid in the same
year. Accordingly, the Continuing Suretyships executed in 1977
cannot be availed of to secure Uy Tiam's Letter of Credit obtained
in 1979 because a guaranty cannot exist without a valid obligation.
It was further argued that they can not be held liable for the
obligation contracted in 1979 because they are not privies thereto
as it was contracted without their participation (Records, pp.
42-46).
On April 24, 1984, METROBANK filed its opposition to the motion
to dismiss. Invoking the terms and conditions embodied in the
comprehensive suretyships separately executed by
sureties-defendants, the bank argued that sureties-movants
bound themselves as solidary obligors of defendant Uy Tiam to
both existing obligations and future ones. It relied on Article 2053
of the new Civil Code which provides: "A guaranty may also be
given as security for future debts, the amount of which is not yet
known; . . . ." It was further asserted that the agreement was in full
force and effect at the time the letter of credit was obtained in
1979 as sureties-defendants did not exercise their right to revoke
it by giving notice to the bank. (Ibid., pp. 51-54).
Meanwhile, the resolution of the aforecited motion to dismiss was
held in abeyance pending the introduction of evidence by the
parties as per order dated February 21, 1986 (Ibid., p. 71).
Having been granted a period of fifteen (15) days from receipt of
the order dated March 7, 1986 within which to file the answer,
sureties-defendants filed their responsive pleading which merely
rehashed the arguments in their motion to dismiss and
maintained that they are entitled to the benefit of excussion
(Original Records, pp. 88-93).
On February 23, 1987, plaintiff filed a motion to dismiss the
complaint against defendant Uy Tiam on the ground that it has no
information as to the heirs or legal representatives of the latter
who died sometime in December, 1986, which motion was
granted on the following day (Ibid., pp. 180-182).
After trial, . . . the court a quo, on December 2, 198, rendered its
judgment, a portion of which reads:
The evidence and the pleadings, thus, pose the querry (sic):
Are the defendants Jacinto Uy Diñoand Norberto Uy liable for the
obligation contracted by Uy Tiam under the Letter of Credit
(Exh. B) issued on March 30, 1987 by virtue of the Continuing
Suretyships they executed on February 25, 1977?
Under the admitted proven facts, the Court finds that they are not.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
a) When Uy and Diño executed the continuing suretyships,
exhibits E and F, on February 25, 1977, Uy Tiam was obligated to
the plaintiff in the amount of P700,000.00 — and this was the
obligation which both obligation which both defendants
guaranteed to pay. Uy Tiam paid this 1977 obligation –– and such
payment extinguished the obligation they assumed as
guarantors/sureties.
b) The 1979 Letter of Credit (Exh. B) is different from the 1977
Letter of Credit which covered the 1977 account of Uy Tiam. Thus,
the obligation under either is apart and distinct from the obligation
created in the other — as evidenced by the fact that Uy Tiam had
to apply anew for the 1979 transaction (Exh. A). And Diño and Uy,
being strangers thereto, cannot be answerable thereunder.
c) The plaintiff did not serve notice to the defendants Diño and Uy
when it extended to Credit — at least to inform them that the
continuing suretyships they executed on February 25, 1977 will
be considered by the plaintiff to secure the 1979 transaction of Uy
Tiam.
d) There is no sufficient and credible showing that Diño and Uy
were fully informed of the import of the Continuing Suretyships
when they affixed their signatures thereon –– that they are
thereby securing all future obligations which Uy Tiam may
contract the plaintiff. On the contrary, Diño and Uy categorically
testified that they signed the blank forms in the office of Uy Tiam
at 623 Asuncion Street, Binondo, Manila, in obedience to the
instruction of Uy Tiam, their former employer. They denied having
gone to the office of the plaintiff to subscribe to the documents
(October 1, 1987, tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8,
13-16). (Records, pp. 333-334). 3
xxx xxx xxx
In its Decision, the trial court decreed as follows:
PREMISES CONSIDERED, judgment is hereby rendered:
a) dismissing the COMPLAINT against JACINTO UY DIÑO and
NORBERTO UY;
b) ordering the plaintiff to pay to Diño and Uy the amount of
P6,000.00 as attorney's fees and expenses of litigation; and
c) denying all other claims of the parties for want of legal and/or
factual basis.
SO ORDERED. (Records, p. 336) 4
From the said Decision, the private respondent appealed to the
Court of Appeals. The case was docketed as CA-G.R. CV No.
17724. In support thereof, it made the following assignment of
errors in its Brief:
I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING
AND HOLDING THAT DEFENDANTS-APPELLEES JACINTO
UY DIÑO AND NORBERTO UY ARE SOLIDARILY LIABLE TO
PLAINTIFF-APPELLANT FOR THE OBLIGATION OF
DEFENDANT UY TIAM UNDER THE LETTER OF CREDIT
ISSUED ON MARCH 30, 1979 BY VIRTUE OF THE
CONTINUING SURETYSHIPS THEY EXECUTED ON
FEBRUARY 25, 1977.
45
II. THE LOWER COURT ERRED IN HOLDING THAT
PLAINTIFF-APPELLANT IS ANSWERABLE TO
DEFENDANTS-APPELLEES JACINTO UY DIÑO AND
NORBERTO UY FOR ATTORNEY'S FEES AND EXPENSES OF
LITIGATION. 5
On 22 June 1989, public respondent promulgated the assailed
Decision the dispositive portion of which reads:
WHEREFORE, premises considered, the judgment appealed
from is hereby REVERSED AND SET, ASIDE. In lieu thereof,
another one is rendered:
1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy
to pay, jointly and severally, to appellant METROBANK the
amount of P2,397,883.68 which represents the amount due as of
July 17, 1987 inclusive of principal, interest and charges;
2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy
to pay, jointly and severally, appellant METROBANK the accruing
interest, fees and charges thereon from July 18, 1987 until the
whole monetary obligation is paid; and
3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy
to pay, jointly and severally, to plaintiff P20,000.00 as attorney's
fees.
With costs against appellees.
SO ORDERED. 6 1. Whether petitioners are liable as sureties for the 1979
In ruling for the herein private respondent (hereinafter
METROBANK), public respondent held that the Continuing
Suretyship Agreements separately executed by the petitioners in
1977 were intended to guarantee payment of Uy Tiam's
outstanding as well as future obligations; each suretyship
arrangement was intended to remain in full force and effect until
METROBANK would have been notified of its revocation. Since
no such notice was given by the petitioners, the suretyships are
deemed outstanding and hence, cover even the 1979 letter of
credit issued by METROBANK in favor of Uy Tiam.
Petitioners filed a motion to reconsider the foregoing Decision.
They questioned the public respondent's construction of the
suretyship agreements and its ruling with respect to the extent of
their liability thereunder. They argued the even if the agreements
were in full force and effect when METROBANK granted Uy
Tiam's application for a letter of credit in 1979, the public
respondent nonetheless seriously erred in holding them liable for
an amount over and above their respective face values.
In its Resolution of 21 August 1989, public respondent denied the
motion:
. . . considering that the issues raised were substantially the same
grounds utilized by the lower court in rendering judgment for
defendants-appellees which We upon appeal found and resolved
to be untenable, thereby reversing and setting aside said
judgment and rendering another in favor of plaintiff, and no new or
fresh issues have been posited to justify reversal of Our decision
herein, . . . .
7
Hence, the instant petition which hinges on the issue of whether
or not the petitioners may be held liable as sureties for the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
obligation contracted by Uy Tiam with METROBANK on 30 May
1979 under and by virtue of the Continuing Suretyship
Agreements signed on 25 February 1977.
Petitioners vehemently deny such liability on the ground that the
Continuing Suretyship Agreements were automatically
extinguished upon payment of the principal obligation secured
thereby, i.e., the letter of credit obtained by Uy Tiam in 1977.
They further claim that they were not advised by either
METROBANK or Uy Tiam that the Continuing Suretyship
Agreements would stand as security for the 1979 obligation.
Moreover, it is posited that to extend the application of such
agreements to the 1979 obligation would amount to a violation of
Article 2052 of the Civil Code which expressly provides that a
guaranty cannot exist without a valid obligation. Petitioners further
argue that even granting, for the sake of argument, that the
Continuing Suretyship Agreements still subsisted and thereby
also secured the 1979 obligations incurred by Uy Tiam, they
cannot be held liable for more than what they guaranteed to pay
because it s axiomatic that the obligations of a surety cannot
extend beyond what is stipulated in the agreement.
On 12 February 1990, this Court resolved to give due course to
the petition after considering the allegations, issues and
arguments adduced therein, the Comment thereon by the private
respondent and the Reply thereto by the petitioners; the parties
were required to submit their respective Memoranda.
The issues presented for determination are quite simple:
obligations of Uy Tiam to METROBANK by virtue of the
Continuing Suretyship Agreements they separately signed in
1977; and
2. On the assumption that they are, what is the extent of their
liabilities for said 1979 obligations.
Under the Civil Code, a guaranty may be given to secure even
future debts, the amount of which may not known at the time the
guaranty is
executed. 8 This is the basis for contracts denominated as continuing
guaranty or suretyship. A continuing guaranty is one which is not
limited to a single transaction, but which contemplates a future course
of dealing, covering a series of transactions, generally for an indefinite
time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within
certain limits, and contemplates a succession of liabilities, for which,
as they accrue, the guarantor becomes liable. Otherwise stated, a
9
continuing guaranty is one which covers all transactions, including
those arising in the future, which are within the description or
contemplation of the contract, of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as continuing
10
when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time
either indefinitely or until a certain period, especially if the right to
recall the guaranty is expressly reserved. Hence, where the contract
of guaranty states that the same is to secure advances to be made
"from time to time" the guaranty will be construed to be a continuing
one. 11
In other jurisdictions, it has been held that the use of particular
words and expressions such as payment of "any debt," "any
indebtedness," "any deficiency," or "any sum," or the guaranty of
"any transaction" or money to be furnished the principal debtor "at
any time," or "on such time" that the principal debtor may require,
have been construed to indicate a continuing guaranty. 12
46
In the case at bar, the pertinent portion of paragraph I of the
suretyship agreement executed by petitioner Uy provides thus:
I. For and in consideration of any existing indebtedness to the
BANK of UY TIAM (hereinafter called the "Borrower"), for the
payment of which the SURETY is now obligated to the BANK,
either as guarantor or otherwise, and/or in order to induce the
BANK, in its discretion, at any time or from time to time hereafter,
to make loans or advances or to extend credit in any other
manner to, or at the request, or for the account of the
Borrower, either with or without security, and/or to purchase or
discount, or to make any loans or advances evidence or secured
by any notes, bills, receivables, drafts, acceptances, checks, or
other instruments or evidences of indebtedness (all hereinafter
called "instruments") upon which the Borrower is or may become
liable as maker, endorser, acceptor, or otherwise, the SURETY
agrees to guarantee, and does hereby guarantee, the punctual
payment at maturity to the loans, advances credits and/or other
obligations hereinbefore referred to, and also any and all other
indebtedness of every kind which is now or may hereafter
become due or owing to the BANK by the Borrower, together with
any and all expenses which may be incurred by the BANK in
collecting all or any such instruments or other indebtedness or
obligations herein before referred to, and/or in enforcing any
rights hereunder, and the SURETY also agrees that the BANK
may make or cause any and all such payments to be made strictly
in accordance with the terms and provisions of any agreement(s)
express or implied, which has (have) been or may hereafter be
made or entered into by the Borrow in reference thereto,
regardless of any law, regulation or decree, unless the same is
mandatory and non-waivable in character, nor or hereafter in
effect, which might in any manner affect any of the terms or
provisions of any such agreement(s) or the Bank's rights with
respect thereto as against the Borrower, or cause or permit to be
invoked any alteration in the time, amount or manner of payment
by the Borrower of any such instruments, obligations or
indebtedness; provided, however, that the liability of the SURETY
hereunder shall not exceed at any one time the aggregate
principal sum of PESOS: THREE HUNDRED THOUSAND ONLY
(P300,000.00) (irrespective of the currenc(ies) in which the
obligations hereby guaranteed are payable), and such interest as
may accrue thereon either before or after any maturity(ies)
thereof and such expenses as may be incurred by the BANK as
referred to above. 13
Paragraph I of the Continuing Suretyship Agreement executed by
petitioner Diño contains identical provisions except with respect to
the guaranteed aggregate principal amount which is EIGHT
THOUSAND PESOS (P800,000.00). 14
Paragraph IV of both agreements stipulate that:
VI. This is a continuing guaranty and shall remain in full force and
effect until written notice shall have been received by the BANK
that it has been revoked by the SURETY, but any such notice
shall not release the SURETY, from any liability as to any
instruments, loans, advances or other obligations hereby
guaranteed, which may be held by the BANK, or in which the
BANK may have any interest at the time of the receipt (sic) of
such notice. No act or omission of any kind on the BANK'S part in
the premises shall in any event affect or impair this guaranty, nor
shall same (sic) be affected by any change which may arise by
reason of the death of the SURETY, or of any partner(s) of the
SURETY, or of the Borrower, or of the accession to any such
partnership of any one or more new partners. 15
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
The foregoing stipulations unequivocally reveal that the
suretyship agreement in the case at bar are continuing in nature.
Petitioners do not deny this; in fact, they candidly admitted it.
Neither have they denied the fact that they had not revoked the
suretyship agreements. Accordingly, as correctly held by the
public respondent:
Undoubtedly, the purpose of the execution of the Continuing
Suretyships was to induce appellant to grant any application for
credit accommodation (letter of credit/trust receipt) UTEFS may
desire to obtain from appellant bank. By its terms, each
suretyship is a continuing one which shall remain in full force and
effect until the bank is notified of its revocation.
xxx xxx xxx
When the Irrevocable Letter of Credit No. SN-Loc-309 was
obtained from appellant bank, for the purpose of obtaining goods
(covered by a trust receipt) from Planters Products, the continuing
suretyships were in full force and effect. Hence, even if
sureties-appellees did not sign the "Commercial Letter of Credit
and Application, they are still liable as the credit accommodation
(letter of credit/trust receipt) was covered by the said suretyships.
What makes them liable thereunder is the condition which
provides that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise." And since UTEFS which (sic)
was liable as principal obligor for having failed to fulfill the
obligatory stipulations in the trust receipt, they as insurers of its
obligation, are liable thereunder.16
Petitioners maintain, however, that their Continuing Suretyship
Agreements cannot be made applicable to the 1979 obligation
because the latter was not yet in existence when the agreements
were executed in 1977; under Article 2052 of the Civil Code, a
guaranty "cannot exist without a valid obligation." We cannot
agree. First of all, the succeeding article provides that "[a]
guaranty may also be given as security for future debts, the
amount of which is not yet known." Secondly, Article 2052 speaks
about a valid obligation, as distinguished from a void obligation,
and not an existing or current obligation. This distinction is made
clearer in the second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It may
also guarantee a natural obligation.
As to the amount of their liability under the Continuing Suretyship
Agreements, petitioners contend that the public respondent
gravely erred in finding them liable for more than the amount
specified in their respective agreements, to wit: (a) P800,000.00
for petitioner Diño and (b) P300,000.00 for petitioner Uy.
The limit of the petitioners respective liabilities must be
determined from the suretyship agreement each had signed. It is
undoubtedly true that the law looks upon the contract of
suretyship with a jealous eye, and the rule is settled that the
obligation of the surety cannot be extended by implication beyond
its specified limits. To the extent, and in the manner, and under
the circumstances pointed out in his obligation, he is bound, and
no farther.17
Indeed, the Continuing Suretyship Agreements signed by
petitioner Diño and petitioner Uy fix the aggregate amount of their
liability, at any given time, at P800,000.00 and P300,000.00,
respectively. The law is clear that a guarantor may bond himself
for less, but not for more than the principal debtor, both as
47
regards the amount and the onerous nature of the conditions. In 18
the case at bar, both agreements provide for liability for interest
and expenses, to wit:
. . . and such interest as may accrue thereon either before or after
any maturity(ies) thereof and such expenses as may be incurred
by the BANK referred to above. 19
They further provide that:
In the event of judicial proceedings being instituted by the BANK
against the SURETY to enforce any of the terms and conditions of
this undertaking, the SURETY further agrees to pay the BANK a
reasonable compensation for and as attorney's fees and costs of
collection, which shall not in any event be less than ten per cent
(10%) of the amount due (the same to be due and payable
irrespective of whether the case is settled judicially or
extrajudicially).
20
Thus, by express mandate of the Continuing Suretyship
Agreements which they had signed, petitioners separately bound
themselves to pay interest, expenses, attorney's fees and costs.
The last two items are pegged at not less than ten percent (10%)
of the amount due.
Even without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial costs. Article
2055 of the Civil Code provides: 21
Art. 2055. A guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal
obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been judicially required
to pay.
Interest and damages are included in the term accessories.
However, such interest should run only from the date when the
complaint was filed in court. Even attorney's fees may be imposed
whenever appropriate, pursuant to Article 2208 of the Civil Code.
Thus, in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc., this Court held:
22
Petitioner objects to the payment of interest and attorney's fees
because: (1) they were not mentioned in the bond; and (2) the
surety would become liable for more than the amount stated in
the contract of suretyship.
xxx xxx xxx
The objection has to be overruled, because as far back as the
year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852,
that creditors suing on a suretyship bond may recover from the
surety as part of their damages, interest at the legal rate even if
the surety would thereby become liable to pay more than the total
amount stipulated in the bond. The theory is that interest is
allowed only by way of damages for delay upon the part of the
sureties in making payment after they should have done so. In
some states, the interest has been charged from the date of the
interest has been charged from the date of the judgment of the
appellate court. In this jurisdiction, we rather prefer to follow the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
general practice, which is to order that interest begin to run from
the date when the complaint was filed in court, . . .
Such theory aligned with sec. 510 of the Code of Civil Procedure
which was subsequently recognized in the Rules of Court (Rule
53, section 6) and with Article 1108 of the Civil Code (now Art.
2209 of the New Civil Code).
In other words the surety is made to pay interest, not by reason of
the contract, but by reason of its failure to pay when demanded
and for having compelled the plaintiff to resort to the courts to
obtain payment. It should be observed that interest does not run
from the time the obligation became due, but from the filing of the
complaint.
As to attorney's fees. Before the enactment of the New Civil Code,
successful litigants could not recover attorney's fees as part of the
damages they suffered by reason of the litigation. Even if the
party paid thousands of pesos to his lawyers, he could not charge
the amount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).
However the New Civil Code permits recovery of attorney's fees
in eleven cases enumerated in Article 2208, among them, "where
the court deems it just and equitable that attorney's (sic) fees and
expenses of litigation should be recovered" or "when the
defendant acted in gross and evident bad faith in refusing to
satisfy the plaintiff's plainly valid, just and demandable claim."
This gives the courts discretion in apportioning attorney's fees.
The records do not reveal the exact amount of the unpaid portion
of the principal obligation of Uy Tiam to MERTOBANK under
Irrevocable Letter of Credit No. SN-Loc-309 dated 30 March 1979.
In referring to the last demand letter to Mr. Uy Tiam and the
complaint filed in Civil Case No. 82-9303, the public respondent
mentions the amount of "P613,339.32, as of January 31, 1982,
inclusive of interest commission penalty and bank
charges." This is the same amount stated by METROBANK in
23
its Memorandum. However, in summarizing Uy Tiam's
24
outstanding obligation as of 17 July 1987, public respondent
states:
Hence, they are jointly and severally liable to appellant
METROBANK of UTEFS' outstanding obligation in the sum of
P2,397,883.68 (as of July 17, 1987) — P651,092.82 representing
the principal amount, P825,133.54, for past due interest (5-31-82
to 7-17-87) and P921,657.32, for penalty charges at 12% per
annum (5-31-82 to 7-17-87) as shown in the Statement of
Account (Exhibit I).25
Since the complaint was filed on 18 May 1982, it is obvious that
on that date, the outstanding principal obligation of Uy Tiam,
secured by the petitioners' Continuing Suretyship Agreements,
was less than P613,339.32. Such amount may be fully covered
by the Continuing Suretyship Agreement executed by petitioner
Diño which stipulates an aggregate principal sum of not
exceeding P800,000.00, and partly covered by that of petitioner
Uy which pegs his maximum liability at P300,000.00.
Consequently, the judgment of the public respondent shall have
to be modified to conform to the foregoing exposition, to which
extent the instant petition is impressed with partial merit.
WHEREFORE, the petition is partly GRANTED, but only insofar
as the challenged decision has to be modified with respect to the
extend of petitioners' liability. As modified, petitioners JACINTO
48
UY DIÑO and NORBERTO UY are hereby declared liable for and
are ordered to pay, up to the maximum limit only of their
respective Continuing Suretyship Agreement, the remaining
unpaid balance of the principal obligation of UY TIAM or UY TIAM
ENTERPRISES & FREIGHT SERVICES under Irrevocable Letter
of Credit No. SN-Loc-309, dated 30 March 1979, together with the
interest due thereon at the legal rate commencing from the date
of the filing of the complaint in Civil Case No. 82-9303 with
Branch 45 of the Regional Trial Court of Manila, as well as the
adjudged attorney's fees and costs.
All other dispositions in the dispositive portion of the challenged
decision not inconsistent with the above are affirmed.
SO ORDERED.
SECOND DIVISION
G.R. No. 174006 December 8, 2010
BANK OF COMMERCE and STEPHEN Z. TAALA, Petitioners,
vs.
Spouses ANDRES and ELIZA FLORES, Respondents.
DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule
45 of the Rules of Court, assailing the Decision1 dated February
28, 2006 and the Resolution2 dated August 9, 2006 of the Court of
Appeals (CA) in CA-G.R. CV No. 80362.
The facts of the case are as follows:
Respondents filed a case for specific performance against
petitioners before the Regional Trial Court (RTC) of Quezon City,
docketed as Civil Case No. Q-98-35425. Respondents are the
registered owners of a condominium unit in Embassy Garden
Homes, West Triangle, Quezon City, registered under
Condominium Certificate of Title (CCT) No. 2130,3 issued by the
Register of Deeds of Quezon City.4
On October 22, 1993, respondents borrowed money from
petitioner bank in the amount of Nine Hundred Thousand Pesos
(₱900,000.00). Respondents executed a Real Estate
Mortgage5 over the condominium unit as collateral, and the same
was annotated at the back of CCT No. 2130.
On October 3, 1995, respondents again borrowed One Million
One Hundred Thousand Pesos (₱1,100,000.00) from petitioner
bank, which was also secured by a mortgage over the same
property annotated at the back of CCT No. 2130.6
On January 2, 1996, respondents paid One Million Eleven
Thousand Five Hundred Fifty-Five Pesos and 54 centavos
(₱1,011,555.54), as evidenced by Official Receipt No.
1477417 issued by petitioner bank. On the face of the receipt, it
was written that the payment was "in full payment of the loan and
interest." Respondents then asked petitioner bank to cancel the
mortgage annotations on CCT No. 2130 since the loans secured
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
by the real estate mortgage were already paid in full. However,
the bank refused to cancel the same and demanded payment of
Four Million Six Hundred Thirty-Three Thousand Nine Hundred
Sixteen Pesos and Sixty-Seven Centavos (₱ 4,633,916.67),
representing the outstanding obligation of respondents as of
February 27, 1998. Respondents requested for an accounting
which would explain how the said amount was arrived at.
However, instead of heeding respondents’ request, petitioner
bank applied for extra-judicial foreclosure of the mortgages over
the condominium unit. The public auction sale was scheduled on
September 4, 1998. Petitioner Stephen Z. Taala, a notary public,
was tasked to preside over the auction sale.8
Respondents filed suit with the RTC, Quezon City, assailing the
validity of the foreclosure and auction sale of the property. They
averred that the loans secured by the property had already been
paid in full. Furthermore, they claimed that the Notice of Auction
Sale by Notary Public9 failed to comply with the provisions of Act
No. 3135, as amended by Act No. 4118, requiring the publication
and posting of the notice of auction sale in at least three (3) public
places in Quezon City.10 Respondents likewise prayed for the
payment of moral and exemplary damages, and attorney’s fees,
and for the issuance of a temporary restraining order and/or writ
of preliminary injunction to enjoin the extra-judicial foreclosure
sale of the property.11
On October 23, 1998, the RTC granted respondents’ prayer for
issuance of a writ of preliminary injunction, restraining petitioner
bank from foreclosing on the mortgage.12
Petitioner bank admitted that there were only two (2) mortgage
loans annotated at the back of CCT No. 2130, but denied that
respondents had already fully settled their outstanding obligations
with the bank.13 It averred that several credit lines were granted to
respondent Andres Flores by petitioner bank that were secured
by promissory notes executed by him, and which were either
increased or extended from time to time. The loan that was paid
on January 2, 1996, in the amount of ₱1,011,555.54, was only
one of his loans with the bank. There were remaining loans
already due and demandable, and had not been paid by
respondents despite repeated demands by petitioner bank. The
remaining loans, although not availed of at the same time, were
similarly secured by the subject real estate mortgage as provided
in the continuing guaranty agreement therein.14
Petitioner bank alleged that respondents requested and were
granted an increase in their Bills Discounted Line from Nine
Hundred Thousand Pesos (₱900,000.00) to Two Million Pesos
(₱2,000,000.00), which was secured by the same real estate
mortgage on CCT No. 2130. However, the subject condominium
unit commanded only a market value of One Million Seven
Hundred Twenty-Three Thousand Six Hundred Pesos
(₱1,723,600.00), and a loan value of Nine Hundred Fifty-Nine
Thousand Six Hundred Sixteen Pesos (₱959,616.00). Since the
market value of the condominium unit was lower than the
combined loans, the parties agreed to fix the amount of the real
estate mortgage at ₱1,100,000.00. Moreover, petitioner bank
stressed that under the terms of the two real estate mortgages,
future loans of respondents were also covered.15 1avvphi1
On December 4, 2002, the RTC rendered a resolution,16 the fallo
of which reads:
FROM THE FOREGOING MILIEU, the present case for specific
performance with damages and injunction filed by plaintiffs, Sps.
Andres and Eliza Flores against defendants, Bank of Commerce
49
and Stephen Z. Taala, is hereby DISMISSED. Likewise, the
counterclaim filed by defendants, Bank of Commerce and
Stephen Z. Taala against plaintiffs, Sps. Andres and Eliza Flores
is DISMISSED for insufficiency of evidence.
SO ORDERED.17
In denying respondents’ complaint for specific performance, the
RTC ratiocinated that respondents’ right of action hinged mainly
on the veracity of their claim that they faithfully complied with their
loan obligations and had fully paid them in January 1996. The
RTC stated that the evidence submitted by petitioner bank,
specifically the promissory notes and statement of account dated
February 27, 1998, negated this contention. The RTC declared
that respondents incurred other debts from petitioner bank, which
must be paid first before they could be absolved of liability, and,
consequently, demand the release of the mortgage. The RTC
also struck down respondents’ assertion that petitioner bank did
not comply with the posting and publication requirements under
Act No. 3135, as amended.
Respondents filed a motion for reconsideration, which was,
however, denied by the RTC in a decision18 dated August 8, 2003.
Aggrieved, respondents appealed to the CA.
Meanwhile, on March 25, 2004, the auction sale of the subject
property was conducted, and petitioner bank was awarded the
property, as the highest bidder.
On February 28, 2006, the CA rendered a Decision19 reversing
the decision and the resolution of the RTC. The dispositive
portion of the CA Decision reads:
IN VIEW OF ALL THE FOREGOING, the instant appeal
is GRANTED; the challenged Decision dated December 4, 2002,
is REVERSED and SET ASIDE; and a new one entered:
(a) ordering the cancellation of the real estate mortgage
annotations on the dorsal side of CCT No. 2130 of the Registry of
Deeds of Quezon City;
(b) ordering appellee Bank to issue a corresponding release of
mortgages to plaintiffs-appellants’ CCT No. 2130;
(c) declaring null and void the challenged extra-judicial
foreclosure and public auction sale held on March 25, 2004
together with the Certificate of Sale dated April 14, 2004 issued in
favor of appellee Bank; and,
(d) appellees’ counterclaims are ordered dismissed, for lack of
sufficient basis therefor.
No costs.
SO ORDERED.20
The CA ratiocinated that the principal obligation or loan was
already extinguished by the full payment thereof. Consequently,
the real estate mortgages securing the principal obligation were
also extinguished. A real estate mortgage, being an accessory
contract, cannot survive without the principal obligation it secures.
The CA also noted that the two mortgages were individually
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
annotated at the back of CCT No. 2130. Thus, the CA opined that
the individual annotations clearly indicated that the said
mortgages were not meant to serve as a continuing guaranty for
any future loan that respondents would obtain from petitioner
bank.
Petitioners filed a motion for reconsideration. On August 9, 2006,
the CA issued a Resolution21 denying the same.
Hence, the instant petition.
The sole issue for resolution is whether the real estate mortgage
over the subject condominium unit is a continuing guaranty for the
future loans of respondent spouses despite the full payment of
the principal loans annotated on the title of the subject property.
We resolve this issue in the affirmative.
The contested portion of the Deed of Real Estate Mortgage dated
October 22, 1993 for the principal obligation of ₱900,000.00 and
of the second one dated October 3, 1995 for the sum of
₱1,100,000.00, uniformly read:
WITNESSETH: That
for and in consideration of the credit
accommodations granted by the
MORTGAGEE [Bank of Commerce] to the
MORTGAGOR [Andres Flores] and/or
_____________________ hereby initially
fixed at
_____________________________PESOS:
(P____________), Philippine Currency, and
as security for the payment of the same, on
demand or at maturity as the case may be,
be the interest accruing thereon, the cost of
collecting the same, the cost of keeping the
mortgaged property(ies), of all amounts now
owed or hereafter owing by the
MORTGAGOR to the MORTGAGEE under
this or separate instruments and agreements,
or in respect of any bill, note, check, draft
accepted, paid or discounted, or advances
made and all other obligations to every kind
already incurred or which may hereafter be
incurred, for the use or accommodation of
the MORTGAGOR, as well as the faithful
performance of the terms and conditions of
this mortgage and of the separate
instruments and/or documents under which
credits have been or may hereafter be
advanced by the MORTGAGEE to the
MORTGAGOR, including their renewals,
extensions and substitutions, any and all of
which separate instruments and/or
documents and their renewals, extensions
and substitutions are hereunto incorporated
and made integral parts hereof, the
MORTGAGOR [Andres Flores] has
transferred and conveyed, as by these
presents it/he does hereby transfer and
convey, by way of First Mortgage, to the
MORTGAGEE [Bank of Commerce], its
successors and assigns, all its/ his rights, title
and interest to that parcel(s) of land, together
with all the buildings and improvements now
50
 existing or which may hereafter be erected or
constructed thereon, including all other rights
or benefits annexed to or inherent therein
now existing or which may hereafter exist,
situated in Embassy Garden Homes, Quezon
City, Philippines, and more particularly
described in Original/Transfer Certificate(s)
of Title No. CCT No. 2130 of the Registry of
Deeds [of] Quezon City, as follows:
CCT No. 2130
Unit No. L-2, located on Building L,
consisting of Ninety Five point Twenty (95.20)
Square Meters, more of less, with Parking
Space No. L-2.22
It is petitioner bank’s contention that the said undertaking,
stipulated in the Deed of Real Estate Mortgage dated October 22,
1993 and October 3, 1995, is a continuing guaranty meant to
secure future debts or credit accommodations granted by
petitioner bank in favor of respondents. On the other hand,
respondents posit that, since they have already paid the loans
secured by the real estate mortgages, the mortgage should not
be foreclosed because it does not include future debts of the
spouses or debts not annotated at the back of CCT No. 2130.
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 mortgage contract.23 Under Article 2053 of the
Civil Code, a guaranty may be given to secure even future debts,
the amount of which may not be known at the time the guaranty is
executed. This is the basis for contracts denominated as a
continuing guaranty or suretyship. A continuing guaranty is not
limited to a single transaction, but contemplates a future course of
dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation
and is generally intended to provide security with respect to future
transactions within certain limits, and contemplates a succession
of liabilities, for which, as they accrue, the guarantor becomes
liable. In other words, a continuing guaranty is one that covers all
transactions, including those arising in the future, which are within
the description or contemplation of the contract of guaranty, until
the expiration or termination thereof.24
A guaranty shall be construed as continuing when, by the terms
thereof, it is evident that the object is to give a standing credit to
the principal debtor to be used from time to time either indefinitely
or until a certain period, especially if the right to recall the
guaranty is expressly reserved. In other jurisdictions, it has been
held that the use of particular words and expressions, such as
payment of "any debt," "any indebtedness," "any deficiency," or
"any sum," or the guaranty of "any transaction" or money to be
furnished the principal debtor "at any time" or "on such time" that
the principal debtor may require, has been construed to indicate a
continuing guaranty.25
In the instant 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 the back of
CCT No. 2130, and as security for all amounts that respondents
may owe petitioner bank. It is well settled that mortgages given to
secure future advance or loans are valid and legal contracts, and
that the amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as security if
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
from the four corners of the instrument the intent to secure future
and other indebtedness can be gathered.26
A mortgage given to secure advancements is a continuing
security and is not discharged by repayment of the amount
named in the mortgage until the full amounts of the
advancements are paid.27 Respondents’ full payment of the loans
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 secure all future debts of the spouses and such
debts had been obtained and 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 mortgage.
WHEREFORE, in view of the foregoing, the Decision dated
February 28, 2006 and the Resolution dated August 9, 2006 of
the Court of Appeals in CA-G.R. CV No. 80362 are hereby
REVERSED and SET ASIDE. The decision of the Regional Trial
Court dated December 4, 2002 is hereby REINSTATED.
SO ORDERED.
SECOND DIVISION
G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL
CORPORATE BANK, respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision of the Court of
1
Appeals in C.A.-G.R. CV No. 19094, affirming the decision of the
Regional Trial Court of the National Capital Judicial Region, Branch
XLV, Manila, which ordered petitioner Willex Plastic Industries
Corporation and the Inter-Resin Industrial Corporation, jointly and
severally, to pay private respondent International Corporate Bank
certain sums of money, and the appellate court's resolution of October
17, 1989 denying petitioner's motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a
letter of credit with the Manila Banking Corporation. To secure
payment of the credit accomodation, Inter-Resin Industrial and
the Investment and Underwriting Corporation of the Philippines
(IUCP) executed two documents, both entitled "Continuing Surety
Agreement" and dated December 1, 1978, whereby they bound
themselves solidarily to pay Manilabank "obligations of every kind,
on which the [Inter-Resin Industrial] may now be indebted or
hereafter become indebted to the [Manilabank]." The two
agreements (Exhs. J and K) are the same in all respects, except
as to the limit of liability of the surety, the first surety agreement
being limited to US$333,830.00, while the second one is limited to
US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex
Plastic Industries Corp., executed a "Continuing Guaranty" in
favor of IUCP whereby "For and in consideration of the sum or
sums obtained and/or to be obtained by Inter-Resin Industrial
51
Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic
jointly and severally guaranteed "the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S . . .
to the extent of the aggregate principal sum of FIVE MILLION
PESOS (P5,000,000.00) Philippine Currency and such interests,
charges and penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to
Manilabank the sum of P4,334,280.61 representing Inter-Resin
Industrial's outstanding obligation. (Exh. M-1) On February 23
and 24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and
Willex Plastic the payment of what it (IUCP) had paid to
Manilabank. As neither one of the sureties paid, Atrium filed this
case in the court below against Inter-Resin Industrial and Willex
Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which
had in turn succeeded Atrium, the sum of P687,600.00
representing the proceeds of its fire insurance policy for the
destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing
Guaranty" was intended to secure payment to Atrium of the
amount of P4,334,280.61 which the latter had paid to Manilabank.
It claimed, however, that it had already fully paid its obligation to
Atrium Capital.
On the other hand, Willex Plastic denied the material allegations
of the complaint and interposed the following Special Affirmative
Defenses:
(a) Assuming arguendo that main defendant is indebted to
plaintiff, the former's liability is extinguished due to the accidental
fire that destroyed its premises, which liability is covered by
sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is
indebted to plaintiff, its account is now very much lesser than
those stated in the complaint because of some payments made
by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus,
its liability is only secondary to that of the principal;
(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its
claim against the principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the
action. The case then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to
have waived the right to present evidence for its failure to appear
at the hearing despite due notice. On the other hand, Willex
Plastic rested its case without presenting any evidence.
Thereafter Interbank and Willex Plastic submitted their respective
memoranda.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
On April 5, 1988, the trial court rendered judgment, ordering
Inter-Resin Industrial and Willex Plastic jointly and severally to
pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff,
with interest of 17% per annum from August 11, 1982, when
Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full
payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of
the total amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of
Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial
presented a "Motion to Conduct Hearing and to Receive Evidence
to Resolve Factual Issues and to Defer Filing of the Appellant's
Brief." After its motion was denied, Inter-Resin Industrial did not
file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision
affirming the ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be
allowed to present evidence to show that Inter-Resin Industrial
had already paid its obligation to Interbank, but its motion was
denied on December 6, 1991:
The motion is denied for lack of merit. We denied
defendant-appellant Inter-Resin Industrial's motion for reception
of evidence because the situation or situations in which we could
exercise the power under BP 129 did not exist. Movant here has
not presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision
of February 22, 1991 and the resolution of December 6, 1991 of
the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing
Guaranty" signed on April 2, 1979 petitioner Willex Plastic may be
held jointly and severally liable with Inter-Resin Industrial for the
amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's
predecessor-in-interest, Atrium Capital, to Manilabank pursuant
to the "Continuing Surety Agreements" made on December 1,
1978. In denying liability to Interbank for the amount, Willex
Plastic argues that under the "Continuing Guaranty," its liability is
for sums obtained by Inter-Resin Industrial from Interbank, not for
sums paid by the latter to Manilabank for the account of
Inter-Resin Industrial. In support of this contention Willex Plastic
cites the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION,
hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks,
bills receivable/s and/or other evidence/s of indebtedness
(hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual
52
payment at maturity of the NOTE/S issued by the DEBTOR/S in
your and/or your principal/s, successor/s and assigns favor to the
extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00), Philippine Currency, and such interests,
charges and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked
is the fact that evidence aliunde was introduced in the trial court to
explain that it was actually to secure payment to Interbank
(formerly IUCP) of amounts paid by the latter to Manilabank that
the "Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest, Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit
accommodation granted to defendant IRIC [Inter-Resin Industrial]
by Manilabank, the plaintiff required defendant IRIC [Inter-Resin
Industrial] to execute a chattel mortgage in its favor and a
Continuing Guaranty which was signed by the other defendant
WPIC [Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation
although it claimed that it had already paid its obligation in its
entirety. On the other hand, Willex Plastic, while denying the
allegation in question, merely did so "for lack of knowledge or
information of the same." But, at the hearing of the case on
September 16, 1986, when asked by the trial judge whether
Willex Plastic had not filed a crossclaim against Inter-Resin
Industrial, Willex Plastic's counsel replied in the negative and
manifested that "the plaintiff in this case [Interbank] is the
guarantor and my client [Willex Plastic] only signed as a
guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the
"Continuing Guaranty" had been made to guarantee payment of
amounts made by it to Manilabank and not of any sums given by it
as loan to Inter-Resin Industrial. Interbank's witness testified
under cross examination by counsel for Willex Plastic that Willex
"guaranteed the exposure/of whatever exposure of ACP [Atrium
Capital] will later be made because of the guarantee to Manila
Banking Corporation." 3
It has been held that explanatory evidence may be received to
show the circumstances under which a document has been made
and to what debt it relates. At all events, Willex Plastic cannot
4
now claim that its liability is limited to any amount which Interbank,
as creditor, might give directly to Inter-Resin Industrial as debtor
because, by failing to object to the parol evidence presented,
Willex Plastic waived the protection of the parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the
guarantee made by plaintiff of the credit accommodation granted
to defendant IRIC [Inter-Resin Industrial] by Manilabank, [that] the
plaintiff required defendant IRIC to execute a chattel mortgage in
its favor and a Continuing Guaranty which was signed by the
defendant Willex Plastic Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact
that "to secure the guarantee undertaken by plaintiff-appellee
[Interbank] of the credit accommodation granted to Inter-Resin
Industrial by Manilabank, plaintiff-appellee required
defendant-appellants to sign a Continuing Guaranty." These
factual findings of the trial court and of the Court of Appeals are
binding on us not only because of the rule that on appeal to the
Supreme Court such findings are entitled to great weight and
respect but also because our own examination of the record of
the trial court confirms these findings of the two courts.7
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Nor does the record show any other transaction under which
Inter-Resin Industrial may have obtained sums of money from
Interbank. It can reasonably be assumed that Inter-Resin
Industrial and Willex Plastic intended to indemnify Interbank for
amounts which it may have paid Manilabank on behalf of
Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic
admitted that it was "to secure the aforesaid guarantee, that
INTERBANK required principal debtor IRIC [Inter-Resin Industrial]
to execute a chattel mortgage in its favor, and so a "Continuing
Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC
INDUSTRIES CORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC
[Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an
accessory contract, cannot legally exist because of the absence
of a valid principal obligation. Its contention is based on the fact
8
that it is not a party either to the "Continuing Surety Agreement" or
to the loan agreement between Manilabank and Interbank
Industrial.
Put in another way the consideration necessary to support a
surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a
"guarantor or surety is bound by the same consideration that
makes the contract effective between the principal parties thereto.
It is never necessary that a guarantor or surety should receive
any part or benefit, if such there be, accruing to his principal." In
9
an analogous case, this Court held:
10
At the time the loan of P100,000.00 was obtained from petitioner
by Daicor, for the purpose of having an additional capital for
buying and selling coco-shell charcoal and importation of
activated carbon, the comprehensive surety agreement was
admittedly in full force and effect. The loan was, therefore,
covered by the said agreement, and private respondent, even if
he did not sign the promissory note, is liable by virtue of the surety
agreement. The only condition that would make him liable
thereunder is that the Borrower "is or may become liable as
maker, endorser, acceptor or otherwise." There is no doubt that
Daicor is liable on the promissory note evidencing the
indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr.
and private respondent, is an accessory obligation, it being
dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot
be retroactivelt applied so as to secure payments made by
Interbank under the two "Continuing Surety Agreements." Willex
Plastic invokes the ruling in El Vencedor v. Canlas and Diño
11
v. Court of Appeals in support of its contention that a contract of
12
suretyship or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present
case. In El Vencedor v. Canlas we held that a contract of
suretyship "is not retrospective and no liability attaches for
defaults occurring before it is entered into unless an intent to be
so liable is indicated." There we found nothing in the contract to
show that the paries intended the surety bonds to answer for the
debts contracted previous to the execution of the bonds. In
contrast, in this case, the parties to the "Continuing Guaranty"
clearly provided that the guaranty would cover
53
"sums obtained and/or to be obtained" by Inter-Resin Industrial
from Interbank.
On the other hand, in Diño v. Court of Appeals the issue was
whether the sureties could be held liable for an obligation
contracted after the execution of the continuing surety agreement.
It was held that by its very nature a continuing suretyship
contemplates a future course of dealing. "It is prospective in its
operation and is generally intended to provide security with
respect to future transactions." By no means, however, was it
meant in that case that in all instances a contrast of guaranty or
suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands
v. Foerster, although a contract of suretyship is ordinarily not to
13
be construed as retrospective, in the end the intention of the
parties as revealed by the evidence is controlling. What was said
there applies mutatis mutandis to the case at bar:
14
In our opinion, the appealed judgment is erroneous. It is very true
that bonds or other contracts of suretyship are ordinarily not to be
construed as retrospective, but that rule must yield to the intention
of the contracting parties as revealed by the evidence, and does
not interfere with the use of the ordinary tests and canons of
interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the
bond given by Echevarria was intended to cover all of the
indebtedness of the Arrocera upon its current account with the
plaintiff Bank that we cannot possibly adopt the view of the court
below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded
against without first exhausting all property of Inter-Resin
Industrial. Willex Plastic thus claims the benefit of excussion. The
Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by
Willex Plastic and Inter-Resin Industrial in favor of IUCP (now
Interbank) reads:
If default be made in the payment of the NOTE/s herein
guaranteed you and/or your principal/s may directly proceed
against Me/Us without first proceeding against and exhausting
DEBTOR/s properties in the same manner as if all such liabilities
constituted My/Our direct and primary obligations. (emphasis
supplied)
This stipulation embodies an express renunciation of the right of
excussion. In addition, Willex Plastic bound itself solidarily liable
with Inter-Resin Industrial under the same agreement:
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION,
hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks,
bills receivable/s and/or other evidence/s of indebtedness
(hereinafter referred to as the NOTE/S), I/We hereby jointly and
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S in
your and/or your principal/s, successor/s and assigns favor to the
extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00), Philippine Currency, and such interests,
charges and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already
paid its indebtedness to Interbank and that Willex Plastic should
have been allowed by the Court of Appeals to adduce evidence to
prove this. Suffice it to say that Inter-Resin Industrial had been
given generous opportunity to present its evidence but it failed to
make use of the same. On the otherhand, Willex Plastic rested its
case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on
January 29, 1987, but because of its failure to appear on that date,
the hearing was reset on March 12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear.
Upon motion of Willex Plastic, the hearings on March 12 and 26,
1987 were cancelled and "reset for the last time" on April 2 and 30,
1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear.
Accordingly the trial court issued the following order:
Considering that, as shown by the records, the Court had exerted
every earnest effort to cause the service of notice or subpoena on
the defendant Inter-Resin Industrial but to no avail, even with the
assistance of the defendant Willex the defendant Inter-Resin
Industrial is hereby deemed to have waived the right to present its
evidence.
On the other hand, Willex Plastic announced it was resting its
case without presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court
reconsidered its order and set the hearing anew on July 23, 1987.
But Inter-Resin Industrial again moved for the postponement of
the hearing be postponed to August 11, 1987. The hearing was,
therefore, reset on September 8 and 22, 1987 but the hearings
were reset on October 13, 1987, this time upon motion of
Interbank. To give Interbank time to comment on a motion filed by
Inter-Resin Industrial, the reception of evidence for Inter-Resin
Industrial was again reset on November 17, 26 and December 11,
1987. However, Inter-Resin Industrial again moved for the
postponement of the hearing. Accordingly the hearing was reset
on November 26 and December 11, 1987, with warning that the
hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was
reset on January 22, 1988 and February 5, 1988 upon motion of
its counsel. As Inter-Resin Industrial still failed to present its
evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its
evidence, however, the hearing was postponed to March 4, 1988.
Again Inter-Resin Industrial's counsel did not appear. The trial
court, therefore, finally declared Inter-Resin Industrial to have
waived the right to present its evidence. On the other hand, Willex
Plastic, as before, manifested that it was not presenting evidence
and requested instead for time to file a memorandum.
54
There is therefore no basis for the plea made by Willex Plastic
that it be given the opportunity of showing that Inter-Resin
Industrial has already paid its obligation to Interbank.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED, with costs against the petitioner.
SO ORDERED.
EN BANC
G.R. No. 4465 September 10, 1908
MARCELA ALVARAN, plaintiff-appellee,
vs.
BERNARDO MARQUEZ, defendant-appellant.
F. Manalo for appellant.
B. G. Zoboli for appellee.
TORRES, J.:
On the 5th of March, 1906, Marcela Alvaran, the wife of Isabelo
Reyes, filed a written complaint while the court of First Instance of
La Laguna, stating that her husband had no interest, nor could he
have any right in the matter that she brought before the court of
the attachment of a parcel of land that was exclusively and
absolutely her property. The said land is situated in the barrio of
San Gregorio, pueblo of San Pablo, and is bounded on the north
by the property to the barrio of Santa Maria; on the south by the
properties of Mamerto Evangelista, Tranquilino Gapuno, and
Rufino Calabia; and on the west, by the properties of Maria
Nieves Calabia and Leoncia Evangelista.
The said parcel of land was attached by the municipal sheriff on
the 17th of February, 1906, at the request of Bernardo Marquez,
as being the property of the said Marcela's husband, in the
conformity with the judgment entered against the latter in an oral
action brought by said Marquez against Reyes, in the court of the
justice of the peace, for the recovery of a certain sum of money.
the creditor, Marquez, insisted upon maintaining the attachment,
and furnished the necessary bond in accordance with the
provision of section 451 of Act No. 190, notwithstanding the claim
made by the plaintiff, and the fact that her title was entered in the
registry of property in accordance with Act No, 496; therefore, she
asked that judgment be rendered ordering the defendant to
recognize the plaintiff as the sole owner of the land in question;
that the attachment thereof be annulled, and that the defendant
be sentenced to indemnify her for damages incurred and the
costs of the proceedings, together with any other remedy that
might be considered just and equitable.
The defendant, Bernardo Marquez, on the 29th of March, 1906,
answered the complaint, and denied all and each of the facts
stated in the same in so far as they did not agree with those in the
answer; that in the execution of the judgment entered against
Isabelo Reyes, the plaintiff's husband, the sheriff of San Pablo
had not levied upon the property described in the complaint, and
which does not belong to the plaintiff, since the land attached is
situated in the barrio of San Gregorio, municipality of San Pablo,
and is planted with 300 cocoanut trees, all of which bear more or
less fruit, and the boundaries of which are; On the north, the lands
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
of Damiana Briones and Lucio Evangelista; on the east the
"Vecinal" street of said barrio; on the west of the land of Leon
Briones, and on the south of the lands of Mamreto Evangelista
and Tranquilino Gapuno; that the land attached was the property
of Isabelo Reyes, who was in the possession and enjoyment
thereof; that the execution and attachment was limited to the
property of Isabelo Reyes by virtue of the obligation contracted by
him while united in marriage to the plaintiff; that the plaintiff was
cognizant of said obligation; that at the time her husband
contracted it the plaintiff intervened and verbally guaranteed the
solvency of her husband, and assured creditor that her husband
was the owner of the said land with 300 cocoanut trees; that,
owing to the fact that the complaint does not set forth the title of
the dominion alleged by the plaintiff, the same does not contain
facts sufficient to constitute a costs of action, depriving the
defendant of the power to answer and refute the supposed title of
dominion. therefore prayed that the complaint be dismissed with
costs.
Evidence have been adduced by both parties, their exhibits were
made of record. On the 22d of March, 1907, judgment was
rendered by the court below annulling the attachment and the
adjudication of the land in controversy to the defendant, Bernardo
Marquez, and sentencing the latter to return the said land
described in the complaint to its owner, the plaintiff Marcela
Alvaran, to pay the latter P90, received for 4,500 cocoanuts,
when the costs of the proceedings.
The defendant excepted to the above judgment and moved for a
new trial; the motion was overruled for the 30th of April, 1907, and
it does not appears that the petitioner excepted thereto.
Before dealing in this decision with the main points in controversy,
and should be stated that as to the form the petitioner has not
excepted to the order of the 30th of April, 1907, overruling the
motion for the new trial, this court can not review the evidence nor
examined the findings of the court below to see if they are in
accordance with the law and the merits of the case; it must limit
itself to deciding only the questions of law referred to in appeal of
exceptions, contained in the assignment of errors set out in the
appellant's proof. (Sec. 497 of Act No. 190 as amended by Act No.
1596.)
It is fully proven that the land in question is owned exclusively by
the plaintiff, Marcela Alvaran, as duly shown by the title issued by
the Court of Land Registration, and produced in due course in this
litigation. The plaintiff was in possession thereof for fifteen years
prior to the time when it was claimed: that is, since she inherited it
from her mother, Maria Banayo, she being then already married
to her present husband, Isabelo Reyes.
Under these circumstances it is understood at once that the
matter at issue refers to the property of the right, acquired by her
during marriage, and brought into the conjugal partnership apart
from the dowry and without being included therein. Said
inheritance is included among the property that the law classifies
as paraphernal. (Arts. 1381, 1396, No. 2 Civil Code.) Article 1823
of the Civil Code reads:
The wife retains the ownership of the paraphernal property.
So that, according to the provisions of article 1834 of the said
code, even if the land in question was administered by Isabelo
Reyes, his wife, Alvaran, has not lost her right of dominion thereto,
no can it be attached for a debt contracted by her husband at the
instance of a creditor of the latter.
55
The doctrine has been established in a decision of the case
of Lopez Villanueva vs. Alvarez Perez et al., (9 Phil. Rep., 28) and
it is a settled rule that it is a legal condition n attachments of all
kinds that the thing attached must be the property of the debtor,
and from no provision of the Mortgage Law can a conclusion be
derived contrary to such principle.
If the aforesaid estate was not the property of Reyes, the husband,
but of his wife, the plaintiff, as concluded by the court below in
view of the evidence, in no manner could the same have been
attached at the request of Bernardo, nor adjudicated to him,
inasmuch as no legal reason existed whereby the plaintiff was
obliged to make him any payment or loan; therefore, the
proceedings from which it resulted that the plaintiff was unjustly
deprived of her property on account of a debt for which she was
not responsible are entirely null and void.
Inasmuch as in the case at bar no question has been set up
relative to the nature and destination of the fruits obtained from
the said land, nor in connection with the kind and the conditions of
the indebtedness of Isabelo Reyes to the defendant Marquez, it is
our opinion that we are not permitted to decide points of law
defined by articles 1385 and 1386 of the Civil Code outside or
beyond what has been decided in the judgment appealed from
with respect to the value of the cocoanuts harvested by the
defendant,
Section 20 of the Rules of this Court provides that —
No error not affecting the jurisdiction over the subject matter will
be considered unless stated in the assignment of errors and
relied upon the brief.
The defendant alleges that the plaintiff stood as surety for her
husband, but, as the judgment appealed from rightly states, there
is no evidence on record that such a bond, which would be an
actual contract, was ever undertaken, and without the consent of
the party supposed to be bound thereby its existence can not be
conceived. Moreover under article 1827 of the code security is not
presumed; it must be expressed, and can not be interfered or
presumed because of the existence of a contract or principal
obligations. From mere presumption it is not possible to establish
contractual relations and liens which presuppose a willingness to
buy oneself. This requisite is not present in the case at bar, since
it does not appear that Marcela Alvaran had voluntarily
guaranteed the solvency of her husband, and therefore the
attachment proceedings, the sale and adjudication of said land to
the defendant, in payment of a debt to which the owner of the land
is in no manner liable, are notoriously contrary to law.
For the above reasons, and accepting the conclusions contained
in the judgment appealed from, it is our opinion that the same
should be affirmed with the costs against the appellant. So
ordered.
EN BANC
G.R. No. L-42518 August 29, 1936
WISE & CO., INC., plaintiff-appellee,
vs.
DIONISIO P. TANGLAO, defendant-appellant.
The appellant in his own behalf.
Franco and Reinoso for appellee.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
AVANCEÑA, C. J.:
In the Court of First Instance of Manila, Wise & Co. instituted civil
case No. 41129 against Cornelio C. David for the recovery of a
certain sum of money David was an agent of Wise & Co. and the
amount claimed from him was the result of a liquidation of
accounts showing that he was indebted in said amount. In said
case Wise & Co. asked and obtained a preliminary attachment of
David's property. To avoid the execution of said attachment,
David succeeded in having his Attorney Tanglao execute on
January 16, 1932, a power of attorney (Exhibit A) in his favor, with
the following clause:
To sign for me as guarantor for himself in his indebtedness to
Wise & Company of Manila, which indebtedness appears in civil
case No. 41129, of the Court of First Instance of Manila, and to
mortgage my lot (No. 517-F of the subdivision plan Psd-20, being
a portion of lot No. 517 of the cadastral survey of Angeles, G. L. R.
O. Cad. Rec. No. 124), to guarantee the said obligations to the
Wise & Company, Inc., of Manila.
On the 18th of said month David subscribed and on the 23d
thereof, filed in court, the following document (Exhibit B):
COMPROMISE
Come now the parties, plaintiff by the undersigned attorneys and
defendants in his own behalf and respectfully state:
I. That the defendant confesses judgment for the sum of six
hundred forty pesos (P640), payable at the rate of eighty pesos
(P80) per month, the first payment to be made on February 15,
1932 and successively thereafter until the full amount is paid; the
plaintiff accepts this stipulation.
II. That as security for the payment of said sum of P640,
defendant binds in favor of, and pledges to the plaintiff, the
following real properties:
1. House of light materials described under tax declaration No.
9650 of the municipality of Angeles, Province of Pampanga,
assessed at P320.
2. Accesoria apartments with a ground floor of 180 sq. m. with the
first story of cement and galvanized of iron roofing located on the
lot belonging to Mariano Tablante Geronimo, said accesoria is
described under tax declaration No. 11164 of the municipality of
Angeles, Province of Pampanga, assessed at P800.
3. Parcel of land described under Transfer Certificate of Title No.
2307 of the Province of Pampanga recorded in the name of
Dionisio Tanglao of which defendant herein holds a special power
of attorney to pledge the same in favor of Wise & Co., Inc., as a
guarantee for the payment of the claim against him in the above
entitled cause. The said parcel of land is bounded as follows: NE.
lot No. 517 "Part" de Narciso Garcia; SE. Calle Rizal; SW. lot No.
517 "Part" de Bernardino Tiongco; NW. lot No. 508 de Clemente
Dayrit; containing 431 sq. m. and described in tax declaration No.
11977 of the municipality of Angeles, Pampanga, assessed at
P423.
That this guaranty is attached to the properties above mentioned
as first lien and for this reason the parties agree to register this
compromise with the Register of Deeds of Pampanga, said lien to
56
be cancelled only on the payment of the full amount of the
judgment in this case.
Wherefore, the parties pray that the above compromise be
admitted and that an order issue requiring the register of Deeds of
Pampanga to register this compromise previous to the filing of the
legal fees.
David paid the sum of P343.47 to Wise & Co., on account of the
P640 which he bound himself to pay under Exhibit B, leaving an
unpaid balance of P296.53.
Wise & Co. now institutes this case against Tanglao for the
recovery of said balance of P296.53.
There is no doubt that under Exhibit, A, Tanglao empowered
David, in his name, to enter into a contract of suretyship and a
contract of mortgage of the property described in the document,
with Wise & Co. However, David used said power of attorney only
to mortgage the property and did not enter into contract of
suretyship. Nothing is stated in Exhibit B to the effect that Tanglao
became David's surety for the payment of the sum in question.
Neither is this inferable from any of the clauses thereof, and even
if this inference might be made, it would be insufficient to create
an obligation of suretyship which, under the law, must be express
and cannot be presumed.
It appears from the foregoing that defendant, Tanglao could not
have contracted any personal responsibility for the payment of the
sum of P640. The only obligation which Exhibit B, in connection
with Exhibit A, has created on the part of Tanglao, is that resulting
from the mortgage of a property belonging to him to secure the
payment of said P640. However, a foreclosure suit is not
instituted in this case against Tanglao, but a purely personal
action for the recovery of the amount still owed by David.
At any rate, even granting that defendant Tanglao may be
considered as a surety under Exhibit B, the action does not yet lie
against him on the ground that all the legal remedies against the
debtor have not previously been exhausted (art. 1830 of the Civil
Code, and decision of the Supreme Court of Spain of March 2,
1891). The plaintiff has in its favor a judgment against debtor
David for the payment of debt. It does not appear that the
execution of this judgment has been asked for and Exhibit B, on
the other hand, shows that David has two pieces of property the
value of which is in excess of the balance of the debt the payment
of which is sought of Tanglao in his alleged capacity as surety.
For the foregoing considerations, the appealed judgment is
reversed and the defendant is absolved from the complaint, with
the costs to the plaintiff. So ordered.
EN BANC
G.R. No. 42490 September 9, 1937
VALERIANO SOLON, NATIVIDAD SOLON and MANUEL
IBAÑEZ, plaintiff-appellants,
vs.
APOLONIA SOLON, ZOILO SOLON, ROBERTA SOLON,
FELISA SUICO (minor), and THE DIRECTOR OF
LANDS, defendants-appellees.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Jose Delgado and Vickers, Ohnick, Opisso and Velilla for
appellants.
Cuenco and Cuenco for appellees.
DIAZ, J.:
In his lifetime Eugenio Solon, father of the parties surnamed
Solon, grandfather of defendant Felisa Suico, and husband of the
plaintiff Manuela Ibañez in second marriage contract on May 23,
1899, bought, on installments, from the Bureau of Lands the
parcel of land described as "Lot No. 903 of the Banilad Friar
Lands Estate" in transfer certificate of title No. 8379 of the registry
of Cebu, situated in the barrio of Cogon, municipality of Cebu,
Cebu Province having an area of 6 hectares, 46 ares and 13
centares, and assessed by said bureau at P403. The sale took
place on December 12, 1919, and the time stipulated for the
complete payment of its price was thirteen years, the first annual
installment being P31, and the subsequent twelve installments to
be paid every year being P21 each. On July 30, 1925, with the
amount of P126 as part of the agreed purchase price still unpaid
Eugenio Solon, after securing the consent and approval of the
Bureau of Lands, sold and conveyed for the sum of P1,00 all his
rights, title and interest in the land acquired by him executing for
that purpose in favor of Apolonia Solon who agreed to pay the
installments still owing to the Bureau of Lands, the deed of
transfer appearing in the record as Exhibit B. Apolonia Solon paid
to the Bureau of Lands on the same date of the execution of the
deed the amount of P21, and the balance of P105 at one time
only a month thereafter. The year following, or on July 10, 1926,
Eugenio Solon died, leaving no will, and two years, eight months
and eight days later, or on March 18, 1929, the register of deeds
of Cebu, upon compliance with the formalities of law, issued
transfer certificate of title No. 8379 in the name of Apolonia Solon.
The latter took charge of the property occupying it as her own
through tenants from the time she bought the same, according to
the evidence for the defendants, and from the death of Eugenio
Solon, according to the evidence for the defendants, and from the
death of Eugenio Solon, according to that for the plaintiffs.
Plaintiffs surnamed Solon, all of whom are children of the
deceased Eugenio, Solon in his marriage with his widow Manuela
Ibañez, joining with the latter in maintaining that Exhibit B is false
and simulated and that if the same had been executed by
Eugenio Solon, it was without just consideration, commenced this
suit praying (1) that said document be declared null and void
because false and simulated, (2) that they be adjudged the
absolute owners pro indiviso of the land in question together with
the other heir of Eugenio Solon, (3) that defendants Apolonia
Solon, Zoilo Solon, Roberta Solon and the latter's husband
Andres Montalban, be sentenced to pay jointly and severally, to
the plaintiffs the value of the fruits of the land in question from the
death of Eugenio Solon, and (4) that said defendants be
sentenced to pay, also jointly and severally to the plaintiffs the
sum of P30,000 as damages, besides the costs of the suit.
Defendants, by way of defense, filed an answer containing a
general denial and the special defense of prescription based on
the exercising their right of action.
After trial the lower court rendered judgment dismissing plaintiffs'
complaint, without any pronouncement as to costs, and declaring
valid in effect the transfer made by Eugenio Solon in favor of
Apolonia Solon appealed to this court after their motion for new
trial on the ground that the judgment was contrary to law and not
sufficiently supported by the evidence was denied.
57
In support of their appeal appellants assigned eight errors as
committed by the lower court which may be summed up as
follows: (1) In giving no credit to the witnesses for the plaintiffs
and in making no mention of the falsehoods committed by the
witnesses for the appellees in their testimony; (2) in failing to
consider the real value of the land in question by reason of its
location and value in 1925 when the alleged transfer took place;
(3) in failing to take into account the conclusion at which it had
arrived during trial, that the land in question, being located near
the Osmeña bridge, was worth P0.25 per square meter in 1925,
and declaring afterwards in its decision that it is worthless than
P0.01 per square meter; (4) in not declaring that Eugenio Solon,
like other owners of lands adjacent to his, knew of the plan to
construct the provincial capitol on lot No. 850 adjoining lot No.
903 in question; (5) in holding that appellants weakened their side
of the case when, after contending that the document Exhibit B is
false and simulated they conceded that although the same may
have been executed, it must, at all events, be declared void by
reason of the disproportion between the price paid for the land
and its true value at the time; (6) in failing to take into account the
various facts and circumstances showing that the transaction
which took place according to Exhibit B, is fraudulent and false, in
view of the fact that the supposed grantor under said deed was an
illiterate, 88 years of age and was furthermore the father of
Apolonia Solon, and also of the fact that the whole transaction
was carried out without the knowledge of his wife and other
children; (7) in not holding that Exhibit B is fraudulent and false
and that Eugenio Solon, who was 88 years old, ignorant and
illiterate was induced to sign it; and finally (8) in not holding null
and void the deed in question and in not finding that the land to
which the same refers belongs to all the heirs of the deceased
Eugenio Solon.
1. It is fact clearly shown by the evidence for the defendants,
which appears to us to have more weight than that for the
plaintiffs notwithstanding the latter's efforts to show the contrary,
that the transfer of the land in question made by Eugenio Solon to
Apolonia Solon, according to Exhibit B, had taken place long
before the commencement of the suit of MaCleod and Co.,
against Andres Montalban, husband of Roberta Solon, as
principal, and Eugenio Solon, as surely of said Montalban. It
cannot, therefore, be believed, and the lower court did well in
refusing to believe, that Andres Montalban had been making
statements to the effect that Apolonia Solon had paid nothing for
the reason that the same was not real but only simulated and that
it was made solely for the sole purpose of placing the land in
question beyond the reach of any action that might be brought by
Macleod and Company against said Eugenio Solon; and Apolonia
Solon had been telling her tenant named Eugenio Labra that
there had been an understanding among her brothers of the
whole blood that they would cede the said land to her as part of
her inheritance from their father, because, in the first place there
was an action against Eugenio Solon for the collection of an
amount himself to pay; and, in the second place, Apolonia Solon
could not have made the above statement attributed to her for the
simple reason that she was then already the owner of the land
aforesaid by virtue of the purchase appearing in Exhibit B.
When Eugenio Solon bound himself as surely for Andres
Montalban for the payment to Macleod and Company of the
amount of P5,000 which Montalban owed to the latter, he limited
himself to giving as security, by way of mortgage, the land, and no
other, belonging to him and described as lot No. 892 of the
Banilad Friar Lands Estate in case No. 5988 of the Court of Land
Registration and in transfer certificate of title No. 2499 of the
registry of property of the Province of Cebu. It is not possible that
Macleod and Company could have ever contemplated bringing an
action against Eugenio Solon to obtain possession not only of the
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
land expressly mortgaged to it, which, as has been said, is lot No.
892 described in the certificate of title above-mentioned, which is
distinct from lot No. 903, but also of any other land belonging to
him or of lot No. 903 itself, for the purpose of collecting its credit
against Andres Montalban, because it would not have failed to
know, better than any one else, that the contract of suretyship in
its favor does not admit of the interpretation that it could make
Eugenio Solon liable for an amount greater than P5,000 and that
it could require him to pay Montalban's indebtedness, should the
latter fail to do so, with lands other than that he had mortgaged.
This is so because the clauses of a contract of suretyship
determine the extent of the liability of the surely (Government of
the Philippine Islands vs. Herrero, 38 Phil., 410); because said
liability should not be extended farther than the clear terms of the
contract of guarantee by mere implication; and because the
surety should be liable only in the manner and to the extent, and
under the circumstances pointed out in the contract of suretyship
or which may be clearly deduced therefrom (La Insular vs.
Machuca Go-Tauco and Nubla Co-Siong 39 Phil., 567).
2. Plaintiffs believe having proved that the value of the land in
question in 1925 was P0.25 per square meter. The evidence
upon which they rely was the testimony of the engineer, surveyor
and real estate broker Thomas F. Breslin, who affirmed that a
parcel adjacent to the one under discussion had been sold to a
lady named Consolacion Albade Rodriguez in that year at P0.25
per square meter. it should be noted that, upon cross-examination
said witness had to admit that all he knew concerning the
transaction had been obtained from said lady. Although the lower
spite of a timely motion by defendants to that effect, inasmuch as
it limited itself to saying: "It will be taken into consideration," the
truth is that when it decided the case dismissing plaintiffs'
complaint, it completely disregarded said evidence which is
tantamount to having ordered its exclusion on account of its
incompentency.
The sales made in 1926 and 1927 of lots Nos. 900 and 1009-A by
Jose Vaño to Soledad, Salud and Mercedes Espina, and by Maria
Solon to Zenon Diaz, respectively, at the rate of P0.20 and P0.24
per square meter, according to Exhibits BB and X, and the sale
made by Viscal S. Duterte to the spouses Severino Rodriguez
and Consolacion Alba, of lot No. 1009-B, in October, 1925, at
P0.25 per square meter, according to Exhibit Y, do not
necessarily prove that the land in question was worth that mush
on the date of its sale. It must be remembered that this had taken
place three months before the sale of the land referred to in
Exhibit Y, and one and two years before those set forth in Exhibits
BB and Y, respectively. Those who acquired said lands,
according to their own testimony, desired to speculate because
they had heard that the capitol of Cebu would be erected nearby.
It is, nevertheless, a fact that since then until the date of the
decision appealed from — in the words of the lower court — the
capitol had not been erected, nor had any road been opened
through said parcels, nor had the rumors that the capitol would be
construed sooner or later in the vicinity had any appearance of
truth. However, although there may have been a proposal to erect
the capitol thereon, the evidence does not show that Eugenio
Solon had never had acknowledge of that fact. Furthermore,
knowing that he had paid for the land only P270.70, it is only
reasonable to suppose that he was more than satisfied when he
received an offer of P1,000 therefor and was paid that amount
which is, no doubt, almost three times that which he had invested,
not at one time, of course, but in six years. On the other hand, the
person to whom he transferred the land was no other than his
own daugther. For these reasons, we believe and so hold that the
second error is without merit.
58
3. There is nothing in the record which proves that the court found
that the value of the land in dispute in 1925 was P0.25 per square
meter. All that the lower court said during the trial, and it appears
only incidentally, in ruling on the objection to a question made for
the purpose of finding out the amount at which the land would
quote per square meter in case the capitol were construed on
parcel No. 850 which is a adjacent to the parcel in question, was
the following:
That is extremely remote. I believe that the best proof is that of
P0.25 per square meter, in 1925. I believe that that is the real
value, and it depends upon whether or not a street will be opened
and on whether or not a capitol will be constructed, and if it be
depression time, as it is now, it can not possibly sell at P2, so that
it is all too problematical.
And it should be added that the lower court said this before
hearing the other evidence of plaintiffs and before having any
idea of what the evidence of defendants would be. It surely
corrected the same thereafter in the manner set forth in the
decision appealed from. We hold that the third error is likewise not
well taken.
4. The fourth error is imaginary. As has been said, there is no
evidence of record to show that Eugenio Solon had any
knowledge of the plan to construct the capitol of Cebu near the
land in dispute upon selling the same to Apolonia Solon. The
argument of plaintiffs that it must be presumed that every land
owner has knowledge of all the improvements which are to be
made in properties near his own, does not prove anything
because it does nowhere appears as a fact that the capitol of
Cebu was to be constructed sooner or later in the immediate
vicinity of the land in question. But even supposing that Eugenio
Solon had guessed that there would be such a plan, this does not
imply that the transfer he made to Apolonia Solon was void
because the owner has the right to sell what belongs to him to
whomever he chooses and for whatever price satisfactory to him.
5. And it is no error for the lower court to have considered that the
cause of the plaintiffs was weakened on account of the fact that
they maintain two propositions which are, in reality, incompatible
with each other. That the documentary of transfer Exhibit B was
false and simulated, and that it must simply be declared void for
the reason that the price paid therefor is disproportionate to its
value in 1925 are two irreconcilable things. If the latter were true,
then it would be useless to insist that the said document is false or
simulated. But the truth is that there is no disproportion between
the price paid for it and its real value in 1925. The Bureau of
Lands itself sold, on July 28, 1924, lot No. 887 of the same
Banilad Friar Lands Estate, located near the land in question and
having an area of 3 hectares, 43 ares, 62 centares for the small
sum of P190 of less than 6/10 centavo per square meter. (Exhibit
II-A.) There is no occasion to repeat here the same reasons for
the statement that there is no evidence of record in support of the
conclusion that there was a proposal on the part of the Province
of Cebu to construct its capitol on lot No. 850. If there was any
disproportion between the price paid and real value of the land, it
was not to the prejudice of Eugenio Solon because he was paid
much more than he really paid therefor to the Bureau of Lands
nor withstanding that he had not made any improvements thereon
or completed the payment he had agreed to make to said office.
6. The sixth error attributed by appellants to the lower court has
been practically shown not to exist for the reasons given in
discussing the first five error. In addition thereto, it may be said
transfer did not take place. On the other hand, defendants proved
that it did take place by means of Exhibit B which, it may be
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
truthfully said, was executed was all the formalities law before a
notary public and in the presence of an official of the Bureau of
Lands in the very office of the latter in Talisay, Cebu, and in that
of another witness, and by means of the approval of said transfer
by the Directors of Lands. They further proved through one of the
instrumental witness to said document and through Apolonia
Solon herself that the price appearing in said document Exhibit B
was paid to Eugenio Solon; and that the latter had tried to sell the
land before that date to other P750. All the foregoing, together
with the fact that the last annual payments which Eugenio Solon
should made to the Bureau of Lands were effected by Apolonia
Solon and that said defendant took possession of the land
immediately after the execution of Exhibit B conclusively show
that said document was neither fraudulent nor false. And it is not
true that Eugenio Solon was then 8 years old and, therefore,
could be easily imposed upon by reason of his mental and
physical weakness because the best evidence appearing of
record with respect to his age, Exhibit F, shows that he was only
66 years, 2 months and 7 days at the time of the transfer.
7 and 8. The seventh and eight errors need no further discussion.
The reasons above given clearly show that they do not exist. The
inescapable conclusion, therefore, is that the appeal taken by
plaintiffs is unfounded and without merit for the reason that the
judgment appealed from is in accordance with law and supported
by the evidence.
In view of the foregoing, the judgment appealed from is affirmed
with the costs of the appeal against the plaintiffs and appellants.
So ordered.
EN BANC
G.R. No. L-13873 January 31, 1963
GENERAL INSURANCE and SURETY
CORPORATION, petitioner,
vs.
REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON
EDUCATIONAL FOUNDATION, INC., respondents.
Guido Advincula for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
On May 15, 1954, the Central Luzon Educational Foundation, Inc.
and the General Insurance and Surety Corporation posted in
favor of the Department of Education a bond, the terms of which
read as follows:
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, the Department of Education
has required the Central Luzon Educational
Foundation, Inc., operating the Sison &
Aruego Colleges, of Urdaneta, Pangasinan,
Philippines, an institution of learning to file a
bond to guarantee the adequate and efficient
administration of said school or college and
the observance of all regulations prescribed
by the Secretary of Education and
compliance with all obligations, including the
payment of the salaries of all its teachers and
employees, past, present, and future, and
59
 the payment of all other obligations incurred
by, or in behalf of said school.
NOW, THEREFORE, in compliance with said
requirement, we, CENTRAL LUZON
EDUCATIONAL FOUNDATION, INC.,
operating the Sison and Aruego Colleges,
represented Dr. Jose Aruego, its
Vice-Chairman, as principal, and the
GENERAL INSURANCE AND SURETY
CORPORATION, a corporation duly
organized and existing under and by virtue
the laws of the Philippines, as surety, are
held and firmly bound, jointly and firmly, unto
the Department of Education of the Republic
of the Philippines in the sum of TEN
THOUSAND PESOS (P10,000.00) Philippine
currency, for the payment thereof we bind
ourselves, our heirs, executors,
administrators, successors, and assigns,
jointly and severally firmly by these presents;
WHEN the Secretary of Education is satisfied
that said institution of learning had defaulted
in any of the foregoing particulars, this bond
may immediately thereafter be declared
forfeited and for the payment of the amount
above-specified, we bind ourselves, our heirs,
executors, successors, administrators, and
assigns, jointly and severally.
We further bind ourselves, by these presents,
to give the Department of Education at least
sixty (60) days notice of the intended
withdrawal or cancellation of this bond, in
order that the Department can take such
action as may be necessary to protect the
interests of such teachers, employees or
creditors of the school and of the
Government.
LIABILITY of Surety under this bond will
expire on June 15, 1955, unless sooner
revoked.
IN WITNESS WHEREOF, we signed this
present guarranty at the City of Manila,
Philippines, this 15th day of May, 1954.
On the same day, May 15, 1954, the Central Luzon Educational
Foundation, Inc., Teofilo Sison and Jose M. Aruego executed an
indemnity agreement binding themselves jointly and severally to
indemnify the surety of "any damages, prejudices, loss, costs,
payments, advances and expenses of whatever kind and nature,
including attorney's fees and legal costs, which the COMPANY
may, at any time sustain or incur, as well as to reimburse to said
COMPANY all sums and amounts of money which the
COMPANY or its representatives shall or may pay or cause to be
paid or become liable to pay, on account of or arising from the
execution of the above mentioned Bond."
On June 25, 1954, the surety advised the Secretary of Education
that it was withdrawing and cancelling its bond. Copies of the
letter were sent to the Bureau of Private Schools and to the
Central Luzon Educational Foundation, Inc.
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
It appears that on the date of execution of the bond, the
Foundation was indebted to two of its teachers for salaries, to wit:
to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia,
in the sum of P820.00, or a total of P1,505.64.
Demand for the above amount having been refused, the Solicitor
General, in behalf of the Republic of the Philippines, filed a
complaint for the forfeiture of the bond, in the Court of First
Instance of Manila on July 11, 1956.
In due time, the surety filed its answer in which it set up special
defenses and a cross-claim against the Foundation and prayed
that the complaint be dismissed and that it be indemnified by the
Foundation of any amount it might be required to pay the
Government, plus attorney's fees.
For its part, the Foundation denied the cross-claim and contended
that, because Remedios Laoag owed Fr. Cinense the amount of
P820.65, there was no basis for the action; that the bond is illegal
and that the Government has no capacity to sue.
The surety also filed a third-party complaint against Teofilo Sison
and Jose M. Aruego on the basis of the indemnity agreement.
While admitting the allegations of the third-party complaint, Sison
and Aruego claimed that because of the cancellation and
withdrawal of the bond, the indemnity agreement ceased to be of
force and effect.
Hearing was held and on December 18, 1956, the Court of First
Instance rendered judgment holding the principal and the surety
jointly and severally liable to the Government in the sum of
P10,000.00 with legal interest from the date of filing of the
complaint, until the sum is fully paid and ordering the principal to
reimburse the surety whatever amount it may be compelled to
pay to the Government by reason of the judgment, with costs
against both principal and the surety.
The surety filed a motion for reconsideration and a request to
decide the third-party complaint which the trial court denied.
On appeal, the Court of Appeals rendered a decision, the
dispositive portion of which reads:
WHEREFORE, the appealed judgment is hereby modified in the
following manner:
(a) Ordering Central Luzon Educational Foundation, Inc., and
General Insurance and Surety Corporation to pay jointly and
severally the Republic of the Philippines the sum of P10,000.00,
plus costs and legal interests from July 11, 1956 until fully paid;
and
(b) Ordering Central Luzon Educational Foundation, Inc., Teofilo
Sison and Jose M. Aruego to reimburse, jointly an severally, the
General Insurance and Surety Corporation of all amounts it may
be forced to pay the Republic of the Philippines by virtue of this
judgment, plus costs and P2,000.00 for counsel's fees.
From this decision, the surety appealed to this Court by way
of certiorari, raising questions of law.1
In its first four assignments of error, the surety contends that it
was no longer liable on its bond after August 24, 1954 (when the
60-day notice of cancellation and withdrawal ended), or, at the
60
latest, after June 15, 1955. For support, the surety invokes the
following provisions of the bond:
WE, further bind ourselves, by these presents to give the
Department of Education at least sixty (60) days notice of the
intended withdrawal or cancellation of this bond, in order that the
Department can take such action as may be necessary to protect
the interest of such teachers, employees, Creditors to the
government.
LIABILITY of the Surety under this bond will expire on June 15,
1955, unless sooner revoked.
On the other hand, the Government contends that since the
salaries of the teachers were due and payable when the bond
was still in force, the surety has become liable on its bond from
the moment of its execution on May 15,1954.
We agree with this contention of the Government.
It must be remembered that, by the terms of the bond the surety
guaranteed to the Government "compliance (by the Foundation)
with all obligations, including the payment of the salaries of its
teachers and employees, past, present and future, and the
payment of all other obligations incurred by, or in behalf of said
school." Now, it is not disputed that even before the execution of
the bond the Foundation was already indebted to two of its
teachers for past salaries. From the moment, therefore, the bond
was executed, the right of the Government to proceed against the
bond accrued because since then, there has been violation of the
terms of the bond regarding payment of past salaries of teachers
at the Sison and Aruego Colleges. The fact that the action was
filed only on July 11, 1956 does not militate against this position
because actions based on written contracts prescribe in ten years.
(Art. 1144, par. 1, Civil Code). The surety also cites our decision
in the case of Jollye v. Barcelon and Luzon Surety Co., Inc., 68
Phil. 164 and National Rice & Corn Corp. (NARIC) v. Rivera, et al.,
G.R. No. L-4023, February 29, 1952. But there is nothing in these
cases that supports the proposition that the liability of a surety for
obligations arising during the life of a bond ceases upon the
expiration of the bond.
In the Jollye case, the bond provided:
Whereas, the above bounded principal, on 13th day of February,
1933 entered into an agreement with H. P. L. Jollye of Manila, P.
I., to fully and faithfully refund to said Mr. H. P. L. Jollye the above
stated sum of P7,500 representing the purchase price of the 74
shares of the capital stock of the North Electric Company
(certificate No. 38) paid by said Mr. H. P. L. Jollye to the
undersigned principal, Mr. Emeterio Barcelon, in the event ofthe
title thereto of said Mr. Barcelon is invalidated by any judgement
which may be rendered by the court of Cavite against Vicente
Diosomito or in the event that any of the warranties contained in
that certain deed of sale executed by the undersigned principal on
this 13th day of February, 1933,be invalidated, a copy of which is
hereto attached and made an integralpart hereof, market Exhibit
A.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this Honorable
Court, without prejudice to the parties adducing other evidence to
prove their case not covered by this stipulation of facts. 1äwphï1.ñët
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
According to the bond, "the liability of Luzon Surety Company, Inc.
under this bond will expire (12) months from date hereof." The
date referred to was February 13, 1933. This Court absolved the
surety of liability because the acts for which the bond was posted
happened after its expiration. Thus, We held in that case:
... The acts provided therein by reason of which the contract of
suretyship was executed could have taken place within the
stipulated period twelve months. Hence, the parties fixed that
period exactly at twelve months, limiting thereby the obligation of
the appellee to answer for the payment to the appellant of the
aforesaid sum of P7,500.00 to not more than the stipulated
period. . . .
Here, on the other hand, the right of the Government to collect on
the bond arose while the bond was in force, because, as earlier
noted, even before the execution of the bond, the principal had
already been indebted to its teachers.
Neither does the NARIC case support the surety's position. In that
case, the bond provided that —
This bond expires on March 20th, 1949 and will be cancelled TEN
DAYS after the expiration, unless the surety is notified of any
existing obligation thereunder, or unless the surety renews or
extends it in writing for another term.
and We held that giving notice of existing obligation was a
condition precedent to further liability of the surety and that in
default of such notice, liability on the bond automatically ceased.
Similarly, in the case of Santos, et. al. v. Mejia, et al., G.R. No.
L-6383, December 29, 1953, the bond provided that —
Liability of the surety on this bond will expire in THIRTEEN DAYS
and said bond will be cancelled 10 DAYS after its expiration
unless surety is notified of any existing obligation thereunder.
and We held that the surety could not be held liable because the
bond was cancelled when no notice of existing obligations was
given within ten days.
In the present case, there is no provision that the bond will be
cancelled unless the surety is notified of any claim and so no
condition precedent has to be complied with by the Government
before it can bring an action. Indeed, the provision of the bond in
the NARIC and Santos cases that it would be cancelled ten days
after its expiration unless notice of claim was given was inserted
precisely because, without such a provision, the surety's liability
for obligations arising while the bond was in force would subsist
even after its expiration.
Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No. 11, 3490, We
held that under a provision that the surety "will not be liable for
any claim not discovered and presented to the company within
three months from the expiration of this bond and that the obligee
hereby waives his right to file any court action against the surety
after the termination of the period of three months above
mentioned," the giving of notice is a condition precedent to be
complied with.
And suppose this action were filed while the bond was in force, as
the surety would have the Government do, but the same
remained pending after June 15, 1955, would the surety suggest
61
that the judgment that may be rendered in such action could no
longer be enforced against it because the bond says that its
liability under it has expired?
And what of the provision on 60-day notice? The surety urges that
all actions on the bond must be brought within that period or they
would all be barred. The surety misread the provision. The 60-day
notice is not a period of prescription of action. The provision
merely means that the surety can withdraw — as in fact it did in
this case — even before June 15, 1955 provided it gave notice of
its intention to do so at least 60 days in advance. If at all, the
condition is a limitation on the right of the surety to withdraw
rather than a limitation of action on the bond. This is clear also
from the Manual of Information for Private Schools 2 which states
that "The bond furnished by a school may not be withdrawn by
either or both the bondsmen except by giving the Director of
Private Schools sixty days notice."
In its fifth assignment of error, the surety contends:
1. That the bond is void for being contrary to public policy insofar
as it requires the surety to pay P10,000.00 regardless of the
amount of the salaries of the teachers.3 It is claimed that to
enforce forfeiture of the bond for the full amount would be to allow
the Government to enrich itself since the unpaid salaries of the
teachers amount to P1,318.84 only.
2. That, under Article 1311 of the Civil Code,4 since teachers of
Sison and Aruego Colleges are not parties to the bond, "the bond
is not effective, and binding upon the obligors (principal and
surety) as far as it guarantees payment of the 'past salaries' of the
teachers of said school." This is the same as saying that the
surety is not liable to teachers of Sison and Aruego Colleges
because the latter are not parties to the bond nor are they
beneficiaries of a stipulation pour autrui. But this argument is
based on the false premise that the teachers are trying to enforce
the obligation of the bond, which is not the case here. This is not
an action filed by the teachers against the surety. This is an action
brought by the Government, of which the Department of
Education is an instrumentality, to hold the surety liable on its
bond for the same has been violated when the principal failed to
comply "with all obligations, including the payment of salaries of
its teachers, past, present and future."
There is nothing against public policy in forfeiting the bond for the
amount. The bond is penal in nature. Article 1226 of the Code
states that in obligation 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, and the party to whom payment is to be made is entitled
to recover the sum stipulated without need of proving damages
because one of the primary purposes of a penalty clause is to
avoid such necessity. (Art. 1228, Civil Code; Lambert v. Fox, 26
Phil. 588; Palacios v. Municipality of Cavite, 12 Phil. 140; Manila
Racing Club v. Manila Jockey Club, 69 Phil. 55). The mere
non-performance of the principal obligation gives rise to the right
to the penalty, (IV Tolentino, Civil Code of the Philippines, p. 247.)
In its first and second "alternative assignments of error," the
surety contends that it was released from its obligation under the
bond when on February 4, 1955, Remedios Laoag and the
Foundation agreed that the latter would pay the former's salaries,
which were then already due, on March 1, 1955. In support of this
proposition, the surety cites Article 2079 of the Code which
provides as follows:
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. . . .
But the above provision does not apply to this case. The
supposed extension of time was granted not by the Department of
Education or the Government but by the teachers. As already
stated, the creditors on the bond are not the teachers but the
Department of Education or the Government.
Even granting that an extension of time was granted without the
consent of the surety, still that fact would not help the surety,
because as earlier pointed out, the Foundation was also arrears
in the payment of the salaries of H. B. Arandia. The case of
Arandia alone would be enough basis for the Government to
proceed against the bond.
Lastly, in its third and fourth "alternative assignments of error," the
surety contends that it cannot be made answer for more than the
unpaid salaries of H. B. Arandia, which it claimed amounted to
P720.00 only, because Article 2054 states that —
A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous
nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
What We said about the penal nature of the bond would suffice to
dispose of this claim. For whatever may be the amount of salaries
due the teachers, the fact remains that the condition of the bond
was violated and so the surety became liable for the penalty
provided for therein.
WHEREFORE, the decision of the Court of Appeals is hereby
affirmed, with costs against the surety.
SECOND DIVISION
G.R. No. 130886 January 29, 2004
COMMONWEALTH INSURANCE CORPORATION, Petitioner,
vs.
COURT OF APPEALS and RIZAL COMMERCIAL BANKING
CORPORATION, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari assailing the
Decision of the Court of Appeals (CA), promulgated on May 16,
1
1997 in CA-G.R. CV No. 44473 , which modified the decision
2
dated March 5, 1993 of the Regional Trial Court of Makati (Branch
64); and the Resolution dated September 25, 1997, denying
3
petitioner’s motion for reconsideration.
The facts of the case as summarized by the Court of Appeals are
as follows:
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation
(RCBC) granted two export loan lines, one, for ₱2,500,000.00 to
Jigs Manufacturing Corporation (JIGS) and, the other, for
62
₱1,000,000.00 to Elba Industries, Inc. (ELBA). JIGS and ELBA
which are sister corporations both drew from their respective
credit lines, the former in the amount of ₱2,499,992.00 and the
latter for ₱998,033.37 plus ₱478,985.05 from the case-to-case
basis and trust receipts. These loans were evidenced by
promissory notes (Exhibits ‘A’ to ‘L’, inclusive – JIGS; Exhibits ‘V’
to ‘BB’, inclusive – ELBA) and secured by surety bonds (Exhibits
‘M’ to ‘Q’ inclusive – JIGS; Exhibits ‘CC’ to ‘FF’, inclusive – ELBA)
executed by defendant-appellee Commonwealth Insurance
Company (CIC).
Specifically, the surety bonds issued by appellee CIC in favor of
appellant RCBC to secure the obligations of JIGS totaled
₱2,894,128.00 while that securing ELBA’s obligation was
₱1,570,000.00. Hence, the total face value of the surety bonds
issued by appellee CIC was ₱4,464,128.00.
JIGS and ELBA defaulted in the payment of their respective loans.
On October 30, 1984, appellant RCBC made a written demand
(Exhibit ‘N’) on appellee CIC to pay JIG’s account to the full
extend (sic) of the suretyship. A similar demand (Exhibit ‘O’) was
made on December 17, 1984 for appellee CIC to pay ELBA’s
account to the full extend (sic) of the suretyship. In response to
those demands, appellee CIC made several payments from
February 25, 1985 to February 10, 1988 in the total amount of
₱2,000,000.00. There having been a substantial balance unpaid,
appellant RCBC made a final demand for payment (Exhibit ‘P’) on
July 7, 1988 upon appellee CIC but the latter ignored it. Thus,
appellant RCBC filed the Complaint for a Sum of Money on
September 19, 1988 against appellee CIC. 4
The trial court rendered a decision dated March 5, 1993, the
dispositive portion of which reads as follows:
"WHEREFORE, premises considered, in the light of the above
facts, arguments, discussion, and more important, the law and
jurisprudence, the Court finds the defendants Commonwealth
Insurance Co. and defaulted third party defendants Jigs
Manufacturing Corporation, Elba Industries and Iluminada de
Guzman solidarily liable to pay herein plaintiff Rizal Commercial
Banking Corporation the sum of Two Million Four Hundred
Sixty-Four Thousand One Hundred Twenty-Eight Pesos
(P2,464,128.00), to pay the plaintiff attorney’s fees of P10,000.00
and to pay the costs of suit.
"IT IS SO ORDERED." 5
Not satisfied with the trial court’s decision, RCBC filed a motion
for reconsideration praying that in addition to the principal sum of
₱2,464,128.00, defendant CIC be held liable to pay interests
thereon from date of demand at the rate of 12% per annum until
the same is fully paid. However, the trial court denied the motion.
RCBC then appealed to the Court of Appeals.
On May 16, 1997, the CA rendered the herein assailed decision,
ruling thus:
...
Being solidarily bound, a surety’s obligation is primary so that
according to Art. 1216 of the Civil Code, he can be sued alone for
the entire obligation. However, one very important characteristic
of this contract is the fact that a surety’s liability shall be limited to
the amount of the bond (Sec. 176, Insurance Code). This does
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
not mean however that even if he defaults in the performance of
his obligation, the extend (sic) of his liability remains to be the
amount of the bond. If he pays his obligation at maturity upon
demand, then, he cannot be made to pay more than the amount
of the bond. But if he fails or refuses without justifiable cause
to pay his obligation upon a valid demand so that he is in
mora solvendi (Art. 1169, CC), then he must pay damages or
interest in consequence thereof according to Art. 1170. Even
if this interest is in excess of the amount of the bond, the
defaulting surety is liable according to settled jurisprudence.
...
Appellant RCBC contends that when appellee CIC failed to pay
the obligation upon extrajudicial demand, it incurred in delay in
consequence of which it became liable to pay legal interest. The
obligation to pay such interest does not arise from the
contract of suretyship but from law as a result of delay or
mora. Such an interest is not, therefore, covered by the
limitation of appellee’s liability expressed in the
contract. Appellee CIC refutes this argument stating that since
the surety bonds expressly state that its liability shall in no case
exceed the amount stated therein, then that stipulation controls.
Therefore, it cannot be made to assume an obligation more than
what it secured to pay.
The contention of appellant RCBC is correct because it is
supported by Arts. 1169 and 1170 of the Civil Code and the case
of Asia Surety & Insurance Co., Inc. and Manila Surety & Fidelity
Co. supra. On the other hand, the position of appellee CIC which
upholds the appealed decision is untenable. The best way to
show the untenability of this argument is to give this hypothetical
case situation: Surety issued a bond for P1 million to secure a
Debtor’s obligation of P1 million to Creditor. Debtor defaults and
Creditor demands payment from Surety. If the theory of appellee
and the lower court is correct, then the Surety may just as well not
pay and use the P1 million in the meantime. It can choose to pay
only after several years – after all, his liability can never exceed
P1 million. That would be absurd and the law could not have
intended it. (Emphasis supplied)
6
and disposed of the case as follows:
WHEREFORE, the appealed Decision is MODIFIED in the
manner following:
The appellee Commonwealth Insurance Company shall pay the
appellant Rizal Commercial Banking Corporation:
1. On the account of JIGS, ₱2,894,128.00 ONLY with 12% legal
interest per annum from October 30, 1984 minus payments made
by the latter to the former after that date; and on the account of
ELBA, ₱1,570,000.00 ONLY with 12% legal interest per annum
from December 17, 1984 minus payments made by the latter to
the former after that day; respecting in both accounts the
applications of payment made by appellant RCBC on appellee
CIC’s payments;
2. Defendant-appellee Commonwealth Insurance Company shall
pay plaintiff-appellant RIZAL COMMERCIAL BANKING CORP.
and (sic) attorney’s fee of ₱10,000.00 and cost of this suit;
3. The third-party defendants JIGS MANUFACTURING
CORPORATION, ELBA INDUSTRIES and ILUMINADA N. DE
GUZMAN shall respectively indemnify COMMONWEALTH
63
INSURANCE CORPORATION for whatever it had paid and shall
pay to RIZAL COMMERCIAL BANKING CORPORATION of their
respective individual obligations pursuant to this decision.
SO ORDERED. 7
CIC filed a motion for reconsideration but the CA denied the
same.
Hence, herein petition by CIC raising a single assignment of error,
to wit:
Respondent Court of Appeals grievously erred in ordering
petitioner to pay respondent RCBC the amount of the surety
bonds plus legal interest of 12% per annum minus payments
made by the petitioner. 8 disagreements with RCBC regarding the payment of interest. The
The sole issue is whether or not petitioner should be held liable to
pay legal interest over and above its principal obligation under the
surety bonds issued by it.
Petitioner argues that it should not be made to pay interest
because its issuance of the surety bonds was made on the
condition that its liability shall in no case exceed the amount of the
said bonds.
We are not persuaded. Petitioner’s argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs.
Aldanese and Union Gurantee Co. and reiterated in Plaridel
9 court is correct in imposing 12% interest. It is in accordance with
Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc. ,
and more recently, in Republic vs. Court of Appeals and R & B
Surety and Insurance Company, Inc. , we have sustained the
11
principle that if a surety upon demand fails to pay, he can be held
liable for interest, even if in thus paying, its liability becomes more
than the principal obligation. The increased liability is not because
of the contract but because of the default and the necessity of
judicial collection. 12
Petitioner’s liability under the suretyship contract is different from
its liability under the law. There is no question that as a surety,
petitioner should not be made to pay more than its assumed
obligation under the surety bonds. However, it is clear from the
13
above-cited jurisprudence that petitioner’s liability for the payment
of interest is not by reason of the suretyship agreement itself but
because of the delay in the payment of its obligation under the
said agreement.
Petitioner admits having incurred in delay. Nonetheless, it insists
that mere delay does not warrant the payment of interest. Citing
Section 244 of the Insurance Code, petitioner submits that under
14
the said provision of law, interest shall accrue only when the delay
or refusal to pay is unreasonable; that the delay in the payment of
its obligation is not unreasonable because such delay was
brought about by negotiations being made with RCBC for the
amicable settlement of the case.
We are not convinced.
It is not disputed that out of the principal sum of ₱4,464,128.00
petitioner was only able to pay ₱2,000,000.00. Letters demanding
the payment of the respective obligations of JIGS and ELBA were
initially sent by RCBC to petitioner on October 30, 1984 and 15
December 17, 1984. Petitioner made payments on an installment
16
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
basis spanning a period of almost three years, i.e., from February
25, 1985 until February 10, 1988. On July 7, 1988, or after a
period of almost five months from its last payment, RCBC, thru its
legal counsel, sent a final letter of demand asking petitioner to
pay the remaining balance of its obligation including interest. 17
Petitioner failed to pay. As of the date of the filing of the complaint
on September 19, 1988, petitioner was even unable to pay the
remaining balance of P2,464,128.00 out of the principal amount it
owes RCBC.
Petitioner’s contention that what prevented it from paying its
obligation to RCBC is the fact that the latter insisted on imposing
interest and penalties over and above the principal sum it seeks
to recover is not plausible. Considering that petitioner admits its
obligation to pay the principal amount, then it should have paid
the remaining balance of ₱2,464,128.00, notwithstanding any
fact that the negotiations for the settlement of petitioner’s
obligation did not push through does not excuse it from paying the
principal sum due to RCBC.
The issue of petitioner’s payment of interest is a matter that is
totally different from its obligation to pay the principal amount
covered by the surety bonds it issued. Petitioner offered no valid
excuse for not paying the balance of its principal obligation when
demanded by RCBC. Its failure to pay is, therefore,
unreasonable. Thus, we find no error in the appellate court’s
1âwphi1
ruling that petitioner is liable to pay interest.
As to the rate of interest, we do not agree with petitioner’s
contention that the rate should be 6% per annum. The appellate
10 our ruling in Eastern Shipping Lines, Inc. vs. Court of Appeals, 18
wherein we have established certain guidelines in awarding
interest in the concept of actual and compensatory damages, to
wit:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e. from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty
64
cannot be reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit. (Emphasis supplied)
19
In the present case, there is no dispute that petitioner’s obligation
consists of a loan or forbearance of money. No interest has been
agreed upon in writing between petitioner and respondent.
Applying the above-quoted rule to the present case, the Court of
Appeals correctly imposed the rate of interest at 12% per annum
to be computed from the time the extra-judicial demand was
made. This is in accordance with the provisions of Article 1169 of
20
the Civil Code and of the settled rule that where there has been
an extra-judicial demand before action for performance was filed,
interest on the amount due begins to run not from the date of the
filing of the complaint but from the date of such extra-judicial
demand. RCBC’s extra-judicial demand for the payment of JIGS’
21
obligation was made on October 30, 1984; while the extra-judicial
demand for the payment of ELBA’s obligation was made on
December 17, 1984. On the other hand, the complaint for a sum
of money was filed by RCBC with the trial court only on
September 19, 1988.
WHEREFORE, the instant petition is DENIED and the assailed
Decision and Resolution of the Court of Appeals are
AFFIRMED in toto.
SO ORDERED.
SECOND DIVISION
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE
HONG and JUDGE BENJAMIN K. GOROSPE, Presiding
Judge, Court of First Instance of Misamis Oriental, Branch
I, respondents.
Benjamin Tabique & Zosimo T. Vasalla for petitioner.
Rodrigo F. Lim, Jr. for private respondent.
AQUINO, J.:
This case is about the liability of a surety in a counterbond for the
lifting of a writ of preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama
Supermart in Cagayan de Oro City, sued the spouses Ernesto
Ong and Conching Ong in the Court of First Instance of Misamis
S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship
Oriental for the collection of the sum of P 58,400 plus litigation
expenses and attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary attachment. On March 5,
1976, the lower court issued an order of attachment. The deputy
sheriff attached the properties of the Ong spouses in Valencia,
Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a
counterbond in 'the amount of P 58,400 with Towers Assurance
Corporation as surety. In that undertaking, the Ong spouses and
Towers Assurance Corporation bound themselves to pay
solidarity to See Hong the sum of P 58,400.
On March 24, 1976 the Ong spouses filed an answer with a
counterclaim. For non-appearance at the pre- trial, the Ong
spouses were declared in default.
On October 25, 1976, the lower court rendered a decision,
ordering not only the Ong spouses but also their surety, Towers
Assurance Corporation, to pay solidarily to See Hong the sum of
P 58,400. The court also ordered the Ong spouses to pay P
10,000 as litigation expenses and attorney's fees.
Ernesto Ong manifested that he did not want to appeal. On March
8, 1977, Ororama Supermart filed a motion for execution. The
lower court granted that motion. The writ of execution was issued
on March 14 against the judgment debtors and their surety. On
March 29, 1977, Towers Assurance Corporation filed the instant
petition for certiorari where it assails the decision and writ of
execution.
We hold that the lower court acted with grave abuse of discretion
in issuing a writ of execution against the surety without first giving
it an opportunity to be heard as required in Rule 57 of tie Rules of
Court which provides:
SEC. 17. When execution returned unsatisfied, recovery had
upon bound. — If the execution be returned unsatisfied in whole
or in part, the surety or sureties on any counterbound given
pursuant to the provisions of this rule to secure the payment of
the judgment shall become charged on such counterbound, and
bound to pay to the judgment creditor upon demand, the amount
due under the judgment, which amount may be recovered from
such surety or sureties after notice and summary hearing in the
same action.
Under section 17, in order that the judgment creditor might
recover from the surety on the counterbond, it is necessary (1)
that execution be first issued against the principal debtor and that
such execution was returned unsatisfied in whole or in part; (2)
that the creditor made a demand upon the surety for the
satisfaction of the judgment, and (3) that the surety be given
notice and a summary hearing in the same action as to his liability
for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case
because Towers Assurance Corporation assumed a solidary
liability for the satisfaction of the judgment. A surety is not entitled
to the exhaustion of the properties of the principal debtor (Art.
2959, Civil Code; Luzon Steel Corporation vs. Sia, L-26449, May
15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be heard before an
execution can be issued against him since he is not a party in the
65
case involving his principal. Notice and hearing constitute the
essence of procedural due process. (Martinez vs. Villacete 116
Phil. 326; Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil.
1192, 1200, Luzon Surety Co., Inc. vs. Beson, L-26865-66,
January 30. 1970. 31 SCRA 313).

WHEREFORE, the order and writ of execution, insofar as they

concern Towers Corporation, are set aside. The lower court is
directed to conduct a summary hearing on the surety's liability on
its counterbound. No costs.

SO ORDERED.

S.V.VILLANUEVA CreditTRans - Guaranty & Suretyship 66