SOUTHERN MOTORS v BARBOSA No.
L-9306, May 25, 1956 Code, whereas pledges and mortgages fall under title XVI tbereof, in which articles 2087 and 2126
[Benefit of Excussion, When Not Applicable; Deferment of Execution]
FACTS:
Plaintiff Southern Motors, Inc. (Southern Motors) brought this action against defendant Eliseo
Barbosa (Barbosa), to foreclose a REM, constituted by the latter in favor of the former, as security
for the payment due to said the plaintiff from one Alfredo Brillantes (Brillantes), who had failed to
settle his obligation.
In his defense, Barbosa alleged that he has executed the deed of mortgage for the only purpose of
guaranteeing—as surety and/or guarantor—the payment of the said debt of Brillantes in favor of
the plaintiff.
Further, the defendant argued that plaintiff is not entitled to foreclose the mortgage constituted in
its favor by the defendant, because the property of Brillantes, the principal debtors, had not been
exhausted as yet, and were not sought to be exhausted, for the satisfaction of plaintiff’s credit.
CFI ordered Barbosa to pay or else the land subject of the mortgage will be foreclosed.
ISSUE: W/N the mortgage in question could be foreclosed although plaintiff had not exhausted,
and did not intend to exhaust, the properties of his principal debtor, Brillantes?
RULING:
YES.
The right of guarantors, under article 2058 of the Civil Code of the Philippines, to demand
exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not
been given as special security for the payment of the principal obligation. Guarantees, without any
such pledge or mortgage, are governed by title XV of said Code, whereas pledges and mortgages
fall under title XVI thereof, in which articles 2087 and 2126 of same code among others are found:
ART. 2087. "It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor."
ART. 2126. "The mortgage directly and immediately subjects the property upon which it is
imposed,
whoever the possessor may be, to the fulfillment of the obligation for whose security it was
constituted."
It has been held already that a mortgagor is not entitled to the exhaustion of the property of
the principal debtor.
Although an ordinary personal guarantor—not a mortgagor or pledgor—may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the execution of said judgment
against him until after the properties of the principal debtor shall have been exhausted to satisfy
the obligation involved in the case.
1.SURETY AND GUARANTY; RlGHT OP GUARANTORSJ EXHAUSTION OP PRINCIPAL
DEBTOR'S PROPERTY.—The right of guarantors, under article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special security for the payment of the principal
obligation. Guarantees, without any such pledge or mortgage, are governed by title XV of said
1
of same code among others are found.
2.ID.; ID.; ORDINARY PERSONAL GUARANTOR MAY DEMAND EXHAUSTION; CREDITOR
MAY SECURE JUDGMENT AGAINST GUARANTOR PRIOR THERETO.—Although an ordinary
personal guarantor, not & mortgagor or pledgor, may demand exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment
of the execution of said judgment against him, until after the properties of the principal debtor shall
have been exhausted, to satisfy the obligation involved in the case.
BAYLON v CA
G.R. No. 109941, August 17, 1999
[Effect on the Guarantor of the Lack of Jurisdiction Over the Person of the Principal Debtor]
FACTS:
Rosita Luanzon (Luanzon) obtained a loan of P150,000 from respondent Leonila Tomacruz
(Tomacruz). Petitioner Pacionaria Baylon (Baylon) signed a PN issued by Luanzon, affixing her
signature under the word “guarantor.”
The respondent later made demand for payment but petitioner did not heed the same.
Thus, Tomacruz filed a case for the collection of a sum of money against Luanzon and Spouses
Baylon. However, summons was never served upon Luanzon.
In her answer, petitioner argued that respondent has not exhausted the property of the principal
debtor nor has she resorted to all the legal remedies against the principal debtor.
RTC ruled in favor of the respondent.
CA affirmed the RTC decision.
ISSUE:
W/N Baylon may be held liable as guarantor?
RULING:
Under the circumstances availing in the present case, the Supreme Court held that it is premature
to even determine whether or not petitioner is liable as a guarantor and whether she is entitled to
the concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is
wanting—that is, no judgment was first obtained against the principal debtor Luanzon. It is useless
to speak of a guarantor when no debtor has been held liable for the obligation which is allegedly
secured by such guarantee. Although the principal debtor Luanzon was impleaded as defendant,
there is nothing in the records to show that summons was served upon her. Thus, the trial court
never acquired jurisdiction over the principal debtor. Respondent must first obtain a judgment
against the principal debtor before assuming to run after the alleged guarantor.
It is axiomatic that the liability of the guarantor is only subsidiary. Thus, the creditor may hold the
guarantor liable only after judgment has been obtained against the principal debtor and the latter is
unable to pay, “for obviously the ‘exhaustion of the principal’s property’— the benefit of which the
guarantor claims—cannot even begin to take place before the judgment has

been obtained. This rule is embodied in Art. 2062 of the Civil Code, which provides that the action
brought by the creditor, must be filed against the principal debtor alone, except in some instances
when the action may be brought against both the guarantor and the principal debtor.
Civil Law; Guaranty; The liability of the guarantor is only subsidiary; Creditor may hold the
guarantor liable only after judgment has been obtained against the principal debtor and the
latter is unable to pay.–It is petitioner’s contention that, even though she is held to be a guarantor
under the terms of the promissory note, she is not liable because private respondent did not
exhaust the property of the principal debtor and has not resorted to all the legal remedies provided
by the law against the debtor. Petitioner is invoking the benefit of excussion pursuant to article
2058 of the Civil Code, which provides that–The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor. It is axiomatic that the liability of the guarantor is only subsidiary. All
the properties of the principal debtor must first be exhausted before his own is levied upon. Thus,
the creditor may hold the guarantor liable only after judgment has been obtained against the
principal debtor and the latter is unable to pay, “for obviously the ‘exhaustion of the principal’s
property’–the benefit of which the guarantor claims–cannot even begin to take place before
judgment has been obtained.– This rule is embodied in article 2062 of the Civil Code which
provides that the action brought by the creditor must be filed against the principal debtor alone,
except in some instances when the action may be brought against both the debtor and the
principal debtor.
WISE & CO. v TANGLAO
No. L-9306, May 25, 1956
[Suretyship Must Be Express & Cannot Be Presumed; Exhaustion of All Legal Remedies Against
the Principal Debtor by the Creditor]
FACTS:
Petitioner Wise & Co., Inc. (Wise & Co.) instituted a case for the recovery of a sum of money
against Cornelio David (David). The latter had an unpaid balance of P296.53 out of his account of
P640 to the former.
To avoid the execution of the attachment of David’s property, respondent Atty. Dionisio Tanglao
(Tanglao) executed a SPA (Exhibit A) in David’s favor to enter into a contract of mortgage and
suretyship.
Later, parties agreed to a compromise (Exhibit B). Three (3) real properties in Angeles, Pampanga
were pledged to Wise & Co as security for the payment of the said sum of P640.
ISSUE:
W/N Tanglao entered into a contract of suretyship and liable to pay the said unpaid balance?
RULING:
NO.
There is no doubt that under Exhibit A, Tanglao empowered David to enter into a contract of
mortgage and a contract of suretyship. However, David used the SPA only to mortgage the
property and did not enter into the 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
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inferable from any of the clauses thereof, and even if this inference might be made, it would be
insufficient to create an obligation to suretyship which, under the law, must be express and cannot
be presumed.
It appears from the foregoing that 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 the 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 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. Petitioner Wise & Co. has in its favor a judgment against debtor David
for the payment of the 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.
NOTE:
• Case herein was decided under the Old Civil Code. The term “surety” was used in the
sense of what is presently referred to as “guarantor.”
1. 1.SURETYSHIP AND GUARANTY; THE SURETYSHIP MUST BE EXPRESS.—An
obligation of suretyship, under the law, must be express. It is not inferable from any of
the clauses of the contract that T became D's surety for the payment of the latter's
indebtedness to the plaintiff. Therefore, T could not have con tracted any personal
responsibility for the payment of said debt.
1. 2.ID.; BENEFIT OF EXHAUSTION.—Granting that defendant T may be considered as a
surety under the contract, even then the action against him does not lie on the ground
that all the legal remedies against the debtor have not previously been exhausted (art.
1830, Civil Code, and decision of the Supreme Court of Spain of March 2, 1891).
SYQUIA v JACINTO
No. 41320, November 9, 1934
[Demand ≠ Suit; Chronology in Collection of Payment]
FACTS:
BPI obtained judgment against Perfecto and Felipe Jacinto as debtors and Rafael Palma (Palma)
as guarantor on a PN for the sum of P24,000.
The said bank assigned and transferred said udgment to Gregorio Syquia (Syquia).
Widow and administratrix of the estate of Syquia filed a suit against respondents, praying that the
judgment be revived and that said respondents be adjudged to pay.
In their answer, respondents alleged that they have already paid by virtue of the proceeds from the
execution sale caused by BPI.
CFI ruled that there is still an unpaid balance amounting to P13,596.24.
ISSUE:
W/N demand for payment, as required by law, has
been made upon the guarantor?
RULING:
NO.
It suffices to say that it is conceded that Palma as guarantor is still entitled to the benefits of Arts.
1830, 1832, and 1852 of the Civil Code. Up to the present, the judgment creditor has made no
demand on Palma. Joining him in the suit against the provincial debtor is not the demand intended
by Art. 1832 of the Civil Code. That demand can be made only after judgment on the debt, for
obviously the “exhaustion of the principal’s property”—the benefit of which the guarantor claims—
cannot even begin to take place before judgment has been obtained. Only then can the creditor
“levy upon the property of the principal”— only then can the liability of the creditor begin under Art.
1883 of the Civil Code. It would be absurd and futile to point out “ saleable property of the debtor”
at the inception of the suit, when it cannot be seized or sold, and require the creditor to make a
“levy” upon it.
1. EXECUTION OF JUDGMENT; REVIVAL OF JUDGMBNT; SHERIFF'S
SALE; EQUITABLE PRINCIPLE NOT APPLICABLE.—The appellant invokes the
equitable principle that no person should enrich himself unjustly at the expense of
another. This equitable principle has no application to a legally conducted sheriff's sale.
The appellant does not question the regularity of the sale.
1. 2.ID.; ID.; ID.; RIGHT OF REDEMPTION.—In the instant case, although it was alleged
the property was sold for greatly below its value, the defendants did not exercise any
right of redemption. The judgment debt in its entirety was not discharged before the
action for the revival of the judgment was brought.
1. 3.ID.; ID.; ID.; DEFENSES AVAILABLE TO A GUARANTOR; BENEPIT OF
EXHAUSTION.—With reference to all the defenses available to a guarantor P as
guarantor is still entitled to the benefits of articles 1830, 1832 and 1852 of the Civil
Code. Up to the present, the judgment creditor has made no demand on F. Joining him
in the suit against the principal debtor is not the demand intended by article 1832 of the
Civil Code. That demand can be made only after judgment on the debt, for obviously the
"exhaustion of the principal's property"—the benefit of which the guarantor claims—
cannot even begin to take place before judgment has been obtained.
1. 4.ID.; ID.; ID.; ID.; ID.; PREMATURE DEFENSE.—There is no competent evidence that
the principal debtors, are insolvent—even if they were now, there can be no certainty
that they may not be in funds when an execution on the revived judgment is issued. So
far as this record shows, the judgment creditor has not exhausted his remedies against
the principal debtors and he is still looking to them for payment. It is not for the guarantor
to anticipate that there will be a return of nulla bona on the execution, when and if
issued. Nor is it for him to anticipate a demand on him under article 1832 and to offer
defenses thereto which have not matured. The occasion for these defenses may never
arise.
1. 5.ID.; ID.; ID.; ID.; ID.; ID.—The present revived judgment could not be res judicata as to
such future defenses. The revived judgment does not foreclose any defense which the
guarantor may raise when "demand for payment" is made on him Indeed, he cannot
claim the benefits of articles 1830 1832 1834 and 1852 of the Civil Code before demand
is made on himthey are all available to him only after "demand for payment''' (art. 1832).
3
1. 6.ID.; ID.; ID.; ID.; ID.; lD.—The appellant's defenses may all be considered when they
are properly presented at the proper time. The case which he now presents, in
anticipation of a demand which has not yet been made, is purely hypothetical. The
courts do not undertake to decide hypothetical cases.
2. 7.ID. ; ID. ; ID. ; ID. ; ID. ; ID.—Revenues collected and retained during the year of
redemption by the judgment creditor from real estate purchased by him upon an
execution sale thereof, must be credited upon the judgment debt. (Pabico vs. Ong
Pauco", 43 Phil., 572; Flores vs. Lim, 50 Phil., 738; Powell vs. National Bank, 54 Phil.,
54.)
ARROYO v JUNGSAY
No. 10168, July 22, 1916
[Preconditions to the Exercise of Excussion]
FACTS:
Jose M. A. Arroyo, guardian of one Tito Jocsing, an imbecile, was appointed by the court to
succeed Florentino Hlario Jungsay (Jungsay), the former guardian.
Jungsay together with his bondsmen absconded with the funds of his ward.
CFI ruled that defendants are liable for the sum of P6,000
Appellants alleged that they are entitled to the credit of P4,400, relying upon Art. 1834 of the Civil
Code, which gives to the surety the benefit of a levy (excusion), even when a judgment is rendered
against both the surety and the principal.
ISSUE:
W/N the appellants should be credited with P4,400, the alleged value of certain property attached
as that of the absconding guardian, all of which is in the exclusive possession of third parties under
claim of ownership?
RULING:
NO.
Where a judgment has been rendered against a guardian and his sureties, the latter are not
entitled to be credited with the value of certain property levied upon as that of the former when
such property is in the exclusive possession of third parties under claim of ownership.
Manresa: “It is also necessary that…such property be realizable and that it be situated in
Spanish territory. This is not only logical, but just, because the attachment of property situated a
great distance away would be a lengthy and extremely difficult proceeding and one that, if actually
not opposed to, yet does not very well accord with the purpose of the bond, that is, to insure the
fulfillment of the obligation and at the same time furnish the creditor with the means of obtaining its
fulfillment without hindrance or delays.”
The property pointed out by the sureties is not sufficient to pay the indebtedness; it is not
salable; it is so incumbered that third parties have, as we have indicated, full possession under
claim of ownership without leaving to the absconding guardian a fractional or reversionary interest
without determining first whether the claim of one or more of the occupants is well founded. In all
these respects the sureties have failed to meet the requirements of article 1832 of the Civil Code.
Where a guardian absconds or in beyond the jurisdiction of the court, the proper method, under
article 1834 of the civil Code and section 577 of the Code of Civil Procedure, in order to ascertain
whether such guardian is liable and to what extent, in order to bind the sureties on his official bond,
is by a proceeding in the nature of a civil action wherein the sureties are made parties and given
an opportunity to be heard. All this was done in the instant case.
NOTES:
• Case herein was also decided under the Old Civil Code. The term “surety” was used in
the sense of what is presently referred to as “guarantor.”
• Summary of preconditions for the exercise of the right of excussion:
(1) Saleable; not encumbered
(2) Within the Philippines;
(3) Sufficient to cover the debt
• Location of the subject property is not mentioned in the case.
1. .GUARDIAN AND WARD; LlABILITY ON GUARDIANSHIP BOND.—Where a
judgment has been rendered against a guardian and his sureties, the latter are not
entitled to be credited with the value of certain property levied upon as that of the former
when such property is in the exclusive possession of third parties under claim of
ownership.
1. 2.ID.; ID.; ACTION.—Where a guardian absconds or is beyond the jurisdiction of the
court, the proper method, under article 1834 of the Civil Code and section 577 of the
Code of Civil Procedure, in order to ascertain whether such guardian is liable and to
what extent, so as to bind the sureties on his official bond, is by proceeding as in a civil
action wherein the sureties are made parties.
LUZON STEEL v SIA
No. L-26449, May 15, 1969
[Non-Applicability of Excussion; Pointing Out of Debtor’s Property]
FACTS:
Luzon Steel Corporation (Luzon Steel) has sued Metal Manufacturing of the Philippines and Jose
O. Sia (Sia), the former’s manager, for breach of contract and damages. It obtained a writ of
preliminary attachment of the properties of the defendants, but the attachment was lifted upon a
P25,000.00 counter-bond executed by the defendant Sia, as principal, and the Times Surety &
Insurance., Inc. (Times Surety), as solidary guarantor.
Issues having been joined, plaintiff and defendant (without intervention of the surety) entered into a
compromise whereby defendant Sia agreed to settle the plaintiff’s claim. Sia shall settle with the
plaintiff the amount of P25,000.
Sia defaulted. Luzon Steel obtained a writ of execution against Sia and the joint and several
counterbond.
4
ISSUE:
W/N the writ of execution could be issued against thesurety without previous exhaustion of the
debtor’s properties?
RULING:
NO.
The surety in the present case bound itself "jointly and severally" (in solidum) with the defendant;
and it is prescribed in Article 2059, paragraph 2, of the Civil Code of the Philippines that excussion
(previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has
bound himself solidarily with the debtor." The rule heretofore quoted can not be construed as
requiring that an execution against the debtor be first returned unsatisfied even if the bond were a
solidary one; for a procedural rule may not amend the substantive law expressed in the Civil Code,
and further would nullify the express stipulation of the parties that the surety’s obligation should be
solidary with that of the defendant.
A second reason against the stand of the surety and of the court below is that even if the surety’s
undertaking were not solidary with that of the principal debtor, still he may not demand exhaustion
of the property of the latter, unless he can point out sufficient leviable property of the debtor within
Philippine territory. There is no record that the appellee surety has done so.
Judgment; Judgment on counterbond filed to discharge a levy on attachment; Rule.—
Judgment can be issued against the surety that filed a counterbond to discharge a levy on
attachment of properties of debtor regardless of the manner how the judgment was obtained—
whether judgment was rendered after trial on the merits or upon compromise—for the reason that
the counterbond stands in the place of the property of the debtor released pursuant to Rule 57,
Section 12, Rules of Court.
Attachment; When execution returned unsatisfied, recovery had upon bond.—The rule in
Section 17, Rule 57 of the Rules of Court refers to an ordinary guaranty where the sureties
assume a subsidiary liability.
Same; Same; Previous exhaustion of property of debtor does not apply where surety is
bound in solidum.—Section 17, Rule 57 of the Rules of Court requiring excusion (previous
exhaustion of the property of the debtor) does not apply if the surety or guarantor has bound
himself solidarily with the debtor.
Same; Same; Same; Reason.—A procedural rule may not amend the substantive law expressed
in Article 2059, paragraph 2, of the Civil Code that excusion shall not take place 'if he (the
guarantor) has bound himself solidarily with the debtor."
Same; Same; When excusion does not apply.—The surety may not demand exhaustion of the
property of the principal debtor where he cannot point out sufficient leviable property of the debtor
within Philippine territory.
Same; Same; Liability of surety attaches upon rendition of judgment.—Where under the rule
and the bond the undertaking is to pay the judgment, the liability of the surety or sureties attaches
upon the rendition of the judgment, and the issue of an execution and its return nulla bona is not,
and should not be, a condition to the right to resort to the bond Judgment; Judgment on
counterbond filed to discharge a levy on attachment; Rule.—Judgment can be issued against the
surety that filed a counterbond to discharge a levy on attachment of properties of debtor regardless
of the manner how the judgment was obtained—whether judgment was rendered after trial on the
merits or upon compromise—for the reason that the counterbond stands in the place of the
property of the debtor released pursuant to Rule 57, Section 12, Rules of Court.
TOWERS ASSURANCE v ORORAMA SUPERMART
No. L-45848, November 9, 1977
[Notice and Hearing; Due Process]
FACTS:
See Hong, proprietor of Ororama Supermarket, sued Spouses Ong for the collection of the sum of
P58,400.
LC issued an order of attachment. To lift the attachment, the Ong spouses filed on March 11, 1976
a counterbond in the amount of P58,400 with Towers Assurance Corporation as surety.
LC 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 P58,400.
LC issued a writ of execution was issued against judgment debtors and their surety.
Petitioner filed a petition for certiorari assailing the LC decision and writ of execution.
ISSUE:
W/N writ of execution against Towers Assurance is
procedurally valid?
RULING:
NO.
Under section 17, in order that the judgment creditor might recover from the surety on the
counterbond, it is necessary: (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 surety is entitled to be, heard before an execution can be issued against him since he is not a
party in the case involving his principal. Notice and hearing constitute the essence of procedural
due process.
Provincial remedies; Attachment; Requirements before the judgment creditor may recover
from the surety on the counterbond.—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.
Same; Same; Same; Notice and hearing; Surety should be given an opportunity to be
heard; Reasons.—The surety is entitled to be heard before an execution can be issued
against him since he is not a party in the case involving his principal. Notice and hearing
constitute the essence of procedural due process.
5
Same; Same; Same; Exhaustion of the properties of the principal debtor; Surety not entitled
to exhaustion of the properties of the principal debtor where surety assumes solidary
liability for the satisfaction of the judgment.—The first requisite is not applicable to a surety
who assumes a solidary liability for the satisfaction of the judgment. A surety is not entitled to the
exhaustion of the properties of the principal debtor.
COCHINGYAN v R & B SURETY No. L-47369, June 30, 1987
[Extinguishment via Novation, Extension Without Consent]
FACTS:
Pacific Agricultural Suppliers, Inc. (PAGRICO) was granted an increase in its credit line with
Philippine National Bank (PNB) secured by a surety bond issued by respondent R & B Surety and
Insurance Co., Inc. (R & B Surety).
Under the terms of the said bond, PAGRICO and R & B Surety bound themselves jointly and
severally to comply with the credit line with PNB. The said bank also had the right to proceed
directly against R & B Surety without the necessity of exhausting the assets of the PAGRICO.
Moreover, two (2) indemnity agreements were entered into with R & B Surety: (a) one agreement
executed by Catholic Church Mart (CCM) and Joseph Cochingyan, Jr. (Cochingyan), the latter
signing not only as CCM President but also as in his personal and individual capacity; and (b)
another agreement executed by PAGRICO, Pacific Copra Export, Inc. (PACOCO), Jose K.
Villanueva (Villanueva), signing not only as PAGRICO Manager but also in his personal and
individual capacity, and Liu Tua Beh (Liu), signing not only as PACOCO President but also in his
personal and individual capacity.
When PAGRICO defaulted, PNB demanded payment from R & B Surety the sum of P400,000
representing the amount of the principal obligation. R & B Surety made a series of payments to
PNB totaling P70,000.
In return, R & B Surety sent demand letters to Cochingyan and Villanueva for the reimbursement
of the payments made to PNB.
For failure to heed the demand, suit was brought against Cochingyan, Villanueva and Lui by R &B
Surety.
In his answer, Cochingyan alleged that the execution of the indemnity agreement was a mere
formality due to the existing Trust Agreement between PNB & CCM.
On the other hand, Villanueva claimed in his answer that the execution of the indemnity agreement
was for accommodation purposes because the principal obligation has already been assumed by
CCM.
CFI ordered Cochingyan and Villanueva to pay jointly and severally.
ISSUE:
(1) W/N the Trust Agreement had extinguished by novation, the obligation of R & B Surety
to PNB under the surety bond which, in turn, extinguished the obligations of the petitioners under
the indemnity agreements?
(2) W/N the Trust Agreement extended the term of the surety bond so as to release
petitioners from their obligation as indemnitors thereof as they did not give their consent to the
execution of the trust agreement?
RULING:
(1) NO.
It is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B
Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the
continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any
manner release" R & B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication. But where, as in this case, the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, where, in other words, the parties expressly
negated the lapsing of the old obligation, there can be no novation. The issue of implied novation
is not reached at all.
What the trust agreement did was, at most, merely to bring in another person or persons- the
Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the
Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations
thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect
is the increase of the number of persons liable to the obligee, and not the extinguishment of the
liability of the first debtor. Thus, in Magdalena Estates vs. Rodriguez, we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who
has agreed to assume the obligation, when there is no agreement that the first debtor shall be
released from responsibility, does not constitute a novation, and the creditor can still enforce the
obligation against the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already
previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the
Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the
Trust Agreement was that where there had been only two, there would now be three obligors
directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the
PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never
intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a
party to the Trust Agreement, could not have intended to release any of its own indemnitors simply
because one of those indemnitors, the Trustor under the Trust Agreement, became also directly
liable to the PNB.
(2) NO.
The record, however, is bereft of any indication that the petitioners- indemnitors ever in fact
became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have
directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see
how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the
instant case.
The petitioner-indemnitors are, as, it were, second -tier parties so far as the PNB was concerned
and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B
Surety and the trustors[s]) could not prejudice the second-tier parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under
the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety
6
did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal
Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust
Agreement was entered into. Petitioner's Obligation had in fact already matured, for those
obligations were to mature "as soon as [R & B Surety] became liable to make payment of any sum
under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been
actually paid or not ." Thus, the situation was that precisely envisaged in Article 2079:
[t]he mere failure on the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension of the referred to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to
be immediately subrogated to the creditor's remedies against the principal debtor upon the original
maturity date. The surety is said to be entitled to protect himself against the contingency of the
principal debtor or the indemnitors becoming insolvent during the extended period.
Civil Law; Obligations and Contracts; Novation defined.—Novation is the extinguishment of
an obligation by the substitution or change of the obligation by a subsequent one which terminates
it, either by changing its object or principal conditions, or by substituting a new debtor in place of
the old one, or by subrogating a third person to the rights of the creditor. Novation through a
change of the object or principal conditions of an existing obligation is referred to as objective (or
real) novation. Novation by the change of either the person of the debtor or of the creditor is
described as subjective (or personal) novation. Novation may also be both objective and subjective
(mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved—
an obligation is extinguished and a new one is created in lieu thereof.
Same; Same; Same; Novation is never presumed.—If objective novation is to take place, it is
imperative that the new obligation expressly declare that the old obligation is thereby extinguished,
or that the new obligation be on every point incompatible with the old one. Novation is never
presumed: it must be established either by the discharge of the old debt by the express terms of
the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly discernible.
Same; Same; Same; If old debtor is not released, no novation occurs and the third person
who assumed the obligation becomes a codebtor or surety or a co-surety.—Again, if
subjective novation by a change in the person of the debtor is to occur, it is not enough that the
juridical relation between the parties to the original contract is extended to a third person. It is
essential that the old debtor be released from the obligation, and the third person or new debtor
take his place in the new relation. If the old debtor is not released, no novation occurs and the third
person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a
co-surety.
Same; Same; Same; Novation is not implied when the parties to the new obligation
expressly negated the lapsing of the old obligation.—Neither can the petitioners anchor their
defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-
existing obligation, a showing of complete incompatibility between the old and the new obligation
(and nothing else) would sustain a finding of novation by implication. But where, as in this case,
the parties to the new obligation expressly recognize the continuing existence and validity of the
old one, where, in other words, the parties expressly negated the lapsing of the old obligation,
there can be no novation. The issue of implied novation is not reached at all.
Same; Same; Same; Article 2079 of the Civil Code, not applicable;Case at bar.—The
Indemnity Agreement speaks of the several indemnitors “apply[ing] jointly and severally (in
solidum) to the [R & B Surety]—to become SURETY upon a SURETY BOND demanded by and in
favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions
set forth in said SURETY BOND—”. This part of the Agreement suggests that the indemnitors
(including the petitioners) would become co-sureties on the Security Bond in favor of PNB. The
record, however, is bereft of any indication that the petitioners-indemnitors ever in fact became
cosureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes, remained
simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly
demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how
Article 2079 of the Civil Code—which provides in part that “[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the guaranty”—could apply in the
instant case. The petitioner-indemnitors are, as it were, secondtier parties so far as the PNB was
concerned and any extension of time granted by PNB to any of the first-tier obligors (PAGRICO, R
& B Surety and the trustor[s]) could not prejudice the second-tier parties.
Same; Same; Same; Same; Theory behind Art 2079 is that an extension of time given to the
principal debtor by the creditor without the surety’s consent would deprive the latter of his
right to pay the creditor and to be immediately subrogated to the creditor’s remedies
against the principal debtor upon original maturity.—The theory behind Article 2079 is that an
extension of time given to the principal debtor by the creditor without the surety’s consent would
deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s
remedies against the principal debtor upon the original maturity date. The surety is said to be
entitled to protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period. The underlying rationale is not present in the
instant case.
Same; Same; Same; Indemnity clauses held enforceable and not against any public policy.
—The last issue can be disposed of quickly, Clauses (b) and (c) of the Indemnity Agreements
(quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have
paid the PNB. We have previously held similar indemnity clauses to be enforceable and not
violative of any public policy. The petitioners lose sight of the fact that the Indemnity Agreements
are contracts of indemnification not only against actual loss but against liability as well. While in a
contract of indemnity against loss an indemnitor will not be liable until the person to be indemnified
makes payment or sustains loss, in a contract of indemnity against liability, as in this case,
the indemnitor’s liability arises as soon as the liability of the person to be indemnified has arisen
without regard to whether or not he has suffered actual loss. Accordingly, R & B Surety was
entitled to proceed against petitioners not only for the partial payments already made but for the
full amount owed by PAGRICO to the PNB.
MERCANTILE INSURANCE v YSMAEL & CO.
G. R. No. 43862, January 13, 1989
[Indemnity Agreements]
FACTS:
Philippine National Bank (PNB) granted a P2M credit accommodation in favor of Felipe Ysmael, Jr.
& Co. (Ysmael & Co.) guaranteed by surety bonds from Mercantile Insurance Co., Inc. (Mercantile
Insurance) in the amount of P140K.
Ysmael & Co. and Magdalena Estate, Inc. executed with plaintiff Mercantile Insurance an
indemnity agreement wherein Ysmael & Co. and Felipe Ysmael, Jr. bound themselves jointly and
severally to indemnify the plaintiff.
Paragraph 3 of the indemnity agreement provides that:
7
“…the COMPANY for the protection of its interest may forthwith proceed against the undersigned
or either of them by court action or otherwise to enforce payment even prior to making payment to
the obligee which may hereafter be done by the COMPANY.”
Subsequently Gabriel Daza, Jr. Edgardo Tordesillas, Augusto Torres and Ysmael & co executed
another indemnity agreement with the plaintiff in consideration of the surety bond.
In view of the default of the defendant, PNB demanded from Mercantile Insurance settlement of its
obligations under the surety bonds.
In return, plaintiff wrote a demand letter to the defendants inviting their attention to the letter of
demand of PNB sent to the plaintiff and demanding from the defendants the settlement of said
account.
Since defendants failed to settle their obligations with PNB, plaintiff brought an action.
TC rendered a judgment, ordering defendants to pay jointly and severally.
On appeal, defendants -appellants maintain that the complaint is premature and that the indemnity
agreements is void for being contrary to law, public policy and good morals. They argued that to
allow plaintiff-surety to receive indemnity or compensation for something it has not paid in its
capacity as surety would constitute unjust enrichment at the expense of another.
ISSUE:
W/N Mercantile Insurance can be allowed indemnification from Ysmael & Co. upon the latter’s
default even before the former has paid to the creditor?
RULING:
YES.
The Court has been held that:
The stipulation in the indemnity agreement allowing the surety to recover even before it paid the
creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors
even before paying the creditors.
Correspondingly, it is readily apparent that said cause of action was derived from the terms of the
Indemnity Agreement. By virtue of the provisions of the Indemnity Agreement, defendants-
appellants have undertaken to hold plaintiff-appellee free and harmless from any suit, damage or
liability which may be incurred by reason of non-performance by the defendants-appellants of their
obligation with the PNB. The Indemnity Agreement is principally entered into as security of plaintiff-
appellee in case of default of defendants -appellants; and the liability of the parties under the
surety bonds is joint and several, so that the obligee PNB may proceed against either of them for
the satisfaction of the obligation.
Defendants-appellants have, by virtue of the Indemnity Agreement, given the plaintiff -appellee the
prerogative of filing an action even prior to the latter's making any payment to the PNB.
Elucidating further on the obligations of the parties in agreements of this nature, the Supreme
Court ruled:
“...The indemnity agreement was not executed for the benefit of the creditors; it was rather for the
benefit of the surety and if the latter thought it necessary in its own interest to impose this
stipulation, and the indemnitors voluntarily agreed to the same, the court should respect the
agreement of the parties and require them to abide by their contract.”
It must be stressed that in the case at bar, the principal debtors, defendants-appellants herein, are
simultaneously the same persons who executed the Indemnity Agreement. Thus, the position
occupied by them is that of a principal debtor and indemnitor at the same time, and their liability
being joint and several with the plaintiff-appellee's, the PNB may proceed against either for
fulfillment of the obligation as covered by the surety bonds. There is, therefore, no principle of
guaranty involved and, therefore, the provision of Article 2071 of the Civil Code does not apply.
Otherwise stated, there is no more need for the plaintiff-appellee to exhaust all the properties of
the principal debtor before it may proceed against defendants-appellants.
Mercantile Law; Insurance; Surety; The surety can demand indemnification from the
principal upon the latter’s default, even before the former has paid to the creditor.—
The question as to whether or not under the Indemnity Agreement of the parties, the Surety can
demand indemnification from the principal, upon the latter’s default, even before the former has
paid to the creditor, has long been settled by this Court in the affirmative.
Same; Same; Same; Cause of action of the appellants was derived from the terms of the
indemnity agreement.—Correspondingly, it is readily apparent that said cause of action was
derived from the terms of the Indemnity Agreement, paragraph 3 thereof, as above quoted. By
virtue of the provisions of the Indemnity Agreement, defendantsappellants have undertaken to hold
plaintiff-appellee free and harmless from any suit, damage or liability which may be incurred by
reason of non-performance by the defendants-appellants of their obligation with the Philippine
National Bank. The Indemnity Agreement is principally entered into as security of plaintiff-appellee
in case of default of defendants-appellants; and the liability of the parties under the surety bonds is
joint and several, so that the obligee PNB may proceed against either of them for the satisfaction
of the obligation. (Brief for Plaintiff-Appellee, p. 7).
Same; Same; Same; Same; Pursuant to the indemnity agreement, the appellants have given
the surety the prerogative of filing an action even prior to the latter’s making any payment
to the PNB.—Defendantsappellants have, by virtue of the Indemnity Agreement, given the
plaintiff-appellee the prerogative of filing an action even prior to the latter’s making any payment to
the Philippine National Bank.
Same; Same; Same; Contracts; Contracts are respected as the law between the contracting
parties.—Contracts are respected as the law between the contracting parties (Henson v. IAC, 148
SCRA 11 [1987], citing Castro v, CA, 99 SCRA 722 [1980] and Escano v. CA, 100 SCRA 197
[1980]). It is settled that the parties may establish such stipulations, clauses, terms and conditions
as they may want to include, and as long as such agreements are not contrary to law, morals,
good customs, public policy or public order, they shall have the force of law between them
(Herrera v. Petrophil Corp., 146 SCRA [1986]).
Same; Same; Same; Same; Interpretation; Contracts should be interpreted according to
their literal meaning and should not be interpreted beyond their obvious intendment.—
Contracts should be interpreted according to their literal meaning and should not be interpreted
beyond their obvious intentment (Ibid.). It is a basic and fundamental rule in the interpretation of
contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of the stipulation shall control.
Same; Same; Same; Same; Same; Provisions of the indemnity agreement do not
contravene any law or public policy nor militate against the public good; Having voluntarily
entered into the contract, appellants cannot complain, and their indemnity agreement have
the force and effect of law.—A careful analysis of the contract in question will show that the
provisions therein do not contravene any law or public policy much less do they militate against the
8
public good. In fact, as shown above, they are fully sanctioned by well-established jurisprudence.
Having voluntarily entered into such contract, the appellants cannot now be heard to complain.
Their indemnity agreement have the force and effect of law.
Same; Same; Same; Same; Obligations of the parties under the indemnity agreement.—
Elucidating further on the obligations of the parties in agreements of this nature, this Court ruled: “x
x x The indemnity agreement was not executed for the benefit of the creditors; it was rather for the
benefit of the surety and if the latter thought it necessary in its own interest to impose this
stipulation, and the indemnitors voluntarily agreed to the same, the court should respect the
agreement of the parties and require them to abide by their contract.” (Security Bank v. Globe
Assurance, 107 Phil. 733 [1960]).
Same; Same; Same; Same; Principle of guaranty is not involved in case at bar; No need for
the surety to exhaust all the properties of the principal debtor before it may proceed
against defendants-appellants.—Itmust be stressed that in the case at bar, the principal debtors,
defendants-appellants herein, are simultaneously the same persons who executed the Indemnity
Agreement. Thus, the position occupied by them is that of a principal debtor and indemnitor at the
same time, and their liability being joint and several with the plaintiffappellee’s the Philippine
National Bank may proceed against either for fulfillment of the obligation as covered by the Surety
bonds. There is, therefore, no principle of guaranty involved and, therefore, the provision of Article
2071 of the Civil Code does not apply. Otherwise stated, there is no more need for the plaintiff-
appellee to exhaust all the properties of the principal debtor before it may proceed against
defendants-appellants.
Same; Same; Same; Attorney’s fees; An award of 15% attorney’s fees in case at bar is not
unreasonable.—As to the attorney’s fees, it has been squarely ruled by this Court that the award
of fifteen (15) per cent for cases of this nature is not unreasonable (Cosmopolitan Insurance Co.,
Inc. v. Reyes, supra).
PNB v CA
No. L-30937, January 21, 1987
[Extinguishment via Material Alteration]
FACTS:
Mario Rubin (Rubin) obtained from PNB a crop loan of P40,200 secured by a chattel mortgage
executed by Rubin and Jose A. Campos.
As additional security, Philippine Phoenix Surety and Insurance, Inc. (Phoenix) issued a surety
bond for P10,000 in favor of petitioner bank.
Later, PNB increased the loan from P40,200 to P56,800 without the knowledge and consent of
Phoenix.
When Rubin defaulted, PNB demanded from Phoenix to pay as surety. The latter denied liability.
As a result, a collection case was filed against Rubin including Phoenix.
TC ordered Phoenix to pay P10,000.
On appeal, CA exonerated Phoenix from liability.
ISSUE:
W/N Phoenix is bound to pay the increased loan considering that he was not informed and his
consent was not acquired?
RULING:
NO.
The increase in the indebtedness from P40,200.00 to P56,800.00 is material and prejudicial to
private respondent Phoenix. While the liability of private respondent under the bond is limited to
P10,000.00, the increase in the amount of the debt proportionally decreased the probability of the
principal debtor being able to liquidate the debt; thus, increasing the risk undertaken by the surety
to answer for the failure of the debtor to pay. "A material alteration of the principal contract,
effected by the creditor and principal debtor without the knowledge and consent of the surety,
completely discharges the surety from all liability in the contract of suretyship."
Mercantile Law; Suretyship; Chattel Mortgage; Discharge of surety from liability under its
surety bond, correct; Contract of chattel mortgage, not a continuing chattel mortgage
because a written consent and knowledge of the surety to an increase in the amount of the
principal obligation, is necessary.—The discharge of private respondent Phoenix from liability
under Surety Bond No. 88 is correct. Contrary to petitioner’s thinking, the contract in question is
not a continuing chattel mortgage for which consent and knowledge of the surety is unnecessary
for an increase in the amount of the principal obligation. The contract of chattel mortgage itself
fixed the credits, loans, overdrafts, etc. and other valuable consideration received thereunder at
Forty Thousand Two Hundred Pesos [P40.200.00]. The undertaking under said contract was “for
the purpose of securing their payment including the interest thereon, the cost of collection and
other obligations owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect,
principal or secondary as appears in the accounts, books and records of the mortgagee x x x.” [p.
179, Record on Appeal].
Same; Same; Same; Same; Statutory Construction; Interpretation; Ejusdem Generis; Term
“other obligations” in the chattel mortgage contract, does not include future additional
advances to debtormortgagor nor a previous authorization for surety to increase the
principal amount fixed in the contract—Applying the principle of ejusdem generis, the term
“other obligations” must be limited to such as are of the same nature as interest and costs of
collection. The term cannot be enlarged to include future additional advances to debtor-mortgagor,
much less be interpreted as a previous authorization from the surety to increase the principal
amount fixed in the contract.
Same; Same, Same; Same; Material alteration of the principal contract effected by the
creditor and principal debtor without the surety’s knowledge and consent, completely
discharges the surety from all liability in the contract of suretyship.—The increase in the
indebtedness from P40,200.00 to P56.800.00 is material and prejudicial to private respondent
Phoenix. While the liability of private respondent under the bond is limited to P10,000.00, the
increase in the amount of the debt proportionally decreased the probability of the principal debtor
being able to liquidate the debt; thus, increasing the risk undertaken by the surety to answer for the
failure of the debtor to pay. “A material alteration of the principal contract, effected by the creditor
and principal debtor without the knowledge and consent of the surety, completely discharges the
surety from aE liability in the contract of suretyship.” [Asiatic Petroleum Co. vs. Hizon and David,
45 Phil. 532; Phil. National Bank vs. Veraguth, 50 phil. 253].
PBTC v TAMBUNTING
No. L-29666, October 29, 1971
[Waiver by Guarantor]
FACTS:
9
Peoples Bank and Trust Company (PBTC) granted Spouses Jose and Ma. Paz Tambunting (the
Tambuntings) an overdraft agreement and pledge worth P200K.
Defendant Francisco Santana (Santana), as guarantor, along with the Tambuntings conveyed to
the bank shares of capital stock of International Sports Development Corporation (ISDC) as
collateral security.
Moreover, Santana executed an absolute guaranty wherein he bound himself to PBTC, jointly and
severally, with the Tambuntings for the full and prompt payment of all indebtedness incurred or to
be incurred by said spouses.
Subsequently, the spouses obtained renewal of the overdraft agreement twice but with a reduced
amount of P185K.
Defendants failed to pay and so demand was made upon the guarantor.
In his defense, Santana contended that he had been released from his obligation because PBTC
extended the time of payment and released to the Tambuntings without his consent the ISDC
stocks which had been to the bank.
PBTC sued Santana and the Tambuntings.
TC ruled that the contract of absolute guaranty had waived his rights to the benefit of Art. 2080,
NCC.
ISSUE:
W/N Santana should be released from his obligations on the overdraft line because PBTC had
extended the time and released the payment?
RULING:
NO.
"The contract of absolute guaranty, ..., expressly authorized the plaintiff bank to extend the time of
payment and to release or surrender any security or part thereof held by it without notice to, the
consent of, Santana. He had consented in advance the release of the guaranty which the bank
might make, Santana cannot now complain that the release of the pledge was without his consent,
and that it deprived him of the right to be subrogated to the rights of the creditor. The waiver is not
contrary to law, nor is it contrary to public policy. The law does not prohibit the debtor-guarantor
from agreeing in advance and without notice to the release of any security which had been given
to assure payment of the obligation. The waiver is not contrary to public policy, because the right is
purely personal, and does not affect public interest nor does it violate any public policy. Neither
does the return of the shares of stocks novate the original contract for the obligation remains the
same; and if it is a novation, it is a novation made with the consent of Santana. Moreover, the
pledge is merely an accessory obligation, and its release does not vary the terms of the principal
obligation."
Contracts, Guaranty, Guarantor is not released from his obligations by the creditor’s
extension of the time of payment or surrender of securities given if he gave advance
consent thereto.—Where the contract of absolute guaranty expressly authorized the creditor to
extend the time of payment and to release or surrender any security held by it without notice to, or
the consent of, the guarantor, the latter cannot complain that when the creditor released certain
securities given by the debtor or extended the duration of the loan, he was deprived of the right of
subrogation.
Same; Same; Guarantor’s waiver of right to notice respecting release by creditor of
securities given or extension of duration of loan is valid.—A guarantor may waive his right to
be notified of or to give consent to the release by the creditor of securities given or the extension of
the time for payment respecting the obligations of the principal debtor. The waiver is not contrary
to law, nor is it contrary to public policy.
PNB v MANILA SURETY
No. L-20567, July 30, 1965
[Exoneration of Surety By Negligence of the Creditor]
FACTS:
Philippine National Bank (PNB) had approved a loan to Edgington Oil Refinerty (Edgington)
amounting to $120,000 for 8,000 tons of hot asphalt.
Of the said mount, 2,000 tons worth P279,000.00 were delivered to Adams & Taguba Corporation
(ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. (Manila Surety) up to
the amount of P75,000.
To pay for the asphalt, ATACO constituted PNB its assignee and attorney-in- fact to receive and
collect from the Bureau of Public Works (BPW) the amount aforesaid out of funds payable to the
assignor.
ATACO delivered asphalt to the BPW with the total value of P431,466.52. Of this amount, PNB
was able to collect P106,382.01. Thereafter, for unexplained reasons, PNB ceased to collect, until
its investigators found that more moneys were payable to ATACO from the BPW, because the
latter had allowed another creditor to collect funds due to ATACO under the same purchase order
to a total of P311,230.41.
Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the
Court of First Instance of Manila to recover the balance of P158,563. 18 as of February 15, 1950,
plus interests and costs.
For failing to recover the balance of P158,563.18, PNB sued both ATACO and Manila Surety.
CFI ordered ATACO and Manila Surety to pay.
CA exonerated Manila Surety from liability, having found PNB negligent in having stopped
collecting from the BPW the moneys falling due in favor of ATACO, thereby allowing allowing such
funds to be exhausted by other creditors to the prejudice of the surety.
PNB contended power of attorney obtained from ATACO was merely in additional security in its
favor, and that it was the duty of the surety, and not that of the creditor, to see to it that the obligor
fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any,
sum from the principal debtor.
ISSUE:
10
W/N Manila Surety has been exonerated from liability?
RULING:
YES.
Even if the assignment with power of attorney from the principal debtor were considered as mere
additional security still, by allowing the assigned funds to be exhausted without notifying the surety,
the Bank deprived the former of any possibility of recoursing against that security. The Bank
thereby exonerated the surety, pursuant to Article 2080 of the Civil Code:
ART. 2080. — The guarantors, even though they be solidary, are released from their obligation
whenever by come act of the creditor they cannot be subrogated to the rights, mortgages and
preferences of the latter.
The fact remains that because of the Bank's inactivity the other creditors were enabled to collect
P173,870.31, when the balance due to appellant Bank was only P158,563.18. The finding of
negligence made by the Court of Appeals is thus not only conclusive on us but fully supported by
the evidence.
Agency; Duty of agent to act with the care of a good father of a family .—An agent is required
to act with the care of a good father of a family and becomes liable for the damages which the
principal may suffer through his non-performance.
Same; Same; Bank liable for neglect in collecting sums due its debtor.—A bank is
answerable for negligence in failing to collect the sums due its debtor from the latter’s own debtor,
contrary to said bank’s duty as holder of an exclusive and irrevocable power of attorney to make
such collections.
Suretyship; Surety released when assigned funds permitted by creditor to be exhausted
without notifying former.—By allowing the assigned funds to be exhausted without notifying the
surety, the creditor deprives the surety of any possibility of recoursing against that security, and
therefore the surety is released.
PRUDENCIO v CA
No. L-34539, July 14, 1986
[Release of Accommodation Party]
FACTS:
Petitioners Eulalio & Elisa Prudencio (Sps. Prudencio) are owners of the property mortgaged to
Philippine National Bank (PNB) to guarantee a loan of P10,000 extended to the Concepcion &
Tamayo Construction Company (CTCC).
Said petitioners and Jose Toribio (Toribio), in his capacity as CTCC attorney-in-fact, signed a PN
covering the loan.
On the same date, Toribio executed a Deed of Assignment assigning all payments to be made by
the Bureau of Public Works (BPW) to CCTC in favor of PNB.
Three (3) payments were made by BPW to CCTC instead of PNB. The latter approved the said
disbursements nevertheless.
Later, CCTC abandoned its construction project. As a result, BPW rescinded the contract.
Sps. Prudencio wrote the PNB contending that since PNB authorized payments to CCTC instead
of on account of the loan guaranteed by the mortgage, there was a change in the conditions of the
contract without the knowledge of the petitioners, which entitle the latter to a cancellation of their
mortgage.
Petitioners filed a complaint seeking the cancellation of the REM.
TC denied the prayer, ordering Sps. Prudencio to pay jointly and severally with their co-makers.
On appeal, CA affirmed TC in toto, stating that, as accommodation makers, the petitioners' liability
is that of solidary co- makers and the authorization made by PNB of partial payments to CCTC,
which was also one of the solidary debtors, cannot constitute a valid defense on the part of the
other solidary debtors.
ISSUE:
W/N Sps. Prudencio are released from their obligation to PNB, when PNB, without the knowledge
and consent of the spouses, changed the tenor and condition of the assignment of payment made
by CCTC?
RULING:
YES.
This, notwithstanding, PNB approved the BPW's release of three payments directly to CCTC
instead of paying the same to PNB. This approval was in violation of the Deed of Assignment and
without any notice to the petitioners who stood to lose their property once the PN falls due without
the same having been paid because PNB, in effect, waived payments of the first three releases.
From the foregoing circumstances, PNB cannot be regarded as having acted in good faith which is
also one of the requisites of a holder in due course under Section 52 of the Negotiable Instruments
Law. PNB knew that the PN which it took from the accommodation makers was signed by the
latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply
with strictly. Worse, the third payment to CCTC in the amount of P4,293.60 was approved by PNB
although the promissory note was almost a month overdue, an act which is clearly detrimental to
the petitioners.
The Court, therefore, held that the respondent PNB is not a holder in due course. Thus, the
petitioners can validly set up their personal defense of release from the real estate mortgage
against PNB. The latter, in authorizing the third payment to the Company after the promissory note
became due, in effect, extended the term of the payment of the note without the consent of the
accommodation makers who stand as sureties to the accommodated party and to all other parties
who are not holders in due course or who do not derive their right from the same, including PNB.
The assignee and the creditor in this case are one and the same—PNB itself. When PNB violated
the deed of assignment, it prejudiced itself because its very violation was the reason why it was
not paid on time in its capacity as creditor in the PN. It would be unfair to make the petitioners now
answer for the debt or to foreclose on their property.
Negotiable Instruments Law; Contracts; Mortgages; An accommodation party in a loan
agreement is primarily and unconditionally liable thereon and cannot excuse itself as such
by the fact that the creditor extended the time for payment without its knowledge or
consent.—There is, therefore, no question that as accommodation makers, petitioners would be
primarily and unconditionally liable on the promissory note to a holder for value, regardless of
whether they stand as sureties or solidary co-debtors since such distinction would be entirely
11
immaterial and inconsequential as far as a holder for value is concerned. Consequently, the
petitioners cannot claim to have been released from their obligation simply because the time of
payment of such obligation was temporarily deferred by PNB without their knowledge and consent.
There has to be another basis for their claim of having been freed from their obligation. The
question which should be resolved in this instant petition, therefore, is whether or not PNB can be
considered a holder for value under Section 29 of the Negotiable Instruments Law such that the
petitioners must be necessarily barred from setting up the defense of want of consideration or
some other personal defenses which may be set up against a party who is not a holder in due
course.
Same; “Holder for Value” defined.—A holder for value under Section 20 of the Negotiable
Instruments Law is one who must meet all the requirements of a holder in due course under
Section 52 of the same law except notice of want of consideration, (Agbayani, Commercial Laws of
the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds the
instrument subject to the same defenses as if it were non-negotiable (Section 58, Negotiable
Instruments Law).
Same; A bank that dealt directly with an accommodation party and knows fully well that the
latter signed the promissory note and deed of assignment only because the said deed
contains a provision that the principal debtor assigns and conveys to the bank all
payments to be received from the person who will pay the project to be undertaken by the
principal debtor as public works contractor, cannot be considered a holder in due course. —
Although as a general rule, a payee may be considered a holder in due course we think that such
a rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or
in privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well
that the latter only signed as accommodation makers but more important, it was the Deed of
Assignment executed by the Construction Company in favor of PNB which principally moved the
petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and
on that belief entered into the agreement that no other conditions would alter the terms thereof and
yet, PNB altered the same. The Deed of Assignment specifically provided that Jose F. Toribio, on
behalf of the Company, “have assigned, transferred and conveyed and by these presents, do
assign, transfer and convey unto the said Philippine National Bank, its successors and assigns all
payments to be received from the Bureau of Public Works on account of contract for the
construction of the Puerto Princesa Municipal Building in Palawan, involving the total amount of
P36,000.00” and that “This assignment shall be irrevocable and subject to the terms and
conditions of the promissory note and or any other kind of documents which the Philippine National
Bank have required or may require the assignor to execute to evidence the above-mentioned
obligation.”
Same; The approval by PNB of the direct release of payments owed by the Bureau of Public
Works to the project contractor which PNB should have retained and applied to the
contractor’s loan constitutes a waiver of said payments for which it cannot charge the
accommodation party which had no knowledge of nor approved of such procedure.—This,
notwithstanding, PNB approved the Bureau’s release of three payments directly to the Company
instead of paying the same to the Bank. This approval was in violation of the Deed of Assignment
and without any notice to the petitioners who stood to lose their property once the promissory note
falls due without the same having been paid because the PNB, in effect, waived payments of the
first three releases. From the foregoing circumstances, PNB can not be regarded as having acted
in good faith which is also one of the requisites of a holder in due course under Section 52 of the
Negotiable Instruments Law. The PNB knew that the promissory note which it took from the
accommodation makers was signed by the latter because of full reliance on the Deed of
Assignment, which, PNB had no intention to comply with strictly. Worse, the third payment to the
Company in the amount of P4,293.60 was approved by PNB although the promissory note was
almost a month overdue, an act which is clearly detrimental to the petitioners.
Same; Same; Mortgages; An accommodation party can set up the defense of personal
release from a real estate mortgage where creditor authorized release of payments received
from a third party pay or of the debtor for a project, after the accommodated note has
matured.—We, therefore, hold that respondent PNB is not a holder in due course. Thus, the
petitioners can validly set up their personal defense of release from the real estate mortgage
against PNB. The latter, in authorizing the third payment to the Company after the promissory note
became due, in effect, extended the term of the payment of the note without the consent of the
accommodation makers who stand as sureties to the accommodated party and to all other parties
who are not holders in due course or who do not derive their right from the same, including PNB.
Same; Same; Same; Where a Bank is the payee of a note and assignee of a deed of
assignment, its extension of the period of payment of the note to the debtor would release
the accommodation party who did not consent thereto, from its obligation thereon,
including the mortgage made by the accommodation party.—True, if the Bank had not been
the assignee, then the petitioners would be obliged to pay the Bank as their creditor on the
promissory note, irrespective of whether or not the deed of assignment had been violated.
However, the assignee and the creditor in this case are one and the same—the Bank itself. When
the Bank violated the deed of assignment, it prejudiced itself because its very violation was the
reason why it was not paid on time in its capacity as creditor in the promissory note. It would be
unfair to make the petitioners now answer for the debt or to foreclose on their property.
Same; Same; Same; Same.—Neither can PNB justify its acts on the ground that the Bureau of
Public Works approved the deed of assignment with the condition that the wages of laborers and
materials needed in the construction work must take precedence over the payment of the
promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did,
it should have informed the petitioners about the amendment of the deed of assignment. Secondly,
the wages and materials have already been paid, That issue is academic. What is in dispute is
who should bear the loss in this case. As between the petitioners and the Bank, the law and the
equities of the case favor the petitioners. And thirdly, the wages and materials constitute a lien only
on the constructed building but do not enjoy preference over the loan unless there is a liquidation
proceeding such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin,
124 SCRA 476). There were remedies available at the time if the laborers and the creditors had
not been paid. The fact is, they have been paid. Hence, when the PNB accepted the condition
imposed by the Bureau without the knowledge or consent of the petitioners, it amended the deed
of assignment which, as stated earlier, was the principal reason why the petitioners consented to
become accommodation makers.
SECURITY BANK v CUENCA G.R. No. 138544, October 3, 2000
[Extinguishment by Novation; Construction of Surety Agreement]
FACTS:
Petitioner Security bank and Trust Co. (Security Bank) granted Sta. Ines Melale Corporation
(SIMC) a credit line worth P8M, effective until November 30, 1981.
As security, SIMC executed a chattel mortgage over some of its machinery and equipment in favor
of SBTC. Moreover, SIMC President and Chairman Rodolfo Cuenca (Cuenca) executed an
Indemnity Agreement in favor of Security Bank whereby he solidarily bound himself with SIMC.
On November 26, 1981, SIMC made a first drawdown with Security Bank amounting to P6.1M.
In 1985, Cuenca resigned from SIMC and his shareholdings were sold at a public auction.
Subsequently, SIMC obtained six (6) more loans from Security Bank worth P6.4M.
When SIMC encountered financial difficulty, Security Bank approved a loan restructuring scheme
wherein past due obligations were restructured without prior notice to or consent of Cuenca.
12
To formalize their agreement, Security Bank and SIMC executed a Loan Agreement dated October
31, 1989 amounting to P12.2M, part of which shall be used to liquidate the principal portion of the
outstanding indebtedness.
Despite this, SIMC still defaulted. Thus, Security Bank filed a complaint for collection of a sum of
money.
RTC ordered SIMC and Cuenca to pay jointly and severally.
CA released Cuenca from liability, ruling that the 1989 Loan Agreement had novated the 1980
credit accommodation earlier granted by Security bank to SIMC. Accordingly, such novation
extinguished the Indemnity Agreement, by which Cuenca, who was then the SIMC President and
Chairman, had bound himself solidarily liable for the payment of the loans secured by that credit
accommodation. It noted that the 1989 Loan Agreement had been executed without notice to,
much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.
The appellate court clarified that Cuenca was liable only for loans obtained prior to November 30,
1981, and only for an amount not exceeding P8M.
It further held that the restructuring of the SIMC obligation under the 1989 Loan Agreement was
tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under
Article 2079 of the NCC, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case Security Bank and SIMC decided
to materially alter or modify the principal obligation after the expiry date of the credit
accommodation.
ISSUE:
W/N the 1989 Loan Agreement novated the original credit accommodation and Cuenca’s liability
under the Indemnity Agreement?
RULING:
YES.
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which
reads as follows:
“ART. 1292. In order that an obligation may be extinguished by another which substitute the same,
it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other.”
Novation of a contract is never presumed. It has been held that in the absence of an express
agreement, novation takes place only when:
(1) There is a previous valid obligation;
(2) The parties concerned agree to a new contract;
(3) The old contract is extinguished; and
(4) There is a valid new contract.
Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement
extinguished the obligation obtained under the 1980 credit accommodation. This is evident
from its explicit provision to liquidate the principal and the interest of the earlier
indebtedness, as the following shows:
“1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers
present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan
shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.”
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had
stipulated that the amount of loan was not to exceed P8M, the 1989 Agreement provided that the
loan was P12.2M. The periods for payment were also different.
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the
Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to
Article 1296 of the NCC, which provides:
“ART. 1296. When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit third persons who
did not give their consent.”
As regards the alleged extension, the 1989 Loan Agreement expressly stipulated that its purpose
was to liquidate, not to renew or extend, the outstanding indebtedness. Moreover, respondent did
not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8M
credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article
2079 of the NCC, which specifically states that “an extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. x x x.” In an earlier case, the Court
explained the rationale of this provision in this wise:
“The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to
be immediately subrogated to the creditors remedies against the principal debtor upon the maturity
date. The surety is said to be entitled to protect himself against the contingency of the principal
debtor or the indemnitors becoming insolvent during the extended period.”
While respondent held himself liable for the credit accommodation or any modification thereof,
such clause should be understood in the context of the P8M limit and the November 30, 1981
term. It did not give Security Bank or SIMC any license to modify the nature and scope of the
original credit accommodation, without informing or getting the consent of respondent who was
solidarily liable. Taking the bank’s submission to the extreme, respondent (or his successors)
would be liable for loans even amounting to, say, P100B obtained 100 years after the expiration of
the credit accommodation, on the ground that he consented to all alterations and extensions
thereof.
Indeed, it has been held that a contract of surety cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety . Likewise, the Court has ruled that it is a well-settled legal
principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt
should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the
party who caused the ambiguity. In the absence of an unequivocal provision that respondent
waived his right to be notified of or to give consent to any alteration of the credit accommodation,
we cannot sustain petitioners view that there was such a waiver.
13
That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the
scope of the principal obligation inordinately. In Dino v. CA, the Court held that “a continuing
guaranty is one which covers all transactions, including those arising in the future, which are within
the description or contemplation of the contract of guaranty, until the expiration or termination
thereof.”
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the
credit accommodation:
(1) That the obligation should not exceed P8M, and
(2) That the accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained on or before the aforementioned
expiry date and not exceeding the total of P8M.
Novation; Requisites; In the absence of an express agreement, novation takes place only
when the old and the new obligations are incompatible on every point.—Novation of a
contract is never presumed. It has been held that “[i]n the absence of an express agreement,
novation takes place only when the old and the new obligations are incompatible on every point.”
Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the
parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a
valid new contract.
Same; Loans; That a subsequent loan agreement extinguished an obligation earlier
obtained under a credit accommodation could be evidenced by its explicit provision to
“liquidate” the principal and the interest of the earlier indebtedness.—We reject these
contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement
extinguished the obligation obtained under the 1980 credit accommodation. This is evident from its
explicit provision to “liquidate” the principal and the interest of the earlier indebtedness, as the
following shows: “1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of
the Borrower’s present total outstanding Indebtedness to the Lender (the “Indebtedness”) while the
Second Loan shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness.” (Italics supplied.) The testimony of an officer of the bank that the proceeds of the
1989 Loan Agreement were used “to pay-off” the original indebtedness serves to strengthen this
ruling.
Same; Same; Where the subsequent loan agreement extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was also necessarily
extinguished.—Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished
also, pursuant to Article 1296 of the Civil Code, which provides: “ART. 1296. When the principal
obligation is extinguished in consequence of a novation, accessory obligations may subsist only
insofar as they may benefit third persons who did not give their consent.”
Loans; Guaranty; An extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty; Rationale.—To begin with, the 1989 Loan Agreement
expressly stipulated that its purpose was to “liquidate,” not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which
had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety
should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically
states that “[a]n extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty, x x x.” In an earlier case, the Court explained the rationale of
this provision in this wise: “The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the surety’s consent would deprive the surety of his right to
pay the creditor and to be immediately surrogated to the creditor’s remedies against the principal
debtor upon the maturity date. The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming insolvent during the extended
period.”
Same; Same; Suretyship; An essential alteration in the terms of a Loan Agreement without
the consent of the surety extinguishes the latter’s obligation.—At the outset, we should
emphasize that an essential alteration in the terms of the Loan Agreement without the
consent of the surety extinguishes the latter’s obligation. As the Court held in National Bank v.
Veraguth , “[i]t is fundamental in the law of suretyship that any agreement between the creditor and
the principal debtor which essentially varies the terms of the principal contract, without the consent
of the surety, will release the surety from liability.”
Same; Same; Same; Even as a surety held himself liable for the credit accommodation or
any modification thereof, such clause should be understood in the context of the loan limit
and the term.—While respondent held himself liable for the credit accommodation or any
modification thereof, and the November 30, 1981 term. It did not give the bank or Sta. Ines any
license to modify the nature and scope of the original credit accommodation, without informing or
getting the consent of respondent who was solidarily liable. Taking the bank’s submission to the
extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100
billion obtained 100 years after the expiration of the credit accommodation, on the ground that he
consented to all alterations and extensions thereof.
Same; Same; Same; It is a well-settled legal principle that if there is any doubt on the terms
and conditions of the surety agreement, the doubt should be resolved in favor of the
surety; In the absence of an unequivocal provision that the surety waived his right to be
notified of or to give consent to any alteration of the credit accommodation, waiver could
not be presumed.—It has been held that a contract of surety “cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging
the liability of the surety.” Likewise, the Court has ruled that “it is a well-settled legal principle that if
there is any doubt on the terms and conditions of the surety agreement, the doubt should be
resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who
caused the ambiguity.” In the absence of an unequivocal provision that respondent waived his right
to be notified of or to give consent to any alteration of the credit accommodation, we cannot
sustain petitioner’s view that there was such a waiver.
Same; Same; Same; The submission that only the borrower, not the surety, is entitled to be
notified of any modification in the original loan accommodation is untenable—such theory is
contrary to the principle that a surety cannot assume an obligation more onerous than that of the
principal.—We reject petitioner’s submission that only Sta. Ines as the borrower, not respondent,
was entitled to be notified of any modification in the original loan accommodation. Following the
bank’s reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but
would still be valid as to respondent to whom no notice need be given. The latter’s liability would
thus be more burdensome than that of the former. Such untenable theory is contrary to the
principle that a surety cannot assume an obligation more onerous than that of the principal.
Same; Same; Same; Continuing Sureties; Words and Phrases; That the Indemnity
Agreement is a continuing surety does not authorize the lender to extend the scope of the
principal obligation inordinately; A continuing guaranty is one which covers all
transactions, including those and the November 30, 1981 term. It did not give the bank or Sta.
Ines any license to modify the nature and scope of the original credit accommodation, without
informing or getting the consent of respondent who was solidarily liable. Taking the bank’s
submission to the extreme, respondent (or his successors) would be liable for loans even
amounting to, say, P100 billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations and extensions thereof.
14
Same; Same; Same; It is a well-settled legal principle that if there is any doubt on the terms
and conditions of the surety agreement, the doubt should be resolved in favor of the
surety; In the absence of an unequivocal provision that the surety waived his right to be
notified of or to give consent to any alteration of the credit accommodation, waiver could
not be presumed.—It has been held that a contract of surety “cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging
the liability of the surety.” Likewise, the Court has ruled that “it is a well-settled legal principle that if
there is any doubt on the terms and conditions of the surety agreement, the doubt should be
resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who
caused the ambiguity.” In the absence of an unequivocal provision that respondent waived his
right to be notified of or to give consent to any alteration of the credit accommodation, we cannot
sustain petitioner’s view that there was such a waiver.
Same; Same; Same; The submission that only the borrower, not the surety, is entitled to be
notified of any modification in the original loan accommodation is untenable—such theory
is contrary to the principle that a surety cannot assume an obligation more onerous than
that of the principal.—We reject petitioner’s submission that only Sta. Ines as the borrower, not
respondent, was entitled to be notified of any modification in the original loan accommodation.
Following the bank’s reasoning, such modification would not be valid as to Sta. Ines if no notice
were given; but would still be valid as to respondent to whom no notice need be given. The latter’s
liability would thus be more burdensome than that of the former. Such untenable theory is contrary
to the principle that a surety cannot assume an obligation more onerous than that of the principal.
Same; Same; Same; Continuing Sureties; Words and Phrases; That the Indemnity
Agreement is a continuing surety does not authorize the lender to extend the scope of the
principal obligation inordinately; A continuing guaranty is one which covers all
transactions, including those Same; Same; Same; There is no reason or logic for the
lender or the borrower to assume that a former principal officer or stockholder would still
agree to act as surety in a subsequent loan agreement, if at such later time, he was no
longer an officer or a stockholder of the debtorcorporation.—Following this practice, it was
therefore logical and reasonable for the bank to have required the JSS of respondent, who was
the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted.
There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still
agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an
officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure
the payment of the obligation. Neither did he have any reason to bind himself further to a bigger
and more onerous obligation.