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Tupaz IV & Tupaz v. CA & BPI  Letter of Credit No. 2-00914-5 for ₱294,000 to Maresco
G.R. No. 145578 – November 18, 2005
J. Carpio
Topic: Effects of Guaranty Between Guarantor and Creditor; Benefit of Excussion
Doctrine: (1) Excussion is not a prerequisite to secure judgment against a guarantor. The
guarantor can still demand deferment of the execution of the judgment against him until after
the assets of the principal debtor shall have been exhausted. (2) The benefit of excussion may
be waived.
Petitioners: Jose C. Tupaz IV & Petronila C. Tupaz
Respondents: The Court of Appeals & Bank of the Philippine Islands
Case Summary:  Jose and Petronila, officers of El Oro Corporation, signed trust receipts
(30 September 1931 and 7 October 1981) in behalf of the company, and in favor of BPI.
They were not able to fulfill their obligations under the trust receipts. BPI charged
petitioners with estafa under the Trust Receipts Law. They were acquitted but were held
solidarily liable with El Oro in the payment of the debt to BPI.  Oro Corporation, a trust receipt corresponding to Letter of Credit No. 2-
Held: Jose and Petronilla are not liable under the October 7 trust receipt because they
signed it in their capacities as officers of the corporation. Only Jose is liable for the
September 30 trust receipt because he signed it in his personal capacity. However, his
liability is not solidary with El Oro; he is liable only as guarantor. The solidary guaranty
clause makes guarantors signing the trust receipt solidarily liable with each other; it does
not operate to make them solidarily liable with the company. But, the suit against Jose still
stands because excussion is not a pre-requisite to secure judgment against a guarantor. In
fact, excussion can be waived.
Facts:
 Petitioners Jose C. Tupaz IV and Petronila C. Tupaz were Vice-President for
Operations and Vice-President/Treasurer, respectively, of El Oro Engraver
Corporation. El Oro Corporation had a contract with the Philippine Army to supply
the latter with "survival bolos." 
 To finance the purchase of the raw materials for the survival bolos, petitioners, on
behalf of El Oro Corporation, applied with respondent BPI for two commercial
letters of credit.
o The letters of credit were in favor of El Oro Corporation’s suppliers,
Tanchaoco Manufacturing Incorporated and Maresco Rubber and
Retreading Corporation.
o BPI granted petitioners’ application and issued:
 Letter of Credit No. 2-00896-3 for ₱564,871.05 to Tanchaoco
Incorporated
Corporation. 
 Simultaneous with the issuance of the letters of credit, petitioners signed trust
receipts in favor of BPI.
o On 30 September 1981, petitioner Jose C. Tupaz IV signed, in his personal
capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3
(for ₱564,871.05).
 Petitioner Jose Tupaz bound himself to sell the goods covered
by the letter of credit and to remit the proceeds to respondent
bank, if sold, or to return the goods, if not sold, on or before 29
December 1981. 
o On 9 October 1981, petitioners signed, in their capacities as officers of El
00914-5 (for ₱294,000).
 Petitioners bound themselves to sell the goods covered by that
letter of credit and to remit the proceeds to respondent bank, if
sold, or to return the goods, if not sold, on or before 8 December
1981. 
 After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials
to El Oro Corporation, BPI paid the former ₱564,871.05 and ₱294,000, respectively.
 Petitioners did not comply with their undertaking under the trust receipts. BPI made
several demands for payments but El Oro Corporation made partial payments only.
o On 27 June 1983 and 28 June 1983, BPI’s counsel and its representative
respectively sent final demand letters to El Oro Corporation.
o El Oro Corporation replied that it could not fully pay its debt because the
Armed Forces of the Philippines had delayed paying for the survival
bolos.
 BPI charged petitioners with estafa under Section 13, P.D. No. 115 or Trust Receipts
Law.
 After preliminary investigation, the then Makati Fiscal’s Office found probable
cause to indict petitioners. The Makati Fiscal’s Office filed the corresponding
Informations (Criminal Case Nos. 8848 and 8849) with RTC Makati, on 17 January
1984 and the cases were raffled to Branch 144 on 20 January 1984. Petitioners
pleaded not guilty to the charges and trial ensued. During the trial, BPI presented
evidence on the civil aspect of the cases.

Trial Court: WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C.
Tupaz, IV and Petronila Tupaz based upon reasonable doubt. However, El Oro Engraver
Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are hereby ordered, jointly and solidarily,
to pay the Bank of the Philippine Islands the outstanding principal obligation of ₱624,129.19
(as of January 23, 1992) with the stipulated interest at the rate of 18% per annum; plus 10% of
the total amount due as attorney’s fees; ₱5,000.00 as expenses of litigation; and costs of the
suit.
- Since the civil action for the recovery of the civil liability is deemed impliedly
instituted with the criminal action, the El Oro Engraver Corporation and both
accused, jointly and solidarily should be held civilly liable to BPI. The mere fact that
they were unable to collect in full from the AFP and/or the Department of National
Defense the proceeds of the sale is no valid defense to the civil claim of the said
complainant.
CA: affirmed trial court’s ruling
- It is clear from Sec 13, PD 115 that civil liability arising from the violation of the
trust receipt agreement is distinct from the criminal liability imposed therein.
- Vintola vs. Insular Bank of Asia and America  acquittal in the estafa case is no bar
to the institution of a civil action for collection. The civil liability of the accused
does not arise ex delicto but rather based ex contractu.
- Appellants argued that they cannot be held solidarily liable with their corporation,
alleging that they executed the subject documents including the trust receipt
agreements only in their capacity as such corporate officers.
o However, the trust receipt agreement indicated in clear and unmistakable
terms that the accused signed the same as surety for the corporation and
that they bound themselves directly and immediately liable in the event of
default with respect to the obligation under the letters of credit which were
made part of the said agreement, without need of demand.
o Even in the application for the letter of credit, it is clear that the
undertaking of the accused is that of a surety: "In consideration of your
establishing the commercial letter of credit herein applied for substantially
in accordance with the foregoing, the undersigned Applicant and Surety
hereby agree, jointly and severally, to each and all stipulations, provisions
and conditions on the reverse side hereof."  payment of the corporation’s debts.1
Issues + Held:
1. W/N petitioners bound themselves personally liable for El Oro Corporation’s debts
under the trust receipts – For Jose Tupaz IV: YES, as a guarantor under the trust
receipt dated 30 September 1981; NO for trust receipt dated 9 October 1981. For
Petronila Tupaz: NO for both.
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o A corporation, being a juridical entity, may act only through its directors,
officers, and employees. Debts incurred by these individuals, acting as
such corporate agents, are not theirs but the direct liability of the
corporation they represent.
 Exception: directors or officers are personally liable for the
corporation’s debts only if they so contractually agree or
stipulate.
o Here, the dorsal side of the trust receipts contains the following
stipulation:
To the Bank of the Philippine Islands 
In consideration of your releasing to …………………………………
under the terms of this Trust Receipt the goods described herein, I/We,
jointly and severally, agree and promise to pay to you, on demand,
whatever sum or sums of money which you may call upon me/us to pay to
you, arising out of, pertaining to, and/or in any way connected with, this
Trust Receipt, in the event of default and/or non-fulfillment in any respect
of this undertaking on the part of the said
……………………………………. I/we further agree that my/our liability
in this guarantee shall be DIRECT AND IMMEDIATE, without any need
whatsoever on your part to take any steps or exhaust any legal remedies
that you may have against the said ………………………………….
before making demand upon me/us.
o In the trust receipt dated 9 October 1981, petitioners signed below this
clause as officers of El Oro Corporation. Under Petronila Tupaz’s
signature are the words "Vice-Pres–Treasurer" and under Jose Tupaz’s
signature are the words "Vice-Pres–Operations."
 By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation’s
obligation.
 Ong v. Court of Appeals  A corporate representative signed a
solidary guarantee clause in two trust receipts in his capacity as
corporate representative. Court held that the corporate
representative did not undertake to guarantee personally the
1
Petitioner placed his signature after the typewritten words "ARMCO INDUSTRIAL
CORPORATION" found at the end of the solidary guarantee clause. Evidently, petitioner did
not undertake to guaranty personally the payment of the principal and interest of ARMAGRI’s
debt under the two trust receipts.

o Hence, for the trust receipt dated 9 October 1981, we sustain petitioners’
claim that they are not personally liable for El Oro Corporation’s
obligation.
o For the trust receipt dated 30 September 1981, the dorsal portion of which
petitioner Jose Tupaz signed alone, we find that he did so in his personal
capacity.
 Petitioner Jose Tupaz did not indicate that he was signing as El
Oro Corporation’s Vice-President for Operations.
 Hence, petitioner Jose Tupaz bound himself personally liable for
El Oro Corporation’s debts. Not being a party to the trust receipt
dated 30 September 1981, petitioner Petronila Tupaz is not
liable under such trust receipt.
2. If so:
(a) W/N petitioners’ liability is solidary with El Oro Corporation – NO
o As stated, the dorsal side of the trust receipt dated 30 September 1981
provides: “I/We, jointly and severally, agree and promise to pay to you, on
demand x x x I/we further agree that my/our liability in
this guarantee shall be DIRECT AND IMMEDIATE, without any need
whatsoever on your part to take any steps or exhaust any legal
remedies that you may have x x x”
o The lower courts interpreted this to mean that Jose Tupaz bound himself
solidarily liable with El Oro Corporation for the latter’s debt under that
trust receipt. This is error. 
o Prudential Bank v. IAC  Court interpreted a substantially identical
o However, BPI’s suit against petitioner Jose Tupaz stands despite the
clause in a trust receipt signed by a corporate officer who bound himself
Court’s finding that he is liable as guarantor only.
personally liable for the corporation’s obligation.
 The petitioner here contended that the stipulation "we jointly
and severally agree and undertake" rendered the corporate
officer solidarily liable with the corporation.
 We dismissed this claim and held the corporate officer liable as
guarantor only.
 The Court further ruled that had there been more than one
signatories to the trust receipt, the solidary liability would exist
between the guarantors.
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 “This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is
ineffective in this case because the space therein for
the party whose property may not be exhausted was
not filled up. Under Art 2058 CC, the defense of
exhaustion (excussion) may be raised by a guarantor
before he may be held liable for the obligation.”
 “Petitioner likewise admits that the questioned
provision is a solidary guaranty clause, thereby
clearly distinguishing it from a contract of surety. It,
however, described the guaranty as solidary between
the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the
undertaking of the two (2) parties who are to sign it or
to the liability existing between themselves. It does not
refer to the undertaking between either one or both of
them on the one hand and the petitioner on the other
with respect to the liability described under the trust
receipt.” 
 “Furthermore, any doubt as to the import or true intent
of the solidary guaranty clause should be resolved
against the petitioner. The trust receipt, together with
the questioned solidary guaranty clause, is on a form
drafted and prepared solely by the petitioner; Chi’s
participation therein is limited to the affixing of his
signature thereon. It is, therefore, a contract of
adhesion; as such, it must be strictly construed against
the party responsible for its preparation.”
 First, excussion is not a pre-requisite to secure judgment against
a guarantor.
 The guarantor can still demand deferment of the
execution of the judgment against him until after the
assets of the principal debtor shall have been
exhausted.
 Second, the benefit of excussion may be waived.
 Under the trust receipt dated 30 Sept 1981, Jose Tupaz
waived excussion when he agreed that his "liability in
[the] guaranty shall be DIRECT AND IMMEDIATE,

without any need whatsoever on xxx [the] part [of
respondent bank] to take any steps or exhaust any
legal remedies xxx."
 The clear import of this stipulation is that petitioner
Jose Tupaz waived the benefit of excussion under his
guarantee.
o As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation’s
principal debt and other accessory liabilities (as stipulated in the trust
receipt and as provided by law) under the trust receipt dated 30 September
1981.
 That trust receipt (and the trust receipt dated 9 October 1981)
provided for payment of attorney’s fees equivalent to 10% of the
total amount due and an "interest at the rate of 7% per annum, or
at such other rate as the bank may fix, from the date due until
paid xxx."
 In the applications for the letters of credit, the parties stipulated
that drafts drawn under the letters of credit are subject to interest
at the rate of 18% per annum.
o The lower courts correctly applied the 18% interest rate per
annum considering that the face value of each of the trust receipts is based
on the drafts drawn under the letters of credit. Based on the guidelines laid
down in Eastern Shipping Lines, Inc. v. CA the accrued stipulated interest
earns 12% interest per annum from the time of the filing of the
Informations in the Makati RTC on 17 January 1984.
 The total amount due as of the date of the finality of this
Decision will earn interest at 18% per annum until fully paid
since this was the stipulated rate in the applications for the
letters of credit.
o The accounting of El Oro Corporation’s debts as of 23 January 1992,
which the trial court used, is no longer useful as it does not specify the
amounts owing under each of the trust receipts. Hence, in the execution of
this Decision, the trial court shall compute El Oro Corporation’s total
liability under each of the trust receipts dated 30 September 1981 and 9
October 1981 based on the following formula (see footnote)2
2 criminal but only civil in nature xxx as, for instance, in the felonies of estafa, theft, and
TOTAL AMOUNT DUE = [principal + interest + interest on interest] – partial payments
made
Interest = principal x 18 % per annum x no. of years from due date 27 until finality of judgment
Interest on interest = interest computed as of the filing of the complaint (17 January 1984) x
12% x no. of years until finality of judgment
Attorney’s fees is 10% of the total amount computed as of finality of judgment
PAGE 4 of 26
o Rizal Commercial Banking Corporation v. Alfa RTW Manufacturing
Corporation  SC ordered TC to compute the amount of obligation due
based on a formula substantially similar to that indicated above:
“Mathematics is an exact science, the application of which needs no
further proof from the parties.”
(b) W/N petitioners’ acquittal of estafa under Section 13, PD 115 extinguished
their civil liability – NO
 The rule is that where the civil action is impliedly instituted with the
criminal action, the civil liability is not extinguished by acquittal where
the civil liability does not arise from or is not based upon the criminal act
of which the accused was acquitted.3
 Here, BPI chose not to file a separate civil action to recover payment
under the trust receipts. Instead, BPI sought to recover payment in
Criminal Case Nos. 8848 and 8849.
 Although the TC acquitted petitioner Jose Tupaz, his acquittal did not
extinguish his civil liability. His liability arose not from the criminal act of
which he was acquitted (ex delito) but from the trust receipt contract (ex
contractu) of 30 September 1981. Jose Tupaz signed the trust receipt of 30
September 1981 in his personal capacity.
3. On the other Matters Petitioners Raise
 Petitioners raise for the first time in this appeal the contention that El Oro
Corporation’s debts under the trust receipts are not yet due and
demandable. Alternatively, petitioners assail the trust receipts as
simulated.
 These assertions have no merit. Under the terms of the trust receipts dated
30 September 1981 and 9 October 1981, El Oro Corporation’s debts fell
due on 29 December 1981 and 8 December 1981, respectively.
Total amount due as of the date of finality of judgment will earn an interest of 18% per annum
until fully paid.
3
[w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence is
required in civil cases; where the court expressly declares that the liability of the accused is not
malicious mischief committed by certain relatives who thereby incur only civil liability (See
Art. 332, RPC); and, where the civil liability does not arise from or is not based upon the
criminal act of which the accused was acquitted xxx.

 Neither is there merit to petitioners’ claim that the trust receipts were
simulated. During the trial, petitioners did not deny applying for the letters
of credit and subsequently executing the trust receipts to secure payment
of the drafts drawn under the letters of credit.
Ruling:
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the
following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount due under the trust
receipts dated 30 September 1981 and 9 October 1981, as computed by the Regional Trial
Court, Makati, Branch 144, upon finality of this Decision, based on the formula provided
above; 
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporation’s total debt under the
trust receipt dated 30 September 1981 as thus computed by the Regional Trial Court, Makati,
Branch 144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust receipt
dated 9 October 1981.
SO ORDERED.
Aglibot vs. Santia
G.R. No. 185945 - December 5, 2012
J. Reyes
Topic: Effects of guaranty between guarantor and creditor
Doctrine: The liability of a guarantor is only subsidiary, and all the properties of the principal
debtor must first be exhausted before the guarantor may be held answerable for the debt. 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, because the exhaustion of the principal’s
property cannot take place before final judgment has been obtained.
Petitioners: FIDELIZA J. AGLIBOT
Respondents: INGERSOL L. SANTIA
Case Summary: Santia loaned PLCC P2.5M through its Manager Aglibot.
As guaranty or surety, Aglibot issued 11 post dated checks drawn from her
PAGE 5 of 26
own demand account. These were dishonored. Aglibot claims that she is not
personally or primarily liable since the beneficiary of the loans was PLCC.
She is only subsidiarily liable, having the benefit of excussion. SC held that
by issuing post dated checks from her own account, Aglibot assumed
obligation to repay the loan as accommodation party, not a guarantor. An
accommodation party is bound equally and absolutely with the principal
and is deemed an original promisor and debtor from the beginning. The
liability is immediate and direct.
Facts:
● Engr. Ingersol L. Santia loaned Php2.5 million to Pacific Lending & Capital Corporation
(PLCC), through its Manager, Fideliza J. Aglibot.
○ The loan was evidenced by a Promissory Note dated July 1, 2003, issued by
Aglibot in behalf of PLCC, payable in one year subject to interest at 24% per
annum.
○ Allegedly as a guaranty or security for the payment of the note, Aglibot also
issued and delivered to Santia 11 post-dated personal checks drawn from her
own demand account maintained at Metrobank, Camiling Branch. Aglibot is a
major stockholder of PLCC, with headquarters at 27 Casimiro Townhouse,
Casimiro Avenue, Zapote, Las Piñas, Metro Manila, where most of the
stockholders also reside.
● The checks were dishonored by the bank due to insufficient funds or closed account.
Santia then demanded payment from PLCC and Aglibot for the face value of the checks,
but neither heeded the demand.
● 11 informations for BP 22 violations were filed against Aglibot before MTCC Dagupan.
○ Aglibot admitted that she did obtain a loan from Santia, but claimed that she
did so on behalf of PLCC. Before granting the loan, Santia demanded a security
for the repayment in the form of the checks, but upon remittance in cash of the
face value of the checks, Santia would return to her each check paid. Despite
having already paid the said checks, Santia refused to return them to her,
although he gave her assurance that he would not deposit them. But in breach
of his promise, Santia deposited her checks, resulting in their dishonor
○ MTCC acquitted Aglibot based on reasonable doubt; RTC affirmed on the
ground of “failure to fulfill, a condition precedent of exhausting all means to
collect from the principal debtor.”

● Santia appealed @CA, arguing that RTC erred:
○ in concluding that it is the Pacific Lending and Capital Corporation and not
Aglibot which is principally responsible for the amount of the checks being
claimed by Santia
○ in finding that Santia failed to exhaust all available legal remedies against the
principal debtor Pacific Lending and Capital Corporation
○ in finding that Aglibot is a mere guarantor and not an accommodation party,
and thus, cannot be compelled to pay Santia unless all legal remedies against
the Pacific Lending and Capital Corporation have been exhausted by Santia
● CA decision: rejected RTC dismissal
○ Since Aglibot's acquittal by the criminal case was upon a reasonable doubt on
whether the prosecution was able to satisfactorily establish that she did receive
a notice of dishonor, a requisite to hold her criminally liable under B.P. 22, her
acquittal did not operate to bar Santia's recovery of civil indemnity.
○ Ordered Aglibot to personally pay Santia Php3m with interest at 12% p.a. from
the filing of the info until finality of decision + 12%p.a. from finality of
judgment until full payment.
● Aglibot appeal @SC: argues that CA erred in holding her personally liable for issuing her
own 11 post-dated checks to Santia since she did so in behalf of her employer PLCC, the
true borrower and beneficiary of the loan.
○ She argues that she was a mere guarantor of the debt of PLCC when she agreed
to issue her own checks, and that Santia failed to exhaust all means to collect
the debt from PLCC, the principal debtor.
Issue/s + Held:
1. W/N Aglibot is a mere guarantor of the indebtedness of PLCC to Santia = NO!
● RTC held that:
○ "It is obvious, from the face of the Promissory Note . . . that the accused-
appellant signed the same on behalf of PLCC as Manager thereof and nowhere
does it appear therein that she signed as an accommodation party."
○ What Aglibot agreed to do by issuing her personal checks was merely to
guarantee the indebtedness of PLCC. Aglibot asserts that as guarantor, she must
be accorded the benefit of excussion (prior exhaustion of property of the
debtor) as provided under NCC 20584.
● The liability of a guarantor is only subsidiary, and all the properties of the principal
debtor must first be exhausted before the guarantor may be held answerable for the debt.
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, because the exhaustion of the
principal’s property cannot take place before final judgment has been obtained 5.
4 charged, or by his agent; evidence, therefore, of the agreement cannot be received without the
Art. 2058. 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.
5
Article 2062 of the Civil Code provides that the action brought by the creditor must be filed
against the principal debtor alone, except in some instances mentioned in Article 2059 16
PAGE 6 of 26
● However, Aglibot is not a mere guarantor of PLCC’s debt due to want of proof under
the Statute of Frauds6. A guaranty agreement is a promise to answer for the debt or
default of another. The law requires that the agreement, or some note or memorandum
thereof, be in writing. Otherwise, it would be unenforceable unless ratified. They are not
invalid, the Statute of Frauds simply provides the method by which the contracts
enumerated may be proved. Article 2055 of the Civil Code also provides that a guaranty
is not presumed, but must be express, and cannot extend to more than what is stipulated
therein.
● In this case, Aglibot has not shown any proof, such as a contract, a secretary's certificate
or a board resolution, nor even a note or memorandum thereof, whereby it was agreed
that she would issue her personal checks in behalf of the company to guarantee the
payment of its debt to Santia. There is nothing shown in the Promissory Note signed by
Aglibot herself containing an agreement between her and PLCC guaranteeing her debt to
Santia
● Aglibot is an accommodation party, and is therefore liable to Santia.
○ Section 185 of the Negotiable Instruments Law defines a check as "a bill of
exchange drawn on a bank payable on demand." Section 126 defines a bill of
exchange as "an unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer."
○ By issuing her own post-dated checks, Aglibot thereby bound herself
personally and solidarily to pay Santia. She could have issued PLCC's checks,
but instead she chose to issue her own checks, drawn against her personal
account with Metrobank.
○ No credence in Aglibot's claim that she had an understanding with Santia that
the checks would not be presented to the bank for payment, but were to be
returned to her once she had made cash payments for their face values on
maturity. Aglibot failed to present any proof that she had indeed paid cash on
the checks as she claimed. This is why Santia decided to deposit the checks in
order to obtain payment of his loan.
when the action may be brought against both the guarantor and the principal debtor.
6
Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxx xxx xxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing, and subscribed by the party
writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be performed within a year from the making
thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
xxx xxx xxx

○ The relation between an accommodation party 7 and the party accommodated is
one of principal and surety — the accommodation party being the surety. A
surety is bound equally and absolutely with the principal and is deemed an
original promisor and debtor from the beginning. The liability is immediate and
direct.
○ Unlike in a contract of suretyship, the liability of the accommodation party
remains not only primary but also unconditional to a holder for value, such that
even if the accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the latter is still
liable for the whole obligation and such extension does not release him because
as far as a holder for value is concerned, he is a solidary co-debtor.
Ruling: Petition DENIED.
7
Sec. 29. Liability of an accommodation party. — An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person. Such a person is liable
on the instrument to a holder for value notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
As elaborated in The Phil. Bank of Commerce v. Aruego:
An accommodation party is one who has signed the instrument as maker, drawer, indorser,
without receiving value therefor and for the purpose of lending his name to some other person.
Such person is liable on the instrument to a holder for value, notwithstanding such holder, at
the time of the taking of the instrument knew him to be only an accommodation party. In
lending his name to the accommodated party, the accommodation party is in effect a surety for
the latter. He lends his name to enable the accommodated party to obtain credit or to raise
money. He receives no part of the consideration for the instrument but assumes liability to the
other parties thereto because he wants to accommodate another. . . . .
PAGE 7 of 26
Security Bank and Trust Company vs Cuenca
G.R. 138544 – Oct. 3, 2000
J. Panganiban
Topic: Secured Transactions – Personal Security - Surety
Doctrine: A surety agreement is strictly construed against the creditor, and every doubt is
resolved in favor of the solidary debtor. Creditor is required to obtain the consent of the surety
to any material alteration in the principal loan agreement, or at least to notify the surety.
Security Bank cannot hold Cuenca responsible for loans obtained in excess of the amount or
beyond the period stipulated in the original agreement, absent any clear stipulation showing
that the Cuenca waived his right to be notified thereof, or to give consent thereto. This is
especially true where, as in this case, Cuenca was no longer the principal officer or major
stockholder of the corporate debtor at the time the later obligations were incurred, so he was
thus no longer in a position to compel the debtor to pay the creditor and had no more reason to
bind himself anew to the subsequent obligations.
Petitioners: Security Bank and Trust Company, Inc
Respondents: Rodolfo M. Cuenca
Case Summary: Security Bank granted a credit line to Sta. Ines worth P8M to assist
them in meeting the addt’l capitalization reqs of its logging operations. Rodolfo
Cuenca (Pres and Chair of BoD of Sta. Ines) executed an indemnity agreement where
he solidarily bound himself with Sta. Ines. Sta. Ines made its first drawdown on the
credit line in the amt of 6.1M. Cuenca then resigned from the company. After his
resignation, Sta. Ines made use of its credit line repeatedly, then requested for the
restructuring of the loans, which was done without notification and consent of
Cuenca. Security Bank granted this restructuring, but Sta. Ines defaulted in its loan.
Security Bank then demanded the amount from Sta. Ines AND CUENCA, and this
was granted by the RTC but the CA removed Cuenca’s liability as surety. The SC
upheld the CA’s decision and held that Cuenca cannot be held solidarily liable
because he was not notified of the subsequent loans, and his resignation rendered him
as one not in a position to be a surety of Sta Ines.
Facts:
 Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in logging operations, and a
holder of a Timber License issued by the Department of Environment and Natural
Resources (‘DENR’).
 1980 INITIAL LOAN: Security Bank and Trust Co. granted Sta. Ines a ₱8M credit
line to assist them in meeting the additional capitalization requirements of its

logging operations. Credit Approval Memorandum expressly stated that ₱8M Credit
Loan Facility shall be effective until 30 November 1981
 ‘JOINT CONDITIONS:
o Xxx 4. Lines shall expire on November 30, 1981 xxx
 To secure the payment of the amounts drawn, Sta. Ines executed a Chattel Mortgage
over some of its machinery and equipment in favor of Security Bank. As additional
security for the payment of the loan, the president and Chairman of the BoD of Sta.
Ines, Rodolfo M. Cuenca, executed an Indemnity Agreement whereby he solidarily
bound himself with Sta. Ines:
o ‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and
severally with the client (SIMC) in favor of the bank for the payment,
upon demand and without the benefit of excussion of whatever amount x x
x the client may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x .’ (Emphasis supplied).
 Four days prior to the expiration of the period of effectivity of the ₱8M-Credit Loan
Facility, Sta. Ines made a first drawdown from its credit line with Security Bank in
the amount of ₱6.1M, which is covered by a promissory note.
 Cuenca resigned as President and Chairman of the Board of Directors of Sta.
Ines.
 Sta. Ines repeatedly availed of its credit line and obtained six other loans from
Security Bank for the total of ₱6,369,019.50. Accordingly, SIMC executed six
Promissory Notes to cover these addtl loans
 Sta. Ines encountered difficulty in making the amortization payments on its loans
and requested Security Bank a complete restructuring of its indebtedness.
o 1989 RESTRUCTURING: Security Bank sent a letter to Sta. Ines, without
notice to or the prior consent of Cuenca, where it agreed to restructure the
past due obligations of defendant-appellant Sta. Ines.
 Term loans in the amounts of ₱8.8M (principal portion) and
P3.4M (interest due and penalty portion) to be applied to
liquidate Sta. Ines‘ total outstanding indebtedness to Security
Bank
o In restructuring defendant-appellant Sta. Ines’ obligations to Security
Bank, the ₱6.1M Promissory Note (the only loan incurred prior to the
expiration of the P8M-Credit Loan Facility on 30 November 1981 and the
only one covered by the Indemnity Agreement with Cuenca) was not
segregated from, but was instead lumped together with, the other loans
obtained by Sta. Ines which were not secured by said Indemnity
Agreement.
 Sta. Ines thus executed the two promissory notes (P8.8M and P3.4M) in favor of
Security Bank:
 To formalize their agreement to restructure the loan obligations of Sta. Ines, Security
Bank and Sta. Ines executed a Loan Agreement
o Section 1.02 of the said Loan Agreement dated 31 October 1989 provides:
 ‘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
PAGE 8 of 26
Second Loan shall be applied to liquidate the past due interest
and penalty portion of the Indebtedness.’
 Sta. Ines made further payments to Security Bank in the amount of P1,757,000.00
 Sta. Ines defaulted in the payment of its restructured loan obligations to Security
Bank despite demands made upon it and Cuenca, and both refused to pay Security
Bank.
 Security Bank filed a complaint for collection of sum of money. RTC held that Sta.
Ines and Cuenca are liable to pay, jointly and severally, Security Bank P39M w/12%
interest p.a. plus attys fees and costs of litigation
 The CA relieved Cuenca from liability and ruled that the 1989 Loan Agreement had
novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines &
accordingly extinguished the Indemnity Agreement. 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.
o The Credit Approval Memorandum specified that the credit
accommodation was for a total amount of ₱8M, and that its expiry date
was November 30, 1981. Cuenca was liable only for loans obtained prior
to November 30, 1981, and only for an amount not exceeding ₱8M
o The restructuring of Sta. Ines’ 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 Civil Code, such
extension extinguished the surety.
o The surety was entitled to notice, in case the bank and Sta. Ines decided to
materially alter or modify the principal obligation after the expiry date of
the credit accommodation.
o MR filed by Security Bank, denied.
 Security Bank filed this Petition for Review under Rule 45 assailing the relief from
liability of Cuenca.
Issues + Held:
4. Whether the 1989 Loan Agreement novated the original credit accommodation and
Cuenca’s liability under the Indemnity Agreement - YES
 REQS of NOVATION: (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.
 Petitioner contends that there was no absolute incompatibility between the old and
the new obligations, and that the latter did not extinguish the earlier one. It further
argues that the 1989 Agreement did not change the original loan in respect to the
parties involved or the obligations incurred. It adds that the terms of the 1989
Contract were "not more onerous."
 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
o 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.
 Several incompatibilities:

o 1980: amount of loan was not to exceed ₱8 million; the 1989 Agreement:
₱12.2 million
o The periods for payment were also different
o Positive and negative covenants are found in the agreement which was not
found in the original obligation.
 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:
o "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."
 Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of
the ₱8 million original accommodation; it was not a novation.
 SC: No, 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 ₱8 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,26 the Court explained the rationale of this provision in this wise:
o "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 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."
 CA relied on the provisions of the Credit Approval Memorandum in holding that the
credit accommodation was only for ₱8 million, and that it was for a period of one
year ending on November 30, 1981. Security Bank claims that it was not a binding
agreement because it was not signed by the parties. It adds that it was merely for its
internal use.
o SC: petitioner itself presented the said document to prove the
accommodation
 Cuenca is estopped from denying the terms and conditions of the ₱8 million credit
accommodation because it cannot take advantage of that document by agreeing to be
bound only by those portions that are favorable to it, while denying those that are
disadvantageous.
5. Whether Cuenca waived his right to be notified of and to give consent to any
substitution, renewal, extension, increase, amendment, conversion or revival of the
said credit accommodation. – NO
- 1989 Loan Agreement extinguished 1980 ₱8 million credit accommodation via novation
- Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, is
also extinguished
- Cuenca did not waive his right to be notified of, or to give consent to, any modification or
extension of the 1980 credit accommodation.
PAGE 9 of 26
 Security Bank contends that Respondent Cuenca "impliedly gave his consent to any
modification of the credit accommodation or otherwise waived his right to be
notified of, or to give consent to, the same" which is found in the Agreement, in
which he held himself liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments, conversions and
revival."
 SC: An essential alteration in the terms of the Loan Agreement without the consent
of the surety extinguishes the latter’s obligation.
o National Bank v. Veraguth: it is fundamental in the law of suretyship that
any agreement between the creditor and the principal debtor which
essentially varies the terms of the principal contract, without the consent
of the surety, will release the surety from liability.
 While Cuenca held himself liable for the credit accommodation or any modification
thereof, such clause should be understood in the context of the ₱8 million limit 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, Cuenca (or his successors) would be liable for
loans even amounting to, say, ₱100 billion obtained 100 years after the expiration of
the credit accommodation, on the ground that he consented to all alterations and
extensions thereof.
 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."
 If there is any doubt on the terms and conditions of the surety agreement, the doubt
should be resolved in favor of the surety. Ambiguous contracts are construed against
the party who caused the ambiguity.
 No waiver 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
 Credit Approval Memorandum clearly shows that the bank did not have absolute
authority to unilaterally change the terms of the loan accommodation. Indeed, it may do
so only upon notice to the borrower, pursuant to this condition:
o 5. The Bank reserves the right to amend any of the aforementioned terms
and conditions upon written notice to the Borrower."
 If only Sta. Ines as the borrower, and not Cuenca, the surety, was entitled to be
notified of any modification in the original loan accommodation, the latter’s liability
would thus be more burdensome than that of the former. Surety cannot assume an
obligation more onerous than that of the principal.
o DISTINGUISH FROM: Philamgen v. Mutuc: SC sustained a stipulation
whereby the surety consented to be bound not only for the specified
period, "but to any extension thereafter made, an extension x x x that could
be had without his having to be notified."
 Surety agreement contained this unequivocal stipulation: "It is
hereby further agreed that in case of any extension of renewal of
the bond, we equally bind ourselves to the Company under the
same terms and conditions as herein provided without the
necessity of executing another indemnity agreement for the
purpose and that we hereby equally waive our right to be
 PAGE 10 of 26

notified of any renewal or extension of the bond which may be
granted under this indemnity agreement."
o In the present case, there is no such express stipulation.
 Petitioner claims that Indemnity agreement is a continuing surety & maintains that
there was no need for respondent to execute another surety contract to secure the
1989 Loan Agreement.
 SC: That the Indemnity Agreement is a continuing surety does not authorize the
bank to extend the scope of the principal obligation inordinately.
o Dino v. CA: 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.
 In this case, the surety Agreement specifically provided that
"each suretyship is a continuing one which shall remain in full
force and effect until this bank is notified of its revocation."
Since the bank had not been notified of such revocation, the
surety was held liable even for the subsequent obligations of the
principal borrower.
 No such provision in the present case
 The Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed ₱8 million, 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 ₱8 million.
 Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans, purportedly
under the 1980 credit accommodation, that were obtained in 1986. Certainly, he
could not have guaranteed the 1989 Loan Agreement, which was executed after
November 30, 1981 and which exceeded the stipulated P8 million ceiling.
 Bank should also have been prudent in insisting on the JSS of one who was in a
position to ensure the payment of the loan.
[procedural issues/not relevant]
Motion for Reconsideration Not Pro Forma
 Respondent contends that petitioner’s Motion for Reconsideration of the CA
Decision, in merely rehashing the arguments already passed upon by the appellate
court, was pro forma; that as such, it did not toll the period for filing the present
Petition for Review, and was filed out of time.
 A motion for reconsideration is not pro forma just because it reiterated the
arguments earlier passed upon and rejected by the appellate court. A movant may
raise the same arguments, precisely to convince the court that its ruling was
erroneous. Also, no intent to delay proceedings.
Service by Registered Mail Sufficiently Explained
 Respondent maintains that the present Petition for Review does not contain a
sufficient written explanation why it was served by registered mail.
 The Petition does state that it was served on the respective counsels of Sta. Ines and
Cuenca "by registered mail in lieu of personal service due to limitations in time and
distance." This explanation sufficiently shows that personal service was not
practicable.
Ruling: WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner

 JSS ("joint and solidary signature") of a major stockholder or corporate officer –

common banking practice
o additional security for loans granted to corporations
o Reasons: (1) in case of default, the creditor’s recourse, which is normally
limited to the corporate properties under the veil of separate corporate
personality, would extend to the personal assets of the surety; (2) such
surety would be compelled to ensure that the loan would be used for the
purpose agreed upon, and that it would be paid by the corporation.
 Bank should not have assumed 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. He was not anymore in a position to ensure the payment
of the obligation. He did not have any reason to bind himself further to a bigger and
more onerous obligation.
 The stipulation in the 1989 Loan Agreement providing for the surety of respondent,
without even informing him, smacks of negligence on the part of the bank and bad
faith on that of the principal debtor.
o 1989 Loan Agreement constituted a new indebtedness, the old loan having
been already liquidated, the spirit of fair play should have impelled Sta.
Ines to ask somebody else to act as a surety for the new loan.

Mariano Lim v. Security Bank Corporation
G.R. 188539 – March 12, 2014
J. Peralta
Topic: Surety – Obligations Secured
Nature: Petition for review on certiorari (Rule 45)
Doctrine: A contract of suretyship is an agreement whereby a party, called the surety,
guarantees the performance by another party, called the principal or obligor, of an obligation
or undertaking in favor of another party, called the obligee. Although the contract of a surety
is secondary only to a valid principal obligation, the surety becomes liable for the debt or duty
of another although it possesses no direct or personal interest over the obligations, nor does it
receive any benefit therefrom. This was explained in the case of Stronghold Insurance
Company, Inc. v. Republic-Asahi Glass Corporation, where it was written:
The surety's obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless,
although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with the
principal.
xxxx
Thus, suretyship arises upon the solidary binding of a person deemed the surety with the
principal debtor for the purpose of fulfilling an obligation. A surety is considered in law as
being the same party as the debtor in relation to whatever is adjudged touching the
obligation of the latter, and their liabilities are interwoven as to be inseparable. x x x.
Continuing Suretyship defined: A bank or financing company which anticipates entering
into a series of credit transactions with a particular company, normally requires the projected
principal debtor to execute a continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor.
PAGE 11 of 26
Petitioners: Mariano Lim
Respondents: Security Bank Corporation
Case Summary: Lim executed a Continuing Suretyship in favor of Security Bank to
secure any and all types of credit in favor of Raul Arroyo, for the amount of P2M covered
by a Credit Agreement/Promissory Note which stipulated interest of 19% per annum
compounded monthly, and a penalty clause of 2% per month on the total outstanding
principal and interest due and unpaid. Raul defaulted, and Lim as surety failed to pay
Security Bank on demand. The RTC of Davao, the CA, and the SC affirmed that Lim, as
surety, needed to pay Security Bank, but modified the payments according to from when it
should be computed and how much attorney’s fees should be paid (10%).
Facts:
Before trial
 Lim executed a Continuing Suretyship in favor of Security Bank to secure “any and all
types of credit accommodation that may be granted by the bank hereinto and hereinafter”
in favor of a Raul Arroyo, for the amount of P2M which is covered by a Credit
Agreement/Promissory Note.
o The promissory note stated that the interest on the loan shall be 19% per
annum, compounded monthly, for the first 30 days from the date, and if the
note is not fully paid when due, an additional penalty of 2% per month of the
total outstanding principal and interest due and unpaid shall be imposed.
 The Continuing Suretyship executed by Lim stipulated:
1. Liability of the Surety. - The liability of the Surety is solidary and not contingent
upon the pursuit of the Bank of whatever remedies it may have against the Debtor or
the collaterals/liens it may possess. If any of the Guaranteed Obligations is not
paid or performed on due date (at stated maturity or by acceleration), the
Surety shall, without need for any notice, demand or any other act or deed,
immediately become liable therefor and the Surety shall pay and perform the
same.
o The same document defined Guaranteed Obligations:
a) "Guaranteed Obligations" - the obligations of the Debtor arising from all
credit accommodations extended by the Bank to the Debtor, including
increases, renewals, roll-overs, extensions, restructurings, amendments or
novations thereof, as well as (i) all obligations of the Debtor presently or
hereafter owing to the Bank, as appears in the accounts, books and records
of the Bank, whether direct or indirect, and (ii) any and all expenses which
the Bank may incur in enforcing any of its rights, powers and remedies
under the Credit Instruments as defined hereinbelow.
 The debtor, Raul Arroyo, defaulted on his loan obligation. Lim received a Notice of Final
Demand dated Aug. 2, 2001, informing him that he was liable to pay the loan obtained by
Raul and Edwina Arroyo, including the interests and penalty fees amounting to
P7,703,185.54, demanding payment.
RTC of Davao
 For failure of Lim to comply with the demand, Security Bank filed a complaint for
collection of sum of money against him and the Arroyo spouses (they could not be
located).
 RTC rendered judgment against petitioner:

Wherefore, judgment is hereby rendered ordering defendant Lim to pay the following
sums.
1. The principal sum of two million pesos plus nineteen percent interest of the
outstanding principal interest due and unpaid to be computed from January 28, 1997
until fully paid, plus two percent interest per month as penalty to be computed from
February 28, 1997 until fully paid.
2. Four hundred thousand pesos as attorney's fees.
3. Thirty thousand pesos as litigation expenses.
SO ORDERED.
CA
 July 30, 2008: On appeal, the RTC judgment was affirmed with the modification that
interest be computed from Aug. 1, 1997; the penalty should start only from Aug. 28,
1997; the award of attorney’s fees is set at 10% of the total amount due; and the award
for litigation expenses increased to P92,321.10.
 June 1, 2009: Motion for reconsideration denied
SC
 Hence, this appeal.
Issues + Held:
6. W/N Lim may validly be held liable for the principal debtor’s loan obtained 6 months
after the execution of the Continuing Suretyship – YES.
o Philippine Charter Insurance Corporations v. Petroleum Distributors &
Service Corporation provides:
A contract of suretyship is an agreement whereby a party, called the surety,
guarantees the performance by another party, called the principal or obligor, of
an obligation or undertaking in favor of another party, called the obligee.
Although the contract of a surety is secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it
possesses no direct or personal interest over the obligations, nor does it receive
any benefit therefrom. This was explained in the case of Stronghold Insurance
Company, Inc. v. Republic-Asahi Glass Corporation, where it was written:
The surety's obligation is not an original and direct one for the performance of
his own act, but merely accessory or collateral to the obligation contracted by
the principal. Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the creditor
or promisee of the principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the principal.
xxxx
Thus, suretyship arises upon the solidary binding of a person deemed the surety
with the principal debtor for the purpose of fulfilling an obligation. A surety is
considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable. x x x.
o What Lim had executed was a Continuing Suretyship, as described in Saludo
Jr. v. Security Bank Corp., citing Totanes v. China Banking Corporation:
PAGE 12 of 26
o A bank or financing company which anticipates entering into a series of
credit transactions with a particular company, normally requires the
projected principal debtor to execute a continuing surety agreement along
with its sureties. By executing such an agreement, the principal places itself
in a position to enter into the projected series of transactions with its
creditor; with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor.
o The terms of the Continuing Suretyship are very clear. It states that petitioner,
as surety, shall, without need for any notice, demand or any other act or deed,
immediately become liable and shall pay "all credit accommodations
extended by the Bank to the Debtor, including increases, renewals, roll-overs,
extensions, restructurings, amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter owing to the Bank, as
appears in the accounts, books and records of the Bank, whether direct or
indirect, and (ii) any and all expenses which the Bank may incur in enforcing
any of its rights, powers and remedies under the Credit Instruments as defined
hereinbelow."
 Article 2053 of the Civil Code provides that "[a] guaranty may also
be given as security for future debts, the amount of which is not yet
known; x x x." Thus, petitioner is unequivocally bound by the terms
of the Continuing Suretyship. There can be no cavil then that
petitioner is liable for the principal of the loan, together with the
interest and penalties due thereon, even if said loan was obtained by
the principal debtor even after the date of execution of the Continuing
Suretyship.
 On award of attorney’s fees, Art. 2208 of the Civil Code does not prohibit recovery of
attorney’s fees if there is a stipulation in the contract for payment of the same. However,
the courts still have the power to reduce the same if it is unreasonable. Hence, we reduce
the amount of attorney’s fees to 10% of the principal debt only.
7. W/N the proper computation of the total indebtedness and the amount of litigation
expenses are factual matters that had been satisfactorily addressed by the CA –
IMPROPER. Court is not a trier of facts.
Ruling: WHEREFORE, the petition is PARTIALLY GRANTED. The Decision of the
Court of Appeals, dated July 30, 2008, in CA-G.R. CV No. 00462, is AFFIRMED with
MODIFICATION in that the award of attorney's fees is reduced to ten percent (10%) of the
principal debt only.
SO ORDERED.

International Finance Corporation v. Imperial Textile Mills, Inc.
G.R. 160324 – November 15, 2005
J. Panganiban
Topic: Surety – Distinguished from Guaranty
Doctrine: When the obligor undertakes to be "jointly and severally" liable, it means that the
obligation is solidary. If solidary liability was instituted to "guarantee" a principal obligation,
the law deems the contract to be one of suretyship.
Petitioners: INTERNATIONAL FINANCE CORPORATION
Respondents: IMPERIAL TEXTILE MILLS, INC.
Case Summary: International Finance Corporation and Philippine Polyamide Industrial
Corporation entered into a $7m USD loan agreement, which Imperial Textile Mills and
Grand Textile Manufacturing Corporation guaranteed by way of a Guarantee Agreement.
PPIC defaulted on its payment, resulting in IFC foreclosing on its mortgaged properties.
IFC then went after ITM and Grandtex for the remainder of the balance, which the latter
two refused to pay. IFC filed a complaint before the RTC, which ruled in favor of IFC,
ordering PPIC to pay the balance but relieving ITM of its obligation as guarantor. On
appeal to the CA, the CA reversed the RTC and held ITM secondarily liable to IFC. IFC
PAGE 13 of 26
elevated the case to the SC, insisting that ITM bound itself solidarily, not secondarily. The
SC held in favor of IFC, holding that while the terms used in the contract pointed to a
guaranty, the actual stipulations pointed to a solidary agreement between PPIC, ITM and
Grantex, making the contract not one of guaranty, but of suretyship.
Facts:
 On December 17, 1974, petitioner International Finance Corporation (IFC) and
Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement
wherein IFC granted a loan of $7,000,000.00 USD, payable in sixteen semi-annual
installments of $437,500.00 each, with interest at the rate of 10% per annum on the
principal amount of the loan and outstanding from time to time.
o The interest shall be paid semi-annually on June 1 and December 1 in each
year, and interest for any period less than a year shall accrue and be pro-
rated on the basis of a 360-day year of twelve 30-day months.
 On the same day, a Guarantee Agreement was executed with respondent Imperial
Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and
IFC as parties thereto. ITM and Grandtex agreed to guarantee PPIC’s obligations
under the loan agreement.
 PPIC paid the first 3 installments on June 1 and December 1, 1977 and June 1, 1978.
PPIC then asked for a rescheduling of the next 3 installments, which IFC granted.
 Despite the rescheduling, PPIC defaulted. On April 1, 1985, IFC sent a written
demand for the loan and interest. PPIC still failed to pay despite the demand.
 As a result, IFC, together with the Development Bank of the Philippines, applied for
the extrajudicial foreclosure of PPIC’s properties in Calamba, Laguna. The auction
sale was held on July 30, 1985, with IFC and DBP as the only bidders.
 IFC’s winning bid was for Php99,269,100.00 which was equivalent to
$5,250,000.00 USD (exchange rate: Php18.9084 = $1 USD). This fell short of the
outstanding $8,083,967.00 loan still present, thus leaving a balance of
$2,833,967.00. PPIC still failed to pay such balance.
 IFC thus demanded ITM and Grandtex, as guarantors, to pay the outstanding
balance. They failed to do so.
 On May 20, 1988, IFC filed a Complaint with the RTC of Manila against PPIC and
ITM for payment of the balance, plus interests and attorney’s fees.
RTC
 HELD for IFC and held PPIC liable for the payment of the loan plus interests and
attorney’s fees.
 However, the RTC relieved ITM of its obligation as guarantor, and dismissed the
complaint against it.
CA
 IFC appealed to the CA, arguing that ITM should not have been relieved of its duty
as guarantor of PPIC’s loan.
 The CA REVERSED the Decision of the RTC insofar as ITM was exonerated
from any obligation to the IFC. The CA held that ITM bound itself under the
Guarantee Agreement to pay PPIC’s obligation upon default.
 However, the CA noted that ITM’s obligation only arose upon PPIC’s failure to pay
the loan. Thus, ITM cannot be held liable for the obligation from the onset. It held
ITM and Grantex secondarily liable to pay IFC.
 Motion for reconsideration denied.
SC

 IFC elevated the case to the SC via a Petition for Review on Certiorari under Rule
45.
 IFC raises the following issues:
o 1.) W/N ITM and Grantex are sureties and therefore, jointly and
severally liable with PPIC for the payment of the loan.
o 2.) W/N the petition raises a question of law.
o 3.) W/N the petition raises a theory not raised in the lower court.
 IFC claims that under the Guarantee Agreement, ITM bound itself as surety to
PPIC’s obligations from the loan agreement.
o ITM asserts that by the terms of the Guarantee Agreemet, it was merely a
guarantor and not a surety. Additionally, as IFC drafted the contract, any
ambiguity should be resolved against it.
Issues + Held:
1. W/N ITM is a surety, and thus solidarily liable with PPIC for the payment of
the loan. – YES
 The Guarantee Agreement states as follows:
o "Whereas,
"(A) By an Agreement of even date herewith between IFC and
PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION (herein
called the Company), which agreement is herein called the Loan
Agreement, IFC agrees to extend to the Company a loan (herein called the
Loan) of seven million dollars ($7,000,000) on the terms therein set forth,
including a provision that all or part of the Loan may be disbursed in a
currency other than dollars, but only on condition that the Guarantors
agree to guarantee the obligations of the Company in respect of the Loan
as hereinafter provided.”
"(B) The Guarantors, in order to induce IFC to enter into the Loan
Agreement, and in consideration of IFC entering into said Agreement,
have agreed so to guarantee such obligations of the Company.”
o "Section 2.01. The Guarantors jointly and severally, irrevocably,
absolutely and unconditionally guarantee, as primary obligors and not as
sureties merely, the due and punctual payment of the principal of, and
interest and commitment charge on, the Loan, and the principal of, and
interest on, the Notes, whether at stated maturity or upon prematuring, all
as set forth in the Loan Agreement and in the Notes.”
 ITM bases its arguments on the specific wording of the Agreement in that it uses the
terms “guarantee” and “guarantors”.
 The SC disagreed with ITM’s argument, holding that the specific stipulations in
the Contract show otherwise. In particular:
o The Agreement stated that the guarantors was “jointly and severally”
liable.
o It also noted that they were “primarily obligors and not as sureties…”
o The stipulations meant that at bottom, and to all legal intents and purposes,
it was a surety.
 As a result of such binding, ITM bound itself to be solidarily liable with PPIC, and
cannot be deemed merely secondarily liable.
o Article 2047, NCC: By guaranty, a person, called the guarantor binds
himself to the creditor to fulfill the obligation of the principal in case the
latter should fail to do so.
PAGE 14 of 26
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed.
In such case the contract shall be called suretyship.”
 Pursuant to Art. 1216, NCC, IFC validly went after ITM for fulfillment of the
obligation.
o Article 1216, NCC: "The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not
been fully collected."
 Anent the argument that the terms of the Guarantee Agrement were ambiguous, the
SC rejected the same. When qualified by the term “jointly and severally”, the
use of the word “guarantor” to refer to a “surety” does NOT violate the law.
o The use of the word “guarantee” does not ipso facto make the contract one
of guaranty. It is the terms of the contract that govern the obligations of
the parties. In this case, the literal meaning of the stipulations are clear and
there is no doubt as to the intentions of the parties.
o Additionally, the SC has recognized that the term “guarantee” is
frequently used in business transactions to describe the intent to be bound
by a primary or independent obligation.
o The CA denied solidary liability on the theory that the parties would never
have executed the Agreement if they had intended to name ITM as a
primary obligor; that ITM’s obligation was to remain collateral to the loan
agreement. The SC agreed insofar as to the nature of ITM’s obligation: a
suretyship is merely an accessory or collateral to a principal obligation,
meaning that ITM remained collateral to the loan agreement. However,
while a surety contract is secondary to the principal obligation, its liability
is direct, primary and absolute. Hence the CA’s theory was correct, but
it was wrong in denying solidary liability.
 A surety is considered in law to be on the same footing as the principal debtor in
relation to whatever is adjudged against the latter.
[IRRELEVANT] Peripheral Issues
 On change of theory on appeal: IFC had used “primary obligor” before the RTC, and
“surety” before the CA. The SC ruled that the terms were premised on the same
stipulations in the Agreement, and had the same legal consequences. As a result,
there was effectively no change of theory on appeal.
 On only questions of law permitted to be raised in a Petition for Review: the SC
recognizes that this case falls under an exception: the assailed Decision was based
on a misapprehension of facts, particularly as to certain stipulations in the Guarantee
Agreement. As a result, the SC was compelled to review the contract firsthand and
make its own findings and conclusions.
Ruling: WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and
Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety to
Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance
Corporation the same amounts adjudged against PPIC in the assailed Decision. No costs.
SO ORDERED.
 PAGE 15 of 26

simply that he is able to do so. In other words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor makes default, while a guarantor contracts
to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.

Petitioner: Estrella Palmares

Respondents: CA & MB Lending Corporation

Case Summary: MB Lending extended a loan to spouses Azarraga with

petitioner Estrella Palmares. The spouses failed to pay the loan. MB Lending
directly filed a complaint solely against Palmares, to the exclusion of the
principal debtors. The main issue in this case is whether Palmares is a surety or a
guarantor. SC held that Palmares is a surety, and that a creditor’s right to proceed
against the surety exists independently of his right to proceed against the
principal.

Facts:
● Pursuant to a promissory note dated March 13, 1990, private RESP MB Lending
Corporation extended a loan to the spouses Osmena and Merlyn Azarraga with PET
Estrella Palmares, in the amount of P30,000 payable on or before May 12, 1990,
with compounded interest at the rate of 6% per annum to be computed every 30 days
from the date thereof.
● The basis of PET Estrella Palmares’ liability under the promissory note is expressed
in this wise:

ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the
contents of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable
with the above principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of
the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the
payment of the note subject to the same conditions above-cited.

Palmares v. Court of Appeals & M.B. Lending Corporation

G.R. No. 126490 -- March 31, 1998
J. Regalado
Topic: Surety - Distinguished from Guaranty
Doctrine: A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency
of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. Stated differently, a surety promises to pay the
principal’s debt if the principal will not pay, while a guarantor agrees that the creditor, after
proceeding against the principal, may proceed against the guarantor if the principal is unable
to pay. A surety binds himself to perform if the principal does not, without regard to his ability
to do so. A guarantor, on the other hand, does not contract that the principal will pay, but
● PET Azarraga spouses were able to pay a total of P16,300.00, leaving a balance of
P13,700.00.
○ No payments were made after September 26, 1991
● Consequently, on the basis of petitioner’s solidary liability under the promissory
note, RESP MB Lending filed a COMPLAINT FOR SUM OF MONEY against PET
Palmares as the lone party-defendant, to the exclusion of the principal debtors,
allegedly by the reason of the insolvency of the latter.
○ PET Palmares: sometime in August 1990, immediately after the loan
matured, she offered to settle the obligation with respondent corporation

but the latter informed her that they would try to collect from spouses
Azarraga and that she need not worry about it;
■ that there has already been a partial payment in the amount of
P17,010;
■ that the interest of 6% per month compounded at the same rate
per month, as well as the penalty charges of 3% per month, are
usurious and unconscionable;
■ and that while she agrees to be liable on the note but only
upon the default of the principal debtor, respondent
corporation acted in bad faith in suing her alone within
including the Azarragas when they were the only ones who
benefited from the proceeds of the loan.
● RTC: DISMISSED the complaint without prejudice to the filing of a separate action
for a sum of money against Azarragas who are primarily liable on the instrument;
petitioner, as co-maker, is only secondarily liable on the instrument.
○ Filing of the complaint against Palmares amounted to a discharge of a
prior party; offer to pay by Palmares was a valid tender of payment
sufficient to discharge a person’s secondary liability on the instrubment
● CA: REVERSED THE RTC
○ PET Palmares is a surety since she bound herself to be jointly and
severally or solidarily liable with the principal debtors, the Azarraga
spouses, when she signed as a co-maker. As such, petitioner is primarily
liable on the note and hence may be sued by the creditor corporation for
the entire obligation.
○ Even if the promissory note were to be considered as a contract of
adhesion, the same is not entirely prohibited because the one who adheres
to the contract is free to reject it entirely; if he adheres, he gives his
consent.
● Present Petition for Review on Certiorari filed by PET Palmares
○ PET Palmares’ Arguments: her liability should be deemed restricted by
the clause in the third paragraph of the promissory note 8 to be that of a
guarantor
○ Second and third paragraph of the promissory note are conflicting in that
while the 2ndparagraph seems to define here liability as that of a surety
which is joint and solidary with the principal make, on the other hand,
under 3rd paragraph her liability is actually that of a mere guarantor
because she bound herself to fulfill the obligation only in case the
principal debtor should fail to do so, which the essence of a contract of
guaranty.
○ The words “jointly and severally or solidarily liable” used in the
2ndparagraph are technical and legal terms which are not fully appreciated
by an ordinary layman like herein petitioner, a 65y.o. housewife who is
likely to enter into such transactions without fully realizing the nature and
extent of her liability. On the contrary, the wordings used in the
3rdparagraph are easier to comprehend.
○ The law looks upon the contract of suretyship with a jealous eye and that
rule is that the obligation of the surety cannot be extended by implication
beyond specified limits, taking into consideration the peculiar nature of a
surety agreement which holds the surety liable despite the absence of any
8 of suretyship
Refer to the promissory note at the beginning part of the digest (the box).
PAGE 16 of 26
direct consideration received from either the principal obligor or the
creditor.
○ The promissory note is a contract of adhesion. Thus, any apparent
ambiguity in the contract should be strictly construed against private
respondent pursuant to Art. 1377.
○ PET also submits that she cannot be compelled to pay the loan because the
principal debtors cannot be considered in default in the absence of a
judicial or extrajudicial demand.
■ No demand letters were attached in the pleadings; and while she
indeed received a 1990 demand letter, it did not put her in
default because partial payment was still made on Sept 1991
Issues + Held:
[On promissory note being a contract of adhesion]
● Contracts of adhesion are not invalid per se and that on numerous occasions the
binding effects thereof have been upheld.
● The peculiar nature of such contracts necessitate a close scrutiny of the factual
milieu to which the provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof when justified in
light of the operative facts and surrounding circumstances
● Present scenario warrants a liberal application in favor of MB Lending Corporation
[RELATED ISSUE ON SURETY V. GUARANTOR]
1. W/E Palmares is a surety or a guaranto r-- SURETY
● Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor
to fulfill the obligation of the principal debtor in case the latter should fail to do so.
○ If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be observed.
In such case the contract is called a surety ship.
● It is a cardinal rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control.
○ In the case at bar, PET expressly bound herself to be jointly and
severally or solidarily liable with the principal maker of the note. The
terms of the contract are clear, explicit and unequivocal that petitioner’s
liability is that of a surety.
● PET’s pretension that the terms “jointly and severally or solidarily liable” are
technical and legal terms which could not be understood by an ordinary layman like
her is diametrically opposed to her manifestation in the contract that she “fully
understood the contents” of the promissory note and that she is “fully aware” of her
solidarily liability with the principal maker
○ Having entered into the contract with full knowledge of its terms and
conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the effect of
the undertaking.
○ The rule that ignorance of the contents of an instrument does not
ordinarily affect the liability of one who signs it also applies to contracts

○ The mistake of a surety as to the legal effect of her obligation is ordinarily
no reason for relieving her of liability.
● [ON SURETY V. GUARANTOR] A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the debtor.
○ A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay.
○ Stated differently, a surety promises to pay the principal’s debt if the
principal will not pay, while a guarantor agrees that the creditor, after
proceeding against the principal, may proceed against the guarantor if the
principal is unable to pay.
○ A surety binds himself to perform if the principal does not, without regard
to his ability to do so. A guarantor, on the other hand, does not contract
that the principal will pay, but simply that he is able to do so.
○ In other words, a surety undertakes directly for the payment and is so
responsible at once of the principal debtor makes default, while guarantor
contracts to pay of, by the use of due diligence, the debt cannot be made
out of the principal debtor.
● Quintessentially, the undertaking to pay upon default of the principal debtor
does not automatically remove it from the ambit of a contract of suretyship.
The 2ndand 3rdparagraphs of the aforequoted portion of the promissory note do not
contain any other condition for the enforcement of RESP corporation’s right against
petitioner. It has NOT been shown, either in the contract or the pleadings, that RESP
corporation agreed to proceed against herein petitioner only if and when the
defaulting principal has become insolvent.
● Other attendant factors that lend support to the finding that the PET is a surety:
○ When PET was informed about the failure of the principal debtor to pay
the loan, she immediately offered to settle the account with respondent
corporation. Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal.
○ Petitioner present receipts of the payments already made, from the time of
initial payment up to the last, which were all issued in her name and of the
Azarraga spouses. This can only be construed to mean that the payments
made by the principal debtors were considered by respondent corporation
as creditable directly upon the account and inuring to the benefit of
petitioner.
● A surety is bound equally and absolutely with the principal, and as such is deemed
an original promissor and debtor from the beginning. This is because in suretyship
there is but one contract, and the surety is bound by the same agreement which binds
the principal. In essence, the contract of a surety starts with the agreement, which
precisely the situation obtaining in this case before the Court.
● PET’s undertaking as co-maker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor, and the principal obligors.
○ A surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; he is an
original debtor, and his liability is immediate and direct.
○ Where a written agreement on the same sheet of paper with and
immediately following the principal contract between the buyer and seller
is executed simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, the signers were
“sureties” jointly liable with the buyer. A surety usually enters into the
same obligation as that of his principal, and the signatures of both usually
PAGE 17 of 26
appear upon the same instrument, and the same consideration usually
supports the obligation for both the principal and the surety.
2. W/N there is merit in petitioner’s contention that the complaint was
prematurely filed because the principal debtors cannot as yet be considered in
default, there having been no judicial or extrajudicial demand made by
respondent corporation. – NO.
● Paragraph (G) of the promissory note states that “should I fail to pay in accordance
with the above scheduled payment, I hereby waive my right to notice and demand.”
○ Hence, demand by creditor is no longer necessary in order that delay may
exist since the contract itself already expressly so declares. As surety,
petitioner is equally bound by such waiver.
● Even if it were otherwise, demand on the sureties is not necessary before
bringing the suit against them, since the commencement of the suit is a
sufficient demand.
○ A surety is not even entitled, as a matter of right, to be given notice of the
principal’s default. Inasmuch as the creditor owes no duty of active
diligence to take care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the default of the principal
cannot have the effect of discharging the surety.
● A suretyship is a direct contract to pay the debt of another. A surety is liable as
much as his principal is liable, and absolutely liable as soon as default is made,
without any demand upon the principal whatsoever or any notice of default. As
an original promisor and debtor from the beginning, he is held ordinarily to
know every default of his principal.
● Petitioner questions the propriety of the filing of a complaint solely against her to
the exclusion of the principal debtors who allegedly were the only ones who
benefited from the proceeds of the loan
○ Court: A creditor’s right to proceed against the surety exists independently
of his right to proceed against the principal.
○ Under Article 1216 of the Civil Code, the creditor may proceed
against any one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the obligation is joint and
several, the creditor has the right to proceed even against the surety alone.
○ Since, generally, it is not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by the terms of the
contract, the obligation of the surety is the same that of the principal,
then soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are
had against the principal
○ Perforce, in accordance with the rule that, in the absence of statute or
agreement otherwise, a surety is primarily liable, and with the rule that
his proper remedy is to pay the debt and pursue the principal for
reimbursement, the surety cannot at law, unless permitted by statute and
in the absence of any agreement limiting the application of the security,
require the creditor or obligee, before proceeding against the surety, to
resort to and exhaust his remedies against the principal, particularly where
both principal and surety are equally bound.
● It may not be amiss to add that leniency shown to a debtor in default, by delay
permitted by the creditor without change in the time when the debt might be

demanded, does not constitute an extension of the time of payment, which would
release the surety. In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period, pursuant to an enforceable
agreement between the principal and the creditor, and that it was made without the
consent of the surety or with a reservation of rights with respect to him.
Ruling: WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of
attorney’s fees is reduced to P10,000.00.
E. Zobel, Inc. v. Court of Appeals
G.R. 113931 – May 6, 1998
J. Martinez
Topic: Surety – Distinguished from Guaranty
Doctrine: A surety is distinguished from a guaranty in that a guarantor is the insurer of the
solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a
surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay.
Petitioners: E. ZOBEL, INC.,
Respondents: THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R. CLAVERIA
PAGE 18 of 26
Case Summary: The Spouses Claveria contracted a loan with SOLIDBANK, with E.
Zobel, Inc. as a “guarantor” under a Continuing Guarantee agreement. When the spouses
failed to pay the loan, SOLIDBANK filed a complaint for sum of money against the
Spouses and E. Zobel, Inc. E. Zobel challenged the complaint on the basis of Art. 2080,
alleging that their liability as a guarantor was extinguished based on said Article. The
Supreme Court ruled against E. Zobel, Inc., holding that the title of the aforementioned
agreement does not define the character of E. Zobel, Inc. as a guarantor – it is a Surety.
Facts:
 Spouses Raul and Elea Claveria, doing business under the name “Agro Brokers,”
applied for a loan with Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of P2,875,000.00 to finance the purchase of two
maritime barges and one tugboat which would be used in their molasses business.
o The loan was granted subject to the condition that the spouses execute a
chattel mortgage over the three (3) vessels to be acquired and that a
continuing guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc., in favor of SOLIDBANK.
The respondent spouses agreed to the arrangement.
 Consequently, a chattel mortgage and a Continuing Guaranty
were executed.
 The spouses defaulted in the payment of the entire obligation upon maturity. On
January 31, 1991, SOLIDBANK filed a complaint for sum of money with a prayer
for a writ of preliminary attachment, against the spouses and E. Zobel, Inc.
 E. Zobel, Inc. moved to dismiss the complaint on the ground that its liability as
guarantor of the loan was extinguished pursuant to Article 2080 of the Civil Code 9.
o Argument: it has lost its right to be subrogated to the first chattel mortgage
in view of SOLIDBANK’s failure to register the chattel mortgage with the
appropriate government agency.
 SOLIDBANK opposed the motion contending that Article 2080 is not
applicable because petitioner is not a guarantor but a surety.
 Trial Court:
o “After a careful consideration of the matter on hand, the Court finds the
ground of the motion to dismiss without merit. The document referred to
as ‘Continuing Guaranty’ dated August 21, 1985 (Exh. 7) states as
follows:
 For and in consideration of any existing indebtedness to you of
Agro Brokers, a single proprietorship owned by Mr. Raul
Claveria for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your
9
Art. 2080 -- The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and
preference of the latter. (1852)

discretion, at any other manner, to, or at the request or for the
account of the borrower, x x xÊ
o “The provisions of the document are clear, plain and explicit. Clearly
therefore, defendant E. Zobel, Inc. signed as surety. Even though the title
of the document is ‘Continuing Guaranty’ the Court’s interpretation is not
limited to the title alone but to the contents and intention of the parties
more specifically if the language is clear and positive. The obligation of
the defendant Zobel being that of a surety, Art. 2080 New Civil Code will
not apply as it is only for those acting as guarantor.”
o The chattel mortgage is an additional security and should not be
considered as payment of the debt in case of failure of payment. The same
is true with the failure to register, extinction of the liability would not lie.
 CA:
o Affirmed the TC.
Issues + Held:
8. W/N E. Zobel, Inc under the “Continuing Guaranty” obligated itself to
SOLIDBANK as a guarantor or a surety. – SURETY
 A contract of surety is an accessory promise by which a person binds himself for
another already bound, and agrees with the creditor to satisfy the obligation if the
debtor does not. A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter does not pay the debt.
 Guaranty and Surety are nearly related, and many of the principles are common to
both.
o They may be distinguished thus: A surety is usually bound with his
principal by the same instrument, executed at the same time, and on the
same consideration. He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere indulgence of the
creditor to the principal, or by want of notice of the default of the
principal, no matter how much he may be injured thereby.
o On the other hand, the contract of guaranty is the guarantor’s own separate
undertaking, in which the principal does not join. It is usually entered into
before or after that of the principal, and is often supported on a separate
consideration from that supporting the contract of the principal. The
original contract of his principal is not his contract, and he is not bound to
take notice of its non-performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal.
 Simply put, a surety is distinguished from a guaranty in that a guarantor is the
insurer of the solvency of the debtor and thus binds himself to pay if the principal is
PAGE 19 of 26
unable to pay while a surety is the insurer of the debt, and he obligates himself to
pay if the principal does not pay.
 Based on the aforementioned definitions, it appears that the contract executed by
petitioner in favor of SOLIDBANK, albeit denominated as a “Continuing Guaranty”
is a contract of surety. The terms of the contract categorically obligates petitioner as
surety to induce SOLIDBANK to extend credit to respondent spouses. This can be
seen in the following stipulations:
o “undersigned is now obligated to you as surety and in order to induce
you”;
o the undersigned agrees to guarantee, and does hereby guarantee, the
punctual payment, at maturity or upon demand, to you of any and all such
instruments, loans, advances, credits and/or other obligations herein
before referred to, and also any and all other indebtedness of every kind
which is now or may hereafter become due or owing to you by the
Borrower
 The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a
regular party to the undertaking and obligated itself as an original promissor. It
bound itself jointly and severally to the obligation with the respondent spouses.
 SOLIDBANK need not resort to all other legal remedies or exhaust the spouses’
properties before it can hold petitioner liable for the obligation.
o “If default be made in the payment of any of the instruments, indebtedness
or other obligation hereby guaranteed by the undersigned, or if the
Borrower, or the undersigned should die, dissolve, fail in business or
become insolvent, x x x, or if any funds or other property of the Borrower,
or of the undersigned which may be or come into your possession or
control or that of any third party acting in your behalf as aforesaid should
be attached or distrained, or should be or become subject to any
mandatory order of court or other legal process, then, or any time after
the happening of any such event any or all of the instruments of
indebtedness or other obligations hereby guaranteed shall, at your option
become (for the purpose of this guaranty) due and payable by the
undersigned forthwith without demand of notice”
o “In case of any sale and other disposition of any of the property aforesaid,
after deducting all costs and expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, you may apply the residue of the
proceeds of the sale and other disposition thereof, to the payment or
reduction, either in whole or in part, of any one or more of the obligations
or liabilities hereunder of the undersigned whether or not except for
disagreement such liabilities or obligations would then be due, making
proper allowance or interest on the obligations and liabilities not
otherwise then due, and returning the overplus, if any, to the undersigned;
all without prejudice to your rights as against the undersigned with
respect to any and all amounts which may be or remain unpaid on any of
the obligations or liabilities aforesaid at any time(s)”
o “Should the Borrower at this or at any future time furnish, or should be
heretofore have furnished, another surety or sureties to guarantee the
payment of his obligations to you, the undersigned hereby expressly
waives all benefits to which the undersigned might be entitled under the
provisions of Article 1837 of the Civil Code (beneficio division), the

liability of the undersigned under any and all circumstances being joint
and several”
 The use of the term “guarantee” does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word “guarantee” is frequently employed in
business transactions to describe not the security of the debt but an intention to be
bound by a primary or independent obligation.
 [On the issue of the Chattel Mortgage not being registered] EVEN assuming that
Article 2080 is applicable, SOLIDBANKÊs failure to register the chattel mortgage
did not release petitioner from the obligation. In the Continuing Guaranty executed
in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the
existence of any collateral. It even released SOLIDBANK from any fault or
negligence that may impair the contract.
o “the undersigned (petitioner) who hereby agrees to be and remain bound
upon this guaranty, irrespective of the existence, value or condition of any
collateral”
o “This is a Continuing Guaranty and shall remain in full force and effect
until written notice shall have been received by you that it has been
revoked by the undersigned, but any such notice shall not be released the
undersigned from any liability as to any instruments, loans, advances or
other obligations hereby guaranteed, which may be held by you, or in
which you may have any interest, at the time of the receipt of such notice.
No act or omission of any kind on your part in the premises shall in any
event affect or impair this guaranty, nor shall same be affected by any
change which may arise by reason of the death of the undersigned, of any
partner(s) of the undersigned, or of the Borrower, or of the accession to
any such partnership of any one or more new partners.”
Ruling: WHEREFORE, the decision of the respondent Court of Appeals is hereby
AFFIRMED. Costs against the petitioner.
SO ORDERED.
PAGE 20 of 26
Philippine Blooming Mills, Inc & Ching v. CA
G.R. 142381 – Oct 15, 2003
J. Carpio
Topic: Surety
Doctrine: The law expressly allows a suretyship for “future debts”. Article 2053 of the Civil
Code provides: A guaranty may also be given as security for future debts, the amount of which
is not yet known; there can be no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured. Furthermore, this Court has ruled in Diño v. Court
of Appeals that: Under the Civil Code, a guaranty may be given to secure even future debts,
the amount of which may not be known at the time the guaranty is executed. This is the basis
for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one
which is not limited to a single transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time
or until revoked. It is prospective in its operation and is generally intended to provide security
with respect to future transactions within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor becomes liable.
Petitioners: Philippine Blooming Mills, Inc and Alfredo Ching
Respondents: Court of Appeals and Traders Royal Bank
Case Summary: Ching signed a Deed of Suretyship, binding himself in his personal
capacity and not as a corporate officer of Philippine Blooming Mills. When PBM
defaulted in its payments, SEC placed it under a rehabilitation plan. Traders Royal
Bank filed a complaint for collection against Ching. Ching argued that he was not
liable to pay because of the rehab plan.
Facts:
● The case stems from an action to compel Alfredo Ching to pay Traders Royal Bank
(TRB)10.
● Ching was the Senior Vice President of Philippine Blooming Mills, Inc (PBM). In
his personal capacity and not as a corporate officer, he signed a Deed of Suretyship
(21 July 1977), binding himself as the primary obligor (and not as a mere guarantor)
of PBM.
● March 24 and August 6 1980 - TRB granted PBM letters of credit on application of
Ching in his capacity as Senior Vice President of PBM.
o Ching later accomplished and delivered to TRB trust receipts, which
acknowledged receipt in trust for TRB of the merchandise subject of the
letters of credit.
o Under the trust receipts, PBM had the right to sell the merchandise for
cash with the obligation to turn over the entire proceeds of the sale to TRB
as payment of PBM’s indebtedness.
o Ching further executed an Undertaking for each trust receipt.
● April 27, 1981 - PBM obtained a P3,500,000 trust loan from TRB. Ching signed as
co-maker in the notarized Promissory Note (PN).
● PBM defaulted in its payment of the two Trust Receipts as well as the trust loan.
10
P959, 611.96 under Letter of Credit 479 covered by Trust Receipt 106; P1,191,137.13
under Letter of Credit 563 covered by Trust Receipt 113, and P3,500,000 under the trust loan
covered by a notarized PN

● April 1, 1982 - PBM and Ching filed a petition for suspension of payments with the
Securities and Exchange Commission (SEC). The petition prayed that the SEC
would allow PBM to continue its normal business operations free from the
interference of its creditors (one of which was TRB)
● July 9, 1982 - SEC placed all of PBM’s assets, liabilities and obligations under the
rehabilitation receivership of Kalaw, Escaler and Associates
● Ten months later, TRB filed a complaint for collection against PBM and Ching. It
asked the trial court to order the defendants to pay solidarily.
● May 25, 1983 - TRB moved to withdraw complaint, because the SEC had already
placed PBM under receivership. TC thus dismissed the complaint.
● June 23, 1983 - PBM and Ching also moved to dismiss the complaint on the grounds
that the TC had no jurisdiction, invoking the assumption of jurisdiction by the SEC.
o TRB filed an opposition to the MTD, arguing that Ching is being sued in
his personal capacity as a surety for PBM, that the SEC decision declaring
PBM in suspension of payments was not binding on TRB and that PD
175811 does not apply to Ching as the decree regulates corporate activities
only.
● TC denied the MTD with respect to Ching, and affirmed it dismissal with respect to
PBM. Court stated that TRB was holding Ching liable under the Deed of Suretyship.
As Ching’s obligation was solidary, the trial court ruled that TRB could proceed
against Ching as surety upon default of the principal debtor. PD 1758 only applied to
corporations, partnerships and associations, not to individuals.
● Ching filed a Petition for Certiorari and Prohibition before the CA. The CA granted
the petition and ordered the dismissal of the case. It ruled that the SEC assumed
jurisdiction over Ching and PBM to the exclusion of courts or tribunals of
coordinate rank.
● TRB assailed the decision before the SC.
o TRB vs CA: Court upheld TRB and ruled that Ching was merely a
nominal party in the SEC case. Creditors may sue individual sureties of
debtor corporations (like Ching) in a separate proceeding before regular
courts despite the pendency of a case before the SEC involving the debtor
corporation.
● Ching’s argument: He denied liability as surety and accomodation co-maker of
PBM. SEC had already issued a decision approving a revised rehab plan for PBM’s
creditors. As a surety, he had the right to the defenses personal to PBM. Thus, his
liability as surety would attach only if, after the implementation of payments
scheduled under the rehab plan, there would remain a balance of PBM’s debt to
TRB. Although Ching admitted PBM’s availment of the credit accommodations, he
did not show any proof of payment of PBM or by him.
● RTC found Ching liable to TRB for P19,333,558.16 under the Deed of Surety,
stating that his liability attaches independently from his capacity as a stockholder of
PBM.
● CA: Ruled in favor of TRB. Ching is presumed to be liable. He can answer
separately for the obligations of debtor PBM.
Issues + Held:
W/N the CA erred when it ruled that Ching was liable for obligations contracted by
PBM long after the execution of the deed of suretyship – YES.
11
Ching relied on the PD to support his assertion that all claims against PBM are suspended
PAGE 21 of 26
● Ching: The Deed of Suretyship (21 July 1977) could not answer for obligations not
yet in existence at the time of its execution. It could therefore not answer for debts
contracted in 1980 and 1981.
● Court: Petition has no merit. The petition is a thinly veiled attempt to make the
Court reconsider the TRB vs CA decision, which stated that:
○ SEC could not assume jurisdiction over Ching’s person and properties
because the SEC has jurisdiction over corporations only and not over
private individuals.
○ The bank was therefore not barred from filing a suit against Ching as a
surety for PBM. He may be sued separately to enforce his liability as
surety for PBM, as expressly provided by Art 1216 of the NCC.
● Ching is liable for credit obligations contracted by PBM against TRB before and
after the execution of the 1977 Deed of Suretyship. The law expressly allows a
suretyship for “future debts”12
● The law expressly allows a suretyship for “future debts”.
● Article 2053 of the Civil Code provides: A guaranty may also be given as security
for future debts, the amount of which is not yet known; there can be no claim against
the guarantor until the debt is liquidated. A conditional obligation may also be
secured.
● Furthermore, this Court has ruled in Diño v. Court of Appeals that: Under the Civil
Code, a guaranty may be given to secure even future debts, the amount of which
may not be known at the time the guaranty is executed. This is the basis for contracts
denominated as continuing guaranty or suretyship.
○ A continuing guaranty is one which is not limited to a single transaction,
but which contemplates a future course of dealing, covering a series of
transactions, generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended to provide security
with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes
liable.
Ruling: Judgment Affirmed
12
Art 2053 of the NCC

Trade and Investment Development Corporation of the Philippines (Formerly Philippine
Export and Foreign Loaahn Guarantee Corporation) vs. Asia Paces Corporation
G.R. 187403 – February 12, 2014
J. Perlas-Bernabe
Topic: Surety – Distinguished from Guaranty
Doctrine: Although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the
debt and duty of another although he possesses no direct or personal interest over
theobligations nor does he receive any benefit therefrom.
Thus, it is not necessary that the original debtor first failed to pay before the surety could be
made liable; it is enough that a demand for payment is made by the creditor for the surety’s
liability to attach
Petitioners: Trade And Investment Development Corporation Of The Philippines
(Formerly Philippine Export And Foreign Loan Guarantee Corporation),
Respondents: Asia Paces Corporation, Paces Industrial Corporation, Nicolas C.
Balderrama, Siddcor Insurance Corporation (Now Mega Pacific Insurance
Corporation), Philippine Phoenix Surety And Insurance, Inc., Paramount Insurance
Corporation, And Fortune Life And General Insurance Company,
Case Summary: Petitioner ASPAC entered into a loan with Banque & PCI Capital, that
was secured by TIDCORP, via Letters of Guarantee. As a condition to the approval of
TIDCORP’s guarantee, ASPAC, PICO, and Pres. Balderrama undertook deeds of
undertaking, binding themselves to TIDCORP, and ASPAC entered into Surety
Agreements with Paramount, Phoenix, Mega Pacific, and Fortune (Bonding Companies),
holding them liable to TIDCORP for the damages and liabilities TIDCORP may incur.
ASPAC defaulted causing Banque and PCI to demand payment from TIDCORP, who then
demanded from ASPAC, PICO, Balderrama, and the Bonding Compan
TIDCORP and Banque and PCI would later enter into a Restructuring Agreement,
extending the maturity of the loan, which respondent Bonding Companies (Group 2) aver
extinguishes their liability under the surety/ship agreements, pursuant to NCC Art. 2049.
The SC finds that respondent Bonding Companies’ liability cannot be extinguished as the
extension granted only covers TIDCORP’s liability to Banque & PCI, not ASPAC’s and
the Bonding Companies’ liability to TIDCORP.
Facts:
 On January 19, 1981, Asia Paces Corporation (ASPAC) and Paces Industrial
Corporation (PICO) entered into a sub-contracting agreement with the Electrical
Projects Company of Libya (ELPCO)
 ASPAC obtained loans from foreign banks Banque Indosuez and PCI Capital
Limited (PCI Capital)
RTC Ruling
PAGE 22 of 26
o The loans were secured by several Letters of Guarantee issued by
petitioner Trade and Investment Development Corporation of the
Philippines (TIDCORP)
[TIDCORP secures ASPAC & PICO Loans]
 Under the Letters of Guarantee, TIDCORP irrevocably and unconditionally
guaranteed full payment of ASPAC's loan obligations to Banque Indosuez and PCI
Capital in the event of default by the latter.
o Baneuq Indosuez; 1 Letter of Guarantee in the amount of $250,000.00
o PCI Capital; 2 Letters of Guarantee in the amount of $2,250,000.00
 (250,000.00.) + (2,000,000.00)
 As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee,
ASPAC, PICO, and ASPAC's President, respondent Nicolas C. Balderrama
(Balderrama) had to execute several Deeds of Undertaking, binding themselves
to jointly and severally pay TIDCORP for whatever damages or liabilities it
may incur under the aforementioned letters.
[ASPAC, PICO, & Balderrama executes deeds of Undetaking with TIDCORP]
o ASPAC also entered into surety agreements (Surety Bonds) with
Paramount, Phoenix, Mega Pacic and Fortune (Bonding Companies),
as sureties, also holding themselves solidarily liable to TIDCORP, as
creditor, for whatever damages or liabilities the latter may incur under the
Letters of Guarantee.
 ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI
Capital, prompting them to demand payment from TIDCORP under the Letters of
Guarantee.
o The demand letter of Banque Indosuez was sent to TIDCORP on March 5,
1984,
o The demand letter of PCI Capital was sent on February 21, 1985.
 In turn, TIDCORP demanded payment from Paramount, Phoenix, Mega Pacic, and
Fortune under the Surety Bonds.
o TIDCORP's demand letters to the Bonding Companies were sent on May
28, 1985, or before the final expiration dates of all the Surety Bonds, but
to no avail.
 On April 16, 1986, TIDCORP and its various creditor banks, such as Banque
Indosuez and PCI Capital, forged a Restructuring Agreement, extending the maturity
dates of the Letters of Guarantee.
o The bonding companies were not privy to the Restructuring Agreement
and did not give their consent to the payment extensions granted by
Banque Indosuez and PCI Capital, among others, in favor of TIDCORP.
o Following new payment schedules, TIDCORP fully settled its obligations
under the Letters of Guarantee to both Banque Indosuez and PCI Capital
on December 1, 1992, and April 19 and June 4, 1991
 Seeking payment for the damages and liabilities it had incurred under the Letters of
Guarantee and with its previous demands therefor left unheeded, TIIDCORP filed a
collection case against:
o ASPAC, PICO, and Balderrama on account of their obligations under the
deeds of undertaking; and;
o The bonding companies on account og their obligations under the surety
bonds

 RTC partially granted TIDCORP’s complaint, and;
o found ASPAC, PICO, and Balderrama jointly and severally liable to
TIDCORP in the sum of ₱277,891,359.66 pursuant to the terms of the
Deeds of Undertaking,
o absolved the bonding companies from liability on the ground that the
moratorium request and the consequent payment extensions granted by
Banque Indosuez and PCI Capital in TIDCORP’s favor without their
consent extinguished their obligations under the Surety Bonds.
 As basis, the RTC cited Article 2079 of the Civil Code which provides that an
extension granted to the debtor by the creditor without the consent of the
guarantor/surety extinguishes the guaranty/suretyship, and, in this relation, added
that the bonding companies "should not be held liable as sureties for the extended
period.
 TIDCORP and Balderrama filed separate appeals before the CA.
o TIDCORP averred, among others, that Article 2079 of the Civil Code is
only limited to contracts of guaranty, and, hence, should not apply to
contracts of suretyship.
o Balderrama theorized that the main contractor’s (i.e., ELPCO) failure to
pay ASPAC due to the war/political upheaval in Libya which further
resulted in the latter’s inability to pay Banque Indosuez and PCI Capital
had the effect of releasing him from his obligations under the Deeds of
Undertaking
CA Ruling
 The CA upheld the RTC’s ruling that the moratorium request "had the effect of an
extension granted to a debtor, which extension was without the consent of the
guarantor, and thus released the surety/bonding companies from their respective
liabilities under the issued surety bonds" pursuant to Article 2079 of the Civil
Code.
o To this end, it noted that the extension of the loans, via the Restructuring
Agreement “is beyond the expiry date[s] of the surety bonds x x x and
the maturity date of the principal obligations it purportedly secured, which
extension was without [the bonding companies’] consent,"
 It further discredited TIDCORP’s contention that Article 2079 of the Civil Code is
only limited to contracts of guaranty by citing the Court’s pronouncement on the
provision’s applicability to suretyships in the case of Security Bank and Trust Co.,
Inc. v. Cuenca (Security Bank)
Issues + Held:
2. W/N the CA erred in holding that the Bonding Companies’ liabilities have been
extinguished by the payment extensions granted to TIDCORP. - YES,
Liabilities not extinguished
 A surety is considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter,
o their liabilities are interwoven as to be inseparable.
 Although the contract of a surety is in essence secondary only to a valid principal
obligation,
o his liability to the creditor is direct, primary and absolute;
o he becomes liable for the debt and duty of another although he possesses
no direct or personal interest over the obligations nor does he receive any
benefit therefrom.
PAGE 23 of 26
 The fundamental reason therefor is that a contract of suretyship effectively binds the
surety as a solidary debtor.
o Thus, it is not necessary that the original debtor first failed to pay before
the surety could be made liable; it is enough that a demand for payment is
made by the creditor for the surety’s liability to attach
 [Palmares v. CA] that a surety is responsible for the debt's payment at once if
the principal debtor makes default, whereas a guarantor pays only if the
principal debtor is unable to pay
 [Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc., and later in the case of
Security Bank]
o Article 2079 of the Civil Code, which pertinently provides that "[a]n
extension granted to the debtor by the creditor without "[a]n extension
granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty," the consent of the guarantor extinguishes the
guaranty," equally applies to both contracts of guaranty and
suretyship.
o The rationale therefor was explained by the Court as follows:
 an extension of time given to the an extension of time given to
the principal debtor by the creditor without the surety's consent
would deprive 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 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 maturity to the creditor's remedies against the
principal debtor upon the maturity date 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 the Court finds that the payment extensions granted by Banque Indosuez and
PCI Capital to TIDCORP under the Restructuring Agreement did not have the
effect of extinguishing the bonding companies’ obligations to TIDCORP under
the Surety Bonds, notwithstanding the fact that said extensions were made without
their consent.
o This is because Article 2079 of the Civil Code refers to a payment
extension granted by the creditor to the principal debtor without the
consent of the guarantor or surety.
 In this case, the Surety Bonds are suretyship contracts which
secure the debt of ASPAC, the principal debtor, under the Deeds
of Undertaking to pay TIDCORP, the creditor, the damages and
liabilities it may incur under the Letters of Guarantee, within the
bounds of the bonds’ respective coverage periods and amounts.
o No payment extension was, however, granted by TIDCORP in favor of
ASPAC in this regard; hence, Article 2079 of the Civil Code should not
be applied with respect to the bonding companies’ liabilities to
TIDCORP under the Surety Bonds.
 The payment extensions granted pertain to TIDCORP’s own debt under the
Letters of Guarantee wherein it guaranteed full payment of ASPAC’s loan
obligations to the banks in the event of its default.
 PAGE 24 of 26

o In other words, the Letters of Guarantee secured ASPAC’s loan

agreements to the banks.
o Under this arrangement, TIDCORP therefore acted as a guarantor, with
ASPAC as the principal debtor, and the banks as creditors.
 Proceeding from the foregoing discussion, it is quite clear that there are two sets of
transactions that should be treated separately and distinctly from one another
(1 & 2) following the civil law principle of relativity of contracts
o "which provides that contracts can only bind the parties who entered into
it, and it cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof."
 As the Surety Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s
debt to the banks, the payments extensions would not deprive the bonding
companies of their right to pay their creditor (TIDCORP) and to be immediately
subrogated to the latter’s remedies against the principal debtor (ASPAC) upon the
maturity date.
o The payment extensions did not modify the terms of the Letters of
Guarantee but only provided for a new payment scheme covering
TIDCORP’s liability to the banks. Escano v. Ortigas
o In fine, considering the inoperability of Article 2079 of the Civil Code in G.R. No. 151953 – June 29, 2007
J. Tinga
this case, the bonding companies’ liabilities to TIDCORP under the Surety
Bonds – except those issued by Paramount and covered by its
Topic: Surety: Distinguished from Joint and Solidary Obligations
Compromise Agreement with TIDCORP – have not been extinguished.
Doctrine: In the case of joint and several debtors, Article 1217 makes plain that
o Since these obligations arose and have been duly demanded within the
the solidary debtor who effected the payment to the creditor "may
coverage periods of all the Surety Bonds, TIDCORP’s claim is hereby claim from his co-debtors only the share which corresponds to each,
granted and the CA’s ruling on this score consequently reversed. with the interest for the payment already made."
Nevertheless, given that no appeal has been filed on Balderrama’s …In contrast, even as the surety is solidarily bound with the principal
adjudged liability or on the award of attorney's fees, the CA's dispositions debtor to the creditor, the surety who does pay the creditor has the
on these matters are now deemed as final and executory. right to recover the full amount paid, and not just any proportional
Ruling: share, from the principal debtor or debtors.
WHEREFORE, the petition is GRANTED. The Decision dated April 30, 2008 and Resolution
dated March 27, 2009 of the Court of Appeals in CA-G.R. CV No. 86558 are MODIFIED in Petitioners: Salvador P. Escano and Mario M. Silos
that respondents Philippine Phoenix Surety and Insurance, Inc., Mega Pacific Insurance Respondents: Rafael Ortigas. Jr.
Corporation, Fortune Life and General Insurance Company are ORDERED to fulfill their
Case Summary: Ortigas had assumed solidary liability with Falcon Minerals, Inc for the
respective obligations to petitioner Trade and Investment Development Corporation of the
latter to obtain a loan. Later on, Ortigas ceded control of Falcon to Escano and Silos (and
Philippines (TIDCORP) under the Surety Bonds subject of this case, discounting the
Matti), part of the consideration was that Ortigas would be relieved from its assumed
obligations arising from the Surety Bonds issued by Paramount Insurance Corporation and
liabilities. Falcon defaulted on its loan and Ortigas entered into a compromise agreement
covered by its Compromise Agreement with TIDCORP.
with PDCP. Ortigas claims reimbursement and the RTC ordered Escano, Silos, and Matti,
jointly and severally to pay Ortigas. SC said that they are only jointly liable to Ortigas.

Facts:
 The main contention raised in this petition is that petitioners are not under obligation
to reimburse respondent, a claim that can be easily debunked. The more perplexing
question is whether this obligation to repay is solidary, as contended by respondent
and the lower courts, or merely joint as argued by petitioners.
 April 28 ’80: Private Development Corporation of the Philippines (PDCP) entered
into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to
make available and lend to Falcon the amount of US$320,000.00.
o On the same day, three stockholders-officers of Falcon, namely:
respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George

T. Scholey executed an Assumption of Solidary Liability whereby they
agreed "to assume in [their] individual capacity, solidary liability with
[Falcon] for the due and punctual payment" of the loan contracted by
Falcon with PDCP.
o In the meantime, two separate guaranties were executed to guarantee the
payment of the same loan by other stockholders and officers of Falcon,
acting in their personal and individual capacities – one by Escaño, and the
other by Silos, Ricardo C. Silverio, Carlos L. Inductivo and Joaquin J.
Rodriguez.
 1982: An agreement developed to cede control of Falcon to Escaño, Silos and
Joseph M. Matti.
o Contracts were executed whereby Ortigas, George A. Scholey, Inductivo
and the heirs of George T. Scholey assigned their shares of stock in Falcon
to Escaño, Silos and Matti.
o Part of the consideration that induced the sale of stock was a desire by
Ortigas, et al., to relieve themselves of all liability arising from their
previous joint and several undertakings with Falcon, including those
related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982
was executed by the concerned parties, namely: with Escaño, Silos and
Matti identified in the document as "SURETIES," on one hand, and
Ortigas, Inductivo and the Scholeys as "OBLIGORS," on the other;
providing:
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release
OBLIGORS from their said guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs’ said guarantees [sic] to PDCP and PAIC under the
following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or
PAIC for the payment of FALCON’s obligations with it, any of [the] OBLIGORS
shall immediately inform SURETIES thereof so that the latter can timely take
appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of
OBLIGORS for collection of said loans and/or credit facilities, SURETIES agree to
defend OBLIGORS at their own expense, without prejudice to any and/or all of
OBLIGORS impleading SURETIES therein for contribution, indemnity, subrogation
or other relief in respect to any of the claims of PDCP and/or PAIC;
c. In the event that any of [the] OBLIGORS is for any reason made to pay any
amount to PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from
FALCON arising out of, or in connection with, their said guarantees
 Falcon availed of the sum of US$178,655.59 from the credit line extended by PDCP
(also executed a Deed of Chattel Mortgage over its personal properties to further
secure the loan). However, Falcon subsequently defaulted in its payments. After
foreclosure on the chattel mortgage, there remained a subsisting deficiency of
₱5,031,004.07, which Falcon did not satisfy despite demand.
 April 28 ’89: PDCP filed a complaint for sum of money with the Makati RTC
against Falcon, Ortigas, Escaño, Silos, Silverio and Inductivo.
o Ortigas filed… a cross-claim against his co-defendants Falcon, Escaño and
Silos, and also manifested his intent to file a third-party complaint against
the Scholeys and Matti.
PAGE 25 of 26
o The cross-claim lodged against Escaño and Silos was predicated on the
1982 Undertaking, wherein they agreed to assume the liabilities of Ortigas
with respect to the PDCP loan.
 Escaño, Ortigas and Silos each sought to seek a settlement with PDCP.
o Escaño: agreed to pay the bank ₱1,000,000.00. In exchange, PDCP waived
or assigned in favor of Escaño 1/3 of its entire claim in the complaint
against all of the other defendants in the case.
o Ortigas: (allegedly without the knowledge of Escaño, Matti and Silos)
agreed to pay PDCP ₱1,300,000.00 as "full satisfaction of the PDCP’s
claim against Ortigas," in exchange for PDCP’s release of Ortigas from
any liability or claim arising from the Falcon loan agreement, and a
renunciation of its claims against Ortigas.
o Silos: agreed to pay ₱500,000.00 in exchange for PDCP’s waiver of its
claims against him.
 In the meantime… Ortigas pursued his claims against Escaño, Silos and Matti,
on the basis of the 1982 Undertaking. He initiated a third-party complaint against
Matti and Silos, while he maintained his cross-claim against Escaño.
 In a summary judgment the RTC ordered Escaño, Silos and Matti to pay
Ortigas, jointly and severally, the amount of ₱1,300,000.00, as well as ₱20,000.00
in attorney’s fees.
o none of the third-party defendants disputed the 1982 Undertaking,
 The appeals of Escaño and Silos and that of Matti were dismissed by the CA
o RTC did not err in rendering the summary judgment since the three
appellants did not effectively deny their execution of the 1982
Undertaking.
 Hence, the present petition for review filed by Escaño and Silos.
o petitioners dispute that they are liable to Ortigas on the basis of the 1982
Undertaking, a document which they do not disavow and have in fact
annexed to their petition.
o on the assumption that they are liable to Ortigas under the 1982
Undertaking, petitioners argue that they are jointly liable only, and not
solidarily.
o petitioners also submit that they are not liable for interest and if at all, the
proper interest rate is 6% and not 12%.
Issues + Held:
9. W/N summary judgment is the appropriate recourse in this case | YES
o Petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary
judgment as a relief favorable to Ortigas. …Thus, we affirm with ease the
common rulings of the lower courts that summary judgment is an
appropriate recourse in this case.
10. W/N petitioners were correctly held liable to Ortigas on the basis of the 1982
Undertaking | NO
o Several clauses make it clear that the agreement was brought forth by the
desire of Ortigas, Inductivo and the Scholeys to be released from their
liability under the loan agreement which release was, in turn, part of the
consideration for the assignment of their shares in Falcon to petitioners
and Matti.

o clause in Paragraph 3 of the Undertaking wherein petitioners
“irrevocably agree and undertake to assume all of OBLIGORs’ said
guarantees [sic] to PDCP…”
o At the same time, the assumption by petitioners of Ortigas’s "guarantees"
[sic] to PDCP is governed by stipulated terms and conditions as set forth
in sub-paragraphs (a) to (c)
o First, upon receipt by "any of OBLIGORS" of any demand from
PDCP for the payment of Falcon’s obligations with it, "any of
OBLIGORS" was to immediately inform "SURETIES" thereof so
that the latter can timely take appropriate measures.
o Second, should "any and/or all of OBLIGORS" be impleaded by
PDCP in a suit for collection of its loan, "SURETIES agree[d] to
defend OBLIGORS at their own expense, without prejudice to any
and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief" in respect to any
of the claims of PDCP.
o Third, if any of the "OBLIGORS is for any reason made to pay any
amount to [PDCP], SURETIES [were to] reimburse OBLIGORS for
said amount/s within seven (7) calendar days from such payment."
o P: contrary to paragraph 3(c) of the Undertaking, Ortigas was not "made to
pay" PDCP the amount now sought to be reimbursed, as Ortigas
voluntarily paid PDCP the amount of ₱1.3 Million as an amicable
settlement
o the phrase "for any reason" reasonably includes any extra-judicial
settlement of obligation such as what Ortigas had undertaken to pay
to PDCP, as it is indeed obvious that the phrase was incorporated in
the clause to render the eventual payment adverted to therein
unlimited and unqualified.
o there is no argument to support petitioners’ position on the import of
the phrase "made to pay" in the Undertaking, other than an unduly
literalist reading that is clearly inconsistent with the thrust of the
document
 stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result
from all of them taken jointly.
 if stipulations should admit of several meanings, it shall be
understood as bearing that import which is most adequate
to render the contract effectual.
o P: Ortigas "paid PDCP BANK the amount of ₱1.3 million without
petitioners ESCANO and SILOS’s knowledge and consent."
o Paragraph 3(a) of the Undertaking does impose a requirement that
any of the "OBLIGORS" shall immediately inform "SURETIES" if
they received any demand for payment of FALCON’s obligations to
PDCP, but that requirement is reasoned "so that the [SURETIES] can
timely take appropriate measures" presumably to settle the obligation
without having to burden the "OBLIGORS."
o This notice requirement is way off from the suggestion of petitioners
that Ortigas, after already having been impleaded as a defendant in
PAGE 26 of 26
the collection suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP.
o P: Ortigas had, in his answer, denied any liability to PDCP and had alleged
that he signed the Assumption of Solidary Liability not in his personal
capacity, but as an officer of Falcon. However, such position, according to
petitioners, could not be justified since Ortigas later voluntarily paid
PDCP the amount of ₱1.3 Million -> amounted to estoppel on his part.
o The Partial Compromise Agreement between PDCP and Ortigas
expressly stipulated that Ortigas’s offer to pay PDCP was conditioned
"without [Ortigas’s] admitting liability to plaintiff PDCP Bank’s
complaint, and to terminate and dismiss the said case as against
Ortigas solely."
o P: Ortigas made the payment to PDCP after he had already assigned his
obligation to petitioners through the 1982 Undertaking.
o PDCP did pursue a judicial claim against Ortigas notwithstanding the
Undertaking he executed with petitioners. Not being a party to such
Undertaking, PDCP was not precluded by a contract from
pursuing its claim against Ortigas based on the original
Assumption of Solidary Liability.
o Note paragraph 1: "nothing herein shall prevent OBLIGORS, or any
one of them, from themselves negotiating with PDCP x x x for the
release of their said guarantees [sic]."
 Undertaking did not bar Ortigas from pursuing his own
settlement with PDCP. Neither did the Undertaking bar
Ortigas from recovering from petitioners whatever amount
he may have paid PDCP through his own settlement. The
stipulation that if Ortigas was "for any reason made to pay
any amount to PDCP[,] x x x SURETIES shall reimburse
OBLIGORS for said amount/s within seven (7) calendar
days from such payment" makes it clear that petitioners
remain liable to reimburse Ortigas for the sums he paid
PDCP.
11. W/N petitioners could only be held jointly (not solidarily) | YES
o P: the Undertaking did not provide for express solidarity.
o Art 1207, NCC: "[t]here is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the
obligation requires solidarity."
o Ortigas argues that petitioners, as well as Matti, are jointly and severally
liable for the Undertaking, as the language used in the agreement "clearly
shows that it is a surety agreement" between the obligors (Ortigas group)
and the sureties (Escaño group).
o Ortigas points out that the Undertaking uses the word "SURETIES"
o principal objective of the parties in executing the Undertaking cannot
be attained unless petitioners are solidarily liable "because the total
loan obligation can not be paid or settled to free or release the
OBLIGORS if one or any of the SURETIES default from their
obligation in the Undertaking."
o Arts 1207 & 1210 establish that in case of concurrence of two or more
creditors or of two or more debtors in one and the same obligation, and in

the absence of express and indubitable terms characterizing the obligation
as solidary, the presumption is that the obligation is only joint. It is
incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of
evidence.
o The Undertaking does not contain any express stipulation that the
petitioners agreed "to bind themselves jointly and severally" in their
obligations to the Ortigas group,
o Hence, such obligation established in the Undertaking is presumed
only to be joint.
 Ortigas bears the burden to overcome the presumption of
jointness of obligations -> he failed.
o Ortigas places primary reliance on the fact that the petitioners and
Matti identified themselves in the Undertaking as "SURETIES", a
term repeated no less than thirteen (13) times in the document. Ortigas
claims that such manner of identification sufficiently establishes that
the obligation of petitioners to him was joint and solidary in nature.
o The term "surety" has a specific meaning:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a
suretyship.
o In a surety agreement the surety undertakes to be bound solidarily
with the principal debtor. Thus, a surety agreement is an ancillary
contract as it presupposes the existence of a principal contract. It
appears that Ortigas’s argument rests solely on the solidary nature of
the obligation of the surety under Article 2047. In tandem with the
nomenclature "SURETIES" accorded to petitioners and Matti in the
Undertaking, however, this argument can only be viable if the
obligations established in the Undertaking do partake of the nature of
a suretyship as defined under Article 2047 in the first place. That
clearly is not the case here, notwithstanding the use of the
nomenclature "SURETIES" in the Undertaking.
o A suretyship requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of segregate
identity from the obligation between the principal debtor and the
creditor. The suretyship does bind the surety to the creditor, inasmuch as
the latter is vested with the right to proceed against the former to collect
the credit in lieu of proceeding against the principal debtor for the same
obligation. At the same time, there is also a legal tie created between the
surety and the principal debtor to which the creditor is not privy or party
to. The moment the surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is extinguished. At the
same time, the surety may seek reimbursement from the principal
debtor for the amount paid, for the surety does in fact "become
subrogated to all the rights and remedies of the creditor."
PAGE 27 of 26
o Solidarity signifies that the creditor can compel any one of the joint
and several debtors or the surety alone to answer for the entirety of
the principal debt. The difference lies in the respective faculties of the
joint and several debtor and the surety to seek reimbursement for the
sums they paid out to the creditor.
o Dr. Tolentino explains the differences between a solidary co-debtor and
a surety:
o A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the
Civil Code.
o In the case of joint and several debtors, Article 1217 makes plain that
the solidary debtor who effected the payment to the creditor "may
claim from his co-debtors only the share which corresponds to each,
with the interest for the payment already made." Such solidary debtor
will not be able to recover from the co-debtors the full amount already
paid to the creditor, because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to the particular
proportional share of the solidary debtor who already paid. In contrast,
even as the surety is solidarily bound with the principal debtor to the
creditor, the surety who does pay the creditor has the right to recover
the full amount paid, and not just any proportional share, from the
principal debtor or debtors.
o In order for the conclusion espoused by Ortigas to hold, in light of the
general presumption favoring joint liability, the Court would have to be
satisfied that among the petitioners and Matti, there is one or some of them
who stand as the principal debtor to Ortigas and another as surety who has
the right to full reimbursement from the principal debtor or debtors. No
suggestion is made by the parties that such is the case, and certainly the
Undertaking is not revelatory of such intention. If the Court were to give
full fruition to the use of the term "sureties" as conclusive indication
of the existence of a surety agreement that in turn gives rise to a
solidary obligation to pay Ortigas, the necessary implication would be
to lay down a corresponding set of rights and obligations as between
the "SURETIES" which petitioners and Matti did not clearly intend.
o It is not impossible that as between Escaño, Silos and Matti, there
was an agreement whereby in the event that Ortigas were to seek
reimbursement from them per the terms of the Undertaking, one of
them was to act as surety and to pay Ortigas in full, subject to his
right to full reimbursement from the other two obligors.In such case,
there would have been, in fact, a surety agreement which evinces a
solidary obligation in favor of Ortigas. Yet if there was indeed such
an agreement, it does not appear on the record -> no such intention is
reflected in the Undertaking itself
 PAGE 28 of 26

o The mere utilization of the term "SURETIES" could not work to such
effect, especially as it does not appear who exactly is the principal
debtor whose obligation is "assured" or "guaranteed" by the surety.

Ruling: Petition is GRANTED in PART.

o Petitioners and Joseph M. Matti are only jointly liable, not jointly and severally, to
respondent Rafael Ortigas, Jr. in the amount of ₱1,300,000.00.
o Legal interest of 12% per annum on the amount of ₱1,300,000.00 is to be computed
from 14 March 1994, the date of judicial demand, and not from 28 February 1994 as
directed by the lower court.