G.R. No. 151903. October 9, 2009.
* of the obligation to pay, the law requires the companion acts of tender of payment
MANUEL GO CINCO and ARACELI S. GO CINCO, petitioners, vs. COURT
OF APPEALS, ESTER SERVACIO and MAASIN TRADERS LENDING
CORPORATION, respondents.
Civil Law; Obligations and Contracts; Payment; Under Article 1232 of the
Civil Code, payment means not only the delivery of money but also the performance,
in any manner, of an obligation—Article 1233 of the Civil Code states that “a debt
shall not be understood to have been paid unless the thing or service in which the
obligation consists have been completely delivered or rendered, as the case may
be.”—Obligations are extinguished, among others, by payment or performance, the
mode most relevant to the factual situation in the present case. Under Article 1232 of
the Civil Code, payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. Article 1233 of the Civil Code
states that “a debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered,
as the case may be.” In contracts of loan, the debtor is expected to deliver the sum of
money due the creditor. These provisions must be read in relation with the other
rules on payment under the Civil Code, which rules impliedly require acceptance by
the creditor of the payment in order to extinguish an obligation.
Civil Procedure; Foreclosure; Section 4, Rule 68 of the 1997 Rules of Civil
Procedure on the disposition of the proceeds of sale after foreclosure actually
requires the payment of the proceeds to, among others, junior encumbrancers in the
order of their priority.—There is nothing legally objectionable in a mortgagor’s act
of taking a second or subsequent mortgage on a property already mortgaged; a
subsequent mortgage is recognized as valid by law and by commercial practice,
subject to the prior rights of previous mortgages. Section 4, Rule 68 of the 1997
Rules of Civil Procedure on the disposition of the proceeds of sale after foreclosure
actually requires the payment of the proceeds to, among others, the junior
encumbrancers
_______________
* SECOND DIVISION.
109
in the order of their priority. Under Article 2130 of the Civil Code, a
stipulation forbidding the owner from alienating the immovable mortgaged is
considered void. If the mortgagor-owner is allowed to convey the entirety of his
interests in the mortgaged property, reason dictates that the lesser right to encumber
his property with other liens must also be recognized. Ester, therefore, could not
validly require the spouses Go Cinco to first obtain her consent to the PNB loan and
mortgage. Besides, with the payment of the MTLC loan using the proceeds of the
PNB loan, the mortgage in favor of the MTLC would have naturally been cancelled.
Same; Same; Payment; Consignation; A refusal without just cause is not
equivalent to payment, to have the effect of payment and consequent extinguishment
and consignation.—A refusal without just cause is not equivalent to payment; to
have the effect of payment and the consequent extinguishment of the obligation to
pay, the law requires the companion acts of tender of payment and consignation.
Tender of payment, as defined in Far East Bank and Trust Company v. Diaz Realty,
Inc., 363 SCRA 659 (2001), is the definitive act of offering the creditor what is due
him or her, together with the demand that the creditor accept the same. When a
creditor refuses the debtor’s tender of payment, the law allows the consignation of
the thing or the sum due. Tender and consignation have the effect of payment, as by
consignation, the thing due is deposited and placed at the disposal of the judicial
authorities for the creditor to collect.
Same; Same; Same; Same; Since payment was available and was unjustifiably
refused, justice and equity demand that petitioners be freed from obligation to pay
interest on the outstanding amount from the time the unjust refusal took place, they
would not have been liable for any interest from the time tender of payment was
made if the payment had only been accepted.—We also find that under the
circumstances, the spouses Go Cinco have undertaken, at the very least, the
equivalent of a tender of payment that cannot but have legal effect. Since payment
was available and was unjustifiably refused, justice and equity demand that the
spouses Go Cinco be freed from the obligation to pay interest on the outstanding
amount from the time the unjust refusal took place; they would not have been liable
for any interest from the time tender of payment was made if the payment had only
been accepted. Under Article 19 of the
110
Civil Code, they should likewise be entitled to damages, as the unjust refusal
was effectively an abusive act contrary to the duty to act with honesty and good faith
in the exercise of rights and the fulfillment of duty.
Same; Same; Same; Same; Damages; Moral Damages; Exemplary Damages;
Respondent’s act of refusing payment was motivated by bad faith as evidenced by
the utter lack of substantial reasons to support it—and thus liable for moral and
exemplary damages.—Ester’s act of refusing payment was motivated by bad faith as
evidenced by the utter lack of substantial reasons to support it. Her unjust refusal, in
her behalf and for the MTLC which she represents, amounted to an abuse of rights;
they acted in an oppressive manner and, thus, are liable for moral and exemplary
damages. We nevertheless reduce the P1,000,000.00 to P100,000.00 as the originally
awarded amount for moral damages is plainly excessive.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Godofredo L. Cualteros for petitioners.
Victoria G. De Los Reyes for respondents.
BRION, J.:
1
 Before the Court is a petition for review on certiorari1filed by petitioners,
spouses Manuel and Araceli Go Cinco (collectively, the spouses Go Cinco), assailing
the decision2dated June 22, 2001 of the Court of Appeals (CA) in CA-G.R. CV No.
47578, as well as the resolution 3 dated January 25, 2002 denying the spouses Go
Cinco’s motion for reconsideration.
_______________
1 Under Rule 45 of the 1997 Rules of Civil Procedure. Rollo, pp. 5-32.
2 Penned by Associate Justice Renato Dacudao (retired), with Associate Justice
Romeo Callejo, Jr., who retired as Member of this Court, and Associate Justice
Sergio Pestaño, concurring; Id., at pp. 75-84.
3 Id., at pp. 99-100.
111
The Factual Antecedents
In December 1987, petitioner Manuel Cinco (Manuel) obtained a commercial
loan in the amount of P700,000.00 from respondent Maasin Traders Lending
Corporation (MTLC). The loan was evidenced by a promissory note dated December
11, 1987,4 and secured by a real estate mortgage executed on December 15, 1987
over the spouses Go Cinco’s land and 4-storey building located in Maasin, Southern
Leyte.
Under the terms of the promissory note, the P700,000.00 loan was subject to a
monthly interest rate of 3% or 36% per annum and was payable within a term of 180
days or 6 months, renewable for another 180 days. As of July 16, 1989, Manuel’s
outstanding obligation with MTLC amounted to P1,071,256.66, which amount
included the principal, interest, and penalties.5
To be able to pay the loan in favor of MTLC, the spouses Go Cinco applied for a
loan with the Philippine National Bank, Maasin Branch (PNB or the bank) and
offered as collateral the same properties they previously mortgaged to MTLC. The
PNB approved the loan application for P1.3 Million6 through a letter dated July 8,
1989; the release of the amount, however, was conditioned on the cancellation of the
mortgage in favor of MTLC.
On July 16, 1989, Manuel went to the house of respondent Ester Servacio
(Ester), MTLC’s President, to inform her that there was money with the PNB for the
payment of his loan with MTLC. Ester then proceeded to the PNB to verify the
information, but she claimed that the bank’s officers informed her that Manuel had
no pending loan application with them. When she told Manuel of the bank’s
response, Manuel assured her there was money with the PNB and promised to
_______________
4 Id., at p. 46.
5 Id., at p. 49.
6 The net proceeds of the PNB loan were P1,203,685.17.
113
execute a document that would allow her to collect the proceeds of the PNB loan.
On July 20, 1989, Manuel executed a Special Power of Attorney 7 (SPA)
authorizing Ester to collect the proceeds of his PNB loan. Ester again went to the
bank to inquire about the proceeds of the loan. This time, the bank’s officers
confirmed the existence of the P1.3 Million loan, but they required Ester to first sign
a deed of release/cancellation of mortgage before they could release the proceeds of
the loan to her. Outraged that the spouses Go Cinco used the same properties
mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign the deed
and did not collect the P1.3 Million loan proceeds.
As the MTLC loan was already due, Ester instituted foreclosure proceedings
against the spouses Go Cinco on July 24, 1989.
To prevent the foreclosure of their properties, the spouses Go Cinco filed an
action for specific performance, damages, and preliminary injunction 8 before the
Regional Trial Court (RTC), Branch 25, Maasin, Southern Leyte. The spouses Go
Cinco alleged that foreclosure of the mortgage was no longer proper as there had
already been settlement of Manuel’s obligation in favor of MTLC. They claimed that
the assignment of the proceeds of the PNB loan amounted to the payment of the
MTLC loan. Ester’s refusal to sign the deed of release/cancellation of mortgage and
to collect the proceeds of the PNB loan were, to the spouses Go Cinco, completely
unjustified and entitled them to the payment of damages.
Ester countered these allegations by claiming that she had not been previously
informed of the spouses Go Cinco’s plan to obtain a loan from the PNB and to use
the loan proceeds to settle Manuel’s loan with MTLC. She claimed that she had no
explicit agreement with Manuel authorizing her to apply the
_______________
7 Rollo, p. 47.
8 Docketed as Civil Case No. R-2575.
113
proceeds of the PNB loan to Manuel’s loan with MTLC; the SPA merely authorized
her to collect the proceeds of the loan. She thus averred that it was unfair for the
spouses Go Cinco to require the release of the mortgage to MTLC when no actual
payment of the loan had been made.
In a decision dated August 16, 1994, 9 the RTC ruled in favor of the spouses Go
Cinco. The trial court found that the evidence sufficiently established the existence
of the PNB loan whose proceeds were available to satisfy Manuel’s obligation with
MTLC, and that Ester unjustifiably refused to collect the amount. Creditors, it ruled,
2
cannot unreasonably prevent payment or performance of obligation to the damage
and prejudice of debtors who may stand liable for payment of higher interest
rates.10 After finding MTLC and Ester liable for abuse of rights, the RTC ordered the
award of the following amounts to the spouses Go Cinco:
(a) P1,044,475.15 plus 535.63 per day hereafter, representing loss of savings on
interest, by way of actual or compensatory damages, if defendant corporation
insists on the original 3% monthly interest rate;
(b) P100,000.00 as unrealized profit;
(c) P1,000,000.00 as moral damages;
(d) P20,000.00 as exemplary damages;
(e) P22,000.00 as litigation expenses; and
(f) 10% of the total amount as attorney’s fees plus costs.11
Through an appeal with the CA, MTLC and Ester successfully secured a reversal
of the RTC’s decision. Unlike the trial court, the appellate court found it significant
that there was no explicit agreement between Ester and the spouses Go Cinco for the
cancellation of the MTLC mortgage in favor of PNB to facilitate the release and
collection by Ester of the
_______________
9 Penned by Judge Numeriano Avila, Jr., Rollo, pp. 60-73.
10 Id., at p. 67.
11 Id., at p. 73.
114
proceeds of the PNB loan. The CA read the SPA as merely authorizing Ester
to withdraw the proceeds of the loan. As Manuel’s loan obligation with MTLC
remained unpaid, the CA ruled that no valid objection could be made to the
institution of the foreclosure proceedings. Accordingly, it dismissed the spouses Go
Cinco’ complaint. From this dismissal, the spouses Go Cinco filed the present appeal
by certiorari.
The Petition
The spouses Go Cinco impute error on the part of the CA for its failure to
consider their acts as equivalent to payment that extinguished the MTLC loan; their
act of applying for a loan with the PNB was indicative of their good faith and honest
intention to settle the loan with MTLC. They contend that the creditors have the
correlative duty to accept the payment.
The spouses Go Cinco charge MTLC and Ester with bad faith and ill-motive for
unjustly refusing to collect the proceeds of the loan and to execute the deed of
release of mortgage. They assert that Ester’s justifications for refusing the payment
were flimsy excuses so she could proceed with the foreclosure of the mortgaged
properties that were worth more than the amount due to MTLC. Thus, they conclude
that the acts of MTLC and of Ester amount to abuse of rights that warrants the award
of damages in their (spouses Go Cinco’s) favor.
In refuting the claims of the spouses Go Cinco, MTLC and Ester raise the same
arguments they raised before the RTC and the CA. They claim that they were not
aware of the loan and the mortgage to PNB, and that there was no agreement that the
proceeds of the PNB loan were to be used to settle Manuel’s obligation with MTLC.
Since the MTLC loan remained unpaid, they insist that the institution of the
foreclosure proceedings was proper. Additionally, MTLC and Ester contend that the
present petition raised questions of fact that cannot be addressed in a Rule 45
petition.
115
The Court’s Ruling
The Court finds the petition meritorious.
Preliminary Considerations
Our review of the records shows that there are no factual questions involved in
this case; the ultimate facts necessary for the resolution of the case already appear in
the records. The RTC and the CA decisions differed not so much on the findings of
fact, but on the conclusions derived from these factual findings. The correctness of
the conclusions derived from factual findings raises legal questions when the
conclusions are so linked to, or are inextricably intertwined with, the appreciation of
the applicable law that the case requires, as in the present case. 12 The petition raises
the issue of whether the loan due the MTLC had been extinguished; this is a
question of law that this Court can fully address and settle in an appeal by certiorari.
Payment as Mode of
Extinguishing Obligations
Obligations are extinguished, among others, by payment or performance, 13 the
mode most relevant to the factual situation in the present case. Under Article 1232 of
the Civil Code, payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. Article 1233 of the Civil Code
states that “a debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered,
3
as the case may be.” In contracts of loan, the debtor is expected to deliver the sum of
money due the creditor. These provisions must be read in relation with the other
rules on
_______________
12 See Philippine American General Insurance Company v. Pks Shipping
Company, 449 Phil. 223; 401 SCRA 222 (2003).
13 Civil Code, Article 1231 (1).
116
payment under the Civil Code, 14 which rules impliedly require acceptance by the
creditor of the payment in order to extinguish an obligation.
In the present case, Manuel sought to pay Ester by authorizing her, through an
SPA, to collect the proceeds of the PNB loan—an act that would have led to payment
if Ester had collected the loan proceeds as authorized. Admittedly, the delivery of the
SPA was not, strictly speaking, a delivery of
_______________
14 The pertinent provisions of the Civil Code on Payment are:
Art. 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or objection, the
obligation is deemed fully complied with.
Art. 1236. The creditor is not bound to accept payment or performance by a
third person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except
that if he paid without the knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the debtor.
Art. 1238. Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the debtor’s
consent. But the payment is in any case valid as to the creditor who has accepted it.
Art. 1244. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more valuable than
that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by
another act or forbearance against the obligee’s will.
Art. 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the prestations in which the obligation
consists. Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former without
waiting for the liquidation of the latter.
117
the sum of money due to MTLC, and Ester could not be compelled to accept it as
payment based on Article 1233. Nonetheless, the SPA stood as an authority to collect
the proceeds of the already-approved PNB loan that, upon receipt by Ester, would
have constituted as payment of the MTLC loan. 15 Had Ester presented the SPA to the
bank and signed the deed of release/cancellation of mortgage, the delivery of the sum
of money would have been effected and the obligation extinguished. 16 As the records
show, Ester refused to collect and allow the cancellation of the mortgage.
Under these facts, Manuel posits two things: first, that Ester’s refusal was based
on completely unjustifiable grounds; and second, that the refusal was equivalent to
payment that led to the extinguishment of the obligation.
a. Unjust Refusal to Accept Payment
After considering Ester’s arguments, we agree with Manuel that Ester’s refusal
of the payment was without basis.
Ester refused to accept the payment because the bank required her to first sign a
deed of release/cancellation of the mortgage before the proceeds of the PNB loan
could be released. As a prior mortgagee, she claimed that the spouses Go Cinco
should have obtained her consent before offering the properties already mortgaged to
her as security for the PNB loan. Moreover, Ester alleged that the SPA merely
authorized her to collect the proceeds of the loan; there was no explicit
_______________
15 We apply here, by parity of reasoning, the principle adopted in payment using
mercantile documents. Payment by means of mercantile documents like checks and
promissory notes in lieu of the sum of money due does not extinguish the obligation
until they have been accepted and cashed by the creditor. See Crystal v. Court of
Appeals, 159 Phil. 557; 62 SCRA 501 (1975).
16 The PNB’s officers testified that had the required document (deed of
release/cancellation of mortgage) been submitted, the bank could have released the
loan proceeds. Rollo, p. 81.
118
agreement that the MTLC loan would be paid out of the proceeds of the PNB loan.
There is nothing legally objectionable in a mortgagor’s act of taking a second or
subsequent mortgage on a property already mortgaged; a subsequent mortgage is
recognized as valid by law and by commercial practice, subject to the prior rights of
previous mortgages. Section 4, Rule 68 of the 1997 Rules of Civil Procedure on the
disposition of the proceeds of sale after foreclosure actually requires the payment of
the proceeds to, among others, the junior encumbrancers in the order of their
priority.17 Under Article 2130 of the Civil Code, a stipulation forbidding the owner
from alienating the immovable mortgaged is considered void. If the mortgagor-
owner is allowed to convey the entirety of his interests in the mortgaged property,
4
reason dictates that the lesser right to encumber his property with other liens must
also be recognized. Ester, therefore, could not validly require the spouses Go Cinco
to first obtain her consent to the PNB loan and mortgage. Besides, with the payment
of the MTLC loan using the proceeds of the PNB loan, the mortgage in favor of the
MTLC would have naturally been cancelled.
We find it improbable for Ester to claim that there was no agreement to apply the
proceeds of the PNB loan to the MTLC loan. Beginning July 16, 1989, Manuel had
already expressed intent to pay his loan with MTLC and thus requested for an
updated statement of account. Given Manuel’s express intent of fully settling the
MTLC loan and of paying
_______________
17 SEC. 4. Disposition of proceeds of sale.—The amount realized from the
foreclosure sale of the mortgaged property shall, after deducting the costs of the sale,
be paid to the person foreclosing the mortgage, and when there shall be any balance
or residue, after paying off the mortgage debt due, the same shall be paid to junior
encumbrancers in the order of their priority, to be ascertained by the court, or if there
be no such encumbrancers or there be a balance or residue after payment to them,
then to the mortgagor or his duly authorized agent, or to the person entitled to it.
119
through the PNB loan he would secure (and in fact secured), we also cannot give
credit to the claim that the SPA only allowed Ester to collect the proceeds of the
PNB loan, without giving her the accompanying authority, although verbal, to apply
these proceeds to the MTLC loan. Even Ester’s actions belie her claim as she in fact
even went to the PNB to collect the proceeds. In sum, the surrounding circumstances
of the case simply do not support Ester’s position.
b. Unjust Refusal Cannot be Equated to Payment
While Ester’s refusal was unjustified and unreasonable, we cannot agree with
Manuel’s position that this refusal had the effect of payment that extinguished his
obligation to MTLC. Article 1256 is clear and unequivocal on this point when it
provides that—
“ARTICLE 1256. If the creditor to whom tender of payment has been
made refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due. [Emphasis supplied.]”
In short, a refusal without just cause is not equivalent to payment; to have the effect
of payment and the consequent extinguishment of the obligation to pay, the law
requires the companion acts of tender of payment and consignation.
Tender of payment, as defined in Far East Bank and Trust Company v. Diaz
Realty, Inc.,18 is the definitive act of offering the creditor what is due him or her,
together with the demand that the creditor accept the same. When a creditor refuses
the debtor’s tender of payment, the law allows the consignation of the thing or the
sum due. Tender and consignation have the effect of payment, as by consignation,
the thing due is deposited and placed at the disposal of the judicial authorities for the
creditor to collect.19
_______________
18 416 Phil. 147; 363 SCRA 659 (2001).
19 Civil Code, Article 1258.
120
A sad twist in this case for Manuel was that he could not avail of consignation to
extinguish his obligation to MTLC, as PNB would not release the proceeds of the
loan unless and until Ester had signed the deed of release/cancellation of mortgage,
which she unjustly refused to do. Hence, to compel Ester to accept the loan proceeds
and to prevent their mortgaged properties from being foreclosed, the spouses Go
Cinco found it necessary to institute the present case for specific performance and
damages.
c. Effects of Unjust Refusal
Under these circumstances, we hold that while no completed tender of payment
and consignation took place sufficient to constitute payment, the spouses Go Cinco
duly established that they have legitimately secured a means of paying off their loan
with MTLC; they were only prevented from doing so by the unjust refusal of Ester to
accept the proceeds of the PNB loan through her refusal to execute the release of the
mortgage on the properties mortgaged to MTLC. In other words, MTLC and Ester in
fact prevented the spouses Go Cinco from the exercise of their right to secure
payment of their loan. No reason exists under this legal situation why we cannot
compel MTLC and Ester: (1) to release the mortgage to MTLC as a condition to the
release of the proceeds of the PNB loan, upon PNB’s acknowledgment that the
proceeds of the loan are ready and shall forthwith be released; and (2) to accept the
proceeds, sufficient to cover the total amount of the loan to MTLC, as payment for
Manuel’s loan with MTLC.
We also find that under the circumstances, the spouses Go Cinco have
undertaken, at the very least, the equivalent of a tender of payment that cannot but
have legal effect. Since payment was available and was unjustifiably refused, justice
and equity demand that the spouses Go Cinco be freed from the obligation to pay
interest on the outstanding
121
amount from the time the unjust refusal took place;20they would not have been
liable for any interest from the time tender of payment was made if the payment had
only been accepted. Under Article 19 of the Civil Code, they should likewise be
entitled to damages, as the unjust refusal was effectively an abusive act contrary to
5
the duty to act with honesty and good faith in the exercise of rights and the
fulfillment of duty.
For these reasons, we delete the amounts awarded by the RTC to the spouses Go
Cinco (P1,044,475.15, plus P563.63 per month) representing loss of savings on
interests for lack of legal basis. These amounts were computed based on the
difference in the interest rates charged by the MTLC (36% per annum) and the PNB
(17% to 18% per annum), from the date of tender of payment up to the time of the
promulgation of the RTC decision. The trial court failed to consider the effects of a
tender of payment and erroneously declared that MTLC can charge interest at the
rate of only 18% per annum—the same rate that PNB charged, not the 36% interest
rate that MTLC charged; the RTC awarded the difference in the interest rates as
actual damages.
As part of the actual and compensatory damages, the RTC also awarded
P100,000.00 to the spouses Go Cinco representing unrealized profits. Apparently, if
the proceeds of the PNB loan (P1,203,685.17) had been applied to the MTLC loan
(P1,071,256.55), there would have been a balance of P132,428.62 left, which amount
the spouses Go Cinco could have invested in their businesses that would have earned
them a profit of at least P100,000.00.
We find no factual basis for this award. The spouses Go Cinco were unable to
substantiate the amount they claimed as unrealized profits; there was only their bare
claim that the
_______________
20 Spouses Biesterbos v. Court of Appeals and Bartlome, G.R. 152529.
September 22, 2003, 411 SCRA 396, citing Araneta, Inc. v. De Paterno and Vidal,
91 Phil. 786 (1952).
122
excess could have been invested in their other businesses. Without more, this claim
of expected profits is at best speculative and cannot be the basis for a claim for
damages. In Lucas v. Spouses Royo,21 we declared that:
“In determining actual damages, the Court cannot rely on speculation, conjecture or
guesswork as to the amount. Actual and compensatory damages are those
recoverable because of pecuniary loss in business, trade, property, profession, job or
occupation and the same must be sufficiently proved, otherwise, if the proof is
flimsy and unsubstantiated, no damages will be given.” [Emphasis supplied.]
We agree, however, that there was basis for the award of moral and exemplary
damages and attorney’s fees.
Ester’s act of refusing payment was motivated by bad faith as evidenced by the
utter lack of substantial reasons to support it. Her unjust refusal, in her behalf and for
the MTLC which she represents, amounted to an abuse of rights; they acted in an
oppressive manner and, thus, are liable for moral and exemplary damages. 22 We
nevertheless reduce the P1,000,000.00 to P100,000.00 as the originally awarded
amount for moral damages is plainly excessive.
We affirm the grant of exemplary damages by way of example or correction for
the public good in light of the same reasons that justified the grant of moral damages.
As the spouses Go Cinco were compelled to litigate to protect their interests, they
are entitled to payment of 10% of the total amount of awarded damages as attorney’s
fees and expenses of litigation.
WHEREFORE, we GRANT the petitioners’ petition for review on certiorari,
and REVERSE the decision of June 22, 2001 of the Court of Appeals in CA-G.R.
CV No. 47578, as well as the resolution of January 25, 2002 that followed. We
_______________
21 398 Phil. 400; 344 SCRA 481 (2000).
22 Civil Code, Articles 2220 and 2232.
123
REINSTATE the decision dated August 16, 1994 of the Regional Trial Court,
Branch 25, Maasin, Southern Leyte, with the following MODIFICATIONS:
(1) The respondents are hereby directed to accept the proceeds of the
spouses Go Cinco’s PNB loan, if still available, and to consent to the release
of the mortgage on the property given as security for the loan upon PNB’s
acknowledgment that the proceeds of the loan, sufficient to cover the total
indebtedness to respondent Maasin Traders Lending Corporation computed
as of June 20, 1989, shall forthwith be released;
(2) The award for loss of savings and unrealized profit is deleted;
(3) The award for moral damages is reduced to P100,000.00; and
(4) The awards for exemplary damages, attorney’s fees, and expenses
of litigation are retained.
The awards under (3) and (4) above shall be deducted from the amount of the
outstanding loan due the respondents as of June 20, 1989. Costs against the
respondents.
SO ORDERED.
Carpio-Morales** (Acting Chairperson), Corona,***Nachura**** and Abad, JJ.,
concur.
Petition granted, judgment and resolution reversed. Decision of Regional Trial
Court of Maasin, Southern Leyte, Br. 25 reinstated with modifications.
_______________
** Designated Acting Chairperson of the Second Division per Special Order No.
690 dated September 4, 2009.
*** Designated additional Member of the Second Division per Special Order
No. 718 dated October 2, 2009.
**** Designated additional Member of the Second Division per Special Order
No. 730 dated October 5, 2009.
6

124
Note.—Consignation is the deposit of the proper amount with a judicial
authority, before whom the debtor must establish compliance with certain mandatory
requirements. (Allandale Sportsline, Inc. vs. The Good Development Corporation,
574 SCRA 625 [2008]).
——o0o——
G.R. No. 156162. June 22, 2015.*
CCC INSURANCE CORPORATION, petitioner, vs.KAWASAKI STEEL
CORPORATION, F.F. MAÑACOP CONSTRUCTION CO., INC., and
FLORANTE F. MAÑACOP, respondents.
Civil Law; Suretyship; Words and Phrases; Jurisprudence also defines a
contract of suretyship as an agreement where a party called the surety guarantees
the performance by another party called the principal or obligor of an obligation or
undertaking in favor of a third person called the obligee.—The statutory definition
of suretyship is found in Article 2047 of the Civil Code, thus: Art. 2047. By
guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. If a person
binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship. (Emphasis supplied) Jurisprudence also defines a contract of
suretyship as “an agreement where a party called the surety guarantees the
performance by another party called the principal or obligor of an obligation or
undertaking in favor of a third person called the obligee. Specifically, suretyship is a
contractual relation resulting from an agreement whereby one person, the surety,
engages to be answerable for the debt, default or miscarriage of another, known as
the principal.” The Court expounds that “a surety’s liability is joint and several,
limited to the amount of the bond, and determined strictly by the terms of contract of
suretyship in relation to the principal contract between the obligor and the obligee. It
bears stressing, however, that although the contract of suretyship is secondary to the
principal contract, the surety’s liability to the obligee is nevertheless direct, primary,
and absolute.”
Same; Contracts; Principle of Relativity of Contracts; According to the
principle of relativity of contracts in Article 1311 of the Civil Code, a contract takes
effect only between the parties, their assigns, and heirs; except when the contract
contains a stipulation in favor of
_______________
* FIRST DIVISION.
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
a third person, which gives said person the right to demand fulfillment of said
stipulation.—According to the principle of relativity of contracts in Article 1311 of
the Civil Code, a contract takes effect only between the parties, their assigns, and
heirs; except when the contract contains a stipulation in favor of a third person,
which gives said person the right to demand fulfillment of said stipulation. In this
case, the Surety and Performance Bonds are enforceable by and against the parties
FFMCCI (the obligor) and CCCIC (the surety), as well as the third person Kawasaki
(the obligee) in whose favor said bonds had been explicitly constituted; while the
related Consortium Agreement binds the parties Kawasaki and FFMCCI. Since the
Republic is neither a party to the Surety and Performance Bonds nor the Consortium
Agreement, any action or omission on its part has no effect on the liability of CCCIC
under said bonds.
Same; Novation; It is well-settled that novation is never presumed — novatio
non praesumitur.—It is well-settled that novation is never presumed — novatio non
praesumitur. As the party alleging novation, the onus of showing clearly and
unequivocally that novation had indeed taken place rests on CCCIC. The Court laid
down guidelines in establishing novation, viz.: Novation is never presumed, and
the animus novandi, whether totally or partially, must appear by express agreement
of the parties, or by their acts that are too clear and unequivocal to be mistaken. The
extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. The term “expressly”
means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations. There are
two ways which could indicate, in fine, the presence of novation and thereby produce
the effect of extinguishing an obligation by another which substitutes the same.
The first is when novation has been explicitly stated and declared in unequivocal
terms. The second is when the old and the new obligations are incompatible on every
point. The test of incompatibility is whether or not the two obligations can stand to-
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334 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
gether, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes that
breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation,
such as its object, cause or principal conditions thereof; otherwise, the change would
7
be merely modificatory in nature and insufficient to extinguish the original
obligation.
Same; Same; Subrogation; In Autocorp Group v. Intra Strata Assurance
Corporation, 556 SCRA 250 (2008), the Court ruled that: The benefit of
subrogation, an extinctive subjective novation by a change of creditor, which
“transfers to the person subrogated, the credit and all the rights thereto
appertaining, either against the debtor or against third persons,” is granted by the
Article 2067 of the Civil Code only to the “guarantor (or surety) who pays.”—
Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to indemnification
and subrogation will arise only after it has paid its obligations to Kawasaki as the
debtor-obligee. In Autocorp Group v. Intra Strata Assurance Corporation, 556
SCRA 250 (2008), the Court ruled that: The benefit of subrogation, an extinctive
subjective novation by a change of creditor, which “transfers to the person
subrogated, the credit and all the rights thereto appertaining, either against the debtor
or against third persons,” is granted by the Article 2067 of the Civil Code only to
the “guarantor (or surety) who pays.” (Emphases supplied, citations omitted) In
the present case, CCCIC has yet to pay Kawasaki.
Remedial Law; Civil Procedure; Domestic Corporations; Service of Summons;
Rule 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed the
service of summons upon a director of a private domestic corporation.—Rule 14,
Section 13 of the 1964 Rules of Court, which was then in force, allowed the service
of summons upon a director of a private domestic corporation: Sec. 13. Service upon
private domestic corporation or partnership.—If the defendant is a corporation
organized under the laws of the Philippines or a partnership duly registered, service
may be made on the president, manager, secretary, cashier, agent, or any of its
directors. The aforementioned rule does not require that service on the private
domestic corporation be served at its principal office in order for the court to acquire
jurisdiction over the same. The Court, in Talsan Enterprises, Inc. v. Baliwag Transit,
Inc., 310 SCRA 156 (1999),
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
citing Baltazar v. Court of Appeals, 168 SCRA 354 (1988), affirmed that:
[S]ervice on respondent’s bus terminal at the address stated in the summons and not
in its main office in Baliwag do not render the service of summons invalid.
In Artemio Baltazar v. Court of Appeals, we held: “The regular mode, in other
words, of serving summons upon a private Philippine Corporation is by personal
service upon one of the officers of such corporation identified in Section 13.
Ordinarily, such personal service may be expected to be made at the principal office
of the corporation. Section 13, does not, however, impose such requirement, and
so personal service upon the corporation may be effected through service upon,
for instance, the president of the corporation at his office or residential
address.” x x x. In fine, the service of summons upon respondent Baliwag Transit is
proper. Consequently, the trial court validly acquired jurisdiction over respondent
Baliwag. (Citation omitted) Hence, the personal service of the AliasSummons on an
FFMCCI director was sufficient for the RTC to acquire jurisdiction over FFMCCI
itself.
Same; Same; Cause of Action; Words and Phrases; A cause of action is
defined as the act or omission by which a party violates a right of another.—
Nevertheless, the Third-Party Complaint filed by CCCIC against FFMCCI and
Mañacop must be dismissed on the ground of lack of cause of action. A cause of
action is defined as the act or omission by which a party violates a right of another.
The essential elements of a cause of action are: (a) the existence of a legal right in
favor of the plaintiff; (b) a correlative legal duty of the defendant to respect such
right; and (c) an act or omission by such defendant in violation of the right of the
plaintiff with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant.
Attorney’s Fees; Article 2208(2) of the Civil Code allows the award of
attorney’s fees “[w]hen the defendant’s act or omission has compelled the plaintiff
to litigate with third persons or to incur expenses to protect his interest[.]”—Article
2208(2) of the Civil Code allows the award of attorney’s fees “[w]hen the
defendant’s act or omission has compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest[.]” In Servicewide Specialists,
Incorporated v. Court of Appeals, 256 SCRA 649 (1996), the Court declared that:
Article 2208 of the Civil Code allows attorney’s fees to be awarded by a court when
its claimant is compelled to
336
336 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
litigate with third persons or to incur expenses to protect his interest by reason
of an unjustified act or omission on the part of the party from whom it is sought. To
be sure, private respondents were forced to litigate to protect their rights but as we
have previously held: “where no sufficient showing of bad faith would be reflected
in a party’s persistence in a case other than an erroneous conviction of the
righteousness of his cause, attorney’s fee shall not be recovered as cost.”
Bad Faith; Words and Phrases; Bad faith has been defined as a breach of a
known duty through some motive of interest or ill will.—Bad faith has been defined
as “a breach of a known duty through some motive of interest or ill will. It must,
however, be substantiated by evidence. Bad faith under the law cannot be presumed,
it must be established by clear and convincing evidence.” There is no evidence in
this case to show bad faith on the part of CCCIC. CCCIC, in refusing the claim of
Kawasaki, was merely acting based on its belief in the righteousness of its defense.
Hence, even though Kawasaki was compelled to litigate to enforce its claim against
CCCIC, the award of attorney’s fees is not proper.
Interest Rates; The Supreme Court (SC), in Nacar v. Gallery Frames, 703
SCRA 439 (2013), modified the guidelines in imposing interests, taking into account
Bangko Sentral ng Pilipinas-Monetary Board (BSP-MB) Resolution No. 796 dated
8
May 16, 2013 and Circular No. 799, Series of 2013, which fixed the legal rate at six
percent (6%) per annum effective July 1, 2013.—The Court, in Nacar v. Gallery
Frames, 703 SCRA 439 (2013), modified the guidelines in imposing interests, taking
into account Bangko Sentral ng Pilipinas-Monetary Board Resolution No. 796 dated
May 16, 2013 and Circular No. 799, Series of 2013, which fixed the legal rate at
6% per annum effective July 1, 2013. In the absence of stipulated interest in the
present case, the Court imposes upon the amounts covered by the Surety and
Performance Bonds the legal rate of 12% per annum from September 15, 1989, the
date of demand, until June 30, 2013; and then the legal rate of 6% per annum from
July 1, 2013 until full payment of the same.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
Buñag & Uy Law Offices for petitioner.
E.B. Astudillo & Associates for respondent Kawasaki.
LEONARDO-DE CASTRO, J.:
Assailed in this Petition for Review on Certiorari are: (1) the Decision1 dated
May 30, 2002 of the Court of Appeals in C.A.-G.R. CV No. 54066, which reversed
and set aside the Decision2 dated May 2, 1996 of the Regional Trial Court (RTC),
Makati City, Branch 66, and held petitioner CCC Insurance Corporation (CCCIC)
liable under its Surety and Performance Bonds to respondent Kawasaki Steel
Corporation (Kawasaki); and (2) the Resolution3 dated November 14, 2002 of the
appellate court in the same case which denied the Motion for Reconsideration of
CCCIC.
The antecedents of this case are as follows:
On August 16, 1988, Kawasaki, represented by its Manager, Yoshimitsu Hosoya,
and F.F. Mañacop Construction Company, Inc. (FFMCCI), represented by its
President, Florante F. Mañacop (Mañacop), executed a Consortium Agreement for
Pangasinan Fishing Port Network Project (Consortium Agreement). 4 Kawasaki and
FFMCCI formed a consortium (Kawasaki-FFMCCI Consortium) for the purpose of
contracting with the Philippine Government for the construction of a fishing port
network in Pangasinan (Project). According to their Consortium Agreement,
Kawasaki and FFMCCI undertook to perform and accomplish their respective and
specific portions of work in the intended contract with the Philippine Government.5
_______________
1 Rollo, pp. 37-49; penned by Associate Justice Perlita J. Tria-Tirona, with
Associate Justices Buenaventura J. Guerrero and Rodrigo V. Cosico, concurring.
2 CA Rollo, pp. 71-79; penned by Judge Eriberto U. Rosario, Jr.
3 Rollo, pp. 51-54.
4 Id., at pp. 64-87.
5 Article 5, Consortium Agreement.
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338 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
The Project was awarded to the Kawasaki-FFMCCI Consortium for the contract
price of P62,000,441.00, 33.37% of which or P20,692,026.00 was the price of work
of FFMCCI. On October 4, 1988, the Republic of the Philippines (Republic), through
the Department of Public Works and Highways (DPWH), represented by former
Secretary Romulo M. del Rosario, as owner, and the Kawasaki-FFMCCI
Consortium, represented by Shigeru Kohda, as contractor, entered into a Contract
Agreement entitled Stage I-A Construction of Pangasinan Fishing Port Network
(Construction Contract).6
In accordance with Article 10 of the Consortium Agreement, 7 “Consortium
Leader” Kawasaki, on behalf of the Consortium, secured from the Philippine
Commercial International Bank (PCIB) Letter of Credit No. 38-001-183617 8 in the
amount of P6,200,044.10 in favor of DPWH, available from September 9, 1988 to
November 19, 1990. Said Letter of
6 Rollo, pp. 95-98.
7 ARTICLE 10 – BONDS
10.1 The CONSORTIUM LEADER shall arrange, at their own cost, all
necessary bonds or guarantees as required under the CONTRACT on behalf of the
CONSORTIUM. MAÑACOP shall, at its own cost, furnish the CONSORTIUM
LEADER with a suitable counter guarantees of its advance payment under the
CONTRACT and the performance of its PORTION OF WORK in the amount of
fifteen (15%) percent (in the case of the repayment guarantee for the advance) and
ten (10%) percent (in the case of the performance guarantee) of the price of its
PORTION OF THE WORK.
10.2 If the EMPLOYER exercises its right on the bonds or guarantees furnished
by the CONSORTIUM LEADER, the PARTIES shall decide the respective
responsibilities according to the provisions of this AGREEMENT and the necessary
reimbursement or compensation shall be made also according to the provisions of
this AGREEMENT. (Rollo, p. 79)
8 Records (Vol. I), p. 130.
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
Credit guaranteed the faithful performance by Kawasaki-FFMCCI Consortium of
its obligation under the Construction Contract.
The Republic made an advance payment for the Project to the Kawasaki-
FFMCCI Consortium in the amount of P9,300,066.15, representing 15% of the
contract price of P62,000,441.00.
For the release of its share in the advance payment made by the Republic, and
also pursuant to Article 10 of the Consortium Agreement, FFMCCI secured from
9
CCCIC the following bonds in favor of Kawasaki: (a) Surety Bond No. B-
88/111919 in the amount of P3,103,803.90 (equivalent to 15% of the price of work of
FFMCCI), effective from October 26, 1988 to October 26, 1989, to counter-
guarantee the amount of advance payment FFMCCI would receive from Kawasaki;
and (b) Performance Bond B-88/11193 10 in the amount of P2,069,202.60 (equivalent
to 10% of the price of work of FFMCCI), effective from October 27, 1988 to
October 27, 1989, to guarantee completion by FFMCCI of its scope of work in the
Project. In turn, FFMCCI and Mañacop executed two Indemnity
Agreements11 promising to compensate CCCIC for any damages the insurance
company might incur from issuing the Surety and Performance Bonds.
In two letters dated October 27, 1998, 12 FFMCCI submitted the Surety and
Performance Bonds to Kawasaki and requested Kawasaki to release the advance
payment in the amount of P3,103,803.90. FFMCCI eventually received the amount
of advance payment it requested on a staggered basis.13
_______________
9 Rollo, pp. 99-100.
10 Id., at pp. 101-102.
11 Records (Vol. I), pp. 220-223.
12 Id., at pp. 46-47.
13 Records (Vol. IV), pp. 59-60.
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340 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
The Project commenced in November 1988. 14 Sometime in April 1989, FFMCCI
ceased performing its work in the Project after suffering financial problems and/or
business reverses. After discussions, Kawasaki and FFMCCI then executed a new
Agreement15 on August 24, 1989 wherein Kawasaki recognized the “Completed
Portion of Work” of FFMCCI as of April 25, 1989, and agreed to take over the
unfinished portion of work of FFMCCI, referred to as “Transferred Portion of
Work.” Kawasaki and FFMCCI further agreed that “[a]ny profit or benefit arising
from the performance by [Kawasaki] of the Transferred Portion of Work shall accrue
to [Kawasaki].”
In a letter dated September 14, 1989,16 Kawasaki informed CCCIC about the
cessation of operations of FFMCCI, and the failure of FFMCCI to perform its
obligations in the Project and repay the advance payment made by Kawasaki.
Consequently, Kawasaki formally demanded that CCCIC, as surety, pay Kawasaki
the amounts covered by the Surety and Performance Bonds. Because CCCIC did not
act upon its demand, Kawasaki filed on November 6, 1989 before the RTC a
Complaint17against CCCIC to collect on Surety Bond No. B-88/11191 and
Performance Bond No. B-88/11193.
In its Answer with Counterclaims,18 CCCIC denied any liability on its Surety and
Performance Bonds on the following grounds: (a) the rights of Kawasaki under the
Surety and Performance Bonds had not yet accrued since the said Bonds were mere
counter-guarantees, for which CCCIC could only be held liable upon the filing of a
claim by the Republic against the Kawasaki-FFMCCI Consortium; (b) Kawasaki and
FFMCCI, without the consent of CCCIC, executed a new Agreement dated August
24, 1989 novating the terms of the
_______________
14 TSN, March 18, 1993, p. 32.
15 Records (Vol. I), pp. 165-167.
16 Id., at p. 50.
17 Id., at pp. 1-9.
18 Id., at pp. 157-164.
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
Consortium Agreement, which prevented CCCIC from being subrogated to the
right of Kawasaki against FFMCCI; (c) Kawasaki, in completing the Transferred
Portion of Work was correspondingly compensated, which negated any allegation of
loss on the part of Kawasaki; and (d) the obligation of CCCIC was extinguished
when the Republic granted the Kawasaki-FFMCCI Consortium an extension of time
to complete the Project, without the consent of CCCIC.
CCCIC subsequently filed on August 19, 1991 before the RTC a Third-Party
Complaint19 against FFMCCI and its President Mañacop based on the two Indemnity
Agreements which FFMCCI and Mañacop executed in favor of CCCIC. The RTC
issued summonses but FFMCCI and Mañacop failed to file any responsive pleading
to the Third-Party Complaint of CCCIC. Upon motion of CCCIC, the RTC issued an
Order20 dated December 2, 1991 declaring FFMCCI and Mañacop in default.
After trial, the RTC rendered a Decision on May 2, 1996 dismissing the
Complaint of Kawasaki and the counterclaim of CCCIC. The RTC agreed with
CCCIC that the Surety and Performance Bonds issued by the insurance company
were mere counter-guarantees and the cause of action of Kawasaki based on said
Bonds had not yet accrued. Since the Republic did not exercise its right to claim
against the PCIB Letter of Credit No. 38-001-183617, nor compelled Kawasaki to
perform the unfinished work of FFMCCI, Kawasaki could not claim indemnification
from CCCIC. Moreover, the RTC, citing Article 2079 of the Civil Code, ruled that
the obligations of CCCIC under the Surety and Performance Bonds were
extinguished when the Republic granted the Kawasaki-FFMCCI Consortium a 43-
day extension to finish the Project, absent the consent of CCCIC. The RTC found no
deliberate intent on the part of Kawasaki to cause prejudice to CCCIC, so it did
_______________
19 Id., at pp. 207-210.
20 Id., at p. 271.
342
342 SUPREME COURT REPORTS ANNOTATED
10
 CCC Insurance Corporation vs. Kawasaki Steel Corporation
not grant the counterclaims for moral and exemplary damages and attorney’s fees
of CCCIC against Kawasaki.
Kawasaki appealed before the Court of Appeals assigning the following errors on
the part of the RTC:
I. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT [CCCIC]
CAN BE HELD LIABLE TO [Kawasaki] UNDER THE SUBJECT BONDS ONLY
“IF THE GOVERNMENT EXERCISES ITS RIGHTS AGAINST THE
GUARANTEE-BONDS ISSUED TO IT BY [Kawasaki]” ON THE THEORY
ADVANCED BY [CCCIC], WHICH THE COURT A QUO FULLY EMBRACED
AND ADOPTED, THAT THE BONDS ARE MERE “COUNTER-
GUARANTEES.”
II. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT THE
EXTENSION GRANTED BY THE GOVERNMENT TO THE CONSORTIUM
FOR THE CONSTRUCTION OF THE PANGASINAN FISHING PORT
NETWORK PROJECT EXTINGUISHED THE LIABILITY OF [CCCIC].
III. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT ARTICLE
2079 OF THE CIVIL CODE OF THE PHILIPPINES APPLIES TO THE CASE AT
BAR. IN A LONG LINE OF DECISIONS, THE SUPREME COURT HAS HELD
THAT THE RULE OF “STRICTISSIMI JURIS” DOES NOT APPLY TO SURETY
COMPANIES SUCH AS [CCCIC] HEREIN.
IV. THE SUBJECT BONDS ARE FIXED UNTIL OCTOBER 26 AND 27, 1989
RESPECTIVELY WHILE THE ORIGINAL PERIOD OF THE CONTRACT WITH
THE GOVERNMENT, THE PERFORMANCE OF WHICH BY [CCCIC] ARE
PRECISELY GUARANTEED BY THESE BONDS, IS UNTIL DECEMBER 30,
1989. ON THE OTHER HAND, THE DEFAULT BY [FFMCCI] WHICH THE
BONDS GUARANTEED AGAINST OCCURRED ON [OR] ABOUT AUGUST
24, 1989. THEREFORE, IRRESPECTIVE OF WHETHER THERE WAS AN
EXTENSION OR NOT AT THE END OF THE ORIGINAL CONTRACT PERIOD
AND IRRESPECTIVE
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
OF WHETHER THIS EXTENSION IS KNOWN OR UNKNOWN TO
[CCCIC], THE LIABILITY THAT IT BOUND ITSELF UNTO UNDER THE
BONDS IS VERY CLEARLY AND UNEQUIVOCALLY FIXED UNTIL
OCTOBER 26 AND 27, 1989 RESPECTIVELY. THEREFORE, ARTICLE 2079
WILL NOT APPLY. HENCE, THE COURT A QUO GROSSLY ERRED IN
HOLDING OTHERWISE.21
The Court of Appeals, in its Decision dated May 30, 2002, reversed the appealed
RTC Decision, reasoning as follows:
From the language of the aforesaid bonds, it is clear that, in the case of the surety
bond, the same was posted, jointly and severally, by [FFMCCI] and CCCIC “to fully
and faithfully guarantee the repayment of the down payment made by the principal
([FFMCCI]) to the obligee (KAWASAKI) in connection with the construction of the
Pangasinan Fishing Port Network Project at Pangasinan” subject only to the
condition that “the liability of the [herein] surety shall in no case exceed the amount
of Pesos: THREE MILLION ONE HUNDRED THREE THOUSAND EIGHT
HUNDRED THREE & 90/100 (P3,103,803.90) Philippine currency; and in the case
of the performance bond, the same was posted, jointly and severally by [FFMCCI]
and CCCIC “to guarantee the full and faithful performance of the principal
([FFMCCI]) of its obligation in connection with the project for the construction of
the Pangasinan Fishing Port Network located at Pangasinan in accordance with the
plans and specifications of the contract” subject only to the condition that “the
liability of the [herein] surety shall in no case exceed the amount of Pesos: TWO
MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100
(P2,069,202.60) Philippine currency.”
The right of KAWASAKI as the obligee/creditor of the said bonds was not made
subject to any other condition expressly so provided in the Consortium Agreement,
_______________
21 CA Rollo, pp. 42-44.
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344 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
which was the reason for the bonds posted by [FFMCCI] and CCCIC, or in the
subject bonds themselves.
It is not provided, neither in the Consortium Agreement nor in the subject bonds
themselves that before KAWASAKI may proceed against the bonds posted by
[FFMCCI] and CCCIC, the Philippine government as employer must first exercise
its rights against the bond issued in its favor by the consortium.
Hence, this Court finds that the court a quo did err in ruling that “[u]nder the
Consortium Agreement, the bonds are counter-guarantees which only guarantee the
plaintiff KAWASAKI for reimbursement to the extent of the value of the bonds in
case the employer (government) successfully exercised its rights under the bonds
issued to it by plaintiff KAWASAKI”; and that “[c]onsidering that the government
did not exercise its rights against the bond issued to it by the Consortium Leader, it
follows that the Consortium Leader cannot collect from the counter-guarantees
furnished by [FFMCCI].”
Time and again, the Supreme Court has stressed the rule that a contract is the law
between the parties, and courts have no choice but to enforce such contract so long as
they are not contrary to law, morals, good customs or public policy.
With respect to the second, third and fourth issues raised, suffice it to say that
this Court finds Article 2079 of the Civil Code of the Philippines not applicable.
[Kawasaki] claims that since the issue in this case is the liability of CCCIC to
KAWASAKI, the extension of forty-three (43) days within which to complete the
Pangasinan Fishing Port Network Project granted by the Philippine government, who
11
is not a party to the two (2) bonds posted by [FFMCCI] and CCCIC, to the
consortium, does not absolve CCCIC’s liabilities to KAWASAKI under the subject
bonds.
We agree.
As stated earlier, the parties insofar as the surety bond and performance bond are
concerned are: KAWA-
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
SAKI, as obligee, [FFMCCI], as principal; and CCCIC, as surety.
Considering therefore that the extension of time within which to complete the
construction of the Pangasinan Fishing Port Network Project was granted by the
Philippine government, who is not the creditor of the bonds, this Court finds that
Article 2079 of the Civil Code of the Philippines does not apply and the extension of
time granted by the Philippine government, contrary to the ruling of the trial court,
does not absolve the surety of its liabilities to KAWASAKI under the subject bonds.
The principle of relativity of contracts provides that contracts can only bind the
parties who entered into it.
Finally, this Court finds the award of attorney’s fees in favor of the appellant
warranted under the circumstance, pursuant to paragraph (2) of Article 2208 of the
Civil Code of the Philippines.22
In the end, the Court of Appeals decreed:
WHEREFORE, the instant appeal is hereby GRANTED. Accordingly, the
assailed decision of the Regional Trial Court of Makati City, Branch 66, is
hereby REVERSED and SET ASIDE.
CCC Insurance Corporation is hereby ordered to pay KAWASAKI the
following:
1. The amount of P3,103,803.90 representing its liability to Kawasaki Steel
Corporation under Surety Bond No. B-88/11191, plus legal interest at the rate of
12% per annum computed from 15 September 1989, until fully paid;
2. The amount of P2,069,202.80 representing its liability to Kawasaki Steel
Corporation under Performance Bond No. B-88/11193, plus legal interest at the rate
of 12% per annum computed from 15 September 1989, until fully paid; and
_______________
22 Rollo, pp. 46-48.
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346 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
3. 15% of the total amount due as and for attorney’s fees.23
In its Resolution dated November 14, 2002, the Court of Appeals denied the
Motion for Reconsideration of CCCIC. However, in the same Resolution, the
appellate court partially granted the Third-Party Complaint of CCCIC by holding
Mañacop liable under the Indemnity Agreements he executed in favor of the
insurance company, while declaring the RTC was without jurisdiction over FFMCCI
due to invalid service of summons. The Court of Appeals ultimately resolved:
WHEREFORE, judgment is hereby rendered in favor of third party plaintiff
CCC Insurance Corporation and against third party defendant Florante F. Mañacop,
ordering the latter to indemnify the former the total amount paid by the former to
Kawasaki Steel Corporation representing CCC Insurance Corporation’s liabilities
under Surety Bond No. B-88/11191 and Performance Bond No. B-88/11193 and to
pay CCC Insurance Corporation 25% of the total amount due, as and for attorney’s
fees.24
In the instant Petition for Review on Certiorari, CCCIC assails the
aforementioned Decision and Resolution of the Court of Appeals on six
grounds, viz.:
A.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO
CONSIDER THE TRUE NATURE OF THE TRANSACTION BETWEEN THE
PARTIES AND THE TRUE NATURE OF A COUNTER-GUARANTEE.
_______________
23 Id., at p. 48.
24 Id., at p. 54.
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
B.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO
APPRECIATE THE APPLICABILITY OF ARTICLE 2079 OF THE CIVIL CODE,
WHICH PROVIDES THAT AN EXTENSION GRANTED TO THE DEBTOR BY
THE CREDITOR WITHOUT THE CONSENT OF THE GUARANTOR
EXTINGUISHES THE GUARANTY.
C.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
FAILED TO CONSIDER THE FACT THAT KAWASAKI AND FFMCCI HAVE
NOVATED THEIR ORIGINAL AGREEMENT WITHOUT THE KNOWLEDGE
AND CONSENT OF CCCIC, THEREBY RELEASING THE LATTER FROM
ANY OBLIGATION UNDER THE BONDS IT ISSUED.
D.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
RENDERED CCCIC LIABLE TO PAY THE FULL AMOUNT OF THE SURETY
AND PERFORMANCE BONDS DESPITE THE FACT THAT FFMCCI WAS
ABLE TO PARTIALLY EXECUTE ITS PORTION OF THE WORK AND THAT
12
KAWASAKI HAD BEEN FULLY COMPENSATED FOR TAKING OVER THE
UNFINISHED PORTION.
E.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
AWARDED ATTORNEY’S FEES TO KAWASAKI UNDER PARAGRAPH 2 OF
ARTICLE 2208 OF THE CIVIL CODE.
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348 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
F.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
RULED THAT THERE WAS NO VALID SERVICE OF SUMMONS UPON
FFMCCI.25
CCCIC avers that its liabilities under the Surety and Performance Bonds are
directly linked with the obligation of the Kawasaki-FFMCCI Consortium to finish
the Project for the Republic, so that its liability as surety of FFMCCI will only arise
if the Republic made a claim on the PCIB Letter of Credit furnished by Kawasaki, on
behalf of the Consortium. Since the Republic has not exercised its right against said
Letter of Credit, Kawasaki does not have a cause of action against CCCIC.
CCCIC also maintains that its obligations under the Surety and Performance
Bonds had been extinguished when (a) the Republic extended the completion period
for the Project upon the request of Kawasaki but without the knowledge or consent
of CCCIC, based on Article 2079 of the Civil Code; and (b) when Kawasaki and
FFMCCI executed the Agreement dated August 24, 1989, without the consent of
CCCIC, there being a novation of the Consortium Agreement.
CCCIC further argues that when Kawasaki, under the Agreement dated August
24, 1989, voluntarily took over the Transferred Portion of Work from FFMCCI, it
resulted in the reduction of revenue of FFMCCI on which CCCIC relied upon as a
source of indemnification. CCCIC additionally posits that Kawasaki already received
compensation for doing the Transferred Portion of Work, so the Court of Appeals
had no basis for still ordering Kawasaki to pay the full value of the Surety and
Performance Bonds, plus interest.
Moreover, CCCIC contends that the Court of Appeals erred in awarding
attorney’s fees in favor of Kawasaki based on
_______________
25 Id., at pp. 17-18.
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VOL. 759, JUNE 22, 2015 349
CCC Insurance Corporation vs. Kawasaki Steel Corporation
paragraph 2 of Article 2208 of the Civil Code as it is not a sound policy to place
a penalty on the right to litigate.
Lastly, CCCIC insists that there was proper service of summons upon FFMCCI,
through one of its directors, as authorized by the Rules of Court.
The Petition is partly meritorious.
The liability of CCCIC under the Surety and Performance Bonds is dependent on
the fulfillment and/or nonfulfillment of the obligation of FFMCCI to KAWASAKI
under the Consortium Agreement.
The statutory definition of suretyship is found in Article 2047 of the Civil Code,
thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail to
do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract
is called a suretyship. (Emphasis supplied)
Jurisprudence also defines a contract of suretyship as “an agreement where a
party called the surety guarantees the performance by another party called the
principal or obligor of an obligation or undertaking in favor of a third person called
the obligee. Specifically, suretyship is a contractual relation resulting from an
agreement whereby one person, the surety, engages to be answerable for the debt,
default or miscarriage of another, known as the principal.”26 The Court expounds
_______________
26 Visayan Surety & Insurance Corporation v. Court of Appeals, 417 Phil. 110,
116-117; 364 SCRA 631, 636 (2001).
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350 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
that “a surety’s liability is joint and several, limited to the amount of the bond,
and determined strictly by the terms of contract of suretyship in relation to the
principal contract between the obligor and the obligee. It bears stressing, however,
that although the contract of suretyship is secondary to the principal contract, the
surety’s liability to the obligee is nevertheless direct, primary, and absolute.” 27
At the outset, the Court ascertains that there are two principal contracts in this
case: (1) the Consortium Agreement wherein Kawasaki and FFMCCI agreed to
jointly enter into a contract with the Republic for the Project, each assuming the
performance of specific scopes of work in said Project; and (2) the Construction
Contract whereby the Republic awards the Project to the Kawasaki-FFMCCI
Consortium. While there is a connection between these two contracts, they are each
distinguishable from and enforceable independently of one another: the first governs
the rights and obligations between Kawasaki and FFMCCI, while the second covers
contractual relations between the Republic and the Kawasaki-FFMCCI Consortium.
13
The Surety and Performance Bonds from CCCIC guaranteed the performance by
FFMCCI of its obligations under the Consortium Agreement; whereas the Letter of
Credit from PCIB warranted the completion of the Project by the Kawasaki-FFMCCI
Consortium. At the crux of the instant controversy are the Surety and Performance
Bonds issued by CCCIC in relation to the Consortium Agreement.
FFMCCI secured the Surety and Performance Bonds from CCCIC in compliance
with Article 10 of the Consortium Agreement which provided:
ARTICLE 10 – BONDS
10.1 The CONSORTIUM LEADER [Kawasaki] shall arrange, at [its] own cost,
all necessary bonds or
_______________
27 The Manila Insurance Company, Inc. v. Amurao, G.R. No. 179628, January
16, 2013, 688 SCRA 609, 616-617.
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
guarantees as required under the CONTRACT on behalf of the CONSORTIUM.
[FFMCCI] shall, at its own cost, furnish the CONSORTIUM LEADER [Kawasaki]
with a suitable counter guarantees of its advance payment under the CONTRACT
and the performance of its PORTION OF WORK in the amount of fifteen (15%)
percent (in the case of the repayment guarantee for the advance) and ten (10%)
percent (in the case of the performance guarantee) of the price of its PORTION OF
THE WORK.
10.2 If the EMPLOYER [Republic] exercises its right on the bonds or guarantees
furnished by the CONSORTIUM LEADER, the PARTIES shall decide the
respective responsibilities according to the provisions of this AGREEMENT and the
necessary reimbursement or compensation shall be made also according to the
provisions of this AGREEMENT.28
Pertinent portions of Surety Bond No. B-88/11191 read:
SURETY BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as principal, and
CCC Insurance Corporation, x x x, as SURETY, are held and firmly bound unto
KAWASAKI STEEL CORPORATION, hereinafter referred to as the OBLIGEE: in
the sum of PESOS: THREE MILLION ONE HUNDRED THREE THOUSAND
EIGHT HUNDRED THREE & 90/100 ONLY (P3,103,803.90), Philippine currency,
for the payment of which, well and truly to be made, we bind ourselves, our heirs,
executors, administrators, successors and assigns, jointly and severally, firmly bound
from notice of acceptance, by these presents.
_______________
28 Rollo, p. 79.
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352 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO FULLY AND FAITHFULLY GUARANTEE THE REPAYMENT OF
THE DOWNPAYMENT MADE BY THE PRINCIPAL TO THE OBLIGEE IN
CONNECTION WITH THE CONSTRUCTION OF THE PANGASINAN FISHING
PORT NETWORK PROJECT AT PANGASINAN; AND
PROVIDED, HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY
SHALL IN NO CASE EXCEED THE AMOUNT OF PESOS: THREE MILLION
ONE HUNDRED THREE THOUSAND EIGHT HUNDRED THREE & 90/100
ONLY (P3,103,803.90) PHILIPPINE CURRENCY.
xxxx
WHEREAS, the said OBLIGEE requires said Principal to give a good and
sufficient bond in the above stated sum to secure the full and faithful performance
on his part of said UNDERTAKING.
NOW, THEREFORE, if the above bounden principal shall in all respects duly
and fully observe and perform all and singular the aforesaid covenants, conditions
and agreements to the true intent and meaning thereof, then this obligation shall be
null and void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 26, 1989 and
the Surety does not assume responsibility for any liability incurred or created after
said date. Any claims against this bond must be presented to the Surety in writing not
later than ten (10) days after said expiry date; otherwise, failure to do so shall
forthwith release the Surety from all liabilities under this bond and shall be a bar to
any court action against it and which right to sue is hereby waived by the Obligee
after the lapse of said period of ten (10) days above cited.29 (Emphases supplied)
_______________
29 Id., at p. 99.
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
Performance Bond No. B-88/11193 contains the following terms and conditions:
PERFORMANCE BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as principal, and
CCC Insurance Corporation, x x x, as SURETY, are held and firmly bound unto
KAWASAKI STEEL CORPORATION, hereinafter referred to as the OBLIGEE: in
the sum of PESOS: TWO MILLION SIXTY-NINE THOUSAND TWO HUNDRED
TWO & 60/100 ONLY (P2,069,202.60), Philippine currency, for the payment of
which, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly bound from
notice of acceptance, by these presents.
14
 THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
TO GUARANTEE THE FULL AND FAITHFUL PERFORMANCE OF
THE PRINCIPAL OF ITS OBLIGATION IN CONNECTION WITH THE
PROJECT FOR THE CONSTRUCTION OF PANGASINAN FISHING PORT
NETWORK LOCATED AT PANGASINAN IN ACCORDANCE WITH THE
PLANS AND SPECIFICATION OF THE CONTRACT; AND
PROVIDED, HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY
SHALL IN NO CASE EXCEED THE AMOUNT OF PESOS: TWO MILLION
SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100 ONLY
(P2,069,202.60) PHILIPPINE CURRENCY.
xxxx
WHEREAS, the said OBLIGEE requires said Principal to give a good and
sufficient bond in the above stated sum to secure the full and faithful performance
on his part of said UNDERTAKING.
354
354 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
NOW, THEREFORE, if the above bounden principal shall in all respects duly
and fully observe and perform all and singular the aforesaid covenants, conditions
and agreements to the true intent and meaning thereof, then this obligation shall be
null and void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on October 27, 1989 and
the Surety does not assume responsibility for any liability incurred or created after
said date. Any claims against this bond must be presented to the Surety in writing not
later than ten (10) days after said expiry date; otherwise, failure to do so shall
forthwith release the Surety from all liabilities under this bond and shall be a bar to
any court action against it and which right to sue is hereby waived by the Obligee
after the lapse of said period of ten (10) days above cited.30 (Emphasis supplied)
The Court reiterates that a surety’s liability is determined strictly by the terms of
contract of suretyship, in relation to the principal contract between the obligor and
the obligee. Hence, the Court looks at the Surety and Performance Bonds, in relation
to the Consortium Agreement.
According to the principle of relativity of contracts in Article 1311 of the Civil
Code,31 a contract takes effect only between the parties, their assigns, and heirs;
except when the
_______________
30 Id., at p. 101.
31 Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the contract are
not transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.
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VOL. 759, JUNE 22, 2015 355
CCC Insurance Corporation vs. Kawasaki Steel Corporation
contract contains a stipulation in favor of a third person, which gives said person
the right to demand fulfillment of said stipulation. In this case, the Surety and
Performance Bonds are enforceable by and against the parties FFMCCI (the obligor)
and CCCIC (the surety), as well as the third person Kawasaki (the obligee) in whose
favor said bonds had been explicitly constituted; while the related Consortium
Agreement binds the parties Kawasaki and FFMCCI. Since the Republic is neither a
party to the Surety and Performance Bonds nor the Consortium Agreement, any
action or omission on its part has no effect on the liability of CCCIC under said
bonds.
The Surety and Performance Bonds state that their purpose was “to secure the
full and faithful performance on [FFMCCI’s] part of said undertaking,” particularly,
the repayment by FFMCCI of the down payment advanced to it by Kawasaki (in the
case of the Surety Bond) and the full and faithful performance by FFMCCI of its
portion of work in the Project (in the case of the Performance Bond). These are the
only undertakings expressly guaranteed by the bonds, the fulfillment of which by
FFMCCI would release CCCIC from its obligations as surety; or conversely, the
nonperformance of which would give rise to the liabilities of CCCIC as a surety.
The Surety and Performance Bonds do not contain any condition that CCCIC
would be liable only if, in addition to the default on its undertakings by FFMCCI, the
Republic also made a claim against the PCIB Letter of Credit furnished by
Kawasaki, on behalf of the Kawasaki-FFMCCI Consortium. The Court agrees with
the observation of the Court of Appeals that “it is not provided, neither in the
Consortium Agreement nor in the subject bonds themselves that before KAWASAKI
may proceed against the bonds posted by [FFMCCI] and CCCIC, the Philippine
government as employer must first
356
356 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
exercise its rights against the bond issued in its favor by the consortium.”32
The Court cannot give any additional meaning to the plain language of the
undertakings in the Surety and Performance Bonds. The extent of a surety’s liability
is determined by the language of the suretyship contract or bond itself. Article 1370
of the Civil Code provides that “[i]f the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control.”33
15
 There is no basis for the interpretation by CCCIC of the word “counter-
guarantee” in Article 10 of the Consortium Agreement. The first paragraph of Article
10 of the Consortium Agreement provides that Kawasaki, as the Consortium Leader,
shall arrange, at its own cost but on behalf of the Kawasaki-FFMCCI Consortium,
for all necessary bonds and guarantees under the Construction Contract with the
Republic. The same paragraph requires, in turn, that FFMCCI, at its own cost, to
furnish Kawasaki with suitable counter-guarantees for the repayment by FFMCCI for
the advance payment from Kawasaki and performance by FFMCCI of its portion of
work in the Project. Clearly, the “guarantees” and “counter-guarantees” were
securities for the fulfillment of the obligations of the Kawasaki-FFMCCI Consortium
to the Republic under the Construction Contract and of FFMCCI to the Consortium
Leader Kawasaki under the Consortium Agreement, respectively. The CCCIC Surety
and Performance Bonds were not counter-guarantees to the PCIB Letter of Credit. In
fact, in the event that the Republic did make a claim on the PCIB Letter of Credit,
the second paragraph of Article 10 of the Consortium Agreement stipulates that
Kawasaki and FFMCCI would still have to determine their re-
_______________
32 Rollo, p. 46.
33 Molino v. Security Diners International Corporation, 415 Phil. 587, 595; 363
SCRA 358, 367-368 (2001).
357
VOL. 759, JUNE 22, 2015 357
CCC Insurance Corporation vs. Kawasaki Steel Corporation
spective responsibilities, reimbursements, and/or compensations according to the
provisions of the Consortium Agreement, instead of simply allowing Kawasaki to
recover on the “counter-guarantees” of FFMCCI.
It is not disputed that FFMCCI, due to financial difficulties, was unable to repay
the advance payment it received from Kawasaki and to finish its scope of work in the
Project, thus, FFMCCI defaulted on its obligations to Kawasaki. Given the default of
FFMCCI, CCCIC as surety became directly, primarily, and absolutely liable to
Kawasaki as the obligee under the Surety and Performance Bonds. The following
pronouncements of the Court in Asset Builders Corporation v. Stronghold Insurance
Company, Inc.34 are relevant herein:
Respondent, along with its principal, Lucky Star, bound itself to the petitioner
when it executed in its favor surety and performance bonds. The contents of the said
contracts clearly establish that the parties entered into a surety agreement as defined
under Article 2047 of the New Civil Code. x x x.
xxxx
As provided in Article 2047, the surety undertakes to be bound solidarily with
the principal obligor. That undertaking makes a surety agreement an ancillary
contract as it presupposes the existence of a principal contract. Although the contract
of a surety is in essence 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. Let it
be stressed that notwithstanding the fact that the surety contract is secondary to the
principal obligation, the surety assumes liability as a regular party to the undertaking.
_______________
34 647 Phil. 692, 702-704; 633 SCRA 370, 379 (2010).
358
358 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,
reiterating the ruling in Garcia v. Court of Appeals, expounds on the nature of the
surety’s liability:
x x x. 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.
Suretyship, in essence, contains two types of relationship — the principal
relationship between the obligee (petitioner) and the obligor (Lucky Star), and the
accessory surety relationship between the principal (Lucky Star) and the surety
(respondent). In this arrangement, the obligee accepts the surety’s solidary
undertaking to pay if the obligor does not pay. Such acceptance, however, does not
change in any material way the obligee’s relationship with the principal obligor.
Neither does it make the surety an active party to the principal obligee-obligor
relationship. Thus, the acceptance does not give the surety the right to intervene in
the principal contract. The surety’s role arises only upon the obligor’s default, at
which time, it can be directly held liable by the obligee for payment as a solidary
obligor.
In the case at bench, when Lucky Star failed to finish the drilling work within
the agreed time frame despite petitioner’s demand for completion, it was
already in delay. Due to this default, Lucky Star’s liability attached and, as a
necessary consequence, respondent’s liability under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with the petitioner and
further failed to return the P575,000.00 downpayment that was already ad-
359
VOL. 759, JUNE 22, 2015 359
CCC Insurance Corporation vs. Kawasaki Steel Corporation
vanced to it, respondent, as surety, became solidarily bound with Lucky Star for
the repayment of the said amount to petitioner. The clause, “this bond is callable on
demand,” strongly speaks of respondent’s primary and direct responsibility to the
petitioner.
16
 Accordingly, after liability has attached to the principal, the obligee or, in
this case, the petitioner, can exercise the right to proceed against Lucky Star or
respondent or both. x x x. (Emphases supplied, citations omitted)
Article 2079 of the New Civil Code is not applicable to the instant case.
To free itself from its liabilities under the Surety and Performance Bonds,
CCCIC cites Article 2079 of the Civil Code, which reads:
Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The mere failure on the part of
the creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein.
The aforequoted provision clearly speaks of an extension for the payment of a
debt granted by the creditor to a debtor without the consent of the surety. The theory
behind Article 2079 was further explained by the Court in Trade and Investment
Development Corporation of the Philippines (formerly Philippine Export and
Foreign Loan Guarantee Corporation) v. Asia Paces Corporation,35 thus:
Comparing a surety’s obligations with that of a guarantor, the Court, in the case
of Palmares v. CA, illumined that a surety is responsible for the debt’s pay-
_______________
35 G.R. No. 187403, February 12, 2014, 716 SCRA 67, 78-83.
360
360 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
ment at once if the principal debtor makes default, whereas a guarantor pays only
if the principal debtor is unable to pay, viz.:
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 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. x x x.
Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety &
Insurance Co., Inc., and later in the case of Security Bank, held that Article 2079 of
the Civil Code, which pertinently provides that “[a]n extension granted to the debtor
by the creditor without the consent of the guarantor extinguishes the guaranty,”
equally applies to both contracts of guaranty and suretyship. The rationale therefor
was explained by the Court as follows:
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
princi-
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
pal debtor or the indemnitors becoming insolvent during the extended
period. x x x.
Applying these principles, 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. 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. 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 by Banque Indosuez and PCI Capital pertain to
TIDCORP’s own debt under the Letters of Guarantee wherein it (TIDCORP)
irrevocably and unconditionally guaranteed full payment of ASPAC’s loan
obligations to the banks in the event of its (ASPAC) default. In other words, the
Letters of Guarantee secured ASPAC’s loan agreements to the banks. 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 following the civil law principle of relativity of contracts “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
362
362 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
aware of such contract and has acted with knowledge thereof.” Verily, as the
Surety Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s debt to
17
the banks, the payments extensions (which conversely concern TIDCORP’s debt
to the banks and not ASPAC’s debt to TIDCORP) 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. It must be stressed that these 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. In fine,
considering the inoperability of Article 2079 of the Civil Code in this case, the
bonding companies’ liabilities to TIDCORP under the Surety Bonds — except those
issued by Paramount and covered by its Compromise Agreement with TIDCORP —
have not been extinguished. Since these obligations arose and have been duly
demanded within the coverage periods of all the Surety Bonds, TIDCORP’s claim is
hereby granted. x x x. (Emphases supplied, citations omitted)
Similarly, there are two sets of transactions in the present case covered by two
different contracts: the Consortium Agreement between Kawasaki and FFMCCI and
the Construction Contract between the Republic and the Kawasaki-FFMCCI
Consortium. The Surety and Performance Bonds guaranteed the performance of the
obligations of FFMCCI to Kawasaki under the Consortium Agreement. The
Republic was not a party in either the Surety and Performance Bonds or the
Consortium Agreement. Under these circumstances, there was no creditor-debtor
relationship between the Republic and FFMCCI and Article 2079 of the Civil Code
did not apply. The extension granted by the Republic to Kawasaki modified the
deadline for the completion of the Project under the Construction Contract, but had
no effect on the obligations of FFMCCI to Kawasaki under the Consortium Agree-
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VOL. 759, JUNE 22, 2015 363
CCC Insurance Corporation vs. Kawasaki Steel Corporation
ment, much less, on the liabilities of CCCIC under the Surety and Performance
Bonds.
CCCIC failed to discharge the burden of proving the novation of the Consortium
Agreement which would have extinguished its obligations under the Surety and
Performance Bonds.
CCCIC argues that it was released from its obligations as surety under the Surety
and Performance Bonds because of the novation of the Consortium Agreement by
the subsequent Agreement dated August 24, 1989 executed between Kawasaki and
FFMCCI, without the consent of CCCIC.
The Court first notes that the default of FFMCCI preceded the execution of the
Agreement on August 24, 1989 which purportedly novated the Consortium
Agreement and, in effect, extinguished the Surety and Performance Bonds. As early
as his letter dated July 20, 1989, Mañacop, FFMCCI President, already admitted the
inability of FFMCCI to continue with its portion of work in the Project and
authorized Kawasaki to continue the same. It was precisely because FFMCCI
defaulted on its obligations under the Consortium Agreement that necessitated the
execution of the Agreement dated August 24, 1989 between Kawasaki and FFMCCI,
and this is evident from one of the “whereas” clauses in the said Agreement which
says that “due to some financial reverses[, FFMCCI] can no longer do its portion of
the work under the Contract.” The liabilities of CCCIC as surety to Kawasaki under
the Surety and Performance Bonds had already attached upon the default of FFMCCI
while the said bonds were still in effect and prior to the alleged novation of the
Consortium Agreement by the Agreement dated August 24, 1989 which resulted in
the extinguishment of the bonds.
364
364 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
The Court expounded on the concept of novation in Reyes v. BPI Family Savings
Bank, Inc.:36
Novation is defined as the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which terminates the first, either by
changing the object or principal conditions, or by substituting the person of the
debtor, or subrogating a third person in the rights of the creditor.
Article 1292 of the Civil Code on novation further provides:
Article 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible with each other.
The cancellation of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. While there is really
no hard and fast rule to determine what might constitute sufficient change resulting
in novation, the touchstone, however, is irreconcilable incompatibility between the
old and the new obligations.
In Garcia, Jr. v. Court of Appeals, we held that:
In every novation there are four essential requisites: (1) a previous valid
obligation; (2) the agreement of all the parties to the new contract; (3) the
extinguishment of the old contract; and (4) validity of the new one. There must be
consent of all the parties to the substitution, resulting in the extinction of the old
obligation and the creation of a valid new one. x x x. (Citations omitted)
_______________
36 520 Phil. 801, 806-807; 486 SCRA 276, 281 (2006).
365
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
It is well-settled that novation is never presumed — novatio non praesumitur. As
the party alleging novation, the onus of showing clearly and unequivocally that
novation had indeed taken place rests on CCCIC. 37 The Court laid down guidelines
in establishing novation, viz.:
18

Novation is never presumed, and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts that are
too clear and unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is a necessary element
of novation which may be effected either expressly or impliedly. The term
“expressly” means that the contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. Upon the other
hand, no specific form is required for an implied novation, and all that is prescribed
by law would be an incompatibility between the two contracts. While there is really
no hard and fast rule to determine what might constitute to be a sufficient change that
can bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which
substitutes the same. The first is when novation has been explicitly stated and
declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the first. Corollarily,
changes that breed incompatibility must be essential in nature and not merely
accidental. The in-
_______________
37 St. James College of Parañaque v. Equitable PCI Bank, 641 Phil. 452, 464;
627 SCRA 328, 341-342 (2010).
366
366 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
compatibility must take place in any of the essential elements of the obligation,
such as its object, cause or principal conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient to extinguish the original
obligation.38(Citations omitted)
CCCIC failed to discharge the burden of proving novation of the Consortium
Agreement by the Agreement dated August 24, 1989. The Court failed to see the
presence of the essential requisites for a novation of contract, specifically, the
irreconcilable incompatibility between the old and new contracts. Indeed, Kawasaki
and FFMCCI executed the Agreement dated August 24, 1989 pursuant to Article 8.3
of the Consortium Agreement:
8.3 If, for any reason, any PARTY should fail in the performance of its
PORTION OF WORK or contractual obligations and if such defaulting PARTY
refuses to cure or makes no remedial action, without presenting any valid cause,
within fifteen (15) days following demand of rectification by registered letter sent by
the other PARTY, the defaulting PARTY’s PORTION OF WORK may be
performed at the account and responsibility of the defaulting PARTY, by the non-
defaulting PARTY or by any other contractor selected by the non-defaulting PARTY
and approved by the EMPLOYER. In such event, the defaulting PARTY or its
representative shall, in no way, interfere with the performance of the CONTRACT or
impede the progress thereof, on any ground, and shall allow such performing
PARTY or the said contractor to use the materials and equipment of such defaulting
PARTY, for the purpose of remedial action.
_______________
38 Quinto v. People, 365 Phil. 259, 267-268; 305 SCRA 708, 715-716 (1999).
367
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
FFMCCI was unable to finish its portion of work in the Project because of
business reverses, and by the Agreement dated August 24, 1989, Kawasaki assumed
the Transferred Portion of Work from FFMCCI and was accorded the right to receive
the profits and benefits corresponding to said portion. Although the Agreement dated
August 24, 1989 resulted in the reallocation of the respective portions of work of
Kawasaki and FFMCCI, as well as their corresponding shares in the profits and
benefits under the Consortium Agreement, such changes were not incompatible with
the object, cause, and principal conditions of the Consortium Agreement.
Consequently, the changes under the Agreement dated August 24, 1989 were only
modificatory and did not extinguish the original obligations under the Consortium
Agreement.
Even granting that there is novation, the Court in Stronghold Insurance
Company, Incorporated v. Tokyu Construction Company, Ltd.,39 held that to release
the surety, the material change in the principal contract must make the obligation of
the surety more onerous. The Court ratiocinated in Stronghold as follows:
Petitioner’s liability was not affected by the revision of the contract price, scope
of work, and contract schedule. Neither was it extinguished because of the issuance
of new bonds procured from Tico.
As early as February 10, 1997, respondent already sent a letter to Gabriel
informing the latter of the delay incurred in the performance of the work, and of the
former’s intention to terminate the subcontract agreement to prevent further losses.
Apparently, Gabriel had already been in default even prior to the aforesaid letter; and
demands had been previously made but to no avail. By reason of said default,
Gabriel’s liability had arisen; as a consequence, so also did the liability of petitioner
as a surety arise.
_______________
39 606 Phil. 400, 411-413; 588 SCRA 410, 421 (2009).
368
368 SUPREME COURT REPORTS ANNOTATED
19
 CCC Insurance Corporation vs. Kawasaki Steel Corporation
xxxx
By the language of the bonds issued by petitioner, it guaranteed the full and
faithful compliance by Gabriel of its obligations in the construction of the SDS and
STP specifically set forth in the subcontract agreement, and the repayment of the
15% advance payment given by respondent. These guarantees made by petitioner
gave respondent the right to proceed against the former following Gabriel’s
noncompliance with her obligation.
Confusion, however, transpired when Gabriel and respondent agreed, on
February 26, 1997, to reduce the scope of work and, consequently, the contract price.
Petitioner viewed such revision as novation of the original subcontract agreement;
and since no notice was given to it as a surety, it resulted in the extinguishment of its
obligation.
We wish to stress herein the nature of suretyship, which actually involves two
types of relationship — the underlying principal relationship between the creditor
(respondent) and the debtor (Gabriel), and the accessory surety relationship between
the principal (Gabriel) and the surety (petitioner). The creditor accepts the surety’s
solidary undertaking to pay if the debtor does not pay. Such acceptance, however,
does not change in any material way the creditor’s relationship with the principal
debtor nor does it make the surety an active party to the principal creditor-debtor
relationship. In other words, the acceptance does not give the surety the right to
intervene in the principal contract. The surety’s role arises only upon the debtor’s
default, at which time, it can be directly held liable by the creditor for payment as a
solidary obligor.
The surety is considered in law as possessed of the identity of the debtor in
relation to whatever is adjudged touching upon the obligation of the latter. Their
liabilities are so interwoven as to be inseparable. Although the contract of a surety is,
in essence, secondary only to a valid principal obligation, the surety’s liability to the
creditor is direct, primary, and absolute; he becomes liable for the debt and duty of
another although he pos-
369
VOL. 759, JUNE 22, 2015 369
CCC Insurance Corporation vs. Kawasaki Steel Corporation
sesses no direct or personal interest over the obligations nor does he receive any
benefit therefrom.
Indeed, a surety is released from its obligation when there is a material alteration
of the principal contract in connection with which the bond is given, such as a
change which imposes a new obligation on the promising party, or which takes away
some obligation already imposed, or one which changes the legal effect of the
original contract and not merely its form. However, a surety is not released by a
change in the contract, which does not have the effect of making its obligation
more onerous.
In the instant case, the revision of the subcontract agreement did not in any way
make the obligations of both the principal and the surety more onerous. To be sure,
petitioner never assumed added obligations, nor were there any additional
obligations imposed, due to the modification of the terms of the contract. Failure to
receive any notice of such change did not, therefore, exonerate petitioner from its
liabilities as surety. (Emphasis supplied, citations omitted)
There is no showing herein that the obligations of CCCIC as surety had become
more onerous with the execution of the Agreement dated August 24, 1989 between
Kawasaki and FFMCCI. The Agreement dated August 24, 1989 did not alter in any
way the original coverage and the terms and conditions of the Surety and
Performance Bonds of CCCIC. If truth be told, the Agreement dated August 24,
1989 made it more onerous for Kawasaki which had to take over the Transferred
Portion of Work from FFMCCI.
That Kawasaki was to receive the profits and benefits corresponding to the
Transferred Portion of Work would not extinguish the liabilities of CCCIC under the
Surety and Performance Bonds. The right of Kawasaki to the profits and benefits
corresponding to the Transferred Portion of Work was granted under the Agreement
dated August 24, 1989 because Kawasaki was the one that would actually perform
370
370 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
the remaining portion of work and complete the Project and should be duly
compensated for the same. It is separate and distinct from the right of Kawasaki to
demand payment of the amounts guaranteed by CCCIC as surety upon the default of
FFMCCI on its undertakings under the Surety and Performance Bonds. CCCIC
cannot standby passively and be benefitted by payments made by the Republic, as
owner of the Project, to Kawasaki, as contractor, for the Transferred Portion of
Work. The only way CCCIC can extinguish its liabilities as surety, which already
attached upon the default of FFMCCI, is to make its own payments to Kawasaki of
the amounts guaranteed under the Surety and Performance Bonds.
Equally without merit is the averment of CCCIC that by executing the
Agreement dated August 24, 1989, which gave Kawasaki the right to the profits and
benefits corresponding to the Transferred Portion of Work, Kawasaki and FFMCCI
colluded or connived to deprive CCCIC of its source of indemnification. Other than
its allegation, CCCIC failed to present any evidence of collusion or connivance
between Kawasaki and FFMCCI to intentionally prejudice CCCIC. The Court
reiterates that the execution of the Agreement dated August 24, 1989 was actually
authorized under Article 8.3 of the Consortium Agreement. Kawasaki was given the
right to the profits and benefits corresponding to the Transferred Portion of Work
because it would be the one to perform the same. It would be the height of inequity
to allow FFMCCI to continue collecting payments for work it was not able to do.
Besides, there is utter lack of basis for the claim of CCCIC that without the
compensation for the Transferred Portion of Work, FFMCCI would have no means
to indemnify CCCIC for any payments the latter would have to make to Kawasaki
20
under the Surety and Performance Bonds. As the succeeding discussion will show, it
is premature for CCCIC to question the capacity of FFMCCI to indemnify it.
371
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CCC Insurance Corporation vs. Kawasaki Steel Corporation
CCCIC must first pay its liabilities to Kawasaki under the Surety and Performance
Bonds before it could be indemnified and subrogated to the rights of Kawasaki
against FFMCCI.
The rights of a guarantor who pays for the debt of the debtor are governed by the
following provisions of the Civil Code:
Art. 2066. The guarantor who pays for a debtor must be indemnified by the
latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to
the debtor, even though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor that
payment had been demanded of him;
(4) Damages, if they are due.
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the
debtor more than what he has really paid.
Although the foregoing provisions only speak of a guarantor, they also apply to a
surety, as the Court held in Escaño v. Ortigas, Jr.:40
What is the source of this right to full reimbursement by the surety? We find the
right under Article 2066
_______________
40 553 Phil. 24, 43-44; 526 SCRA 26, 45-46 (2007).
372
372 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
of the Civil Code, which assures that “[t]he guarantor who pays for a debtor must
be indemnified by the latter,” such indemnity comprising of, among others, “the total
amount of the debt.” Further, Article 2067 of the Civil Code likewise establishes that
“[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.”
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that
the provisions should not extend to sureties, especially in light of the qualifier in
Article 2047 that the provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr. Tolentino’s observation that
“[t]he reference in the second paragraph of [Article 2047] to the provisions of
Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however,
does not mean that suretyship is withdrawn from the applicable provisions governing
guaranty.” For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors,
for both classes of obligors would be governed by exactly the same rules and
limitations.
Accordingly, the rights to indemnification and subrogation as established and
granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as
defined under Article 2047. x x x. (Citations omitted)
Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to
indemnification and subrogation will arise only after it has paid its obligations to
Kawasaki as the debtor-obligee. In Autocorp Group v. Intra Strata Assurance
Corporation,41 the Court ruled that:
The benefit of subrogation, an extinctive subjective novation by a change of
creditor, which “transfers to the person subrogated, the credit and all the rights
thereto
_______________
41 578 Phil. 804, 822-823; 556 SCRA 250, 267 (2008).
373
VOL. 759, JUNE 22, 2015 373
CCC Insurance Corporation vs. Kawasaki Steel Corporation
appertaining, either against the debtor or against third persons,” is granted by
the Article 2067 of the Civil Code only to the “guarantor (or surety) who
pays.” (Emphases supplied, citations omitted)
In the present case, CCCIC has yet to pay Kawasaki.
While summons was validly served upon FFMCCI, the Third-Party Complaint of
CCCIC against FFMCCI is dismissed on the ground of lack of cause of action.
The Court disagrees with the ruling of the Court of Appeals that there was no
proper service of summons upon FFMCCI. The appellate court overlooked the fact
that the service of summons on FFMCCI at its principal address at #86 West
Avenue, Quezon City failed because FFMCCI had already vacated said premises
without notifying anyone as to where it transferred. For this reason, the RTC, upon
the motion of CCCIC, issued an Order 42 dated September 4, 1991, directing the
issuance and service of Alias Summons to the individual directors of FFMCCI.
Eventually, the Alias Summons was personally served upon FFMCCI director
Vicente Concepcion on September 25, 1991.43
21
 Rule 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed
the service of summons upon a director of a private domestic corporation:
Sec. 13. Service upon private domestic corporation or partnership.—If the
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the presi-
_______________
42 Records (Vol. I), p. 250.
43 Id., at p. 255.
374
374 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
dent, manager, secretary, cashier, agent, or any of its directors.
The aforementioned rule does not require that service on the private domestic
corporation be served at its principal office in order for the court to acquire
jurisdiction over the same. The Court, in Talsan Enterprises, Inc. v. Baliwag Transit,
Inc.,44 citing Baltazar v. Court of Appeals,45affirmed that:
[S]ervice on respondent’s bus terminal at the address stated in the summons and
not in its main office in Baliwag do not render the service of summons invalid. In
Artemio Baltazar v. Court of Appeals, we held:
“The regular mode, in other words, of serving summons upon a private
Philippine Corporation is by personal service upon one of the officers of such
corporation identified in Section 13. Ordinarily, such personal service may be
expected to be made at the principal office of the corporation. Section 13, does not,
however, impose such requirement, and so personal service upon the
corporation may be effected through service upon, for instance, the president of
the corporation at his office or residential address.” x x x.
In fine, the service of summons upon respondent Baliwag Transit is proper.
Consequently, the trial court validly acquired jurisdiction over respondent Baliwag.
(Citation omitted)
Hence, the personal service of the Alias Summons on an FFMCCI director was
sufficient for the RTC to acquire jurisdiction over FFMCCI itself.
_______________
44 369 Phil. 409, 419-420; 310 SCRA 156, 165 (1999).
45 250 Phil. 349, 360-361; 168 SCRA 354, 362 (1988).
375
VOL. 759, JUNE 22, 2015 375
CCC Insurance Corporation vs. Kawasaki Steel Corporation
Nevertheless, the Third-Party Complaint filed by CCCIC against FFMCCI and
Mañacop must be dismissed on the ground of lack of cause of action.
A cause of action is defined as the act or omission by which a party violates a
right of another. The essential elements of a cause of action are: (a) the existence of a
legal right in favor of the plaintiff; (b) a correlative legal duty of the defendant to
respect such right; and (c) an act or omission by such defendant in violation of the
right of the plaintiff with a resulting injury or damage to the plaintiff for which the
latter may maintain an action for the recovery of relief from the defendant. 46
As discussed earlier, the rights to indemnification and subrogation of a surety
only arise upon its payment of the obligation to the obligee. In the case at bar, since
CCCIC up to this point refuses to acknowledge and pay its obligation to Kawasaki
under the Surety and Performance Bonds, it has not yet acquired the rights to seek
indemnification from FFMCCI and subrogation to Kawasaki as against FFMCCI. In
the same vein, the corresponding obligation of FFMCCI to indemnify CCCIC under
the Indemnity Agreements has yet to accrue. Thus far, there is no act or omission on
the part of FFMCCI which violated the right of CCCIC and for which CCCIC may
seek relief from the courts. In the absence of these elements, CCCIC has no cause of
action against FFMCCI and/or FFMCCI President Mañacop. Resultantly, the Third-
Party Complaint of CCCIC should be dismissed.
There is no basis for awarding attorney’s fees in favor of Kawasaki. In addition,
the rate of legal interest imposed shall conform with latest jurisprudence.
_______________
46 Turner v. Lorenzo Shipping Corporation, 650 Phil. 372, 388; 636 SCRA 13,
30 (2010).
376
376 SUPREME COURT REPORTS ANNOTATED
CCC Insurance Corporation vs. Kawasaki Steel Corporation
Article 2208(2) of the Civil Code allows the award of attorney’s fees “[w]hen the
defendant’s act or omission has compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest[.]” In Servicewide Specialists,
Incorporated v. Court of Appeals,47 the Court declared that:
Article 2208 of the Civil Code allows attorney’s fees to be awarded by a court
when its claimant is compelled to litigate with third persons or to incur expenses to
protect his interest by reason of an unjustified act or omission on the part of the party
from whom it is sought. To be sure, private respondents were forced to litigate to
protect their rights but as we have previously held: “where no sufficient showing of
bad faith would be reflected in a party’s persistence in a case other than an erroneous
conviction of the righteousness of his cause, attorney’s fee shall not be recovered as
cost.” (Citation omitted)
Bad faith has been defined as “a breach of a known duty through some motive of
interest or ill will. It must, however, be substantiated by evidence. Bad faith under
the law cannot be presumed, it must be established by clear and convincing
evidence.”48 There is no evidence in this case to show bad faith on the part of
22
CCCIC. CCCIC, in refusing the claim of Kawasaki, was merely acting based on its
belief in the righteousness of its defense. Hence, even though Kawasaki was
compelled to litigate to enforce its claim against CCCIC, the award of attorney’s fees
is not proper.
Finally, the Court, in Nacar v. Gallery Frames,49modified the guidelines in
imposing interests, taking into account Bangko Sentral ng Pilipinas-Monetary Board
Resolution No. 796 dated May 16, 2013 and Circular No. 799, Series of 2013,
_______________
of an obligation or undertaking in favor of another party called the obligee.
(American Home Insurance Co. of New York vs. F.F. Cruz & Co., Inc., 655
SCRA 248 [2011])
Although the contract of suretyship is secondary only to a valid principal
obligation, the surety’s liability to the creditor is direct, primary, and absolute. (Id.)
——o0o——

47 326 Phil. 660, 669; 256 SCRA 649, 655 (1996).

48 GF Equity, Inc. v. Valenzona, 501 Phil. 153, 168; 462 SCRA 466, 482
(2005).
49 G.R. No. 189871, August 13, 2013, 703 SCRA 439, 454-456.
377
VOL. 759, JUNE 22, 2015 377
CCC Insurance Corporation vs. Kawasaki Steel Corporation
which fixed the legal rate at 6% per annum effective July 1, 2013. In the absence
of stipulated interest in the present case, the Court imposes upon the amounts
covered by the Surety and Performance Bonds the legal rate of 12% per annum from
September 15, 1989, the date of demand, until June 30, 2013; and then the legal rate
of 6% per annum from July 1, 2013 until full payment of the same.
WHEREFORE, premises considered, the instant Petition for Review
on Certiorari is PARTLY GRANTED.The Decision dated May 30, 2002 and
Resolution dated November 14, 2002 of the Court of Appeals are AFFIRMED with
the following MODIFICATIONS:
1) The Third-Party Complaint filed by CCC Insurance Corporation against F.F.
Mañacop Construction Company, Inc. and Mr. Florante F. Mañacop
is DISMISSED on the ground of lack of cause of action; G.R. No. 203133. February 18, 2015.*
2) The award of attorney’s fees in favor of Kawasaki Steel Corporation
is DELETED; and YULIM INTERNATIONAL COMPANY LTD., JAMES YU, JONATHAN YU,
3) In addition to the amounts CCC Insurance Corporation is ordered to pay and ALMERICK TIENG LIM, petitioners, vs. INTERNATIONAL
Kawasaki Steel Corporation under Surety Bond No. B-88/11191 and Performance EXCHANGE BANK (now Union Bank of the Philippines), respondent.
Bond No. B-88/11193, CCC Insurance Corporation is further ORDERED to pay Civil Law; Suretyship; Solidary Obligations; In a contract of suretyship, one
Kawasaki Steel Corporation legal interest on said amounts at the rates of 12% per lends his credit by joining in the principal debtor’s
annumfrom September 15, 1989 to June 30, 2013 and 6% per annum from July 1, _______________
2013 until full payment thereof.
SO ORDERED. * THIRD DIVISION.
Sereno (CJ., Chairperson), Bersamin, Perez and Perlas-Bernabe, JJ., concur. 130
Petition partly granted, judgment and resolution affirmed with modifications.
378 130 SUPREME COURT REPORTS ANNOTATED
378 SUPREME COURT REPORTS ANNOTATED Yulim International Company Ltd. vs. International Exchange Bank (now Union
CCC Insurance Corporation vs. Kawasaki Steel Corporation Bank of the Philippines)
Notes.—A contract of suretyship is an agreement whereby a party called the obligation so as to render himself directly and primarily responsible with him
surety, guarantees the performance by another party, called the principal or obligor, without reference to the solvency of the principal.—In a contract of suretyship, one

23
lends his credit by joining in the principal debtor’s obligation so as to render himself
directly and primarily responsible with him without reference to the solvency of the
principal. According to the above Article, if a person binds himself solidarily with
the principal debtor, the provisions of Articles 1207 to 1222, or Section 4, Chapter 3,
Title I, Book IV of the Civil Code on joint and solidary obligations, shall be
observed. Thus, where there is a concurrence of two or more creditors or of two or
more debtors in one and the same obligation, Article 1207 provides that among them,
“[t]here is a solidary liability only when the obligation expressly so states, or when
the law or the nature of the obligation requires solidarity.” “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.” And it is well-settled that when the obligor or obligors undertake to be
“jointly and severally” liable, it means that the obligation is solidary, as in this case.
Same; Mortgages; The assignment being in its essence a mortgage, it was but
a security and not a satisfaction of the petitioners’ indebtedness.—To stress, the
assignment being in its essence a mortgage, it was but a security and not a
satisfaction of the petitioners’ indebtedness. Article 1255 of the Civil Code invoked
by the petitioners contemplates the existence of two or more creditors and involves
the assignment of the entire debtor’s property, not a dacion en pago. Under Article
1245 of the Civil Code, “[d]ation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law on sales.”
Nowhere in the Deed of Assignment can it be remotely said that a sale of the
condominium unit was contemplated by the parties, the consideration for which
would consist of the amount of outstanding loan due to iBank from the petitioners.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Teresita De Leon-Nuguid for petitioners.
131
VOL. 751, FEBRUARY 18, 2015 131
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
Macalino and Associates for respondent.
REYES, J.:
In the assailed Decision1 dated February 1, 2012 in C.A.-G.R. CV No. 95522, the
Court of Appeals (CA) modified the Decision2 dated December 21, 2009 of the
Regional Trial Court (RTC) of Makati City, Branch 145, in Civil Case No. 02-749,
holding that James Yu (James), Jonathan Yu (Jonathan) and Almerick Tieng Lim
(Almerick), who were capitalist partners in Yulim International Company Ltd.
(Yulim), collectively called as the petitioners, were jointly and severally liable with
Yulim for its loan obligations with respondent International Exchange Bank (iBank).
The Facts
On June 2, 2000, iBank, a commercial bank, granted Yulim, a domestic
partnership, a credit facility in the form of an Omnibus Loan Line for P5,000,000.00,
as evidenced by a Credit Agreement3 which was secured by a Chattel Mortgage 4 over
Yulim’s inventories in its merchandise warehouse at 106 4th Street, 9th Avenue,
Caloocan City. As further guarantee, the partners, namely, James, Jonathan and
Almerick, executed a Continuing Surety Agreement5 in favor of iBank.
Yulim availed of its aforesaid credit facility with iBank, as follows:
_______________
1 Penned by Associate Justice Josefina Guevara-Salonga, with Associate
Justices Ramon M. Bato, Jr. and Priscilla J. Baltazar-Padilla, concurring; Rollo, pp.
420-431.
2 Issued by Acting Presiding Judge Cesar O. Untalan; id., at pp. 367-372.
3 Id., at p. 84.
4 Id., at pp. 92-98.
5 Id., at pp. 90-91.
132
132 SUPREME COURT REPORTS ANNOTATED
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
The above promissory notes (PN) were later consolidated under a single
promissory note, PN No. SADDK001014188, for P4,246,310.00, to mature on
February 28, 2002.7 Yulim defaulted on the said note. On April 5, 2002, iBank sent
demand letters to Yulim, through its President, James, and through Almerick, 8 but
without success. iBank then filed a Complaint for Sum of Money with
Replevin9 against Yulim and its sureties. On August 8, 2002, the Court granted the
application for a writ of replevin. Pursuant to the Sheriff’s Certificate of Sale dated
November 7, 2002,10 the items seized from Yulim’s warehouse were worth only
P140,000.00, not P500,000.00 as the petitioners have insisted.11
On October 2, 2002, the petitioners moved to dismiss the complaint insisting that
their loan had been fully paid after they assigned to iBank their Condominium Unit
No. 141, with parking space, at 20 Landsbergh Place in Tomas Morato Avenue,
Quezon City.12 They claimed that while the preselling value of the condominium unit
was P3.3 Million, its market value has since risen to P5.5 Million. 13 The RTC,
however, did
_______________
6 Id., at pp. 195-204.
7 Id., at pp. 177-178.
8 Id., at pp. 205-208.
9 Id., at pp. 66-83.
10 Id., at p. 192.
24
 11 Id., at p. 245. and Almerick, stating that there was no iota of evidence that the loan proceeds
12 Id., at pp. 120-123. benefited their families.16
13 Id., at p. 58. The petitioners moved for reconsideration on January 12, 2010; 17 iBank on
133 January 19, 2010 likewise filed a motion for partial reconsideration. 18 In its Joint
VOL. 751, FEBRUARY 18, 2015 133 Order19dated March 8, 2010, the RTC denied both motions.
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Ruling of the CA
Bank of the Philippines)
On March 23, 2010, Yulim filed a Notice of Partial Appeal, followed on March
not entertain the motion to dismiss for noncompliance with Rule 15 of the Rules 30, 2010 by iBank with a Notice of Appeal.
of Court. Yulim interposed the following as errors of the court a quo:
On May 16, 2006, the petitioners filed their Answer reiterating that they have I. THE LOWER COURT ERRED IN ORDERING [YULIM] TO PAY [iBANK]
paid their loan by way of assignment of a condominium unit to iBank, as well as THE AMOUNT OF P4,246,310.00 WITH INTEREST AT 16.5% PER
insisting that iBank’s penalties and charges were exorbitant, oppressive and ANNUM FROM FEBRUARY 28, 2002 UNTIL FULLY PAID.
unconscionable.14 II. THE LOWER COURT ERRED IN NOT ORDERING [iBANK] TO PAY
ATTORNEY’S FEES, MORAL DAMAGES AND EXEMPLARY DAMAGES.20
Ruling of the RTC
For its part, iBank raised the following as errors of the RTC:
After trial on the merits, the RTC rendered judgment on December 21, 2009, the I. THE TRIAL COURT ERRED IN NOT HOLDING INDIVIDUAL
dispositive portion of which reads, as follows: [PETITIONERS JAMES, JONATHAN AND ALMERICK] SOLIDARILY LIABLE
WHEREFORE, in view of the foregoing considerations, the Court finds the WITH [YULIM] ON THE BASIS OF THE CONTINUING SURETYSHIP
individual defendants James Yu, Jonathan Yu and Almerick Tieng Lim, not liable to AGREEMENT EXECUTED BY THEM.
the plaintiff, iBank, hence the complaint against them is hereby DISMISSED for _______________
insufficiency of evidence, without pronouncement as to cost.
This court, however, finds defendant corporation Yulim International Company 16 Id., at p. 370.
Ltd. liable; and it hereby orders defendant corporation to pay plaintiff the sum of 17 Id., at pp. 277-282.
P4,246,310.00 with interest at 16.50% per annum from February 28, 2002 until fully 18 Id., at pp. 283-294.
paid plus cost of suit. 19 Id., at pp. 311-312.
The counterclaims of defendants against plaintiff iBank are hereby DISMISSED 20 Id., at p. 399.
for insufficiency of evidence. 135
SO ORDERED.15 VOL. 751, FEBRUARY 18, 2015 135
Thus, the RTC ordered Yulim alone to pay iBank the amount of P4,246,310.00, Yulim International Company Ltd. vs. International Exchange Bank (now Union
plus interest at 16.50% per annum from February 28, 2002 until fully paid, plus costs Bank of the Philippines)
of suit, and dismissed the complaint against petitioners James, Jonathan II. THE TRIAL COURT ERRED IN NOT HOLDING ALL THE
_______________ [PETITIONERS] LIABLE FOR PENALTY CHARGES UNDER THE CREDIT
AGREEMENT AND PROMISSORY NOTES SUED UPON.
14 Id., at pp. 137-145. III. THE TRIAL COURT ERRED IN NOT HOLDING [THE PETITIONERS]
15 Id., at p. 372. LIABLE TO [iBANK] FOR ATTORNEY’S FEES AND INDIVIDUAL
134 [PETITIONERS] JOINTLY AND SEVERALLY LIABLE WITH [YULIM] FOR
134 SUPREME COURT REPORTS ANNOTATED COSTS OF SUIT INCURRED BY [iBANK] IN ORDER TO PROTECT ITS
RIGHTS.21
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines) Chiefly, the factual issue on appeal to the CA, raised by petitioners James,
Jonathan and Almerick, was whether Yulim’s loans have in fact been extinguished

25
with the execution of a Deed of Assignment of their condominium unit in favor of
iBank, while the corollary legal issue, raised by iBank, was whether they should be
held solidarily liable with Yulim for its loans and other obligations to iBank.
The CA ruled that the petitioners failed to prove that they have already paid
Yulim’s consolidated loan obligations totaling P4,246,310.00, for which it issued to
iBank PN No. SADDK001014188 for the said amount. It held that the existence of a
debt having been established, the burden to prove with legal certainty that it has been
extinguished by payment devolves upon the debtors who have offered such defense.
The CA found the records bereft of any evidence to show that Yulim had fully
settled its obligation to iBank, further stating that the so-called assignment by Yulim
of its condominium unit to iBank was nothing but a mere temporary arrangement to
provide security for its loan pending the subsequent execution of a real estate
mortgage. Specifically, the CA found nothing in the Deed of Assignment which
could signify that iBank had accepted the said property as full payment of the
petitioners’ loan. The CA cited Manila Banking Corporation v.
_______________
21 Id., at pp. 335-336.
136
136 SUPREME COURT REPORTS ANNOTATED
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
Teodoro, Jr.22 which held that an assignment to guarantee an obligation is in
effect a mortgage and not an absolute conveyance of title which confers ownership
on the assignee.
Concerning the solidary liability of petitioners James, Jonathan and Almerick,
the CA disagreed with the trial court’s ruling that it must first be shown that the
proceeds of the loan redounded to the benefit of the family of the individual
petitioners before they can be held liable. Article 161 of the Civil Code and Article
121 of the Family Code cited by the RTC apply only where the liability is sought to
be enforced against the conjugal partnership itself. In this case, regardless of whether
the loan benefited the family of the individual petitioners, they signed as sureties,
and iBank sought to enforce the loan obligation against them as sureties of Yulim.
Thus, the appellate court granted the appeal of iBank, and denied that of the
petitioners, as follows:
WHEREFORE, the foregoing considered, [iBank’s] appeal is PARTLY
GRANTED while [the petitioners’] appeal is DENIED. Accordingly, the appealed
decision is hereby MODIFIED in that [petitioners] James Yu, Jonathan Yu and
A[l]merick Tieng Lim are hereby held jointly and severally liable with defendant-
appellant Yulim for the payment of the monetary awards. The rest of the assailed
decision is AFFIRMED.
SO ORDERED.23
Petition for Review to the Supreme Court
In the instant petition, the following assigned errors are before this Court:
1. The CA erred in ordering petitioners James, Jonathan and Almerick jointly
and severally liable with petitioner
_______________
22 G.R. No. 53955, January 13, 1989, 169 SCRA 95.
23 Rollo, pp. 430-431.
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Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
Yulim to pay iBank the amount of P4,246,310.00 with interest at 16.5% per
annum from February 28, 2002 until fully paid.
2. The CA erred in not ordering iBank to pay the petitioners moral damages,
exemplary damages, and attorney’s fees.24
The petitioners insist that they have paid their loan to iBank. They maintain that
the letter of iBank to them dated May 4, 2001, which “expressly stipulated that the
petitioners shall execute a Deed of Assignment over one condominium unit No. 141,
3rd Floor and a parking slot located at 20 Landsbergh Place, Tomas Morato Avenue,
Quezon City,” was with the understanding that the Deed of Assignment, which they
in fact executed, delivering also to iBank all the pertinent supporting documents,
would serve to totally extinguish their loan obligation to iBank. In particular, the
petitioners state that it was their understanding that upon approval by iBank of their
Deed of Assignment, the same “shall be considered as full and final payment of the
petitioners’ obligation.” They further assert that iBank’s May 4, 2001 letter expressly
carried the said approval.
The petitioner invoked Article 1255 of the Civil Code, on payment by cession,
which provides:
Art. 1255. The debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the contrary, shall
only release the debtor from responsibility for the net proceeds of the thing assigned.
The agreements which, on the effect of the cession, are made between the debtor and
his creditors shall be governed by special laws.
Ruling of the Court
The petition is bereft of merit.
_______________
24 Id., at p. 55.
138
138 SUPREME COURT REPORTS ANNOTATED
26
 Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
Firstly, the individual petitioners do not deny that they executed the Continuing
Surety Agreement, wherein they “jointly and severally with the PRINCIPAL
[Yulim], hereby unconditionally and irrevocably guarantee full and complete
payment when due, whether at stated maturity, by acceleration, or otherwise, of any
and all credit accommodations that have been granted” to Yulim by iBank,
including interest, fees, penalty and other charges. 25Under Article 2047 of the Civil
Code, these words are said to describe a contract of suretyship. It states:
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.
In a contract of suretyship, one lends his credit by joining in the principal
debtor’s obligation so as to render himself directly and primarily responsible with
him without reference to the solvency of the principal. 26According to the above
Article, if a person binds himself solidarily with the principal debtor, the provisions
of Articles 1207 to 1222, or Section 4, Chapter 3, Title I, Book IV of the Civil Code
on joint and solidary obligations, shall be observed. Thus, where there is a
concurrence of two or more creditors or of two or more debtors in one and the same
obligation, Article 1207 provides that among them, “[t]here is a solidary liability
only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.”
_______________
25 Id., at p. 90.
26 See Palmares v. Court of Appeals, 351 Phil. 664; 288 SCRA 422 (1998).
139
VOL. 751, FEBRUARY 18, 2015 139
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
“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.”27 And it is well-settled that when the obligor or
obligors undertake to be “jointly and severally” liable, it means that the obligation is
solidary,28 as in this case. There can be no mistaking the same import of Article I of
the Continuing Surety Agreement executed by the individual petitioners:
ARTICLE I
LIABILITIES OF SURETIES
SECTION 1.01. The SURETIES, jointly and severally with the PRINCIPAL,
hereby unconditionally and irrevocably guarantee full and complete payment when
due, whether at stated maturity, by acceleration, or otherwise, of any and all credit
accommodations that have been granted or may be granted, renewed and/or extended
by the BANK to the PRINCIPAL.
The liability of the SURETIES shall not be limited to the maximum principal
amount of FIVE MILLION PESOS (P5,000,000.00) but shall include interest, fees,
penalty and other charges due thereon.
SECTION 1.02. This INSTRUMENT is a guarantee of payment and not
merely of collection and is intended to be a perfect and continuing indemnity in favor
of the BANK for the amounts and to the extent stated above.
The liability of the SURETIES shall be direct, immediate and not contingent
upon the pursuit of the
_______________
27 Philippine National Bank v. Pineda, 274 Phil. 274, 282; 197 SCRA 1, 10-11
(1991).
28 Crystal v. Bank of the Philippine Islands, G.R. No. 172428, November 28,
2008, 572 SCRA 697, 703. See also Escano v. Ortigas, Jr., 553 Phil. 24; 526 SCRA
26 (2007).
140
140 SUPREME COURT REPORTS ANNOTATED
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
BANK of whatever remedies it may have against the PRINCIPAL of the other
securities for the Accommodation.29
Thereunder, in addition to binding themselves “jointly and severally” with Yulim
to “unconditionally and irrevocably guarantee full and complete payment” of any
and all credit accommodations that have been granted to Yulim, the petitioners
further warrant that their liability as sureties “shall be direct, immediate and not
contingent upon the pursuit [by] the BANK of whatever remedies it may have against
the PRINCIPAL of other securities.” There can thus be no doubt that the individual
petitioners have bound themselves to be solidarily liable with Yulim for the payment
of its loan with iBank.
As regards the petitioners’ contention that iBank in its letter dated May 4, 2001
had “accepted/approved” the assignment of its condominium unit in Tomas Morato
Avenue as full and final payment of their various loan obligations, the Court is far
from persuaded. On the contrary, what the letter accepted was only the collaterals
provided for the loans, as well as the consolidation of the petitioners’ various PN’s
under one PN for their aggregate amount of P4,246,310.00. The letter goes on to
spell out the terms of the new PN, such as, that its expiry would be February 28,
27
2002 or a term of 360 days, that interest would be due every 90 days, and that the
rate would be based on the 91-day Treasury Bill rate or other market reference.
Nowhere can it be remotely construed that the letter even intimates an
understanding by iBank that the Deed of Assignment would serve to extinguish the
petitioners’ loan. Otherwise, there would have been no need for iBank to mention
therein the three “collaterals” or “supports” provided by the petitioners, namely, the
Deed of Assignment, the Chattel
_______________
29 Rollo, p. 90.
141
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Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
Mortgage and the Continuing Surety Agreement executed by the individual
petitioners. In fact, Section 2.01 of the Deed of Assignment expressly acknowledges
that it is a mere “interim security for the repayment of any loan granted and those
that may be granted in the future by the BANK to the ASSIGNOR and/or the
BORROWER, for compliance with the terms and conditions of the relevant credit
and/or loan documents thereof.”30 The condominium unit, then, is a mere temporary
security, not a payment to settle their promissory notes.31
Even more unmistakably, Section 2.02 of the Deed of Assignment provides that
as soon as title to the condominium unit is issued in its name, Yulim shall
“immediately execute the necessary Deed of Real Estate Mortgage in favor of the
BANK to secure the loan obligations of the ASSIGNOR and/or the
BORROWER.”32This is a plain and direct acknowledgment that the parties really
intended to merely constitute a real estate mortgage over the property. In fact, the
Deed of Assignment expressly states, by way of a resolutory condition concerning
the purpose or use of the Deed of Assignment that after the petitioners have delivered
or caused the delivery of their title to iBank, the Deed of Assignment shall then
become null and void. Shorn of its legal efficacy as an interim security, the Deed of
Assignment would then become functus
_______________
30 Section 2.01. This ASSIGNMENT is executed as an interim security for
the repayment of any loan granted and those that may be granted in the future by the
BANK to the ASSIGNOR and/or the BORROWER, for compliance with the terms
and conditions of the relevant credit and/or loan documents thereof x x x.
31 Rollo, pp. 427-428.
142
142 SUPREME COURT REPORTS ANNOTATED
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
officio once title to the condominium unit has been delivered to iBank. This is so
because the petitioners would then execute a Deed of Real Estate Mortgage over the
property in favor of iBank as security for their loan obligations.
Respondent iBank certainly does not share the petitioners’ interpretation of its
May 4, 2001 letter. Joy Valerie Gatdula, Senior Bank Officer of iBank and the Vice
President of iBank’s Commercial Banking Group, declared in her testimony that the
purpose of the Deed of Assignment was merely to serve as collateral for their loan:
Q: And during the time that the defendant[,] James Yu[,] was negotiating with
your bank, [is it] not a fact that the defendant offered to you a [condominium] unit so
that — that will constitute full payment of his obligation?
A: No ma’am. It was not offered that way. It was offered as security or collateral
to pay the outstanding loans. But the premise is, that he will pay x x x in cash. So,
that property was offered as a security or collateral.
Q: That was your position?
A: That was the agreement and that was how the document was signed. It was
worded out[.]
xxxx
Q: Do you remember if a real estate mortgage was executed over this property
that was being assigned to the plaintiff?
A: To my recollection, none at all.
Q: Madam Witness, this Deed of Assignment was considered as full payment by
the plaintiff bank, what document was executed by the plaintiff bank?
A: It should have been a Dacion en Pago.
Q: Was there such document executed in this account?
A: None.33
_______________
33 Rollo, p. 427.
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Bank of the Philippines)
To stress, the assignment being in its essence a mortgage, it was but a security
and not a satisfaction of the petitioners’ indebtedness. 34 Article 125535 of the Civil
Code invoked by the petitioners contemplates the existence of two or more creditors
and involves the assignment of the entire debtor’s property, not a dacion en
pago.36 Under Article 1245 of the Civil Code, “[d]ation in payment, whereby
property is alienated to the creditor in satisfaction of a debt in money, shall be
governed by the law on sales.” Nowhere in the Deed of Assignment can it be
remotely said that a sale of the condominium unit was contemplated by the parties,
the consideration for which would consist of the amount of outstanding loan due to
iBank from the petitioners.
WHEREFORE, premises considered, the petition is DENIED.
SO ORDERED.
28
 Velasco, Jr. (Chairperson), Peralta, Del Castillo** and Villarama, Jr., JJ.,
concur.
Petition denied.
Notes.—There is solidary liability when the obligation expressly so states, when
the law so provides or when the nature of the obligation so requires. ( Alba vs.
Yupangco,622 SCRA 503 [2010])
_______________

34 Philippine Bank of Commerce v. De Vera, 116 Phil. 1326, 1329; 6 SCRA

1026, 1029 (1962).
35 Art. 1255. The debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the contrary, shall
only release the debtor from responsibility for the net proceeds of the thing assigned.
The agreements which, on the effect of the cession, are made between the debtor and
his creditors shall be governed by special laws.
36 DBP v. Court of Appeals, 348 Phil. 15, 29-30; 284 SCRA 14, 25 (1998).
* * Designated acting member per Special Order No. 1934 dated February 11,
2015 vice Associate Justice Francis H. Jardeleza.
144
144 SUPREME COURT REPORTS ANNOTATED
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
A contract of suretyship is defined as 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 a third party, called the obligee. (The
Manila Insurance Company, Inc. vs. Amurao, 688 SCRA 609 [2013])
——o0o——

29