Part Five: Guaranty and Suretyship

Machetti v. Hospicio de San Jose, 43 Phil 297 (1922)

Phil. Export v. V.P. Eusebio, 434 SCRA 202 (2004)
IFC v. Imperial Textile 475 SCRA 149 (2005)
Severino v. Severino, 56 Phil 187 (1931)
Lee v. CA, 375 SCRA 579 (2002)
De Guzman v. Santos, 68 Phil 371 (1939)
Municipality of Gassan v. Marasigan, 63 Phil 510 (1956).
Smith Bell v. PNB, 42 Phil 733 (1922)
RCBC v.Arro, 115 SCRA 777 (1982)
Willex Plastics v. CA, 256 SCRA 478 (1996)
Traders Insurance v. Dy. 104 Phil. 806 (1958)
SOCONY v. Cho Siong, 52 Phil 612 (1928)
Garon v. Project Movers, 520 SCRA 365 (1972).
Republic v. Pal-Fox Lumber 43 SCRA 365 (1972)
Commonwealth v. CA, 421 SCRA 367 (2004)
Namarco v. Marquez, 26 SCRA 722 (1969)
Vizconde v. IAC, 149 SCRA 226 (1987)
Estate of Hemady v. Luzon Surety, 100 Phil. 388 (1956)
Wise & Co. v. Tanglao 63 Phil. 372 (1936)
Southern Motors v. Barbosa, 99 Phil 263 (1956)
Arroyo v. Jungsay, 34 Phil 590 (1916)
Bitanga v. Pyramid, 563 SCRA 544 (2008)
Ong v PCIB, 448 SCRA 705 (2005)
Mira Hermanos v. Manila Tobacconists 74 Phil. 367 (1943)
Cacho v. Valles, 45 Phil 107 (1932)
Autocorp v. Intra Strata, 556 SCRA 250 (2008)
Manila Surety v. Batu Construction, 101 Phil 494 (1957)
General Indemnity Co., Inc. v. Alvarez, 100 Phil. 1059 (1957)
Intra Strata Assurance Corp. v. Republic, 557 SCRA 363 (2008).
Radio Corp. of the Phil. V Roa, 62 Phil 211 (1935)
Security Bank v. Cuenca, 351 SCRA 781 (2000)
PNB v. Manila Surety, 14 SCRA 776 (1965)
Machetti v. Hospicio de San Jose, 43 Phil 297 (1922)
https://jur.ph/jurisprudence/v/digest/machetti-v-hospicio-de-san-jose?q=G.R.+No.+L-
16666

**Facts:**
- On July 17, 1916, Romulo Machetti agreed to construct a building in Manila for the
Hospicio de San Jose for P64,000.
- The contract required Machetti to obtain a guarantee from the Fidelity and Surety
Company of the Philippine Islands for P128,800.
- Machetti built the structure under the Hospicio's supervision, receiving partial payments
totaling P59,021.92.
- The Hospicio discovered defects in the construction, leading to a counterclaim for
damages amounting to P71,350.
- Machetti was declared insolvent on February 27, 1918, halting the case proceedings.
- The Hospicio sought to make the Fidelity and Surety Company the new defendant,
excluding Machetti.
- The Hospicio filed a complaint against the Fidelity and Surety Company for P12,800, the
amount guaranteed.

**Issues:**
- Whether the Fidelity and Surety Company, as a guarantor, is liable for the P12,800
guarantee despite Machetti's insolvency.
- Determining the distinction between guarantor and surety, and the obligations associated
with each.
- Establishing the conditions under which the guarantor's liability is triggered.

**Decisions:**
- The Court reversed the judgment against the Fidelity and Surety Company, ruling it was
premature.
- The Fidelity and Surety Company's liability is contingent upon Machetti's inability to pay,
which was not conclusively proven by his insolvency alone.
- The Hospicio de San Jose may pursue action against Machetti after exhausting remedies
against him.
- The case highlights the distinction between a guarantor and a surety, emphasizing the
former's obligation to pay only if the principal debtor cannot.
IFC v. Imperial Textile 475 SCRA 149 (2005)
https://jur.ph/jurisprudence/v/digest/international-finance-corp-v-imperial-textile-mills-
inc?q=G.R.+No.+160324

On December 17, 1974, International Finance Corporation (IFC) and Philippine Polyamide
Industrial Corporation (PPIC) entered into a loan agreement where IFC extended a loan of
US$7,000,000 to PPIC. The loan was payable in sixteen semi-annual installments, with
interest at a rate of 10% per annum. Concurrently, Imperial Textile Mills, Inc. (ITM) and
Grand Textile Manufacturing Corporation (Grandtex) entered into a "Guarantee
Agreement" with IFC, whereby they guaranteed PPIC's obligations under the loan
agreement.
Despite PPIC's initial payments on the loan, subsequent defaults occurred. By April 1, 1985,
IFC served PPIC with a notice of default, demanding payment of the outstanding loan and
accrued interest. PPIC failed to comply, leading IFC to initiate foreclosure proceedings on
PPIC's properties to recover the unpaid balance.
IFC also demanded payment from ITM and Grandtex as guarantors, holding them
responsible for PPIC's default under the guarantee agreement. Despite the demand, ITM
and Grandtex did not pay the outstanding balance, prompting IFC to file a complaint
against PPIC and ITM in the Regional Trial Court of Manila in 1988, seeking recovery of the
outstanding loan amount, accrued interest, and attorney's fees.

**Issues:**
1. Whether ITM and Grandtex are sureties and therefore jointly and severally liable with
PPIC for the payment of the loan.
2. Whether the Petition raises a question of law.
3. Whether the Petition raises a theory not raised in the lower court.
The primary issue revolves around the liability of ITM and Grandtex as guarantors
under the "Guarantee Agreement." Specifically, whether they are jointly and severally liable
with PPIC for the payment of the loan and related obligations. Secondary issues include
procedural matters raised by ITM, such as alleged changes in legal theories during the
appeal process and the Supreme Court's jurisdiction to review factual findings.

**Decisions:**
1. The Court of Appeals reversed the trial court's decision, holding ITM and Grandtex
jointly and severally liable with PPIC for the outstanding loan. The CA determined that by
entering into the Guarantee Agreement, ITM and Grandtex assumed the role of sureties,
making them directly liable to IFC.
2. Upon IFC's Petition for Review, the Supreme Court granted it and modified the CA's
decision. The Court held that ITM and Grandtex were indeed sureties, not mere guarantors,
as evidenced by the terms of the Guarantee Agreement. As sureties, they were jointly and
severally liable with PPIC for the outstanding loan. The Court rejected ITM's procedural
arguments and affirmed its jurisdiction to review factual findings when necessary.

In summary, the Supreme Court clarified the nature of ITM and Grandtex's liability as
sureties and affirmed their joint and several liability with PPIC for the outstanding loan and
related obligations.
Severino v. Severino, 56 Phil 187 (1931)
https://jur.ph/jurisprudence/v/digest/severino-v-echaus?q=G.R.+No.+34642

**Facts:**
- Fabiola Severino and her husband Ricardo Vergara filed a case to recover P20,000 from
Guillermo Severino and Enrique Echaus, the latter being the guarantor for the former.
- The trial court ruled in favor of the plaintiffs, ordering the defendants to pay P20,000 with
interest from November 15, 1929.
- The judgment stated that execution should first be sought against the property of
Guillermo Severino, with Enrique Echaus liable as guarantor if Guillermo's property was
insufficient.
- Enrique Echaus appealed the judgment, while Guillermo Severino did not.

**Issues:**
- The main issue was whether Enrique Echaus, as guarantor, was bound by the contract and
liable for the debt.
- Echaus argued that he received no consideration for his role as guarantor, making the
contract void as to him.

**Decisions:**
- The court affirmed the judgment of the trial court, finding it correct in all respects.
- It ruled that Echaus, as a guarantor, was bound by the contract, even if he received no
direct benefit from it.
- The compromise and dismissal of the lawsuit by Fabiola Severino and others against
Guillermo Severino constituted valid consideration for the contract, making Echaus's
promise as a guarantor binding.
- The court ordered Echaus to pay the debt, affirming the trial court's decision, and
imposed costs against him.

**Conclusion:**
The court upheld the judgment in favor of Fabiola Severino and Ricardo Vergara, holding
Enrique Echaus liable as guarantor for the debt owed by Guillermo Severino, and affirming
the trial court's decision to recover P20,000 plus interest from the defendants.
Municipality of Gassan v. Marasigan, 63 Phil 510 (1936).
https://jur.ph/jurisprudence/v/digest/municipality-of-gasan-v-marasigan?q=G.R.+No.
+43486
**Facts:**
- The municipality of Gasan in Marinduque brought an action against Miguel Marasigan,
Angel R. Sevilla, and Gonzalo L. Luna to recover license fees owed for the privilege of
gathering whitefish spawn.
- Marasigan had bid and been granted this privilege at an auction held by the municipality.
- The auction was contested by Graciano Napa, who protested to the provincial board and
Executive Bureau, claiming he was the highest bidder.
- The provincial board and Executive Bureau declared the auction invalid and suggested
awarding the privilege to Napa.
- The municipality attempted to award the privilege to Napa, but he ceded it to Marasigan.
- A contract between the municipality and Marasigan was suspended pending resolution of
the auction dispute.
- Marasigan paid certain fees to the municipality, suggesting he enjoyed the privilege of
gathering whitefish spawn.
- Sureties Sevilla and Luna had guaranteed Marasigan's compliance with the contract.

**Issues:**
1. Validity of the contract between the municipality and Marasigan.
2. Liability of the sureties, Sevilla, and Luna.
3. Whether Marasigan enjoyed the privilege of gathering whitefish spawn.
4. Refund of deposits made by Marasigan.
5. Whether Marasigan is entitled to any credits or reimbursements.

**Decisions:**
1. The contract between the municipality and Marasigan was deemed canceled due to the
invalidity of the auction process, absolving Marasigan and the sureties from compliance.
2. The sureties were absolved of liability due to the cancellation of the contract.
3. Marasigan was found to have enjoyed the privilege of gathering whitefish spawn, based
on payments made and evidence presented.
4. Marasigan was entitled to a credit of previous deposits made to the municipality.
5. Marasigan owed the municipality a sum of P140 for the privilege, after considering
credits and reimbursements.

In conclusion, the court absolved the sureties from the complaint and ordered Marasigan to
pay the municipality P140.
SOCONY v. Cho Siong, 52 Phil 612 (1928)
https://jur.ph/jurisprudence/v/digest/standard-oil-co-of-new-york-v-cho-siong?
q=Cho+Siong

**Case No. 29588:**

**Facts:**
- Standard Oil Co. of New York (Plaintiff) sued Cho Siong and Ong Guan Can (Defendants)
for an outstanding amount of P2,197.42, plus interest and attorney's fees.
- Cho Siong, as an agent of the plaintiff, received petroleum products worth P14,136.79 but
had paid back only P14,027.33, leaving a balance of P64.46.
- Cho Siong signed a contract assuming responsibility for all debts owed by a former agent,
Tong Kuan, totaling P3,132.96, which added to the balance owed by Cho Siong, makes up
the total claimed amount.
- Ong Guan Can acted as surety for Cho Siong but wasn't liable as Cho Siong had not
incurred any liability under his contract with the plaintiff.
- The court found Cho Siong liable only for the balance owed directly under his agency
contract, relieving Ong Guan Can of any liability.

**Issues:**
- Whether Cho Siong and Ong Guan Can are liable for the claimed amount.
- The interpretation of Cho Siong's contracts with the plaintiff and the implications for Ong
Guan Can's suretyship.

**Decision:**
- The judgment was modified, ordering Cho Siong to pay the plaintiff the amount of
P2,197.42 only, relieving Ong Guan Can of all liability.

**Case No. 29753:**

**Facts:**
- Ong Guan Can claimed P15,000 in damages from Standard Oil Co. of New York due to a
two-day attachment on his lands.
- The trial court found no proven damages and absolved the plaintiff of this claim.

**Issues:**
- Whether Ong Guan Can suffered damages due to the attachment on his lands.

**Decision:**
- The trial court's decision was affirmed, with costs against the appellant, as no damages
were proven to have been suffered by Ong Guan Can due to the attachment.

**Conclusion:**
- Case No. 29588 resulted in a modified judgment against Cho Siong only, while Case No.
29753 affirmed the trial court's decision in favor of Standard Oil Co. of New York.
Estate of Hemady v. Luzon Surety, 100 Phil. 388 (1956)
https://jur.ph/jurisprudence/v/digest/estate-of-k-h-hemady-v-luzon-surety-co-inc?q=G.R.
+No.+L-8437
**Facts:**
- Luzon Surety Co., Inc. filed a claim against the Estate of K. H. Hemady based on twenty
indemnity agreements or counter bonds. These agreements were subscribed by various
principals and by K. H. Hemady, who acted as a solidary guarantor in all of them.
- The agreements contained stipulations regarding premiums, indemnity, interest on
amounts paid by the company, waiver of certain rights, and the liability of the indemnitors.
- Before an answer was filed, upon motion of the administratrix of Hemady’s estate, the
lower court dismissed the claims of Luzon Surety Co., stating that the premiums due and
cost of documentary stamps were not part of Hemady's liability as a guarantor since they
were not liabilities incurred after the execution of the counterbonds.
- The court also argued that upon Hemady's death, his liability as a guarantor terminated
because integrity, a required qualification for a guarantor, is purely personal and not
transmissible.

**Issues:**
1. Whether the liability of a surety or guarantor terminates upon their death.
2. Whether the premiums due and cost of documentary stamps are part of the surety's
liability.

**Decisions:**
1. The Supreme Court reversed the lower court's decision, stating that the liability of a
solidary guarantor does not extinguish upon their death. Therefore, Luzon Surety Co. had
the right to file a contingent claim against Hemady's estate for reimbursement.
2. The Court did not delve into the issue of whether premiums and documentary stamps
were part of Hemady's liability. Regardless of this, Luzon Surety Co.'s claim still stated a
cause of action.

**Key Legal Points:**

- Contracts and obligations are generally transmissible to successors, including heirs,
unless specified otherwise by law or stipulation.
- The obligation of a surety or guarantor is not strictly personal, but rather involves the
reimbursement of moneys disbursed by the creditor.
- The supervening incapacity or dishonesty of a guarantor does not terminate the contract
but entitles the creditor to demand a replacement guarantor.
- The liability of a solidary guarantor extends to their estate upon death, and creditors may
file contingent claims against the estate for reimbursement.
- The specific issue of whether premiums and documentary stamps are part of the surety's
liability was not addressed in the decision.
Wise & Co. v. Tanglao 63 Phil. 372 (1936)
https://jur.ph/jurisprudence/v/digest/wise-co-inc-v-tanglao?q=G.R.+No.+42518

**Facts:**
1. Wise & Co. filed civil case No. 41129 against Cornelio C. David to recover a sum of money
owed by David as an agent of Wise & Co.
2. A preliminary attachment of David's property was obtained by Wise & Co. in this case.
3. To avoid the attachment, David had his attorney, Tanglao, execute a power of attorney on
January 16, 1932, empowering David to act on his behalf, including entering into contracts
of suretyship and mortgage.
4. Subsequently, a compromise agreement (Exhibit B) was reached between Wise & Co. and
David on January 18, 1932, where David confessed judgment for a specified sum and
pledged certain properties as security.
5. David partially paid the agreed sum, leaving a balance owed to Wise & Co.
6. Wise & Co. initiated a case against Tanglao for the recovery of the unpaid balance,
arguing that Tanglao, through the power of attorney, became a surety for David's debt.

**Issues:**
1. Whether Tanglao, through the power of attorney (Exhibit A), became a surety for David's
debt owed to Wise & Co.
2. Whether Tanglao's personal liability can be established based on the compromise
agreement (Exhibit B) between Wise & Co. and David.
3. Whether the action against Tanglao is premature considering the existence of legal
remedies against David and the availability of David's properties to satisfy the debt.

**Decisions:**
1. The Court found that Tanglao did not become a surety for David's debt owed to Wise &
Co. based on the power of attorney (Exhibit A) and the compromise agreement (Exhibit B).
2. Tanglao's obligation, as evidenced by the documents, was limited to the mortgage of his
property as security for David's debt.
3. Even if Tanglao could be considered a surety, the action against him is premature
because all legal remedies against David have not been exhausted, and David's properties
are available to satisfy the debt.
4. As a result, the judgment against Tanglao was reversed, and he was absolved from the
complaint, with costs to the plaintiff.
Mira Hermanos v. Manila Tobacconists 74 Phil. 367 (1943)
https://jur.ph/jurisprudence/v/digest/mira-hermanos-inc-v-provident-insurance-co?
q=G.R.+No.+48979
**Facts:**
1. Mira Hermanos, Inc., entered into a contract with Manila Tobacconists, Inc., wherein Mira
Hermanos agreed to deliver merchandise to Manila Tobacconists on consignment, and
Manila Tobacconists agreed to pay the invoice value of the sold merchandise by the 20th of
each month.
2. Mira Hermanos required a bond of P3,000 from Manila Tobacconists, which was
executed by Provident Insurance Co., to secure the fulfillment of the Tobacconists'
obligation.
3. As the volume of business increased, Mira Hermanos demanded an additional bond of
P2,000 from Manila Tobacconists, which was executed by Manila Compañ ia de Seguros,
with the same terms as the previous bond, except for the amount.
4. A final liquidation revealed a balance due from Manila Tobacconists to Mira Hermanos,
which the Tobacconists recognized but could not pay.
5. Mira Hermanos demanded payment from both surety companies. Provident Insurance
Co. paid only 60% of the amount owed, arguing that the remaining 40% should be paid by
Manila Compañ ia de Seguros in accordance with the Civil Code.

**Issues:**
1. Whether the bond of Provident Insurance Co. and Manila Compañ ia de Seguros
responded for the obligation of Manila Tobacconists jointly or separately.
2. Whether Provident Insurance Co. is entitled to the "benefit of division" provided in
article 1837 of the Civil Code.

**Decisions:**
1. The trial court found that the bond of Provident Insurance Co. responded for the
obligation of Manila Tobacconists up to the sum of P3,000, while the bond of Manila
Compañ ia de Seguros responded for the obligation only insofar as it exceeded P3,000 and
up to P5,000.
2. The trial court concluded that article 1837 of the Civil Code, which refers to several
sureties of only one debtor for the same debt, did not apply in this case. While the two
bonds appeared to guarantee the same debt, they were found to cover different portions of
the obligation.
3. The judgment of the trial court was affirmed, with the modification that it shall be
entered against Manila Tobacconists, Inc., and Provident Insurance Co. jointly and
severally. Appellant Provident Insurance Co. was ordered to pay the costs of the instance.
PNB v. Manila Surety, 14 SCRA 776 (1965)
https://jur.ph/jurisprudence/v/digest/philippine-national-bank-vs-manila-surety-fidelity-
co-inc?q=G.R.+No.+L-20567

**Facts:**
- The Philippine National Bank (PNB) petitioned to review and reverse a decision by the
Court of Appeals (CA) regarding a case involving Manila Surety & Fidelity Co., Inc. and the
Bank.
- PNB provided a letter of credit and advanced $120,000 to Edgington Oil Refinery for hot
asphalt, with part of it released to Adams & Taguba Corporation (ATACO) under a trust
receipt guaranteed by Manila Surety & Fidelity Co.
- ATACO assigned the Bank as its attorney-in-fact to collect payments from the Bureau of
Public Works under Purchase Order No. 71947.
- The Bank stopped collecting from the Bureau, allowing other creditors to exhaust funds
payable to ATACO, leading to a dispute over the remaining balance owed to the Bank.

**Issues:**
- Whether the Bank's negligence in failing to collect from the Bureau of Public Works
released the surety from liability.
- Whether the Bank's actions were in line with its duty as an agent and whether it fulfilled
its obligation under the power of attorney.

**Decisions:**
- The Court of Appeals found the Bank negligent in stopping collections from the Bureau of
Public Works, thereby releasing the surety from liability.
- The Court affirmed the decision of the CA, stating that the Bank's negligence led to the
surety's exoneration.
- The Court held that even if the assignment with power of attorney was considered
additional security, the Bank's inactivity deprived the surety of any possibility of recourse
against that security.
- The Court emphasized the Bank's duty to act diligently as an agent and found its
negligence conclusive based on evidence.
- The Court upheld the CA's decision, affirming the surety's release from liability and
ordering costs against the Bank.